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

The Mode of apportioning Labor and Capital among the Industrial Groups

Chapter XIX

We are now prepared to state the law by which the entire capital of society at each point in its growth apportions itself, in certain natural quantities, among the different groups and sub-groups. That conception of social capital which we have carried through our entire study implies such an apportionment as this; for capital does not set as a completely socialized agent unless society, in some way, controls it all and disposes it so as to secure the best results. This requires that an economic force shall put into each sub-group in the system a definite and normal fraction of all the capital that society possesses, round as physical force levels the surface of a pond by putting into each part of it a definite fraction of all the water that it contains.

It is clear that there is a normal apportionment. In the static state, there must be a given number of units of capital at A, a given number at A’, a given number at B, and so on throughout the system. What is it that makes these numbers normal? We have said that, in a general way, the apportionment is normal, when both labor and capital are uniformly productive at all the different points within the system—that is, when a unit of labor produces as much in one sub-group as it does in another, and when a unit of capital has everywhere the same producing power. Labor moves to and fro, seeking the points where it can produce and get the most wealth. What capital may get at the different points is not an influence that appeals to labor, for wages only are what labor is seeking. Capital, likewise, moves to and fro in the group system, seeking out the points where it can get the most interest. So far as motives are concerned, each of these agents is independent of the other.

Yet neither of these agents can move without affecting the productive power of the other. If any labor departs from the sub-group A’, the capital that remains there will lose something of its own productive power—will produce per unit fewer goods than before. As yet we say nothing about values, although they constitute a second element that must soon be considered. The first consideration is: How much power has a unit of labor, on the one hand, or a unit of capital, on the other, to create goods? If labor departs from one group, the power of capital to create commodities is there reduced; and there is, to this extent, an influence that tends to make capital move also. As a matter of fact, neither of these producing agents can move from group to group without exerting an influence that tends to make the other agent also move. The action of these influences in actual life is highly complex, because different industries are related to each other in very detailed and complex ways; yet the principle that governs the movement is in its nature simple. It is not difficult to understand what share of the whole capital of society is the normal amount for the group A to possess, or what is the natural amount for B or for C. When an abnormal amount of capital is found at one of these points, an influence that is not hard to detect sets itself at work to move capital to or from it, as the case may require.

Capital is moved from group to group by the same agency which brings about the transformation in its quality. Both kinds of changes involve the intervention of the H group. If there is an instrument in the A group that is not to be replaced, and if it has earned its sinking fund by creating enough of A”’ to pay for the replacement of it, then this A”’ goes to pay for another instrument that is capable of being used in (say) the B group. The men in the H group make, for example, a tool that will help to make clothing, instead of one that would have helped to create food. The
entrepreneurs at A thus relinquish a certain quantity of capital, and the
entrepreneurs at B receive it. The mechanism by which this transfer is effected we have just traced, for the self-replacing fund created by one instrument has been used to pay men for making an instrument of another kind. There are, of course, cases in which tools may be taken bodily out of one industry and put into another; but there are few in which this can be done without some waste of capital. The regular method of moving capital, without wasting any of it, is the one that we have just described. Together with this moving of fixed capital, there are, of course, local changes in the amounts of raw materials used, and these are equivalent to moving circulating capital.

It is to be noted that labor is moved in the same way. Men can be taken out of one industry and put into another more easily than can material instruments, since they are more adaptable; and yet the cases are few in which a workman can change his occupation with absolutely no waste of productive energy. If he has learned to work at one occupation, it requires some time to enable him to work at another equally well. Old workmen in highly skilled occupations can, as a rule, never develop in a new employment the facility which they have possessed in the old one. The regular way of moving labor without wasting any of it is to let the son of a workman learn a trade that is unlike his father’s. The permanent force of social labor maintains its own tissue in a way that is quite analogous to the way in which social capital does so. Besides earning a living for themselves, men must rear successors who will take their places in the working series. The moving of labor from group to group means, then, that the successors of certain laborers do new kinds of work. Labor, as a permanent force, may he said to be perfectly mobile; and yet the transfers, if they do not reduce the amount of the force, must be made without actually changing the places of the men.

Being, then, quite sure that it is perfectly possible to move both labor and capital without sacrificing any part of either of them, we may put before our minds a society that fulfils the condition of the static slate. The elements are perfectly fluid, but they do not flow. The condition is like that of a pond, where the dropping of a pebble into the water would ultimately move every particle of it, and yet not one particle stirs. The static group system is one in which a slight disturbance would cause many transfers of labor and capital from group to group, and yet not a single transfer takes place. There is, in other words, a perfectly normal amount of labor and of capital in every group and sub-group in the series. How did it get there? It is equalized pressure that brought the surface of the pond to a level; and it is
equalized inducement that produces the static adjustment of labor and capital in the group system.

