Distribution as Determined by a Law of Rent

John Bates Clark

[Reprinted from the Quarterly Journal of Economics, Vol.5, 1890-91]

Part 1

The law of rent has become an obstacle to scientific progress: it has retarded the attainment of a true theory of distribution. Yet it is itself capable of affording such a theory. The principle that has been made to govern the income derived from land actually governs those derived from capital and from labor. Interest as a whole is rent; and even wages as a whole are so. Both of these incomes are "differential gains", and are gauged in amount by the Ricardian formula.

Wages and interest are incomes that may be treated as static in their nature: they would exist if society were to remain in an unprogressive state, with it forces in a certain balanced condition that excludes internal changes. Disturb this equilibrium of forces, make structural changes in society, create a condition in which labor and capital begin to move from one point in the general system to another, and you furnish opportunities for the creating of another income that is distinctively dynamic. We shall call this pure profit. It is a product of unbalanced forces, and exist, under natural law, only while society is changing. eliminate those internal movements of the industrial forces that we have indicated, and you destroy it. The remaining product of social industry will then resolve itself into wages and interest; and both of these are rent, or differential product due to permanent agents. In this respect they are analogous to the income from land as it appears in current theories, and they in fact include that income with others. The true method of attaining a law of distribution is not, therefore, first to eliminate from the earnings of society the element of ground rent, and then to try to find principles that will account for the remaining elements: it is to eliminate what is not rent, -- namely, pure profit, -- by reducing society to a static condition, and then, by a use of the rent law, to account for all that remains.

Five changes of social structure need to be excluded, if society is to be reduced to a static condition; and by a use of the scientific imagination we will exclude them, and create that state. These are: first, changes in the character of social wants; secondly, changes in the mechanical processes of production; thirdly, alterations in the mode of organizing industry; fourthly, shiftings of labor and capital from place to place within the system; and, fifthly, increase or diminution of the amounts of capital and labor in existence. The movements in which the dynamic quality of actual society consists would respectively be brought to a stand-still if we should in some way make human wants constant in character and degree, arts unprogressive, modes of organization stable, the magnitude of different industries normal and permanent, and the total amounts of labor and capital fixed. We must in this way create for our own purposes an imaginary state, in which for a tine social forces and relations are stable. Yet we make in this way a study that is completely realistic, since the static forces are dominant in the world of actual business. We isolate the, in order that we may know their nature. In the end, -- though not in this article, -- we shall take account of all essential changes that in reality take place, and attain the dynamic laws of distribution.

The term "rent" has become synonymous with differential gain by an evolution in language that needs to be briefly traced. In popular speech rent is a payment made by one man to another for the use of something: in scientific language it means not a payment, but a product. The mere transfer of the stipulated amount from hand to hand passes out of sight, and rent becomes whatever the thing earns in the hands of the man who hires it. The rent of the farm or the shop is the wealth that it brings into existence. To society as a whole rent is always a product, and not a payment, since there exists no outside party of the second part to whom the social organism can let a thing for hire. In its conception of rent science takes the social point of view.

Again, to the common mind, anything whatever may be a rent-producer, provided it is let for hire; and to many persons the typical rent is a payment for the use of a dwelling-house or a room. Scientists have chosen to restrict the term to the product of land, on the ground that the income afforded by things that are artificially made tends to conform to the cost of making them. If buildings pay ten per cent. on their cost, there will in due time be more buildings; and in the end they will earn what is equal to current interest on the amount spent in constructing them. Land is not produced, and has no normal cost. It earns what it can; and that is an amount that is independently fixed, according to the Ricardian formula. While the annual income derived from a house tends to become a certain fraction of the value of it, the market value of a piece of land tends to become a certain multiple of its annual earnings. The cost of the thing is the starting-point of the calculation in the one case, and the income is the fixed element in the other.

