The Distribution of Wealth: A Theory of Wages, Interest and Profits

Preface

It is the purpose of this work to show that the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates. However wages may be adjusted by bargains freely made between individual men, the rates of pay that result from such transactions tend, it is here claimed, to equal that part of the product of industry which is traceable to the labor itself; and however interest may be adjusted by similarly free bargaining, it naturally tends to equal the fractional product that is separately traceable to capital. At the point in the economic system where titles to property originate,—where labor and capital come into possession of the amounts that the state afterwards treats as their own,—the social procedure is true to the principle on which the right of property rests. So far as it is not obstructed, it assigns to every one what he has specifically produced.

In a series of articles and monographs, published at intervals since 1881, I have endeavored to formulate the parts of this theory relating severally to value, capital, wages, interest, rent and profits. These papers appeared in the
New Englander, the
Quarterly Journal of Economics, the
Yale Review, the
Political Science Quarterly, the
Annals of the Academy of Political and Social Science, the
Revue d’Economie Politique, the
Dictionary of Political Economy, and the series of monographs and studies published by the American Economic Association. These partial statements are now brought into an orderly arrangement and extensively supplemented.

The term
natural, as used by classical economists in connection with standards of value, wages and interest, was unconsciously employed as an equivalent of the term
static; and it is such natural or static standards that this volume undertakes to present. It aims to show to what rates the market prices of goods, the wages of labor and the interest on capital would conform, if the changes that are going on in the shape of the industrial world and in the character of its activities were to cease. It tries completely to isolate the static forces that act in distribution from the dynamic forces. Actual society is always dynamic, and the part of it that we are most concerned with is highly so. Change and progress are apparent everywhere, and industrial society is constantly assuming new forms and discharging new functions. Because of this continual evolution the standards of wages and of interest to-day are not what they will be ten years hence. There are, however, normal standards to-day. In the midst of all changes there are at work forces that fix rates to which, at any one moment, wages and interest tend to conform. However stormy may be the ocean, there is an ideal level surface projecting itself through the waves, and the actual surface of the turbulent water fluctuates about it. There are, likewise, static standards with which, in the most turbulent markets, actual values, wages and interest tend to coincide.

What would be the rate of wages, if labor and capital were to remain fixed in quantity, if improvements in the mode of production were to stop, if the consolidating of capital were to cease and if the wants of consumers were never to alter? The question assumes, of course, that industry shall go on, and that, notwithstanding a paralysis of the forces of progress, wealth shall continue to be created under the influence of a perfectly unobstructed competition. The values and the rates of wages and interest which, under such conditions, would prevail, are those to which, in spite of all disturbances that progress occasions, the rates in the actual market tend, at any one time, to conform. They are the theoretically “natural” rates which science has seeking.

In presenting the laws by which such rates are fixed, this volume tries to perform a work that is constructive and not controversial. At a few points it will gain something, in the way of clearness, by calling attention to contrasting theories, but it will offer no systematic criticism of them. An adequate treatment of the various theories of distribution would require a book not less extensive than this one devoted wholly to controversy. The plan of making relatively few references to other writings may leave a reader in some uncertainty as to whether a particular part of the present work may have been borrowed from existing economic literature, and it seems therefore necessary to say that no part has been consciously borrowed in this way. At the dates when I first published the several parts in the series of articles above referred to, only one important point could, so far as I now know, have been thus obtained. One very important point might have been taken from the writings of the early economist, von Thünen; and if I had seen the passage in his works in which it is stated, before publishing certain articles which contained a similar statement, those articles would not have failed to refer to the work of this brilliant pioneer in economic theory. The omission is now remedied. In an extended note I have pointed out the resemblances and the differences between von Thünen’s final-productivity theory of wage and interest and my own. Up to a certain point the two theories can be stated in identical terms; and yet the difference between them is in reality a radical one.

It was the claim advanced by Mr. Henry George, that wages are fixed by the product which a man can create by tilling rentless land, that first led me to seek a method by which the product of labor everywhere may be disentangled from the product of coöperating agents and separately identified; and it was this quest which led to the attainment of the law that is here presented, according to which the wages of all labor tend, under perfectly free competition, to equal the product that is separately attributable to the labor. The product of the “final unit” of labor is the same as that of every unit, separately considered; and if normal tendencies could work in perfection, it would be true not only of each unit, but of the working force as a whole, that its product and its pay are identical.

