The Distribution of Wealth: A Theory of Wages, Interest and Profits
Wages in a Static State the Specific Product of Labor
The value of a commodity might be called "natural," if it resulted from the action of the native impulses of men. There are impulses that cause men to do other things than to compete with each other in business; but competition is the activity that causes prices to be, in the customary sense of the term, natural. This process is, in reality, a rivalry in serving the public. The merchant who undersells his competitor is actually offering to the public a larger benefit than his rival offers for a given return. The motive is, of course, self-interest; and the action that results from it is a spontaneous and general effort to get wealth. One effect of it is, however, to insure to the public the utmost that the existing power of man can give in the way of efficient service; and another effect is to control the values of goods.
A natural price is a competitive price. It can be realized only where competition goes on in ideal perfection—and that is nowhere. It is approximated, however, wherever prices are neither adjusted by a government nor vitiated by a monopoly. If a commodity were produced in a public factory and sold at a rate arbitrarily fixed by the state, with a view to getting a revenue or to attaining some ulterior end, the mode of adjusting the price would be the antithesis of natural. If a private monopoly were created or fostered by the state, the price that it would put on its products would also vary from the natural standard. There is, in fact, always a trace of monopoly in the condition of an industry to which labor and capital tend to move, but cannot move with absolute freedom. Perfect mobility of the agents of production never exists; and hence prices are always varying, in greater or less degree, from the rates that the unhindered action of the competitive impulse in men would maintain.
As we have shown, the terms "natural" and "normal," as used in economic literature, are other names for static. The assumption that removes all dynamic movement and all friction leaves prices normal. We shall see that this fact is in harmony with what we have just said—namely, that natural values are competitive values; for, if we stop all dynamic movement and also all friction, we enable competition to work in perfection. The standards of price that have figured in the older economic studies have been attained without any conscious reduction of society to the static condition; for, as we noted, the idea of separating the dynamic activities of society from the static ones did not occur to these writers. Their natural prices were attained by observing the tendency of actual markets to yield certain prices; and these standard rates they defined as those which would about repay to employers the outlay that they incurred in bringing the commodities into existence. It was a simple and preliminary study of natural or static price that the classical economists made, and it afforded an imperfect, rather than an incorrect, theory.
Cost prices are, of course, no-profit prices. They afford, in the case of each article, enough to pay wages for the labor and interest on the capital that are used in making it; but they give no net surplus to the entrepreneur, as such. Since dynamic changes cause the prices of this, that or the other commodity to yield such a surplus, they make prices, for the time being, unnatural, in the sense of being unlike purely competitive or cost prices. Dynamic changes themselves are, however, in another and a broader sense natural. Nature herself is continually disturbing the régime of natural prices, but competition is trying to restore it. At this moment many commodities are not selling at cost; yet in the case of all of them there are forces at work, which, if they were not counteracted, would bring the prices to the cost level. Ideally there is at this moment a natural price for everything; and if we could remove disturbances and friction, actual prices would reach and remain at this ideal standard. When we study economic dynamics, we shall ask how much an actual price may vary from such a theoretical price, without the introduction of a really abnormal force. In dynamics variations from standards have to be studied; and, in a broader use of terms, there is such a thing as a natural variation. Now, however, we are studying solely the standards from which variations are to be calculated, and we are following the classical economists in calling such standards natural. Natural, normal or static prices are cost, or no-profit prices. They are equalized-gain prices, for they cause the returns of different industries to be the same per unit of labor and per unit of capital. They enable the steel makers, for example, to pay as much for labor of a given grade as do the wagon makers; and they enable the two classes of employers to pay uniform rates of interest on capital. Natural or cost prices sweep away any special gain that an industrial group may enjoy.
