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

John Bates Clark, from the Warren J. Samuels Portrait Collection
Clark, John Bates
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First Pub. Date
New York: The Macmillan Company
Pub. Date

Chapter I

Issues that depend on Distribution


For practical men, and hence for students, supreme importance attaches to one economic problem—that of the distribution of wealth among different claimants. Is there a natural law according to which the income of society is divided into wages, interest and profits? If so, what is that law? This is the problem which demands solution.*1


A majority of men live chiefly by labor; and for these men the resultant of all the economic forces takes the practical form of wages. Arts have been mastered, labor has been divided and subdivided, and machinery has been set working; and as the result of it all, that which comes to wage-earners is the pay that employers give to them. The amount of this pay fixes the degree of comfort that these men themselves can enjoy, and the amount of culture, health and well-being that they can insure to their children. Moreover, the affects of high or low wages upon the welfare of the working class are cumulative, as generations succeed each other. The money that a man earns may be thought of as potential well-being condensed into a material form; and if workers now get enough of it to put them on a high plane of comfort, their descendants will probably reach a higher plane. It is, then, the nature of the law of wages which determines whether the continuous life of working humanity shall have a rising or a falling trend.


Wages are usually paid by one person to another. The amount thus paid is adjusted by bargain, and may seem to depend on the comparative power and the adroitness of the parties to the contract; for commercial strategy is an important art, practised by both employers and workmen according to their several abilities. There is, however, a market rate of wages; and this is, in the main, controlled by ulterior and positive forces. The so-called "higgling of the market," in fact, affects the rate of pay for labor only in a local way and within narrow limits. The amount that workmen can generally, by any shrewdness or firmness, exact from employers is limited, as we shall show, by the productive power that resides in labor; and the forces that control the prevailing terms of wage contracts are those which determine the amount of that productive power. There is, in short, a deep acting natural law at work amid the confusing struggles of the labor market.


The function of this natural law is to separate the gross earnings of society into three generic shares that are unlike in kind. It causes the whole annual gains of society to distribute themselves into three great sums—general wages, general interest and aggregate profits.*2 These are, respectively, the earnings of labor, the earnings of capital and the gains from a certain coördinating process that is performed by the employers of labor and users of capital. This purely coördinating work we shall call the entrepreneur's function, and the rewards for it we shall call profits. The function in itself includes no working and no owning of capital: it consists entirely in the establishing and maintaining of efficient relations between the agents of production.


We have said that the pay which, with all the bargaining strategy that they call use, workmen get from employers is limited by the productive power that resides in labor itself, and that a study of the wage law must search for the influences that fix this productive power. We may now advance the more general thesis—later to be proved—that, where natural laws have their way, the share of income that attests to any productive function is gauged by the actual product of it. In other words, free competition tends to give to label what labor creates, to capitalists what capital creates, and to entrepreneurs what the coördinating function creates.


The entire study of distribution is, in this view, a study of specific production. It is an analysis of the wealth-creating operation, and a tracing to each of the three agencies that together bring wealth into existence of the part which it separately contributes to the joint result. To each agent a distinguishable share in production, and to each a corresponding reward—such is the natural law of distribution. This thesis we have to prove; and more hinges on the truth of it than any introductory words can state. The right of society to exist in its present form, and the probability that it will contribute so to exist, are at stake. These facts lend to this problem of distribution its measureless importance.


The welfare of the laboring classes depends on whether they get much or little; but their attitude toward other classes—and, therefore, the stability of the social state—depends chiefly on the question, whether the amount that they get, be it large or small, is what they produce. If they create a small amount of wealth and get the whole of it, they may not seek to revolutionize society; but if it were to appear that they produce an ample amount and get only a part of it, many of them would become revolutionists, and all would have the right to do so. The indictment that hangs over society is that of "exploiting labor." "Workmen" it is said, "are regularly robbed of what they produce. This is done within the forms of law, and by the natural working of competition." If this charge were proved, every right-minded man should become a socialist; and his zeal in transforming the industrial system would then measure and express his sense of justice. If we are to test the charge, however, we must enter the realm of production. We must resolve the product of social industry into its component elements, in order to see whether the natural effect of competition is or is not to give to each producer the amount of wealth that he specifically brings into existence.


In case it shall prove to be true that products and shares do thus coincide, we need further to know whether each of these separate incomes grows absolutely larger or smaller. We must ascertain whether evolution makes labor more productive, and therefore better paid, or less productive, and therefore worse paid. We need also to know whether it treats capital and the undertaking function, in these respects, well or ill. As evolution proceeds, do owners of capital and users of capital become better off or worse off? Having first tested the honesty of the social state, by determining whether it gives to every man his own, we have next to test its beneficence, by ascertaining whether that which is his own is becoming greater or smaller. The right of the present social system to exist at all depends on its honesty; but the expediency of letting it develop in its own way depends entirely on its beneficence. We therefore need first to know whether we have the right to let natural economic forces work as they are doing; and we need next to know whether, on grounds of utility, it is wise to let them work thus.


The whole income of the world is, of course, distributed among all the persons in the world; but the science of distribution does not directly determine what each person shall get. Personal sharing results from another kind of sharing: only the resolving of the total income of society into wages, interest and profits, as distinct kinds of income, falls directly and entirely within the field of economics. Each of these shares is unlike the others in kind, since it has a different origin. One comes from performing work, one from furnishing capital and one from coördinating these two agents. Nearly every man's income, furthermore, is more or less composite. Laborers own some capital, capitalists perform some labor, and entrepreneurs usually own capital and perform a kind of labor. To what extent a particular man's income is derived from one source or another, depends on a wider range of influences than our present study can include. We cannot inquire how much labor a capitalist naturally performs. What we wish to ascertain is solely what fixes the rate of wages, as such, and what fixes the rates of pure interest and of net profits, as such. When these rates are determined, a particular man's income depends on the amount and kind of work that he performs, the amount of capital that he furnishes, and the extent and kind of coördinating that he does. That which is beyond his control, and fixed by a general and purely economic law, is the determination of the product that labor and capital, in themselves, can create and ultimately get.