We have described, in an earlier chapter, the law that controls the apportionment of labor and capital among all the groups, and have called it the universal law of economic variation. It acts in consumption; and when it operates upon a fixed number of persons, it causes an increasing amount of consumers’ wealth to have less and less specific utility. That law thus regulates values; for goods bring smaller prices, the more there are of them. The law acts also in production, causing an increasing amount of one industrial agent, when it is used in connection with a fixed amount of another agent, to have per unit less and less productive power. Labor, for example, in connection with a fixed amount of capital, produces fewer and fewer goods per unit, the more there is of it. The law has to act in both these ways, in order to apportion labor and capital, in natural amounts, throughout the industrial system. The general law that, on the one side, fixes values and, on the other side, fixes power to produce goods thus has a twofold effect; and the outcome of it all is that a unit of labor tends, under perfect competition, to have as large a power to produce
value in one part of the system as it has in another. A unit of capital shows the same tendency.

Let us apportion labor and capital somewhat at random throughout the group system. In some places we shall have more of both agents than a static adjustment calls for, and in some places we shall have less of both. In some sub-groups we shall have more of one agent and less of another than a normal adjustment would give. If the proportions of labor and capital within a group are normal, and if there is an excess of both of these agents within the sub-group, the effect will show itself simply in the low price of the product of the industry. The respective products of labor and of capital, as these products are measured in kind, will be normal. Each agent creates the right amount of goods
within the group.

Where, on the other hand, there is too much of one agent and too little of another, a unit of the agent that is present in excessive quantity will create fewer goods than it should, and a unit of the agent that is present in deficient quantity will create more goods than it should. It is possible, under these conditions, that the price of the goods may still be normal; since, whatever their respective productiveness, the two agents together may produce a normal quantity of the goods. In apportioning labor and capital amoung different employments, we can seldom secure to a group, as a whole, the exact amount of productive power that static law calls for; and we can still less hope to secure for the labor and the capital that go to each sub-group the right amounts of specific power to create goods in kind. Nearly every sub-group will, then, produce either too much or too little of its commodity; and the price of its product will be either too low or too high. In nearly every sub-group there will be too much labor, as compared with the amount of capital, or too little. The specific power of one of these agents to create goods will be larger, and that of the other will be smaller, than static law requires. Under such circumstances, there will be movements in many directions; as there would be in a pond, if water were in some way put into different parts of it in an equally haphazard way. Nevertheless, the principle that governs such currents of water as would result is simple, though the currents themselves may be too complex for tracing; and the same thing is true of the movements of labor and capital.

Labor and capital move from separate impulses, since each agent seeks its own interest, and not the interest of the other. The motives of their movements are independent; but their movements are interdependent, since neither of them can move without changing the productive power of the other. As the result of all this, each one goes where it can produce the most. Whenever one is placed in such a position that any movement would diminish its productive power, it is under an inducement to stay where it is. Such an agent, however, may enjoy for the moment a productive power that is abnormally great; and, if that is the case, it is bound to lose this excess of productivity by reason of the movements of other agents. We shall see how this occurs.

Let us, at first, confine our attention to movements between the general groups, whose incomes are clearly derived from the sale of completed products. When the price of A”’, for example, is high, the whole group that makes it is well off; and when the price falls, this body as a whole becomes worse off. This change affects the product and the income of the group as a whole; but there is another change that affects the product and the pay of labor within the group; and that, as we have seen, is a diminution in the amount of this labor or an increase in the amount of the capital that is used in connection with it. In general, the returns obtainable by an agent of production depend, first, on the relation of the group in which it works to other groups and, secondly, on the relation of this agent to other agents within its own group. The agent that has the largest productive power of all is in a group the total output of which is abnormally small; and, further, this agent is present in the group in an unnaturally small quantity. Labor would have its largest wealth-creating power, if it were employed in making an article of which the demand exceeded the supply, so that the value of the article should be great, and if it were working in shops in which capital was over-abundant, so that the part of the product that could be traced to a unit of labor itself would be large. A single workman might virtually make, in a year, many pairs of shoes, because of the profusion of instruments placed in his hands; and yet the price of the shoes might be high, because of a shortage in the total supply. Here is the condition of all abnormally large productivity for this kind of labor.

