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
Effects of Social Progress
The changes that take place in a civilized society affect its entire collective life, and even the lives of its individual members. Every man in such a community acts and thinks differently, and comes in time to be a somewhat different being, in consequence of the share that he personally experiences of the effect of social economic dynamics.
We may keep in view, as the visible sign of this thoroughgoing transformation, the local shifting of labor and capital that dynamics involves. It is important to note that every such shifting of the work of production from group to group is an effort on the part of society to put itself into the new shape that static law
at the time calls for. With population as it is at any moment, and with the other elements that determine the shape of society unchanged, there is a certain part of the working force that naturally belongs in each sub-group in the system. But with an accession of new workers, a new adjustment is called for; and labor will proceed to move toward the points at which,
under the conditions created by the enlarged population, static forces alone would locate it. Capital must, to some extent, move also. If the dynamic changes were not again to take place, the labor and the capital of society would find their new places and keep them. They would so locate themselves that each unit of labor would create as much wealth as any other.
Mere competition tends to equalize the productive power of what we may call units of labor in different occupations, and it has the same levelling effect on capital. If it were allowed to work without obstruction, competition would reduce the earning power of all units of either of these agents to uniformity, by apportioning them, in a natural way, among the producing groups.
A skilled worker will, of course, always create more wealth than an unskilled one; for personal differences between men will always count in determining their social powers as producers. A good instrument will also produce more than a poor one. Such a good instrument, however, represents more units of capital than does the poor one; and all that we have claimed for competition is a tendency to put the different units of capital where their earnings are equal. This, of itself, requires that the better instruments—embodying, as they do, greater amounts of capital—should earn the larger incomes. In like manner, a laborer of a high grade embodies in himself more units of labor than does an inferior one. Precisely what such a unit of labor is, we must in due time ascertain; but provisionally we may use the familiar term, unskilled labor, and treat the work performed by a man with no exceptional skill or endowment as constituting the unit of which we are speaking. A superior artisan, however, represents more than one such unit, and a successful business manager represents many of them.
Labor and capital tend to acquire each a certain producing power that is uniform in the different groups and sub-groups; and it is movements caused by competition that cause this tendency. If we could think of dynamic influences as exerting themselves for a time and then completely ceasing to act, we should see society thrown out of one static adjustment and given time to assume another. If the dynamic influences were to act intermittently, with long intervals between their periods of activity, society would attain an endless series of perfect static adjustments, each of which would be unlike the one that preceded it. Thus, water in a quiet tank, to and from which there is no flow, is in a static condition. The pressure on each particle is uniform in all directions, and accordingly no particle is in motion. It is perfectly fluid, however, and the slightest excess of pressure in any one direction would make it change its place. Such perfect mobility without motion is the sign of a static state. Motion is prevented, not by friction, but by an equilibrium of the forces that press each particle in different directions.
Open now the valve that lets water rush into the tank. The equilibrium is destroyed, and there is movement everywhere. The surface boils, and currents are created throughout the body of formerly quiet fluid. A dynamic force has added itself to the static ones that were formerly in action, but those static forces are not annulled: they continue to act without any diminution of their energy. Stop the inflow; and though, for a time, the waves and the currents continue, in the end they subside. There is now attained a new static adjustment of the different particles of water in the tank. Each is where the equalized pressure will hold it under the new conditions. Repeat the whole operation at intervals; and after each inflow there will be a movement that will relocate every particle of water in the tank. Afterward there will come a period of quiet, when the particles will be held in a static equilibrium.
If we regard the individual laborer as the social molecule, there is a force acting on him that is analogous to the pressure which acts on a particle of water. This is the acquisitive impulse—the desire to go where the largest earnings are to be had. If a man’s earnings in his sub-group are the same that he could get elsewhere, the pressure on him is, as it were, equal in all directions; and he keeps his place. If the same thing is true of all other workers, society is in a condition of static equilibrium. The movements of labor from group to group, which are the visible signs of dynamic conditions, are then entirely wanting. But if there is an influx of population, corresponding to the flow of water into the tank, there is a rearrangement of the social atoms. Some groups come to have relatively more laborers than they formerly had, and others come to have comparatively fewer. If the influx of population ceases and other disturbing causes are absent, a new static condition will ensue. The men will be in somewhat changed positions, in which the earnings of laborers of a given grade are again brought to an equality in the different sub-groups. There are, however, some dynamic influences that act more strikingly, as rearrangers of society, than a mere influx of population would do. Machines, for example, have been rapid transformers of the social organism; but, for illustrating the principle that we have in view, any one of the five dynamic changes above specified will serve, since each relocates the members of the industrial society. If, after such a change, the dynamic influences cease to act, the static ones place the members in natural positions and keep them there.