Here is a seemingly radical distinction; but it will vanish, as our analysis proceeds. It is true, indeed, that the income derived from buildings conforms to the cost of making them; but this simply means that, if buildings are especially productive, there will occur a transfer of wealth from other forms of investment to this one. Men and working appliances will be diverted from the making of various other commodities, and will be directed to the creating of the one that is more profitable. This is merely a movement tending to equalize interest in its various forms of investment. In the industrial field as a whole there is a current rate of interest; and, by making now more of one thing and now more of another, society causes each to earn, in the long run, about the prevailing percentage. This equalization of the earnings of different forms of capital is a process that has a secondary significance. Of primary consequence is the question. What fixes the general rate to which the interest on "money" invested in a building tends to conform? What determines the earnings of capital as a whole? We shall see that it is a law of rent. Buildings, indeed, tend to earn, in proportion to their cost, as much as is on the average earned by tools, ships, engines, mercantile stocks, etc.; but the general earnings of all these things are fixed, like ground rent, by the Ricardian law. In the end we shall see that this law applies primarily to the general fund of invested wealth, and only secondarily to land. What we have here to emphasize is the fact that the supposed law of interest that governs the income afforded by a particular made instrument resolves itself into a mere equalizing tendency, -- a movement that causes interest at one point to equal interest at another. One artificial thing may, as an investment, pay as well as another. What they all pay is determined by the law with which the Ricardian study of land has made us familiar.

The study of the earnings of land has revealed the general principle of differential gain; and the word "rent" has lately been used in an abstract way, as meaning any gain whatever that exemplifies this principle. "Rent of ability" and "consumers' rent" are now familiar terms. Scientific language here cuts loose from historical moorings. There is nothing in the conscious thought of the business world that corresponds to this mathematical idea of an income made up of surpluses or differences. To the practical man rent is nothing if not concrete. It is the lump sum that he gets every year from some material possession or other. It is the dollars per annum that as an owner he gets out of a house, a farm, a machine, etc. It is therefore doubtful whether, in the end, the various other gains that come to men in accordance with the differential law will continue to be called by the name that is popularly used in so concrete a way. In the present study, we use the term "rent," in order that we may bring our analysis into connection with recent scientific studies, and, in particular, in order that we may have all the benefit that it is possible to derive from the Ricardian theory. Ground rent is a useful type of the two static incomes that we have to examine.

The most interesting of recent applications of the principle of differential gain is the study of "Consumers' Rent" by Professor Marshall. This is something that practical men think of, but not in any connection with the product of land, buildings, etc., and therefore not in a way that would ever suggest the use of the term "rent." This gain that consumers realize is rent simply because it result from that principle that the case of land has made familiar to us. There is a similarity between the personal gain that a consumer realizes by buying a necessary article cheaply and the income that a landlord gets from his estate. Labor spent on the poorest land in cultivation earns wages only. This is marginal labor, and the product of it affords the standard from which may be measured the earnings of similar labor expended elsewhere. In tilling a better field the worker creates a surplus above this standard product, and the excess is the rent of the superior field. It goes to the owner of this field, since the man who tills it gets the same wages as the marginal worker.

There is another variety of marginal labor that set a standard from which differential gains may be estimated: it is the last increment of labor applied to the good land itself. Agriculture is subject to the law of diminishing returns: the early increments of labor expended on a given area are more productive than the later ones, and the last increment of all creates a product that is equal to that created on the land of poorest quality. This is a marginal product, in a more refined sense of that term; and it is entirely absorbed by the wages of the man who creates it. The farmer gets nothing for himself out of the last increment of hired labor that he puts upon his land. All earlier increments create surpluses above the standard set by the last. The sum of all these surpluses is the rent of the land; and it goes in the first instance to the farmer, since the earlier workers are paid at the same rate as the last. By the competition of different farmers this sum is handed over to the landlord. This variety of rent, the surplus created by early increments of labor expended on a given field, is the best type of differential gain.

