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

If we were to assume, at the outset, that all of the universal truths of economics are known, we should pass completely over the first division of a general economic theory and begin with the second. Principles that in reality apply to all industrial life are thrown into prominence in elementary treatises, although these consciously aim to explain the economy of organized societies. Such treatises have never divided the theory of economics in the manner here proposed, and have never presented the universal truths of that science in a division by themselves, in a way that marks the distinction between them and those facts and laws which depend on social organization. What they have done, however, in the way of presenting these truths, has made it possible to discuss the social laws of economics without rehearsing at the beginning many of the more general laws. We know what wealth is, what its varieties are, and what agencies act in the production of it. We have in mind definitions of labor and capital, and the usual distinction between fixed capital and that of the circulating kind. We are familiar with the so-called law of diminishing returns, by which land under tillage rewards labor and capital less and less bountifully, as more and more labor and capital are used on a given area. We know the essential laws of consumption. In short, we possess a body of truth which, although it has not been separated from truths of a distinctively social economy, makes it possible for us to study the social problems without an extended introduction to them.
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Some general questions in economics, however, have not yet been treated in the way that furnishes the needed basis for the study of distributive problems. In these instances we shall be forced to make brief statements that would naturally fall in the introductory division of a general treatise on economics, if such a division were offered. On controverted points, moreover, we must take a definite position and assign grounds for doing so.

It happens that in an earlier work the author of the present volume has presented some of the universal laws of wealth in a form that makes them harmonize with the theory here to be presented and constitute, in so far, an introduction to it.
*6 The treatment that these laws there received was, however not complete. Moreover, the work was not prepared with a view to its serving as an adequate introduction to the present treatise. For such a purpose, what is especially needed is a sharply defined boundary line separating the field of universal economics from that of social economics. How much, then, is contained in the first of these fields?

We have said that the universal laws of economics depend on relations of mankind to nature, while the social laws, as included in a theory of distribution, depend on relations between man and man. This generalization will guide us in defining the scope of the preliminary division of the general theory. We said that the essential laws of consumption and all those laws of production that act in the absence of exchanges are subjects for this introductory division of the general theory. What we need particularly to know is how much of what is contained in such a division of the subject has to be used in the second division. How far does a statement of universal laws of economics go in the direction of furnishing premises for a theory of value and for a theory of wages and interest?

It will be recalled that in our analysis the fixing of values is the same thing as the adjusting of the terms of group distribution, while the fixing of wages and interest is the making of the final division of incomes within the several sub-groups. Value, wages and interest
*7 are, therefore, the distinctive subjects of the second of the proposed scientific divisions, since they are essentially social phenomena. The first division, on the contrary, must include nothing that depends on exchanges: it must put out of sight the organization of society and whatever that entails. Under these limitations, does a theory of universal economics offer any materials for a study of values, wages and interest? We shall see.

Take away exchanges. In imagination sweep out of existence the industrial institutions of modern society. This is annihilating the most of what is known as civilization: it leaves the individual man face to face with nature, and under the necessity of making a living by his efforts and her bounty. He must make his own goods and use them. He must begin with the rawest material and fashion goods to completion. Under such circumstances it is a short list of articles that a man can have. Rude must they be, and awkward must be the process of making them. By some tests the man who should live without exchanges would be less civilized than are bees, ants, beavers and other animals whose production is organized; yet he would still lead an economic life. He would possess wealth, and some of it would be capital. His production and his consumption would be subject to laws.

Since production acts on nature for no other purpose than that nature may react on the producer himself, the economy of every man resolves itself into a process by which he indirectly serves himself, using natural material as a means. This “means” is wealth. Through the medium of things, man serves man in any system of economy. In the primitive system the same man is server and the served, whereas in a social system one man serves another. Wealth is, nevertheless, always the means employed. The goods that an isolated man would make for himself are the concrete forms that his wealth would assume; and the attributes that would distinguish them are the same that in a commercial city make the difference between what is wealth and what is not.

