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 Growth of Capital by Qualitative Increments
The outline of the law of interest and wages has now been filled in by the addition of some important details.
The diagram that has already been used presents the law of interest in its simplest form; and it is now clear that the capital which increases along the line AD is a permanent fund, consisting of in instruments every one of which, except land, perishes but virtually creates a successor to keep the series unimpaired. The increments that come to the fund, as the line AD lengthens, are mainly new qualities infused into the capital-goods already in the working outfit. If we were to try the experiment of making a capital grow from a small beginning to the size which, in view of the amount of labor that was to use it, it was naturally to take, we should need to have a magical power of transforming and improving every instrument of production; and we should have to exercise this power with every addition that we might make to the productive fund. At a touch, nearly everything that labor uses would then become by one grade better; and the difference between the old grade of everything-in-the-stock and the new grade of this miscellaneous aggregate would constitute the new increment of true capital. It is composite in the highest degree, and it is mainly an aggregation of new qualities imparted to old things. We have next to see by what mechanism this is done. In the group system of production, we shall see, lies the alchemy that accomplishes this difficult thing.
The new capital, as thus composed, is under a very composite control. It is all, indeed, the property of the social organism; but this means that a certain foreordained part of it is in the hands of each
entrepreneur in the system. A social law governs this apportionment; and, if the law could work without friction or disturbance, it would make the apportionment unerringly. If, under such conditions, a million dollars’ worth of capital were injected into the working fund of an entire society, a definite fraction of this amount would go to every sub-group in it; and a law that it is possible to trace would determine how large each of these fractional amounts should be. Interest, under such conditions, would conform to the product of this widely distributed increment of true capital, consisting mainly in qualities newly infused into old appliances. Before us, then, is the further problem of tracing the manner in which society, by no conscious act but by what is clearly a collective or social act, makes this apportionment, assigning to each group and to each sub-group its determinate share of the whole fund of capital, as well as of each new increment that adds itself to the fund.
The same law that apportions the capital among the sub-groups apportions the whole laboring force among them, and thus gives to each specific industry a certain share of the whole number of workers. The increments of labor are social, and are apportioned among the groups and sub-groups by an unconscious act of society. These increments are not mainly qualitative, for a working force is not to be thought of as gradually built up by making a given set of men more efficient. Improving men does, indeed, add to the laboring power of society; but the addition to labor that economics has first to deal with comes from an increase of population. The chief qualitative transformations that the enlargement of the working force occasions are still in the capital-goods; but they are opposite in character to those which take place when labor is fixed in amount and capital increases. Enlarging population, with a fixed
quantity of capital, means, as we have seen, an increasing quantity and a deteriorating quality of capital-goods. With two men working where one worked before, there are, perhaps, twice as many tools as before, each costing a half of what a tool for the same purpose formerly cost. Quantitative increments are, in this case, adding themselves to the working force, while qualitative elements are leaving the capital-goods, and quantitative additions to the stock are making and are keeping the true capital intact.
With these interpretations of the terms of the general law in mind, let us see, first, how qualitative additions to capital are actually made and, later, how capital apportions itself among the sub-groups. The mechanism by which capital-goods are improved is the same as that by which they perpetuate their kind. We noted that each perishable instrument of production virtually creates a successor for itself. The table that represents the group system of production reveals how this is done and also how, as true capital grows larger, the goods that embody it become better.
Let us, then, complete the table representing groups and sub-groups, in an extremely simple form but in a way that will completely reveal the law by which the apportionment of labor and capital is affected.
The A’s in the table now represent an article of prime necessity in process of completion. Let us say that A”’ is food ready to be eaten, and that A is the rawest material that enters into it. Possibly A may be standing wheat, A’ threshed and winnowed wheat stored in the granary, A” flour and A”’ bread. B may represent the material for clothing, in the shape of wool on sheep’s backs; B’ may be wool washed, sorted and stored in the warehouse; B” may be cloth and B”’ clothing. The C’s may represent, successively, forest trees, saw-logs, lumber and houses. Severely simple, indeed, would be the wants of a society that should content itself with this list of articles. It is, perhaps, heroic theorizing that creates such a society, even in imagination; but what we said before, about the creating of an imaginary static society, holds true here. We are putting a myriad of facts for the moment out of sight, in order that we may isolate and clearly understand certain other facts. The law that would apportion the labor and capital of a very simple society is, as we shall see, the one that actually apportions them in the most complex society that anywhere exists.