Consumers' rent is realized in an analogous way: we get it when we buy for a dime the loaf that nourishes us. The benefit derived from the first dime that we spend is very large as compared with the benefit derived from the last one. Our purchases arrange themselves in a series, in the order of their importance. In spending our income we first make sure of what is imperatively necessary, then get what is desirable, and end by getting that which affords the smallest gratification afforded by anything that we buy at all. The things that come early in the list have a high "subjective value" as compared with those that come later, since they render a far more important personal service. This excess of utility in early purchases is a differential service rendered to the purchaser, or a consumers' rent. It may be illustrated, for an average man, by a dinner where the articles are selected from a menu on the European plan. A substantial dish renders the largest personal service to the consumer; while the delicacy that he hesitates in ordering represents the marginal purchase. If the two chance to be of equal cost, the former dish affords a large consumers' rent. It will be seen that the radical difference between this gain and the income from land is that the one is subjective and the other objective. This advantage that comes from the buying of cheap and highly serviceable articles is purely personal, resolving itself into an effect on the sensibility of the user. Now, there are, in fact, other forms of subjective rent that are equally important. All of them together constitute a generic variety of differential gain, that is related to ordinary rent much as subjective value, in recent studies, is related to objective. Subjective rent is a fundamental element in the philosophy of distribution. As a whole, it is the basis of the distributive law, and it is the practical end of the productive and the distributive processes. It embraces the total personal advantage secured by industry.

Professor F.H. Giddings has recently called attention to the increasing onerousness of successive hours of labor put forth by a man in a single day. The first hour of work costs little or nothing, since the weariness entailed by it is no greater than health and enjoyment require. The fourth hour may entail a positive sacrifice, the eighth imposes a large one, and the tenth and last is so wearying as to bring the work to an end, unless by some complications of the industrial system the man is forced to continue working. The mere wages of another hour of service would not induce him to render it.

Now, for our present purpose, we need to notice that, if wages are uniform through the series of hours, there is a special gain derived from the work performed in the earlier and less onerous ones. On the supposition that the man is working by the piece and can stop when he pleases, he would naturally stop when he is so weary that further work would cost him personally more than it would bring to him in the way of gratifications.(1*) In the last fractional hour of his labor he earns just enough to offset the sacrifice that this final increment of labor costs; and, if circumstances force him to work longer in order to retain his employment, he will rebel against his fate and join an eight-hour movement. Here, then, is a point of equilibrium of gains and sacrifices involved in wage-earning. The final increment of labor put forth in a day costs the worker personally just what it brings him. Earlier increments bring the same wages, and cost the worker less. They afford a differential gain that we may term laborers' subjective rent.

In a full analysis of the wages problem it will appear that, if the number of workers be limited, the amount of work to be had for hire depends on the length of the working day. The final increment of labor offering in the market is the labor put forth in each day in the latest working hour. By a commercial principle this final increment offered sets the general rate of wages. We notice, in passing, that the location of the no-rent period, or the point of equilibrium of gains and sacrifices resulting from labor, has a determining influence on the rate of wages. It fixes the quantity of work for sale. Determined in amount as it actually is, labor at every period of the day except the last insures a differential gain to the worker, and this represents the entire personal advantage that he gets from earning money by labor. Consumer's rent represents the entire advantage that he gets in spending the money. Earning a dollar by work that entails less than a marginal dollar's worth of weariness, and spending or investing it in a way that affords more than a marginal dollar's worth of gratification, -- these two operations insure to the worker net personal gains. They represent the advantage afforded by work and wages over idleness and starvation.

Labor is not the only sacrifice incurred in the creating of wealth: abstinence entails sacrifices, and it increases the fruits of industry. The part of the social product that is insured by capital is traceable to a personal process that is costly. What is here important is that acts of abstinence arrange themselves in a series, according to their costliness, like the succession of hours in a working day. Putting the last dime of a day's wages into the savings-bank entails the present loss of the last and least of the gratifications that a day's work might have secured. Saving a second dime cut more deeply into the pleasures of the present, and the saving of the last increment of income that is actually put into the fund of capital entails the foregoing of a gratification that is so intense that whatever can be had through this means in the future barely offsets the sacrifice involved in waiting for it.

If we arrange the units of wages secured by the labor of a day in order, according to the increasing personal sacrifice involved in earning them, we shall have a series that, if placed in an inverted order, will represent the increasing difficulty of saving them. It costs the worker practically nothing to earn his first dime, while it costs him about what a dime is subjectively worth to earn the last one. The last dime that is earned is the first one that is saved. Putting this one into the savings-bank cost the man subjectively little, since it means only the foregoing of a luxury while saving the first dime that is earned would mean the foregoing of bread itself. Somewhere there is a limit where abstinence naturally ceases, because the gains of it just offset the personal cost that it entails. Saving that is practised before the limit is reached insures a net personal gain that is the capitalists' subjective rent and corresponds in quality to the laborers' subjective rent that we have already analyzed.

