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

John Bates Clark, from the Warren J. Samuels Portrait Collection
Clark, John Bates
(1847-1938)
BIO
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Editor/Trans.
First Pub. Date
1899
Publisher/Edition
New York: The Macmillan Company
Pub. Date
1908
Comments

1. By "wealth" is meant those sources of human welfare which the are material, transferable and limited in quantity. See the first chapter of The Philosophy of Wealth by the author of the present work.

2. The rent of land is to be regarded—for reasons that will appear later—as merged with interest. This, however, involves an extension of the traditional theory of rent, rather than a denial of it.

Chapter II

3. An article is not finished, in the economic sense, till the retail merchant has found the customer whose needs it satisfies. The sale of completed articles is thus the terminal act of social production.

Chapter III

4. If the term "statics of distribution" had been used and had been very broadly defined, it might have been made to coincide in its scope with the second of the three proposed divisions; but this would have involved attaching a broad meaning to the term, distribution, since it would thus have made it to cover the organization of productive society into groups.

figureDividing a field by two intersecting lines makes four divisions instead of three. A treatment of every possible phase of economic life would require us to study field 1 of the accompanying diagram, or primitive economic statics, and then field 2, or primitive economic dynamics. If after this we were to enter the social territory, we should at once be in field 4, that of social economic dynamics, and should have passed by the indispensable division of social economic statics. As our entire purpose is to understand the laws of a dynamic social industry, we attain our end by covering only fields 1, 3 and 4.

Chapter IV

5. The reader is referred to the English works of J. S. Mill, Henry Fawcett, Sidgwick and Marshall, to authoritative foreign treatises, and to such American works as those of F. A. Walker, Hadley and others, for able presentations of economic truths that are universal in their application, although these are not formally separated from those which are limited in their application to a social economy.

6. See The Philosophy of Wealth.

7. The reason for omitting to treat profits at this point will soon appear. See p. 70, also p. 78 et seq.

8. Here the greatest of care has to be used in the definition of terms. We have said that the specific productivity of labor fixes wages; and this means that pay conforms to the amount of product that is specifically imputable to any one unit of labor in a working force. This implies that the products of the different units are equal. In like manner, the specific productivity of capital fixes interest. The earnings of a dollar are what the dollar creates; and this implies that in any one fund of capital, as it is described in terms of money, the products of all the different dollars are the same. Yet the law of diminishing productivity seems to require that the products of different units of labor and of capital should be unlike and that final units should be the least productive. Here is, apparently, a startling contradiction; but it will soon disappear. If terms be defined with care, final productivity and specific productivity mean the same thing. Only when the terms are so used is it correct to say that wages are fixed by the final productivity of labor and interest by that of capital. Moreover, when the term productivity is otherwise defined, it leads to a theory of the exploitation of labor. If units of labor that stand early in a series continue to create more wealth than they get, labor is robbed. The theory that makes society honest and the one that makes it to be a system of organized plundering of labor are distinguished by the two unlike definitions of the term, final productivity. We must soon make clear the nature of these opposite views that may be stated in the same terms. We must separate the concept of final productivity that is identical with specific productivity from the one that is unlike it. This, however, is the work of a later chapter.

Chapter VII

9. This view may involve an imperfect conception of the law of value; for it is, of course, the final utility of that part of the wheat crop which remains at home that directly fixes the value of it here. England, however, represents the European market; and this, in its entirety, draws away enough of the American wheat crop to reduce appreciably the amount that has to be consumed here. The final utility of the part of the crop that is thus left at home is raised to such a level that it can be sold as advantageously here as in Europe.

10. For an early publication of the substance of this chapter and of much of the following one, the reader as referred to a monograph of the American Economic Association, containing a paper on "The Possibility of a Scientific Law of Wages." The paper was presented at a meeting of the Association held in December, 1888, and was printed in March, 1889. One qualification of the statement made in that monograph is to be found at the end of the eighth chapter of the present work.

The substance of much of the ninth and tenth chapters of this book was first published in May, 1888, in monograph of the American Economic Association on "Capital and its Earnings"; and a further part was published in the Yale Review for November, 1893, in an article on "The Genesis of Capital."

Chapter IX

11. In a monograph of the American Economic Association on "Capital and its Earnings," published in May, 1888, I called attention to the distinction between capital and capital-goods, and applied the term pure capital to the permanent fund of productive wealth. The word "pure" suggests freedom from some admixture, and the admixture that is excluded is a combination with concrete objects such as tools, etc. Yet it was not at all my intention to convey the idea that pure capital is something that can objectively exist without being in such a combination. It is, however, thought of in ways in which, in the concept itself, it has to be freed from the combination. "It lasts," as we say, and "it moves from industry to industry"; but the tools do not last, and they do not change their places as working implements. The fund, the "dollars," or the pure capital does these things. When one set of bodies perishes and another one replaces it, we say that capital continues, and yet it is only an abstraction that has literally a continuous existence. The concrete embodiments of the abstraction have only transient existences. With this understanding, pure capital might be termed capital in the abstract, though it is never objectively an abstraction. It is value embodied in goods the identity of which is perpetually changing, so that any affirmation that may be made of the permanent fund applies to-day to one set of bodies, to-morrow to another, etc. Here is the kernel of the logical distinction. An affirmation that is made about capital goods involves retaining the idea of the identity of the goods. We say "all capital-goods perish," and we mean by it, not that all matter belonging to the genus capital-goods perishes from the earth, but that the particular capital-goods that we identify in the affirmation do this. A literal description of what, in the monograph referred to, was called pure capital, and is here called capital, might term it a quantum of matter of the kind defined as producers' goods, measured in terms of value and having the characteristic of forever shifting its bodily identity. Nothing that is permanently true can be affirmed of the goods, as such: since the particular goods themselves do not abide. Such affirmations may be made only of the fund.

