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
First Pub. Date
New York: The Macmillan Company
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.
- Chapter II, The Place of Distribution Within the Traditional Divisions of Economics
- Chapter III, The Place of Distribution Within the Natural Divisions of Economics
- Chapter IV, The Basis of Distribution in Universal Economic Laws
- Chapter V, Actual Distribution the Result of Social Organization
- Chapter VI, Effects of Social Progress
- Chapter VII, Wages in a Static State the Specific Product of Labor
- Chapter VIII, How the Specific Product of Labor may be distinguished
- Chapter IX, Capital and Capital-Goods contrasted
- Chapter X, Kinds of Capital and of Capital-Goods
- Chapter XI, The Productivity of Social Labor Dependent on its Quantitative Relation to Capital
- Chapter XII, Final Productivity the Regulator of Both Wages and Interest
- Chapter XIII, The Products of Labor and Capital, as measured by the Formula of Rent
- Chapter XIV, The Earnings of Industrial Groups
- Chapter XV, The Marginal Efficiency of Consumers' Wealth the Basis of Group Distribution
- Chapter XVI, How the Marginal Efficiency of Consumers' Wealth is measured
- Chapter XVII, How the Efficiency of Final Increments of Producers' Wealth is tested
- Chapter XVIII, The Growth of Capital by Qualitative Increments
- Chapter XIX, The Mode of Apportioning Labor and Capital among the Industrial Groups
- Chapter XX, Production and Consumption synchronized by rightly Apportioned Capital
- Chapter XXI, The Theory of Economic Causation
- Chapter XXII, The Law of Economic Causation applied to the Products of Concrete Instruments
- Chapter XXIII, The Relation of All Rents to Value and thus to Group Distribution
- Chapter XXIV, The Unit for measuring Industrial Agents and their Products
- Chapter XXV, Static Standards in a Dynamic Society
- Chapter XXVI, Proximate Static Standards
The Earnings of Industrial Groups
We have not yet exhausted the applications of the principle that is at the basis of the familiar law of rent. It has been customary to apply it to the product of land; we have made it govern the product of all capital; and, in thus applying the principle, we have put out of sight particular instruments of industry and have treated capital in its entirety as a permanent agent of production. Interest, the product of this agent, can be translated into a form that is akin to rent. Capital constitutes a social fund; and, if economic law be not obstructed, the suitable amount of it is to be found in each one of the affiliated industries that constitute the producing organism, society. This apportioning of the social fund among the different industrial groups helps to fix the amount of goods that each group shall produce; and that, again, controls the value of the goods. Values, as we have seen, control the comparative earnings of different groups; for the one whose product is selling at a high price is getting a relatively large group income, and the one whose product is cheap is getting a small one. Values themselves are governed by the same all-embracing law that fixes rents, but it is that law in another sphere of action. We have to examine the special way in which this law acts in fixing values, which is the same thing as adjusting the comparative earnings of groups. Group distribution and that final distribution which fixes wages and interest are controlled by one law.
We have seen that the law which has been made the basis of the rent of land really governs the earnings of labor; and, in studying labor, we have ceased to think of particular men and have considered labor, in its entirety, as a permanent agent of industry. Work continues, though particular workers pass from the field and are replaced by others. Labor is a social agent of production; for, like capital, it has to apportion itself in certain quantities among the groups and sub-groups of which industrial society is composed; and a free play of economic forces decides how much labor each industry shall have. We presuppose this apportioning and locating of labor, when we speak of it, in its entirety, as a second generic agent of production, and one that is combined with capital in a proportion that determines the earnings of both of these producers. It is by the combination of all the labor of society with all the capital of society that the general rates of wages and interest are fixed; but the combination runs through all the groups, and a play of forces that is simple in principle, though minutely detailed and complex in its practical working, tends to give to each occupation that men pursue a definite amount of the laboring force of society, as well as a definite part of the social capital. It is, again, by this apportioning process that group products, values, and group incomes are controlled. Each industry tends, under a perfectly free competition, to get that share of the social laboring force which will make its output of goods and its collective income, as derived from the sale of the goods, normal.
By a wonderful social mechanism these results are brought about. The production of the world is carried on by a network of affiliated groups or industries, which are so interdependent that a change in any one of them carries a series of resulting changes through the whole complex system. It is this dependence of industrial occupations on each other that makes it possible to speak of labor and capital as having, in each case, a unity, a social character and a general rate of earnings.
