The Distribution of Wealth: A Theory of Wages, Interest and Profits
Production and Consumption synchronized by rightly Apportioned Capital
The law of final productivity that the familiar diagram presents is not yet translated into concrete and literal terms. We know that, when the agent which is increasing along the line AD is capital, it is the productive fund of true capital, rather than the mere number of capital-goods, which is thus increasing; also, that the increments are mainly qualitative improvements of the general stock; also, that at any point in the growth of the fund, it is all apportioned among the sub-groups according to a certain law; and, finally, that the forms of it, in each sub-group, are determined by an equally nice adjustment and by the action of the same law. There are further general statements, suggested by the same figure, that need to be expanded into detailed and literal descriptions of the phenomena of business life. CD, for instance, measures the rate of interest on capital, and AECD expresses the total amount of this income. In a static adjustment of society, no one is "saving money" and adding to his capital; and therefore the whole income of capitalists, as a class, comes to them in the shape of goods that are ripe for consumption. These are goods of the type of A''', B''' and C''' of the table that we have often used to illustrate the system of groups and sub-groups and the made of producing wealth of different kinds. Capitalists in all the different sub-groups get a uniform rate of income, in proportion to their several capitals, and get it in a uniformly ripened state; yet capitalists in the sub-groups, A, B, C—and, indeed, in all the sub-groups except those in the uppermost tier in the table—are producing things today that will not themselves be ready to use for some time to come. Weeks or months may elapse before the capitalists in A can use any of the things that they are at this moment working on. But during the interim they must live. May they not, therefore, have to borrow commodities from capitalists at A'''? May not the element, time, make trouble, disturb the simple action of the law that the diagram expresses, and make it necessary for capitalists in the lower sub-groups to get advances from men in the upper ones and to pay for these advances? May not such payments disturb the equality of the earnings of capital at different points in the system?
The same question arises in connection with the laborers in the different sub-groups. Those at A''', B''' and C''' are making finished goods; and, if they can divide their gross products with the capitalists in their several industries and carry away from their mills their own shares of the joint output, they have only to exchange with each other, in order that each may at once get his income in the forms in which he needs it. Laborers at A, B and C, however, are apparently not in so favorable a position. May not they have to get and pay for advances from the workmen in the uppermost tier of sub-groups, just as the capitalists in the lower tiers seem obliged to get them from the capitalists in the uppermost tier?
The whole question, whether goods are advanced by one class of persons to another, in order to tide that other class over an interval of waiting, clearly has reference, not to the relation of capitalists in general to laborers in general, but to the relation of certain sub-groups to other sub-groups in the producing series. It is the sub-group A''' that must advance the stock of the article A''' to all the sub-groups that are below it in the series, if any advances at all are needed; but does it actually make any advances? If this term be used in any true sense, it must mean that a stock of passive capital-goods is drawn upon at one date and replenished at a later date, and that it stands reduced in size during the interval. Nothing of this kind, however, takes place. The stocks of A''', B''' and C''' are drawn upon and replenished simultaneously, like water in a full pipe, with an inflow at one end and an outflow at the other.
Let us try the experiment in a simple and practical way, and see whether advances of this kind are necessary, either by capitalists to laborers or by one sub-group to another. Here are three households needing water for daily use. Two have capital to use, while the third has only labor. One establishes a pumping plant which raises the water to a high level; the second furnishes a settling tank and a filter, which, as it were, "ripens" the water, or makes it fit for use; and the third family, having labor only to put into the combination, does the pumping for all. The tanks are full, pumping is going on and the outflow of pure water is continuous. Does the man who furnished the settling tank advance water to the man who furnished the pump and to the other man who is using it? He gives to them to-day, it is true, water that is in a more advanced state than the water they are pumping to-day, but he does not deplete his tank in doing it. A true advance would require that he should drain his tank and let it fill again, but this he does not do. The apparent storage of water is only a means of improving the quality of it: the man imparts a utility to the water, but he does not change the quantity of it.
