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
Actual Distribution the Result of Social Organization
Exchanges add much to the economy of primitive life, but they subtract nothing from the essential laws of it. Man must still tame the forces of nature and transform materials into commodities. The general laws of the wealth-creating and the consuming process are the same in all economics; and it is this persistence in civilized conditions of the laws that govern primitive life which makes it worth while to study that life at all. It is in such simple conditions that these laws act alone; and it is here, therefore, that they can be separately examined. It is not because the life of a Crusoe is of much importance that it has been introduced into economic discussion: it is because the principles by which the economy of an isolated man are directed still guide the economy of a modern state.
There are, it is true, new forces now in action, in connection with the old ones; and it is absolutely necessary to make a separate study of these new forces. Catallactics, the term once suggested as a title for the whole of economic science, is an accurate name for that division of the science which treats of phenomena that are attributable to exchange only. It assumes, at the outset, the facts and principles that are common to all economics; and then proceeds to examine those which are peculiar to an exchange economy. The interchange of products disguises, but does not destroy, the dependence of the individual on nature. A laborer’s income may seem to come to him as a payment from another man; but in essence it is still the response that nature makes to his own labor—it is his own virtual product.
A study of exchanges naturally notices at the outset the motive for resorting to them. This motive is the gain that is inherent in a division of labor. This principle, however, is only the reversal of one that we have referred to in connection with primitive life. We there saw that the diversification of employments by an isolated man involves a loss of productive power. Whoever thus does many things, does them slowly and ill, and he is sure to have few and poor appliances for aiding him in the processes. Since the diversification of a man’s productive action is a loss, specialization is a gain. Moreover, the farther the specializing is carried, the greater become the celerity and the accuracy of the man’s work.
This principle of loss from doing many kinds of labor, and of gain from doing a few kinds, is one one applies to all economic states; but what is not universal is the opportunity for specializing that an exchange economy offers. The organization of society into producing groups and sub-groups makes it possible for a man to produce only one kind of product, or, in the end, only one minute fraction of a product, while still satisfying his omnivorous wants.
Let us, then, withdraw from the persons who are making everything for themselves the single function of making shoes and assign it to a distinct class, who shall provide foot-wear for the community. This industry may not absorb their whole time and energy; but, so far as they are engaged in it, they constitute one industrial group. Assign, now, the making of clothing, the securing of meat, the raising of cereals, etc., each to its own separate group, and we have made the first and most general organization of society for production. We have thus multiplied many fold the product that can be created, and we have also made the income of each group depend on the exchange value of its product. The market prices of goods fix the incomes of groups in their entirety; and, as we have already indicated and shall hereafter state in greater detail, the movements of men from groups in which returns are low to those in which they are higher has the effect of drawing the price of each article toward a natural standard. We have seen that normal prices are those which afford equal gains to the labor and the capital in different groups. Wherever normal prices rule, they indicate such an arrangement of the groups that a day’s labor in one produces as much, and gets as much, as it does in another. When the adjustment is complete, the income of such a group, if it be reduced to value, is its own virtual product. The members of it may retain none of their own merchandise; but they get the “dollars,” or units of wealth, that they produce. This is a thesis for the theory of catallactics to establish.
Now push the differentiating process further, and let the making of each completed article become the joint function of several sub-groups. Let some men raise cattle, others tan hides and others make shoes. Let the work of making clothing, food products, etc., also be subdivided. The gain that is inherent in specialization is increased. The income of each sub-group is now the value, not of a completed article, but of the one particular utility that it imparts to that article. It is a distinguishable something, indeed; but it is something that is merged and lost in an indivisible commodity. In
kind, it is a quality imparted to the article; in
value, it is a fraction of the article. A thesis that the theory of exchange economy has to establish is that such particular utilities, or sub-products, have their prices, and when these are normal, each sub-group gets, as an income, the value that it creates.