We have already gone far enough to get a view of one very general law. So all-embracing, indeed, is it that it dominates economic life. Classical studies afforded a glimpse of the working of it, within a very limited field, by their study of the so-called diminishing returns from agriculture. As they pointed out, labor and capital, when applied to land in a series of increments or “doses,” produce less and less per dose.
Modern studies of value afford a glimpse of the action of this principle in a wholly different sphere. They show that doses of consumers’ goods, given in a series to the same persons, have less and less utility per dose. The final utility theory of value rests on the same principle as does the theory of diminishing returns from agriculture; and this principle has a far wider range of new applications. One law, therefore, governs economic life, and theories old and new contain partial expressions of it. The theory of value rests upon one application of the general law, and the theory of rent on another. As this law may be traced in consumption, where the “final increment” of a particular article is less useful than earlier increments, so it is observable also in production, where the final increment of an industrial agent is less fruitful than earlier ones. As value depends on final utility, so shares in distribution depend on final productivity. Thus, interest is fixed by the product of the final increment of capital, and wages are determined by the product of the final increment of labor. The value of goods, on the one hand, and the productivity of the two agents, labor and capital, on the other hand, depend on the same general law. It is value, however, that controls group incomes in their entirety; and it is the action of this law in the sphere of consumption that ultimately fixes values. Opposite in kind, indeed, are consumption and production. Nature spends itself upon man in the one process, and man spends himself upon nature in the other. Yet the same law governs the results realized in each at these cases. It may be called a law of variation of economic results; and, if it were stated in its entirety, it would give unexpected unity and completeness to the science of economics. It would explain at the same time values, wages and interest.
Consumption is a process that yields subjective returns, which are measured in the sensibilities of men and are the ultimate objects of the production itself. The immediate objects of production, on the other hand, are the material things that affect the consumer’s sensibilities. These things are objective, but they are valued only for what they do for man. Man acting on man through matter—such is the whole economic process. How much can be gained by the whole of it? is the practical question to be answered. The gain depends on the benefit that a product will afford to a man when he gets it, and also on the number of products which he can get. This, however, is merely saying that it depends on the utility of the goods, and on the productivity of the agents that create them. It depends, then, on the two variations that are governed by this law.
Final utility itself has been studied in a way too narrowly limited. In the case that is usually cited, one commodity is taken and, in imagination, is given in increasing quantity to one consumer. The successive units of it then do less and less for him. Bread given to a man in a succession of slices nourishes, and pleases, but ultimately gluts him. The
nth slice, if he must eat it, is worth nothing to him, and the following slices less than nothing. Coats of one kind bestowed on a man, one after another, soon lose their power to benefit him. The fourth may be of so little use that a tramp can have it for the asking. Duplicate copies of the same book or of the same picture encumber the shelves and walls, and their room is better than their presence. Very abrupt, in short, is the descent of the “utility curve” which, in graphic representation, expresses the lessening services that successive units of things of exactly the same kind are capable of rendering.
Vary the articles in kind, and you have a different result. Change the weight, the color and the cut of the successive coats, and the man will be glad to have more than four of them. Give him books that differ from each other, and he may strain the storage capacity of his house to accommodate them. By changing the quality of the articles offered you appeal to different wants; and so long as there are in mall’s sentient nature wants still to be satisfied, there is do reason why he should cease to accept what you offer. If two coats are alike in all respects but weight, the thicker garment satisfies just one want that is not satisfied by the other. It will be purchased, perhaps, for the sake of that single utility. Clothing in general, not confined to garments of any kind, shows a utility curve descending gradually. Food in general diminishes in utility far less abruptly than does a single article, like bread. Duplicate nothing; to potatoes add bread, then meat, pastry, fruit and the refined products of the French cuisine, and you will find the diminution of the utility of successive increments far less rapid than is the diminution of the utility of any one thing. Where we thus vary the quality of the second increment of an article offered to a consumer, we virtually offer him a different article, which renders a new and distinct service.
The theory of value has not taken due account of the abruptness in the decline in the utility of an article, when successive units of it, wholly uniform in quality, are offered to one consumer. The gently descending utility curves of the ordinary graphic representations tell what is true of a genus of articles rather than of a single one;
*24 and a correction, therefore, needs to be made in the theory of value.
