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 Place of Distribution within the Natural Divisions of Economics
There is, we may now note, a mode of dividing the field of economics that will enable us to study distribution without forgetting its relations to exchanges and to production. In social economics there are three distinct kinds of force working together. If we study them separately, we shall resolve economic science into three divisions, the boundaries of which have been drawn by nature. Man modifies matter by production, and matter modifies man through consumption. These processes do not require any organization on the part of the men who impart and then receive impressions. All this could be accomplished by an isolated man, or by men living together for protection or for the mere pleasures of association, without any system of exchange of products. Let every one make his own goods and consume them, and an economic life of a certain kind is complete.
The distinctive feature of such a life is that it establishes direct relations between the individual man and nature. Every man subdues for himself a part of his material environment; and he gets the direct service that this bit of nature, when thus subdued, can render. Under these conditions, there are no disguises thrown over the relation that workers sustain to the earth. Obvious dependence on nature, obvious independence of other men—such is the rule of every one’s economic life. Out of materials furnished by the earth each producer creates his own income; and connected with this process there are no problems of distribution.
Yet, in this mode of living, which puts every man face to face with nature, there is room for the action of all of the more fundamental laws of economics. Here, for example, is a hunter in a primeval forest, converting the flesh of animals into food and their skins into clothing and shelter. He is creating something that can be defined as wealth. It has the essential marks that analysis detects in the wealth that crowds the shops of the modern city. The man uses capital, and includes in his equipment both the fixed and the circulating varieties of it. His consumption has its laws; and the chief of them is the one that calls for variety in the things consumed. He must not make and use too much of one kind of product and too little of another—he must guard against glutting some wants and letting others go unsatisfied, if the wealth that he creates is to do him much good.
There is, then, a distinct set of economic laws, the action of which is not dependent on organization. They are fundamental; and we now have to note that they are universal. They act in the economy of the most advanced state, as well as in that of the most primitive. Wealth has everywhere the same distinguishing marks. The producing and the consuming of it are always subject to the same general conditions. The first natural division of economic science should, therefore, present the universal laws of wealth: it should discuss the more general laws of production and all the laws of consumption.
A second series of phenomena is traceable to a further set of forces which originate in relations between man and man. They are made to work wherever persons begin to exchange products; for this organizes society into groups or specific industries. Let some men produce food and others build huts, exchanging products with each other, and things happen that are not accounted for by the laws of that general economy in which this direct relations of man to nature are explained. Exchanges involve the determining of values; and these, as we have seen, fix the terms of group distribution.
The organization of society is further extended when, within each group or specific industry, there arise employers paying wages to the men who labor and interest to those who furnish capital. Distribution, in a broad definition of that term, results from such an organization of the wealth-creating powers. The division of economics that treats of it will first deal with group distribution, which depends on exchanges, and then deal with that final distribution which takes place within each sub-group, fixing the wages, the interest and the profits that are there received. Broadly conceived, and made to include a description of the group system and its exchanges of products, the science of distribution embraces the social laws of economics. Such a science begins with a description of the group system of industry. It accounts for the terms on which the groups buy and sell from each other, and shows on what the income of each group in its entirety depends. It further shows what becomes of the income which in this way comes to a group as a whole. Laborers get some of it, capitalists get come, and
entrepreneurs get the remainder—if there is one. In short, the distinctively social relations that are created when society as a whole becomes the producer, may be treated under the title, distribution. This term, however, cannot be used as the title of a scientific division, if this use of it carries with it the idea that what is treated under this title is not production and is not exchange. Distribution is a process which, in its completeness, includes exchange, but it falls within production. It is not expedient, therefore, to characterize the second natural division of economic science as the science of distribution; since the idea of distinctness from production and exchange attaches itself, in the public mind, to this term. It is best described as the division that treats of the social laws of economics, as distinct from the general laws. When we know what happens in consequence of the economic actions and reactions that are taking place between man and nature, we need further to know what takes place in consequence of relations between man and man.
It is conceivable that production might go on in an organized way without any change in the character of the operation. Men might conceivably produce to the end of time the same kinds of goods, and they might do it by the same processes. Their tools and materials might never change; and they might not alter, either for the better or for the worse, the amount of wealth that industry would yield. Social production can thus be thought of as static. In such a changeless mode of social industry, distribution, with all that it involves, would take place. Groups would exchange products, and each would be dependent on the value of its own goods for the amount of its collective income. The price of agricultural produce would determine the income of farmers, and the price of ore would fix that of miners. The gains of a group as a whole would be divided among the sub-groups composing it, and would then by a further operation be parted into wages, interest and profits.
