THE COLLECTED WORKS OF THORSTEIN VEBLEN: Business Theories, Economic Articles & Essays. Thorstein Veblen
or by some similar but less overt market valuation in case the company's capital is not quotable on the market. The effective (business) capitalization, as distinct from the de jure capitalization, is not fixed permanently and inflexibly by a past act of incorporation or stock issue. It is fixed for the time being only, by an ever recurring valuation of the company's properties, tangible and intangible, on the basis of their earning-capacity. 83
In this capitalization of earning-capacity the nucleus of the capitalization is. not the cost of the plant, but the concern's good-will, so called, as has appeared in the last preceding chapter.84 "Good-will" is a somewhat extensible term, and latterly it has a more comprehensive meaning than it once had. Its meaning has, in fact, been gradually extended to meet the requirements of modern business methods. Various items, of very diverse character, are to be included under the head of "good-will"; but the items included have this much in common that they are "immaterial wealth," "intangible assets"; which, it may parenthetically be remarked, signifies among other things that these assets are not serviceable to the community, but only to their owners. Good-will taken in its wider meaning comprises such things as established customary business relations, reputation for upright dealing, franchises and privileges, trade-marks, brands, patent rights, copyrights, exclusive use of special processes guarded by law or by secrecy, exclusive control of particular sources of materials. All these items give a differential advantage to their owners, but they are of no aggregate advantage to the community.85 They are wealth to the individuals concerned differential wealth; but they make no part of the wealth of nations.86
It is in the industrial corporations that this capitalization of good-will is seen to the best advantage - including, under the term "industrial corporations," railway companies, iron and steel concerns, mines, etc., as well as what are known in the stock market specifically as "industrials." The corporation is, of course, not the only form of business concern in the industrial field, but it is the typical, characteristic form of business organization for the management of industry in modern times, and the peculiarities of modern capital are therefore best seen in these modern corporations. Many of these corporations have grown out of partnerships and firms previously existing, and such is still the genesis of many of the corporations that come forward from time to time. In such a case of conversion from partnership or firm to corporation the rule is that the new corporation takes over a body of good-will, under one form and name or another, previously pertaining to the partnership which it displaces. Conversely, when a flourishing partnership or similar private firm has gained an assured footing of good-will, in the way of any or all of the items enumerated under that term above, its lot, as prescribed by modern business exigencies, is to go up into a corporation, either by simple conversion into the corporate form or through coalition with other firms into a larger corporate whole. There is in this matter no hard and fast rule, of course. On the one hand, the approved methods of corporation finance may in some measure be resorted to by a private firm, Without formal conversion of the concern into the corporate form; and on the other hand, an incorporated company may continue to carry on its business after the manner usual with privately owned concerns. But taken by and large, it will be found that with the assumption of the corporate form is associated a more modern method of capitalization and a freer use of credit. The advantages which the corporate form offers in these respects are commonly not neglected. The more archaic forms of organization and business management, in which recourse is commonly not had to the characteristic methods of corporation finance, prevail chiefly in those "backward" lines of industry in which monopoly or other differential advantages of an intangible nature are not readily attainable; such, e.g., as farming, fishing, local merchandising, and the minor mechanical trades and occupations. In this range of industries large (corporate) organization has hitherto been virtually impracticable, and here at the same time differential advantages, of the nature of good-will (as indicated above), are relatively scant and precarious. Where extensive differential advantages of this kind come in, the corporate form of organization is also likely to come in.
The cases are also frequent where a corporation starts out full-fledged from the beginning, without derivation from a previously existing private firm. Where this happens, the start is commonly made with some substantial body of immaterial goods on which to build up the capitalization; it may be a franchise, as in the case of a railway, telegraph, telephone, street-car, gas, or water company; or it may be the control of peculiar sources of material, as in the case of an oil or natural gas company, or a salt, coal, iron, or lumber company; or it may be a special industrial process, patented or secret; or it may be several of these. When a corporation begins its life history without such a body of immaterial differential advantages, the endeavors of its management are early directed to working up a basis of good-will in the way of trade-marks, clientele, and trade connections which will place it in something of a monopoly position, locally or generally 87 Should the management not succeed in these endeavors to gain an assured footing on some such "immaterial" ground, its chances of success among rival corporations are precarious, its standing is insecure, and its managers have not accomplished what is looked for at their hands. The substantial foundation of the industrial corporation is its immaterial assets.
The typical modern industrial corporation is a concern of sufficient magnitude to be of something more than barely local consequence, and extends its trade relations beyond the range of the personal contact of its directive officials. Its properties and its debts are also commonly owned, in part at least, by persons who stand in no direct personal relation to the board of managers. In an up-to-date corporation of this character the typical make-up of the corporate capital, or capitalization, is somewhat as follows: The common stock approximately covers the immaterial properties of the concern, unless these immaterial properties are disproportionately large and valuable; in case of a relatively small and local corporation the common stock will ordinarily somewhat more than cover the value of the immaterial property and comprise something of the plant; in case of the larger concerns the converse is likely to be true, so that here the immaterial property, intangible assets, is made to serve in some measure as a basis for other securities as well as for the common stock. The common stock, typically, represents intangible assets and is accounted for by valuable trade-marks, patents, processes, franchises, etc. Whatever material properties, tangible assets, are in hand or to be acquired are covered by preferred stock or other debentures. The various forms of debentures account for the material equipment and the working capital (the latter item corresponding roughly to the economists' categories of raw materials, wages fund, and the like). Of these debentures the preferred stock is the most characteristic modern development. It is, de jure, counted as a constituent of the concern's capital and the principal is not repayable; in this (legal) respect it is not an evidence of debt or a credit instrument.88 But it has little voice in the direction of the concern's business policy.89 In practice the management rests chiefly on the holdings of common stock. This is due in part to the fact that the preferred bears a stated rate of dividends and is therefore taken up by scattered purchasers as an investment security to a greater extent than the common. In this (practical) respect it amounts to a debenture. Its practical character as a debenture is shown by the stated rate of dividends, and where it is "cumulative" that feature adds a further step of assimilation to the ordinary class of debentures. Indeed, in point of practical effect preferred stock is in some respects commonly a more pronounced credit instrument than the ordinary mortgage; it alienates the control of the property which it represents more effectually than the ordinary bond or mortgage loan, in that it may practically be a debt which, by its own terms, cannot be collected, so that by its own terms it may convey a credit extension from the holder to the issuing corporation in perpetuity. Its effect is to convey the discretionary control of the material properties which it is held to represent into the hands of the holders of the common stock of the concern. The discretionary management of the corporate capital is, by this device,