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

By John Bates Clark

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

Editor, Library of Economics and Liberty

June, 2001

Book Cover

First Pub. Date

1899

Publisher

New York: The Macmillan Company

Pub. Date

1908

Copyright

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

Proximate Static Standards

Chapter XXVI

If, under the influence of competition, labor can go exactly to the points where it is wanted in a period of fifty years, if capital can do the same in twenty-five years and if the best method of producing some article can come into general use in ten years, it will be necessary to stop all dynamic changes and to wait through the full fifty years’ period, in order that either value, wages or interest shall be reduced absolutely to the rate at which static law alone would fix it. It may be, however, that the fifty years’ period that labor occupies in adjusting itself within the group system is made necessary by the obstacles that are in the way of migrating from one geographical locality to another. It may, for instance, be easy for the son of a miner to become a machinist, instead of following in his father’s footsteps; and if many young men do this, there is an exodus of labor from the mining sub-group and an influx of labor into the machinist’s trade. Where, however, the change carries men from one country to another, it is a slow and costly process. Within the limits of a single small country, labor may be able to dispose itself in the way that static law requires within ten years and capital may do so within a shorter time. Even these local adjustments, with others that can always be made quickly, suffice to bring value, wages and interest within the small country to certain quasi-static levels. They approximate the levels that would be reached, if we were rigorously to repress dynamic changes within the one small territory and were to let static forces there continue to work.

When population surges in a wave of migration from Ireland, Germany and Italy to the United States, the movement is a part of the generic operation of giving to the population of the world, as a whole, a natural geographical distribution. In a study that has the world in its purview, this migration is to be considered in the study of economic statics. It is as though there were too much water in the Indian Ocean and the surplus were bringing the sea, as a whole, to an equilibrium by rushing into the Atlantic. In the Atlantic, however, the movement is highly dynamic. The whole surface is rising and the whole body of the water is full of violent currents. An influx of men from Asia into America would be one of the movements that would tend to bring the distribution of population in the entire world to an equilibrium; but in America, separately considered, it would constitute a great and typical dynamic change.

The same thing is true of many other movements. When Asia shall copy the mills and the machines of America, the act will be a part of the operation of unifying the industrial processes of the world. This process tends to bring about an equilibrium in the industry of the world; and it is, in this view, a static process. In Asia itself, nevertheless, it is an eminently dynamic process; for it is much as though inventions were there rapidly going on in every mechanical field. The reaction that America would experience, in turn, would be highly dynamic in America. Something of this kind is, without doubt, before the people of these two contrasted regions. That which is a static adjustment within the world as a whole may create a dynamic movement within a limited part of the world.

We are, however, immediately concerned with natural standards of wages and interest within limited parts of the world: we wish to know what now fixes the rate about which wages fluctuate in the United States, in England or in Italy. This problem it is possible to solve. There is a rate of wages that would be realized within the limits of the United States, if dynamic changes within that area were at once to cease and if competition were there to work without any obstructions. This rate would differ from the one that would be realized, if the whole world were brought into a static equilibrium. Not till labor and capital are distributed over the world in such a way that there is nowhere any reason for migrating—not till methods of production are, in a way, unified on a world-wide scale, and not till consumers’ wants are normal, can the rate of pay for laboring humanity as a whole be natural. After reducing one country only to a static condition, this universal adjustment still remains to be made. The rate of wages that is realized in the one country differs by a certain interval from the ultimate standard, even though it is fixed at a certain proximate static level.

It is possible to study the activities of a limited part of the world by themselves, without being unscientific. Throughout our study we have, indeed, spoken of society without assigning to it any territorial limits. We have tacitly assumed that competition extends through it and that such an influence as a mechanical invention originating in any part of this organism will produce effects in every other part. Does this organism include all humanity? In a sense, it does; for, unless there is a country that, with all its people, could sink beneath the sea without producing economic changes in other countries, there is none that is outside of the world organism with which the economist must ultimately deal. It would be more than heroic theorizing, however,—for it would be unnatural theorizing,—that should assume that the whole world is bound in so close an organization that there is, even in theory, only one rate of wages, one rate of interest and one standard of value for each commodity throughout the whole of it.

The relation that different parts of the earth sustain to each other furnishes the most difficult and the most fruitful study within the theory of economic dynamics. In view of what Europe and America are doing and are about to do in Asia, this study is as important to the practical man as it is fascinating to the theorist. Already does economic society include the whole world; for trade already unites its parts, so that a change in one part is felt in some degree in every other. Yet there are demarcations to be recognized within this great area. One general boundary is drawn about the civilized nations that constitute the economic centre of the world. Within the area included by this line, economic influences are active—each part is sensitive to influences that originate in other parts. Here there is a strong tendency toward uniform values and toward uniform rates of wages and interest. Across the general boundary, on the other hand, such influences act in a comparatively feeble way. In the inner and the outer areas there are great differences in values and in the rates of wages and of interest.