Let us now vary the illustration, by assuming that the inflow of water is continuous. The static forces are in action, as before; but they do not succeed in placing each particle of the fluid in what would be, if the water were undisturbed, its natural place. They cause each particle to tend, at every instant, to move toward what would be at that instant its natural or static position, if the inflow were then to cease; but there is a perpetual variation between the actual position that the particle of water occupies and its static place. Moreover, its static position at one time differs from its static position at another time. The addition to the volume of water in the tank creates a change in the conditions under which mere pressure, acting on the fluid material, has to do its work; and the locating of the particles, under the influence of this pressure, gives one result when the tank is half full and a different result when it is full.
This corresponds to what is taking place in society. There the five great dynamic influences are all constantly at work. The static forces do their full work also; but the resultant of it all cannot be the shaping of the group system exactly as static law alone would shape it. At any one instant there is a particular place in the system which each man would take, if the disturbing influences were altogether to cease. At that instant the man is impelled toward the place, but he is not exactly there. Society throughout shows an approximation to the natural static arrangement of its members, but it can never exactly realize it. A perpetual divergence from the form into which the acquisitive impulse, acting on each man, would bring society, if it worked without let or hindrance, results from the continuous action of the dynamic forces.
These general forces of change also cause the static shape of the society at one time to differ from its static shape at another time. A variation from a standard form is one effect of dynamic forces, and constant change in the standard form itself is another effect. A progressive society, as we have seen, has rising standards of wages, to which actual wages are always tending to conform. It also develops an endless series of ideal shapes, and strives to form itself after them. It approximates each of these shapes, but never exactly attains any one. The ideal model to which the group system is trying to conform at one time differs from the model to which it tends to conform at any other time. Society, in its growth, is pursuing the changes in its model, but it is perpetually behind time in the race.
For static science the task is set of finding the natural condition of society at any one time. For dynamic science there remains the work of ascertaining the two effects of the forces of change: namely, the variation of the actual state of society, at any one time, from the static condition for that time; and, secondly, the difference between the static condition of society at one time and the static condition at another time.
One can hardly assert too emphatically the dominance of the static forces in real and dynamic societies. For example, a square mile of the ocean during a storm is not in a static condition. To the man in a ship dynamic forces appear decidedly to predominate; and yet it is the effects of weight, pressure and fluidity—the static forces—that keep the vessel afloat. They do what, even from the sailor’s point of view, is the more fundamental work. It is these static forces that determine the effect of every blow that a wave strikes against the side of the ship; and it is these same forces that keep the waves from rising to abnormal heights and hold the general surface of the sea in a position that approximates its natural level. Projecting itself through the waves, in their most violent movement, there is an ideal surface to which, at a particular moment, weight, pressure and fluidity, acting unhindered on the water, would make its surface correspond. The actual surface undulates above and below this ideal surface, but always tends toward it. Similarly, projecting itself through the group system of a progressive state, there is an ideal arrangement of the elements of society, to which the force of competition, acting on individual men, would make the society conform. The producing organism actually shapes itself about this model, and at no time does it vary greatly from it.
Ricardian political economy has distinguished itself by bold deductions concerning the values of commodities, the rent of land and the wages of labor. There are, it affirms, “natural values,” to which the selling prices of different goods tend to conform, and to which they would accurately conform, if it were not for “disturbing influences.” There is also a “natural rent” of every piece of land; and, if there were no friction, the actual rent would equal it. Sweeping assumptions have been made, in order to create the conditions that the classical economists had in mind. The “economic man” has been created, and has been made to pursue his own interests remorselessly and intelligently. He knows what will increase his gains, and does it without hindrance. Mobility is his most marked characteristic. The slightest excess of pressure in one direction will cause him to change his place in the economic system. He drops one pursuit and takes up another without hesitation, and he encounters no obstacles in the transit. With such conditions given, prices, rents, wages and interest are supposed to be “natural.” The prices of goods are in these older theories said to be “natural,” when they equal the cost of producing them; and market prices are said to fluctuate about this standard.
The impression that classical political economy, where it has thus been most successful, has made on practical minds is one of doctrinarianism. The world that is under analysis appears to have been created in the study and to be unreal. All the conclusions hinge on hypotheses which seem to be inconsistent with the facts of life. On the assumed premises, the conclusions are reasonable; but they seem inapplicable to any world but an imaginary one. In short, there appear to be so many disturbing influences at work that theoretical standards of value, rent, etc., cannot be realized. What the Ricardian theory unconsciously and imperfectly accomplished was the separation of static from dynamic forces. It was really studying a static world, but it studied that world with no complete idea of its nature. There was not in the minds of any of these early writers any conception of the two distinct sets of forces that are really acting together; and there could, therefore, be no systematic plan for studying them separately.
