Front Page Titles (by Subject) PART IV.: DISTRIBUTION. - Political Economy
The Online Library of Liberty
A project of Liberty Fund, Inc.
PART IV.: DISTRIBUTION. - Francis Amasa Walker, Political Economy 
Political Economy (London: Macmillan, 1892) 3rd revised and enlarged edition.
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
The text is in the public domain.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
THE PARTIES TO THE DISTRIBUTION OF WEALTH.
244. Distribution as a Department of Political Economy.—Under the title, Distribution, we inquire, what are the forces which divide wealth among the several persons, or classes of persons, who have taken part in its production?
In a primitive condition of society, the problem of distribution is a simple one. Three hunters join in an expedition, and at the conclusion of the chase, divide their game into three equal parts. If boys, or cripples, or men of less than ordinary force or skill, are taken into the partnership, it is easily determined what portion of a full man's share each such person shall receive.
In a highly organized community, however, the division of the product of industry into shares corresponding to the number of persons who have taken part in production, is a complicated problem.
245. The Division of the Web of Cloth.—For example, let us take the case of a cotton factory, at Lawrence, which produces in a given time a million yards of cloth. We may suppose that this is all woven in one piece, and that each person who has, in any way, contributed to making this giant web, advances in a certain order to receive his share.
The agent for the water company first appears, and cuts off some thousands of yards, inasmuch as his company furnished the power that drove the wheels below, that turned the spindles above. Then comes the owner of the land on which the mill is built, and carries off, perhaps, a piece five times as large; next, the owner of the mill, who takes the largest piece of all; next, the man who gave the use of the machinery and loaned the working capital, and now measures off many miles of the cloth as his share.
So far, all has gone smoothly. Though the manufacturer has stood by and seen the fearful inroads made upon the web by the successive claimants, little has been said, and that in a low tone and in a business-like way. Some reason is known to the manufacturer why each of these persons should receive so much and no less. Some calculation which he is able rapidly to make maintains a complete understanding between him and them.
Now, however, the scene changes; there remain but two parties as claimants to the six or seven hundred thousand yards that are left. On the one side we see a crowd composed of persons engaged in the mill as overseers, as clerks, as mechanics, as laborers, as “operatives,” in all, some hundreds of men, women and children, of varying degrees of strength, skill and intelligence; on the other side, stands the manufacturer. All that these do not take, will be his; and as piece after piece is rapidly cut off, he seems to fear that not enough will remain for him, while each of them appears disaffected that his own share is not larger, deeming it especially a hardship that, after he and his comrades are served, so much will be left to the manufacturer. According to their several dispositions, some threaten that it shall not be so again; some merely grumble; others take up their little rolls of cloth and walk away with a patient air, as if they hoped for nothing better.
At last the manufacturer is left with his share. If it has been a good season, and all has gone well; if the cotton has turned out of good quality, if the weather has been propitious, with just enough of heat and of moisture for the quickest and most uniform spinning; if there have been no floods in the river, giving trouble, and no low water, so that the wheel has turned steadily and powerfully whenever the gate was lifted, the roll of cloth which the manufacturer will carry back into the warehouse will be large, and his face will wear a contented look. If, on the other hand, any one of a dozen untoward accidents, reasonably to be apprehended, has occurred, his share will be less, perhaps little, possibly nothing.
246. The Problem of Distribution.—It is under the present title that we inquire why it is that each of these claimants on the product of the cotton factory takes so much and takes no more. Of course, in the immediate instance that reason is found in the force of contract. All the other parties had agreed with the manufacturer to allow him the use of their property, or to render him their services, at certain rates. But why did they contract at those rates, and not at higher; and why will they, as they probably will, immediately proceed to make new contracts, at the same, perhaps at lower rates?
Why, in particular, is it that the division of the product is effected with so little of friction or complaint, as between the manufacturer and the water company, the owner of the ground, the owner of the mill, the owner of the machinery and of the working capital; while between the manufacturer and the “hands” there is so much of dissatisfaction and jealousy, of complaint and irritation?
247. Distinction between the Exchange of Services and of Commodities.—Among those writers who have defined political economy as the Science of Exchanges, distribution is not recognized as a separate department of inquiry, involving principles peculiar to itself. These writers find that the subjects of exchange are, broadly speaking, two, viz., services and commodities, or, labor and the products of past labor. To carry forward this distinction is not consistent with the simplicity of the science which these writers have in contemplation. The difficulty is soon resolved. They discover that commodities are, after all, nothing but services which have taken on a material form, and thereafter they speak only of services, and thereby secure to political economy “one grand characteristic of the great sciences, viz., simplicity.” This effected, the distinction between the Distribution and the Exchange of wealth falls to the ground. There is no longer any need for the former term in political economy.
But I venture to assert that this forced simplicity, secured by compelling into a single form things having much that is not in common; this false peace, which disregards irreconcilable differences; this hasty generalization, by which services and commodities are made to be one and the same thing, has had the effect to render political economy signally barren through the very period when social philosophy has been most prolific, and, secondly, to forfeit nearly all popular respect for, and interest in, the so-called science of exchanges.
248. “During the present century,” says the Duke of Argyle, in his Reign of Law, “two great discoveries have been made in the science of government: the one is the immense advantage of abolishing restrictions upon trade; the other is the absolute necessity of imposing restrictions upon labor.”
I do not quote this passage, here, for the sake of raising the question of Ten-Hour laws or factory inspection (pars. 471–3), but only to call attention to the clear, strong antithesis in which it places services and commodities. That statement does not exaggerate the general and still growing consent of social philosophers and legislators that the rendering of services differs so widely from the exchange of commodities that the two must stand in different relations to legislation. More and more fully has this distinction come to be recognized. If political economy denies the validity of the distinction, so much the worse for political economy, in the eyes of social philosophers and statesmen alike. Surely, the simplicity of the science may be secured at too high a cost!
