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

By John Bates Clark

This 1908 edition is the third reprinting of Clark’s path-breaking, yet widely under-read, 1899 textbook, in which he developed marginal productivity theory and used it to explore the way income is distributed between wages, interest, and rents in a market economy. In this book Clark made the theory of marginal productivity clear enough that we take it for granted today. Yet, even today, the power of his methodical development of what seems obvious at first glance clarifies and demolishes inaccurate theories that linger on. His work remains illuminating because of its classic explanations of the mobility of capital via its recreation while it wears out, the difference between static and dynamic models, the equivalence of rent and interest, the inability of entrepreneurs to “exploit” (meaning, underpay) labor (or capital) in a competitive market economy, the flaws of widely-quoted existing theories such as the labor theory of value and the irrelevance of rent on land, and, in a
famous footnote, why von Thünen’s concept of final productivity didn’t go far enough.The work is reproduced here in full with the exception of Clark’s textbook-style marginal notes and his “chapter overviews” in the Table of Contents.Lauren Landsburg

Editor, Library of Economics and Liberty

June, 2001

Book Cover

First Pub. Date

1899

Publisher

New York: The Macmillan Company

Pub. Date

1908

Copyright

The text of this edition is in the public domain. Picture of John Bates Clark courtesy of The Warren J. Samuels Portrait Collection at Duke University.

The Productivity of Social Labor Dependent on its Quantitative Relation to Capital

Chapter XI

Throughout this work the thing described by the term, capital, will be what a business man understands by that word. It is a permanent fund of productive wealth, and is what is commonly meant by “money” invested in productive goods, the identity of which is forever changing. The articles that embody the fund are, like particles of water in a river, vanishing things; while the fund itself, like the river, is the abiding thing.

It is a striking fact that labor also is a permanent force—a fund of human energy that never ceases to exist and to act. Men are as perishable as are capital-goods, but labor is as permanent as is capital. The problem of wages has to do with the continuous earning power that the imperishable agent, labor, possesses and will possess. The question is, What will labor create and get during this year, next year and all the following years? if the rate of wages is hereafter to rise, this means that labor will acquire, as the years pass by, an increasing power of production. The attention of practical men is directed to the interests, the rights and the struggles, not of particular laborers, but of labor in its permanence.

This enduring agent is not an abstract or an immaterial thing any more than is capital. We do not view it as an action apart from an actor, for it consists of men in action. Moreover, the men, in their capacity of consumers, get the benefit of their work, and they have the privilege of deciding what forms their work shall take. Just as a capitalist determines what kinds of goods shall constitute his productive wealth, so the laborer decides into what kind of productive action he shall put his bodily and mental powers. He decides, that is, whether he will make of himself a farmer, a miner, a weaver or a printer. The man as a consumer is the owner of the man as a producer. He will put his powers into the particular kind of activity that, in his view, gives a promise of yielding the largest product.

As the generations come and go, the forms that labor takes steadily change. The conditions of the year 1800 demanded certain kinds of labor; those of 1900 demand different kinds. There are youthful laborers coming continually on to the industrial stage; and, when the conditions of their time are akin to those of their fathers’ time, they may learn their fathers’ trades. Even then, however, they usually practise the trades in new ways; and where the conditions require it, they master wholly new acts. Labor, the permanent personal agent, is as changeful in its forms as is capital, the permanent material agent. As a worn-out instrument may be succeeded by one of a different kind, so may a retiring laborer be followed by one who will do a different kind of work. Men come and men go, but work continues forever. Because the men are changing, however, the kinds of work change also.

There are, then, two permanent entities combined in the industry of the world. The one is capital, or the wealth that continues forever by casting off and renewing material bodies—capital-goods. The other is labor, which continues in a similar way. It is represented to-day by one set of men, and tomorrow by another. Both of these permanent agents of production have an unlimited power of bodily transmutation: they are changing their embodiment every year and every day.

What has here been termed economic dynamics compels both labor and capital to go through this change. With new wants to be gratified, men must make new kinds of consumers’ wealth; and they must do this by working in ways and with instruments that are unlike the old. Mechanical inventions alter the forms of labor and of capital. The centralizing process that supplants many small shops by one great factory, and then gathers many such factories under one management, does the same thing. Labor, as such, never stops; but certain forms of it stop and are succeeded by others. Capital never goes out of existence, but certain forms of it perish and are followed by others. These permanent producing agents are in endless self-transmutation.

