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 Unit for measuring Industrial Agents and their Products
We are ready for the supplying of the last detail that is necessary, in order to make the statement of the law of wages and interest intelligible. There is before us the picture of social labor coöperating with social capital. Both are governed by the law of diminishing returns, and their earnings are fixed by the productivity of their final units. The labor in the case is a permanent force, and the capital is a permanent fund. Each exists in an endless succession of concrete forms, which change whenever the quantity of either agent changes. Particular increments of capital consist in distinguishable elements in concrete instruments, rather than in particular instruments in their entirety. Both capital and labor have to be apportioned, by a nice adjustment, among all the groups and sub-groups of society, if either value, wages or interest is to be normal. Every separate increment of labor and capital has to be apportioned in the same way and by the same play of forces. Wages, then, conform to the product of the final increment of social labor and interest to the product of the final increment of social capital. Both of these incomes may be translated into the form of rents of concrete producers; and these, like all products, are elements in determining values.
This statement will be complete enough to reveal all the general and essential facts of distribution, when we know how we may measure labor, capital and their products. But we need, evidently, a universally usable measure of values.
In the statement of the law of diminishing returns, as applied to capital, it was said that the successive units of capital produce less and less. Provisionally, the “doses” of capital are measured in terms of money;
*54 but it is necessary to know exactly what the money ultimately represents. When, in our illustration, it is assumed that the capital of a society increases from ten thousand dollars to a million, does this mean, at bottom, that the capital comes to represent a hundred times as much labor as it did before or a hundred times as much personal sacrifice? If it means either of these things, it is still necessary to find some way in which to express a measurement of labor or of sacrifice.
Moreover, when what we are measuring is social capital and the social product, it is clear that we must have some unit that will give us absolute sums. In a way, the capital of a group might be measured by comparing it with the capital of another group; but this process would never give us the total capital of the whole industrial system. So, also, might the product of one group be compared with the product of another; but that would yield no sum total of products. Interest is a ratio between the sum of the products of all the separate capitals and the sum of the capitals themselves. For these purposes,—and for more than it is now necessary to enumerate,—a universal unit for measuring economic values is necessary, if the law of final productivity is to have scientific exactness.
The entire study of wealth is, indeed, meaningless unless there be a unit for measuring it; for the questions to be answered are quantitative. How great is the wealth of a nation? Such inquiries demand that the thing which is studied shall be measured in units of some kind and that the result shall be stated as an absolute amount. Mere reciprocal comparisons give no sums. The commodity
A may be regularly exchanged in the market for
B, and the two together for
C; but that fact gives us no intimation as to the total value of the three. Ratios of exchange alone afford no answer to the economist’s chief inquiries.
The actual wealth of a community consists in heterogeneous things. If they are ever added together, it must be because there is some one element present in all of them and this element is absolutely measured. Thus, unlike things can be weighed and their total weight can be stated in a sum, because they all gravitate toward the earth and exert a force on whatever resists their movement. A unit of weight may, therefore, be applied successively to many such apparently unlike things, in order to measure one element common to all of them. In like manner, there is one element that is common to all the diverse things that appear in the inventory of social wealth. In every commodity there is a power of a certain kind which can be measured.
Amounts of wealth are usually stated in money: thus, we say a man is “worth a million dollars.” This, however, does not mean merely that he could sell all he has for a million of our bulky silver coins. The thought in the minds of the men who use money as a standard of value runs forward to the power that resides in the coins. They will buy goods or they will set men working. There resides in each one of them a certain amount of influence on human well-being. The rich man in the illustration wields a power of this kind, and it is a million times as great as that which resides in one of the coins. The intuitions that are at the basis of this popular mode of speech are nearer to absolute truth than much of economic analysis. They discern a power of things over men, lay hold of an available unit of that power, apply it to the diverse goods and state the measurement in a sum.
Effective utility is the name by which this potency of goods will here be designated. It is the power that a particular unit of a commodity has to change the status of its possessor and to promote him in the scale of well-being. Give to a man a barrel of flour and you make him by so much better off. You do not save him from starvation, though he may live for a time on the food that you furnish. If you had not given him the flour, he would have got it by some sacrifice; and what you have done is, in effect, to save him from the sacrifice. This effect measures the value of the flour. Take away a barrel of flour that the man now has, estimate the real detriment that he suffers, and you measure the effective utility in another way. He must have food and will get it by a sacrifice of some kind. He may not fully replace the loss of the flour; for he may live on maize, and in that case the utility of the barrel of flour is gauged by the cost of the maize and the unsatisfied want of a better quality of food.
