Sec. 4] EARNINGS AND INCOME 235 
four per cent basis) the value of the bond will oscillate 
between $1000 and $1040, rising gradually from the former 
to the latter between interest payments and falling back 
suddenly as each payment is made. The income is simply 
the payment of $40 at the end of each year. Even our 
objector will not deny this. During the entire year up to 
the very end there is no income at all; yet the bond 
“earns” about $10 each quarter, in the form of an increase 
in the value of the bond. These earnings are simply equal 
to the interest on the capital. And so in general, when 
we assume that income is definitely foreknown, earnings 
will equal the interest on the capital. It is, therefore, 
to earnings that accountants instinctively give their main 
attention. But they err grievously when they attempt to 
spirit away realized income and put earned income in its 
place. Realized income plays the more important role, for 
on it depend all the other elements, — capital-value, value- 
return, depreciation, and even earnings themselves. To 
take the case of the house, the first and primary fact is that 
it promises to yield $1000 a year for fifty years. This income 
series being given, it is possible to obtain its capital-value 
by the discounting process; its value-return, by division of 
income by capital ; its depreciation, by comparing its capital 
values at successive dates; and its earnings, by deducting 
depreciation from realized income. Unless the realized 
income be given at the start, all these calculations are im-. 
possible. Earnings could not serve as our starting point, 
for earnings cannot be calculated except by the aid of de- 
preciation, depreciation cannot be calculated except from 
capital-value, and capital-value cannot be calculated except 
from expected realized income. 
Moreover, the fundamental proposition of the last chap- 
ter, that capital-value is the discounted value of expected 
income, will cease to hold true, if by income we mean 
earnings. Thus, the house has a capital-value of $18,300, 
which is the discounted value of its realized income of