It is possible to study the economy of this civilized centre of the world, as a unit, and still to proceed on a scientific plan. Europe, America and whatever other continents and islands are in close connection with them constitute this centre, which may be treated as a complete society, with an environing world acting on it. This central society trades with the outer zone, and it sends labor and capital thither. Whether it will or not, it gradually instructs the people of the outlying zone in industrial method. For business purposes it is, in this way, assimilating belt after belt of the outer zone to itself—that is, the civilized economic society is absorbing parts of the uncivilized and loosely bound area. Ultimately all will have been absorbed; and, if we can now establish economic principles that work within the centre, our theory will in the end apply to the world as a whole.

Let us, then, limit our studies to this economic centre. Under these conditions, the importation of goods into it is to be regarded as equivalent to producing them in an indirect way; and this process is naturally resorted to, when it costs less than the production of them in a direct way. All that the people of the centre get, in the way of consumers’ goods, we may, then, consider that they directly or indirectly produce.

Laborers come into the area; but this is to be regarded as an influence that quickens the increase of population which would, in any case, take place. When laborers go out of this area, the movement retards the increase of population. The moving of capital out of the region or into it is to be regarded as merely changing the natural rate of increase of capital. If a new method of production is ever borrowed from people in the outer zone, the effect in the centre is the same as if it were there invented.

In attaining now a static standard of wages and interest for the centre itself, we assume, first, that labor and capital there remain fixed in amount. This cuts off immigration and emigration, as well as the natural increase in the population. We assume that methods of production remain unchanged, and this cuts off any copying of foreign arts. We assume, too, that other economic elements remain unchanged, that competition goes on with no hindrances and that, within the area that we have in view, static rates of wages and interest are realized. In addition to repressing wholly new dynamic influences, we have stopped impulses that are communicated by the outer region to the central zone. We saw that, in fact, certain unifying movements in the world, as a whole, are bringing it all toward a static equilibrium; and we also saw that such movements, in their effect on a limited region, are equivalent to dynamic changes. These we have cut off, as we have cut off new dynamic changes; and the effect is to produce a local static state, which gives the standard of wages and interest toward which local rates are practically tending.

The wages that are thus made generally to rule in the civilized heart of the business world contain an element that we may designate as quasi-profit. In this there is something akin to profits,
entrepreneurs’ gains, which we identified as an income that will soon slip from
entrepreneurs and assume the form of an addition to wages and interest. This income, thus transferred to laborers, will early raise wages in the central area; but the barrier that separates this region from the outer zone will long retard the effect that in the end it will produce on wages there. Perfect and world-wide competition would give to laborers in China benefits from the invention of shoe-making machinery that now accrue to those in America; but, since such perfect and general competition does not exist, the gain that is on its way to the labor of the world pauses long in the hands of the laborers of the civilized part of it. This premium which appears in the pay of laborers of Europe and America, as compared with that of men of Asia and Africa, is quasi-profit: it is a gain from a dynamic source only partially diffused. Friction prevents the men of the outer world from sharing it now, although in the remote future static forces, acting throughout the world, will give it to them.

Mere advantage in point of time thus gives an advantage in point of wages and interest. It is the leaders in the adoption of fruitful methods of creating goods who get profits; while imitators, who straggle into line long after an invention has been made, may barely save their wages and interest. Men who labor in a region that leads in inventions may enjoy forever the quasi-profits that inventions give; for some fruit of each improvement may escape from the hands of the
entrepreneurs who adopt it early and, becoming wages for the men who there labor, may continue long in this shape. The Golconda of the future, the region of limitless wealth, is to be the region where the greatest dynamic influences originate. A lead in the race that all humanity is running is to determine the comparative wealth of countries and of continents. Wealth is to abide with the swifter runners.

Tidal waves cause large areas of the sea to rise higher than the general static level of it, and they cause other large areas to fall below that level.
Thus, the line AB represents the static level of the entire ocean. The double curve AC represents the surface as it is elevated here and depressed there by a tidal wave. The wavy line AD represents the upper surface of the tidal swell, as it is thrown into local waves by the wind. At any one instant the actual surface is here above and there below the normal surface of the tidal wave itself. Now, giving to this figure an economic meaning, let AB represent the ultimate static level of wages in the entire world. Let all dynamic influences definitely cease, leaving a world-wide competition in free play, and AB will represent the general rate of pay for labor. But, in fact, increased power of production, with that friction which prevents the fruits of it from being shared equally by all mankind, has caused the pay of civilized laborers to conform, in a general way, to the rate described by the upper part of the curve AC and that of the uncivilized laborers to take the level indicated by the lower part of it. And local influences within the civilized area have caused wages here and there to vary from the standard indicated by the upper part of AC, so that the pay of men in different parts of Europe and America conforms to the varying levels described by the line AD. At one point the rate is above the general standard that prevails in the economic centre of the world and at another point it is below that level.