This is not the only correction that needs to be made; for we have undertaken to generalize the law that is at the basis of the theory of value. In reality, it is all-comprehensive. The first generalization to be made consists in applying the law, not to single article, but to consumers’ wealth in all its forms. The richer a man becomes, the less can his wealth do for him. Not only a series of goods that are all alike, but a succession of units of wealth itself, with no such limitation on its forms, becomes less and less useful per unit. Give to a man not coats, but “dollars,” one after another, and the utility of the last will still be less than that of any other. The early dollars feed, clothe and shelter the man, but the last one finds it hard to do anything for him. A dollar, as thus used, means command of a quantity of consumers’ wealth indeterminate in its form; and wealth, as such, loses its specific utility, if you give it, unit after unit, to a single consumer. To apply the law of diminishing utility only to series of similar goods is to get only one of the facts that are at the basis of the law of value; but to apply it to the largest genus of usable goods that can be made—that is, to consumers’ wealth in general—is to take a scientific step in advance. The more wealth, then, that a man has for personal use, the less is its value per unit to him.
Very many and very diverse, it should be observed, are the articles that constitute the last increment of general wealth that a consumer devotes to his personal use. In the consumption of any person for a year, for example, an article or two for food may constitute the first or most necessary element. Plain clothing may constitute the second. Rude shelter, an improvement in the food, and some fuel for heat and light may compose the third. Every later element, however, will include qualitative changes in the articles already possessed; for the man wants, not only more things, but better ones. He improves and diversifies the material that he uses, and the later increments of his year’s stipend of consumers’ wealth take on a very heterogeneous character. The composition of the several increments of wealth consumed is of scientific importance. In the statements that are current, it is said that the final increments of different commodities purchased for consumption at the same cost are, with certain allowances, of the same utility to the purchaser. With the last hundred dollars of the year’s income, the man in the illustration, will buy some particular things that he did not have before, and he will add quantitatively to his supply of things of which he has already had a certain amount. If each distinct article on the list costs a dollar, they are all supposed to be of equal utility; but their degrees of utility are, in fact, very unequal. If the modern theory of value, as it is commonly stated, were literally true, most articles of high quality would sell for three times as much as they actually bring. It is well, at this point in the discussion, to make the needed correction of the law of value; inasmuch as group incomes depend on that law, and inasmuch as the distinction on which the correction rests is of cardinal importance in connection with wages and interest. When we undertake the more detailed study of the productivity of final investments of capital, we shall find that success depends on keeping constantly in view this essential distinction.
In careful statements of the law of value, allowance is made for the fact that, as an income grows larger, there is not a continuous quantitative increase in the consumption of all the articles that are early secured. Some articles for consumption are never duplicated at all; and others which are duplicated have, after one unit has been supplied, a comparatively slight utility. Thus, one watch may be nearly indispensable while a second would be of very little use. Another correction of the current form of statement of this law is of much more importance. What is the final increment of wealth consumed? It is not complete articles,
as such: it is almost entirely composed of
utilities of articles. These can be mentally distinguished from other qualities that compose the entire articles, but they cannot be separated from them. A man’s final increment of consumers’ wealth consists mainly in certain elementary qualities that help to constitute the articles that he uses. It is a literal fact that one can scarcely find on the dining-table of a rich man a single article that, in its entirety, enters into the final increment of wealth that he consumes; yet some component element of almost everything there found does so. Something in the meat, the prepared vegetables, the pastry, etc., is bought with the man’s final dollars and constitutes his final increment of food.
In pure theory, the statement of the vital fact of consumption should be this: Every article that a man buys for personal use contains a composite of elements, some one of which enters into his final increment of consumers’ wealth. What a man does, as his means increase, is, before anything else, to demand new qualities in the articles that he uses. Often he does not add at all to their number; but he causes them to be made of finer material or to be larger or handsomer. He adds to his wealth for consumption, not new things, but new utilities; and these are mainly attached to things of the kinds formerly consumed. As he cannot literally buy a cheap article and afterward improve it, he buys the improved article at a single purchase. The literal effect of spending his last dollar consists in the substituting of a good article for the cheap one, with which he would fave contented himself if his available means had been smaller.