Equally against the pressure of enormous vested interests, and against the protests of professional political economists, the legislation of almost every enlightened country has progressed by steady steps, through the last sixty, forty, and especially during the last twenty years, in the direction of discriminating vitally between commodities and services, allowing continually greater and greater freedom of contract in respect to the former, and bringing the contracts which involve the latter more and more completely under the authority and supervision of the State.
And yet there is complaint that statesmen and the mass of the people entertain such slight regard for political economy, whose professors, in the interest of the purity and simplicity of their science, discard from the premises of their reasoning (par. 21) all the “sympathies, apathies, and antipathies” of mankind, and insist upon treating a Manchester spinner, with a wife and six children, ignorant, fearful, and poor, as possessing the same mobility economically, and under the same subjection to the impulses of pecuniary interest, as a bale of Manchester cottons on the wharf, free to go to India or to Iceland, as the difference of a penny in the price may determine!
249. An Analogous Case.—But we shall not get a full measure of the insufficiency of the reasons given for dropping the distinction between commodities and services, in exchange, unless we ask what would be the consequences to political economy of dealing in the same spirit with the analogous case of the distinction between labor and capital, in production. Suppose the political economist were to say: Capital is but the result of the labor of the past; it is, in essence, labor which has taken on a material and more or less permanent form; whatever is true of labor must be true of capital; we will, therefore, resolve the two into one, and thus promote the simplicity of political economy. Simplicity, indeed! but at the cost of the loss of all significance, if not all sense. What sort of a political economy would that be which did not recognize the distinction between labor and capital in production? Yet the distinction has a singularly close analogy to that between services and commodities in exchange.
250. A Contest, though not a Destructive Contest.—It will be noted that the distribution of the product of industry involves what may be termed a perpetual contest between the parties to production. This contest is not a destructive one, since the interest of each of the participants requires the existence, and, by consequence, the sustentation, of all the others. Yet, within the limits consistent with this, there is opposition of interests.
251. The Parties to the Distribution of Wealth.—The contest is, in the last analysis, between individuals. We shall see that the real or supposed common interests of a number of producers may create a supposed class interest which will lead them to act in concert, with a subordination of individual preferences to the general good; but, as a rule, the efforts of individuals are directed to a personal benefit. Inasmuch, however, as it would be impossible to work out the problem of distribution with reference to each man, woman, and child, we may aggregate individuals, according to what they have in common, into classes, larger or smaller, and may seek for the general law which governs the efforts of the members of each class towards the acquisition of wealth.
252. Classes in Distribution.—Even if we disregard petty distinctions and inconsiderable exceptions, the prime classes appearing in distribution will vary in different countries. A classification which would fully meet the facts of industrial organization in India, would omit distinctions of prime importance in England.
Inasmuch as we could not, in an elementary treatise, give the space needed to set forth the problem of distribution in each country or group of countries having a common industrial organization, we will consider for our present purpose the industrial organization of England. We take this, because it is the most highly developed organization known to industry; because it is largely reproduced in the United States and on the continent of Europe, and in Canada and Australia, and is everywhere, among progressive peoples, more and more widely extending from year to year. Moreover, it will be easier for the reader to work out for himself the problem of distribution in countries of a lower organization, than it would be to go from the simpler to the more complex forms of industrial life.
Under the system which we have taken for the purposes of the present discussion, we have four classes of claimants upon the product of industry, and that product is accordingly divided into four grand shares. These classes and the shares respectively received by them may be expressed as follows:
The reason for naming these several claimants in the order just given, will appear as we make progress in the discussion of the forces which effect the distribution of wealth.
253. Definition of Rent.—Rent is the term applied to the remuneration received by the land-owning class for the use of the native and indestructible powers of the soil, or, as it might be expressed, for the use of natural agents.
That remuneration may be paid in money or in produce. The term land, or natural agents, must be understood to include not only arable land, but pasture, timber lands, mineral deposits, water privileges and building sites. For the present discussion, however, it will be best to take our illustrations from the occupancy and cultivation of arable land.
254. The Origin of Rent Illustrated.—Let us suppose a community, isolated from all others, to occupy a circular tract of land divided, as in the following diagram, into four sectors equal in extent but so differing in fertility that one piece will, with so many days' labor in the year given to plowing, cultivating and harvesting, yield 24 bushels of wheat per acre, while the second will yield, with the same amount of labor, but 22 bushels, the third but 20 bushels, and the fourth but 18. Now the assumption we have made as to differing degrees of fertility in the soil of the several tracts, is not an extravagant one. On the contrary, we might reasonably have assumed the degrees of fertility to differ far more widely. “A quarter of wheat,” says Mr. McCulloch, “may be raised in Kent, or Essex, or in the Carse of Gowrie, for a fourth or fifth part, perhaps, of the expense necessary to raise it on the worst soils under cultivation in the least fertile parts of the kingdom.”
In order to further simplify the problem, we will suppose that all the inhabitants of this community reside in a village at the center.
255. The Ante-Rent Stage of Cultivation.—Let the first case taken be when the village is yet so small that all the wheat required for the subsistence of the population can be raised upon a portion only of what we will call the 24-bushel tract. If the tract be held by a number of competing owners,∗ each acting for himself, seeking his individual in terest, no rent will be paid, or only a rent so small that for purposes of economic reasoning we may disregard it. Each owner of land in this tract will be desirous of securing for himself whatever compensation, if any, is to be paid for the use of land. But as the entire tract is not required for cultivation, and, as, consequently, only a part of the owners can receive any compensation for their land, an active competition will set in, each man offering the use of his land for less and less, in order to get something, until rent falls to a minimum, or disappears altogether.