It will appear that this power of substituting one thing for another, in repairing the injury caused by the loss of that other thing, plays a very comprehensive part in determining values. In the case of many articles the substitute resorted to is quite different in kind from the thing that it replaces. Having parted with one means of well-being, the man proceeds, as best he can, to make himself as well off generally as he was before. If he is to gauge the real importance to himself of a particular saddle horse, he may, perhaps, do it by ascertaining how many hours he must work in order to get enough in the way of boats, guns or a tennis outfit, etc., to afford as much pleasure, as he can get from the horse. The mental process in the case is, first, a balancing of one pleasure as against another and, secondly, a measuring of the substituted pleasure by its cost. By the two operations the owner of the horse determines how much it is effectively worth to him. The final measure in the case is one of pain; for the ultimate injury that is done to a man by depriving him of any one means of pleasure, resolves itself into putting him under the necessity of enduring a certain amount of personal sacrifice in the effort to secure something that will effectually replace it.
It is this process, in which men are continually engaged, of determining how important it is to have one thing by ascertaining how much it will cost to get a very different thing, that reveals one special significance of a study of effective utility. Men pursue happiness in the generic, and the form in which it may come is secondary. The measurement of well-being, thus regarded in the abstract, is an occult but dominant fact in exchanges. A man may have a monopoly of one means of promoting happiness, yet he cannot set his own price for his wares. That is fixed by the cost entailed on the community by the effort to secure, by any means whatever, an equal quantity of happiness. With many possible ladders to Elysium, the toll for the use of one is limited. Effective utility, whatever be its form, is measured in the market in a purely quantitative way.
It is measured by society, as a whole; and in this lies the significance of the phrase, “measure of effective
social utility,” which, in earlier studies by the present writer, has been used as a synonym of value. It was on the word “social” that emphasis was laid. The price of a thing gauges its importance, not to one man, but to all men, as organically related to each other. The efficient serving power of an article varies in the case of different individual users, but to society as a whole it is constant. A civilized man is a specialist. He produces unit after unit of one kind of product and hands them over to society. Into the mysteries of distinctly social psychology, therefore, the measuring process that gauges value must be traced. Essentially simple in nature is the operation—simpler even than the act of the man who decides how important a horse is to himself by seeing how long he must work to get a boat and a tennis outfit.
In this connection it is now necessary to give definiteness of meaning to the word “social.” There is such a thing as a unit of social improvement or detriment. It happens, however, that the detriment is more available for measuring purposes than is the improvement; and so the final unit of value is the sacrifice entailed by a quantity of distinctly social labor. Society, in short, sets value upon a thing by ascertaining how much work is necessary to replace it or to get an equivalent for it.
In its simplest form, division of labor means that one kind of commodity is carried to completion by one man. He is a specialist, to the extent of being a maker of entire shoes, or clocks, or tables. Working on raw material taken from nature, he hands it over to the community in condition for final use. But the differentiating of labor has, of course, gone far beyond the point where any man begins the making of a thing and completes it. Most work is now done by highly complex groups, and the individual’s function is limited to a minute but distinguishable part of the operation. The principle that we are studying is, however, not affected by this fact; and we may gain clearness by first examining a society of a more primitive type, in which it may be assumed that whole articles are made by individual workers. As such goods leave the maker’s hands day after day, in a continuous supply, they seek purchasers. No one man will take many, but society will take them all. We may even assume, without vitiating the principle to be studied, that every man in the community takes at least one. That each class of goods
is made in great numbers by one man and
consumed singly by many men, is the essential thing to be noted.
It is the users of an article who can best gauge the well-being that it gives them, and they make the estimate continually. Shall I buy this article? Will the paying for it trench on my income and make me go without something that is of greater importance? Is this article or some other of equal cost the more desirable? Such comparisons of services rendered by different articles are going on in the minds of the many consumers who constitute the purchasing public. These comparisons alone give us only rude ratios, not sums; and the ratios are different in the case of all the different members of the community. If each man could measure the usefulness of an article by the effort that it costs him to get it, and if he could attain a fixed unit of effort, he could state the utility of a number of different articles in a sum total. Similarly, if all society acts in reality as one man, it makes such measurements of all commodities, and the trouble arising from the fact that there are many measurers disappears. A market secures this result, for society acts as a unit—like an individual buyer.
