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 Mode of apportioning Labor and Capital among the Industrial Groups
We are now prepared to state the law by which the entire capital of society at each point in its growth apportions itself, in certain natural quantities, among the different groups and sub-groups. That conception of social capital which we have carried through our entire study implies such an apportionment as this; for capital does not set as a completely socialized agent unless society, in some way, controls it all and disposes it so as to secure the best results. This requires that an economic force shall put into each sub-group in the system a definite and normal fraction of all the capital that society possesses, round as physical force levels the surface of a pond by putting into each part of it a definite fraction of all the water that it contains.
It is clear that there is a normal apportionment. In the static state, there must be a given number of units of capital at A, a given number at A’, a given number at B, and so on throughout the system. What is it that makes these numbers normal? We have said that, in a general way, the apportionment is normal, when both labor and capital are uniformly productive at all the different points within the system—that is, when a unit of labor produces as much in one sub-group as it does in another, and when a unit of capital has everywhere the same producing power. Labor moves to and fro, seeking the points where it can produce and get the most wealth. What capital may get at the different points is not an influence that appeals to labor, for wages only are what labor is seeking. Capital, likewise, moves to and fro in the group system, seeking out the points where it can get the most interest. So far as motives are concerned, each of these agents is independent of the other.
Yet neither of these agents can move without affecting the productive power of the other. If any labor departs from the sub-group A’, the capital that remains there will lose something of its own productive power—will produce per unit fewer goods than before. As yet we say nothing about values, although they constitute a second element that must soon be considered. The first consideration is: How much power has a unit of labor, on the one hand, or a unit of capital, on the other, to create goods? If labor departs from one group, the power of capital to create commodities is there reduced; and there is, to this extent, an influence that tends to make capital move also. As a matter of fact, neither of these producing agents can move from group to group without exerting an influence that tends to make the other agent also move. The action of these influences in actual life is highly complex, because different industries are related to each other in very detailed and complex ways; yet the principle that governs the movement is in its nature simple. It is not difficult to understand what share of the whole capital of society is the normal amount for the group A to possess, or what is the natural amount for B or for C. When an abnormal amount of capital is found at one of these points, an influence that is not hard to detect sets itself at work to move capital to or from it, as the case may require.
Capital is moved from group to group by the same agency which brings about the transformation in its quality. Both kinds of changes involve the intervention of the H group. If there is an instrument in the A group that is not to be replaced, and if it has earned its sinking fund by creating enough of A”’ to pay for the replacement of it, then this A”’ goes to pay for another instrument that is capable of being used in (say) the B group. The men in the H group make, for example, a tool that will help to make clothing, instead of one that would have helped to create food. The
entrepreneurs at A thus relinquish a certain quantity of capital, and the
entrepreneurs at B receive it. The mechanism by which this transfer is effected we have just traced, for the self-replacing fund created by one instrument has been used to pay men for making an instrument of another kind. There are, of course, cases in which tools may be taken bodily out of one industry and put into another; but there are few in which this can be done without some waste of capital. The regular method of moving capital, without wasting any of it, is the one that we have just described. Together with this moving of fixed capital, there are, of course, local changes in the amounts of raw materials used, and these are equivalent to moving circulating capital.
It is to be noted that labor is moved in the same way. Men can be taken out of one industry and put into another more easily than can material instruments, since they are more adaptable; and yet the cases are few in which a workman can change his occupation with absolutely no waste of productive energy. If he has learned to work at one occupation, it requires some time to enable him to work at another equally well. Old workmen in highly skilled occupations can, as a rule, never develop in a new employment the facility which they have possessed in the old one. The regular way of moving labor without wasting any of it is to let the son of a workman learn a trade that is unlike his father’s. The permanent force of social labor maintains its own tissue in a way that is quite analogous to the way in which social capital does so. Besides earning a living for themselves, men must rear successors who will take their places in the working series. The moving of labor from group to group means, then, that the successors of certain laborers do new kinds of work. Labor, as a permanent force, may he said to be perfectly mobile; and yet the transfers, if they do not reduce the amount of the force, must be made without actually changing the places of the men.