256. Relation of Waste to Rent.—And it is here we see the significance of the word, “indestructible,” in par. 253. All scientific reasoning about rent is based on the assumption that the tenant will leave the soil in as good condition as it was in when he took it. Now, it is possible for a tenant to impair the fertility of land, first, by intentional abuse, or, secondly, by taking away its productive essences, in the crops of successive years, without returning any thing to it in the shape of manures or other fertilizers.
It is only upon the above assumption that it would be true that each owner of land in the twenty-four bushel tract would prefer to lease it for a very small rent, approaching nothing, rather than not lease it at all. Unless he could be protected, by law or contract, against exhaustion of the soil, he might prefer to let his land go unoccupied. But on the assumption stated, the proposition is true that, in the situation described, no portion of the twenty-four bushel tract would bring so large a rent that it might not, for purposes of economic reasoning, be treated as nil.
257. Rent Emerges.—Let us now advance to the second stage. We will suppose that the population of the village has increased to such an extent that the whole of the twenty-four bushel tract will no longer raise, when cultivated as it has heretofore been, all the wheat required for the subsistence of the community. Cultivation will then be driven down to an inferior grade of soils. A part of the second tract, the twenty-two bushel tract, will be taken up.
Do you ask, why not increase the amount of labor upon the twenty-four bushel tract, and so raise more wheat to the acre? I answer, because of the great fact of Diminishing Returns in Agriculture, which was set forth in Part II., with so much particularity. We shall now see the whole theory of rent built upon it. The fact itself is undeniable. In every country of the world, and in every parish or township of every country, cultivation is seen descending to grades of soils below the best, because the yield from the highest grades can not be increased proportionally to an increase of labor expended thereon.
Cultivation having, in the case of the community whose industrial history we have traced so far, been driven down to the twenty-two bushel tract, rent will at once emerge. Not that rent will be paid for any portion of the latter tract, which will all be in the same condition, as regards compensation for its use, as was the first tract, when that alone was cultivated; but for the twenty-four bushel tract, and for each portion of it, rent will now be paid. Why? Because any person desiring to raise wheat may better, may he not? pay something for cultivating a portion of that tract, than cultivate a portion of the new lands for nothing.
How much will he pay? Exactly the difference between the crops to be grown on the two soils, with the same application of labor, i. e., two bushels, since he can afford to pay this rent rather than move to the less productive soil. As some must so move, the landlord will be able to exact the maximum rent from the present cultivator: if not, from some other.
Let us now advance another stage, and suppose the increase of population to require the cultivation of the twenty-bushel tract. The effect of this downward movement of the limit of cultivation will be two-fold:
First, the twenty-two bushel tract will begin to bear a rent, since any cultivator can better afford to pay a certain rent for the privilege than occupy a portion of the new land for nothing. The amount of that rent will be determined by the difference in productiveness between the two tracts, being, in the case supposed, two bushels, an acre.
Secondly, the tract first cultivated now brings its owner a rent (24—20=4), not of two bushels, but of four. It is no better land than it was before; it produces no more wheat under the same application of labor and capital; yet it yields its owner a rent twice as great as before cultivation descended to the third grade of soils. That increase of rent takes place simply and solely because cultivation has so descended.
If, again, we suppose that the increasing needs of the community require the cultivation of the eighteen-bushel tract, even the twenty-bushel tract will begin to bear a rent, viz., two bushels, while the rent of the next tract will rise to four bushels, and that of the most productive land to six bushels, or three times the original amount.
258. The Law of Rent.—If we have correctly traced the course of self-interest, in dealing with the occupation of land, under the necessity of a resort to inferior soils, we are prepared to state the law of rent.
259. Cost of Transportation.—By productiveness throughout the foregoing discussion, has been intended net productiveness, the cost of transportation to market being first deducted.
In the illustration as thus far given, the cost of transportation has been left out of account. Let us now, however, suppose a tract to be brought under cultivation for the purpose of supplying this market, situated at so great a distance as to make the cost of transportation a considerable element in the problem of rent.
If the reader will recur to the diagram, he will see that we have marked out a tract, at some distance from our village, the path thereto bearing the legend —2, by which we have intended to signify that the cattle and men taking the grain to market will eat, going and returning, two bushels out of the produce of each acre. The net productiveness of the tract will then be, for the purpose of determining its rental, not 23 bushels, but 21. It will not be cultivated until after the first two tracts have been completely occupied. It will then be cultivated, but will bear no rent so long as its produce, combined with that of those two tracts, suffices for the sustentation of the community. But when the increasing needs of population drive cultivation down to the 20-bushel tract, the tract in question will bear a rent of one bushel, which will rise to three when cultivation seeks the 18-bushel tract.
260. A New Continent.—The reader will further note that we have connected the same community with the projecting edge of a continent, which we have named America, by a dotted line, to which we have attached the sign and figure —8. These represent that portion of the crop of the year which is given to railway companies and the owners of vessels, as a consideration for transporting the grain to the English market. The net produce of these lands is, then, 20 bushels. Though they actually yield 28 bushels to the acre, with the given application of labor, they will bear no rent till the 18-bushel tract of English land is brought under cultivation, when they will yield two bushels rent, an acre, the same as the 20-bushel English tract, the net productiveness being the same.