What has already appeared, and what greatly concerns us at this point, is the fact that any increase or diminution in the amount of labor that is employed in connection with a given amount of capital causes that capital to change its forms. Where there is a capital of five hundred dollars for each worker, that fund is in one set of forms; and where there is a capital of a thousand dollars per man, it is in a different set. Now, the labor changes its forms in the same way. The men who are working with the smaller capital perform one set of acts, and those who have the greater capital in their hands perform another set. Arts are always practised in new and changed ways, when capital multiplies itself and takes the shape of costly and elaborate machinery. That the relative
amounts of labor and capital should change, means that the
forms of both should change: it means that each agent must fit itself to the other’s requirements. Mutual adaptations are the rule, wherever the two agents are combined.

We are now prepared to test the productive power that resides in the final increment of each of these permanent agents. With a force of a thousand men, working for decade after decade, with neither diminution nor increase, and with a capital of a million dollars, sustaining itself also without deduction or enlargement, how large is the product that a unit of labor will produce? The answer to this question, which furnishes the law of wages and interest, is:
These incomes are fixed by the final productivity of labor and of capital, as permanent agents of production.

There is a formula which has been used to explain the rent of land that we may well apply in a new way. We may have a simple illustration, by disregarding, for a moment, the existence of that auxiliary capital which labor needs in tilling the soil. We will suppose each worker to carry with him a simple tool, of which the cost is too small to represent any appreciable amount of wealth. Practically empty-handed, then, this labor applies itself to a piece of land, and creates an income in the shape of a crop. This reduction of the auxiliary capital to a practical zero, be it noted, affects no principle that we are studying; for the thing that we have to prove could be established perfectly well, if we used a more cumbersome illustration, by assuming that the workers were supplied with a complicated outfit of tools, seed, live stock, ate. The product that can be traced to the last unit of labor applied to land affords, however, the most available, because the most simple, illustration of the principle of the final productivity of labor.

It is a static standard of wages that we are now seeking. The field and the working force are assumed to remain unchanged, while methods and environment also remain constant. What permanent income are we, under these conditions, to attribute to the final unit of labor? We apply the simplest test that can be made, when we take one man from the force and so dispose of the remaining men that no appreciable disarrangement of the industry results from this withdrawal. The field is still tilled in its entire area; but it is tilled less completely and the crop is, by a certain amount, reduced. On the other hand, we may add a man to the force and rearrange the company so that no misadjustment is occasioned by the addition. A more intensive cultivation of the field now results, and in consequence there is a definite enlargement of the product.

The amount that is taken from the crop, when one cultivator is withdrawn from the force, measures the effective productivity of every laborer of like personal capacity. It makes no difference which of such laborers is selected for the test. The withdrawal of any one makes the force by one unit smaller; and what we wish to measure is the reduction of the crop that the taking of a unit from the working force occasions. No man can get more than his presence adds to the product that the land and the labor could create without him.

It may be that there are differences in the kinds of work that different men do; and one man may do what is indispensable to the securing of any crop whatever, while another does what is of far less consequence. The man who drops seed cannot be dispensed with; but the one who gives to the land the final touches that prepare it to receive the seed can be spared with less loss. Yet the one laborer is of no more effective consequence than the other, so long as they are interchangeable. Let the seed sower depart, and the other man will be put in his place. The crop will be the same as it would have been, if the worker in the less important place had been the one to depart. In effect, the products of all men who are personally equal and interchangeable are alike. The product that can be attributed to any one, as due solely to his presence, is tested by taking him out of the force, rearranging the remaining workers and letting only the least important kind of work go unperformed.

Now, if we can assume, for a moment, that this territory is a state by itself, and that workers do not come to it from other industrial fields and do not go from it to others, the rate of wages is fixed by what one man on this isolated plantation is effectively worth. A man can claim, not what men are paid somewhere else, but what he virtually gives to his employer here. Only under such circumstances are wages fixed by the product that is attributable to a final unit of labor.

If the assumed reduction in the working force be permanent, so that the force forever continues smaller, the crop will amount to less, year by year, by reason of the reduction. A similar test might have been made by adding a unit of labor, instead of taking one away. In that case, if the addition be permanent and the force always continues by one unit larger, the average crop will be greater. This enables us to measure the permanent income that is imputable to one unit of labor.

