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Capital, Interest, and Rent: Essays in the Theory of Distribution; Fetter, Frank A.
16 paragraphs found.
Part 3, Essay 1

2. The distinction between land and capital is formally given up by thinkers of this school, so far as it concerns the individual owner, the investor, or business manager. It is said:

The balance of usage and convenience is in favour of reckoning rights to land ( sic) as part of individual capital. *8
It is to be observed that land is but a particular form of capital from the point of view of the individual producer. *9
A manufacturer or trader owning both land and buildings, regards the two as bearing similar relations to his business.... When he comes to decide whether to obtain [more] space by taking in an extra piece of land, or by building his factory a floor higher, he weighs the net income to be derived from further investments in the one against that to be derived in the other.... This argument says nothing as to whether the appliances were made by man, or part of a stock given by nature. *10
It is true that land is but a particular form of capital from the point of view of the individual manufacturer or cultivator. *11
There is likeness [between land and appliances made by man] in that, since some of the latter can not be produced quickly, they are practically a fixed stock for short periods, and for those periods the incomes derived from them stand in the same relation to the value of the produce raised by them, as do true rents. *12
It may be well to refer once again to the relations between land, whether agricultural or urban, and other forms of wealth regarded from the point of view of the individual investor. Even from the point of view of normal value, the distinction, though a real one, is slighter than is often supposed; and even in an old country, the distinction between land and other forms of wealth has very little bearing on the detailed transactions of ordinary life. *13

3. These changes in the concepts of land and capital are not treated as equivalent to an abandonment of the distinction entirely, for it is justified from a different standpoint.

When regarding capital from the social point of view it is separate the capital, which is the result of labour and saving, from those things which nature has given freely. *14

The reason for this distinction is given as follows:—

[Although land and other wealth appear alike to the individual], there is this difference from the point of view of society. If one person has possession of another farm there is less land for others to have. His use of it is not in addition to, but in lieu of the use of a farm by other people. Whereas if he invests in improvements of land or in buildings on it, his investments will leave as good a field as before for an increasing population to improve other land or put buildings on it.... There is likeness amid unlikeness between land and appliances made by man. There is unlikeness because land is a fixed stock for all time: while appliances made by man, whether improvements in land, or in buildings or machinery, &c., are a flow capable of being increased or diminished according to variations in the effective demand for the products which they help in raising. *15

Again, objection must be made to the view of the increase of capital. Capital, as the term is here employed, can be increased; but it does not increase because it is employed in one industry rather than in another. It is sure to be employed in some industry or it is not capital. Why should its use in a particular industry increase the total supply? The additional ploughs can be produced to meet the demand only by the use of the available appliances, which are limited in amount, and which, if used for the ploughs, cannot be used for other things. There will be less productive power to put into other industries unless the general stock of wealth is increased. It is hard to see how the use of the existing stock of capital in one industry rather than another can be assumed to be the cause of this. *18


It is said that the distinction between rent and interest may be made to turn on a difference of time. It is probably true that nowhere in current discussion will the statement be found that this is the whole difference, but it is put thus:—

The greater part, though not the whole, of the distinction between rent and interest on capital turns on the length of the period which we have in view. *28 [And again:] For the time they [the net incomes derived from appliances for production already made] hold nearly the same relation to the price of the things which they take part in producing, as is held by land or any other free gift of nature. *29

In this conception, as the period under consideration is lengthened, the rent bearer, if it is a perishable thing, gradually becomes an interest bearer, rent gradually merges into interest, and there is no sharp dividing line between them. In the static view of industry, the income from material agents is rent, and interest is nonexistent. If there is any thought here of the bounty of nature or of the attribute of extension, it comes in the dynamic view of industry in considering long periods. The income derived from the durable sources is always rent (in this conception), and never becomes interest; while the income from appliances which must be renewed, is sometimes rent (in short periods), but becomes interest if a period of some length be considered.


Further criticism may be reserved, for the time concept is nowhere in contemporary discussion fully worked out; and it may perhaps be looked upon as an undeveloped thought suggested by the recent mode of treating costs and rent. Those goods which are worn out and renewed more or less frequently tend, in the long run, to conform (it is thought) to the cost rule, while the durable goods are independent of the cost rule. In the latter case the income is a true rent; but all the other appliances yield what appears to be a rent, if they be studied for short periods, within which their value cannot be adjusted to their cost. This supposed relation between cost and rent—the no-cost concept of rent—will later be given a fuller consideration.