But suppose this American land is of vast extent, and upon it can be raised all the grain which this, or any, market requires, what will be the effect upon rents? Why this: no one will now cultivate the English 18-bushel tract. Why should one, since a greater net produce can be obtained by the same labor elsewhere? This lowest grade of soils, therefore, falls out of cultivation. With what effect upon the rent of other parcels of land? To answer this, let us recur to our formula. The rent of any piece of land is determined by the difference between its annual yield and that of the least productive land under cultivation for the purpose of supplying the same market. The 24-bushel English tract has been bringing its owner 6 bushels, an acre, rent, because, and only because, the 18-bushel tract was necessarily brought under cultivation. Now, however, that American land, with a net productiveness of 20 bushels, an acre (28—8=20) is found in unlimited amount, the margin of cultivation is pushed backwards, and the best of the English tracts brings but four bushels rent; the next best but two; the 20-bushel tract now bears no rent, as it is in competition with free American land of indefinite extent.
Again, assume that the introduction of Bessemer steel rails and various improvements in ocean navigation reduce the cost of transportation of American grain to seven bushels out of every 28, what will be the effect on English rents? Clearly the American land now has a net productiveness represented by 21 bushels, and, as it is of unlimited extent, all the English 20-bushel land is thrown out of cultivation—for who would wish to cultivate it? and the rent of the best English land is reduced to three bushels, and that of the second grade to one.
The foregoing illustration accounts sufficiently for the great economic, and, by consequence, great social change, which has been going on in the British Islands within the last few years. The reduction in the cost of transportation from the American wheat fields beyond the Mississippi to the seaboard, and from the seaboard to Liverpool, has increased the net productiveness of those fields to a degree equal to the addition of several bushels an acre to the crop. This has thrown out of cultivation much of the poorer English land, and, by lifting upward the limit of cultivation, has decreased the normal rent of all English lands, cutting deeply, in prospect, into the incomes of the land-owning class. The first effects, however, have been most severely felt by the cultivators of the soil, who, holding their farms by lease, find themselves still bound to pay the stipulated rents.
261. Relation of Rent to the Price of Land.—We have stated the economic doctrine of rent. The price of land and its rental value stand in a certain necessary relation to each other. Land has its price because, and only because, it can command a rent. But while the relation between the two is a necessary one, being no less direct than that of cause and effect, the ratio between the rent of land and the price of land, expressed in terms of produce or of money, varies widely. In some countries, where the amount of accumulated capital is large; where a high degree of civil security exists; where the rights of property are respected, and where the ownership of land carries with it social distinction and perhaps political influence, the price of land may be twenty, twenty-five or even thirty times the annual rental. In other countries, from the failure of one or all of the conditions indicated, land may not sell for more than fifteen or even ten times its rental.
262. Rent forms no part of the Price of Agricultural Produce.—From the law of rent, as it has been stated, we deduce the very important conclusion that rent forms no part of the price of agricultural produce.
No proposition which the political economist has occasion to announce is so startling, at the first hearing, as this; nor does any other contend against such persistent incredulity. And yet, no proposition can be more clearly established. We have seen (par. 132) that in the same market, at the same time, there is but one price for different equal portions of any commodity. We have also seen (par. 137) that normal price is fixed by the cost of producing that portion of the supply which is produced at the greatest disadvantage.
Apply these principles to the case in hand. England does not raise all the wheat needed for the subsistence of her population. Besides cultivating the most fertile of her own fields, she makes heavy draughts upon the United States, France, Egypt, Hungary, and the Black Sea region. For the wheat of all these countries, however, so far as it is of the same quality, there is but one price. That price is fixed by the cost of raising the million, say, of bushels which are raised at the greatest disadvantage, which means, in this case, at the greatest distance, viz., on the plains of Dakota. This wheat the English must have: the proof of which is found in the fact that they do have it. Now, if they will have it, they must pay the cost of raising it, that is, must pay enough to induce men to go to that far-off country, undergo the privations of a frontier life, undertake all the risks of pioneer agriculture, and submit to enormous charges for the transportation of their product by land two thousand miles to the seaboard, and, then, three thousand miles, by sea. If the English will not pay this price, they can not have the wheat. That they get the wheat is proof that they pay this price, which, in turn, sets the price for all the wheat raised in England, and for all the wheat brought thither, whether from France, from Egypt or from the Black Sea. Wheat may be raised in Middlesex at an actual cost not exceeding two shillings a bushel; but the Middlesex farmer will not, on that account, sell his wheat below the market price, say six shillings, which price is fixed, as we have seen, by the wheat from America. The difference, four shillings, is to be profit for somebody; and we will now proceed to show that this body must be either the landlord, or the tenant, not the agricultural laborer, and not the consumer of flour.
263. What Would Happen if Rents Were Remitted?—We shall best make this appear by means of an illustration. Let us suppose that a philanthropic gentleman, whose rent roll is £20,000, being greatly moved by tales of distress, knowing that the quartern loaf is very dear, and believing this to be due to the large rents paid for the use of land, calls his tenants together, and tells them that, in consideration of the hard times and the great suffering of the poor, he has determined to remit one-half of the rent of all his farms. What would be the consequence? Doubtless all the tenants would accept the proffered terms cheerfully, and humbly thank his honor. But would they sell the wheat at any lower price? Not at all; why should they? They can get the market price for it. That price is not fixed by the cost of raising wheat on their farms, or any farms for which rent is paid. It is the no-rent land that raises that last portion of the necessary supply of wheat which fixes the price of all wheat.
But suppose, to imagine a most improbable case, that some one out of the fifty tenants on this estate were to go to the dealer in grain to whom he was accustomed to sell his crop, and say: “Mr. B., inasmuch as my landlord has remitted half my rent this year, I offer you my wheat a shilling less a bushel, in order that you may sell it at a corresponding reduction to the baker.” What would the grain-dealer do? Clearly he would take the wheat, at the reduced price offered; but would he sell it to the baker for any less? Or, if he did, would the baker, getting his flour a shilling “off,” put down the price of the loaf? Not if he were of the sort of baker that you and I know.