Being, then, quite sure that it is perfectly possible to move both labor and capital without sacrificing any part of either of them, we may put before our minds a society that fulfils the condition of the static slate. The elements are perfectly fluid, but they do not flow. The condition is like that of a pond, where the dropping of a pebble into the water would ultimately move every particle of it, and yet not one particle stirs. The static group system is one in which a slight disturbance would cause many transfers of labor and capital from group to group, and yet not a single transfer takes place. There is, in other words, a perfectly normal amount of labor and of capital in every group and sub-group in the series. How did it get there? It is equalized pressure that brought the surface of the pond to a level; and it is
equalized inducement that produces the static adjustment of labor and capital in the group system.
We have described, in an earlier chapter, the law that controls the apportionment of labor and capital among all the groups, and have called it the universal law of economic variation. It acts in consumption; and when it operates upon a fixed number of persons, it causes an increasing amount of consumers’ wealth to have less and less specific utility. That law thus regulates values; for goods bring smaller prices, the more there are of them. The law acts also in production, causing an increasing amount of one industrial agent, when it is used in connection with a fixed amount of another agent, to have per unit less and less productive power. Labor, for example, in connection with a fixed amount of capital, produces fewer and fewer goods per unit, the more there is of it. The law has to act in both these ways, in order to apportion labor and capital, in natural amounts, throughout the industrial system. The general law that, on the one side, fixes values and, on the other side, fixes power to produce goods thus has a twofold effect; and the outcome of it all is that a unit of labor tends, under perfect competition, to have as large a power to produce
value in one part of the system as it has in another. A unit of capital shows the same tendency.
Let us apportion labor and capital somewhat at random throughout the group system. In some places we shall have more of both agents than a static adjustment calls for, and in some places we shall have less of both. In some sub-groups we shall have more of one agent and less of another than a normal adjustment would give. If the proportions of labor and capital within a group are normal, and if there is an excess of both of these agents within the sub-group, the effect will show itself simply in the low price of the product of the industry. The respective products of labor and of capital, as these products are measured in kind, will be normal. Each agent creates the right amount of goods
within the group.
Where, on the other hand, there is too much of one agent and too little of another, a unit of the agent that is present in excessive quantity will create fewer goods than it should, and a unit of the agent that is present in deficient quantity will create more goods than it should. It is possible, under these conditions, that the price of the goods may still be normal; since, whatever their respective productiveness, the two agents together may produce a normal quantity of the goods. In apportioning labor and capital amoung different employments, we can seldom secure to a group, as a whole, the exact amount of productive power that static law calls for; and we can still less hope to secure for the labor and the capital that go to each sub-group the right amounts of specific power to create goods in kind. Nearly every sub-group will, then, produce either too much or too little of its commodity; and the price of its product will be either too low or too high. In nearly every sub-group there will be too much labor, as compared with the amount of capital, or too little. The specific power of one of these agents to create goods will be larger, and that of the other will be smaller, than static law requires. Under such circumstances, there will be movements in many directions; as there would be in a pond, if water were in some way put into different parts of it in an equally haphazard way. Nevertheless, the principle that governs such currents of water as would result is simple, though the currents themselves may be too complex for tracing; and the same thing is true of the movements of labor and capital.
Labor and capital move from separate impulses, since each agent seeks its own interest, and not the interest of the other. The motives of their movements are independent; but their movements are interdependent, since neither of them can move without changing the productive power of the other. As the result of all this, each one goes where it can produce the most. Whenever one is placed in such a position that any movement would diminish its productive power, it is under an inducement to stay where it is. Such an agent, however, may enjoy for the moment a productive power that is abnormally great; and, if that is the case, it is bound to lose this excess of productivity by reason of the movements of other agents. We shall see how this occurs.
Let us, at first, confine our attention to movements between the general groups, whose incomes are clearly derived from the sale of completed products. When the price of A”’, for example, is high, the whole group that makes it is well off; and when the price falls, this body as a whole becomes worse off. This change affects the product and the income of the group as a whole; but there is another change that affects the product and the pay of labor within the group; and that, as we have seen, is a diminution in the amount of this labor or an increase in the amount of the capital that is used in connection with it. In general, the returns obtainable by an agent of production depend, first, on the relation of the group in which it works to other groups and, secondly, on the relation of this agent to other agents within its own group. The agent that has the largest productive power of all is in a group the total output of which is abnormally small; and, further, this agent is present in the group in an unnaturally small quantity. Labor would have its largest wealth-creating power, if it were employed in making an article of which the demand exceeded the supply, so that the value of the article should be great, and if it were working in shops in which capital was over-abundant, so that the part of the product that could be traced to a unit of labor itself would be large. A single workman might virtually make, in a year, many pairs of shoes, because of the profusion of instruments placed in his hands; and yet the price of the shoes might be high, because of a shortage in the total supply. Here is the condition of all abnormally large productivity for this kind of labor.