12. See Professor v. Böhm-Bawerk's Positive Theory of Capital.

13. The bringing of a new coördinated series of capital-goods into existence takes time. The original planting of the forest, in our illustration, involved waiting for fifty years before the cutting of the first row of trees could take place. This, however, is not the kind of waiting that is supposed to be involved in the use of capital. If no new capital were ever to be created, the vast fund that now exists would do its work forever. Interest would still be created; and, if capital were loaned, interest would still be paid by one person to another. In this there would, of course, be no waiting that would be like that which the original maker of the forest had to do; and we have seen that this is the only waiting that is involved in the process.

Moreover, this waiting that takes place in the creating of a new coördinated series of capital goods, like the forest trees, or the A's, the B's, and the C's of our more general illustration, is not a waiting for income. The capitalist, even here, gets his income every year; but he is forced to take it in the form of more capital. The forest, when it has reached the degree of maturity at which cutting begins, is worth more than fifty times the amount that has been spent on it each year. It is a bad investment if it is not then worth enough to pay interest on all the capital that has been sunk on it in the making. The owner has had to forego dividends, in the shape of firewood, and to take what, in the case of corporations, are rated as additions to a surplus of real capital. The capitalist who makes up his mind to secure such an instrument of production as a growing forest, a canal, a tunnel, or anything that takes time in the making, has to forego getting an income the form of consumers' goods, while the instrument is making. He does not, however, wait far his true income even during that time; and after that he does not wait for consumers' goods or far anything else. The instrument will, of itself, virtually create a new instrument to take its place when it is discarded: the series of capital-goods will be self-perpetuating. All the while it will yield a net income, in goods for consumption, to its owners; and this creation of income in this form will go on day by day, as the capital does its work. To-day's work will bring today's income, and to-morrow's will do the same.

It is worthy of notice that, so far as the periods which are bounded by the beginning and the end of particular instruments are concerned, a certain slow increase of their average length takes place, as capital increases, because this increase makes it desirable to substitute durable things for more perishable ones. Some marginal capital may substitute a steel bridge for a wooden one. But the duration of the series of steel bridges, which embodies the true capital, is not different from that of the wooden ones; and the duration of any one bridge in the series, on the supposition that it replaces itself by special earnings, is a matter of indifference to the capitalist. Moreover, the lengthening of the average period is not in proportion to the increase of capital. On the quantity of this capital depends the productivity of the final unit of it.

In connection with the definitions of rent and interest given in the foregoing chapter, see Chapters XIX and XXII.

Chapter X

14. The pure fund of capital may even stay longer in some kinds of passive capital-goods than it does in some active instruments. Emery, for example, is an active agent for polishing metals. While doing its work, it imparts utilities and does not receive them; but it does not last long, and the metal that it is polishing may continue for a much longer time in the condition of a passive instrument. Coal, too, is an active instrument: it is not in the mill for the purposes of receiving any additional utility, but is there for the purpose of helping workmen to impart utility. It transmutes itself into power, and saves muscle; but it perishes quickly. The essential fact is that it is for the interest of the owner to have his emery-wheels last as long as they will, and to have his coal keep up a fire as long as it will. Capital may stay for an instant in steam, and for an hour in the fuel that generates it; but it also stays for weeks in unfinished products. It remains for years in machines, for decades in the buildings that house them, and forever in the land that the buildings now stand on. Fixed capital will always keep its forms as long as it can; while circulating capital will change its forms as quickly as it can.

15. Professor Cairnes, in his latter-day effort to galvanize the wages-fund doctrine into life, classified all capital as consisting in raw materials, fixed capital and the wages fund. If his terms be understood in the natural way, this classification involves adding together two qualities and one pure quantity in order to get a sum total. The wages fund is a quantitative fraction of all the capital in existence; while raw materials and fixed capital, in the sense in which Professor Cannes uses the terms, are material forms of it—are kinds of capital-goods.

If, however, we interpret all three terms as referring to kinds of wealth, and not to quantities, we encounter another difficulty that is equally fatal. Let us make the terms, wages, found in this connection, mean the kind of goods that laborers consume; and we now have, as the three varieties of capital-goods, raw materials, fixed capital (meaning active instruments of production), and, finally, the commodities that laborers consume. The third kind of capital-goods, however, nowhere exists. Instrumental wealth is all included in the first two classes. Every bit of it is either in the category of active instruments of production, or in that of passive instruments; it is either among the tools that transform, or among bit matter that is in the transforming.

It is clear that Professor Cairnes could not have intended by the term wages fund to designate goods in retail shops; for many of these are destined for the use of other persons than laborers. If they are neither raw materials nor fixed capital, they cannot not find a place anywhere in Professor Cairnes's classification; yet obviously they represent a part of the merchant's capital. A list of varieties of capital that was intended to include the whole of it, could not well omit those parts of the stocks of retail merchants that are designed to be sold to these men who are not laborers. If they are not raw materials, they are not forms of capital at all, according to Professor Cairnes's classification; and if they are raw materials, then the parts of the stocks that workmen will buy come in the same class, and should not be counted a second time as the "wages fund."

Retail stocks are, in fact, passive capital-goods, receiving utilities. Thus, the shoe that is in a box on a merchant's shelves has by no means acquired its full service-rendering power until a foot is found that it fits, and the fabric that lies in a roll upon the counter will not develop its full utility until a customer comes whose taste it shall accurately gratify. All goods that are waiting to be parcelled in proper quantities and delivered at customers' houses, are waiting to have producers' finishing touches put upon them—are consumers' goods in the making, like any other raw materials.

An article by Professor S. N. Patten, in the Quarterly Journal of Economics for January, 1889, discusses admirably the case of food storing that is compelled by the intermittence of agriculture, and makes an acute study of the element, time, in connection with capital and its function.