It is the “final” productivity of labor, as thus measured, that fixes wages. This term, final, implies an order of succession: it signifies that there is a first, a second and a last unit of labor to be distinguished. By the common method of illustrating the law of value, there is a final unit of a kind of commodity consumed by one person. We give to him one article of a kind, then another and after a while, a last one; and we discover that they are less and less useful to him, as the series is carried toward completion. The last unit has less of utility than any of the others. By a law that Austrian studies have made familiar, the value of any article in this series of goods of one kind is fixed by the utility of the final one—final utility universally gauges value.

This principle we have undertaken to apply to the productive powers of different agents of production, and just now we are applying it to labor. We may, if we wish, arrange in a similar imaginary series workmen who are of like personal capacity and can be changed, the one for the other. We shall then introduce the men into the field one at a time, and see what product is virtually created by each of them. With one man in a field of a given size, a certain crop will, on the average, be secured. With two men, however, the crop will not be doubled; for the second worker will create less than the first one. This reduction in the productivity of successive units of labor, as they are set tilling a field of fixed extent, furnishes the basis for a general law.

It is, of course, true that, if two men can combine their labors so as to assist each other in essential ways, such a diminution of their specific productivity may not appear. Two men make possible a rudimentary organization of labor; and this is a new influence, of which a full study must take account. If we start with one man quite alone on a very large tract of land, he may work at a certain disadvantage; and a second man may so far remove this disadvantage as to insure more than a double crop. A third, a fourth and a fifth man might contribute to the perfection of the organization, and so hold somewhat in abeyance the law of diminishing returns that we have cited; but in the end the law would assert itself. When there are twenty men in the field, for example, the addition of a twenty-first will have no appreciable effect in improving the organization; while, on the other hand, it will overcrowd and overwork the land. The mere effect of this crowding is what we now have to study. We may disregard the gain that would come in the earlier stages of the process, through the organization of labor; for in a large force it is the last unit which fixes by its product the standard of wages; and what this unit does is not needed for the perfecting of the organization.

In studying the mere effect of crowding the land with laborers, it is better at first to disregard the gain that comes by organization. This gain we have to study by itself, in that division of the theory which is to be devoted to economic dynamics. Organization, like mechanical invention, simply improves the conditions under which the successive units of labor are applied. It is as though the new men brought better tools with them. If we are to isolate and measure the mere effects of overcrowding the land, we must, however, assume that this and all other conditions remain for the time being unaltered.

We will, then, assume that one man goes into a large field, then another and another, till in the end there are twenty. We will assume that their methods of tilling the soil remain unchanged, and we will disregard the enlarged power that, in the early stages of the growth of the force, they may derive from coöperation. The whole process of thus building up a working force is, of course, imaginary: it represents an unreal and one-sided process in economic dynamics. Nowhere can we ever find such an experiment. A farmer would never actually place one man on two hundred acres of land, leave him there for a year and measure the crop; and then, putting an additional man there in the following year, measure the increase of the crop. He would certainly not continue such an experiment for twenty years and so make of his farm a laboratory where the economist might see, in complete operation, the law of diminishing returns from land under tillage. Having twenty men at work on the two hundred acres, the farmer would, indeed, ascertain in some experimental way how large a product is imputable to the twentieth one. He would test the final productivity of labor; and he would find that the product due to the twentieth man’s presence is less than would be the product that one man would have called into existence, if he had entered the field when it was less crowded. This fact is amply attested by experience, is confirmed by deductive reasoning and is one of the undisputed truths of economic science. Land of a given area and quality yields less and less per man, as more and more men are set tilling it. The simplest and most natural mode of illustrating this law is to imagine the men placed in a field, one at a time, till there are twenty of them at work. Each of them is thus seen to add less to the crop than did his predecessor. The product that can be attributed to any one man grows steadily less, as the force is thus built up to its full complement; and the amount that is due to the twentieth man is least of all. If all men must accept as pay what this man produces, we have the solution of the problem of wages.
*16