But perhaps it is said, we concede that the farmers will not sell their wheat at any lower price, on account of the remission of rent, but they will raise the wages of their laborers. Why should they? They can make presents to their laborers, just as they could make presents to grain dealers or bakers, but we are talking now about business, and, as a matter of business, why should these fifty persons raise the wages of their laborers, in consequence of the generosity of their own landlord? The laborers were willing to work, before, for the wages that were stipulated, the same wages, it may be assumed, which other laborers in the county were receiving. Why should the laborers now be unwilling to work at the same wages? And if the laborers are willing to work at the same wages, why should the farmers pay more?
264. Resume of the Subject.—These illustrations may seem very elementary, but I have known so many persons, after a complete demonstration of the proposition we are considering, go away, showing, by look or by remark, that they still clung to the notion that rent has, somehow, something to do with the price of agricultural produce, that I have thought it worth the space required to repeat the demonstration and fully illustrate the argument. I trust it has been shown, to the conviction of every reader, that rent is a matter between the landowner and the tenant, not between the landlord and the agricultural laborer, or between the landlord and the consumer of agricultural produce.
Rent is the surplus of the crop above the cost of cultivation on the least productive lands contributing to the supply of the market. Admitting the private ownership of land (pars. 493-505), that surplus, necessarily, so far as economic forces are concerned, is left in the hands of the landlord. There, so far as economic forces are concerned, it must remain. The landlord can give it away, if he pleases, just as he can give away his horse, or his house, or any thing that is his. He can give it to his tenant, just as he could give to any one else. But if he does, it becomes a pure gratuity to the tenant, who, under the operation of the principle of self-interest, will transmit it neither to the agricultural laborer nor to the consumer of food, but will retain it entire for his own enrichment.
265. Attacks on the Doctrine of Rent.—Such is the economic doctrine of wealth, which is generally known by the name of David Ricardo, though, in truth, it was announced by Anderson, a Scotch economist, who wrote at an earlier date.∗
I postpone to Part VI. the consideration of attacks upon the doctrine of Rent, by certain American and French writers.
266. The Doctrine of Rent: How Far Applicable to Actual Conditions?—The law of rent which has been expounded, is true only hypothetically, that is, upon the condition assumed, viz., that the owners and the occupiers of land, each for himself, fully understand their own pecuniary interests, and will unflinchingly seek and unfailingly find their best market.
How much does this mean? A great deal; more than ever was realized in any country, at any time, though it has been far more nearly approached in some than in others. Just what is implied in the above assumption?
On the landlord's part that (1) he would as soon take a new tenant as retain one whose family had been on the soil for centuries; that (2) he will entertain no other consideration than the realization of the largest possible rent; that (3) he knows all the facts which in any way bear upon the highest rate that could be charged for the use of the land without driving away all would-be tenants.
On the tenant's part, that (1) he has the means to place himself elsewhere; that (2) he could carry with him the value of his stock and fixtures, and of any improvements made during his tenancy; that (3) he knows and can intelligently canvass the varying advantages of a sufficient number of localities to make his choice practically indefinite; and that (4) neither indolence, nor inertia, nor dread of change, nor love of home, friends or country, will intervene to keep him from his best market: that is, where he can rent land, of a given degree of productiveness, at the lowest annual rate.
The recital of the foregoing conditions shows that Ricardo's law does not furnish a formula by which the rent of a single piece of land can be determined in advance. The doctrine is true only hypothetically, and the conditions assumed exist nowhere.
267. Yet this hypothetical doctrine of rent is by no means to be regarded as vain and illusory. It is, on the contrary, of vast importance. It must be fundamental in any correct theory of the distribution of wealth. No projectile ever describes a perfect parabola, since the resistance of the air and the force of the wind will interfere to prevent an absolute compliance with the law of the projectile. Yet the artillerist must always have reference to that law in pointing his piece, making such allowance for disturbing influences as existing conditions may seem to require. Any attempt to explain the partition of the product of industry which should leave Economic Rent out of account, would be either futile or deceptive.
In some countries, notably in the United States and in England, Ricardo's law furnishes the great underlying principle according to which, with more or less of divergence from general or from local and individual causes, actual rents are primarily determined. In other countries, like those of continental Europe generally, where custom operates powerfully upon the rental of land, the doctrine is still of importance; first, as clearly furnishing the outside limit of rent; secondly, as establishing the proposition that the question of rent or no rent, of high rent or low rent, is purely a question between landlord and tenant, not between the employer and the employed, and not between the producer and the consumer of food.
268. Rents in the United States.—We have said that in some countries the economic doctrine of rent furnishes the principle which primarily determines actual rents. The United States offer the most striking illustration of this. So completely is the American mind imbued with the feeling that a thing is worth what it will bring; so little sympathy is here found for the notion of classes which, by reason of weakness, must be hedged in from competition with outside forces; so vast are the tracts of arable land not yet occupied; so freely do our people move from place to place; so slight are their attachments to locality, that no prejudice whatever would be created by a landlord's demanding the utmost rent which the tenant could, and in the result, would, pay. The fact that the tenant actually paid the rent demanded would be proof sufficient that he ought to pay it; that the land was worth it, and that the landlord showed only a proper sense of his own interest in advancing the price.
Nay, should the tenant refuse to pay the increased rent and give way to another, I know not an American community where odium would attach to the landlord. It would be felt, it would be freely said: If the tenant is not willing to pay the price of the land, let some one take it who is. And what is true of the United States in this particular, is true probably in nearly equal degree of Canada and Australia, new countries exhibiting the same general conditions of social life.