Intermittent production, with constant use, of course, demands storage. Where production is, for natural reasons, periodic, as in the case of agriculture, a special store is obviously needed. If the pumping, in our illustration, could not take place except in the early morning, it would be necessary to have a reservoir of pure water, in addition to the settling tank. This kind of storage, however, raises questions entirely apart from the problems that arise from the mere relations of labor to capital, or from those of sub-groups to sub-groups. Where production is constant, there are laborers to be provided for, and there are whole sub-groups that of themselves produce only raw materials. These all get finished products for use, and that without imposing on any one the necessity of making a true advance.
Does the amount of A''' on hand at any one time have anything to do with the rate of wages?*40 The form of wages it affects in a certain way. If the demand for this kind of finished goods were to be, not continuous and uniform, but intermittent and irregular, workers might chance at some time to exhaust the stock of it. In that case, they would have to take their pay in some other form. In a static condition, this could occur only in consequence of the changing seasons. The production of winter clothing, for instance, might go on through the year; and there would then be, at the beginning of a cold season, a stock of it large enough to meet the demand arising at that time. In the absence of such an intermittent demand, the A''' would be taken for use as fast as it ripened, and no faster. With the sub-groups properly balanced, the A''' would be brought to completion as fast as would the A'', the A' and the A. There would be no accumulation at any part of the line. If more of A were made than could in the same time be converted into A', there would ensue a glut of A, a falling of the price of it, and a quick transfer of labor and capital to the other sub-groups. Static law thus keeps the sub-groups balanced in point of size and productive power, keeps the passive capital-goods in a continuous flow and makes every one's pay depend on the rate of the flow. Passive capital-goods are, however, never a fund, in the normal sense of the term. They are not kept in storage, except as irregular demands require this. It is on the rapidity of the flow of ripening commodities that income depends. It is all a question of velocity—of the quantity of A''' that ripens in a given time.*41
Capital, apportioned in the ways that have just been traced, is a requisite of synchronized production and consumption. Labor and time are the only absolute requisites of production not thus qualified. If the existence of the natural world and of human wants and powers be assumed, man has only to work and to wait in order to create wealth. But, with capital already on hand and rightly coördinated, labor and its fruits become synchronous. Coördinated capital is, then, a requisite of that production which is instantly followed by a ripened and consumable income. By means of a permanent fund of capital, adjusted in the ways in which the play of forces that has just been described would arrange it, men in all the sub-groups may produce at the same time and consume at the same time; and the consumption of all of them may closely accompany their production.
In the natural sense of the term, then, the universal requisite of production is effort; but the production that comes by effort only is certain to cover a period of time. It separates by an interval the beginning of the productive operation from the enjoyment of the first fruits of it. If the man is collecting tree trunks for a raft, it will be some time before he can float on it across the stream; and if he is making a hut, in the same primitive way, it will be still longer before he can get shelter within it.*42 It is, however, practically certain that the man will not build a hut in this simple way. He can do better by first making a rude hatchet; and this making of the hatchet is the "round-about" method of making goods, of which Professor von Böhm-Bawerk has spoken, as the typical fact in capitalistic production. By spending some time in making a tool and more time in using it, a man can get a larger and better house in a month than be could have secured by working empty-handed for the same time. The tool adds to his product; and indirectly, therefore, the time spent in making it does so.
Tools are productive, but time is the condition of getting tools—this is the simple and literal fact. The round-about or time-consuming mode of using labor insures efficient capital-goods. Granting that time be used for this purpose, we may say that "time is productive"; but we must be careful to keep in view the fact that it is the tools secured by time which do the producing.
When the hatchet has worn itself completely out, and the fruits of using it are before the man in the large dwelling, he may look backward to the beginning of the process, when he faced nature empty-handed, and say: "Labor has done it all. Work and waiting have given me my goods." The working and the waiting have, indeed, insured the hatchet, as an incidental result of this way of working. Production that plans to put its fruits into the future will create capital-goods as an immediate effect, but labor and time are enough to make the ultimate effect certain. Let the man work intelligently through an interval of time, and the production of consumers' wealth is sure. The thing, then, that is ultimately essential for production is labor. But if time is to intervene between the labor and the enjoyment of its fruits, the work may be first spent on capital-goods, which are a requisite of an accelerated rate of production. What they insure is an added quantity of product. They are not, however, a requisite of production, as a process, for wealth may be created without them.