Such prices would prevail in practice, if labor and capital were absolutely mobile. If men in one industry could instantly leave it and betake themselves to another, this latter industry could not be favored in the amount of its returns. If we could at this moment remove everything that hinders a steel maker from becoming a wagon maker, we should preclude all chance that one class, as a whole, should be better paid than the other. Static prices would be realized at any one time, if we merely annihilated economic friction. They would be realized in another way, if dynamic changes were stopped and if friction were allowed to continue. Thus, let there be henceforth no improvement in methods of production, and let population, wealth, etc., remain forever unchanged. There is, then, nothing that will make the standard level of prices next year at all different from that which now prevails. Actual prices are not now at the standard levels; but they are tending toward them, under the influence of competition. Labor and capital are tending to move to the points where rewards are greatest, but this movement is obstructed by friction. With dynamic changes ended, this friction is slowly overcome. The transfers of labor and capital take place in spite of it. To stop the dynamic changes and wait for the transfers to take place is to bring industrial society slowly into the condition that static forces alone tend to impose on it. Henceforth the state will be an unchanging one. Once society has reached this shape, it will hold it forever. Each unit of labor and each unit of capital will remain forever in the group where it is, and prices will be unvarying.
Here, then, are two ways of conceiving a régime of static—or, in the Ricardian sense, natural—values. With dynamic changes in progress and friction absent, the standards of price change every day, but actual selling ratios conform every day to them: there is an endless succession of different actual prices, but there is never any difference between the prices that the market gives and those which theory calls for. With dynamic changes absent and friction continuing, the static or cost standard of price becomes an unchanging one; but actual values, which at the outset vary from the standard ones, require time to conform to them. In the end, they conform to them and remain thenceforth without change.
It is best to assume that both the dynamic changes and the friction which always obstructs competition cease. Under this hypothesis, labor and capital can instantly go wherever gains are large; and this movement brings prices at once to what is now their static level. As there are hereafter to be none of the changes that alter that level, prices—both actual and normal—must hereafter remain unchanged. No variation of actual prices from perfect competitive prices; no change in ideal competitive prices themselves; no change in price-making conditions—this is the conception that creates a perfect static state. There is mobility of labor and capital, but there is no motion. Here we may study static prices, pure and simple.
It is well also to see whether a theoretically natural rate of wages can be established in a similar way. Looking at the transactions between employers and employed, can we see in them anything that causes wages to fluctuate about a standard which is more less akin to the natural prices of goods? We shall at once find that there is a similarity between what the classical economists distinguished as the market price of goods and the market rate of wages. Let us for the moment cease to look at standards of pay about which, through long intervals, wages fluctuate, and see how the rate for one short period is fixed. We shall find that it is fixed in a way akin to that in which the immediate selling prices of goods are determined. Later we shall find that, in both cases, the market rates fluctuate about permanent standards.
Let us use commercial terms, and speak of a "market for labor." Let us keep in view what is called the action of demand and supply, and say that they, in some way, put a price on men, as they do on commodities. There is much to be said as to the accuracy of such terms in this connection; but there is no great danger that by thus using the terms in a preliminary study we shall reach an incorrect result. We shall, in fact, be able in this way to establish a normal rate of pay for general labor, which will have a certain kinship to the normal standard of price with which we have long been familiar.
"The produce of labor," said Adam Smith, "constitutes the natural recompense or wages of labor. In that original state of things which precedes both the appropriation of land and the accumulation of stock, the whole produce of labor belongs to the laborer. He has neither landlord nor master to share with him." There follows in the same chapter the statement that modern industry has changed this natural condition, that wages are now paid out of employers' capital, and that they do not consist in the product of labor itself. It is, in Adam Smith's view, the presence of the landlord and the master that has made this radical change.
What we have claimed is that, in modern life as well as in primitive life, the identity of wages with the product of labor is, in a general and approximate way, maintained, and that this product furnishes the standard about which wages for short periods fluctuate. It is clear, indeed, that the whole product of industry does not go to the worker. If the entire joint product of labor and capital be what we have in mind, the men who furnish land, tools, buildings, materials, etc., get a share of it. If what we mean is the part of this total that is attributable to labor itself, it is not merely possible that the worker should get it all, but it is certain that he would get it all, if competition could do its work perfectly—that is, if the static standards of wages were realized. Moreover, it is the presence of the employer that helps to reveal what the product of labor is, and it is the action of employers that enables the laborers to get pay that approximates to that product.