In every one of these sub-groups there is labor and capital; and, as we have seen, the material tissues of the capital—the concrete things that compose it—are in a perpetual process of destruction and renewal. How are the destroying and the renewing effected? The stock of passive goods wastes, whenever an A”’, a B”’ or a C”’ is withdrawn for use; and it is replenished by the industry that continually goes on in all the sub-groups. So much we have already seen. The stock of active capital-goods—the tools, machines, buildings, etc.—wastes by wearing out and by falling into natural decay. How is this stock replenished? There is, obviously, no power in the group of A’s directly to restore the active capital-goods that are used up in making A”’, for the whole power of this group exhausts itself in making A”’.
Somewhere, however, there is another group, which we may represent by a series of H’s. Its function is to make tools, machines, etc. In our highly simplified table, we will let this group of H’s replenish all the waste of tissue that fixed capital suffers in the whole series of groups. H, H’, H” and H”’ now represent the materials that go into active instruments of production, and they represent them in four stages of advancement. H is the rawest material that goes into tools, etc., while H”’ is the assortment of instruments ready to be used. This succession is kept up, as in the case of the other groups: every evening finished H”’ ‘s are taken away, and every day the stock of H”’ ‘s is replenished by the transmuting of H” into H”’, H’ into H” and H into H’, and by the creating of a new H. Forever intact is the series of H’s, and this means that the true capital in the instrument-making group remains unchanged in amount.
Where do the H”’ ‘s go, and what do they bring to the man in the H group? They go everywhere throughout the system replacing instruments that are worn out. Some of them go to A, some to B’, some to C”, etc. Some of them go back into the different sub-groups of the H series itself, to replenish the stock of instruments that are worn out in the making of instruments. The income which comes to the men in the sub-group H”’ must, it is clear, come in the form of A”’, B”’ and C”’. The men in the last group in the table cannot eat the looms, the threshing-machines, the flouring mills, etc., that they are themselves making; but they must eat the bread represented by A”’. They can not wear their machines or dwell in mills; but they must have clothing and dwelling-houses. These they must get by taking some part of the product of the first three groups.
What is the source of that part of consumers’ wealth which goes to supply the wants of makers of instruments? Is it gained by taxing the other groups? Does it come out of other men’s wages? Is it, in truth, produced by labor or by capital in the former groups? Here we must be careful; for here, if anywhere in the analysis, there is a temptation to say that labor is creating “capital,” by feeding the men who make the capital. The laborers in the A group are certainly working for the laborers in the H group, and getting capital-goods as a return for it. Yet, as a matter of fact, the food for the men in the H group is no part of the net product of any of the men or of any of the tools in the A group. It is, however, a part of the gross product of the tools in these groups. Every instrument that is worth having creates a product that makes good its own wear and tear, besides the further product that is a dividend for its owner. The cloth that a loom weaves, to make good the waste that it undergoes itself in the weaving, is what it passes over to the H”’ group. The men of H”’ are virtually eating flouring machinery, since they are eating the flour that the mill makes in wearing itself out, but they are eating only that part of the flour which is reserved to make good this waste.
There are, then, quantities of A”’, B”’ and C”’ that are regularly making their way to the H”’ group. If they constituted deductions from the wages and the interest of the men in the first three groups, the makers of H”’ would be pensioners of the men in the other groups. In fact, however, the men in H”’ make their own income goods, in an indirect way, just as the men in the first three groups make their own active capital-goods, also in an indirect way. The men in H”’ are not pensioners, but self-sustaining men, eating their own wages and interest. In concrete form, their incomes consist in goods that are of the kinds that support other men and that come from the same sources. The A”’, B”’ and C”’ groups make the things that maintain the men in H”’; but the quantitative part of these products that goes to the men in H”’ is solely that special amount that is produced by the machines, etc., in the first three groups for the replacing of the worn parts of the plant. In quantity, it is entirely distinct from the product of labor; and it is equally distinct from the net product of true capital, as such.
The men of the first three groups, then, in maintaining the men in H”’, do not tax themselves in any way. The first task that is imposed upon a tool is to create wealth enough to buy another like itself, when it shall be worn out. This is a part of the gross product of the instrument, but it is no part of the net product of the capital in the instrument. Only where an endless succession of instruments does more than to maintain itself—only where such a series of capital-goods creates a net surplus for its owner—is capital, as such, productive.
We have noted the fact that capital tends to be everywhere equally productive. It is true capital, however, that is so, not capital-goods. The net product from an endless succession of working instruments in the sub-group A tends to be as great as that of an endless series of working instruments in the group C”, or as that of one in B”’ or elsewhere. This tendency requires that every instrument which is anywhere used shall, under a normal adjustment, create a product just large enough to pay for a duplicate of itself, besides yielding to the man who uses it a net annual income that is the same fraction of the cost of the instrument as is the income yielded by other capital-goods. This is the literal and concrete fact that is involved in the law of uniform interest.
