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 II

The Place of Distribution within the Traditional Divisions of Economics


We have undertaken to solve a test problem of distribution—to ascertain whether the division of the social income into wages, interest and profits is, in principle, honest. We have seen that this compels us to enter the realm of production, in order to find whether these incomes are earned. Is each of them specifically created by the agent that gets it? If it is, the entire science of distribution is nothing more than a science of the process of specific production. In any case, the relation of the wealth-creating process to the wealth-dividing process needs a most searching examination.


The terms, Production, Distribution, Exchange and Consumption, have been used to designate four divisions of economic science. These, however, are not distinct divisions; for one of them includes two of the others. The production of wealth, as it is carried on by an organized society, is a process that embraces within itself both exchange and distribution. This fact makes it necessary completely to rearrange economic theory, for purposes of study, and to divide it according to a new principle. The old landmarks of the science will not entirely disappear, for it will still be necessary to speak of production, distribution, etc., as processes that are going on, and that can be defined and understood. As divisions of the science, however, they will vanish; for the demarcations that have been made between them correspond to nothing in actual life. They are forced distinctions, made for the sake of resolving into smaller areas a field that is too large to be dealt with as a whole. As we throw them away, the economic field takes on an entirely new appearance, and it will soon be seen that this is its true and natural appearance. This field will still, however, have its divisions; and it is a striking fact that the study which shows how hopelessly blended are exchange, distribution and production has also the effect of revealing three divisions of economics that are natural and clear. We attain the true divisions, in fact, by perceiving why we may not use the old ones.


Production is the bringing of commodities into existence; and in any state except a primitive one it is accomplished by a division of labor. The producer is a specialist, selling one article, or a part of an article, and buying what he needs with the proceeds. Only society in its entirety is an all-around creator of goods. This is equivalent to saying that social production is now accomplished by means of exchanges. The passing of goods from man to man enables all society to make all goods; and the two expressions, "division of labor," on the one hand, and "exchange," on the other, merely describe in different ways the organized process of creating wealth, as contrasted with the method of isolated and independent production. Where a thing stays in one man's hands until it is finished and in use, production is not yet socialized.*3 Society in its entirety is the one producer of wealth. Exchange is, then, the socializing element in production. It is a characteristic part of the comprehensive process.


The relation of man to Nature in the productive operation remains unchanged, however much society may be organized. The earth still gives matter, and man transforms it. The making of a steel tool in a modern shop is, in this respect, akin to the fashioning of a stone hatchet by a prehistoric man. What is new in social production is the relation of man to man. Interdependence has supplanted independence: a great organization has taken the place of a mass of unconnected producers. Specializing and exchanging have made this difference.


Production by society as a whole, moreover, involves a fixing of values. If we part with our own products, something must decide how much we are to get in return for them. The ratios of exchange that a market establishes have, not unnaturally, been treated in that division of the science which is customarily entitled exchange. Is that, however, the proper place for them?


There is a kind of distribution that does not fix the rates of wages and interest, but determines how much one industry, as a whole, including its laborers, its capitalists and its entrepreneurs, shall get, as compared with other industries. It determines whether one whole branch of business shall be more prosperous than another. This is an intermediate part of the general distributing operation. and it is accomplished by means of prices. When wheat, for example, is high in price, the farming industry is well paid, as compared with others; and when wheat is cheap, that industry is ill paid. If what we have in mind is the so-called "market price" of an article,—the immediate price of any given supply of an article,—this kind of value governs what we may call group distribution. If steel, for example, sells at a high rate, a large income goes to the group that produces it. This income distributes itself somewhere in the group; but how much of it laborers get, and how much capitalists and employers get, is a question that we do not now raise. This is determined by an ultimate distribution taking place within the groups. Group distribution is a preliminary division of the social income, and it deals with branches of industry in their entirety. The terms of this primary division of the social income depend on the prices of different kinds of goods. Farmers want wheat to be dear, as miners want ore to be dear, etc. Prices, then, fix the incomes of these groups.


The great income of all society—that which is to be distributed—really consists of concrete articles, all for some use, Most of them are goods for consumption; and they serve to stock retailers' shops, while waiting for purchasers. In some way this promiscuous stock of consumers' goods gets divided into shares, of which every man, whether he be a laborer or a capitalist, gets a part. There is no way in which the fixing of the terms of this division can be begun and completed after the goods are finished and exposed for sale. If, before the stock of goods was ready to be taken by consumers, nothing had been done to decide how much each laborer and each a capitalist might have, the distribution would have to be made according to some arbitrary rule and by some officer of the state. The terms of the division that is actually made, however, are fixed as the production of the goods goes on: the goods are really apportioned in the making.