It is clear that labor would rush to such a point from groups where opposite conditions existed. This influx would have two effects. It would first reduce the specific power of labor to create goods; for, as soon as there were more laborers in the shops,—supposing that the capital were adapted, in form, to the needs of the larger number of workmen,—a particular worker would be able to make a smaller number of them than he could make when labor was scarcer. Moreover, the influx of labor would mean a greater sum total of these goods for sale, and the price would fall. The goods attributable to a unit of labor would, then, already have been reduced in quantity; and they would now also be reduced in price. The specific product of the labor, as counted in value, would thus be reduced in two ways. Each man would produce fewer goods than he did before, and each unit of the goods would sell for less.
What, now, is the effect of such an influx of labor on the productive power of capital in this group? In one way it reduces it, while in another way it increases it; and it may end by leaving it not greatly changed. The more labor there is in the group, the greater is the specific power of capital there to produce goods. In this respect, capital steadily gains by the influx of labor. On the other hand, this influx means the enlargement of the total output of the industry, and a reduced price for its product. Here the capital loses. While there are more goods, the origin of which is traceable to a unit of capital, these goods sell for less than they previously sold for. Capital loses by the fall of the price of its product, though it gains in the quantity of its own specific product, as measured in kind.
It may be that, after the influx of labor, the capital of this sub-group is slightly more or slightly less productive than it is in other industries. The variation from the normal productivity will, however, probably be far less than it was in the case of labor. The original hypothesis assumed that capital was abundant in the group and also that the price of its product was high, by reason of a small total output. Under these original conditions, a unit of capital would produce few goods; but, as the price of the goods would be high, possibly the power of a unit of capital to produce
value might not be very abnormal. When the new labor came into the group, the power of the capital to create value might not greatly change, for it would be diminished by one influence and increased by another. The enlarging power to create goods might, therefore, allow a unit of capital, in the end, to create about as much value as it did at the outset.
The power of labor to create value would, then, have been lessened by two influences working together, since a unit of it would create fewer goods, while the goods would bring smaller prices. The specific power of capital to create value would, on the other hand, have been reduced in one way and raised in another. If, as we have said might be the case, the value-producing power of capital, after the transfer of labor had been completed, were either more or less than it was elsewhere, there would be a slight movement of capital to or from this group. This movement would quickly make the productive power of this capital about normal. If capital were flowing into the sub-group, this movement would reduce the productive power of capital in the two ways that we have described—by diminishing its power to create goods, and by bringing down the price of the goods. It would, however, have very little effect on labor; for, while it would slightly increase the total output of goods and would reduce the price of them, it would increase the quantity of goods specifically traceable to labor.
It is clear that movements of this kind have the power to correct disproportions in the quantities of labor and capital existing within the groups. We selected for study an industry in which the productive power of labor was at its maximum—where labor produced much in goods and goods were high in price. Such a group exercises the largest attractive power over labor. The group from which labor would be most strongly repelled would be the one in which these conditions were exactly reversed—one, namely, in which there should be much labor relatively to capital, a large aggregate of goods produced and a low price for the goods. Here one man would produce few goods, and the goods would be cheap; so that the men would be under the greatest inducement to move away.
In noting the manner in which a disturbed pond of water acquires a level surface, we do no harm by supposing that the identical water of the highest wave flows into and fills the deepest trough. So, in the case of the disturbed sub-groups, we may suppose that labor rushes from the point where it has the smallest productive power to the point where it has the greatest. If, for local reasons, some of this particular labor stops on the way, it does not fail to cause an equal amount of labor to move to the point where the great deficiency existed; and the effect is the same as though the identical men in the group where the labor had the smallest productive power made their way directly to the group where it had the largest.