The instruments of the H”’ kind that are scattered through the general groups, A, B and C are thus besides providing for their own successors, paying uniform interest. Every one earns a sinking fund during its lifetime, and the goods that constitute this sinking fund maintain the men in H”’; but entirely distinct from this fund is the interest on the true capital embodied in the instruments, which tends, under static law, to be uniform in rate. The goods that feed the men in H”’ are the material forms into which, in a figurative sense, the tissue of the fixed capital has converted itself; while the goods that feed the men in A”’, B”’ and C”’ are the true product of the labor and the capital in these groups.
Active capital-goods, or the tissues of fixed capital, are, then, self-maintaining; and, over and above this, true capital maintains its owners.
*35 What this capital bestows on its owners they can afford to use up, without at any point impairing the integrity of the series of capital-goods that is to embody the permanent capital.
More capital, as has been shown, means better capital-goods; and we can now see how they are secured. In terms of our table, this improvement signifies that the H group becomes larger and that, in this way, a larger amount of productive energy is available for replenishing the tissues of fixed capital, as they perish in the using. Either more tools or better ones can now be made; but the conditions require that, in the main, it shall be better ones. The fixed number of workers in the A, B and C groups get improved appliances, and they turn out more of the A”’, the B”’ and the C”’ than they formerly did. The improved tools maintain themselves, as the original ones did; and the special surplus of consumers’ goods that goes to the H group is sufficient to maintain that group in an enlarged state.
An incidental result of the existence of more capital is higher wages and a larger grand total of interest. This signifies a greater output of A”’, B”’ and C”’; but it involves an improved quality of these consumers’ goods, rather than a greater number of them. The studies that we have made of the law of value make this clear. Consumers’ wealth, like producers’, enlarges itself mainly by qualitative increments; and it follows that the difference between A, B, C and A”’, B”’, C”’ becomes greater than it was. Each transmutation that takes place in a raw material that is “refining” under the workers’ manipulations becomes a more decided transformation, and the finished product is a finer and better thing than an equally ripe product formerly was. This is possible without any addition to the number of laborers in the A, B and C groups, by virtue of the increased power that more capital—that is, better capital-goods—gives to them.
How the original enlargement of the capital is caused is a question of economic dynamics. It may even seem that we have been outside of the strict limits of a static science, whenever we have traced the process of increasing the social capital. Throughout this volume, however, we have allowed ourselves to observe changes that directly bring about static adjustments. We have followed the growth of capital from a small beginning to a natural size solely for the purpose of placing by itself the product of the final unit of the capital. The fund is used by a complex society composed of groups and sub-groups, the sum total of the fund is fixed, and the growth of it to its existing size is an imaginary and illustrative process. The illustration, however, is the more valuable when it respects the facts of life and keeps before the mind so much of the action of groups and sub-groups as suffices to reveal the mechanism by which, first, the material tissues of each kind of capital can be maintained and, secondly, the grade of each kind of capital goods can be improved. What is a mere substitution, when a new and improved tool is put into the place of an old one, becomes a transformation, when the permanent series of such tools is viewed in its entirety. Here permanent capital transforms itself for the better,—leaves inferior bodies and enters better ones,—when the amount of it increases, while the laboring force remains unchanged. But it transforms itself for the worse, when it remains unchanged in amount, while labor increases. Both transformations are effected by the agency of the branches of industry that in our simplified table are designated as the H group.
Saying this is not falling into the old error, which has been criticized in an early chapter of this work, of calling a store of food for laborers the primary form of capital. In the view here advanced, (1) there is no such store in existence, (2) the goods of the A”’, B”’ and C”’ type cease instantly to be capital-goods when they are devoted to consumption, and (3) they are not “food for laborers,” but income goods for all laborers and capitalists. Further, the way in which they keep the tissues of capital intact is by substituting themselves for capital-goods that laborers and capitalists have already created and that constitute their incomes in the original forms which those incomes take. Products of the type A”’, B”’ and C”’, as they go through the sub-group system to be used, merely transmute incomes already existing into available forms. The A that is created in the lowest sub-group is entirely income to that group; for it is not a constituent part of its capital or of the series that that sub-group must keep intact in its own hands. It represents the amount that this lowest sub-group can afford to spend on its living. In a static state this group will spend the whole amount. To society, these goods, as they are passed on to the A’ sub-group, are a constituent part of capital; since society cannot afford to trench on the amount embodied in the complete series of A, A’, etc. Society can, however, speed the A”’ that has just emerged from the last steps in the series. This it does by substituting the A”’ for the unfinished goods that, to the men who now have them, are income in amount but not income in a usable form. In the forms in which they first exist these incomes keep social capital intact.