It is clear that labor would rush to such a point from groups where opposite conditions existed. This influx would have two effects. It would first reduce the specific power of labor to create goods; for, as soon as there were more laborers in the shops,—supposing that the capital were adapted, in form, to the needs of the larger number of workmen,—a particular worker would be able to make a smaller number of them than he could make when labor was scarcer. Moreover, the influx of labor would mean a greater sum total of these goods for sale, and the price would fall. The goods attributable to a unit of labor would, then, already have been reduced in quantity; and they would now also be reduced in price. The specific product of the labor, as counted in value, would thus be reduced in two ways. Each man would produce fewer goods than he did before, and each unit of the goods would sell for less.

What, now, is the effect of such an influx of labor on the productive power of capital in this group? In one way it reduces it, while in another way it increases it; and it may end by leaving it not greatly changed. The more labor there is in the group, the greater is the specific power of capital there to produce goods. In this respect, capital steadily gains by the influx of labor. On the other hand, this influx means the enlargement of the total output of the industry, and a reduced price for its product. Here the capital loses. While there are more goods, the origin of which is traceable to a unit of capital, these goods sell for less than they previously sold for. Capital loses by the fall of the price of its product, though it gains in the quantity of its own specific product, as measured in kind.

It may be that, after the influx of labor, the capital of this sub-group is slightly more or slightly less productive than it is in other industries. The variation from the normal productivity will, however, probably be far less than it was in the case of labor. The original hypothesis assumed that capital was abundant in the group and also that the price of its product was high, by reason of a small total output. Under these original conditions, a unit of capital would produce few goods; but, as the price of the goods would be high, possibly the power of a unit of capital to produce
value might not be very abnormal. When the new labor came into the group, the power of the capital to create value might not greatly change, for it would be diminished by one influence and increased by another. The enlarging power to create goods might, therefore, allow a unit of capital, in the end, to create about as much value as it did at the outset.

The power of labor to create value would, then, have been lessened by two influences working together, since a unit of it would create fewer goods, while the goods would bring smaller prices. The specific power of capital to create value would, on the other hand, have been reduced in one way and raised in another. If, as we have said might be the case, the value-producing power of capital, after the transfer of labor had been completed, were either more or less than it was elsewhere, there would be a slight movement of capital to or from this group. This movement would quickly make the productive power of this capital about normal. If capital were flowing into the sub-group, this movement would reduce the productive power of capital in the two ways that we have described—by diminishing its power to create goods, and by bringing down the price of the goods. It would, however, have very little effect on labor; for, while it would slightly increase the total output of goods and would reduce the price of them, it would increase the quantity of goods specifically traceable to labor.

It is clear that movements of this kind have the power to correct disproportions in the quantities of labor and capital existing within the groups. We selected for study an industry in which the productive power of labor was at its maximum—where labor produced much in goods and goods were high in price. Such a group exercises the largest attractive power over labor. The group from which labor would be most strongly repelled would be the one in which these conditions were exactly reversed—one, namely, in which there should be much labor relatively to capital, a large aggregate of goods produced and a low price for the goods. Here one man would produce few goods, and the goods would be cheap; so that the men would be under the greatest inducement to move away.

In noting the manner in which a disturbed pond of water acquires a level surface, we do no harm by supposing that the identical water of the highest wave flows into and fills the deepest trough. So, in the case of the disturbed sub-groups, we may suppose that labor rushes from the point where it has the smallest productive power to the point where it has the greatest. If, for local reasons, some of this particular labor stops on the way, it does not fail to cause an equal amount of labor to move to the point where the great deficiency existed; and the effect is the same as though the identical men in the group where the labor had the smallest productive power made their way directly to the group where it had the largest.

In the group from which the labor moves the effects are, of course, exactly the opposite of those which are seen in the group to which it goes. We said that at first the group where labor was in excess created a large output of goods and got low prices for them. The productive power of a single unit of labor was low, however, because it produced few goods and because the goods did not sell well. With every unit of labor that departs from this group, the remaining labor becomes more productive of goods and the goods sell better. The labor thus gains doubly in its specific power to produce value. The capital in this group loses power to produce goods, but the goods gain in value; and, although these influences may not accurately offset each other in quantity, and some small movement of capital to or from the sub-group may still take place, the amount of this movement, as compared with the movement of the labor, is slight. The changes that take place in this sub-group are, in short, the antithesis of those which take place in the group that we first described.

Two influences, then, determine the specific productive power of labor and of capital in a group. One of them is the price of the product, and that depends on the total amount of it. Another is the fraction of the product that is attributable to a unit of labor or to a unit of capital, and this depends on the relative amounts of labor and capital within the group. Where one agent—say, labor—is in excess, the two influences work together to reduce the amount of it; while, in the case of the other agent, capital, the two influences work in opposite ways.

