Distribution as Determined by a Law of Rent

John Bates Clark

[Part 2 of 2]

We are now ready to prove our theses. Interest is the rent of the social fund of pure capital. It is a differential gain, in the fullest sense of the term. It is measurable by the Ricardian formula, and will bear all the test to which a rent-producer can be subjected.

Ground rent is useful as a type of different gain, and here the major service of the traditional theory of rent ends. The type itself is not a complete one: it fails at one point, but up to that point the income that a landlord gets from his property illustrates the nature of what society gets from its fund of pure capital.

Let us simplify the current law of rent by disregarding for a moment the existence of what has figured as an auxiliary capital, and consider that land is worked by labor that is practically empty-handed. The change affects no principle now under consideration, since the thing that we have to prove could be established as completely if we were to keep the formula in its more cumbersome form. The differential gain of labor alone applied to fertile land is the more useful type of true rent. This labor is subject to a law of diminishing returns. Put one man only on a square mile of prairie, and he will get a rich return. Two laborers on the same groUnd will get less per man; and, if you enlarge the force to ten, the last man will perhaps get wages only. All the earlier men will create surplus products over and above their wages, and the sum of these surpluses is the rent of the field.

For a fixed area of land read now a fixed fund of pure social capital. At one moment this is, in reality, an exact sum; and by our own hypothesis we have prolonged the conditions of that moment. In a static view pure capital is a fund of a given amount invested partly in land and partly in made instruments. These instruments lose their identity, as old ones are used up and new ones are created; but they keep their general character. A hoe replaces a hoe, and a ship replaces a ship. The last man who works in connection with the fixed social fund is like the last man who is set tilling the square mile of land: he creates less than any of his predecessors.

If we pursue the common method of illustrating this principle, we shall introduce workers into the force one at a time, and note the product created by each of them. On this supposition one particular man is the last in point of time. The supposition makes the study for the moment dynamic, since, in addition to the change in the number of the workers, it involves changes in the forms that the fixed fund of capital assumes. When the workers are few, the instruments will have a certain character; and, when the men are numerous, the appliances will have a different character. Such a dynamic study is, however, admissible as an introduction to a study of a static condition. We more readily see how interest and wages are determined in a stationary state by noting the way in which the condition is reached. Let the fund of capital, then, be fixed in amount, and let a force of workers be gradually introduced, as was done in the case of the field in the typical illustration of rent. It will be seen that the pure capital is like the field, in that it is subject to a law of diminishing returns. A few men using a large fund create a large product per man: new men joining the force add less to the output, and the last man who comes adds least of all. Each earlier worker creates a surplus over and above the amount created by the last one, and the sum of al1 these surpluses is the rent of the fund.

We might treat the whole world as an isolated society, such as, indeed, it ultimately will be if the flow of capital and of labor from place to place shall ever become sufficiently unimpeded. On the other hand, we may take as typical a smaller society working in isolation. An island in the sea not reached by ships or an inland country with a prohibitory tariff on the importation and the exportation of both men and material wealth would afford the illustration that we seek. We need no one to tell us that, here as elsewhere, we are so simplifying the ideal society that we make it, as a picture, grotesquely unlike the actual world. It is like it in certain primary facts, and it is these that we are studying. We isolate these facts, and by a study of them get principles that are real, and that will outlive the changeful influences that modify their operation.

Give to an isolated community a billion dollars' worth of capital, and introduce gradually a corresponding force of workers. Put a thousand workers into the rich environment that the conditions afford, and their product per capita will be enormous. Their work will be aided by capital to the extent of a million dollars per man. This sum will be invested in such forms as the workers can use; and, if we were to allow ourselves to imagine the forms that such a condition would require, we should bring before the mind a picture of automatic machinery, electrical motors, chemical wonders in the way of soil creating, and the like. It is the picture of a state that is slowly and remotely approached wherever capital greatly in creases relatively to population.

Enlarge the number of workers to ten thousand, and with the appliances at their service, changed in form as they must be to adapt them to the uses of the larger number of men, the output per man, though smaller than before, will still suggest the gains of a fortunate gold-hunter. Decuple the force again: the working environment will still be a marvel of fruitfulness, but the product per man will be greatly reduced. Decuple it once more, and let a million workers use a billion dollars' worth of capital: the situation now approaches the actual condition of the world; and the output of a man's labor may be supposed to be correspondingly near to that which actual conditions afford.