What are called “natural ” standards of values and “natural” or normal rates of wages, interest and profits are, in reality, static rates. They are identical with those which would be realized, if a society were perfectly organized but were free from the disturbances that progress causes. Far more than classical economists were aware of is involved in a thorough-going study of what they called natural values.
Reduce society to a stationary state, let industry go on with entire freedom, make labor and capital absolutely mobile—as free to move from employment to employment as they are supposed to be in the theoretical world that figures in Ricardo’s studies—and you will have a regime of natural values. These are the values about which rates are forever fluctuating in the shops of commercial cities. You will also have a regime of natural wages and interest; and these are the standards about which the rates of pay for labor and capital are always hovering in actual mills, fields, mines, etc. In this connection, the terms, natural, normal and static are synonymous. That division of economic science which presents natural standards of values, wages and interest ought consciously to take the shape of a theory of Social Economic Statics. Such a theory would treat of distribution as it would go on if there were taking place none of those grand disturbances—changes in the modes of production, etc.—that are forever causing market quotations to vary from the natural standards that figure in classical economics.
A static state, however, is imaginary. All natural societies are dynamic; and those which we have principally to study are highly so. Heroically theoretical is the study that creates in imagination a static society. In the actual world unceasing changes thrust labor and capital, from time to time, out of one occupation and into another. In each industry they change, again and again, the modes of production and the kinds and the quantities of the goods produced. Yet this does not invalidate the conclusions of a static theory; for static laws are nevertheless real laws. The forces that would work in a world that should be held in a fixed shape and made to act forever in a fixed manner still operate in the changing world of reality. We can always see them working in connection with other forces, but we have to imagine them working alone. We study them separately, in order that we may understand one part of what goes on in dynamic society. To do this we imagine a static society, thus making a heroic but necessary application of the isolating method.
Only by reason of its omissions, however, is the imaginary and static state unlike the real and dynamic one. All the forces that would work in the unchanging world are not only working in the changeful one, but are even the dominant forces in it. They do not keep values exactly at the natural standards, but they keep them fluctuating about those standards; and they keep real wages and interest always comparatively near to the natural rates.
We have now described the boundaries of two of the natural divisions of economic science. The first treats of universal phenomena, and the second of static social phenomena. Starting with those laws of economics which act whether humanity is organized or not, we next study the forces that depend on organization but do not depend on progress. Finally, it is necessary to study the forces of progress. To influences that would act if society were in a stationary state, we must add those which act only as society is thrown into a condition of movement and disturbance. This will give us a science of Social Economic Dynamics. It will bring the society that figures in our theory into a condition like that of the natural world. It will supply what a static theory openly and intentionally puts out of sight—namely, changes that alter the mode of production and act on the very structure of society itself. A study of these changes is the content of the third natural division of economic science.
Wants are changing, and the kinds of wealth that are produced must change with them. New methodical processes are coming into use. Machines supplant hand labor, and efficient machines displace inferior ones. New motive powers are taken into service, and new raw materials are used. Population increases and migrates, taking with it some of the increase of its wealth. Large industries grow up and crowd small ones out of the field. The earth becomes crowded with life and wealth. None of these changes, however, serves to suppress the action of static forces; nor do all of them together do so. Not one jot nor one tittle shall fall from the law of natural values, or from that of natural rates of wages, interest and profits. A different set of forces is acting in connection with the static one; and real values, wages, etc., are the resultant of the two kinds of force. In advancing to the study of dynamic phenomena our theory completes itself; and the effect is to make it fully interpret the world of fact. A theoretical dynamic world is exactly like the actual world, if the theory that constructs it is a valid and complete one. It has the elements of disturbance and of friction to which men of business point, as influences that invalidate theoretical conclusions. If the study of it were carried to completion, it would furnish what has heretofore been lacking—namely, a science of economic friction and disturbance.
So far as method is concerned, a theory of economic dynamics must use deduction, as did the theories of the Ricardian school. It must base itself on the conclusions of economic statics, which, as we have seen, are uncompromisingly theoretical. Yet realism is the striking trait of the dynamic theory. It includes in its field of view just the elements that have been needed to make a deductive economic science fully interpret the world of fact.