In every stage of economic evolution wealth consists of useful material things; but their utility is of the kind that we may call
specific. Each part of its supply has some importance attaching to it. Such goods are unlike air or salt water, of which any specific cubic yard might be removed without doing harm. If the goods are of such a kind that by adding to the supply of them you make some one better off, and by taking away any of them you make him worse off, they are wealth. Outward material things that are appropriable and, in this specific way, useful, are economic goods. They are commodities, or concrete forms of wealth; and this description applies as perfectly to the canoe of a savage and its load of fish as it does to an Atlantic steamship and its rich and varied cargo.

If an article is useful to one man, it is usually so to another, and it is therefore in itself exchangeable. It will, in fact, probably be exchanged, if a social economy is established. It has the qualities that would induce a person other than the owner to make some sacrifice in order to get it. In considering how much it is best to give for it,—say, in the form of labor or of the product of labor,—such a person would apply the principle with which all readers are now familiar, under the title, “final utility.” As this term is usually defined, it means the degree of usefulness that the last of a series of similar articles possesses. Give to a man one unit of the article A, and then another and another, till he has ten of then. While each of the articles in the series may do him some good, the amount of the benefit will steadily diminish, as the number of the articles grows larger, and the tenth one will benefit him least of all. In order to add to his stock of A, the man will never sacrifice more than what is, in his view, a fair offset for the benefit that he will get from the tenth and last unit of it. In order that an article may be wealth at all, each unit of the supply of it must, as we have seen, be of some importance to its owner. The law that we have just cited marks the last unit of the supply as the least important unit. This is one of the universal laws of economics.

There is much to be said as to the completeness and the accuracy of this conception of the law of final utility, which modern theory puts at the basis of the theory of value. We shall see what an important change has to be made in it, if it is to be brought into conformity with facts. For the present, we may put it into the form of a hypothesis and use it provisionally. If men do in fact use a number of units of consumers’ goods, all of a kind, and if the specific utility of these goods diminishes as they get more and more of them, then what they will give for any of them will be gauged by the specific utility of the last one. If these familiar premises of the modern theory of value correspond with the facts of life, the theory explains the prices of goods in a modern market: it is a true philosophy of a most important social phenomenon.

The line that separates universal economics from social economics runs between the principle of final utility and the application of that principle in a theory of value. The primitive economy that we have imagined cannot test final utilities in a market, for it has no exchanges. Can it not, then, test them at all, and does it not find it necessary to do so? We may easily see that it does this, and that the purpose is exactly like that for which organized society makes the same test. The principle of final utility belongs in the first division of a theory of economics and has to be assumed in the second division.

There is always a gain in diversifying the articles that men consume. This is a principle of human nature that affords a universal law of consumption. The industry of the savage state cannot carry the diversifying process far, because it cannot produce many kinds of goods. A man who should try to make many different kinds of articles entirely for himself would be a jack of all trades, and would be so poor in most of them that he would lose as a producer more than, through the diversity of the articles, he would gain as a consumer. Making a few things only, the savage can glut his desires for any one of them by an overproduction of it. The diminution in the utility of successive units of goods of one kind makes itself keenly felt, if he works too long in one occupation. If, then, he has so much meat on hand that more will be of little use to him, he may turn to hewing out canoes, fashioning bows and arrows, or building huts. Otherwise, he will do nothing; since the utility of a further unit of an overproduced kind of wealth will not be enough to keep him working.

The law of final utility fixes the point at which such a producer will stop creating one product and begin making another. A modern laborer, with money in his pocket, is supposed to consult the law of final utility in making purchases and to spend each dime where, in view of the supply of different things already on hand, it will do him the most good. The savage in our assumed case has, not dimes, but efforts to expend; and he directs the expenditure of them according to the same principle. When he has dulled the keenness of his desire for one thing, he makes another. While markets and prices are, therefore, modern phenomena, the study of which has no place in a division of the science devoted to universal truths, the law of final utility which directs the purchases that are made in a modern market also directs the production of the isolated man, and is a universal law of economics.

