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, valuereturn,
 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 depreciation,
 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 chapter,
 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