The creation of such a general stock of commodities for use is a great synthesis, which goes on in a systematic way. One group of producers makes the article A, another group makes B, another C, etc. As A is sold, the sum that is paid for it is apportioned among the entire group that makes it; and as B is sold, the returns from this sale are divided, in the same way, among all who have helped to make this article. The prices of completed articles thus fix the incomes of groups in their entirety, These sub-groups are, in an equally exact way, divided into sub-groups. Thus it takes farmers, wool merchants, manufacturers, dyers, cloth merchants and tailors to make a coat. Each of these classes constitutes a sub-group; and each gets a share of the returns of the general group—a share in every case dependent on prices. If wool is dear, farmers thrive; and if the difference between the price of wool and the price of cloth is large, manufacturers thrive. It is market values that fix the incomes of sub-groups, as well as those of groups.


Neither of those price-adjusting operations, however, directly fixes wages and interest. This is the final and critical part of distribution. It takes place within the sub-groups, and it constitutes the third and final division that has to be made. The portions of income that fall to farmers, manufacturers, etc., as such, have to be further subdivided; for a share must be paid to every laborer and to every capitalist. This last division is not made, however, as the mere general divisions are made, by a mere sale of finished goods: finer and more difficult adjustments are involved. We need now to have clearly in mind the systematic way in which the division of the grand stock of usable goods proceeds, the manner in which it follows the stages of production and the part that the fixing of exchange values has in it. This distribution goes on in three distinct stages. There are to be made a division, a subdivision and a final subdivision of the social income. The first division fixes the income of industrial groups; the second fixes that of sub-groups, and the final division adjusts wages and interest within each of the innumerable sub-groups in the system. The shares of the groups and those of the sub-groups depend entirely on the prices of goods, and therefore the fixing of market values results in the adjustment of the terms of group distribution,

A''' B''' C'''
A'' B'' C''
A' B' C'

Thus, let A''' represent some one completed product, any bread; and let A represent raw material, the standing wheat of which it is mode. A' may then represent the wheat as threshed and conveyed to the elevator of a milling company, A''' may represent it as it is ground into flour, and A''' may represent it baked into loaves. In like manner B, B', etc., represent another commodity—say, woollen clothing—in its several stages of advancement, and the series of C's represent still another commodity. All the A's constitute the product of one general group; and the price of A''' fixes the size of its entire group income. The prices of B''' and C''' likewise fix the general incomes of the two groups that make them. Similarly, the difference between the price of A'' and that of A''' fixes the income of the sub-group that transforms the one article into the other. In this case the difference is the gross income of the baking industry. In the same way, the difference between the price of A' and that of A'' determines the income of the flouring industry, etc. The income of each sub-group in the whole series, then, depends directly on prices.


A philosophy that goes behind such market prices, however, brings us to what are called "natural" or "normal" prices. These are the values, expressed in terms of money, to which, in the long run, market values tend to conform. These normal values are also in another way, phenomena of distribution; for a certain force that operates within the sphere of group distribution establishes the normal standards to which market values tend to conform. We have just seen that market prices fix the incomes of the different groups, as such, and so control distribution in its early stages. We have now to see that a deeper force, and one that also acts in distribution, controls normal prices. Market prices are the cause of group distribution; normal prices are the effect of a certain phenomenon of distribution. The adjustment of natural or normal prices is a part of the distributive process. The movements that make prices "natural" are, in fact, efforts on the part of different men to get their natural shares of income.


Prices are at their natural level when labor and capital in one industry produce as much and get as much as they do in any other. Normal prices mean equalized wages and equalized interest. If the prices of wheat, wool, iron, lumber, etc., were such that no laborer and no capitalist could acquire an enlarged producing power by leaving the industry that creates one of these commodities, and betaking himself to one that makes another, the price of each of the commodities would be normal.


The familiar definition of natural price is: that which conforms to the cost of production. The economist has been in the habit of putting himself, in imagination, in the business man's position, and of considering the money that he pays out in producing an article as the cost and what he gets by selling the article as the return. The tendency of competition, according to this conception, is to bring the price down to the point at which the return equals the cost. This is, however, an individualistic and limited view of the law of normal prices. It presents that law as it appears to a man who is performing his one particular part of the social operation of creating wealth. The broad view, on the other hand, presents the law as it appears to a student who has all society within the range of his vision. It is, indeed, true that the normal price of each article is its cost. The cause of this, however, is not local in the industry; it is not anything that takes place within the one group that makes the commodity. The influence that brings, let us say, cotton cloth to a natural price is one that works throughout the productive system. A broadly social tendency it is, in fact, that makes any one price normal. The traditional statement of the law of normal price is not incorrect; but it is misleading, because it is partial and inadequate. It presents things from an entrepreneur's point of view, instead of from a social point of view.