In the group from which the labor moves the effects are, of course, exactly the opposite of those which are seen in the group to which it goes. We said that at first the group where labor was in excess created a large output of goods and got low prices for them. The productive power of a single unit of labor was low, however, because it produced few goods and because the goods did not sell well. With every unit of labor that departs from this group, the remaining labor becomes more productive of goods and the goods sell better. The labor thus gains doubly in its specific power to produce value. The capital in this group loses power to produce goods, but the goods gain in value; and, although these influences may not accurately offset each other in quantity, and some small movement of capital to or from the sub-group may still take place, the amount of this movement, as compared with the movement of the labor, is slight. The changes that take place in this sub-group are, in short, the antithesis of those which take place in the group that we first described.
Two influences, then, determine the specific productive power of labor and of capital in a group. One of them is the price of the product, and that depends on the total amount of it. Another is the fraction of the product that is attributable to a unit of labor or to a unit of capital, and this depends on the relative amounts of labor and capital within the group. Where one agent—say, labor—is in excess, the two influences work together to reduce the amount of it; while, in the case of the other agent, capital, the two influences work in opposite ways.
Three possible conditions render an agent comparatively unproductive in the group where it is located: (1) It may have a low power to create goods, while the goods are of normal value; (2) it may have a normal power to create goods, while the goods are abnormally cheap; or (3) it may have a low power to produce goods, while the goods have a low value. The first condition is corrected by a change in the relative quantities of the labor and the capital in the group, leaving the gloss output of goods unchanged. If labor is the agent that is poorly paid, some labor may move out of this group and some capital may come into it. The second condition is corrected by a change is the absolute quantity of goods produced, leaving the relative amounts of labor and capital essentially unchanged. Both labor and capital may move out of the group, and the price of the product may rise. The third condition is corrected by changing the proportionate amounts of labor and of capital, and also the total amount of goods produced. If labor is the poorly paid agent, some of it may migrate from this industry to others, while no capital migrates to it. The whole output of this industry will then be smaller, the price of it will be higher, and the contributory share of a unit of labor, as compared with that of a unit of capital, will be larger.
Three opposite conditions make an agent exceptionally productive: (1) It may have a large power to create goods, while the goods are of normal value; (2) it may have a normal power to create goods, while the goods are abnormally dear; or (3) it may have an exceptionally large power to create goods, while the goods are unnaturally dear. Movements the reverse of those just described correct these conditions. Whenever the price of goods is normal, while one agent is abnormally productive, the other agent must necessarily be abnormally unproductive. The one agent will, therefore, move to the group and the other will move from it at the same time. One influence tends to raise the price of the goods, while the other tends to lower it. These influences in time neutralize each other, and the only effective change is in the specific powers of each of the agents to produce goods. This is the adjustment that the conditions required, and it ends by making both of the agents normally productive. Where the value of the goods needs to be changed, with no change in the relative powers of labor and of capital to produce goods, the adjustment is effected by an influx or an efflux of labor and capital moving together. Where value and comparative productivity have both to be changed, in order to bring the value-creating power of labor and of capital to a natural level, the adjustment is effected by the process that we described at the outset. One agent is moved out of or into the group by two forces which work together, while the other agent is affected by two forces that work against each other. If the two forces work concurrently in the case of labor, the sum of them expresses the amount of force that is impelling labor to or from the group. If the two work against each other in the case of capital, the difference between them measures the resultant force that acts on that element.
If we were actually to apportion labor and capital at haphazard among the different industries, there would be a few of them into which both labor and capital would flow, in quantities that would be about uniform; there would be a few industries from which labor and capital would flow, in about uniform proportions; and there would be a few into which only one agent would go, and others from which only one agent would go. A great majority of the industries would require some compounding of these adjustments—would demand that one agent should go to them or from them in large quantities, while the other should go from them or to them in small quantities. Every movement that would thus take place would be brought about through the action of the universal law of variation that we have described. The greater the amount of one agent that coöperates with the other, the smaller is the power of a unit of it to create goods; while the greater the amount of goods produced, the smaller is their value. Agents that are perfectly mobile would quickly reach a state of uniform productivity in all industries, by the action of these influences.
We have spoken of the movement of labor and capital as though it were spontaneous, and as though labor, for example, went of its own accord from a place where its productive power was small to a place where that power was greater. But it is, in reality,
entrepreneurs who do the moving, and it is competition that makes them do it. Our theoretical assumption makes the competition of one employer with another active and certain; and unerring, therefore, are the transfers of labor and capital that result from the competition. In every group in which the productive power of labor is slight, low wages only can be paid; and labor can be lured away from this group by the offer of the slightest advance over the rate that it gets. In our ideal hypothesis, there is no friction to be overcome: five cents a day of extra wages will take labor out of one employment and into another, and a tenth of one per cent in interest will move capital.