If we are accurately to express what takes place in simple types of industry, we shall say, not that "the whole produce of labor goes to the laborer," but that the whole produce of industry goes to the independent man who is both a laborer and a capitalist. Nowhere is actual economy so primitive that it uses absolutely no capital; and where there is any capital at all, a part of the product of industry is due to its presence. In the "original state of things," it is nearly impossible for a man to say how much of his product is due to labor only. The distinction between the whole product of labor and the whole product of industry is, however, all-important; for industry involves the coöperation of labor and capital.
Let a man fish from a dugout, with the simplest line and hook that he can make. The fish that he will bring to the shore are the product of labor and capital. Effort aided by instruments has secured them. How much of the catch is due to the man, and how much to the canoe and the fishing tackle? Not for his life can the man himself tell. Can he put the fish into two piles, and say, "This pile is due to my effort only, and that pile to my equipment?"
Every single fish is a joint product—indeed, every fin or scale of a fish is so; and the difficulty is that it is impossible to divide a single one of them into fractions due to the producing agencies. Hopelessly merged with the product of capital is the product of the labor of an independent producer. Instead of presenting the condition in which the wages of labor are readily distinguished from other incomes, and identified as the "produce of labor," such a primitive economy as actually exists is one in which it is impossible to say what the produce of labor itself is.
The illustration used by Adam Smith avoids this difficulty, indeed, by assuming that there is no capital in the case and that, therefore, whatever is produced at all is created by labor. The state that is referred to "preceded the accumulation of stock." If a man does, in fact, work without capital, as well as without a master, his wages will be what he creates. A physical law and not a social one will fix his pay. He will dig his wages literally out of the earth, fish them out of the sea, pursue and capture them in the hunting forest, etc., and he will not have to share them with any industrial partner. There are points in the industrial system where this condition, though it is not absolutely reached, is approximated; and Mr. Henry George has advanced an interesting theory which makes the gains of men who are in this condition set the standard of general wages. A squatter may, for example, till land for which no rent can be obtained, using no appliance that is more elaborate than a hoe or a spade. He may live in a dugout, and have only a few dollars' worth of salable property of any kind. While this state of things lasts, the man has not capital enough to complicate the problem of wages; and for the purpose of illustration he must not be allowed to own land. If he is the owner of his farm, like a homestead settler in the United States, a complication arises which makes it impossible rightly to claim that his wages are the whole income that comes to him.
Mr. George has rightly said that, so long as land is so abundant as to be had for the asking, a man who is willing to work in a shop may demand and get from his employer pay that is large enough to make good to him what he gives up by not taking up a farm. In the period in which a great belt of country has been in the process of settling, and during which agriculture has been the dominant industry, the standard of all wages has, without doubt, been the gains that free farms always bestow on the men who not only till them but own them. These gains, however, are composite. They are not by any means the product of labor only. The fact that he owns his land gives to the homestead settler an income that is a large addition to the one that his bare labor creates. The situation is transitional and anomalous; for the men in the shops get pay that corresponds, in a general way, to the incomes of men who are getting wages and a large additional amount. The rewards of the men to whom the government has given homesteads consist, not merely in what they can get by raising crops, but largely in what comes to them in the form of increments of value that, from year to year, attach themselves to the land itself. The greater part of the income of the man who occupies a homestead, under American laws, consists at first in the so-called "unearned increment" of land value. The farm is worth, perhaps, a dollar per acre when the man enter, his claim. It becomes worth five dollars an acre within a year or two, and ten dollars an acre very soon. It is for this reward that the man is willing to burrow under a hillside for a home, to clothe himself for a time in rags, to live on corn meal, etc. The direct product of his work takes the shape of turf turned over by the breaking plough or furrows cut by the cross plough. Very little of it is food and clothing. Mingled with wages is the larger element of gain that, with the growth of population, shows itself in the ten dollars per acre that the man can soon get for the land itself.