We noticed in passing that, if the number of laborers be fixed, the total amount of labor offering in the market depends on the prolonging of the working day, or on the extending of what we termed the point of equilibrium of gains and sacrifices into the later hours. In like manner, if the number of abstainers be fixed, the amount of capital that is to be had for hire depends on the foregoing of more coveted pleasures, or on the crowding of the capitalist's point of equilibrium of personal gains and sacrifices into the region of increasing sacrifice. As the last hour of labor in a day figures as the final unit in the supply of labor, and determines, in a way that we shall soon clearly see, the rate of wages, so the last dime saved in a day constitutes the final increment in the supply of capital, and figures in a corresponding way in the adjustment of interest. Wages and interest depend on the location of the two marginal lines of subjective equilibrium of gains and losses entailed by production. They are also the lines from which the two varieties of producers' subjective rent are measured. These two rents are the differential gains accruing from what we may term intra-marginal labor and abstinence, or the working and the waiting that cost the men personally less than do the working and the waiting that insure the final increments of labor and capital.(2*) This subjective rent of producers and consumers is the sole object of industry, statically regarded. Wages and interest as embodied in money, or wealth in a convertible form, are objective rent; and this is always a means to the subjective end. Men exert themselves to get money: they realize a producer's subjective rent in making it and a consumer's subjective rent in spending it. If we can get a dollar at a small sacrifice to ourselves, and spend it for a large personal gratification, we are gainers; our industry is profitable.

Actual society is dynamic; and, when we study it statically it is with no purpose of ignoring the changes to which it is subject. By a series of static studies we determine the nature of the changes that are actually taking place, as we might ascertain the movements of particles of water in a stream by making a series of cross-sections of it. This series of studies affords a theory of industrial dynamics.

In one instant of time none of the structural movement of society are possible; and we will, as it were, artificially prolong such an instant. We will create a period long enough to allow labor to go on, and to get and consume its wages, and let the social structure continue through the interval as it was in the beginning.

In actual life there is always too much labor and capital in some industries and too little in others. The working groups are always somewhere out of balance; and in our static study we may, if we choose, leave them so. We may take society as we find it at a particular instant, making too much of commodity A, too little of B, about enough of C, etc., and suppose that it continues in this unsymmetrical condition. Men and money ought to move from one place in the system to another, but they do not. This would bc like making a static study of the surface of the ocean by freezing its waves fast in all their irregularity. A simpler way would be to reduce them to a level; and the better plan for our study of society is to suppose that the industrial groups are not out of balance. Capital and labor are in normal quantities in them all. An equilibrium in the amount of capital and labor in the different groups is artificially created at the beginning of the period that we study, and is held throughout. The relative amounts of silk, iron, etc., that are in process of production are normal.

We need now to define the productive agent, social labor and capital, if the use of the term "rent" in connection with them is not to have a look of absurdity. Labor and capital, in current theories, are the antithesis of the typical rent-producer, land. Yet wages in the aggregate constitute the income derived by society from its entire fund of pure labor energy; and interest is, in like manner, the product of a fund of pure capital. Both are differential gains, and completely amenable to the Ricardian law.

Capital may be studied from two points of view. Science has used both, the one intentionally and the other unconsciously and blunderingly. It has alternated in the same discussion from the one view to the other, to the confusion of the analysis. In formal definitions a concrete view has been taken, and capital has been treated as a mass of instruments for aiding labor. It is tools, buildings, materials, etc. In the actual treatment of the subject capital has been regarded in a way that is more in harmony with practical thought. It has been considered abstractly, as a fund or quantity of wealth devoted to productive uses. In this view it is what a business man has in mind when he speaks of his invested capital as a hundred thousand dollars; and it is what the treasurer of a corporation designates in the same way in his published statement of assets and liabilities.