We are, then, to seek only to discover the forces that fix the amounts of the three kinds of income. It is a striking fact, however, that, even though we thus restrict the inquiry, we do, if we are successful, settle the great personal issues that range men in hostile classes. By discovering the law that fixes the rates of wages, of interest and of pure profits, we decide whether the man, A, has a grievance against B. We have not, indeed, thus ascertained why one of them has only $500 a year, while the other has $50,000; but we have ascertained something about the two incomes that decides whether each of them rightfully belongs to the man who gets it. The two kinds of distribution, however, though thus closely related, must be kept distinct.


Personal distribution decides what is the income of particular men. It gives to A $500 a year, to B $50,000, to C $500,000, etc., regardless of the way in which any one income is obtained. What we call functional distribution decides how much is secured in a particular way. It makes the pay for a certain grade of labor $1.50 a day, regardless of who performs the labor. It makes the rate of interest five per cent, regardless of who gets it. The difference between these two kinds of distribution is marked and important, for the dividing lines that are drawn by one of them cut across those which are drawn by the other. Taking the income of a particular man, as a dividend, by a functional distribution you may separate it into wages, interest and profits; for this individual man may get something in each of these ways. Taking all wages, as such, as a dividend, you may, by a personal distribution, separate this gross amount into the pay that goes to each one of a myriad of different men.


Profits, in the abstract, be it noted, are not under a moral obligation to wages in the abstract; although the entrepreneur, who gets profits, may owe something to his workmen, who get the wages. Rights are always personal; and only a sentient being has claims, as only an intelligent being has duties. There is, then, no issue of right or wrong involved in the fact that wages, as such, fall from a dollar and a half a day to a dollar; but the taking of a half-dollar from the daily pay of each member of a force of men, and the adding of it to the gains of an employer, raises between the parties a critical issue of justice or injustice. The question is: Has the employer taken something that the laborer has produced? Exactly this issue is forever pending between industrial classes. Every day a definite amount is handed over by one class to another. Is this amount determined by a principle that humanity can approve and perpetuate? Does it treat men fairly? The issue is personal; but it settled by a knowledge of purely functional distribution.


If each productive function is paid for according to the amount of its product, then each man gets what he himself produces. If he works, he gets what he creates by working; if he also provides capital, he gets what his capital produces; and if, further, he renders service by coördinating labor and capital, he gets the product that can be separately traced to that function. Only in one of these ways can a man produce anything. If he receives all that he brings into existence through any one of these three functions, he receives all that he creates at all. If wages, interest and profits, in themselves considered, are fixed according to a sound principle, then the different classes of men who combine their forces in industry have no grievances against each other. If functions are paid according to their products, men are also. Hence, while rights are personal, the issue of rights that is involved in distribution is settled by a functional study.


We ought, indeed, go into a further and purely ethical inquiry. We might raise the question, whether a rule that gives to each man his product is, in the highest sense, just. Certain socialists have, indeed, contended that such a rule cannot attain justice. Work according to ability and pay according to need, is a familiar formula, which expresses a certain ideal of equity in distribution. This rule would require the taking from some men of a part of their product, in order to bestow it on others who might be more necessitous. It would violate what is ordinarily regarded as a property right. The entire question whether this is just or not lies outside of our inquiry, for it is a matter of pure ethics. Before us, on the other hand, is a problem of economic fact. Does natural distribution identify men's products and their gains? Is that which we get and which the civil law enables us to keep really our own property by right of creation? Do our actual estates rest, from their very beginnings, on production?


When a workman leaves the mill, carrying his pay in his pocket, the civil law guarantees to him what he thus takes away; but before he leaves the mill he is the rightful owner of a part of the wealth that the day's industry has brought forth. Does the economic law which, in some way that he does not understand, determines what his pay shall be, make it to correspond with the amount of his portion of the day's product, or does it force him to leave some of his rightful share behind him? A plan of living that should force men to leave in their employers' hands anything that by right of creation is theirs, would be an institutional robbery—a legally established violation of the principle on which property is supposed to rest.


The is the problem that we have to solve. It is an issue of pure fact. If the law on which property is supposed to rest—the rule, "to each what he creates"—actually works at the point where the possession of property begins, in the payments that are made in the mill, etc., for values there created, it remains for practical men so to perfect the industrial system, after its kind, that exceptions to this prevalent rule maybe less frequent and less considerable. We can deal otherwise with robberies that are not institutional; but it is evident that a society in which property is made to rest on the claim of a producer to what he creates must, as a general rule, vindicate that right at the point where titles originate—that is, in the payments that are made for labor. If it were to do otherwise, there would be at the foundation of the social structure an explosive element which sooner or later would destroy it. For nothing, if not to protect property, does the state exist. Hence a state which should force a workman to leave behind him in the mill property that was his by right of creation, would fail at a critical point. A study of distribution settles this question, as to whether the modern state is true to its principle. Property is protected at the point of its origin, if actual wages are the whole product of labor, if interest is the product of capital, and if profit is the product of a coördinating act.

Notes for this chapter

By "wealth" is meant those sources of human welfare which the are material, transferable and limited in quantity. See the first chapter of The Philosophy of Wealth by the author of the present work.
The rent of land is to be regarded—for reasons that will appear later—as merged with interest. This, however, involves an extension of the traditional theory of rent, rather than a denial of it.

End of Notes

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