2. The logic by which it is shown that the undertaker need not consider as part of his expenses the rent of the last or marginal unit of product proves too much to be sound. In exactly the same way one can seem to show that interest, wages, and profits do not "enter into" the cost of production,—a reductio ad absurdum which has not failed to appear under the light of recent criticism. *48 Nor does this possibility escape the ingenious thinkers who hold the doctrine under criticism. Speaking of the farmer, it is said:—

The question whether he has carried his cultivation of a particular piece of land as far as he profitably can, and whether he should try to force more from it, or to take in another piece of land, is of the same kind as the question whether he should buy a new plough, or try to get a little more work out of the present stock of ploughs.... That part of his produce which he is in doubt whether to raise by extra use of his existing ploughs, or by introducing a new plough, may be said to be derived from a marginal use of the plough. It pays nothing net (i.e., nothing beyond a charge for actual wear-and-tear) toward the net income earned by the plough. *49

Again, it is said more generally of the manufacturer or trader:—

That part of this production which he just forces out of his existing appliances, being in doubt whether it would not be better worth his while to increase those appliances than to work so intensively those which he has, contributes nothing of the income which those appliances yield him. This argument says nothing as to whether the appliances were made by man, or part of a stock given by nature. *50

When it is noted that these statements are made in connection with the thought that all material agents are capital from the standpoint of the undertaker, the conclusion seems necessary that all claims of any exceptional relation of rent to money costs, and hence to value, must be given up. But such consequences do not appear to be recognized.


The doctrine just stated, far from being rejected, is made the basis of the concept of rent which may be considered the dominant one at present among the economists of England and America. On the assumption that the doctrine has been proved, this peculiar relation to value is made the essence of the rent concept; and all the incomes which are thought to share this peculiarity are classed as rent. It is explained that the "incomes derived from appliances for production made by man" are called quasi-rents, "partly because (in short periods) the stock of them has to be regarded as temporarily fixed," but essentially, as is stated in the next sentence, because "for the time they hold nearly the same relation to the price of the things which they take part in producing, as is held by land or any other free gift of nature, of which the stock is permanently fixed; and whose net income is a true rent." *59


In such cases the incomes from improvements on land "do not take direct part in determining the price of the produce, but rather depend on them" ( sic). *60 Hence these incomes are called quasi-rents; that is, of the nature of rent. The point repeatedly insisted upon is that the mark of rent or of quasi-rent is that it does not "enter directly into the marginal cost of production." *61 In this concept rent is an income that is "a result and not a cause of selling price." *62 Rent is a share, or an income, that does not correspond to a cost which must be met if the supply of the product is to be maintained. The expression "a cause of selling price" means the same as "enters into the cost of production." Instead of a sharp classification of sources of income, as was involved in the original concept of rent, there is here presented a continuity classification of the incomes themselves, ranging from those at the one extreme, which never enter into the cost of production, in a continuous series to those which do not enter when very short periods are considered, but do enter at any other time. At the head of the series are the free gifts of nature, whose supply is said to be fixed, and likewise must be logically the incomes flowing from the possession of strictly unreproducible articles, as masterpieces of art, autographs, though these are not mentioned: all such are true rents. At various points along the scale come the incomes from appliances made by man, the supply of which can be renewed or increased in varying periods of time.


As we have seen, the consideration of money costs of production and their relation to the value of goods compels the adoption of the undertaker's standpoint. The costs of goods act on their value, so far as they do it at all, through the medium of the undertakers, who adjust supply according to the price. We have maintained that in so doing they must count the rent of land precisely as they do any other item; while the doctrine here criticized seems to be that, just as the undertakers need not count their rent, so they need not count any other items of expense, for not one of them enters into the cost of production in short periods. Such a reductio ad absurdum must cause the no-cost doctrine to be renounced; but the conclusion is escaped because the thought has passed on from the undertaker and his burden of costs, and his constant endeavor to adjust supply to the price, and has gone over to the owner of the appliances of production.