What, on the other hand, are the requisites of that production which does not put its fruits into the future? What must be given, in order that effort and the emerging of the product of effort may be simultaneous? When a savage contents himself with gathering sticks by hand and throwing them into his fire, he consumes very little time on each armful of wood; and an industry conducted on this plan is conceivable; yet even in this case the wood that is in transit from the forest to the fire is not warming the man. The labor and the enjoyment are not quite synchronous. It would seem that working with any elaborate outfit of instruments must put the bringing together of work and enjoyment out of the question. Capital-goods would seem to be retarders of enjoyment; though, when the enjoyment comes, it is clear that they have increased the amount of it. If this is their effect, it is certain that enjoyments will always be so retarded. Working without tools is physically possible but practically impossible.
Men can do it, but they certainly will not: they will invariably make the instruments that aid later work. The first tool that is made separates work from its fruits—makes the men wait for what they want, and every added tool means more waiting. Every addition in days of labor to the cost of a tool extends the interval of time that thrusts itself before the enjoyment that is to come. The mass of raw material and enginery by which a modern society produces is the enormous wedge that civilization has driven between labor and products. It is solidified time, or the material result of waiting on a vast scale. It is the visible testimony to the fact that some one's labor for present fruits began far back in the past.
Capital-goods imply waiting for the fruits of labor. Capital, on the contrary, implies the direct opposite of this: it is the means of avoiding all waiting. It is the remover of time intervals—the absolute synchronizer of labor and its fruits. It is the means of putting civilized man in a position which, so far as time is concerned, is akin to that in which the rude forester stood, when he broke off limbs of dead trees and laid them on his fire. The very appliances which, in their extent and complexity, seem in one view to mean endless waiting, in another view mean no waiting at all but the instantaneous appearance of the final fruits of every bit of labor that is put forth.
What, now, are the requisites of production in which time intervals do not figure? Labor, capital and organization. Grant these, and the fruits of today's effort appear to-day, in the shape of the myriad things that civilized men need. Society is an organism. Let it work as an organism, with the proper instruments in its hands, and out of every day's labor will come in their completed shapes the consumers' goods that civilized life will at once use. Given collective labor and not individual labor, and you may put out of view all those separations of work from its fruits that appear when we take a different look at the world as it is. Into the shops go workers, and out of the shops come goods. The work and the outcoming of the goods are synchronous.
This synchronization—this bringing together in time of work of every kind, and the complete ripening of its virtual product—is the function of what we have termed capital, in distinction from capital-goods. Watch a bit of capital-goods—say, a lump of iron ore just broken off from the bed of similar mineral in the Mesaba range. It will make its way to the ships, traverse the Great Lakes, reach a smelting furnace, and become, first, a piece of steel and, later, a knife blade. There is a long interval between the beginning of its career as a capital-good and the beginning of its service as an article of consumption. But watch the entire capital of the steel-making and the cutlery-making industries, and you will see this period vanish. There is always ore in the mine and in the ships, and steel in the furnaces and in the mills. If society is in a static condition, there is always the same amount of it in each department of the extended industry. As some is withdrawn from each department, more takes its place; and a fixed amount of "ripening" metal maintains a continuous existence. As labor goes on in the department farthest removed from the cutlery shop,—as the picks break off lumps of ore in the mine,—knives ready for use emerge from these shops; and the essential fact is that some of these knives are the virtual, though not the literal, product of the work that is done in the mine. All this results from the maintenance of a fund of permanent capital.