In a static state the working force continues forever, without addition or diminution; and methods and conditions of production remain forever the same. The
personnel of the force undergoes the change of identity that must occur as one man dies and another replaces him; but the laboring force, as such, suffers no change. The processes and the environment of the labor are fixed. There is no building up of the force from a small beginning, and no change in its
per capita product. Yet the earnings of the men are fixed by the law of final productivity. This means, in reality, that every laborer gets what would be lost to the employer if any one man now in the force were to stop working. One way of measuring this final product of the labor, and at the same time presenting to the mind a principle that governs the amounts of it, is to imagine that the force grows, unit by unit, to its present size. Each unit, when it adds itself to the force, is for the time being the final one; and it transiently sets the standard of pay. But when the last unit comes, its product becomes the permanent standard; as the force is not further enlarged, and the pay of the men is not again changed. The whole process is imaginary; but it illustrates two principles that together control the fortunes of laboring humanity, namely: (1) At any one time wages tend to equal the product of the final unit of labor; and (2) this product becomes smaller or larger as, other things remaining the same, the force becomes larger or smaller. The former principle is static, and governs wages in each period; while the latter is dynamic and, with other dynamic principles, controls the future of the laboring class. Mere growth of population, without further change, is an impoverishing influence.

How is it, now, that the product which is attributed to the last man fixes the pay of all the men? Here we must be careful to make the conditions of our illustration conform to the facts of life. A farmer hires his men in a general market, and pays a rate of wages that the market has in some way established. He then puts the men into his field until, by the law of diminishing returns, the product of the final man has become so small that it yields wages only. The rate of pay, be it noted, is fixed in the main outside of this farm; and the final productivity of labor on the farm is made to conform to this rate of pay.

What if there were no outside market in which the rate of pay might be fixed? What if the farm were the whole industrial field? This supposition would amplify industry, so as to make it grotesquely unlike the actual world; but it would place in the clearest light the law of wages that is at work in the actual world. If the farm were an isolated society, not selling its products and buying others, and not importing labor at a rate of pay that was fixed outside of its confines, then the rate of pay would be fixed within the farm itself, and by the final productivity of the labor there employed.

Let there, for example, be an island of the sea not reached by ships, and having a fixed amount of land and an unchanging population; and let it have no industry that needs to be considered except agriculture. We need no one to tell us that this state is imaginary and grotesquely unlike the world as it is. It is, nevertheless, like the world in this vital particular, that what is produced by the final man in such an isolated population sets the wages of all men there. The effective value of any man to his employer is what would be lost if he were to cease working. That amount—the effective product of any man in the force—sets the standard to which the pay of labor generally conforms. There is now no consulting an outside labor market—there is no importing into this community a rate of pay that in some way is fixed in an environing world. We have made the community on the island to be a world by itself, and have found that any such society gives to all laborers, as their natural toward, what the final laborer produces.

We will next, to complete our illustration, make our plantation resemble the world in this essential respect, that it is a completely organized society. We will make it vast in extent and will cause the occupants of it to carry on, not agriculture only, but every industry. We will give to the community its complement of smiths, carpenters, weavers, shoemakers, mirrors, printers, etc. We will supply the needed capital and see that it takes the needed forms. We will make sure that each particular industry has its proper part of the whole social fund, and we will carefully retain the condition originally assumed—that the community is isolated from all others. It is a world in itself, and there is no other accessible world from which it can derive its standard of wage. What, then, fixes the rate of pay for labor? Clearly the final productivity of labor, as it is employed in connection with the total fund of productive wealth in all the affiliated groups and sub-groups, or specific industries. The product created by a final unit of social labor sets the standard of wages.

There is, in fact, no other standard to which pay can conform. When we were speaking of a farmer a who obtained his laborers from an environing region of shops, railroads, etc., we found that he would pay to his men what the shops, etc., pay; and he would employ so many of them that the last one set working on the limited piece of land in the farmer’s possession would earn his wages only. Here the last man’s product does not set the rate of wages, but simply conforms to the rate that is imported from without. In a society that is a world in itself, the rate of wages cannot be a borrowed one. The men cannot be lured into society from without and paid enough to induce them to come, since there is no
without in the case. The men are in the society from the first, and must stay there; and all of them must be employed. Every one of them who offers himself to an employer has something to offer to that employer, since he can increase the output of goods in any establishment to which he may go. At some rate the employer will take him; and if competition is perfect, the rate will actually conform to the amount that the man’s presence adds to the product of the mill, farm or shop in which he may be set working. If the man gives to an employer more than he gets from him, an inducement is offered to other employers to take him at a better rate of pay. Men in other occupations are in the same strategic situation, and the wages of social labor equal the product of a composite final unit of it.