It would be pleasant to be able to show the detailed way in which this diminution of the product per capita is brought about. In certain earlier studies I have indicated the nature of the sterilizing of the worker's environment that is the cause of the diminution, and expect in due time to present it more fully. A small capital per man means a list of working appliances that is scanty and cheap. It means land that is contracted in area and badly improved, buildings that are unsubstantial, roadways that are poor, and tools and machines that are of a makeshift character. It means that what instruments of production there are are cheap and perishable, and th at there are not enough of them. There is little danger that either scientist or practical men will dispute the fact that, in the sense in which we are using terms, a reduction of the fund of pure capital entails a per capita diminution of the product. If the fund of capital remains the same, an increase of the working force has the same effect.

In our assumed case the last man added to the working force earns wages only. Why is this? Here, indeed, is a point of much consequence. We made the same statement in regard to land: the last worker on a section of fertile soil earns his wages, and no more; and so does the last comer in the working force employed in connection with a fixed amount of pure capital. The reasons for it in the two cases are different; and a study of the nature of the difference shows that the earnings of land are a sort of mock rent. They are equal to a differential product, but are not the genuine thing; while the earnings of the entire fund of social capital, as embodied in land and in all other productive instruments, are a true differential product.

Why does the last man on the farm earn wages only? The farmer is here the master of the situation, and he hires men from other employments till the product that he gets by means of their labor only offsets the sums that he must pay to them. In the general range of employments there is fixed, in some way, a standard of wages: a farmer must pay the current rate if he is to retain his men. It is, of course, true that agriculture is a part of the broader industrial field in which wages are fixed, and that what is paid in agriculture has its effect on the amount that must elsewhere be paid, if men are to be lured away from the farm to the shop, the railroad, etc. That which is important and is not likely to be disputed is that in any limited section of the general field of labor wages must conform to a standard that is set in and for that general field. Competition tends to equalize wages: it causes them to take, in any one employment, a level that is, with certain well-known allowances, uniform for all employment. What determines that level? What fixes general wages? The Ricardian law of ground rent affords no answer to this question; but the more comprehensive law of differential gain answers it in a twofold way. It guides us to one solution of the problem, and directly gives us another.

The last man added to the force that works with a fixed fund of social capital earns only his wages, but this is not because he is lured into the system from without and must be paid just the wages that elsewhere prevail. When we speak of the general field of industry, and the entire fund of capital, there is no without in the case. The man is in the system from the first, and must stay there; and the conditions existing within it fix his wages. The law in the case is that he gets what he is worth to society. If natural tendencies could completely have their way, the final man would get as a wage what he actually produces. It is the final productivity of labor that fixes its pay.

In a static view of the system, we abandon the conception of a working force gradually enlarging, as it was made to do in our illustration. Capital and working force are both fixed in amount through the period that we consider. There is no particular man who is the last to arrive in point of time, but any one may become the final man by giving up his work for a few days and then applying for it again. He tends, as we have said, to get as wages what his presence in the working system is worth. Let him stop working and continue eating, estimate the net diminution of the social income, and by natural law this will be his wage; and this will be the wage of every other man. What society loses when one man stops working, or what it gains when he recommences working, set the general standard.

How do we know that this is true? Frankly, more needs to be said on this point than there is room to say here. It is the competition of employers that, under the free working of natural law, gives to the marginal man the full amount of his product. If employer A is making more out of the man's labor than he pays to him, employer B is interested to overbid his competitor and get the man away. The presence, not of B only, but of C, D, E, etc., insures that, in the end, the worker will get his value.(3*) What is now evident is that each of the earlier increments of labor employed in connection with a fixed fund of pure social capital creates a surplus, over and above the product of the last one, and that the sum of all these surpluses is the rent of the social fund. Each surplus is a true differential product, a difference between the amount created by a particular increment of labor and that created by the final increment. As the product of the final increment sets the standard of general wages, the earlier product may be measured by comparing them with wages: we may say that each of the early laborers creates a surplus above what he gets as pay. This, however, is introducing a secondary standard of measurement and taking from the surplus that we are testing the character of a true differential gain. The ultimate fact is that each earlier worker creates more than the last one. The rent of the fund of pure capital -- which is interest as an aggregate -- is the sum total of these differences.