Here we see the unrestrained operation of the principle of competition, with a wholly beneficial result. The tenant and landlord, being substantially on an equality as to intelligence, enterprise and freedom of movement, seek each his own interest, yet without injury to the other.
269. English Rents.—When, however, we reach England, we find a new force entering actively to influence rents, all on the side of the tenant. Here the sentiment is universal that there are classes which, by reason of wealth, education, and social position, are bound to do and to forbear much, out of regard to the interests of classes deemed to be permanently and hopelessly weak.
The gentleman must never forget, in dealing with his servants, his laborers, his tenants, and even in some degree his trades' people, that he is dealing with inferiors and dependents, who are, in a sense, under his protection, who can not easily defend themselves against encroachment or fully assert their own interests, and that, in consequence, he is bound to act somewhat differently, it may be very differently, from what he would were he dealing with his equals.
But it is in regard to land that this sentiment operates with the greatest force. It would be impossible for an English landed proprietor to feel that freedom in regard to raising rents which characterizes the action of an American land-owner. A gentleman there who should undertake to force up rents, acting on the principle that, if his present tenants could not or would not pay his price, he would find others to do it, would feel the lash of public indignation descend on his back till life was made a burden to him. Instead of gaining increase of style and state through an enlargement of his rent-roll thus obtained, his social standing would be destroyed.
With public sentiment thus acting strongly and steadily in restraint of the natural impulses of the landholding class, we should look to see a divergence of actual from theoretical rents, all on the side of the tenant's interest; and such, indeed, we find to have been the case down to the time when, perhaps ten years ago, American competition began to operate with prodigious and altogether unprecedented force. “The rent of agricultural land,” wrote Prof. Thorold Rogers, “is seldom the maximum annual value of the occupancy; in many cases is considerably below such an amount.”
270. Customary Rents on the Continent of Europe.—On the Continent of Europe, rents are, in general, not determined by competition, but by custom, to which Mr. Mill has assigned the same beneficent function in economics it has always performed in the sphere of politics, as “the most powerful protector of the weak against the strong.” In Switzerland, France and Italy, rents were formerly fixed almost universally by the custom of the country, at a certain definite portion of the produce of the land. This species of tenure, known as the Metayer tenancy, has been fully recognized as giving to the peasantry the use of land at less than the maximum rents, as determined by the application of the purely economic formula. So strong is custom in protecting the tenant's interest, in these countries, that oftentimes it happens that, where cities have sprung up during the continuance of a family upon the soil, giving a local market for produce, and, by consequence, raising prices, the landlord, even in admitting a new family to the estate, does not attempt to exact a larger share of the produce.
“A proprietor,” says Sismondi, writing of Tuscany, “would not dare to impose conditions unusual in the country; and, even in changing one metayer for another, he alters nothing of the terms of the engagement.”
271. Rents in Ireland.—We have seen how far actual may be made to diverge from theoretical rents, all on the side of the tenant's interest, by the force of public sentiment. Let us now turn to a country where, in the time of which we are to speak, the population was not homogeneous; where prejudices of race and religion had engendered animosities that descended from generation to generation; where no friendly public opinion stood guard over the interests of a peasantry whose improvidence concurred with the greed of the landlord class in exciting a fierce and unremitting competition for the occupancy of the soil.
The story of the wrongs done to Ireland is so familiar that it is needless to enter into details to show why it was that in Ireland nothing intervened between landlord and tenant to break the force of competition. It was not merely that the two classes were of different races, of different religions, and in some degree also of different speech. The confiscations and colonizations of Elizabeth, the wars of Cromwell, and lastly the Penal Code, of which the temperate Hallam says, “to have exterminated the Catholics by the sword, or expelled them, like the Moriscoes of Spain, would have been little more repugnant to justice and humanity, but incomparably more politic”—these were the prime causes which had engendered antagonisms and animosities such as have rarely, in modern times, divided the population of any land.
272. In addition hereto another and most potent cause contributed to the severity with which rents were exacted. This was absenteeism, a great part of the soil being owned by landlords who resided in England and transacted their business through local agents, or through “middlemen,” who assumed the estimated rental of large estates and wrung from the peasantry whatever they could.
By a kind of natural selection, out of these agents and middlemen came to be developed a distinct species of social animal, peculiarly fierce and cunning, of preternatural acuteness to search out every possible occasion for fresh exactions, with heart of flint and face of brass. Only men with a natural aptitude for exaction, distraint and eviction were selected for such a work; years of practice made them perfect in the arts of extortion, while the consciousness of being despised and hated to the point of frenzy choked every casual thought of pity, and made absolute heartlessness both a professional virtue and a condition of self-preservation.
Such was the situation in Ireland, on the part of the landlord class, furnishing all the conditions necessary to a rigid and relentless enforcement of rent, up to the economic maximum —i. e., to the extent of giving to the owner of the land the entire surplus produce above the cost of cultivation on the poorest soils.
273. How was it on the side of the peasantry? Were they prepared to supply the conditions which should prevent competition from becoming disastrous, destructive? Unfortunately, the peasantry of no country in Europe were less fitted to enter upon such a struggle with the landlord class. Sanguine, improvident even to recklessness, the Irish people clung the more closely to the land the more miserable their lot; multiplied at a rate inconsistent with the capacity of the soil for providing subsistence, and competed among themselves for the occupancy of smaller and continually smaller parcels with a passionate eagerness. Had it been a stationary population, like that of France, which entered on this struggle for the fruits of the soil, the peasantry might have had some chance; but, with a population at least fifty per cent. beyond the capabilities of the soil to support, as the art of agriculture was then practiced, while every year largely increased the number of eager, penniless competitors, misery could hardly fail to result.