It will be seen, when we make a fuller study of this subject, that a condition in which all things sell for the amount of money that they have cost—including interest and wages of management, as elements of cost—is a state in which the gross gains of the different industrial groups are brought to pro rata equality, that is, to a condition in which the returns of all groups yield the same amounts per unit of capital and also the same amounts per unit of labor. Cost prices, then, are those that give equalized earnings.


It is comparative gains, and not the gains of any one group, that test prices, and determine whether they are normal. Thus, the present price of wheat is such as to afford a larger product per unit of capital than is afforded in some other industries; it is above the natural standard, and would be so even if wages and interest were locally so high that entrepreneurs got nothing above cost of production. If the result of this should be should be to draw men and capital from other occupations to the raising of this cereal, the operation would end by reducing to nothing the excess of gains that is now secured in this occupation. Prices would then be normal, provided that no other causes had meanwhile noted to disturb the equality of the earning power of labor and capital in the group system. It is because the prices then realized would afford to the different industrial groups equalized returns, that the prices themselves are to be called normal. The term really signifies that group distribution is in a natural state. Equal products everywhere per unit of labor and equal products per unit of capital—this is the condition that affords natural prices of goods. Incidentally, this condition gives what have been defined as cost prices.


When, therefore, men have no further inducement to move from one group to another,—that is, when group distribution is natural,—prices are natural. This requires that labor and capital shall be so apportioned among the various industries that there is neither overproduction of one article nor underproduction of another. Society must, in short, so direct its productive energies as to make different goods in the right quantities. The production of each specific article must be normal in amount, in order that the prices of it may be normal. The influence that brings production to this natural state is the effort of laborers and capitalists to seize any special gain that maybe offered to them, by moving to any group in which the price of the product is high. This is clearly an operation in group distribution. Thus an influence that originates in distribution brings about a state of social production in which exchange values are normal. Where, then, within the four traditional divisions of economic science should the study of exchange value be located? The phenomenon itself is directly connected with exchange: the proximate cause of it is a state of production; the ultimate influence that controls it is an action of the forces of distribution.


It is clear that the study of market value falls within the science of distribution. On the surface it is current market prices that control the distribution which takes place among different groups or specific industries. These prices, however, are transient, and they fluctuate about certain more permanent standards. The tendency of group distribution to become normal—that is, to bring wages and interest to an approximate equality in different industries—draws prices toward the normal standard.


What, then, is left to be treated under the title, exchange? Only the actual passing of goods from hand to hand. This process results in ranging men in distinct groups, each of which has its part to play in the process of social production. Exchange fixes the form of organization of industrial society. Back of each finished article that the shops offer to us there is ranged a series of specialized producers, each of whom has taken his turn in putting a touch upon it. Intricate, indeed, is the organization of society for productive purposes; but the principles that give shape to it are simple. They are the subjects of the theory of exchange, which is the theory of the organization of industrial society. When we examine the system of groups of which society is composed, we shall perceive the full meaning of this statement. For the present, be it noted that exchanges divide and subdivide industry: they range its forces in groups and sub-groups, the functions of which are determined by natural law.


It is, further, clear that all this disposing of the agents of production—this putting of some labor and capital here, and other labor and capital there—is a phenomenon of social production, a part of the social productive organization. It is a certain marshalling of the productive forces, placing them where they will do the most good. Production, in fact, embraces every economic operation except consumption. Exchange is merely the typical feature of production, as carried on by groups. Under this head we shall describe the group system of industry. We have seen that an influence which acts in distribution fixes the sizes of the groups and the amount of goods that each shall create. In the way that we have just noted, it guards against the production of too much of one commodity and too little of another. This is also a part of the all-embracing process of social production.


There is another and an even more important kind of distribution that falls within production. The distribution which connects itself with values, and the study of which gives a science of value, is that which takes place between different industries in their entirety. Thus, a high price for wheat makes the raising of that cereal a well-paid occupation, and puts a large sum into the possession of the group of laborers, capitalists and entrepreneurs who jointly raise it. How much of this large return goes to laborers? Hew much goes to capitalists? How much remains in the hands of entrepreneurs? These, as we noted, are questions involving distribution of another kind. Within each industry there is this final division to be made. After the returns of each sub-group, taken as a whole, have been determined, this lump sum is to be apportioned among different claimants within it; and this is the final process in the distributing of the social income.