It is now clear that, in the strict sense of terms, the rent of land is not a true differential product, though it is equal to one in amount. The surplus products of the early increments of labor applied to agricultural land are amounts remaining in the farmers' hands after wages are paid. The farmer hires men at the rate of pay that the general market has established, till no further increase is profitable. The general rate of wages controls the last man's product, since it determines how many men shall be employed on a fertile field. In a similar way the prevalent rate of wages determines what quality of land shall be taken into cultivation: it locates what is called, in the simple and common form of the Ricardian law, the "margin of cultivation." Wage-earners are at liberty to use rentless land, and they do so when they can earn as much there as elsewhere. If the pay of laborers in the general range of employments were to rise, the poorest land now in use would be thrown out of cultivation: if it were to fall, poorer land than any now used would be taken into cultivation. The product of labor at the margin will always conform to general wages, simply because the margin itself will advance or recede till this conformity results. Philosophically, therefore, the rent of a piece of land, if for simplicity auxiliary capital be disregarded, is its product less the wages of the labor that tills it. The pay of the farmer's men conforms directly to the rate that prevails in the general labor market; and the data for calculating the landlord's claim are, therefore, the product of the farm and the rate of general wages. If, however, land were the only instrument in use, the case would be different. The margin of tillage would not advance and recede as wages in industries mainly outside of agriculture should fall or rise: there would be no industries outside of the agricultural limit, and the product of the last increment of work applied to the soil itself would constitute the standard of wages. The land in this case would yield a true differential product, since the rent of it would consist of the sum of the differences between the products of the earlier increments of labor applied to it and the product of the last one. This is exactly the case in reference to the rent of the social fund of capital. It is a true differential gain, consisting of the sum of the differences between the products of the earlier increments of labor used in connection with it and the product of the last one.

We have now a law that fixes the rate of wages and the aggregate amount of interest. We can get the total amount of wages by a simple process of multiplication; and we can get the rate of interest by a process of division. We can, however, apply the law in a reversed order, and get wages as an aggregate and interest as a rate. Let the labor force be fixed in amount, and let the fund of capital that it uses increase. It is the successive increment of capital that are now subject to the law of diminishing returns. Mass the labor, for illustration, in some isolated and desert corner of the earth, and give to it, in the form of soil and simple tools, a first instalment of capital. The product of this little fund of productive wealth will be very great. As we multiply the amount of the fund that is invested in working instruments, we shall reduce the amount per unit that it produces. Of a succession of units of pure capital brought into use in connection with a fixed labor force, each one adds less to the output of industry than does any of its predecessors.(4*)

The parallelism is complete between the phenomena of a fixed fund of social capital with an increasing force of labor, and, on the other hand, the phenomena of a fixed force of social labor with an increasing fund. The last unit of social capital in our present illustration fixes by its product the general rate of interest, as in the former illustration the last increment of labor fixed by its product the rate of wages. All the earlier units of capital now create surpluses over and above the standard set by the product of the final unit, and the sum total of these surpluses is the rent of the labor force. It is the aggregate of the differential gains resulting from the application, in connection with the fixed labor force, of the earlier increments of capital. Wages in the aggregate are the rent of a fund of human energy.

With extreme brevity we have stated a law that is as comprehensive as anything in economics. We have not referred to the obstacles that the law encounters in practice, nor have we made an attempt to measure the deviations from the theoretical standard that the actual distribution of the social income reveals. As real as gravitation is the law that determines the standard. The inference that we draw is already established as an unquestioned fact in the consciousness of business men; namely, that, as capital increases, while other things remained unchanged, interest falls, and, as the labor force increases, if other things remain the same, wages fall. The prospect of high wages depends on a relatively rapid increase of capital. The principle of differential gain that is at the basis of this conclusion does not figure in the popular mind. This principle has further applications that rival in importance those that we have stated, and that can only be indicated here in concluding paragraphs. It dominates production as well as distribution, is an element in determining rates of exchange, and furnishes the ultimate standard of measurement of market values. It, in fact, identifies production with distribution, and shows that what a social class gets is, under natural law, what it contributes to the general output of industry. Completely stated, the principle of differential gain affords a theory of Economic Statics.