In the markets of all parts of the world where competition rules the standards about which prices fluctuate are set by static forces, and the fluctuations are accounted for by dynamic ones. Actual prices are now above the standards and now below them, as a pendulum is now on one side of an imaginary vertical line and now on the other. This vertical line coincides with the position that the pendulum would hold, if it were under the influence of static forces only. The oscillations are due to dynamic forces; and these can be measured, if we first know the nature of the static forces and the position to which, if they were acting alone, they would bring the pendulum. The oscillations of prices about the natural standards can be accounted for only by a like method of study. The same thing is true of natural wages and interest, and of the fluctuations about these standards that actual rates show. Static forces set the standards, and dynamic forces produce the variations.
This, however, is not the largest effect of dynamic forces. We shall not have learned the most important thing about them, when we have accounted for the deviations from natural rates that actual values, wages and interest show. We shall see that dynamic forces create new conditions in which static force work. In these new conditions natural values, etc., are not what they were in the former conditions. Thus, the price of cotton cloth that is entirely natural when this fabric is made by hand is far from natural when it is made by machinery. The normal price of cotton cloth fell in consequence of the inventions of Watt, Hargreave, Arkwright and Crompton. Before these men did their work, the price of the cloth was fluctuating about one natural standard; afterward it fluctuated about another. Similarly, the normal level of wages is rising and that of interest is falling, in consequence of far-reaching dynamic influences. At any one time there is one standard of value, wages and interest set by static forces, and at that time the temporary fluctuations of actual rates about those standards are due to dynamic causes. At a later time it will be found that the standards themselves have undergone a change; and these grander effects are the most important ones that are attributable to dynamic forces. A theory of disturbance and variation is, indeed, included in the science of economic dynamics; but the most important thing that is included in it is a theory of progress. The normal wealth of the world will be greater, and the natural level of wages will be far higher in the year 2000 than they are to-day, if the greater forces at economic dynamics continue to work.
We have now before us the boundaries of the three natural divisions of economic science. The first embraces the universal phenomena of wealth. If anything is true of the wealth-getting and the wealth-using process under every condition of social development, it is material for this division. The second includes social economic statics, and tells what further happens, in connection with wealth, if society is organized, and if no change takes place in its form of organization or in its mode of action The third division includes social economic dynamics, and tells what still further happens, as regards the wealth and welfare of the community, by reason of the fact that society is changing in form and in modes of activity.
If we wish to note the relation that these three divisions bear to the four traditional ones, we shall see that the first division, treating of universal economic phenomena, includes fundamental concepts and facts that are naturally put into an introductory division or
Grundlegung. Yet this division may be made to include all needful discussion of consumption, since this is an individualistic operation, of which the fundamental laws are the same in all social conditions. The second division discusses value, which has been commonly treated under exchange, and natural or static wages and interest, which have been commonly treated under distribution. The third division is devoted to the dynamics of production, which include changes in value and the whole of the dynamics of distribution. And, as changes in human wants constitute the dynamics of consumption, the effect of such changes enters as an element into the material with which this division deals. The three divisions here proposed are quite distinct from each other, though they are interdependent and consecutive. The second division takes among its data the facts and principles presented in the first; and the third begins by assuming all that is stated or assumed by the second. Of the four old divisions, three are hopelessly merged in each other; and none of the four accurately corresponds to either of the three divisions that we have called natural.
It is already clear that the field for new investigation offered by economic dynamics is an indefinitely fruitful one. It would become still clearer that this the fact, if it were practicable here to describe, in a more detailed way, the particular problems that have to be solved in a theory of social economic progress. They include every possibility of gain that can come to humanity by economic change. They are essentially new problems, because the prevailing mode of economic study has not heretofore isolated them, brought them clearly into view and afforded the data for solving them. Not without its references to progress has been the theory that has founded itself on the old and baffling plan of a fourfold division of the whole science into production, distribution, exchange and consumption; but it has at been in a position to solve the problems that progress presents, for the reason that a knowledge of static law is universally needed as a preliminary to a knowledge of dynamic law. As is the case in mechanics, the forces of rest must be known before those of movement can be understood.
Dividing a field by two intersecting lines makes four divisions instead of three. A treatment of every possible phase of economic life would require us to study field 1 of the accompanying diagram, or primitive economic statics, and then field 2, or primitive economic dynamics. If after this we were to enter the social territory, we should at once be in field 4, that of social economic dynamics, and should have passed by the indispensable division of social economic statics. As our entire purpose is to understand the laws of a dynamic social industry, we attain our end by covering only fields 1, 3 and 4.