In measuring well-being human sensibility is under a limitation which is akin to that under which the eye finds itself in measuring light. It is possible to pronounce two lights equal; but it is not possible to tell, by the mere effect on the eye, how much brighter one light is than another. It is possible to say that two pleasures are equal, but not to say that one is just twice as great as the other. It is, however, practicable to determine when a pain and a pleasure offset each other; and if we can compare many kinds of pleasure with one kind of pain, we can, as a result, both compare pleasures with each other and obtain a sum total of many different ones. If a man knows that he would walk a mile for one gratification, and that he would do this twice over for another, he has the means of knowing that the good afforded by the second is twice as great as that afforded by the first, and that the gain insured by the two together is an offset for three walks of a mile each. Something like this society does, but it does not do it thus crudely.
At the beginning of an attempt to measure wealth by labor, whatever be the method adopted, there presents itself the difficulty that wealth is created by work aided by instruments. There is capital in the case, and this is the fruit of a sacrifice termed abstinence. None of our material comforts are brought into existence merely by the unaided efforts of laborers. This difficulty may be surmounted by taking marginal labor as the test of cost. Let the capital of an establishment remain exactly as large as it is, but introduce a small supply of extra labor, and whatever of product is created by the addition is virtually due to labor only. A part of the supply of every article that is put upon the market may be said to be traceable to the presence of a final increment of work. Take a man or two out of each of the shops that produce this article, leaving the capital unchanged, and this increment of the product will cease to be created. Restore the men, but make no other change, and this marginal part of the product will reappear. This virtually unaided labor is the only kind that can measure values. Attempts to use labor standards have come short of success, because of their failure to isolate from capital the labor to which products are due. As earlier chapters of this book have shown, the product of marginal work is the virtual product of all work; and this fact enables us to disentangle all labor from the capital it uses, and to find what part of the entire product of the industry is distinctly traceable to it.
Work, moreover, consists of concrete acts of men; and these are as unlike in themselves as are the miscellaneous articles that are to be measured by them. Can we make one sum of the labor involved in cutting wood, in playing violins, in setting type, etc.? Adding the unlike acts that constitute social labor is, it appears, as difficult as adding the products that constitute social wealth. There is need of a pervasive element in the actions, and one that can be measured. Such an element can be found; for, as utility is common to all commodities, so personal sacrifice is common to all varieties of labor. There is service rendered to man, on the one hand, and there is burden imposed upon him, on the other. Social self-service—the act of mankind ministering to its own needs—constitutes the whole economic process. Man works on nature to make it useful, and experiences a painful reaction in his own person during the process. Improved nature then works on man, the consumer, and has a counterbalancing and favorable action upon him. If we can find the point at which the unfavorable reaction exactly counterbalances and measures the favorable one, we can then estimate pleasure in terms of pain.
Work becomes more costly to the man who performs it, as the hours of the day succeed each other. The burden of it is at first light, but becomes heavy. Burdensome to a nearly insupportable degree it becomes in the afternoon or evening hours of the really struggling members of the “submerged tenth” of society, while it is lighter at the end of the day’s work of higher grade. In all cases, however, it is the later hours that burden the laborer and test his willingness to continue in the shop. He may work for two hours with pleasure, for four with cheerfulness, for eight with submission, and for ten with incipient rebellion.
The actual number of hours spent in labor in a highly organized society is, of course, not left wholly to the choice of the individual. When working in companies, there is an advantage in beginning and ending together. The principle that determines the length of the normal working day operates, however, in spite of this fact; and it may be revealed by a study of simpler conditions. We will, then, for the moment forget that gangs of men are tied to the steam whistle.
An isolated worker is the user of his own products, and he naturally works each day till it does not pay to work longer. Additional product might be gained by prolonging the toil, but the advantage of having it could not compensate for the sacrifice of making it. The man is already tired, and he feels the confinement of his occupation. He wants both rest and freedom. Nature is luring him from the shop, and the comforts of his home are calling to him. His normal work-day ends when these calls have their way, and this occurs at the mordent when the gains and the losses of production are equal.