In the industry where the productive power of labor is great, the actual pay that the men are getting depends, however, on the productive power of labor, not in that group, but in society as a whole. There is a general rate of wages; and employers in this group can have laborers for what it costs to get them out of the other groups, in which their productive power is smaller. By doing this they can make a profit. For an interval they can hold the difference between the pay of labor in the general market and its earning power in the industry into which they bring it. This is, however, a vanishing difference; for, as competition does its work, it slips through the employers’ fingers. The eagerness of different employers to get a part of this profit makes them strive to anticipate their competitors in enlarging their working forces; and the enlargement goes on till the local product of labor is equal to its pay, and there is no further profit to be gained from this source.
The movements of capital are brought about in the same way, by the action of
entrepreneurs. Competition does it all; profit is the universal lure that makes the competition work; and the ultimate goal of the whole movement is a no-profit state. As the movement proceeds, each bit of
entrepreneurs’ gain dwindles to nothing. A static state offers no inducement to further movement; and that is saying that it offers no profits, for profits are always an inducement to such movements.
*36 When, therefore, we say that the productivity of labor is high in one industry, and that other labor flows into it, what we mean is that the
entrepreneurs in that sub-group are getting the benefit of the high productivity. They are making a profit; and the competition of other
entrepreneurs moves the labor into this sub-group, till labor produces here no more than it gets—that is, till profit is annihilated.
Any unbalanced state of the group system gives profits to some one. Too much labor here and too little there, or any other of the unnatural conditions that we have just described, means that somewhere labor creates more than, for the moment, it gets. Its pay is fixed by its general or social productivity, but here and there its productive power is above this general standard. The profit that is here to be had is the lure to the movement that adjusts the local productivity of the labor to the general standard.
The adjustment that determines how many units of capital are to be used in one general group, in connection with a given number of units of labor, is not the only one that has to be made, since every sub-group needs to get its normal share of the labor and the capital of the general group to which it belongs. This secondary adjustment is made by the same play of forces that makes the more general apportionment between the groups in their entirety. In every completed commodity there is a distinct element that constitutes the specific product of each of the sub-groups that have contributed to the making of it. The product of the A’ sub-group is, indeed, merged and lost in the finished article, A”’; but it is a definable element in that completed article. It is the difference between A and A’. A itself is the product of the lowest sub-group in this series; and the product of the second sub-group is the utility that it imparts to A in converting it into A’. So the specific product of the A” sub-group is, not the article A” in its entirety, but the single utility which, when imparted to A’, converts it into A”. With this understanding of the nature of the specific products of the different sub-groups, we may apply to them the whole statement that has been made concerning the more general groups. The term sub-group may, in fact, be substituted for the term group in the entire foregoing argument.
In movements that take place within one general group a certain steadying effect is secured by the necessity of preserving a uniform flow of the passive capital-goods that are ripening into the completed products. A nice adjustment of the raw materials in different stages of advancement is always needed. There is a relation to be maintained between the quantity of A and the quantity of A’, and between that and the quantity of A”, etc. For every A”’ that leaves the series in a day, one A” must become A”’ in a day; also one A’ must become A”, one A must become A’, and one new A must be created. This does not imply that there are necessarily in the series as many A’s as there are A’ ‘s, as many A’ ‘s as there are A” ‘s, etc. On the contrary, unless it takes the same number of hours to prepare an A as it does for that A to become A’, the number of units of these different passive goods that are constantly to be found in the series will be unequal. If it takes ten days to make an A and twenty days to convert an A into an A’, then a uniformity of rate in the general onflow requires that there shall be constantly in the stock twice as many A’ ‘s as A’s. Let there be ten A’s in the stock, with a new one added every day; and let one that has had ten days of ripening be passed on to the A’ group. Here it requires twenty days for further ripening, before it can be passed on to the A” group. If there are twenty A’ ‘s constantly on hand, one of then, can be passed on every day, in the shape of A’, to the following group; but, if there are only ten of them taking one away daily must mean taking it away in an unripened state.