Chapter XI

16. The possibility that in the early stages of the growth of the laboring force, the diminution of the returns might be counteracted by improved combinations among the men, or by improved methods of tillage, needs to be considered, as do other dynamic influences, in a separate division of economic theory.

Chapter XII

17. The theory advanced in this chapter and the two following ones was first published in the Quarterly Journal of Economics, in two articles entitled, respectively, "Distribution as Determined by the Law of Rent" (April, 1891), and "A Universal Law of Economic Variation" (April, 1894).

Chapter XIII

18. It will be seen that this is not calling land capital. When land is referred to, it will be called by its ordinary name. There is a constant necessity for referring to the total fund of permanent productive wealth that is embodied in land and in artificial instruments. When this is thought of, in practical life, as "money invested in business," it is designated by the term capital; and in this went it will be so called. The objection to calling land one variety of capital-goods vanishes, if it is admissible to call all productive wealth, "in the abstract," capital. Any objection that may arise to this usage is less serious than is the objection to using through a long discussion such a phrase as "permanent fund of productive wealth," or some equivalent and equally inconvenient expression. The nomenclature that we adopt guards not only against confounding land with this fund, but against confounding any other instrument, as concretely regarded, with it. In this, at least, it is a strict constructionist nomenclature.

19. See Ch. XXII.

20. These are (1) the rent of all capital, (2) that of all labor, (3) that of particular capital-goods, and (4) that of particular laborers.

21. The law of rent, a commonly stated, has the defect that is illustrated by the former of these cases, where it is applied to the reward for labor. The farmer who figures in the current statement of the law hires his men at the wages that prevail in the various industries that are carried on about him; and, when he finds that men will not produce their wages, he quits enlarging his force. Each of the earlier men creates a surplus above his wages. When we are considering the rent of a limited piece of land devoted to one use, the scientific way to calculate the rent is to use as the subtrahend wages, rather than the final product of labor; since it is wages that fix final product. If what we want is a genuine differential product, we must isolate our working society, count the laborers, set them all at work and let the last produce what he can. There will then be a difference between what each of the earlier men produces and this final or standard product. This is, in each case, a true differential product. it is measured by comparing, not products created for the farmer and wages paid by him, but one product with another product.

22. In the case of the first increment of labor, we might, by different dialectics, attribute the whole product to the land. Figure.  Click to enlarge in new window.Labor by itself creates nothing, and the addition of the land brings the whole product into existence. Again, by subdividing the one unit of labor into a series of smaller units, we might attribute the product partly to the labor and partly to the land. The product of the last fractional unit of labor would then set to standard to which wages, or the effective product of all fractional units of labor, would conform; and the figure that would express this fact would be the one in which AB' is the amount that is attributable to each fractional unit of labor, AA'B'E is the amount that is attributable to all the labor, and EB'B is the amount that is attributable to the land. It is when there is more than one unit of labor at work that it becomes clear how much should be attributed to all the labor and how much to the land.

23. The above theses appear sharply to contradict the theory of wages advanced by the late President Francis A. Walker, in which wages are called the residual share in distribution. It is an aid in removing causes of confusion from the discussion, and in giving to the theory of this eminent economist what is due to it, to notice the fact that his study was essentially a study of a subject in economic dynamics. If the total product of industry becomes larger than it has been, and if interest, rent and profit do not become any greater than they were, wages must absorb the whole increase. In this view, the residuum may be regarded as a remainder that is left when the former product of the whole industry is subtracted from the present product. Such a view of the power of labor to get all the increase that dynamic changes create would be consistent with the view that, in the merely static adjustment that takes place at all times, wages are determined directly by the law of final productivity, as are other shares of the total product. We might claim that the progress which makes industry, as a whole, more productive makes labor, separately considered, more so, but leaves the productivity of other agents unchanged. Laborers would then, in each static adjustment that takes place, force entrepreneurs to give them their product, just as capitalists would do. Statically, wages would be determined directly; while dynamically they would consist partly in a residuum, made by deducting the former product of industry, as a whole, from the present prouduct.

In our view, progress in methods of production makes both labor and capital more productive; and the fruits of progress are thus shared by the two agents, according to the degrees of specific productivity that the progress gives to them. Labor, then, does net get the whole difference between the former product of industry and the present product. What we are trying to make clear is that, in a merely static adjustment of shares in distribution, both wages and interest must be determined directly, and not residually. After paying interest, the entrepreneur has wages left in his hands; but he is forced to pay it to labor because it is the product of labor. In making his bargain, the worker has the benefit of free competition. He is virtually selling his forthcoming product, and can resort to another employer, if the present one refuses to give him the full value of it. The capitalist, in making this contract for the payment of interest, is in the same way selling a product, and can exact the value of it. Without this power, neither laborers nor capitalists could get their shares from the entrepreneur's hands. For an early statement of the principles presented in this chapter, the reader is referred to an article by the present writer, in the Quarterly Journal of Economics, for April, 1891, on "Distribution as Determined by a Law of Rent."

Chapter XIV

24. These curves tell, also, what may be true of raw material that is capable of being put into many kinds of finished goods. Oak lumber offered for sale, foot after foot, may have a utility that diminishes quite gradually; for it can be wrought into tables, chairs, mantels, bookcases, doors, etc. But if, on the other band, its use were confined to the making of dining-tables of one pattern, the utility of the lumber itself would soon be slight. Raw materials, however, are not consumers' goods and should not figure at all to this part of the study. They have productivity, but none of the utility of which we are speaking.

25. See Ch. XVII.

26. The law of variation that we have stated in this chapter is so comprehensive that, in another mode of action, it fixes wages. The pay of labor is governed by the final productivity of labor, as such, and not merely by the productive power of a final or marginal laborer. We can add to the supply of labor by making workmen more efficient, as well as by making them more numerous. Educating and training men adds new increments to the supply of human productive energy. We can arrange increments of labor, as such, in a series, in the order of their importance, and define the successive increments in the same analytical way in which we have defined the increments of consumers' wealth and those of producers' wealth. In the series of increments of labor, as thus defined, there is traceable the law of diminishing productivity; and it is the productive power of the final increment of labor, thus defined, that in reality governs the rate of wages.