In the next sentence the shift to rent as the owner's income is made:—

Now the income derived from...appliances of production made by man have really something analogous to true rents.... For the time they hold nearly the same relation to the price of things which they take part in producing, as is held by land. *63

Every item of outlay by the undertaker may be viewed from two sides: to the undertaker it is always a money cost, and never an income; to the one who receives it *64 in payment for labor or the use of appliances it is always a part of income, and never a money cost. Now, in the chapter *65 on quasi-rents, after the first sentence, the discussion is all of incomes: "the incomes from buildings," "the net incomes from appliances for production already made may be called their quasi-rents," "the extra income derived from improvements that have been made in the land by its individual owner,"—these are a few of a large number of expressions showing that the payment is not looked upon as a money cost, but as an owner's income. This helps us to understand how it is possible to say that none of the shares are money costs: it is an unannounced and doubtless unconscious shift to a quite different conception.


The changes just noted involve a change of thought also from the production of the commodity in question to that of the production of the appliances. The things these appliances take part in producing are still spoken of, but the interest is indirect. In the case of the production of the commodity, the undertaker pays what he is forced to in each case for the agents of production "without troubling himself" about their origin. The period within which the supply affects price is that within which appliances can be diverted from one use to another. Here, however, the price of commodities is supposed to remain unchanged until new appliances can be brought into existence, tempted by the higher income: the period considered important is that within which the supply of "improvements" or of "means of production" can be increased. Their (real) cost is thought of as reflected on in the price of the goods; but let it be noted in passing that this can never raise, it can only lower the price, through increased supply. Only occasionally is it impossible to divert some of the existing appliances almost immediately to other uses with greater or less ease, so that the period sufficient to increase the supply of the commodity rarely is the same as that needed for creating new appliances. When the relation of money costs to the price of commodities was talked of, it was with reference to their influence in increasing or decreasing the supply of the various commodities: when the relation of owner's income to prices is talked of, it is with reference to the effect they will have in increasing or decreasing the supply of available appliances. The undertaker reaps his unexpected profit when the price of his product suddenly rises, and he has either a large stock of it or has contracts out for the materials, so that he can get a large margin between costs and price by producing quickly and more cheaply than his new competitors. The owner reaps an unexpected income when his appliances are suddenly in greater demand. The case to test what the effect is of a relatively fixed supply of appliances on the undertaker's costs is that where he has no standing contract for materials when the increased demand for the product arises; and here can be seen most clearly that money costs do enter into price. The value of the appliance for the time limited would rise, its owner would get an increased income, and the undertaker must meet increased costs if he is to continue to produce the article.


Here all the points are combined. It is the owner's income, the supply of improvements, and the cost in the form of effort and sacrifice which must be met. There is no hint of the thought that even in the shortest periods the payment that is income to the owner must be a cost to the undertaker. So throughout "the free gift of nature" is said to yield an income that is not a cost. The "made appliances" have cost "effort and sacrifice," which is no more than enough to remunerate the owner. This is the very heart of the quasi-rent doctrine,—the thought that there is a difference in the cost which must be undergone to bring into existence different productive agents. Some are free gifts, and involve no cost (sacrifice): others are made by man, and cost effort. It is not clearly seen and borne in mind that money costs have no correspondence with these, but are merely the market value of the agents of which a producer makes use.


The distinction between the individual and the social views of land, on which much stress is laid by contemporary economists, rests on the recognition of the two points of view indicated. By individual point of view is meant that of the undertaker who considers money costs. By the point of view of society is meant apparently that of owners in general, who are considered as expending effort, making sacrifices, incurring real costs, in the increase of productive appliances. This distinction is made repeatedly, *70 and it must be noted that it is fatal to anything but a "real cost" conception of rent. If land is but a particular form of capital to the undertaker, then there is no difference between rent and interest as money costs to the undertaker. It is only when real costs are considered that there is any difference to note. Now real costs are very little considered in practical business under a money economy. As they are not capable of mathematical expression, they are dismissed pretty effectually from any discussion of practical business problems, of rent in its relation to market values, and from the economist's analysis of industry. It is difficult to see how the conclusion can be evaded that the distinction still insisted on in current discussion between rent and other shares of industry as they affect value, and the quasi-rent doctrine itself, [rests] on a confusion of these two essentially different conceptions.


The relation which rare and not easily producible appliances have to market price over long periods of time is of just the opposite character from that asserted. The less capable of increase particular appliances are, the greater income they yield, the more therefore it "enters into price" as the demand for their products increases.