The gains that are due to the successive hours of labor diminish from the first onward, and the last product the man secures is the least useful of all. If he can work but one hour, he will create that of which the type is food, the life-sustaining things for daily use. If he adds a second hour, it will be spent in getting what still rates as a necessity. With more time available, he will add comforts to his list; and he may end with a positive luxury. In any case, it is the least of his gains for which he works last and hardest. Left to himself and nature, he must work during a part of the day to sustain life and he must refrain from working during a part of it for the same reason. Between the point of no-work, at which he would starve, and that of nothing-but-work, at which he would die from exhaustion, there is the point of balanced gain and loss. If he stops just there, the net gain from labor is at its greatest.
In determining whether it will pay to prolong work for an eleventh hour during each day of the year, the man goes through that balancing of one pleasure against another and that balancing of each pleasure against fatiguing work to which attention has been called. For the final hours of all days in a year the man will get a miscellaneous list of pleasures, and will decide whether the sum total of them offsets the sacrifice of almost three hundred final hours of labor. This is a difficult decision, but the man will make it; and in doing so, he will get a unit of final utility in terms of equivalent pain. We pursue no farther the analysis of the method by which, in the individual mind, it is decided whether it will pay to work eleven hours a day. We are safe in assuming that the man arrives at a judgment on this point. What we now wish to know is how society arrives at this judgment. Individual psychology is not a subject of our investigations; but the manner in which a psychological process in the individual gives a social result is distinctly included in our field of study.
If the duration of a working-day is measured on a horizontal line, and the gains and the sacrifices entailed by it are measured by vertical distances from that line, we may make a simple figure that represents the facts concerning a free and isolated laborer.
AB is the length of the day, while AC is the pain of the earliest labor, and BD that of the last. AE represents the gain secured by the first product, and BD that of the last. BD is, in fact, two coinciding lines, of which one measures the burden of the final labor, and the other the gain of the final consumption. The area ACDB measures the total sacrifice involved in the day’s labor; AEDB, the total gain; and CED, a surplus gain, representing the net benefit of a day of industry. All gains below the line CD are exactly offset by costs.
The man that we are studying is a society by himself: he makes things and he alone uses them. The line BD is his unit of value, which measures the effective utility of everything that he makes. Though AE may measure the absolute benefit conferred by the loaf that satisfies hunger, the real importance of having that loaf is far less. If this necessary article were taken away, the man would devote a final hour to bread-making, and would go without the article otherwise secured by that final increment of work. Destroy his day’s supply of food, and what he goes without will be luxuries naturally secured by the terminal period of labor. BD measures the utility of those luxuries, and it measures therefore the
effective service rendered by the supply of necessaries that are produced in an equal period of work. Any article on the line between E and D will have a true importance measured by BD; since, if it were lost, there would be diverted to the replacing of it some work that would otherwise secure an article having an importance measured by that line. As it is of no more real consequence to the man to keep one of these articles than it is to keep any other, BD measures the subjective value of each of them.
Of a society regarded as a unit the same is true. It produces for itself, and the burden of its final labor measures the utility of its final products, which is the same as the effective utility of any of its products created by the same expenditure of working time. Take away the articles that the society gains by the labor of a morning hour,—the necessary food, clothing and shelter that it absolutely must have,—and to make good the loss it will divert the work performed at the approach of evening, which would otherwise have produced the final luxuries on its list of goods. To society the net importance of the different grades of commodities is equal: take away one variety entire, and terminal labor will be made to replace it. The things otherwise produced by that final labor will be the ones really lost, and their utility is measured by the burden entailed in the creating of them.
If we arrange, as on the opposite page, a series of descending curves to represent the lessening absolute utility of the things consumed by a society, we shall get a representation of a social unit of value—a quantity that measures wealth in all its forms.
We now have a descending curve for each member of society. The goods indicated by the upper section of the several curves, between EE
v and the dotted line designated by the figure 1, are the most essential things used by society. They are to be treated as the product of the first period of the social working day, and the absolute service that they render to society is measured approximately by lines falling from EE
v, etc., to the line AA
v. These goods will differ in the case of different consumers; but, taken collectively, they may be treated as a social complement of goods of the highest importance. We will term them complement number one, including the society’s necessaries of life. Complements numbers two, three, four and five also are designated in the figure. The variety of the goods represented increases as the complements succeed each other; and that of number five, containing the luxuries, is very diverse. What is true of the isolated man is likewise true here. The effective utility of the different complements is uniform and is measured by the lines from DD
v to the line BB
v. Destroy any one of them, except the last, and society will replace it and go without the last. The burden entailed is, in short, always that of the final period of labor.