It is worth while to dwell long enough at this point to make it very clear that a man who is endowed by the state with a gift of land is not one the product of whose hands can furnish a standard of wages. It has been said that wages in America have been made to conform to the amount that homestead settlers can make by availing themselves of the offers of the government, and the statement is, on its face, not incorrect; but it is far from proving that wages conform to the earnings of unaided labor. If it be true, what it proves is that there has been a time when wages have equalled a large and composite gain, much of which comes from land. So long as a man can have a farm for the asking, he will not be willing to work in a mill or shop, except on conditions that afford a fair equivalent for a farmer's gains. During the transient interval in which an abundance of free land of good quality is to be had, the standard of pay in every employment within reach of that land maybe said to be fixed in the belt of newly occupied wilderness that men are beginning to tame. This condition causes wages to vary from the permanent standard rather than to conform to it. The settler gets more than the income that comes to him in the shape of crops. The rising value of land enters directly into his gains; and it enters directly into the pay of the artisans and others who are held in the mills and shops by pay that is approximately equal to settlers' gains. Land values thus diffuse themselves everywhere. To the right and to the left, through all trades and callings, they find their way. The carpenter, the blacksmith, the cook, the hostler, the clerk, and even the doctor and the lawyer, find their earnings made larger by the values that the planting of a community on vacant land imparts to that land itself. For a hundred years all American wages had more or less of this element in them. They were sustained so as to conform, in an approximate way, not to what could be made by tilling no-rent land, but to what could be made by tilling and owning the land.
As the larger of these sources of a settler's income is removed, the gains of an empty-handed laborer working on a farm are confined to what he can extort from the soil in the shape of a crop. Make the man a mere occupier of no-rent land, and not an owner of it, and he will get wages with no increment of land value attached to them. Farms that are worth anything cannot long be had for the asking. Of the fertile areas in America that were once considered boundless, not meet, remains unclaimed. A law of wages, if it, is to be permanently valid, must apply to this condition.
It is possible to adhere steadfastly, as Mr. George has done, to the view that labor always tends to get what labor can create on such land as may be offering itself freely for use. In an advanced state of industrial development, the only land that is thus offering is that which is too poor to command a rent; and the theory therefore claims that the permanent regulator of wages is the gain that labor can extort from marginal and rentless land. There is, however, an element of truth in the theory, even in this form, for the man with capital in land and other instruments will not have to share gains with any one. He will be in the same position as was Adam Smith's primeval worker, who labored "before the accumulation of stock," and who had "neither landlord nor capitalist to share with him." His gains will be all his own, and they will be entirely the product of labor. The theory that makes them set the standard of all wages has the great merit of pointing out a method by which the product of bare work may be disentangled from all other products, and made to stand by itself and to be separately measured.
We are to try to prove that the product which is separately attributable to labor does set the standard of wages; but there is a grave difficulty in making tillers of valueless farms the ones whose returns thus regulate every one's pay. If the theory is advanced that the general wages of labor are permanently fixed by the gains that men can realize, by tilling no-rent ground, this theory must mean that the more occupiers of pieces of land that cannot be let for any appreciable rent are the men to whose gains the wages of every one conform. According to this, an artisan in any workshop in the country would have to keep his eye on the squatters' shanties and see what the occupants were earning, in order to know how much he could make his employer pay him. In its most reasonable form, this theory would mean that a worker in a Belgian mill must take about what a Belgian peasant of the same grade of ability gets by cultivating the sandy waste that borders to the sea. It means that the watchmakers of Switzerland must accept pay that, with an allowance for differing personal power, tends to conform to the amount that their peasant countrymen can extort from patches of green among the crags. It means that, after all the free lands of America shall have been allotted to owners, wage-earners in the mills, shops, mines, etc., from the Atlantic to the Pacific, will get, on the average, what a typical one of them could produce, if he were to build a hut on a piece of poor and untenanted ground, and proceed to till it by the sufferance of the proprietor. This is a theory of "squatter sovereignty" over the labor market. It puts the man in the shanty into a position that is so strategic as to enable him to dominate workmen of every class, to fix the amount of their wages, and so to control the level on which they live.