Now carry the differentiating process to completion. Within each sub-group there is labor to be performed, and there is capital to be furnished. The sub-group that turns leather into shoes must have its factories full of machines and men to run them. We will let a distinct class of persons furnish the factory with machines and with the raw material. The theory of catallactics has to prove that the income of the one class that labors and that of the other which furnishes capital is, in each case, its virtual product. If the adjustments that take place within the sub-groups are perfectly normal, the classes of which the sub-groups are made, as well as the sub-groups in their entirety, get their several products. Catallactics has to study the structure of such a society as this, has to trace the divisions and sub-divisions that it makes in the producing operation, and has to see how the law that tends to identify the income of each agent with its virtual product acts in spite of the complications that disguise it. This is a comprehensive study, structural and functional, of the group system of production. Values, wages and interest are to be accounted for; and the study that does this must analyze the entire producing operation.
Catallactics, as a whole, falls into two divisions, of which the first includes the static, and the second the dynamics of an exchange economy. Progress is mainly the result of the social relation. One function of economic society is that of growth. It is becoming larger and richer, and its structure is changing. As time passes, it uses more and better appliances for production. The individual members of it develop new wants, and the society uses its enlarging process to gratify them. The organism is perpetually gaining in efficiency, and this is promoting the individual members of it to higher planes of life. In the producing operation there is more and more intelligence used, for the forces of nature are better understood and there is a better coördination of all the participants. There is more bounty on the side of nature, since more forces are placed at man’s disposal; and there is more efficiency in the industrial ranks themselves.
Five generic changes are going on, every one of which reacts on the structure of society, by changing the arrangements of that group system which it is the work of catallactics to study:—
2. Capital is increasing.
3. Methods of production are improving.
4. The forms of industrial establishments are changing: the less efficient shops, etc., are passing from the field, and the more efficient are surviving.
5. The wants of consumers are multiplying.
Every one of these changes acts on the structure of the producing organism, society, for it altars the relative sizes of the different industrial groups.
Let us recur to the illustrative table that was used in an earlier chapter. There is one sub-group engaged in getting out of the earth the material that, when finished, will be the article A”’ and in passing it in the form, A, to another set of workers. These impart to it the utility that changes it into A’. A third set of workers now puts its touch on it and carries it, by one point, nearer to completion. It becomes A”, and in that shape goes to the last sub-group to be finished. Here it becomes A”’, a commodity ready for use, and seeks the individual who is in need of it. B is a second raw material; and in the hands of a series of sub-groups of workers it becomes B’, B” and B”’. In the last of these shapes it also is a finished commodity. C, the third raw material, goes through its transmutations in a similar way and ripens into C”’.
A may be the skins of live cattle on a western ranch; A’ may be hides in a warehouse ready to be shipped to a tannery; A” may be tanned leather and A”’, shoes. B”’ may be woollen garments that, by passing through kindred transmutations, have grow out of the fleece of sheep into this completed condition. C”’ may be bread that has been made out of growing wheat and has passed through all the distinct stages in the entire process. All persons in the series that, in the end, makes A”’ constitute a producing group; while those at either A, A’, A” or A”’ constitute a sub-group. In like manner, all persons in the B”’ series or in C”’ series form a general group, which is composed of sub-groups.
This represents the plan on which production goes on. With this illustration simplified to the last degree, not three products, but a countless number are in the retail shops, awaiting consumers. It is, moreover, not a uniform course of ripening, in which each has passed four stages, that has brought them into the finished state. A great variety of ripening processes is represented. Some articles go through many hands in the making, and some go through few. Some also contain many kinds of raw materials. These complications will be examined in due time. At present it suffices to note the effect that changes of the five kinds above referred to have on the form of this society. Each one of them takes men out of some sub-group, and puts them into others. The mere act of exchanging products carries with it, not only the fact of a general social organization, but a certainty of change and progress in that organization. It is thus impossible that any one of these five changes which characterize a dynamic economy should take place without producing an effect on the social structure. As the simplest and most obvious result, the comparative sizes of the different groups must change, if any one of these dynamic movements is in progress. It is possible, therefore, to identify a dynamic social state as one in which there are labor and capital that are shifting their places in the economic system, and thus making some of the sub-groups larger and others smaller. Some labor and some capital may be actually deserting certain sub-groups and betaking themselves to others. Even if a sub-group is not actually losing equipment, it may be growing relatively smaller, by reason of new labor and capital that are adding themselves to other sub-groups.