Chapter XV

27. The money that the man spends really represents some sacrifice on his own part; and a full statement of the theory of value would take us into a psychological region whenever we speak of cost, as it does whenever we speak of utility. Cost is, in the last analysis, pain inflicted, just as utility is pleasure conferred. So far in the study we do not now need to go. It is enough, for present purposes, that the man, as a result of his sacrifices, has dimes to spend and is studying how to make the most of them.

Chapter XVI

28. See The Positive Theory of Capital, by Professor von Böhm-Bawerk, page 146.

29. A full study of value would, of course, notice many things that we here omit. One of them is, that a rise in the price of any article in the list would cause purchasers of the class first mentioned, if their incomes in money remained unchanged, to cease buying F. The demand for the marginal goods of each of the classes of purchasers is thus checked, wherever goods that are not marginal became dearer. Moreover, when a rise in price, either of F or of one of the other things, throws F out of the purchasing list, some article—say, G—may take its place. There is in this, however, nothing that calls for a modification of what we here affirm—namely, that each class of purchasers has its marginal article, that the utility of that article to them has a direct influence in the adjusting of the price of it, and that the utility to these persons of other things has no direct influence on values.

30. A point of much consequence is the fact that many articles have secondary uses, besides those for which they are primarily intended; and so more than one such article may be useful—but for different purposes—to a consumer at one time. The roll, in Professor Böhm-Bawerk's illustration, already cited, can be used to feed a dog as well as a man; and, if we regard the dog, not as a consumer, but as a commodity for his owner's consumption, the roll that appeases the dog's hunger is put to a distinct and subordinate use. Again, the sportsman whose hunting lodge is on one of the Adirondack lakes may keep boats on several others, for the sole purpose of saving the trouble involved in carrying boats from place to place. None of these boats, of course, except the least useful of them, can, in its entirety, be a marginal and price-making commodity. If the owner, for economy, relinquishes any of his boats, it will be this marginal one; and he will give for no one of them more than the marginal one is worth to him. Does that change the principle that we have just stated, that values rest on marginal utilities in goods rather than on goods in their entirety? Let us see.

If the prices of the boats rise, the man who is about to purchase an outfit of them has the alternative of getting on with one less than he had intended to procure, or keeping the proposed number intact and somewhat reducing the quality of all. If he had intended to buy five boats, for use on five different bodies of water, he may content himself with four; and, in lieu of the fifth, he may submit to the inconvenience of carrying one of the others occasionally to the lake where the fifth would have been kept. If this is a smaller sacrifice than is involved in reducing the quality of (say) three of the less important boats, it is conceivable that we have here an exceptional case, in which an entire marginal article of a high grade figures as a price-making increment of consumers' wealth. The man may buy no boats but those of the quality that he had intended to buy before the price was raised, but he may take fewer of them. The utility of the final one, consisting solely in its power to save to the owner the trouble of having a boat transported, will furnish a gauge for the price that this man will pay for all boats of this kind. It is the fortuitous fact that the article has secondary uses which makes this mode of adjusting the price of it possible.

The line of conduct that the owner of these boats is here supposed to pursue is, be it noted, not the line that consumers usually pursue. In a vast majority of cases, a rise in the price of goods of a particular kind throws, not entire goods, but marginal qualities in goods out of use. Even in the case—not over-frequent—of the man who is about to buy several exactly similar boats, the chances are ten to one that a rise in price would cause him to forego something in the quality of one or more of them. If he does this,—if he takes cheaper boats for the less important uses,—the principle that we have stated applies.

Goods of the very poorest grade may, indeed, be marginal in their entirety. If there is no cheaper kind to which one may resort, he must take this grade or nothing. Even then he will doubtless seek for some article, of a somewhat different kind, that will serve as a partial substitute for what he foregoes and, when he does this, the effect is much the same as if a still poorer grade of the article that is foregone had existed.

It should be noted that most articles deteriorate in the using, so that the only way to keep ones self supplied with perfect or nearly perfect goods of this kind is to get new ones often. Wear a coat a few weeks only before discarding it, and be equally liberal with the remainder of your wardrobe, and you will always be clothed in garments that are stylish and free from traces wear. You must, however, buy many coats, etc., in order to do it; and, by thus increasing the quantity of such garments, you really improve the quality of those that you use. This, indeed, is the sole object of the increase. Quantity in goods for consumption may thus really insure quality. It is only the last and least utility that has gone out of a coat that has been used for a short season; and it is only for the sake of restoring that marginal utility float the man buys another. The principle that we have stated operates here. Increasing the amount of consumers' wealth always means improving the quality of consumption, for new qualities are thus added, in an all-around way, to the things that every one uses. There is a social increment of utilities—a vast and composite addition to the service-rendering qualities of things—that appears at every step in the increasing wealth of the world. Those are the strategic elements which rule the market. The measure of them fixes values. The men who, in each case, do the measuring are the agents of society controlling their respective parts of the whole market for consumers' wealth.

Chapter XVII

31. If one part of a symmetrical equipment for carrying on an industry were taken away bodily, this would have such a deranging effect on the remaining parts that it would reduce their own separate power of production. Removing all the locomotives from railroad would, of course, paralyze all the cars, the tracks, the freight-houses, etc.; and removing even one of them might, in a smaller degree, have the same effect, Reducing the quality of the whole equipment by one degree would, however, have no such effect. This method of taking out a increment of capital takes from the product of the whole industry only what is attributable to that one unit. It does not reduce the productive powers of the remaining units.

32. See Ch. X.

33. It is employing new labor without new capital that makes capital-goods more numerous. Extra men can go into a business in which the capital is not enlarged, but they can do this advantageously only where tools are cheapened and multiplied.