There are resemblances and contrasts between the theory that is here presented and those of the Austrian economists, Karl Menger and Friedrich von Wieser; and one feature which distinguishes the present system from the others is a recognition of the difference between permanent capital, or an abiding fund of productive wealth, and particular capital-goods, or instruments of production, which perish in the using. The relation that this theory bears to the fascinating one recently published by Ex-minister von Böhm-Bawerk can best be made clear after a later volume on the dynamics of distinction shall have seen the light. If my present plan had admitted it, I should have been glad to cite and to discuss many specific contributions to the literature of the theory of distribution, such as those made by Professor Alfred Marshall, President Francis A. Walker, President Arthur T. Hadley, Professor Frank W. Taussig, Professor William Smart, Mr. John A. Hobson, Dr. Charles W. MacFarlane, Dr. Stuart Wood and Mr. Herbert M. Thompson. To three men I am indebted for general stimulus and suggestion, the effects of which must have appeared in any theoretical work that I have done. They are my teacher, the late Professor Karl Knies of Heidelberg, and my early associates in economic work, Professor Franklin H. Giddings of Columbia University and Professor Simon N. Patten of the University of Pennsylvania.

For an understanding of the plan on which this book is arranged, it is necessary to note that the principle of final productivity—which, as the work claims is at the basis of the law of wages and interest—can be stated in a few words; but that, when it is so stated, the significance of the terms used requires very extended defining. Interest, for example, is said to depend on the productive power of the final unit of social capital. What, however, is such a final unit, and in what sense can it be called social? Is it highly composite, and is it apportioned, by some nice adjustment, among all the industries of society? Does it consist in concrete things that can everywhere be distinguished? It is said, in the theory, that this increment of productive wealth, on the efficiency of which the rate of interest depends, consists of a quantity of “permanent capital.” Concrete instruments, however, are not permanent. They perish and require continual replacing, and it is essential to know the true relation between the instruments which are thus perishing and the fund of wealth which is abiding. In the apportioning of this fund among different industries, the market values of different products have their influence; and it is necessary to ascertain the relation between the laws of value and those of distribution. Moreover, incomes that are determined by the final-productivity law may also be translated into a form that makes it possible to apply to them the principle of rent. The nature of rent and its relation to wages and interest need to be ascertained. Extended statements on many other points are required, if the apparently simple final-productivity formula for wages and interest is to have definiteness of meaning and a character of reality that will cause it to interpret the practical facts of life.

Now, it would have been possible to make these explanatory statements first, and to reserve the presentation of the law of final productivity till every term that a statement of it would use should have been fully defined and made to represent something in actual business. It would have been possible to discuss the nature of capital and of capital-goods, value, group relations, rent, etc., before presenting the main proposition, concerning the final-productivity law of wages and interest. There would have been a logical justification of such an arrangement, since the explanatory statements would have prepared the way for a brief concluding thesis, which would have contained the essence of the theory. The work would then have culminated in one all-embracing statement. But the use of so much of the book for preliminary definitions and discussions would have made a large demand on the reader’s patience, and would have added to the difficulty of connecting the explanatory matter with the principal thesis. I have, therefore, preferred to state the main proposition early and the explanatory ones afterward. The variety of these latter statements is such that, unless the central truth—the final-productivity law—be kept in mind from the outset, it is not entirely easy to bring them into apparent unity. To make the logical connections more apparent, I have given to the table of contents the character of an outline of the series of leading ideas contained in the several chapters, without any attempt to make it an abstract of the entire contents of the chapters. Many paragraphs are not referred to in it, but the general argument of the book is, I hope, the better given by reason of these omissions.

The plan of advancing early the chief thesis of the work and causing the full meaning of it gradually to unfold itself requires that a subject such as rent or value be treated in more than one part of the book. If rent were to be discussed for its own sake, the treatment of this subject should, of course, be consecutive; but as the purpose of each reference to rent is to add something to the meaning of the thesis which states the final-productivity law of distribution, it is best to forego the attempt to finish the treatment of rent in one passage and, rather, to give the amplifications of the main thesis in a natural order.

The mathematical modes of statement that have been adopted in many parts of the book have been purposely made entirely simple and untechnical. Not even the notation that is in vogue in mathematics has been used.

In the final preparation of this volume I have received assistance that I desire gratefully to acknowledge from my colleague, Professor E. R. A. Seligman; from Professor H. L. Moore, of Smith College; from Mr. A. S. Johnson, Fellow in Columbia University; and particularly from Mr. A. M. Day, Instructor in Political Economy and Social Science in the same University, who has read the work repeatedly in the manuscript and has made very many helpful suggestions, and, in connection with the revising of the proofs, has rendered invaluable aid.