If we make the lines BD, B’D’, etc., numerous and contiguous, so that they fill the area BDD
v, this area becomes the measure of the absolute utility of the last social complement of goods consumed. It is the measure also of the effective utility of each one of the earlier complements and, still further, of the disutility of the labor that produces the final complement. It thus represents a social aggregate of sacrifice, and this is the unit that is most available for measuring all values. Everything that is produced by one hour of social labor, whether that labor be performed early in the day or late, possesses an effective social utility that equals the absolute utility of the final complement of goods consumed; and this, again, is counterpoised and measured by the sacrifice which all society undergoes in the labor of its final hour.
Single things are, however, in our illustration, produced by individuals and consumed by society in its entirety. The relations of man and society must, then, be studied. As applied to social complements of goods, the law is simple enough; since it is society as a whole that makes and uses them. A complement of the kind referred to comes from all men and goes to all men. The social organism gets each complement by labor, and measures the importance of it by the labor of creating the final complement. Collective labor secures and measures collective gain.
We noticed that the different complements of goods are of unequal absolute utility, since they minister to wants of varied degrees of intensity. Bread and the other necessaries of life are absolutely more important than jewelry and other luxuries; but in effective utility the complements are all on a par, since, if any one of them were destroyed, the result would be to make the community go without the last. In like manner, the periods of labor are of unequal degrees of absolute burdensomeness, since the last hour is the most wearying and irksome; yet they are all on a par in
effective burdensomeness, as will appear from a similar test. As we gauged the virtual importance of a thing to its owner by supposing that it were taken away and seeing how much worse off the man would thus become, so we may now estimate the virtual sacrifice involved in the labor of a particular hour by making it unnecessary and seeing how much better off the man would then be. If you supply by a gift the product that an isolated man usually makes in the first and easiest working hour of the day, you thereby save him the necessity of working through the last and hardest hour. You shorten the day by one hour, in supplying the product of any equal period; and the deduction is, of course, made at the latter end, where sacrifice is at its greatest. Similarly, if we could make nature supply gratuitously any one of the successive complements of goods that enter into the consumption of society, the effect would be to shorten the social working day by the omission of the most wearying and irksome period. The effective disutility of all labor is, it thus appears, gauged by the absolute disutility of the concluding work of the day.
It follows that, in the case of an isolated man, we may measure the subjective value of goods by the mere duration of the work that creates them. All goods made in an hour are equal in effective utility and all hours of labor are of equal effective disutility. Destroy the product of an hour’s work, and you injure the man by a fixed amount; make any hour’s work unnecessary, by making nature freely supply what is produced in that period, and you benefit the man by a fixed amount. Unit of product and unit of labor are alike represented by the line BD of the diagram. The product of two hours’ work will always be of just twice as much subjective value as is the product of one.
In the case of society as a whole, the values of different complements of social goods are, in like manner, measured by the mere duration of the collective labor that creates them. The effective sacrifice entailed by labor varies directly as its duration, and the effective utility of products created in different parts of the day varies in the same way. The unit of utility and of disutility is the area BDD
v. In the subjective valuations of society, as an organic whole, the product of two hours’ labor is always worth just twice as much as is the product of one. Mere labor time is an accurate gauge of the values of different complements of goods.
Is it also an adequate gauge of the values of different articles that enter into the complement? Here we introduce a complication. Neither the pain nor the duration of labor will now serve our purpose. The essential feature of the valuation of a complement, in its entirety, is the fact that the same collective personage creates and uses the whole of it. But when a man creates an article and makes it over to society, the condition changes; for he experiences the burden of the production and society gets the benefit. The final disutility of his labor then stands in no connection with the final utility of society’s goods. Though the social organism, as a whole, will work till what it gets offsets what it suffers, will a man also work till what society gets from him offsets what he suffers? Obviously, when the enjoying falls to one party and the suffering to another, there is no offsetting in the case. There is, therefore, no equivalent established between the disutility of such work and the utility of its product.
Yet there is an equivalent between the man’s sacrifices and his own enjoyments. The pain that he undergoes in making his own product is a payment for other men’s products, for it is the personal cost of what he gets. In like manner, the pain that all other men suffer in making products for him represents the cost to them of what they get from him. Between cost and gain there is still an equivalent, and it will furnish us a unit for appraising specific commodities.