In saying that competition tests the productivity of final capital elements, by driving out of business the men in whose plants these elements earn less than a normal amount, we do not deny that the survivors, who fix the rate of interest, must have ways of ascertaining what the final capital elements in their own plants earn for them. By comparisons of various kinds they manage to ascertain what those elements produce, and this knowledge is the basis of the offers that they earn make for loans.

34. In the case of some of the very cheapest tools that are used, an exception to this rule is to be made. They constitute first increments of capital. It is the later increments that cannot be separated from combinations.

Chapter XVIII

35. In the foregoing discussion, the statement has been made that capital-goods, virtually though not literally, make their own successors and thus keep capital unimpaired. Active instruments do this by creating a special income for the group that replaces them. Passive instruments, or raw materials, such as the A, A' and A'' of our table, do it by becoming, in the end, consumers' goods for the men in this series of sub-groups, whose activity keeps the series of A's, etc., intact. The active instruments perish in the using, but the passive ones do not perish while being used as capital-goods. During this process, they receive accretions of value and lose nothing. Only when they cease to be capital-goods and begin to serve consumers do they begin to go to destruction. It is when they are ready for consumption that they are ready to replace themselves by making it possible for the men in the lower sub-groups to replenish the tissue of the circulating capital.

Saying this is not falling into the old error, which has been criticized in an early chapter of this work, of calling a store of food for laborers the primary form of capital. In the view here advanced, (1) there is no such store in existence, (2) the goods of the A''', B''' and C''' type cease instantly to be capital-goods when they are devoted to consumption, and (3) they are not "food for laborers," but income goods for all laborers and capitalists. Further, the way in which they keep the tissues of capital intact is by substituting themselves for capital-goods that laborers and capitalists have already created and that constitute their incomes in the original forms which those incomes take. Products of the type A''', B''' and C''', as they go through the sub-group system to be used, merely transmute incomes already existing into available forms. The A that is created in the lowest sub-group is entirely income to that group; for it is not a constituent part of its capital or of the series that that sub-group must keep intact in its own hands. It represents the amount that this lowest sub-group can afford to spend on its living. In a static state this group will spend the whole amount. To society, these goods, as they are passed on to the A' sub-group, are a constituent part of capital; since society cannot afford to trench on the amount embodied in the complete series of A, A', etc. Society can, however, speed the A''' that has just emerged from the last steps in the series. This it does by substituting the A''' for the unfinished goods that, to the men who now have them, are income in amount but not income in a usable form. In the forms in which they first exist these incomes keep social capital intact.

Chapter XIX

36. It is clear that one group cannot keep its profit-making position in the system, if entrepreneurs who are making no such net gains are at liberty to enter it. May not all entrepreneurs be making the same a rate of net profits, and making them at the same time? May there not be a condition of equal and universal profit? Clearly not; for this would be a universal invitation to capitalists to become entrepreneurs and, is, such, to bid against each other for labor and capital till the profit should everywhere vanish, by being made over to laborers and capitalists in the shape of additions to wages and interest. The pay of each of these agents, therefore, under perfectly free competition, is bound to stand at the productivity level.

37. A difficulty may seem to arise from the fast that a particular entrepreneur, in changing the amount of labor or capital in his establishment, is not greatly affected by a slight change in the value of the product that may result from his action. A concurrent increase in the capital of a whole sub-group would lower the value of its product, but an increase wade by one employer might not do this in any appreciable degree. It might chance that the entire capital of a sub-group would be normal in amount, and that some employers would have too little and others too much. An employer who had too little capital, in proportion to the labor that he employed, would not be deterred from keeping all his men and hiring more capital by the fact that he would make his product cheaper and one who had too much capital and too little labor might not be deterred by the same consideration from imaging all his capital and hiring more men. If this happened often, the whole sub-group would suffer from lowered prices and would reduce its labor and capital in an all-around way. It is clear, however, that it would not happen; with prices normal, the man with a relative excess of labor would find his marginal labor not earning its pay, and would discharge some part of his force; and the man with an excess of capital would, for a similar reason, part with some of that. The labor discharged by the first employer should, in theory, go to the second; and the capital released by the second employer should go to the first. Such adjustments within a sub-group are more easily and surely made than are adjustments between the different groups and sub-groups. The practical fact is that each sub-group attains, by experiment, a knowledge of the normal ratio of labor to capital which in its own specific industry will give the best results. This ratio then tends to remain more or less fixed. Enlargements and reductions of output are afterward made by increasing or reducing labor and capital together, and the motive for the increase or diminution is the state of prices. When the produce of the sub-group is dear, its facilities for production and its operative force are enlarged together.

38. The movements of labor and capital to or from one sub-group are not necessarily from or to another in the same series. There is nothing to prevent labor or capital moving from A' to B'' or to C'''; and, if it does so, it is under the twofold influence of price- and goods-producing power that has been described in the foregoing pages.

39. See Ch. XXII.

Chapter XX

40. For an early discussion of this subject see Chapters vii and viii of The Philosophy of Wealth, by the author of the present work.

41. 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.

42. 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.

43. For an earlier statement of these principles see an article on "The Genesis of Capital" in the Yale Review for November, 1893.

Chapter XXI

44. The most brilliant of early German economists, Von Thünen, offered a theory that applied a final productivity test to both labor and capital, and made wages and interest depend on the result. In his work, Der isolirte Staat, he said that, when new men are taken into an industry,—the tilling of a farm, for example,—they produce less than did the men who were earlier employed. What the farmer gets by means of the labor of the last man, is what he pays for the work of every man. Von Thünen also asserted that a final unit of capital, tested in the same way, shows a similar reduction in its productive power, and that the product of the unit last applied sets the standard of interest.