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1. In the above study we first excluded pure profit from consideration, on the ground that it is a dynamic income. What is commonly and loosely termed profit is partly the wages of directive labor; and this labor is included in the social fund of human energy that we have studied. The earnings of the work of management are, therefore, rent in the same sense as are the earnings of other labor.

There is another element in the composite returns of employers that is profit in an accurate sense of the term. It results from an unbalanced condition of industrial groups. Conditions are continually appearing in which too little is produced of certain commodities to meet the normal demand for them, and in which they sell for more than enough to pay interest on all pure capital and wages on all the working energy employed in producing them. Included in this total interest will be the rent of any land that may be used in these industries, and included in wages will be the rewards of managers' time and effort. Above all these claims, the selling price of the goods may afford a residuum of pure profit. A discover that should make the production of aluminium cheap would afford a profit on the making of it, until this industry should become so much enlarged as to put upon the market as much of this metal as, under the new conditions, would be normal. After the discovery the competition of different producers would enlarge the production of this metal till the point would be reached at which it would not be profitable to move labor and capital from other working groups to this one. At this point the returns of the industry would be, theoretically, absorbed in wages and interest. In a balanced condition of industries superior managers will earn more than others, and superior workers of every kind will do the same; but that gain which results from the distinctively dynamic cause, the discovery or change that throws production temporarily out of balance, ceases to exist. Such a condition of universal equilibrium is never practically reached, and at many points in the industrial system -- not for any length of time the same points -- pure profit is always to be found. This changeful element of gain is the one part of the actual social income not governed by a law of rent.

2. As the product of land may be measured from a standard afforded by the returns from the poorest soil in cultivation, so the product of labor may be measured from a standard set by the returns from the least efficient men in the working force. Land that lies beyond the margin of cultivation would give crops of some kind, if it were tilled; but they would be so scanty as not to reward the labor that it would require to get them. So the labor of men who are so weak, ignorant, or untrustworthy as to be beyond the margin of employment would yield something if it were utilized; but this yield would be so meagre as not to reward the capital that it would be necessary to use in connection with it. An entrepreneur cannot afford to intrust to such men any part of his productive fund. In the case of labor we locate the no-rent line in a qualitative way when we find men whose room in the complex system of social industry is worth just as much as their company. The product of all labor above this line -- and that is the sum total of wages -- may be treated as rent of superior personal quality.

In the same way, it may be shown that interest is due to the superior quality of those working instruments in which pure capital is invested. There are appliances of every kind in existence that are so poor that it does not pay to expend any labor in connection with them. There are no-rent buildings, ships, machines, mercantile stocks, etc. If we so desire, we may measure the products of better appliances by comparing them with what might be had by using these. In a qualitative way these instrument lie on the margin of utilization.

3. It is said that there is no-rent land, but that there is no such thing as no-interest capital; and that land and artificial instrument are in this way radically unlike. Here is a confusion of ideas and a false deduction. There is rent-paying land and rentless land; and there are rent-paying buildings, machines, ships, etc., and there are rentless ones. Good land, on the one hand, and good buildings, etc., on the other, embody pure capital; and this always pays interest. The poor land and the poor buildings, etc., embody no pure capital, and, of course, yield no interest. The true difference between land and other things does not lie here.

4. A point of paramount importance is the mode of measuring the two funds, those respectively of pure capital and of working energy, that figure in distribution. In what sense, for example, does the capital of society need to become large, in order to make wages high? The standard of market value here fails, since a social capital might, by this standard, seem large, when by a truer standard it is small. Put a colony of men on a rocky island, and give to them just seeds and tools enough to keep them from starvation. The value of what they have will be great, and by the standard of the market the capital in their hands will seem to be a large one; but it is clear that it will not aid labor efficiently.

The true standard of measurement is here that of total utility. A colony on a fertile continent, with all the working appliances that they could well handle, might have a capital that would be smaller, if measured by its market value, than the one in the former illustration; but it total utility would be very large. Give to the colonists the appliances one at a time, estimate the value of each increment of capital as it comes, add all these values together, and you have the measure of the total utility of their social capital. When this is large wages are high. On a limitless and fertile continent, where men and tools were scarce, the returns from labor might be large, though the capital, if measured by the standard of market value, might be almost nothing. For such static measurements as are made when one man's capital is compared with another's, while the social fund, as a whole, remains unchanged, the market standard suffices. The labor force of society is measured by a similar process that gives its total efficiency.