In reality, their “natural prices” were static prices. They were those to which an actual market would conform, if dynamic influences were wholly to cease. A heroic alteration of the mercantile world, a paralysis of one set of nerves, an absolute stoppage of one set of activities—this would bring markets into the so-called “natural” condition. Stop all increase of population and of wealth, as well as all changes in the producing operation and in the character of its results, but let industry go on and perfect competition continue, and you bring the world into a state in which the standard theoretical prices will be the real ones. Also normal rates of wages and interest will be realized. Had the Ricardians recognized the fact that they were trying to study a static world and then studied it consistently, they would have made even their own system more realistic. Boldly suppressing in imagination one set of actual forces, in order to study more easily another set, must result in reaching conclusions that are partial but are not necessarily unreal. If these early students had later done what they never tried to do, and had completed their system by separately examining the dynamic forces, they would have attained a complete and realistic science.
The prices that conform to the cost of production are, of course, those which give no clear profit to the
entrepreneur. A business man whose goods sell at such rates will get wages for whatever amount of labor he may perform, and interest for any capital that he may furnish; but he will have nothing more to show in the way of gain. He will sell his product for what the elements that compose it have really cost him, if his own labor and the use of his capital be counted among the costs. We shall see that this condition of no-profit prices exactly corresponds to the one that would result from the static adjustment of the producing groups. We establish such prices, if we so adjust labor and capital in the different groups and sub-groups as to make the earnings of each of these two agents uniform in all parts of the system. The natural prices of the classical school are, therefore, static prices incompletely conceived. A no-profits régime is one of levelled gains for all units of labor and for all units of capital. If the classical study of wages had been, so far as it went, completely successful, it would merely have furnished a static standard of pay for labor.
A normal rate of interest early writers made no attempt to explain. They referred to demand and supply, as the mechanism by which interest is adjusted, but gave no reason why these forces fix the earnings of capital at any definable rate. So far as it went in the direction of attaining natural standards, the classical political economy made an unconscious and incomplete presentation of the rates of interest that would prevail in a static society.
The impression of unreality that is made by these studies is removed by completing them, on the same theoretical plan upon which they have been started. We must use assumptions boldly and advisedly, make labor and capital absolutely mobile, and let competition work in ideal perfection. We must, in imagination, sweep remorselessly from the field the whole set of influences that we have called dynamic. In doing this, we remove all of that friction which vitiates the action of pure economic laws; for friction of this kind goes entirely with dynamics, and there is none of it to the static state. If we make the force that draws a man toward one sub-group equal to that which draws him toward another,—that is, if we bring his earning power in different groups to uniformity,—the man remains in his place. Then, of course, there is none of the friction that a transfer from one sub-group to another encounters; and it is exactly this kind of friction that vitiates the so-called natural laws of the classical economists. It is because labor and capital cannot go from group to group, instantly and without obstruction or waste, that actual values, wages and interest always differ from the normal ones that have figured in pure theory.
Since, then, it is dynamic changes that call for such local transfers of the producing agents, and since it is the transfers that cause the friction, the static condition is free from this disturbing influence. We have proposed to reduce the economic world to this frictionless state. We shall, in imagination, stop every one of the five organic changes that are actually moving and relocating the economic agents. Unlike, indeed, to real life is the economy that results; but it is unlike it only through incompleteness. The forces that in the imaginary world continue to act, are acting in the world as it is. Work continues and instruments are used; and these are substantial realities. Changes in the mode of working and in the forms of the instruments have been stopped; but the economy that is left is, so far as it goes, real. The standards of value, wages and interest that we get are those about which rates in the actual world are fluctuating.
We are next to try to make the economy that we are studying complete, as well as real. We are to give it the elements that are wanting, and make it, in its completeness, correspond accurately to the economy of the actual world. In the concluding part of our study we are to restore the dynamic forces that our earlier hypothesis removed and to note the special effects of their action. For the first time, we shall thus be able to understand and to measure these forces; for their effects will stand by themselves. We can make a science of the movement that is going on within the group system, and of the friction that it encounters. Whenever a theoretical world has been created, in which natural values, wages and interest prevail, that which has been banished is social economic dynamics. This ought not, however, to be treated as a mere disturbing influence: it is an element that science, as such, must include in its calculations. If we put it out of sight, with no intention of restoring it, we get a result that is unreal, because it is seriously incomplete; but if we first remove the dynamic movement and then restore it, we create a science that fully interprets economic life.
In the preliminary study that is made in this legitimate way, population and capital are treated as neither increasing nor diminishing. Under the hypothesis adopted, inventions are not made and processes of production do not change. None of those consolidations of labor and capital, which are so striking a feature of recent times, are forming. The kinds of goods created remain perpetually the same. In consequence of all this, labor and capital remain constant, and values, wages and interest are, in the classical sense, natural. In the world of the completed study, on the other hand, population and wealth are increasing; processes and modes of organization are changing; new products are creating; and the flow of labor and capital from group to group, which is the outward sign of these changes, is going on. It is, in short, the real world that a completed hypothesis brings before us. Though theoretical throughout, the science thus makes itself real, by the completeness of its assumptions.