It is a startling fact that the statements of Von Thünen did not lead directly to the solution of the problem of wages and interest. With such a brilliant beginning of a true theory before them, why should economists still account for the rate of wages, by saying that it depends on the amount of capital that is foreordained to be divided among laborers in the form of wages? Why, also, should they account for the rate of interest merely by saying that it depends on demand and supply? It is doubtless true that Von Thünen himself attached far less importance to his final-productivity formula than he did to that entirely different formula by which, in his view, the socially desirable and rightful rate of wages is expressed; yet it would seem that his statement of the principle of final productivity should have put investigators on the right track.

The explanation is to be found in the incompleteness of Von Thünen's actual theory. It was left in a shape in which it not only fails to reveal the most important fact about wages and interest, but seems actually to contradict it. This fact is that, under the influence of perfectly free competition, the pay of all labor tends to equal the product of all labor, and that interest on all capital mark to conform to the product of all capital.

Von Thünen's theory of wages is apparently a theory of the exploitation of labor. In his illustration, there is a certain force of laborers working on a farm and a man is now added to the force. His presence enables the farmer to glean his fields more closely. As Von Thünen suggested, he can now gather a smaller grade of potatoes than it was formerly profitable to gather; and if the new man is taken in the harvesting season, his product is embodied in the addition that, in such ways as this, is made to the crop. This man, however, produces distinctly less than the men who are before him in the order of the series; and their pay is scaled down to his product. There are expressions in Von Thünen's discussion which seem to imply that, in his own view, the law of final productivity is a law of exploitation of labor. There are also indications that his theory of the final productivity of capital involved a similar exploitation of the earlier units of capital.

What is first needed, it order to make Von Thünen's statement cover a principle that is of cardinal importance in connection with wages, is a theory of what has been called "imputation," or of what, in the foregoing chapter, has been called economic causation. At any one time, all units of labor tend to be equally productive. There is, then, no class of workers who are degraded and virtually robbed, because of the pressure of others who produce less than they do and who set the standard of their pay. The excess of pay that the men on the illustrative farm formerly got is attributable to the greater product that they formerly created and that is solely due to the excess of capital which they had in the earlier period. The theory needs to trace to capital, and not to labor, that extra product which an overplus of capital insures to the men who, in the assumed case, are made to come early in the series. It needs, also, in studying the products that are attributable to a series of units of capital, to use the same discrimination and to show that the earlier units of this agent are not exploited.

As between a theory which asserts that every unit of labor naturally tends to get, as its pay, its entire product and one which says that the great mass of laborers are, by competition, regularly robbed of a part of their product, the difference is radical; and yet these theories may use identical language, in telling how the pay of all labor is directly determined. Both may apply to labor the commercial principle of final valuation and say, in effect, that there cannot be two prices of the same article in the same market—that what the last unit labor brings, all labor brings; and that the last unit brings what it produces. If it produces less than do other units, these others are sufferers by their connection with it, for they lose a part of their products. If, however, all units under present conditions produce the same amount, there is no robbery involved in fixing the pay of all by the product of the final one. Von Thünen's theory is a final productivity theory; but it needs to become, in addition, a specific productivity theory, which makes the pay of each unit of labor conform to its own specific product.

A theory that is to explain the adjustment of wages and interest needs to make clear what is the mature of that "last dose" of capital, on the product of which interest depends; and this involves discriminating between capital and capital-goods. Particularly, also, does the study need to enforce its scope, so as to include, not one industry merely, but the whole system of groups and sub-groups that make an economic society. The final increment of labor, the product of which fixes wages, is a social increment, some of which is found in every sub-group in the series; and the same thing is true of the final increment of capital. The law of value is active in making these apportionments, and it needs to be included as a part of the theory of distribution as a social phenomenon. With Von Thünen's work before us, no one else can claim as his own the application to labor and to capital of the principle of final valuation and the basing of valuation on productivity. A prospector in a mining country may, indeed, independently discover and re-occupy an abandoned claim; and this is all that one would do who should re-discover the single principle of final valuation of labor and capital and should stop where Von Thünen stopped. Going farther and discovering laws that tend to bring the products of different units of labor at any one time to a equality, to bring the products of different units of capital to an equality, and to make wages equal to the entire product of labor and interest equal to the whole product of capital—this is attaining the essential truth in the theory of wages and interest; since it establishes the fact that natural law, so far as it has it way, excludes all spoliation. Such further study reveals the fact that what are apparently surplus parts of the products of early increments of labor are really products of capital. This result is gained by following the line of study in which Van Thünen took the initial steps; and it may, perhaps, give so much of a title to the final result as a miner secures when he strikes a new vein of metal by using, as an entrance way, an abandoned shaft that had led only to a deposit of ore of a different kind. As Von Thünen did not suspect, the natural law of wages gives a result that would satisfy his own requirement, as being desirable and morally justifiable.

45. Figure.  Click to enlarge in new window.In all the foregoing graphic representation there is a slight mathematical inaccuracy, due to the fact that the upper boundary of the figure is made to be a curve with a continuous downward trend. Strictly, the whole figure should have been made of rectangles, and the upper boundary should have been the tops of the contiguous rectangles. With ten units of capital one man produces the amount that is expressed by the first rectangle in the following figure; while, after he has relinquished one-half of the capital to the second man, he produces only the amount indicated by the smaller rectangle on the right of the figure. The difference between these areas, or the space above the dotted line in the larger rectangle expresses the product of five units of capital in the hands of one man. If we continued thus to build up the figure, we should avoid the small inaccuracies just referred to; but we should have a somewhat cumbersome mode of description to contend with, when we should describe the figure by letters.

Chapter XXII

46. Where a building stands on land that is increasing in value, a crude kind of book-keeping treats the increased value of the land as an offset for the diminished value of the building, and therefore reserves no sinking fund from the earnings of the building for the replacement of the structure when it shall be worn out. The whole rent that the tenant pays is, in that case, not very inaccurately regarded as the rent of land and building.