Draw the line, then, between a theory of exchange economy, or catallactics, and a primitive economy that treats of actions and reactions between man and nature. On the one side of this line you will find markets, values and like phenomena; on the other side you will find those laws of consumption which govern values. In modern life these laws direct the social demand for different goods offered in the shops; but in primitive life they control the manner in which a man husbands his productive power and uses it where it will do him the most good. The law of final utility is common to both economies.

This is not all. The picture of an isolated man turning his own labor from making one thing, of which he now has a supply, to the making of a thing that has a higher final utility, illustrates a characteristic of modern life which is in danger of being overlooked. Through the laws of value society, in its entirety, is doing exactly this. It is turning its collective energies from one direction to another, according to the law of final utility. Markets and values afford the mechanism for doing this. Think of society as an isolated being, turning its collective energy to the making of one thing till it has enough of it and then making another, and you have the fundamental fact. The science of an exchange economy must tell us how this change is made.

When we look solely at individuals in a modern state and see how they deal with each other, we lose sight of fundamental truths. The difficulty of seeing a forest, by reason of the trees, is small in comparison with the difficulty of getting a view of society, because of individuals and their intricate dealings. We must, therefore, take a broad view: we must not put ourselves in one man’s place, and look at things solely through his eyes. There is no doubt about one fact—the fact that an oversupply of any one article in a market means a social glut of a specific kind. In such a case, the effective demand for this article in society as a whole is more than met. Then it is that, through the mechanism of a falling price, society is warned to turn its energies to the making of something else; and its whole procedure is nothing more or less than doing what an isolated man would do, if he found his want of one commodity becoming satiated.

If, then, we individualize society—if we make it to be in its entirety one isolated being, and if we give rein to that philosophy which treats a body of independent beings as one organism—we find it doing what a solitary man would do, under the influence of the law of diminishing utility. Putting a price on each article in a market is the act of the collective organism in estimating the importance to itself of each of its own products. Theoretically, it takes the whole of society to make any one article rise or fall in price. The movement of labor and capital from an industry the product of which has fallen in price to one the product of which has risen in price is also a social operation. It is the act of society in economizing its productive forces and turning them where they will do to itself the most good. The motives in this movement are individualistic, but the resultant is collective. Each man pursues his own interest; but, as the outcome of his activity, society acts as a solitary man would act under the influence of the law of diminishing utility. The law itself is universal, and the statement of it belongs in the first division of economic theory; but the description of the mechanism by which the law works in a society belongs in the second division.

The deepest economic problems have reference to wages and interest. These incomes are fixed by that final distributing operation which takes place within each of the industrial groups. Let an employer sell his product, pay for his raw material and use the money that he has left in paying wages and interest, and this final distribution is complete. Nothing of this kind, however, takes place in primitive life. Selling products and dividing the returns carry us to an advanced or social state. Where a man makes all his own goods, is there any trace of distribution in his economy? Of the separating of a collective income into shares there is certainly nothing; and yet the principle that in social economy governs the separation has as clear a field for its action under primitive conditions as it has under any other.

Market value, then, is a social phenomenon; but the principle of final utility, by which values are fixed, is universal in its scope. So, too, the division of the income of an industrial group into wages and interest is a social phenomenon; but the principle that governs that division—the principle, namely, of specific productivity—is as dominant in primitive life as it is anywhere.

The specific productivity of labor fixes wages—this is the thesis that is to be supported in this volume. Ascertain how large a product is to be attributed to a single unit of labor that is employed in raising wheat, making shoes, smelting iron, spinning cotton, etc., and you have the standard to which the pay of all labor tends to conform. In like manner does the specific productivity of capital fix the rate of interest. Ascertain how large a product is due to the presence of the single unit of capital in each industry, and you have the standard to which all interest tends to adjust itself.