There is, then, an ultimate static standard of wages for the whole world, a quasi-static standard for the civilized part of the world, and a local and quasi-static level of wages for every part of that civilized section. The pay of a man in any particular part of Europe or America tends, under the influence of competition, to conform to this local and quasi-static rate. Also, very slowly and through long periods this standard rate itself tends toward the ultimate static standard for the world as a whole.

It will never, however, reach that ultimate standard. Here the hydraulic illustration, in its present shape, fails. The tidal wave is made by withdrawing water from one part of the sea and carrying it to another part; and, if the attracting influence were removed, the level of the whole would become uniform. The greater productivity of labor in the civilized part of the world is not, on the other hand, secured by any deduction from the productivity of labor elsewhere: it is the result of new increments of product that are conjured out of non-existence by civilization itself. As we said in an earlier chapter, the wave that represents the superior productivity of the advanced region must be made by pouring new water on a part of the surface of the ocean and by checking the flow of that water to other parts.

Imagine dams extending from Labrador to Greenland, from Greenland to Norway and from Africa to the nearest point of South America. They would enclose a vast area of the northern Atlantic Ocean; and, if water were to gather within this reservoir, the surface of it could be held at a higher level than that of the outlying seas. This illustration shows the true relation of wages in the civilized states to those in the uncivilized ones, for the superior level may be permanent. Even if the dam were imperfect, so that the water slowly flowed into the outer sea and tended to raise the level of it till it coincided with the falling level within the barrier, new water might enter so much more rapidly as to maintain or increase the superiority of the level there. So dynamic influences, calling new produce into existence in the advanced countries of the world, may preserve or may even increase the superiority in productive power that labor there enjoys, as compared with other labor.

Dynamic gains, endlessly recurring, sustain the quasi-static rate of wages in favored parts of the world. It is primarily with this superior standard, and with the numerous local standards that compose it, that for practical reasons theory should deal. The men of America need to know what fixes the rate of pay for labor in America, as those of Massachusetts need to know what fixes the local rate there. This dominant influence is in every place the product that is there traceable to labor only. It is the rate which would there be realized, if in that locality dynamic influences were to cease and static forces were to operate alone. The specific product of labor in that locality is disentangled from the distinct product of capital in the way that has been fully described in the foregoing chapters of this book.

The relation between the world, as a whole, and its various parts presents no real difficulty in a theory of distribution. There are proximate standards of wages and there are ultimate ones; and the local pay of labor may tend quickly toward the proximate standard and always remain near it, while this standard itself tends slowly toward the ultimate one. What is true of wages is equally true of interest and other elements. One difficulty in the way of the theory is, however, more serious. To many persons any theory based on competition may seem to have somewhat of the character of theoretical romance. Will not competition itself soon be a thing of the past? There are forming on every side trusts and other consolidations of capital that threaten to extinguish competition and to introduce a régime of monopoly within much of the business field. Have we, then, completed the theory of competitive distribution, only to find that the fact on which the whole of it is predicated has ceased to be? If, when competition was at its best, theories of natural values, natural wages and natural interest seemed to have a character of unreality, what is to be said of them when competition appears to be a vanishing element?

It remains for economic dynamics to show that competition is an inextinguishable force. The consolidations of the present period change the mode of its action, but they do not destroy it; and therefore they in no wise invalidate a theory that assumes the existence of it. At no point have we minimized the obstacles that static forces encounter. Everywhere in life are there variations from results that static theory alone calls for. Dynamic theory, if it were quite complete, would give results from which, in actual life, there would be no variation; for it is a part of the function of this division of the science to account for every element of friction, as well as for every change and movement that actual life shows. Among the lesser tasks that it will set for itself is that of reducing to clear formulas the principles which govern trusts, labor unions and other consolidations. It will deal with protective tariffs, which modify values; immigration laws, which affect wages; and currency laws, which influence movements of capital and rates of interest. It will undertake a larger work, when it tries to reduce to law the growth of population and of capital, and a still larger one, when it shall try to determine the conditions that govern the rapidity with which methods of production change and become more fruitful.

Movement is the general subject of dynamic economies. The direction and the velocity of changes in the economic world are always what it seeks to account for. In studying wages it will deal with an actual rise in the rate; in studying interest, with a fall in the rate and an increase in the gross amount; in studying profits, with the alternate appearing and vanishing of this element of gain. Conditions of local and of world-wide prosperity are other subjects for it; and among the conditioning causes of prosperity are political policies, national and international. There is, indeed, in mundane affairs little of importance for humanity that does not fall within the scope of this division of the theory of political economy.

But the task of developing this branch of science is so large that the execution of it will occupy generations of workers. As limitless as any other scientific field is the domain of economic dynamics; and, though early results may be modest, the value of any of them will be great enough to reward the hardest labor, while the unreached areas that will open before the explorer’s eye, at every step in advance, will lure him to work that for difficulty and for fruitfulness will surpass any which has thus far been undertaken. Yet, whatever movements the dynamic division of economic science may discover and explain, static laws will never cease to be dominant. All real knowledge of the laws of movement depends upon an adequate knowledge of the laws of rest.

Categories: John Bates Clark