47. See pp. 297-299. [Chapter 19, par. XIX.35-XIX.37—Ed.]

48. See Ch. XXIV.

49. This is not the only objection to using the old expression. A more serious objection lies in the possible implication that, if we were to extend the margin, we should necessarily increase rent, and should do it by virtue of the extension. A forced or blundering retention of the margin, however, would not add to rent. The location of the margin is not the cause of rent. The power of land to add something to wages and interest is that cause, and wages and interest are the true subtrahend to be used in determining rent.

Let us revert to what is certainty a general and defensible formula for rent. It is net product. It is what any instrument can add to the marginal product of labor and capital. It is what the industrial world would lose outright, if that instrument were taken away. The advance of the margin of utilization is a circumstance that accompanies and reveals an increase in the productive power, and in the consequent rent, of an agent of production. Nothing can make a good piece of land produce more than it now does that will not also make the poorest piece in use produce something more. Whatever does this will also have the affect of making a still poorer piece—which formerly produced a minus quantity, if it was used at all, since it handicapped the agents combined with it—produce something. This piece of land, by virtue of a change of conditions. ceases to be a drag on labor and to auxiliary capital, and is promoted to the position of no-rent land. Land that is still poorer, and that, if used at all, would have inflicted a still greater loss on the agents that combined themselves with it, now inflicts a smaller loss on them. It is promoted from the position of land that is by two degrees below the marginal grade to land that is but one degree below it. In short, an all-around increase of rent has taken place: land of every sort has acquired an increased productive power or a smaller destructive power. Land that produced something now produces more; land that produced nothing now produces something; land that destroyed a small amount now neither destroys nor produces anything; lands that would have destroyed larger quantities, if they had been used, under the new conditions destroy less. An all-around infusion of productive power into land carries with it an extension of the margin of utilization. We utilize all grades to the zero line, and that is now below the former line.

In saying that the rates of wages and of interest locate the margin of land, we do not overlook the fact that the product of labor on marginal land enters in a minute degree into the determination of wages and interest. This point has been fully discussed in an earlier chapter. In the main, wages are what a unit of labor can produce by adding itself to all the other labor and to the great mass of capital, including instruments of all kinds and land of all grades, that are already in use.

50. See note on page 192.

Chapter XXIII

51. The hypothesis that comes nearest to annihilating rent is one that makes all land free, and allows laborers and capitalists to resort to all parts of it at their pleasure. Thus, if ten men wished to cultivate an acre of very productive land, they might de it; and if an eleventh man chose to add himself to their number, he would be admitted. Such an arrangement would be practically impossible; and, in mere theory, the effect of it would be to reduce rent, by causing an unnatural crowding of good land, and to scatter, what rent remained in a pro rata fashion among laborers and capitalists. It would, incidentally, cause the relative amounts of goods produced to vary from the present relative amounts; and so it would affect comparative prices. It would also reduce the absolute quantity of value produced. For a discussion of this subject, see an article on Marshall's Principles of Economics, in the Political Science Quarterly for March, 1891.

52. Final utility is, of course, the determinant of value; but, by changes in the comparative amounts of different articles, those which have equal costs, in the sense here defined, come to have equal final utilities and market values.

53. Total rent is total supply and is one determinant of value. Value is the determinant of group distribution; but, as we have seen, group distribution tends to adjust itself so as to annihilate profits and insure uniformity in wages and interest. The tendency of labor and capital to uniformity of productive power is the most fundamental of these facts.

Chapter XXIV

54. It is clear that the product of capital cannot, in such connections as these, be the basis of the measurement of capital. If we say that whatever produces a unit of consumers' wealth is a unit of capital, we assert nothing by adding that, at any one time, all units of capital are equally productive. On the other hand, when we say that a series of units of capital show diminishing returns, while still measuring the units by their products, we assert what is a self-contradiction.

55. The substance of this chapter was published in the Yale Review for November, 1892, and, as thus published, was a continuation of an article that was printed in the New Englander in 1881. In that earlier study the power residing in all economic goods was termed "effective utility." The entity thus defined is closely identified with the "final" or "marginal" utility of Professor Jevons and the Austrian economists whose researches were then unknown to me. The manner of approaching the law of value differed from that adopted by the European economists, and led to a certain distinctive view of the nature of that law. According to this view value is always subjective and social. It gauges the power of things over society in its entirety.

56. In the figure, this fact is rudely expressed by the fact that the line BD is ,barter than the line BvDv. The lines representing costs between these two would not, however, actually lengthen at a perfectly uniform rate and thus make the line DD straight.

57. On page 343 [Chapter XXII, par. XXII.17—Ed.]it has been stated that there is "a unit for measuring true capital in the form of land." This measurement is made by gauging productive efficiency of each piece of land in terms of the social labor that, as a producing agent, it calls out.

There are questions of some subtlety to be answered before the theory of the ultimate unit of value can be made complete. One of them has reference to the indirect way in which the labor of an individual producer makes itself felt as a power throughout society. He may be making something that is consumed by a limited part of society; and yet he is able to induce, in return for his special product, labor that is literally social, since it enlists every member of society on a certain pro rata proportion. He can cause every one to work for the nth part of his working day. It would be a simplification that would amount to inaccuracy to say that he can make them all work for any fixed period of time, such as a minute; for each person who contributes to the social labor that gauges values of all kinds must contribute an accurately adjusted share of his own labor, and a minute would be a larger fraction of one man's, day than of another's. It is accurate enough for our purpose, however, to say that the social labor is made up of a fixed fraction of a day's labor of every individual. In ways direct and indirect one producer can draw out the composite labor that is thus defined.