Three possible conditions render an agent comparatively unproductive in the group where it is located: (1) It may have a low power to create goods, while the goods are of normal value; (2) it may have a normal power to create goods, while the goods are abnormally cheap; or (3) it may have a low power to produce goods, while the goods have a low value. The first condition is corrected by a change in the relative quantities of the labor and the capital in the group, leaving the gloss output of goods unchanged. If labor is the agent that is poorly paid, some labor may move out of this group and some capital may come into it. The second condition is corrected by a change is the absolute quantity of goods produced, leaving the relative amounts of labor and capital essentially unchanged. Both labor and capital may move out of the group, and the price of the product may rise. The third condition is corrected by changing the proportionate amounts of labor and of capital, and also the total amount of goods produced. If labor is the poorly paid agent, some of it may migrate from this industry to others, while no capital migrates to it. The whole output of this industry will then be smaller, the price of it will be higher, and the contributory share of a unit of labor, as compared with that of a unit of capital, will be larger.

Three opposite conditions make an agent exceptionally productive: (1) It may have a large power to create goods, while the goods are of normal value; (2) it may have a normal power to create goods, while the goods are abnormally dear; or (3) it may have an exceptionally large power to create goods, while the goods are unnaturally dear. Movements the reverse of those just described correct these conditions. Whenever the price of goods is normal, while one agent is abnormally productive, the other agent must necessarily be abnormally unproductive. The one agent will, therefore, move to the group and the other will move from it at the same time. One influence tends to raise the price of the goods, while the other tends to lower it. These influences in time neutralize each other, and the only effective change is in the specific powers of each of the agents to produce goods. This is the adjustment that the conditions required, and it ends by making both of the agents normally productive. Where the value of the goods needs to be changed, with no change in the relative powers of labor and of capital to produce goods, the adjustment is effected by an influx or an efflux of labor and capital moving together. Where value and comparative productivity have both to be changed, in order to bring the value-creating power of labor and of capital to a natural level, the adjustment is effected by the process that we described at the outset. One agent is moved out of or into the group by two forces which work together, while the other agent is affected by two forces that work against each other. If the two forces work concurrently in the case of labor, the sum of them expresses the amount of force that is impelling labor to or from the group. If the two work against each other in the case of capital, the difference between them measures the resultant force that acts on that element.

If we were actually to apportion labor and capital at haphazard among the different industries, there would be a few of them into which both labor and capital would flow, in quantities that would be about uniform; there would be a few industries from which labor and capital would flow, in about uniform proportions; and there would be a few into which only one agent would go, and others from which only one agent would go. A great majority of the industries would require some compounding of these adjustments—would demand that one agent should go to them or from them in large quantities, while the other should go from them or to them in small quantities. Every movement that would thus take place would be brought about through the action of the universal law of variation that we have described. The greater the amount of one agent that coöperates with the other, the smaller is the power of a unit of it to create goods; while the greater the amount of goods produced, the smaller is their value. Agents that are perfectly mobile would quickly reach a state of uniform productivity in all industries, by the action of these influences.

We have spoken of the movement of labor and capital as though it were spontaneous, and as though labor, for example, went of its own accord from a place where its productive power was small to a place where that power was greater. But it is, in reality,
entrepreneurs who do the moving, and it is competition that makes them do it. Our theoretical assumption makes the competition of one employer with another active and certain; and unerring, therefore, are the transfers of labor and capital that result from the competition. In every group in which the productive power of labor is slight, low wages only can be paid; and labor can be lured away from this group by the offer of the slightest advance over the rate that it gets. In our ideal hypothesis, there is no friction to be overcome: five cents a day of extra wages will take labor out of one employment and into another, and a tenth of one per cent in interest will move capital.

In the industry where the productive power of labor is great, the actual pay that the men are getting depends, however, on the productive power of labor, not in that group, but in society as a whole. There is a general rate of wages; and employers in this group can have laborers for what it costs to get them out of the other groups, in which their productive power is smaller. By doing this they can make a profit. For an interval they can hold the difference between the pay of labor in the general market and its earning power in the industry into which they bring it. This is, however, a vanishing difference; for, as competition does its work, it slips through the employers’ fingers. The eagerness of different employers to get a part of this profit makes them strive to anticipate their competitors in enlarging their working forces; and the enlargement goes on till the local product of labor is equal to its pay, and there is no further profit to be gained from this source.