If, for example, trees in the forest require twenty years to fit them for cutting, and if one row is planted and one row is cut every year, there must be twenty rows in the forest. The same amount of cutting could be done from a forest consisting of ten rows, if the trees ripened in ton years; and even a single row would do, if the maturing took only one year. Again, along the course of a river which is flowing steadily, the same amount of water passes each point in a minute; but, where the movement of the water is rapid, the stream may be narrow and shallow; while, where the flow is slow, it has to be broad and deep to give a uniform flow. Accordingly, it is clear that, if converting A into A’ takes ten weeks and converting A’ into A” takes twenty weeks, there must be twice as many units undergoing manipulation in the A” group as there are in the A’ group, in order to give a constant product.
The very existence of circulating capital, or of that which is in the form of passive capital-goods, is, in the strictest logic, the result solely of the time that the transformations of matter require. If we could conceive of them as instantaneous, there would be none of this capital; if, the moment that a raw element in nature were touched by a worker, it passed through all the steps of its ripening and emerged as a finished product, it would be impossible to find passive capital-goods on hand. If the ripening, without being instantaneous, were very rapid, there would be few of such goods. But with slow ripening there are many.
Economy, then, in the use of capital requires that there shall be an accurate adjustment of the relative quantities of passive capital-goods in the different groups of each series; and this adjustment is primarily determined by the comparative rapidity with which the ripening process takes place in the different sub-groups. When the correlation is complete, all the labor and capital of each entire group exactly replenishes the waste of tissue of circulating capital that takes place when a finished article—say, an A”’—passes out of the hands of organized society and goes to some individual to be used up. There is then no industry wasted in making things to be stored, for there is just enough of the A” trade to replace the A”’ that is taken for consumption.
This concerns only the different quantities of circulating capital in the different sub-groups of one general group, but there must be at every point a similarly nice adjustment of fixed capital to circulating capital. It is uneconomical to whittle two blocks of wood at a time with one knife, and it is equally bad to use two knives at a time whittling one block. Increase the quantity of circulating capital used in connection with a given amount of fixed capital, and the former variety will create a smaller and smaller product per unit. Having plenty of tools to work with and no material to work on, the product is nothing. With very little material and a profusion of tools, the material is worked up very quickly; but the gross amount transformed in a year is small. Every part of this little stock of raw material is, under such conditions, of great consequence. Restate the stock by one-tenth, and you take much from the daily product of the industry, as a whole; add a tenth to the stock, and you add much to the output. The
specific productivity of a small amount of circulating capital thus used in connection with a large amount of fixed capital is very great. It is possible, evidently, that a shop may have on hand too little raw material to give adequate scope to its machinery; and then the machines produce too little, while the materials produce relatively too much.
The product of the circulating capital per unit grows smaller, as the quantity of it is increased. At first, it is as though there were one log waiting to be squared into timber by the axes of a dozen workmen, who work at a great disadvantage for lack of free play for their tools. A second log, drawing off six workmen with their tools, would effect a very large increase of the product. Though the six men cannot hew one log into shape quite as rapidly as can twelve, they can do it nearly as rapidly; and so the advent of the second unit of raw material, the second log, may very nearly double the product of the entire industry. This increase in the output represents an enormous proportion—several thousand per cent a year—of the amount of capital embodied in one log.
In this condition, any increase of general capital, if it is to have its best effect, must take the shape of enlarging the quantity of passive capital-goods in use. Doubling the amount of them the second time will vastly increase the general product; though, in the nature of the case, it is not likely to increase it as much as did the former doubling. The active tools now have much freer play; but, if we continue increasing the raw materials, there will certainly come a time when a further increase of them will do less in the way of enlarging the product than will some enlargement or improvement of the active tools. This means that capital embodied in passive goods, on the one hand, and that embodied in active goods, on the other hand, will have reached an equality in their specific productivity. A unit of circulating capital will then be worth as much to the
entrepreneur as a unit of fixed capital. No more material in the left hand than can be profitably manipulated by the tool in the right hand, and no more tools in the right hand than can work advantageously on the stuff that is held in the left—these are the principles of adjustment. The organized worker, society, follows the common-sense rule that a man would follow in fixing the amounts of the two kinds of capital; but, in the case of society, this means a delicate and elaborate adjustment through all the minutest details of the production of every article. Ore and mining machinery, wool and the mills that are to manufacture it, logs and the saws that are to cut them—all must be proportioned in quantity; and these are only a few simple and crude cases of a coördination, the minute and delicate detail, of which we cannot stop to indicate, which runs through every occupation that men pursue. In the different sub-groups of each series, the circulating capital, in the shape of materials in different stages of advancement, must be present in certain well-adjusted proportions; and the fixed capital must also maintain a certain relation to the circulating capital. Crowding the shops at A’ with tools and stinting those at A”, would obviously be uneconomical. But within the general groups these apportionments are easily made.