If, for a simple illustration, we assume that twenty men constitute an isolated society, and if we cause the first of them to make something which is directly consumed by only five of the others, there are fourteen whose labor he can draw out only through a series of intermediate exchanges; and the principle that governs these exchanges is of great importance. A, the first producer, can directly induce labor on the part of B, C, D, E and F. In order that he may cause G to labor, he must offer to him some product created by one of the men for whom he works directly. By performing additional labor for B, getting a second share of B's product and presenting it to G, A may insure work on G's part; and in similar ways he may cause all the others to labor. There may be men in the society who do not consume any of the products made by B, C, D, E and F, the men for whom A produces directly; and A's connection with them may be still more indirect. It may be necessary that A should work still further for B, giving a bit of B's special product to G and some of G's product to H, in order to induce the last-named member of the little society to work. By a chain of connection that is mainly indirect, one worker is always able to exercise over all workers that power which we have described.

The important point in this connection is the nature of the influences that act on the individuals who furnish this chain of connection. These influences are psychological. A motive is presented to B by something that A does for him, and it is the character of this motive that needs carefully to be noted. Something in A's product is a final utility to B. In the goods produced by A there is an element that enters into the final and least important increment of the wealth that B consumer; and yet this final consumption on B's part is important enough for him to cause him to work in the final period of his day, when the service is most burdensome. As has been shown, it is the consumption which is least important which offsets the work that entails the most sacrifice. When B's product is given to A and passed on to G, there is in it an element that is a final utility to G and causes him to do work which offsets and measures the benefit that he gets. By a chain of connection, every link in which is made by a subjective experience of an individual, the first worker in the society reaches and influences all the others. A offers a marginal gratification to B and gets from him a marginal sacrifice; and when, in turn, A gives some of B's product to G, there is the same balancing of inducements and the same result.

Importance attaches to these facts, because they enable us to avoid a difficulty that has been fatal to a certain labor measure of value. If we say that the value of an article corresponds to the amount of labor "of average quality" that has been expended in producing it, we must find a way to average different kinds of labor; and we can do this only by means of the values of the products that different kinds of labor create. These values, in turn, we are obliged to measure by average labor, and we thus find ourselves reasoning in a circle. A commodity is, however, actually measured for value on the basis of the social service that it renders. By means of the chain of purely subjective connections that have here been described, it can diffuse benefits throughout society. At every point in the connection an individual receives a marginal pleasure and subjects himself to a marginal sacrifice. All society, in the end, incurs a marginal sacrifice that measures the value of this kind of goods. The individual labor which made the commodity is the economic equivalent of the social labor that is induced by it and that measures its value, and in this way individual labor performed in making an article corresponds with and expresses the value of it; but the value of a commodity is not derived from the labor that is back of it in the making. It is derived from the social service that is before us her the using. The value of the labor of making the article is derivative. It comes through the product of the labor, from the social effect that the product will produce.

The definitions of the static state that have been given in the earlier chapters of this book have not in any way depended on the definition of a unit of labor that has just been offered. Society is static, if labor and capital are able to move from group to group, even though they do not do so because the inducement is lacking. This implies merely that men do not change their occupations and that the young workers who enter any group merely fill the places of the old workers who withdraw from it. It is not necessary that individual laborers should be tested in a way that would measure in any kind of scientific units the work that they perform. A young man who is about to choose an occupation may embody many units of labor or only a few; but the essence of the static state is that, within the range of employments for which his capacities fit him, he should be as strongly impelled in one direction as another. If, in connection with this description of the static state, we speak provisionally of units of labor, the idea that the expression is intended to convey is that of a certain power to produce merely physical results. When a man is digging in a trench, he may be thought of, in rude way, as embodying a unit of labor, if he throws out in a day an average amount of earth. When the man is in a textile mill, he may similarly be thought of as embodying a unit of labor, if his presence causes the production of so much of the fabric there made as to mark him as an average worker. Values and units of values do not enter into such a measurement.

It is now possible, however, to use the true unit of labor in defining the static state; but this affords a new definition of it. The amount of labor that is potentially in a man is measured by the social labor that he can induce when all workers, as well as all capital, are apportioned among the groups in a normal or static way. If there is a misadjustment of the agents of production, these agents produce different amounts and nearly always smaller amounts than they would in a static state. The actual work that a man then does counts as fewer units of labor than there are potentially in him. The static state can, then, be identified as the one in which every man's actual work represents his potential working power, as measured in scientific units.

Some part of the output of every kind of goods is traceable to capital, and thus to the sacrifice termed abstinence; and the personal sacrifice entailed by abstinence may be measured in terms of that which is entailed by labor. On this point the study of Professor F. H. Giddings, in the Quarterly Journal of Economics for January, 1890, is valuable. Since, however, the creating of a bit of capital secures an endless income, the social labor that the act of abstinence really draws out is also endless. By saving a thousand dollars now, I secure a power to serve society in a minute degree and to draw a return service from society forever. But there is not a calculable connection between the present cost of the abstaining, a measured by its equivalent in social labor, and the value of the earnings of the capital (say) fifty years hence, as measured in terms of social labor of that date. A full study of this point would detain us too long.

Chapter XXV

58. If present plans are realized, the dynamic laws of distribution will be stated in a later work; and, if that were now ready for publication, the present one would end here.

59. It would have been possible to allow mechanical inventions and other improvements to go on until 1945; since, if they were to cease at that date, the five remaining years would suffice to bring industrial methods to uniformity. In the year 1950 the geographical movements of population called for by the conditions existing in 1900 would have been completed and society would have been reduced to a static condition, but for the fact that some minor geographical changes of residence would have been called for by the progress in method occurring in the latter part of the period; and, as these would require further time, a completely static adjustment would not be realized in 1950. Moreover, if we could disregard these induced and miner changes of residence, it would still be true that the static adjustment realized in this way in 1950 would not be the result of the action of static forces only on society, as it was in 1900. It would be, in part, the result of certain dynamic forces acting for forty-five years.

End of Notes

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