Economic dynamics has a striking relation to those recent historical economic studies which have been so attractive and fruitful. Progress is the fact that calls for such studies. The present state of the world, it is obvious, differs from the conditions of fifty years ago and from those of fifty years hence. Historical economics records and measures such differences, while the theory of economic dynamics accounts for them. Historical economics will note and measure the gains that have been made by a hundred years of migration and mechanical invention, while the theory of economic dynamics will refer these gains to their causes and furnish a philosophy of economic evolution. As it shall become more and more nearly complete, this theory will, moreover, enable men to announce with increasing confidence the kinds of change that are to be expected in the future.
Economic dynamics will, in its entirety, incorporate into itself historical economics. The changes that are going on in the world will in future be studied inductively, as well as deductively; and it is the inductive part of the work that falls to the historical economist. In the long run, it is this part that will need to absorb the most scientific labor. The static laws of economics ought, consequently, to be known at an early date. Dynamic laws will not be known so early; but whenever they shall be scientifically established, there will remain to be done the work of measuring the effects of particular influences that act on society.
How great, for example, is the effect of a mechanical invention or of the settlement of a new country on the rate of wages? Such a question, if it can be answered at all, will demand a far more difficult kind of research than does the question whether migrations and inventions naturally raise wages or lower them.
It is within reason to suppose that, before the twentieth century shall have passed, men will know what kinds of results follow an increase of population, an augmentation of capital, a new mode of organizing industry or the use of a new kind of consumers’ wealth. What the pure theory of economic dynamics does, when it answers such a question, is in effect to make a qualitative analysis of the phenomena of change. It must go
seriatim through the list of great movements that are transforming the face of the world, and ascertain the nature of the effect that each of them produces. It must analyze the process by which each effect is produced. Thus far the study does not involve calculations of quantity: there is in it no computation of the amount of each effect. Purely qualitative as the study is, however, it will open to the theoretical economist an inspiring vista for future advances in his science. Does the law ensure the survival of what is best? Is humanity gaining by the changes that are going on in industry? If gains predominate, do they accrue largely to the laborers? What net result to a working-man has followed from the fact that farmers have cast aside the reaping-hooks of their fathers, and are using harvesting-machines? What will happen to workers of the future, as cheap motive powers shall be utilized, and as electric wires shall carry the power everywhere? What will be the effect of the automatic machines that will bring commodities out of non-existence at the cost of little effort beyond the touching of a button? How will the laborer fare as the world shall crowd itself with a dense population? What will befall him, if this teeming life is more than matched by the growth of productive wealth? If capitalists become inordinately rich, what will become of the class that is now poor? Will the ownership of capital ever be widely diffused? It is, in short, the
direction that progress is taking that is the all-important question; and the laborer is the one whose fortunes, in the régime of progress, are of supreme consequence. Issues like this the theory of economic dynamics must decide.
There will then remain a work of verification and of measurement. If improvements tend to raise wages, statistics should prove it; and they should measure the rate of the gain. The most laborious study that economists will ever have to undertake will consist of such a use of comparative statistics as shall measure the separate effects of different dynamic changes that in real life are acting together. Thus, we may ask: How much, in the way of extra wages, can at this date be imputed to the use of electric dynamos? With present means of information, this is an unanswerable question. The study of such problems can, moreover, never be completed, for they will forever present themselves in new forms. The mere theory of economic dynamics will enlarge by many fold the scope of political economy: it will lift theory to a new plane. The statement of the pure laws of economic change will open, as it were, the vestibule of the science of the future. It will afford an approach to a larger area. But the largest and most permanent work of the future must consist of historical and statistical studies, directed by a full knowledge of economic law.
Note.—The statement made in the foregoing chapter that a static state excludes true
entrepreneurs’ profits does not deny that a legal monopoly might secure to an
entrepreneur a profit that would be as permanent as the law that should create it—and that too, in a social condition which, at first glance, might appear to be static. The agents, labor and capital, would be prevented from moving into the favored industry, though economic forces, if they had been left unhindered, would have caused them to move to it. This condition, however, is not a true static state, as it has here been defined. Such a genuine static state has been likened to that of a body of tranquil water, which is held motionless solely by an equilibrium of forces. It is not frozen into fixity; but as each particle is impelled in all directions by the same amounts of force, it retains a fixed position. There is
a perfect fluidity, but no flow; and in like manner the industrial groups are in a truly static state when the industrial agents, labor and capital, show
a perfect mobility, but no motion. A legal monopoly destroys at a certain point this mobility, and is to be treated as an element of obstruction or of friction that is so powerful as not merely to retard a movement that an economic force, if unhindered, would cause, but to prevent the movement altogether.