If A makes the article W, B makes X, C makes Y and D makes Z, and if each gets and uses some part of each product, we have a miniature society in which the relations are clear. A sells to B, C and D; and the effective social utility of W is measured by the pain undergone by B, C and D in creating, in the final period of the day, articles in exchange for it. If money is used in the transactions, and if the price of W and that of X are equal, it is because the last unit of the supply of each commodity, as it is made over to the miniature society for consumption, imparts to the society as a whole a uniform addition to its enjoyments. That addition is in each case measured by the pain of working through the final period of the day in order to get it. Price is, then, an indication of the
social cost of acquisition of different commodities.
Back of the figure ABCDE, which represents the sacrifice, the gain and the surplus of benefit realized by one laborer in a working day, let us place a series of similar figures, setting forth the same facts for each member of our miniature society.
The curves ascending from C, C’, C”, C”’, C
iv and C
v represent the increased cost entailed by the labor of successive hours in the case of all the men. The curves descending from E, E’, etc., show the lessening gains afforded by different increments of things consumed. D, D’, D”, etc., are points of equilibrium of gain and loss; and the lines descending from D, D’, D”, etc., to B, B’, B”, etc., measure sacrifice entailed on all society by its final period of labor.
If the figures were multiplied in number and were so drawn that the lines of one should be contiguous to the similar lines of the other, then the course of the ascending curved surface that follows the lines CD, C’D’, etc., would indicate the increased costliness of the work of all society, as the hours of labor in a day succeed each other; and that of the descending surface ED, E’D’, etc., would represent the diminishing utility of all things consumed. The volume between these curved surfaces and the vertical plane CC
v would measure the total surplus realized by society as a whole in consequence of its work. The area of the vertical plane BDD
v expresses the pain suffered by society as a whole in the final period of daily labor,
and this is this ultimate unit of value. So far as the selling price of a thing corresponds with labor of any kind, it corresponds with the terminal labor that society, the consumer, puts forth in order to get it. If it is as anxious to have more of one product as it is to have more of another, it will be as willing to add a minute to the length of its day in order to obtain the one as it will in order to get the other. By laws that are now wholly familiar, the two things will sell for the same price; and this price is the gauge of the uniform cost, in the labor at the end of successive days, that the acquisition of the two things entails on society.
The value of a thing, then, is the measure of the effective service that it renders to society as a whole. This service is estimated subjectively. The standard for measuring it is the sacrifice, in final periods of labor, entailed on society in acquiring it. By establishing an equality between the gratification conferred on itself by articles different in kind and the element pain, which is here homogeneous, society is able to compare the quantities of gratification in the different cases with each other. The price of things corresponds to the pain of acquisition, of which the unit is the sacrifice entailed on society by the work of the final period in each of a series of days; and the sacrifice involved in the collective labor of one such final period is like that which is imposed by another.
The burden of labor entailed on a man in the making of an article has no fixed relation to its market value. The product of one hour’s work of an eminent lawyer, an artist or a business manager may sell for as much as that of a month’s work of an engine stoker, a seamstress or a stone-breaker. Here and there are “prisoners of poverty,” putting life itself into products of which a wagon-load can literally be bought for a prima donna’s song. Wherever there is exceptional personal power or position, giving to any producer the advantage of a monopoly, there is a divergence between cost and value, if by these terms we mean the cost to the producer and the value in the market. Compare, for example, the labor involved in maintaining telephones with the rates demanded for the use of them. Yet of monopolized products, as of others, our rule holds good: they sell according to the disutility of the terminal social labor expended in order to acquire them. Differences in wealth between different producers cause the costs of different units of the supply of a given commodity to vary, so that not all correspond to the market value. The rich worker stops producing early, while the sacrifice entailed is still small; but his product sells as well as if it cost much more sacrifice.
If we say that the prices of goods correspond with the amount and the
efficiency of the labor that creates them, we say what is equivalent to the above proposition. The efficiency that figures in the case is power and willingness to produce a given effect, and the willingness is as essential as the power. The man of great capacity who is too rich to put forth much effort is not an efficient laborer. Moreover, the effect that gauges the efficiency of the worker is the amount of wealth that he creates, and this must be measured by the units that we have just attained. Efficiency in a worker is, in reality, power to draw out labor on the part of society. It is capacity to offer that for which society will work in return. Hence goods must sell at rates that are in accordance with the quantity and the efficiency of the work which creates them.