Shelter, for example, is one of the prime necessities of life, and there is something in the rich man’s mansion that satisfies this primary need. His present house may be the last house that he builds, and in point of time the whole of it is final; but, in its entirety, it is not included within the final increment of his consumers’ wealth. The element of simple shelter that the building contains represents one of the earliest increments. Some of the dollars that he has spent are paid for shelter, some for comforts and conveniences, and some for the final elegances that the owner adds to his list of consumers’ goods. It is these last elements of cost in the dwelling that, in this man’s case, constitute the final increment of wealth consumed. The same thing is true of simpler articles. As the man sits at his breakfast table, he recognizes, if he thinks, that the very chop on his plate, by virtue of its different utilities, spans the entire range of his consumption, from the first increment to the last. It contains nourishment which is bought with what is logically the man’s first dollar. It also has qualities that are imparted to it at great cost. Skilled and expensive culinary labor has done much for it; and it would not be precisely what it is, if it were not for the last dollars that are expended in securing an accomplished cook. Simple as this article is, it contains, in effect, a composite of quality, some of which enter into the final increment of wealth consumed, while others distribute themselves through the series of increments to the very last. If he can isolate one of these qualitative elements, he can locate it in the series. But the chop, as a whole, is bought with a sum of which some part enters into such increment of the “money” that the man spends on his own gratification.
It is clear that what is called a “final” unit of consumers’ wealth is not the one secured last in point of time. In the case of the house in our illustration, the first and the last increments of consumers’ wealth were bought at the same time, and so were all intermediate increments. This, moreover, is the usual rule. Even if we were actually to dole out to a man, unit by unit, the money that he is to spend on himself in a year, and let him try to buy the supplies for the year in the order of their importance, he could not do it. Let him have, for example, a yearly income of ten thousand dollars. Give him this amount, in a series of sums of a thousand dollars each, and let him try to buy with the first thousand dollars what is actually the first increment of consumers’ wealth for a man on a ten thousand dollar income. With the second of the units of income, let him try to buy what is actually the second increment of consumers’ wealth for a man in his status; and with the last thousand dollars let him try to buy what is the true final increment of consumers’ wealth for such a man. How could he do it? With the first unit of income he would have to buy the cheapest food; and with later increments he would be obliged to transmute such material into that which is of finer quality. But he does not, in fact, try to accomplish this impossibility. Knowing the extent of his income, he buys the fine food in one purchase. That which, in logic and not in time, constitutes the first increment of consumers’ goods is that economic element, or utility, in goods consumed which in some form would have been secured if the man had had only one unit of income at his disposal. A man does not, with the first unit of his income, build a shanty, and with later units transmute it successively into a house, a mansion and a palace: he builds the palace at one operation. Somewhere within it there is what, in an economic sense, is equivalent to a shanty; for there is in it, above all else, a power to afford some shelter to its occupants; and this single utility, merged and lost in the great structure, constitutes an early unit of consumers’ goods. Logically, this unit stands near the head of the list, since it precedes most others in importance. In time, however, it accompanies other utilities that stand late in the list. Some quality in the house and similar qualities in the other goods that the man uses constitute the logically final increment of his goods for consumption. A mass of utilities—the group of logically last and finest qualities imparted to articles used for consumption—constitutes the true final increment of the wealth that he consumes. This is an obvious and practical fact, and it demands—what we shall soon consider—a somewhat radical amendment of the theory of value.
Men add to their consumers’ wealth, then, more by improving the grade of the goods that they use than by multiplying them. They infuse wealth, as it were, into their goods. They give to these goods new service-rendering powers, and cause articles that in their cheapest forms embody one unit each of consumers’ wealth to take a form in which they embody two, three or ten such units.
Capital increases in the same way.
*25 New units are added to producers’ wealth more by improving capital-goods than by multiplying them. We infuse new wealth into the instruments in our hands by imparting to them new productive powers. We substitute a better tool for the one that we have been using, and it is the difference between the two tools that constitutes a final increment of capital.
The conclusions so far reached may be summarized as follows:—
(1) Wealth, as such, whether it be used for consumption or for production, may be arranged in a series of increments, in the order in which they would be selected by a user, if they were purchased one at a time.
(2) This series is imaginary, since it is impossible to separate and buy singly these increments.
(3) The several increments of consumers’ wealth, on the one hand, and of producers’ wealth, en the other, consist rather of elements in goods than of goods in their entirety.
(4) The utility of the final increment of consumers’ wealth grows smaller, as the number of the increments in the series increases.
(5) The productivity of the last unit of producers’ wealth in a series grows less, as the number of units increases.
Two further assertions that we now have to prove are: (1) Market values are fixed entirely by the utility of the final increments of consumers’ wealth, as we have just defined them, and not, as a rule, by the utility of entire articles. (2) Interest is fixed by the productivity of final increments of capital, as we have just defined them, and not by the productive power of instruments of production, taken in their entirety. The usefulness of the final commodity of a given kind seldom fixes the values of such commodities; and the productivity of the final instrument of a given kind seldom fixes the rate of interest.