Let us take the simplest of illustrations. The water that is now flowing into the reservoir of a mill is a good in the raw state. It will take its turn in moving the machinery of the mills, but some time will elapse before it does this. The drops that are at this instant entering the upper end of the pond will require time for their passage to the wheel pit. It takes many days for one of them, which is now in its raw state near the inlet, to "ripen" into motion imparted to a turbine wheel. The drops, separately regarded, have periods of production, but the pond as a whole has no such periods. The water that at this moment flows into one end of the pond causes an overflow from the other end, and the overflow moves the wheel. There is an instantaneous result from the coming of the "unripe" water, and this is assured by the full reservoir. It is this permanent quantity of hydraulic capital that enables the water which to-day is far from the wheel virtually to move the wheel. Forget all about the identity of particular drops of water and the time that each one will take in traversing the pond, and what you see is an inflow which at once causes an outflow that moves the wheel. Capital in the shape of a pond full of water—of which the constituent drops, indeed, are forever changing—synchronizes the flow from the inlet and the moving of the wheel.
Again, let a forest twenty acres in extent suffice to furnish fire-wood for a family. A tree will mature in twenty years; and the forest must be kept intact, in point of size and maturity, or the supply of wood will fail. Each year we plant a row of trees along one side of the forest, and cut a row from the other. The planting and the cutting are, in a way, simultaneous. We do not burn to-day the tree that we plant today; but we do burn a tree, the consuming of which is made practicable by to-day's planting. The tree that is just set is, then, an enabling cause of the consuming of one that is twenty years old. To plant a sapling and wait for it to mature would be a slow way to make a fire; but to plant one and, by means of this planting and the maturing of the forest, to get at once another tree for use, is a quick way to make a fire. The forest is a synchronizer of labor and its virtual fruit. The fact that is of practical consequence is, that if we have once secured the permanent forest, we need do no waiting for fuel. The identity of the tree that we burn is of no consequence. To plant one and to burn another, which is at once made available in consequence of the planting of the former, is to annihilate the interval that would have existed, had it been necessary to depend on one particular tree. The key to success in the effort to make today's work yield to-day's fuel is the surrender of the identity of the thing that we are now working on and that of the thing we at once use.
If, as consumers, we were so made that only the particular thing which is beginning to take shape under our hands to-day could satisfy our wants, then the wants of the present would have to go unsatisfied. There would be an interval of painful waiting between industry and its fruits. Again, if industry were conducted on such a plan that the work that to-day begins to fashion a bit of raw material had no influence in causing a finished article at once to emerge at the other end of the line of operations, then also we should have to wait. As it is, we wait not at all. It is, in practice, immaterial to us whether we consume one thing or another that is exactly like it. Our plan of working enables the labor that is done on a raw article to cause a finished one to come into our possession. In the hydraulic illustrations, the full pond is the condition that causes water at the inlet virtually to move the machinery of the mill. The full pipes furnish the condition that causes water among the remote hills virtually to satisfy the wants of the people of the city. In the case of the forest, the fixed number of trees maintained in the different stages of maturity is the condition that enables the planting of a sapling to furnish fuel. Capital it is, in each case, that does the synchronizing work. This is a cardinal function of this social agent of production.
On the ranches of Montana cattle are breeding, among the forests of Pennsylvania hides are tanning, in the mills of Brockton shoes are finishing; and, if the series of goods in all stages of advancement is only kept intact, the cow-boy may have to-day the shoes that he virtually creates by his efforts. This result is attainable because of the existence of a complete stock of capital-goods. We must have growing cattle, hides, tanned leather, partly made shoes and finished shoes, all maintained in a constant quantity, in order that a certain number of shoes may each day be taken for use. With sheep in the pastures, wool in the mills, cloth in the tailoring shops, and ready-made garments on the retailers' counters, the labor of the people can, as it were, instantaneously clothe the people. With a series of capital-goods of the right kinds once established, the work of to-day yields its result to-day in the shape of completed clothes.
Let the letters in the above horizontal line represent such a series of goods in various stages of combination. A is the raw material, A' is that material somewhat transformed, A'' is the same material farther advanced toward completion and A''' is the completed article ready for consumption. Thus stands the series at the beginning of a working day. At the end of the day the series stands thus:—
The A' here is the A of the former series, which has been advanced to its present state by ten hours of industry; and at the same time a new A has been created, as is shown by the letter in parenthesis that is now prefixed to the series. A'' is the A' of the former series, which has also been advanced toward completion. A''' is the earlier A'', which has now been made ready for final use. The A''' in the parenthesis represents the former A''', which has been taken away to be distributed among all the workers and the capitalists whose agency had made the consuming of it practicable.