5. The principle of rent in its profounder applications furnishes an ultimate basis for the measurement of all values. Labor has been loosely taken as the final standard that is as satisfactory as any; but labor, concretely regarded, resolves itself into a heterogeneous list of act that are incapable of being quantitatively compared with each other, and are quite incapable of being compared with commodities. The common element of personal sacrifice is present in most labor; but it varies in degree in the case of work of different kinds, and in nearly all occupations it is slight during the early periods of the working day.

Every worker has his point of equilibrium of gains and sacrifices involved in production, or the point in each day at which, if he had his way, he would stop work, because what he might earn by further work would not offset the sacrifice that it would cost. The "disutility" of the work at this point is just equivalent to the utility of the things secured by it. Now, if we fix this point in the case of every laborer in the entire force, the line that we draw through all these point becomes a social line of equilibrium of gains and sacrifices involved in production. Just at this line society, as a whole, stops working, because what it here gets by its labor barely offsets the burden of working for it. An indefinitely narrow margin lying just within this outer boundary of social labor constitutes the true final increment of the fund of working energy. An influence that should call for more labor would tend, in the end, to affect the entire line of equilibrium, and to crowd the whole social margin of labor outwards.

The sacrifice entailed by the labor that is located along this entire social margin afford our ultimate basis for measuring values. The disutility of this labor just offsets the utility of the things secured by it. A brief study would show that these particular things are the final ones of their several kind, and are therefore the ones that figure in the adjustment of market values. In other words, the social labor that yield no subjective rent just offset, by the burden that it entails on workers, the service rendered by the things that it produces; and these are the particular things that appear as determining exchange values. It is true, also, that these are things that, as consumed by workers, yield no consumer's rent. We are here on the border of an intricate and extensive study. We have located a social line where work and its fruit are subjective equivalent. It is a psychological border region to which, as to a commercial mark, society brings it good for valuation.

Labor is not the only sacrifice that result in producing good. Abstinence entails, as we have seen, a burden that, in important respect, acts in a parallel way. Every capitalist has his point of equilibrium of sacrifice and gain, and society has it line of equilibrium. Marginal capitalization, or that which is barely remunerative, locates itself along this social line. Society in it organic entirety incurs by it abstinence a disutility that balances the utility of the things that it get by means of it. Moreover, through good produced by labor and by capital respectively, it is possible to establish a relation between the two different disutilities entailed on society by production, the sacrifices respectively involved in effort and in abstinence. Here, again, we are nearing deep water. We can see that the sacrifice of deferring enjoyment is, like that of labor itself, a second basis for measuring values. Every subjective utility has its equivalent of the one kind as well as of the other; and the psychological currency that measures all values is inherently bimetallic. It is posed of two disutilities, both of which are distinctively social, or of two sacrifices made, in each case, not by particular men, but by an entire social force. What all laborers sacrifice in supplying the minute fraction of the day's work that lies just within the line of equilibrium that we have traced, also what all capitalists sacrifice in submitting to that final bit of abstaining or waiting that lies just within their own collective line of equilibrium, -- these constitute the subjective double standard on which all measurements of value rest.

NOTES:

1. Of course the desire to provide for a family and to accumulate wealth for future needs is included among those to be gratified through the fruits of labor. Work naturally stops when the fulfilment of any desire whatever that can be insured by the wage of another hour is estimated by the worker at less than its personal cost.

2. For the bearing of these facts on the general law of value see the summary at the end of this article.

3. In a full analysis of the subject it will appear that we ought strictly to speak, not of marginal men, but of final quantitative increments of pure labor energy. The last fractional hour of labor expended in a day by an entire working force is the true final increment of labor that enters the market; and a minute fraction of it is furnished by every man in the force. It is the product of this very composite final increment of labor that sets the standard of wages. Only for simplicity of illustration do we speak of the last man added to the forceas furnishing the final increment.

4. As the fund increases, its forms of embodiment adapt themselves to the needs of the men who are to use them; and, on the other hand, the forms of labor itself, the nature of the concrete acts in which the fund of pure working energy expends itself, adapt themselves in character to the instruments that are at hand.

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