Chapter II: Section CXLV: Income.--Gross, Free and Net

In all _income_, we may distinguish a _gross_ amount, a _net_ amount and a _free_ amount.[145-1] The gross income of a year, for instance, consists of all the goods which have been newly produced within that time. The net[145-2] income is that portion of the former which remains after deducting the cost of production (§ 106), and which may therefore be consumed without diminishing the original resources. Only the new values incorporated in the new commodities make up the net income. Evidently, a great portion of what is considered in one business the cost of production is net income in a great many others; as for instance, what the person engaged in one enterprise in production has paid out in wages and interest on capital. By means of this outlay, a portion of his circulating capital is drawn by others as income, and, on the other hand, a portion of their original income is turned into a portion of his circulating capital.[145-3] _Free_ income, I call that portion of net income which remains available to the producer after his indispensable wants have been satisfied.

An accurate kind of book-keeping which keeps these three elements of income separate is more generally practicable as civilization advances. We might call it the _economic balance_. Where commerce is very thriving it is even customary to provide by law that those classes who need it especially should have this species of book-keeping. People in a lower stage of cultivation, with their poetical nature, are unfriendly to such calculations.[145-4] [145-5] And where natural-economy (_Naturalwirthschaft_) or barter prevails, a book-keeping of this kind of any accuracy is scarcely practicable. The ratio which net income bears to gross income is a very important element to enable us to judge of the advantageousness of any method of production. If every producer should succeed in consequence of keeping his books in this manner, in determining exactly the cost to him of each of his products, this would be an economic progress similar to that of general spread of good chemical knowledge in the arts. On the amount of _free_ income, on the other hand, depends all the higher enjoyment of life, all rational beneficence, and the progressive enrichment of mankind.[145-6]

[Footnote 145-1: Similarly in _Sismondi_, N. P., II, 330,
and _Rau_, Lehrbuch, I, § 71, a.]

[Footnote 145-2: Called by _Hermann_, loc. cit., simply
income.]

[Footnote 145-3: This truth _J. B. Say_ has exaggerated to
the extent of claiming that gross and net income are one and
the same so far as entire nations are concerned. (Traité,
II, ch. 5; Cours pratique, III, 14; IV, 74.) But the gross
profit of the entire production of any one year is much
greater than the simultaneous net income of all the
individuals engaged in it. This is accounted for by the fact
that in such production an amount of circulating capital is
invested which was saved from the net profit of previous
economic times. Compare _Storch_, Nationaleinkommen, 90 ff.
_Kermann_, loc. cit., 323 ff.]

[Footnote 145-4: In the East, a valuation by one's self of
his property is considered a guilty kind of pride, usually
punished by the loss of one's possessions. (_Burckhardt_,
Travels in Arabia, I, 72 ff.) See _Samuel_, 24, on the
census made by David. The Egyptians, however, as may be
inferred from their monuments, must have very early and very
extensively felt the want of some kind of book-keeping such
as we have mentioned. A very accurate sort of book-keeping
among the more highly cultured Romans, with a daily
memorandum and a monthly book with entries from the former
(_adversaria-tabula expensi et accepti_). Compare _Cicero_,
pro Roscio, com. 2, 3; pro Cluent, 30; _Verr._, II, 1, 23,
36. The Latin _putare_, from _putus_, pure, means: to make
an account clear, and therefore corresponds to the American
provincialism, "I reckon," i. e., I believe; and is a
remarkable proof of a rigid method of keeping accounts. The
Italian, or so-called double-entry method of book-keeping,
which gives the most accurate information on the profit from
every separate branch of business, became usual among the
nations of modern Europe whose civilization was the first to
ripen, about the end of the fifteenth century. Its invention
is ascribed to the monk Luca Paciolo di Borgo S. Sepolcro.

In England, this kind of book-keeping is very gradually
coming into use even among farmers, while _Simond_, Voyage
en Angleterre, 2 ed., II, 64, _Dunoyer_, Liberté du Travail,
VIII, 5, say, "it would in France be considered as
ridiculous as the book-keeping of an apple vendor." In
Germany, there have been for some time past, manufactories
of commercial books. Besides, the remarkable difference
brought out by the income tax in England between the exact
statements made by large manufacturers, etc., and by those
engaged in industry on a medium or small scale, bears
evidence of the better way in which the former keep their
accounts, the cause and effect of their better business in
general. Compare _Knies_, in the Tübing. Zeitschr., 1854,
513. On the best mode of determining income, see _Cazaux_,
Eléments d'Économie publique et privée, Livre, II. It is
especially necessary to keep an account of the increase or
diminution, even when accidental, of the value of the fixed
capital employed.]

[Footnote 145-5: The Code de Commerce, I, art. 8, requires
that every merchant should keep a journal, paged and
approved by the authorities, showing the receipts and
disbursements of each day, on whatever account, and also the
monthly expenditures of his family. Besides, he is required
to make a yearly inventory of his debits and credits,
subscribe to it and preserve it. That such books were
excellent judicial evidence may be shown by Italian statutes
of the fourteenth century. (_Martens_, Ursprung des
Wechschrechts, 23.) Those of Germany even in 1449.
(_Hirsch_, Danziger Handelsgeschichte, 232.)]

[Footnote 145-6: Importance of the so-called "transferring
to credit," where a business man considers his business as
an independent entity and as distinct from himself.]