In the situation described, it was a matter of course that rents were advanced to the full limit allowed by the law we have stated. But there was more than this and worse than this. Rents were demanded by the agent, or middleman, rents were even offered by the peasantry in the eagerness of their competition, in excess of the economic maximum; in excess of what could possibly be paid; in many cases in excess, incredible as it may seem, of the whole annual produce of the soil.∗
274. But, it may be asked, if the tenants could not pay the rents, what harm to promise them? The landlords clearly would be disappointed; but how would the tenants suffer?
The injury done to the peasantry through this cause was threefold.
First. The whole possible produce above the bare necessities of subsistence, belonging to the landlord, the tenant had little interest in the crop or in keeping up the productiveness of the land. Having nothing to hope for, and being in so bad a plight that there was nothing but eviction to fear, all inspiration died out of the cultivation of the soil. What was done was always the least and the meanest that could be done.
Secondly. The promise of excessive, and indeed impossible, rents kept the tenant always in debt to his landlord. Hopeless debt differs little from slavery. The Irish cottier lived by the breath of the agent or the middleman.
Thirdly. The joint effect of the causes described was continually to lower the standard of living, and consequently the cost of cultivating the no-rent land, or lowest grade of soils, by making the peasantry reckless regarding the increase of their numbers.
275. Effects of Unequal Competition.—In the foregoing description of the state of the Irish tenantry prior to 1844, we have an illustration of the results of an unequal competition. That same force which in the United States, operating upon an intelligent, alert, active, aggressive population, under equal laws, produces effects only beneficial, in Ireland, under the conditions recited, produced disaster.
276. Actual vs. Theoretical Rents.—We see, then, that practically there may be three classes of cases in respect to rent.
First. Where, under active competition, with both parties substantially on an equality in respect to intelligence, alertness and freedom of movement, with no laws or habits or sentiments opposing the exaction of all which any thing that is the subject of bargain and sale may be worth, rents, as in the United States, conform nearly to the Ricardian formula.
Second. Where, among a population presenting wide differences of wealth and intelligence, and perhaps, also, of rank and political power, sentiments of personal kindliness and mutual regard between landlord and tenant, and a strong authoritative opinion throughout the community respecting the obligations imposed by the ownership of property, especially of landed property, serve, as in England, and in many countries of the continent of Europe, to reduce the pressure of the landowning upon the tenant class; making the landlord slow to seek occasions for raising rent; reluctant in forcing matters with the tenant to extremity, and altogether unwilling to proceed, in the case of a decent, well-meaning tenant, to distraint and eviction. Hence it comes about that rents vary widely from the Ricardian formula, always on the side of the tenantry.
Third. Where, with a tenantry ignorant, improvident, perhaps reckless in respect to family increase, and by consequence unable to offer effective resistance to an acquisitive, aggressive treatment of the question of rents, little in the way of sentiments of personal kindness on the part of landlords, and nothing in the way of an authoritative public opinion, enters to restrain the impulses which tend to advance rents. Here we have a result of ultimate injury to the economic interests of both parties and of the entire community.
277. The Rent of Pastures.—We have thus far spoken only of the rent of arable land. We have taken this first, not only because it is most important, so far as the mere amount involved is concerned, but also because the principles governing rent can be here most easily discerned. If we have done our work well, there will be little difficulty in applying the principles discovered to the rent of pastures, water privileges, building lots, mines and wood lots.
We have, throughout the foregoing extended illustration, assumed the existence of a considerable body of no-rent, arable lands, furnishing the base-line from which the rentals of the superior lands are respectively measured. To a certain extent this assumption corresponds to the facts of agriculture. More commonly, however, those lands whose net productiveness is so low that they could only be cultivated on the condition of paying no rent, are turned into pasture or grazing land. We might, therefore, say that, in many agricultural regions, the base-line for ascertaining rents, is furnished by a certain grade of pasture-lands, large tracts of which would yield but a scanty subsistence to a few cattle or sheep. Then come the more valuable pastures, which pay an appreciable rent, and, parallel with these, arable lands of moderate fertility, paying, also, an appreciable rent.
As we go upward in the scale of fertility, lands may be transferred from grazing to tillage, or from tillage to grazing, according to the demand for animal as compared with the demand for vegetable productions, at the time prevailing in the local market, or according to other conditions which we need not enter into here. Arable land is, also, often turned into pasture for the purpose of allowing it to recuperate in respect to certain properties of the soil which have been unduly drawn upon by the crops of previous years.
While, thus, a large part of the lands of any agricultural district may be used interchangeably for tillage and for grazing, it seldom happens that the best lands are used at all, or, at any rate, for more than the briefest period, as pasture. Generally speaking, the poorest lands are always used as pasture, the richest lands are always cultivated excepting, only, during intervals required for recuperation. It is in respect to the intermediate grades of soil that the alternation referred to takes place. The principle which determines the rent of pasture lands is the same as that with which we have already become familiar through our discussion of rent in its application to arable lands.
278. The Rent of Water Privileges.—Water privileges have three uses: first, for power, in connection with saw-mills, grist-mills, cotton-factories, etc.; secondly, for the supply of water, for drinking, washing, and other domestic purposes, to cities and towns; thirdly, for the irrigation of land, for the purposes of agriculture. The volume of water, the convenience of its application to the purpose for which water is, in the specific instance, required; proximity to the market, that is, the place where the water is to be used, these are the principal considerations which determine the productiveness of water-privileges for the purposes of rent. For the supply of cities and towns, the quality of the water also becomes an element of importance.