How is this product to be measured? Take away one social unit of labor, and see what is lost by the withdrawal of it; or add one such unit, and see what is gained by the addition. In either case, it is possible to note the amount of product that is separately due to a unit of labor and to no other agent. Let us, then, withdraw what we have called a social unit of labor. This is a composite unit, consisting of some labor from every industrial group that the community contains. We will take away cultivators of the land, smiths, carpenters, weavers, etc., in carefully adjusted proportions, causing a final unit of labor to vanish from every specific industry.

As we take away laborers, we leave the capital everywhere unchanged in amount; but we change the forms of it in every one of the industries, so as to make it accurately fit the needs of the slightly reduced working force. There must be, if our test is perfect, no disarrangements caused by the withdrawal of the unit of social capital. The whole of that capital must continue to be utilized; and, therefore, when the departing men throw down their tools, these must not be left on the ground, as representing so much wasted capital. If this were done, the departure of the men would mean, not only loss of the product of a unit of labor, but the further loss of so much of the products as was attributable to the tools that the men were using. The remaining men may have no need of the abandoned tools themselves, but they do need the capital that these implements embody. That we must save, and we do it by the transmuting process already described. The abandoned pick and shovel become, by a miracle of transmutation, an improvement in the quality of a horse and cart. There are fewer men digging; but they have as much capital as ever, and they have it in a form in which, with their reduced numbers, they can use it. Similarly, in the mill there are abandoned machines, and the remaining workers cannot set them running. The capital that is in them can be utilized, however, if it will transform itself into an improvement in the machinery that the remaining workers use. Everywhere there are fewer instruments, but better ones; and the capital, as such, is not reduced by a jot or a tittle.

This hypothesis it is that tests the productive power of a unit of empty-handed labor—that reveals the actual standard of wages. If a hundred men constitute the unit of social labor that we have described, and if their departure reduces the product of all industries by a total amount that can be stated as two hundred dollars, then that is the product that can be attributed solely to the work of the hundred men. If they are typical men of equal working powers, two dollars a day make one man’s natural wages.

How ultra-imaginary is such a test of the productive power of labor! How far beyond possibility is the actual creation of such to microcosmical society as our assumed plantation would constitute! It would, indeed, be impossible to apportion the labor rightly among all the different industries that, in a laboratory test of the wage law, would have to be represented, or to withdraw exactly the right number of men from each of the industries, when the final unit of social labor should be taken away. How nearly unthinkable is that essential part of the test, the prompt transmuting of the capital into the forms that the reduced working force would require!

Yet all this is done in actual industry: the world daily accomplishes this miraculous thing, automatically and without observation. By forces that run through its economic system, it gives to each industry its due portion of the whole social capital. It puts that portion, in every case, into the forms that the men of the group require. Wherever men become scarcer or more abundant, it alters the forms of the capital to fit their needs. It makes an unconscious but real test of the final productivity of labor; for it reveals what the world would lose, if a unit of labor were to withdraw itself and if the capital were still to be fully utilized; and it makes the pay of labor conform to this standard. In this process is involved a permanent fund of social capital, a permanent force of social labor and an automatic adjustment of wages in each particular part of the industrial system, to conform to the final productivity of labor as a whole.

NOTE.—If in this static study we could allow the eye to range forward and take in a view of the part of the field where changes are going on, we should see that the very formula that describes the present natural standard of wages reveals one of the cardinal influences that cause this standard to rise. If capital becomes abundant, while the supply of labor remains stationary, the same effect is produced as if the supply of labor diminished, while that of capital remained unchanged. It is the reverse of the effect that comes front crowding an environment with workers, and it makes the efficiency of one man grow larger, instead of smaller. The richer the world is in capital, the richer the worker is in productive power. Into this region of thought we may not now go; but what we may properly note is that at every point in the period of growing wealth, labor will find its natural rate of pay fixed by the law that we have now before us. Fifty years hence wages will be higher than they are to-day; but they will be fixed by the final productivity of labor in that later and more fruitful industrial state.

16.

The possibility that in the early stages of the growth of the laboring force, the diminution of the returns might be counteracted by improved combinations among the men, or by improved methods of tillage, needs to be considered, as do other dynamic influences, in a separate division of economic theory.

Categories: John Bates Clark