V. Interest and Profit Discount
This section starts with a well known adage, likely as well known today as hundred years ago, that risk and uncertainty drive a discounting of the future as compared to the present. Interest rates then a re a measure of that future risk but leading to a specific discount factor today.
Commons gives the example of a laborer who is in essence also a creditor to a business or any going concern. The laborer is paid in arrears, but in the meantime is working and creating use value for the employer.
A business is also doing the same thing on the commodity and debt markets. A business may borrow a certain amount form a bank promising to repay them in a short period of time. The business will factor in repaying the loan and also generating a profit, in essence a interest and profit discount of what they are paying for materials and labor today for use value tomorrow. The business may turn out to right or wrong but this is their best forecast at the moment the transactions must occur.
Commons then goes on to discuss Professor Fetter. Fetter was a contemporary of Commons who lived from 1863 through 1949 although is not well known today. Fetter was considered part of the Austrian school but himself cited Thorstein Veblen as an important influence. Fetter argued in his book Principles of Economics and in the journal Quarterly Journal of Economics that according to Commons, "Then these future “rents” are universally reduced by time discount to a present valuation. This discounted valuation is the universal principle of capitalization, which is the modern meaning of Capital" (Commons, 1934, pg. 509). Commons is seeking here to define "Capital" as the discounted valuation of future gain in the context of a capitalist society.
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