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

This whole argument concerns, not the existence of rent, but the disposition of it as an income. Not one of the hypotheses that have here been made, following the line of the classical argument, annihilates the element, rent: the product attributable to land still exists. There is a definite number of bushels of wheat somewhere in the granaries that has been brought into existence by the agency of good land. This wheat is, in reality, the rent of the land; and some one has the value of it as an income. The fact that one person rather than another has this income is not anything that affects values, and this is all that the traditional argument proves. It establishes the fact that the European system of landlord and tenant leaves values where they would be, if the land were the property of the cultivators or of the nation as a whole. Under either of these conditions, rent would exist; and it would constitute an element in supply that would affect value.
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It is a striking fact—but one hitherto much neglected—that similar conclusions apply to the product of every other agent. The principle of rent may be applied, as we have seen, to the concrete products of all artificial capital-goods, and even to those of workmen. In the same inaccurate sense in which it may be said that the rent of land is not an element in price, the rents of tools, etc., and those of men themselves, or interest and wages, are not elements in price. It makes no difference who gets these amounts. Price remains the same, whether we take one of them away from the persons who now get it and bestow it on others, or leave it where it is. We can repeat, word for word, the argument concerning the rent of land, making it apply to the rent of men or to that of artificial instruments, and it will be as true in the one case as in the other. The differential product of artificial instruments of superior quality still constitutes the interest on the capital that they embody, and the differential product of men of superior quality constitutes wages.

Artificial instruments of production are virtually loaned for hire, when the capitalist loans “money” with which to buy them or have them made. What goes to the capitalist is really the earnings of the instruments; but it goes in the form of an annual fraction of the money that he has advanced; and it is thought of in this form, and termed interest rather than rent. If the capitalist says, “I will take none of this interest,” the earnings of the instruments simply remain in the in hands of the
entrepreneur. The price of the products is unaffected. Some of these products, as we have seen, are created by the use of no-rent instruments; and the price is sufficient to justify the use of these instruments. At that price the public demands a certain quantity; and this cannot be secured without using the no-rent instruments, except in ways that are even more costly. The quantity will be secured and the no-rent instruments will be used. With that quantity of product in the market, the price will justify the using of these instruments. The
entrepreneur will now keep the rent that the capitalist makes over to him, but the value of the goods produced will not be changed.

The
entrepreneur may refuse to keep the gain and may pass it on to his workmen; but it exists still, as the rent of concrete instruments of production or—what is the same thing—as the interest on the capital that is in them. This second transfer produces no more effect on price than did the first. The value of the goods is still enough to justify using the marginal instruments. If the workmen in certain factories were to refuse to receive this rent, it might be passed on to the purchasers of the particular goods that were made in these establishments, in the shape of a discount from the market value of these goods; but the price of similar goods would remain the same as before. The rent of the good tools, etc., used in these factories,—or the interest on the capital in them,—would still be in existence; but the purchasers of the particular goods made by this capital would have it. It makes no difference whether capitalists,
entrepreneurs, laborers or favored customers get this interest: prices are not affected by transfers of it from one class to another. In reality, the existence of the interest, or the rent of the capital-goods, is of importance. It is a part of the supply of the goods; and, like every other part of the supply, it is a regular determinant of price.

Exactly the same principles apply to labor and wages. There are a few no-rent laborers at work, though they are not numerous; and what they create is really an infinitesimal part of the supply of goods. If they were more numerous than they are, it would be possible to point to a considerable part of the supply of any one kind of goods and say that this part had been created entirely by capital in the hands of no-rent men—capital working at the “greatest disadvantage.” The public needs this part of the supply and is willing to buy it at the rate at which it pays to produce it by entrusting capital to these marginal workers. In such hands, the capital creates less than it creates elsewhere, and the
entrepreneur has to pay for the capital; so that, in terms of interest, this part of the supply of the product is the “costliest” part, since the
entrepreneur must use more capital in order to bring a given number of goods into existence by the aid of poor labor than he would use with good labor. Five thousand dollars entrusted to a no-rent man may create no more than would five hundred entrusted to an average worker. The cost of all parts of the supply is, however, uniform. The cost of what is produced by hiring capital, paying interest on it and entrusting it to no-rent men, resolves itself wholly into interest, while that of most parts of the supply consists partly of wages; but the amount of the cost of the several parts is the same, and the value of all parts is equal.