There is, then, a way in which we can measure the efficiency of every worker; and by comparing the measurements we can see how much one laborer excels another. A, the weaver, and B, the carpenter, are working on such unlike products that, even though we may know how much the one contributes toward the making of a piece of cloth and how much the other contributes toward the building of a house, we still have trouble in comparing directly the quantities of these dissimilar products and thus gauging the comparative efficiency of the two workers. Running through the unlike products is the one common element, power to give social gratification; and the amount of this gratification is measured by the amount of social labor that it induces. Every worker’s personal power registers itself in the quantity of this composite labor that he is able to draw out. If A, by working for a year, can induce society to work two minutes, and if B, in the same way, can induce it to work three minutes, the former is only two-thirds as efficient as the latter. The labor of each one of a thousand men working in as many different trades may thus be measured, and the amounts given by the different measurements may be added, compared and averaged. If we regard the thousand workers as constituting a complete industrial society, an average worker is one who can induce the whole body, in return for all of his own labor, to work for him for a thousandth part of every day.
Three things can be measured fir terms of this ultimate standard of value—namely, consumers’ wealth, capital and labor. Goods for consumption induce social labor and are valuable in proportion to the amount of it that they severally draw out. Capital creates consumers’ wealth and thus indirectly induces social labor. The capital itself can be measured by means of this social labor which, through its product, it induces. The work of an individual creates consumers’ wealth, draws out social labor and records the degree of its own efficiency by the amount of such labor it gets control of. Though our study has taken us into a region of abstractions, it has not taken us out of the world of reality; for every artisan who is plying his trade actually possesses the power over society that has here been analyzed, and so do the tools in the artisans’ hands and the finished products on the merchants’ shelves. Induced social labor gauges the power of all of them.
Yale Review for November, 1892, and, as thus published, was a continuation of an article that was printed in the
New Englander in 1881. In that earlier study the power residing in all economic goods was termed “effective utility.” The entity thus defined is closely identified with the “final” or “marginal” utility of Professor Jevons and the Austrian economists whose researches were then unknown to me. The manner of approaching the law of value differed from that adopted by the European economists, and led to a certain distinctive view of the nature of that law. According to this view value is always subjective and social. It gauges the power of things over society in its entirety.
v. The lines representing costs between these two would not, however, actually lengthen at a perfectly uniform rate and thus make the line DD straight.
Chapter XXII, par. XXII.17—Ed.]it has been stated that there is “a unit for measuring true capital in the form of land.” This measurement is made by gauging productive efficiency of each piece of land in terms of the social labor that, as a producing agent, it calls out.
There are questions of some subtlety to be answered before the theory of the ultimate unit of value can be made complete. One of them has reference to the indirect way in which the labor of an individual producer makes itself felt as a power throughout society. He may be making something that is consumed by a limited part of society; and yet he is able to induce, in return for his special product, labor that is literally social, since it enlists every member of society on a certain
pro rata proportion. He can cause every one to work for the
nth part of his working day. It would be a simplification that would amount to inaccuracy to say that he can make them all work for any fixed period of time, such as a minute; for each person who contributes to the social labor that gauges values of all kinds must contribute an accurately adjusted share of his own labor, and a minute would be a larger fraction of one man’s, day than of another’s. It is accurate enough for our purpose, however, to say that the social labor is made up of a fixed fraction of a day’s labor of every individual. In ways direct and indirect one producer can draw out the composite labor that is thus defined.
If, for a simple illustration, we assume that twenty men constitute an isolated society, and if we cause the first of them to make something which is directly consumed by only five of the others, there are fourteen whose labor he can draw out only through a series of intermediate exchanges; and the principle that governs these exchanges is of great importance. A, the first producer, can directly induce labor on the part of B, C, D, E and F. In order that he may cause G to labor, he must offer to him some product created by one of the men for whom he works directly. By performing additional labor for B, getting a second share of B’s product and presenting it to G, A may insure work on G’s part; and in similar ways he may cause all the others to labor. There may be men in the society who do not consume any of the products made by B, C, D, E and F, the men for whom A produces directly; and A’s connection with them may be still more indirect. It may be necessary that A should work still further for B, giving a bit of B’s special product to G and some of G’s product to H, in order to induce the last-named member of the little society to work. By a chain of connection that is mainly indirect, one worker is always able to exercise over all workers that power which we have described.