With all its absurdity, this theory does at least appeal to the principle that wages tend to equal what labor itself can produce. If the squatter has not capital enough to count as a producing agent, his entire crop can be attributed to his labor alone. Putting a man into such a position is one way of separating labor from capital, and of disentangling the product of labor from the product of capital. It seems to furnish a case in an advanced society, in which we may see what Adam Smith saw in primitive society—namely, labor getting the entire product of industry and sharing gains with no one. Yet the absurdity of making the occasional squatter dictate the amount of every laborer's pay, is patent on the face of the illustration.
It is, however, desirable to seek for a no-rent territory to which it is not absurd to look for the standard that regulates general wages. It must afford a larger field for labor than the worthless agricultural land affords, if the men who occupy it are to have a general wage-regulating power. Such an economic field is at hand. The workers who occupy it come into it empty-handed. They produce virtually without capital, and the whole of their own separate product is wages. They get the amount of this product as their pay, and all other workers have to take pay that is equal to it.
Looking first at market values, rather than natural ones, we noted that there is a commercial principle which causes the final or marginal part of the supply of anything to be strategic in its action on the value of the whole supply. The value of the whole crop of wheat, for example, conforms to that of the marginal bushel of it. If there are marginal laborers, in the sense in which there are marginal quantities of wheat, cotton, iron, etc., then these final or marginal men are likewise in a strategic position; for their products set the standard of every one's wages.
For the moment, we will adopt the mercantile conception of labor, as a thing to be sold in the market. It is a familiar commercial principle that the last increment of the supply of any commodity fixes the general price of it. A common mode of stating this principle is to assert that English quotations gauge the price of American wheat—that the farmers of the northwest must take for their entire supply of this grain what the surplus part of it brings when it is sent to Liverpool.*9 The statement that the price of our wheat is thus fixed in Liverpool expresses something that does not need to be disputed as a commercial fact. The price of grain on the western side of the Atlantic is actually equal to the price on the eastern side, minus the cost of carrying and handling. It is so, because Europe is a receiving ground on which the whole surplus of American breadstuffs may be sold. If we add fifty million bushels to the exportable crop, Europe will receive it at a somewhat reduced price, and English quotations will indicate the amount of the reduction. A small local market could not be a general price regulator. Iceland or Labrador may import American wheat, but quotations from there have no commercial significance. All that such a region can possibly take makes no impression on the American supply; and if, by reason of some calamity, the unusable part of the wheat crop of this continent had to be put on such a market, it would soon become there an encumbrance to be gotten rid of, worth less than nothing. The utility of the final unit of the wheat raised in this country fixes the price of all of it; but even though that last unit were sold entirely abroad it would be widely scattered. Labrador would have a small part of it, and the price of wheat there would correspond with the price of it elsewhere. Much effect in regulating the price elsewhere it could not have.
In seeking an outlet for surplus labor, it is necessary to look for some economic field in which an indefinitely large amount of it may find employment. Such an outlet is, however, not furnished by the bits of no-rent land to which men may betake themselves. The popular mind has not failed to see that, as an outlet for surplus labor, agricultural land at the margin of cultivation is more like Iceland than like Liverpool in the illustration just given, for it wholly lacks the capacity to receive any large overflow of the supply. Turn the whole overflow of the Belgian population upon the sands for a living, and calculate, if it is possible, how far below the starvation limit their earnings must, by a mathematical necessity, fall. The earnings of the men on the Belgian sands and on the American arid plains do, indeed, correspond with and, within limits, measure the general rate of wages; but this is because in the world as a whole there is a vast and indefinitely elastic market for surplus labor, of which the no-rent lands are certain to get only a microscopic portion. The final increment of the world's labor is the wage-fixing part, as the final unit of the supply of goods is the price-making part; but this unit scatters itself through and through the industries of the entire world. What it ran everywhere produce, is the standard for general wages.