The consideration of such conditions, artificial though they be, under which owners of capital-goods of any kind should refuse to accept the incomes from them, reveals the generic fact that the ownership of an income is not, but that the existence of it is, a determinant of price. Exactly this can, however, be shown to be true of wages. In the same sense in which the interest on artificial capital and the rent of land are not elements in price, wages have no effect on price. If good workers were to relinquish their claims against their employers and work for nothing, the price of the goods would still conform to their marginal utility. It would, incidentally, equal the cost of creating them by means of the labor of no-rent workers, even if the
entrepreneurs should pocket the relinquished wages, or should pass them on to capitalists, as a premium on interest, or to favored customers, as a discount on the market value of goods. But wages would exist in any of these cases, even if the wage-earners did not get them; and prices would be the same as though distribution had not been tampered with.

This hypothesis has an unnatural sound, for there are very few no-rent laborers in the field. Men who produce nothing, get nothing; and the cases are rare in which such persons work at all. They work only where the sacrifice that labor entails is, in some way, offset by a personal benefit; and this is the same as saying that they work only where labor entails no real sacrifice. Yet the proposition, that what has been claimed concerning rent is equally true of wages, is perfectly sound. If there is any sense in which land is not an element in price, then
in the same sense wages are not an element. The important kernel of truth in both of these statements is the insistence upon the fact that the
identity of the persons who receive these incomes is immaterial as affecting prices. It is not true, however, that the
existence of these rewards is thus unimportant. On the contrary, rent of land, rent of concrete instruments and rent of men are all components of the supply of goods—that is, are price determiners.

If wages are not an element in price, then rent is not so; and this is an absurdity. Wages, as a whole, are the rent of social labor as a whole; and the wages of laborers in a group are the rent of the labor in that group. We may here cease to treat as rent producers laborers in the concrete or men of different grades of producing ability. We may now bring into view a permanent force of labor, as such, measured in units. The no-rent laborer embodies not a single unit of labor; and though he can put forth effort, he cannot himself produce anything. But the man of the highest grade, the very high-rent laborer, represents many units of labor in the abstract, for he has the power to create a large product. Measuring the working force in units, we may get from the formula that expresses the law of interest a surplus, or differential amount, which is the rent of pure labor, as such.

Let us assume that the number of units of labor is fixed, that capital increases unit by unit, that the amount of capital is measured along the line AD, and that the productivity of successive units of it declines along the curve BC. AECD is, then, interest and EBC is the surplus, or the rent of labor.

In this view, the last unit of the supply of the product is the one that is created by the final unit of capital, unaided by labor. In our former study, we noticed the virtual isolation of this final unit and of its product. Add a unit of capital and you get a certain net addition to the output of goods, and that without any change in the laboring force. Take away a unit of capital and you make a net deduction from the product, and that, too, without any change in the laboring force. The addition that you make in the one case and the deduction that you make in the other are the products of the units of capital that you respectively add and subtract. If you neither add nor subtract any capital, but leave the amount as it is, there is in the output of the industry a certain final or marginal amount that is entirely due to the presence of the final unit of capitalism—an amount in the production of which labor does not coöperate.