Such quantitative changes in the groups are not the essence of a dynamic social state: more fundamental changes are taking place. Society changes its structure as a means of changing its producing function. It aims to produce goods in greater quantity and greater variety, and with more economy. It is moving upward in the scale of power to create and power to enjoy. Functional change, indeed, is the essence of dynamics. We avail ourselves of the changes that take place in the sizes of sub-groups as the most available test of the presence of dynamic forces. If society begins to produce new kinds of goods, or more goods, or if it begins to use new processes, etc., it is bound to reveal the fact by rearranging, to some extent, its system of industrial groups and sub-groups. A”’, for example, may take more men, and B”’ fewer. A dynamic state may, therefore, be described as one in which changes in the mode of production are taking place and are acting on the structure of industrial society.
In the sense in which we use the term, then, social dynamics does not consist in mere activity, provided that it is not of a kind which changes the social structure. In a physical sense, all action is dynamic; and industry is always action. A physically static industry is obviously a contradiction in terms. On every farm, men, tools, the chemical elements of the soil, and the light and heat of the sun are acting. In every mill, machines are going through their intricate movements and materials are growing into useful shapes. All this, however, resolves itself into an elementary kind of dynamics: it is action on the part of the men, tools and materials—the agents of production. But if there is no change in the mode of the action, there is none of that grander progressive movement by which the structure of society is altered. If no labor and no capital shifts its place from group to group in the industrial system, there is none of that type of movement which, in a special and higher sense, we here term dynamic. Till the ground forever with the same tools and get the same kinds of crop, work in the same mills with the same machines and materials—in short, change nothing in the mode of creating wealth—and you have a socially static industry. The producing organism then keeps its form intact.
A world with none of the physical activities of industry would, of course, be a dead world; but a state can be imagined in which the social organism should keep its shape intact and in which life should continue. Men might work and eat, they might be born and die, in a world in which the forms of industrial organization should show no change. As generations should succeed each other, the men of each would take up the trades of their fathers and transmit them to their children. As tools should be worn out, they would be replaced by others exactly like them. Changeless in its population, its local abodes, its modes of production and the forms of its wealth, such a society would live, indeed, but it would show no change in its organic form. Having life, but not growth, it would be what we identify as a static society.
This is an imaginary state, but it reveals facts of real life. There is, it is true, no society that is thus static. Even the Oriental world is merely less changeful than the Western. Countries can be found where progress is very slow, but it is nowhere altogether absent; and contact with progressive countries induces movement in the most unprogressive. The economy of the world, as a whole, is certain to be increasingly dynamic. Why, then, do we wish to know the laws of an imaginary static state? Because the forces that act in such a state continue to act in a dynamic one. They are even the more powerful of the two sets of forces that there operate. We shall soon see how the two kinds of force mingle in a modern state; and we shall see how unlike are their effects, and how essential it is that we should examine them separately. The study of the unreal static state is a heroic but indispensable use of the isolating method of study, that is adopted in every science where complex phenomena are analyzed. We are, then, studying the realities of the modern progressive state, when we examine the characteristics of the imaginary static one.
We have specified five kinds of change that constitute a dynamic condition. All of them are in progress in a modern society, and all are acting on its structural form. As population increases, the new laborers apportion themselves in an irregular way among the different groups and sub-groups into which the producing society is divided, and some of the sub-groups increase more rapidly than others. As capital increases, there is the same irregularity in the apportionment of it; for some of the sub-groups get a disproportionate share of the new productive fund. A theory of economic dynamics should tell by what principle these apportionments are governed.
Mechanical inventions, in particular, are obvious disturbers of the group relations. Much labor saving in one part of the system is, so far as it goes, the cause of a natural drifting of labor to other parts. New kinds of goods call for new industrial groups to make them, and these are created by taking men and capital from old ones. Thus, every one of the general changes that we have specified, as keeping society in a dynamic state, declares its presence by acting on the social structure. Mere industry is the self-maintenance of society, while growth and change are further phenomena. It is as important to separate the two as it is in hydraulics to examine the properties of a particle of water in a tranquil pool, as distinct from the further properties that it acquires when it is projected into the pit in which a turbine wheel is turning. In dealing with the complex problems of an advancing economy, the key of success is the separate study of the static forces that constantly see within it.