We not only admit, but positively claim, that there is a marginal region where wages are adjusted. It furnishes a large outlet for labor; and what men are able to get in this larger marginal field sets the standard of wages. This field is to labor what, in practical thought, the European market is to wheat: it is a place in which any possible surplus of labor may be disposed of at some living rate. If we find such a market, we definitely solve the problem of the law of wages.
At the very outset, we can find a market of this kind that is large enough to receive a very considerable amount of labor. An unlimited amount it cannot receive, but it is an important outlet for labor, and it is a factor that needs to be considered in a theory of wages. Men virtually work empty-handed, and get all that they create elsewhere than on lands at the agricultural margin. The true margin of cultivation—more accurately, that of utilization—is not wholly or chiefly agricultural, but extends throughout the industrial system. There are productive instruments, other than land, that yield no rent to their owners, and may be had for the use of laborers for the asking. The workmen may not themselves be able to borrow them; but the interest of the men termed entrepreneurs insures that they will be put into service, and that men will be set at work in connection with them, whenever wages, including pay for superintendence and for other labor, may thereby be secured. There is a margin of utilization in cotton-spinning, in iron-smelting, in shop-keeping, in transporting freight and passengers, and in every other possible occupation.
A part of the marginal field for labor is furnished by the waste lands that are available for raising crops; but the part thus furnished is a nearly infinitesimal part of the whole field. A larger part is afforded by no-rent instruments of the other kinds; and still a larger part is created by putting the entire stock of rent-paying instruments into uses for which no extra rent is charged. There may be a thousand men in a modern and profitable mill; and out of the product that their labor and the mill itself create may be paid the rent of the mill. It may be that twenty more men might find places in this mill, and that their presence would result in a distinct addition to the daily product of it. It may be, also, that this entire extra product will go to the men as wages—that the owner of the mill will make no claim on it. If so, these marginal men will get their whole products and will be in reality as free from the claims of masters on their earnings as though they were tilling waste land by the sufferance of the owner, or were running an abandoned mill in which some proprietor might tolerate their presence.
Here, then, is a marginal fraction of the supply of labor; and it would seem that it is in a position to set the market rate of pay for all labor. Here, also, is a direct connection between the pay of this marginal part of the laboring force and the product that can be specifically attributed to it. Does this product of marginal labor set the standard of wages, as the price of a final increment sets the general standard of value of commodities? If so, the law of wages would stand thus: (1) By a common mercantile rule, all men of a given degree of ability must take what marginal men of that same ability get. This principle fixes the market rate of wages. (2) Marginal men get what they produce. This principle governs wages more remotely, by fixing a natural standard for them. In this formula we are, indeed, near to the law that we are seeking; but we have not yet reached it. The true law, when accurately stated, sounds much like the foregoing one; but between the two there is a vital difference.*10
Notes for this chapter
This view may involve an imperfect conception of the law of value; for it is, of course, the final utility of that part of the wheat crop which remains at home that directly fixes the value of it here. England, however, represents the European market; and this, in its entirety, draws away enough of the American wheat crop to reduce appreciably the amount that has to be consumed here. The final utility of the part of the crop that is thus left at home is raised to such a level that it can be sold as advantageously here as in Europe.
For an early publication of the substance of this chapter and of much of the following one, the reader as referred to a monograph of the American Economic Association, containing a paper on "The Possibility of a Scientific Law of Wages." The paper was presented at a meeting of the Association held in December, 1888, and was printed in March, 1889. One qualification of the statement made in that monograph is to be found at the end of the eighth chapter of the present work.
The substance of much of the ninth and tenth chapters of this book was first published in May, 1888, in monograph of the American Economic Association on "Capital and its Earnings"; and a further part was published in the Yale Review for November, 1893, in an article on "The Genesis of Capital."
End of Notes
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