Land is one of the active goods, and it must be adjusted in quantity to the other goods of the same general class. There must not be in any industry so much land that it cannot be advantageously used in connection with the buildings, tools and machines that are there combined with it. Grant, for example, that in the production of A in our table there is much land, in proportion to the other capital-goods, while in the sub-group at A’ there is comparatively little. The specific productivity of land itself will then be larger in A than it is in A’, and there will be an inducement to use less land in the creating of A and more in the transmuting of A into A’.
The natural and accurate expression for the method by which land apportions itself among different groups and sub-groups of the economic system is, that land shifts itself freely from point to point in the system, until it attains equalized productivity. The meaning of this term, equalized productivity, will require special attention, when we reach the point at which we shall study the rent of land.
*39 It does not mean that one acre is as productive as another, or that one man will produce as much as another, for there are differences between men and likewise differences between acres. Yet there is such a thing as a unit of land, just as there is such a thing as a unit of labor. As the apportionment of labor throughout the groups and sub-groups of industrial society gives a uniform productivity per unit, so the apportionment of land gives uniform productivity per unit of land. We shall see in time just what this means, in the way of the adjustment of land to various other producing agents. What we wish now to note is, that land is economically mobile. It is the exception to the rule that capital-goods, as such, cannot be taken out of one industry and put freely into others. Capital, as we have seen, is absolutely mobile, while capital-goods are usually not so. Land, however, is mobile; and what we have been saying about it shows that it cannot develop its full productive power, unless it moves freely from industry to industry till exactly the right quantity of it is found in each one. There is not the full and normal amount of permanent capital in the form of this capital-good, land, so long as one industrial group has more and another has less than it ought to have. The starting-point in a really scientific study of land and its rent looks upon this agent of production as a universal producer, and thus as helping to create every kind of commodity. It looks upon the land as apportioning itself, by a nice adjustment, among all the sub-groups in industrial society. Unscientific is that limited view which, in the study of rent, holds within the field of vision only so much land as, in some mysterious fashion, is given over to creating one particular kind of product. The rent of land is not the result of the price of wheat: it is the result of the power of land to create wealth in a myriad of different forms.
The general law of varying productivity that we described in an earlier chapter determines, first, how much circulating capital shall be combined with a given amount of fixed capital. With the amount of fixed capital given, more and more units of the circulating kind will produce less and less per unit; while, with the amount of circulating capital given, more and more units of the fixed kind will produce less and less per unit. This law operates in so apportioning the whole amount of capital, as between the fixed and the circulating kinds, that a unit of one is as productive as a unit of the other. Within the fixed capital, too, an adjustment has to be made. Land is one form of such capital; for it contains a portion of the entire fund that is embodied in active instruments and operates to impart utilities rather than to receive them. This part of the fund is subject to the law of varying returns. If you combine more and more land with a given amount of fixed capital in other forms, you get less and less product per unit of land. If you combine more and more fixed capital in other forms with a given amount of land, you get less product per unit of the other capital. These two principles, if they have their full effect, result in combining everywhere the right relative quantities of land and of fixed capital in other concrete shapes.
When we study the whole amount of capital in one industry, as compared with the whole amount in another, we have on our hands an elaborate adjustment that introduces considerations of value. What any one kind of business produces, depends on the price of its product. The law of varying productivity, to which we have just referred, does not, however, primarily involve questions of value. In considering it, we were talking about the power of different kinds of capital to produce
goods, as such. With a certain total amount of capital in one industry, that total amount has to be apportioned among the different kinds according to a law of productivity. Too much fixed capital, combined with a given amount of circulating capital, means that the power of a unit of fixed capital to produce
goods is less per unit than it should be. If a shoe manufacturer, for example, has made such a misadjustment of his working funds, he is getting fewer shoes in a year than he might get, and he can increase the output by correcting the error. The law of varying productivity, in all its applications, means primarily that, if we put one productive agent in increasing quantities into combination with another, the increasing agent will produce, in commodity, a smaller and smaller product per unit. If, then, within any particular sub-group—say, A’—we add land, unit by unit, the land will produce less and less per acre in the way of concrete things. Thus far no consideration of the value of the goods is introduced.