Now, if the traditional reasoning about land and its products has validity, the same kind of reasoning is valid here. The price of the goods must be sufficiently high to enable the
entrepreneur to create a certain marginal portion of them by the use of this final unit of capital, unaided by labor. The fact that the earlier units of capital—aided, as they are, by labor—produce “at better advantage” does not affect the price, since that equals the cost of the marginal unit of the supply, which is traceable to the marginal unit of capital. If we can conceive such a thing as an entire working force refusing to accept wages, while continuing to work, then we must accept the conclusion that the
entrepreneurs will pocket the gain. They will, obviously, be under no necessity for passing it over to the public; since, by the action of the law of value, they can always get from the public a price that equals the cost of that marginal unit of the product into which labor does not enter. If the
entrepreneurs choose to dispose of this gain by making it over to capitalists, the effect on price will be
nil; and nothing short of presenting it to the public as a gratuity, by arbitrarily and unnecessarily throwing off something from the price of the whole supply, will cause the price to change. In short, total wages, or the rent of the whole force of social labor, bears the same relation to price as does the rent of land.

Real wages are the goods that labor itself, apart from capital, produces. These goods, like those which land produces, are a component in the supply of the goods and an element in price, although the question who gets them has no bearing on price. If real wages, or the distinct product of labor, were to grow smaller, the absolute value created in a year would become less, and the relative values of different commodities would be affected. A reduction of the contribution that labor makes to the output of different kinds of goods would, however, affect the supplies of the several kinds of goods unequally; since labor creates a certain part of the supply of (say) woollen cloth and a different part of the supply of steel. A horizontal shrinkage of wages, or of the product of labor, would cause the output of woollen cloth and of steel to contract unequally and would thus affect their relative values.

Rent is always product—that is, the part of the total product that can be traced to a distinguishable agent of production. The statement that product is not an element in value is, then, obviously an absurdity; just as the assertion that any component element in product is not an element in value is an absurdity. We have just seen that a general shrinkage of the product of labor would reduce the product of different kinds of goods unevenly; for, since labor enters into the different industries in unequal proportions, this would change relative values. For a similar reason, a shrinkage in the product of artificial capital would also have this effect. This capital enters in unlike proportions into the production of different kinds of goods; and if the whole product of it were to become less, the comparative quantities of different commodities in the market would be changed. Even the gross amount of every rent is an element in relative value; and the rent that is realized from any agent of production in a particular sub-group—or, in other words, the contribution that this agent makes to the product of the sub-group—is obviously an element in adjusting relative values. In this respect the rents of land, of artificial capital and of laborers are all alike. It would be absurd to assert, broadly and vaguely, that wages are not an element in price; and it is equally fallacious to say, in the same vague and sweeping way, that the rent of land is not such an element. These propositions are all specific applications of one principle. Rent is product; product controls values; the existence of any part of any product is important, as fixing the price of the product. But the question who gets this product is not thus important; and the destination of rent as an income is not, in this direct way, a factor in value.

The idea that different parts of a product can be created by an
entrepreneur at greater or less advantage to himself, or at greater or less cost, is fallacious. It is
entrepreneur’s cost that figures in connection with the permanent or “natural” adjustment of values: in a static state all things tend, in the long run, to sell for what they cost the
entrepreneur.*52 To him it makes no difference whether he hires one agent or another, or the two together; since he gets the same results for the same outlay in all cases. When he uses good land and gets a given amount of produce with very little labor, he is employing much of the first agent and relatively little of the second; but he is virtually buying the product of the land at its market value, and he is buying the product of labor also at its value. Hiring an agent is buying the product of the agent, and the values of all parts of the same product are uniform. When the
entrepreneur uses the poorest land and pays nothing for it, he is employing one real-paying agent instead of two; but he gets the produce at the same price per unit, neither more nor less. In a perfectly static state, in the case of any one commodity, cost is as uniform as is price.