The important point in this connection is the nature of the influences that act on the individuals who furnish this chain of connection. These influences are psychological. A motive is presented to B by something that A does for him, and it is the character of this motive that needs carefully to be noted. Something in A’s product is a final utility to B. In the goods produced by A there is an element that enters into the final and least important increment of the wealth that B consumer; and yet this final consumption on B’s part is important enough for him to cause him to work in the final period of his day, when the service is most burdensome. As has been shown, it is the consumption which is least important which offsets the work that entails the most sacrifice. When B’s product is given to A and passed on to G, there is in it an element that is a final utility to G and causes him to do work which offsets and measures the benefit that he gets. By a chain of connection, every link in which is made by a subjective experience of an individual, the first worker in the society reaches and influences all the others. A offers a marginal gratification to B and gets from him a marginal sacrifice; and when, in turn, A gives some of B’s product to G, there is the same balancing of inducements and the same result.
Importance attaches to these facts, because they enable us to avoid a difficulty that has been fatal to a certain labor measure of value. If we say that the value of an article corresponds to the amount of labor “of average quality” that has been expended in producing it, we must find a way to average different kinds of labor; and we can do this only by means of the values of the products that different kinds of labor create. These values, in turn, we are obliged to measure by average labor, and we thus find ourselves reasoning in a circle. A commodity is, however, actually measured for value on the basis of the social service that it renders. By means of the chain of purely subjective connections that have here been described, it can diffuse benefits throughout society. At every point in the connection an individual receives a marginal pleasure and subjects himself to a marginal sacrifice. All society, in the end, incurs a marginal sacrifice that measures the value of this kind of goods.
The individual labor which made the commodity is the economic equivalent of the social labor that is induced by it and that measures its value, and in this way individual labor performed in making an article corresponds with and expresses the value of it; but the value of a commodity is not derived from the labor that is back of it in the making. It is derived from the social service that is before us her the using. The value of the labor of making the article is derivative. It comes through the product of the labor, from the social effect that the product will produce.
The definitions of the static state that have been given in the earlier chapters of this book have not in any way depended on the definition of a unit of labor that has just been offered. Society is static, if labor and capital are able to move from group to group, even though they do not do so because the inducement is lacking. This implies merely that men do not change their occupations and that the young workers who enter any group merely fill the places of the old workers who withdraw from it. It is not necessary that individual laborers should be tested in a way that would measure in any kind of scientific units the work that they perform. A young man who is about to choose an occupation may embody many units of labor or only a few; but the essence of the static state is that, within the range of employments for which his capacities fit him, he should be as strongly impelled in one direction as another. If, in connection with this description of the static state, we speak provisionally of units of labor, the idea that the expression is intended to convey is that of a certain power to produce merely physical results. When a man is digging in a trench, he may be thought of, in rude way, as embodying a unit of labor, if he throws out in a day an average amount of earth. When the man is in a textile mill, he may similarly be thought of as embodying a unit of labor, if his presence causes the production of so much of the fabric there made as to mark him as an average worker. Values and units of values do not enter into such a measurement.
It is now possible, however, to use the true unit of labor in defining the static state; but this affords a new definition of it. The amount of labor that is potentially in a man is measured by the social labor that he can induce when all workers, as well as all capital, are apportioned among the groups in a normal or static way. If there is a misadjustment of the agents of production, these agents produce different amounts and nearly always smaller amounts than they would in a static state. The actual work that a man then does counts as fewer units of labor than there are potentially in him. The static state can, then, be identified as the one in which every man’s actual work represents his potential working power, as measured in scientific units.
Some part of the output of every kind of goods is traceable to capital, and thus to the sacrifice termed abstinence; and the personal sacrifice entailed by abstinence may be measured in terms of that which is entailed by labor. On this point the study of Professor F. H. Giddings, in the
Quarterly Journal of Economics for January, 1890, is valuable. Since, however, the creating of a bit of capital secures an endless income, the social labor that the act of abstinence really draws out is also endless. By saving a thousand dollars now, I secure a power to serve society in a minute degree and to draw a return service from society forever. But there is not a calculable connection between the present cost of the abstaining, a measured by its equivalent in social labor, and the value of the earnings of the capital (say) fifty years hence, as measured in terms of social labor of that date. A full study of this point would detain us too long.