Both views are essential in economic analysis: the common and practical though abstract view is the more serviceable in the solution of problems of distribution. Capital itself is in reality one and the same thing in whichever way it is treated. Regard capital in the concrete, and it will appear that the mass of things that constitute it is changing at every instant: bread, clothing, furnishings, etc., are passing continually out of the stock; and new things are taking their places. Men begin to eat, wear, and otherwise consume articles that until now have figured as a part of some one's stock in trade; and, while doing this, they, by their own industry, replenish the stock from the other end. They produce new raw materials and advance old ones at the same time nearer to completion. They wear out tools, and make new ones. The essential fact is that the things that in each brief period are taken out of the stock are of substantially the same value as those that are put into it: the capital is therefore intact. In actual life the amount of capital in existence changes slowly: in a static view it is supposed not to change at all.

The things, then, in which society invests its fund of productive wealth are changeful, while the fund itself is permanent. The things lose their identity continually, while the fund retains it identity, as does a river of which the component elements, particles of water, are changing at every instant. In the concrete view that for certain purposes it is necessary to take, social capital is a shifting list of things always worth a certain sum; while, in the abstract view that for our present purpose it is necessary to take, social capital is a fund of wealth fixed in amount, though invested in a shifting list of things.

An essential fact concerning what we may now term pure capital is that its outward forms must change continually if the fund itself is to continue to exist. Completed articles must be taken from the stock, unfinished ones must be completed, materials must be advanced towards completion, and new raw materials must be secured. If the process stops, capital perishes. By means of these continuous changes the productive fund is made to take the forms that circumstances require. If an instrument is ill adapted to the service demanded of it, it will be replaced, whenever it is worn out, by a better one. Like the vital tissue of plants and animals, concrete capital, except in the case of land, perishes and is renewed; and the new tissue is sound and adapted to it purpose. In particular does the new concrete capital adapt itself in form to the number of men who are to make it serviceable. A large fund for the use of few workers takes one set of forms, while a small fund for many workers takes a wholly different set. A static view of pure capital represents it as constant in quantity, and as used by a constant number of men. The tissue that is restored by industry is therefore of the same kind as that which is destroyed by use. Change in amount either the working force or the capital, and you introduce a dynamic element into the situation, and you make it necessary to change the outward forms in which the productive fund is invested. Double to-day the capital of an isolated society, and you will not simply duplicate it shovels, ploughs, looms, etc.: you will give it new machines, more solid buildings, new roadways, etc. With two thousand dollars' worth of pure capital per man, the workers need to have in their hands a list of instruments quite different in kind from those that served their purposes when they were using a thousand dollars per man. Vary pure capital quantitatively, and you change working instruments qualitatively.

As the capital that figures in our present problem is the pure social fund of productive wealth, so the labor in our problem is a corresponding fund of human energy. This is a fact as real and important as the former one, and as fully attested by the current thought and language of the business world. It is the interests, the rights, and the struggles, not so much of particular laborers, as of labor as a permanent force, that absorb the attention of practical men. Workers are distinct from work. For the purpose of a study of distribution they are related to it as capitalist are related to capital. They own it, and therefore they justly claim its products. They control the shape that the labor takes to the same extent that the capitalist dictates the forms of investment of his "money." A working man determines whether his labor shall take the form of planting, of quarrying, of weaving, of writing, etc. Concretely regarded, labor is a list of acts that men perform in the creating of wealth. They are as unlike in themselves as are the tools that workmen use. Planting, weaving, etc., are dissimilar outward forms of working energy.

Abstractly regarded, labor is this fund of pure energy itself, as changeful in its forms as is pure capital. As a fund, it is kept intact by the young generation of workers who come upon the scene and take the places of the older ones who depart. Laborers are perishable, but social labor is continuous. This permanent fund of human energy, ready to take shape in such concrete working acts as the needs of industry may require, is the second generic element with which a philosophy of distribution has to deal. The parallelism between capital pure and concrete, on the one hand, and labor pure and concrete, on the other, is a fact of primary importance.

We noticed that, if the working force be constant, capital changes in kind whenever it changes in quantity. Labor is subject to the same law. One man with a thousand dollars at his command will work in a different way, will perform a set of acts different from those that two men will perform if they have the same capital. To change the labor force quantitatively, while other things remain the same, is to change it also qualitatively. In a static view quantity and quality remain constant. There is a fixed number of men, working at the same trades and by the same processes. When a carpenter dies a carpenter's apprentice replaces him, and uses the same tools in the same way.

Part 2