The rent of any agent comes into existence in the hands of the
entrepreneur, and it consists in the goods that the agent produces. The selling of the goods puts the rent into the form of money, but it is still in the
entrepreneur’s possession. When he pays this rent to the owner of the productive agent, rent becomes to the
entrepreneur a cost. In a static state, all the
entrepreneur’s costs consist in such rent claims made on him by laborers and capitalists. As rents created in the shop are products, and as rents received by owners of productive agents are incomes, so rents paid by
entrepreneurs are costs. All rents are, at the proper stage of their existence, thus paid by
entrepreneurs; and at this stage rents and costs are synonymous. Costs are then determinants of value. The broader statement is that rents are products, originally and fundamentally; that the quantities of products fix values; and that values, as thus fixed, influence the income that each specific industry, taken as a whole, can get.
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Note.—For the earliest statement of the theory advanced in this chapter the reader is referred to an extended supplementary net, in a monograph on
The Possibility of a Scientific Law of Wages, published by the American Economic Association, in March, 1889. At the same date there appeared, in Professor Wieser’s work on
Natural Value (Chapter XII), an argument maintaining that the part of rent that is not differential, but general, is an element in price making; while even the differential portion may be such an element, provided the land that earns this income is devoted to “secondary or derivative” uses. In Professor Marshall’s
Principles of Economics (Book V, Chapter VIII), it is shown that, by reason of the competition of different agricultural uses of land with each other, the amount of land devoted to a particular crop may be limited, the supply of that kind of produce may be reduced and the price may be influenced by this limitation of the supply. The reader will see that in the argument presented in the present work the contention is made that all rents, even though they may be reduced to differential quantities, are essentially contributions to the supply of goods and elements in the determining of values, and also that all the rents that have been enumerated are, in this respect, on a parity.

In a work on the
Theory of Wages, by Mr. Herbert M. Thompson, published in 1892, the view is maintained that rents “in the aggregate” are elements that enter into the expenses of production, as do wages, profits, and interest considered as aggregates, and that “the analogy which subsists between land and other agents of production is a very close one.” This theory has a near kinship with the one here advanced.

In Part III, Chapter IV, of his work on
Principles of Social Economics, Mr. George Gunton criticises on quite different grounds the traditional view of the relation of rent to prices.

In connection with all early discussions of rent, and particularly with that of Ricardo, it is to be recalled that at the time when they appeared the distinction between the statics and the dynamics of the subject was not consciously drawn by any one. The impulse to study rent came from a dynamic fact—namely, the increasing density of population and the increasing cost of food products that is traceable to the action of the law of diminishing returns in agriculture. It was to be expected that a writer of that period, in presenting the standard to which under the conditions of a single year rent tends to conform—which is a static subject—would be led to make incursions into dynamic territory. These are wholly admissible, when they are made for the purpose of showing how a static adjustment is brought about. We explain the forces that keep the surface of a pool of water level by showing what movements would bring the surface to the level, if the waters were injected into the pool in irregular fashion and in a way to make the surface originally uneven. References like this to dynamic economic forces are needed in explaining the adjustments of the industrial groups and of values, wages and interest; and they are equally in order in explaining ground rent, when that is singled out as a special and unique product. It is to be recalled, however, that the mode of treatment that merges statics and dynamics, without making a conscious distinction between them, must result in giving a formula for measuring rent that, if it were applied without amendment in dynamic conditions, would give a result either larger or smaller than the actual returns that accrue from the use of land. When society is in the midst of the disturbances that inventions, migration, and a comprehensive reorganization of the business world create, what is actually gained by the use of a piece of land often contains theoretical static rent, with an element of
entrepreneur’s profit added or a loss deducted. It is prospective profit that lures
entrepreneurs to the occupation of wholly new areas of ground, and a rigorous application of an economic test is necessary in order to determine how much of the composite gain is true rent. Moreover, the conditions afforded by such a dynamic state make the Ricardian formula, which gives a correct measure of rent in a static state, inadequate for making each a separation of the composite income and isolating rent from all admixtures. For the scientific isolating and measuring of rent in a dynamic society, we need, first, a formula that is akin to the one used by Ricardo and, secondly, a further formula that will account for the difference between the theoretical rent that the Ricardian formula directly affords and a different rent, strictly static, toward which actual rent is tending. The discussion of the dynamics of rent must, however, be reserved for a later volume.