In the final division that takes place within the sub-groups—the division that separates the gross earnings of each of them into wages, interest and profits—a law of production rules. So far as natural laws are unperverted, labor tends to get, as its share, what it separately produces; and capital does the same. The laborer who has helped a farmer to raise wheat naturally gets the value of that part of the wheat crop which is separately due to his labor. This statement requires proof, and will receive it: but it must stand for the present, as a thesis to be established by a later study. What is now clear is that, if it should be established, the whole of distribution as well as the whole of exchange, would be included within the organized process of producing wealth. Unravel the web of the social product, tracing each thread to its source, and you will have solved the problem of distribution. This is an analytical study. It traces backward, step by step, the synthesis by which, through the putting together of many different things, the great social dividend of usable goods is created. It first traces to each group its share in the creating of the grand total; then it traces the part of this that each sub-group has contributed: : and finally it attributes to labor and capital their several shares in the creating of the sub-group product.


We may, then, gather into the comprehensive science of production all the economic processes that go on in an organized or social way. There is, then, it appears, no separating of the processes that traditional theories have treated as distinct divisions of the science. Here, for example, working in a shoe shop, is a man who gets two dollars a day. Let us set before ourselves the problem of accounting for the amount of his wages. He is a part of a sub-group; and we have first to account for the way in which society has thrown itself into the systematic shape of groups and sub-groups, which exchange products with each other. We discuss the theory of exchange, in the narrow and accurate sense of the term, when we account for this group arrangement which is brought about for the sake of carrying on production in an organized way. In treating exchange, therefore, we are entering on the treatment of production. What the man gets is a part of what his sub-group gets; and this is fixed by the law of group distribution—the law of market value. Market value, however, depends on the relative quantities of the different articles that are produced; and this is saying that it depends on comparative group production. We are, then, still within the more general science of production when we thus try to trace to its causes the income of the sub-group from which the shoemaker's wages are taken. When we have discovered the influences that act on the sub-group's income, we must see why the shoemaker's share of that income is two dollars a day. This will take us into a further study of specific production. We shall have to find out, first, whether the man's pay tends to equal what he separately produces; and, secondly, what fixes the amount that he is able to produce. This is the study of distribution in its final stage, but it is also a study of production. We have, then, studied in part each of the four traditional subjects except consumption, in investigating the causes of the two dollar wage for the shoemaker's labor; and yet we have been, all the while, within the subject of social production.


Consumption alone remains an individualistic process. We produce our food coöperatively, but we eat it each one for himself. Society makes our clothing, builds our houses, etc.; but when we get our clothes, we wear them without assistance; and we dwell under our roofs in the same independent way. Society, however, reacts on our natures, and changes and multiplies our wants. A desire to associate with others, while consumption is going on, may even give a kind of collectivity to the process by which some products are used. Thus, we enjoy dining together; and we listen to music and addresses in assemblies, getting a part of our pleasure from the presence of others; but there is no coöperation in the consumption of goods that resembles what takes place in the production of them. There is no obvious group system, and no coöperation of agents such as labor and capital. It is to the sensibilities of individuals that products address themselves; and therefore consumption is the individualistic part of social economy.


If we look, then, at the relations of man to man, we find that production and consumption are not on the same plane. One is a collective operation: it is nothing, if not organized. The other is an individualistic operation: it consists in the using by each man of what society, by its intricate system of production, has made for him. In an accurate sense, the one process is a part of social economy and the other is not.


If we look at the relations of man to nature, we find that production and consumption are entirely coördinate,—that one of them is the reversal of the other. Man acts on nature in the one case, and nature acts on man in the other. Cultivate the earth till it gives you food, and you have produced a kind of wealth by acting on nature; but the food restores your wasted tissues and your lost energy by acting on you. Man making wealth and wealth making man constitute the whole economic operation. Humanity takes the active and aggressive attitude in the former part of the process, and it takes the passive and recipient attitude in the latter part. In the simplest mode of living these two processes are the only ones that take place. A primitive man, living alone, would kill game and eat it; he would make clothing and wear it; he would build a hut and live in it: in short, he would act on nature and let nature react on him, and that would constitute the whole of his economy. He would have nothing to do with exchange and distribution. This, indeed, is all that an economic society does, if we consider it only as a unit. It produces its food, its clothing, its shelter and its myriad of articles of comfort and luxury; and then it uses them. It produces them in an organized way, indeed, and it uses them in an unorganized way. Incidental to the making of them are the trading and sharing processes that are termed exchange and distribution; but production and consumption still exhaust the whole economy: there is no phenomenon of wealth that lies outside of them.


These are the facts to be recognized in entering on the study of distribution. In carrying that study to completion we cannot get outside of the field of social production, and we cannot avoid including within our more limited field the subject of exchange. Value is the chief subject that has customarily been treated in the division of exchange; but the theory of value and that of group distribution are one and the same.

Notes for this chapter

An article is not finished, in the economic sense, till the retail merchant has found the customer whose needs it satisfies. The sale of completed articles is thus the terminal act of social production.

End of Notes

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