We said, however, that land apportions itself among the different groups and sub-groups, until it is as productive in one as it is in the other. It has to be moved freely from sub-group to sub-group until this equality is attained, and the same is true of artificial capital and of labor. When we are studying the combination of these things within a sub-group, the only thing that we have to note is, what part of the sub-group’s product—estimating the product only in kind—is imputable to each agent. An
entrepreneur in the shoemaking business, for instance, has occasion to know, first, how many more cases of shoes he can make in a year if, without changing his capital in quantity, he gets a few more men in his mill. Again, he has occasion to know how many more shoes he can make in a year, by adding a few thousand dollars to his general capital. Also he needs to know whether he can the better increase his product, counting the product always in shoes, by using more fixed and no more circulating capital, or
vice versa. When the fixed capital is to be increased, he needs to know whether he will turn out more shoes in a year, if he uses more land without enlarging his buildings, machinery, etc., than he will if he keeps his present area of ground and enlarges his mill. Within the sub-groups, or specific industries, productive agents have to be coördinated with each other—the quantity of each kind has to be determined; and the first thing that determines this coördination is the specific power of each agent to produce goods.
In the end, the whole social supply of the several productive agents has to be apportioned among the different industries, so that the right quantity of each one of them may enter into each sub-group. Into this adjustment, moreover, value enters; for the value of the shoes that are attributable to a final unit of land helps to determine how much land shall be used in the shoe-business. The power of each agent to produce a commodity is one factor and the value of the commodity is another factor; while the working of the two together determines how much of each agent there shall be in each sub-group. Each general agent of social industry is, in short, subject to a law of uniform final productivity—measuring products in value, and not merely in kind—in all the different uses to which it is put.
entrepreneurs who are making no such net gains are at liberty to enter it. May not all
entrepreneurs be making the same a rate of net profits, and making them at the same time? May there not be a condition of equal and universal profit? Clearly not; for this would be a universal invitation to capitalists to become
entrepreneurs and, is, such, to bid against each other for labor and capital till the profit should everywhere vanish, by being made over to laborers and capitalists in the shape of additions to wages and interest. The pay of each of these agents, therefore, under perfectly free competition, is bound to stand at the productivity level.
entrepreneur, in changing the amount of labor or capital in his establishment, is not greatly affected by a slight change in the value of the product that may result from his action. A concurrent increase in the capital of a whole sub-group would lower the value of its product, but an increase wade by one employer might not do this in any appreciable degree. It might chance that the entire capital of a sub-group would be normal in amount, and that some employers would have too little and others too much. An employer who had too little capital, in proportion to the labor that he employed, would not be deterred from keeping all his men and hiring more capital by the fact that he would make his product cheaper and one who had too much capital and too little labor might not be deterred by the same consideration from imaging all his capital and hiring more men. If this happened often, the whole sub-group would suffer from lowered prices and would reduce its labor and capital in an all-around way. It is clear, however, that it would not happen; with prices normal, the man with a relative excess of labor would find his marginal labor not earning its pay, and would discharge some part of his force; and the man with an excess of capital would, for a similar reason, part with some of that. The labor discharged by the first employer should, in theory, go to the second; and the capital released by the second employer should go to the first. Such adjustments within a sub-group are more easily and surely made than are adjustments between the different groups and sub-groups. The practical fact is that each sub-group attains, by experiment, a knowledge of the normal ratio of labor to capital which in its own specific industry will give the best results. This ratio then tends to remain more or less fixed. Enlargements and reductions of output are afterward made by increasing or reducing labor and capital together, and the motive for the increase or diminution is the state of prices. When the produce of the sub-group is dear, its facilities for production and its operative force are enlarged together.
same series. There is nothing to prevent labor or capital moving from A’ to B” or to C”’; and, if it does so, it is under the twofold influence of price- and goods-producing power that has been described in the foregoing pages.