There is enough of this A''' to satisfy the claims of all the workers and all the capitalists in the series; and each of them gets his share, and gets it without waiting. All have been applying their powers to the stock of capital-goods, in order to keep the series of goods intact. The withdrawal of the A''' is called for by the wants of all of them, and it is foreordained to take place. In itself alone, it would have made an inroad on the stock of capital-goods—an inroad that had to be neutralized. A''' must never be lacking, and the industry insures that it never shall be. The creation of a new A and the ripening of each of the remaining articles of the former series leaves, at the end of the day, a new series that is the exact duplicate of the former one. At the opening of the second day of industry, there are the same conditions that existed at the beginning of the first day. A is waiting to be made into an A', A' is waiting to be made into an A'', A'' is waiting to be made into an A''' and A'' is ready to be taken for consumption. At each point in the series there is a distinct set of men ready to make the needed transformation, and all these groups will now act again. Each will do its appointed work, and at the end of the second day all will again receive their pay.
This is a picture of organized industry. All the farms, railroads, mills and shops of the world are doing exactly what we have described, and doing it on a vast scale. What stands for A''' in the economy of the world is a vast mass of consumers' goods of every kind that humanity uses. It is all in process of creation, by the method that our simple illustration describes. Each finished article has its series of uncompleted articles of its own kind behind it. When one such thing is taken for use, another replaces it. Coats are bought from the retailers, and other coats come from the workshops to take their places. Cloth goes to the workshops; wool goes to the mills; sheep are growing up on the Western ranges and yielding their fleeces to the shearers. Bread comes from the bakeries for this evening's rise, and other bread replaces it. Flour comes from the mills; wheat from the elevators, and ultimately from the soil. Everywhere there is the series of capital-goods in various stages of advancement. Everywhere industry is applied to this stock of goods, to ripen it, thus making good the waste of its tissues which results from the withdrawal of the consumers' goods and keeping the series intact.
For the immediate creation of wealth for consumption, then, there is needed: (1) A series of consumers' goods in various stages of advancement; (2) workers and tools at each point along the line; (3) simultaneous work. Out of this organization comes consumers' wealth, yet the supply of producers' wealth never fails. The men keep the stock of capital-goods from failing. The permanent stock of shifting capital-goods—the true capital—keeps the men from waiting.*43
Notes for this chapter
For an early discussion of this subject see Chapters vii and viii of The Philosophy of Wealth, by the author of the present work.
The amount of A''' which ripens in a given time is the product of quantity and since the quantity of unfinished goods on hand, in connection with the rate at which each piece moves toward completion, determines the gross amount completed within a given period. In so far as the quantity of unfinished goods varies directly as the number of units of labor and of capital that are at work on them, the quantity of income goods per unit of labor and of capital depends on mere velocity of movement. The gross quantities of wages and interest are the products of the two factors, quantity and speed of flow; but the rates depend mainly on speed. How quickly can an A be made and transformed into all A'''? This is the chief question to be asked, in this connection, if what we want is the rate of wages and that of interest.
An unfinished raft is wealth, though it is not yet a consumers' good. It is a capital-good. The first log that is put into position for the making of the raft is a bit of wealth of this kind. It follows that for the creation of the beginnings of wealth effort without time is all that is requisite. We have, however, been careful to keep in view finished goods, in condition to render their services to the men who make them. For securing these, an amount of time that is at least appreciable is requisite. Yet one cannot work on raw material through any period of time without having a bit of capital-goods in his hands undergoing n manipulation. The full statement, therefore, is that, with only man and nature in existence at the outset, production is initiated by labor only, and the simplest kind of capital-goods is brought at once into existence. Further effort, extending through time, insures consumers' goods, but not without manipulating the materials that are in the interim capital-goods. Capital is requisite for the creation of wealth in the forms in which it can satisfy direct wants.
For an earlier statement of these principles see an article on "The Genesis of Capital" in the Yale Review for November, 1893.
End of Notes
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