This principle of specific productivity acts in all stages of economic life. It reveals itself, however, in one way when a man lives in isolation, and in a very different way when he lives in a commercial state. When labor and capital everywhere coöperate, there is, if we are discerning enough to see it, everywhere a definite product that can be attributed to a single unit of each of them. One hour of labor that a savage bestows on the making of a canoe creates a certain amount of wealth, and so does a unit of labor that he gives to any other of his small list of occupations.

A man living in solitude and making all his own goods, by the aid of his equipment of working instruments, has to form some conception of the productivity of a unit of labor. He may have an hour which is available for fishing or for working on a canoe that will make future fishing more productive. An hour may be devoted to gathering fruits or to fashioning a spade, for working the soil and thus making food in the future more abundant. In making a decision between two such uses of his time and effort he measures, in his own rude way, the productivity of a unit of capital and that of a unit of labor. The canoe and the spade stand for capital; and the hour that is spent in perfecting such an equipment adds one unit to the man’s small fund of it. The hour that is spent in fishing or in fruit gathering adds a unit to the day’s labor. Which, on the whole, is the more productive? The answer depends on a law that is the basis of distribution in a modern society, but the law itself is universal.

As consumers’ goods grow less and less useful, when a series of units of them are supplied, so producers’ goods, or forms of capital, if they have to be used by one man, grow less and less productive. The last tool adds less to man’s efficiency than do earlier tools. If capital be used in increasing quantity by a fixed working force, it is subject to a law of diminishing productivity. This law determines how much labor it is best to withdraw from the securing of what ministers directly to wants, for the sake of making an addition to the equipment of working instruments. The choice between casting a line from the shore to catch fish and working on the construction of a canoe, like the choice between climbing a tree for wild fruit and working on a spade for future gardening, is determined by exactly the same principle that is at work in fixing the point at which the labor force of a civilized state shall be taken out of the shops that make goods for consumption and put into those that make tools, machines, etc. The principle of the final productivity of labor and capital everywhere determines how much capital it pays to accumulate.
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What we have now to note is the fact that the diminishing productivity of labor, when it is used in connection with a fixed amount of capital, is a universal phenomenon. This fact shows itself in any economy, primitive or social. The statement of the general principle belongs in the first division of economic theory, while the application of it to a theory of natural wages in a social state belongs in the second division. It is this application that we have to make in the present volume.

In like manner, in connection with capital, the line that divides the first division of economic theory from the second runs between the law of diminishing productivity and the application of it. Supply capital in successive units to a fixed force of laborers, and everywhere you get, as a result, smaller and smaller additions to your output. This is a universal law, which vitally affects the conduct of men, even in a primitive wilderness, in deciding how large an equipment of capital it pays to create. In such a state there are no wages or interest to be paid, and no market rates of any kind to be determined; but the principle of final productivity reveals itself with entire clearness in the simplest economy. It is when this principle acts in such a way as to determine how many laborers and how much capital there shall be in one of the industries of a civilized state that it produces a social effect. This action of the general law is a fitting subject for the theory of social economics; and here it becomes the basis of a theory of distribution.

Universal principles, then, and the social applications of them, are the two contrasted things. There are no markets in a wilderness; yet the law of final utility, which governs markets, is there in action. There are no wages and interest to be paid in the economy of solitary life; yet the law of the final productivity of labor and of capital is there, as everywhere, in action. These two principles are the ones that we take from the omitted first division of economic theory, as we enter on the second discussion, which deals with distribution. We tacitly assume all the familiar facts about the nature of wealth, and about the character of the economic process, as a subjugation of nature by man. For immediate use, moreover, we need a knowledge of three laws, of which the first is one that we may term the law of the varying efficiency of consumers’ wealth, which is the basis of natural value; the second is the law of the varying efficiency of producers’ wealth, which is the basis of natural interest; and the third is the law of the varying efficiency of labor, which is at the bottom of natural wages. These are among the universal truths of economic science.