Productiveness being thus estimated, there are all degrees of productiveness among water privileges. There are the no-rent privileges, which, by reason of distance, or inconvenience of application, or of insufficient or irregular flow, are not used at all, or only used on condition that no compensation is exacted therefor. Above these, are found low-rent privileges and high-rent privileges, the measure of rent being the degree of productiveness.
279. An instructive illustration of the relation of monopoly to value is often afforded by the action of water-power companies, in regulating the prices they charge for power, according to the price of coal. In, for example, a given textile manufacturing city of New England, if coal can be delivered at four dollars a ton, the water-power company sells to a cotton or woolen-mill the right to take water sufficient to create (by its fall through a given number of feet), one-horse power, for, say, %24 a year, that amount representing the estimated cost of maintaining one-horse power, throughout a year, by the consumption of coal, at four dollars a ton. Should the price of coal fall to, say, three dollars, the water-power company would readjust its charge to meet the changed conditions of competition with steam.
Within the limits thus determined, the price of water-power is a monopoly price, being entirely irrespective of what it cost the company to acquire its rights and construct its works, and of what it may cost to keep up its service. To that monopoly, however, a limit is set by possible competition with steam-power.
280. The Rent of Building Lots.—The rent of building lots is determined by the principles already set forth. There are no-rent building lots in abundance. Every township has its squatters whose cabins, placed out of the way, on worthless land, pay no rent. Even in the neighborhood of large cities, shanties are perched on the rocks without objection from owners of land which, in another twenty or fifty years, may bear a high rent.
But something more is wanted in the case of a building, than ground to stand upon. The building must be placed with reference to its uses; and it is the productiveness of the lot in that respect which determines the rent. Among building lots that bear a rent, the minimum may be said to be determined by the value of land for the purposes of agriculture. A man leases a hundred acres of arable land, of uniform quality, for %500, a year, and places his house upon some convenient spot, occupying, with barns and sheds, half an acre of ground. The rent of this building lot is %2.50 a year. If he were a market gardener near a large city, the rent of the lot so occupied might be %25. If, on the other hand, he were a market man instead of a market gardener, he might pay %50 for the rent of the ground on which to build his cottage in the suburbs of the city, and five times that sum as the ground rent of his little shop in the heart of the city. If a banker, he could better afford to pay %2,000 or perhaps %5,000 ground rent on State Street, or Wall Street, or Lombard Street, than occupy premises half a mile away were he permitted to do so for nothing.
The productiveness of land occupied for the purposes of manufacture or trade, has reference to the number of persons passing through the street, or to the proximity of water-privileges, or wharf-privileges, or railroad stations, or to various other facilities for either doing a greater amount of business with the same capital, or for saving expenditure upon a given amount of business. Such lots being limited in number, yet held by competing owners, their rent conforms closely to the Ricardian formula. In regard to this kind of rent, competition is, if not perfect, at least very active on both sides. No favor is shown or asked; the two parties to the bargain are regarded as equal. The landlord gets all the land will bring, if not from one tenant, then from another. The tenant expects to pay all that any man will be willing to give for the commercial advantages of occupying the ground.
281. The Rent of Mines.—The rent of mines is not governed wholly by the economic law of rent which, as stated (par. 253), has reference to the native and indestructible powers of the soil. Under proper care and husbandry, cultivation does not exhaust the soil. With rotation of crops, with annual manuring and an occasional season of rest, such as are provided for in most English leases, the land returns to its owner, or his representative, after 30, or 50, or 99 years, with unimpaired virtue. The enjoyment of water privileges does not exhaust the capacity of the river. The occupation of the ground for a generation does not contract the surface available for the same or a different use by another generation.
By the very nature of such deposits, the enjoyment of mining privileges diminishes the sum of the mineral in existence. The mine may be “worked out” in ten years or in twenty or in fifty, and nothing but an ugly pit be returned to the owner, at the expiry of the lease. The rent of such properties is not, therefore, regulated by the Ricardian formula, without modification. The rent must be increased sufficiently to compensate for the ultimate exhaustion of the deposits: the destruction of the value of the estate. Otherwise, the rule of rent for these properties is the same as in the case of other natural agents. The chief elements, here, in determining productiveness for the purposes of rent, are the quality of the product, the extent of the deposits, the depth of working, the distance from a market.
There are, in the United States, vast deposits of coal, for instance, near the surface, not far from a market, which will not pay for working, even if no rent be exacted, because the quality is poor, though the coal will burn, will give out light and heat, and, if delivered at the furnace free of cost, would be worth using.
There are other deposits of coal, of excellent quality, which will not pay for working by reason of the thinness of seams, or their narrow extent laterally. There are, again, vast deposits of good coal, which, by reason of their depth below the surface, are not sought by productive industry and perhaps never will be. There are still others which, by reason of distance from market are not now worth taking up at the government rates, which may in another century supply great manufacturing cities with power. These and other mines, a little more fortunate in character or location, which will just pay for working, furnish the no-rent mines. Above these are mines which pay rent, the degree of productiveness rising until the rental of a single mine becomes the income of a prince.
282. The Rent of Woodlots.—Woodlots and timber lands are, in fact, seldom rented in the United States and other new countries; first, on account of the difficulty which would be experienced in preventing waste and abuse by a tenant; and, secondly, because it is generally more profitable to cut off the whole body of wood or timber at once, than to pick from it, year by year, a certain proportion of what is standing. For these reasons, woodlots, when they reach the right condition for cutting, are commonly sold to large operators, at prices determined by the “net productiveness” of the individual tracts, reference being had to the amount and quality of timber and other wood, to the distance from market, facilities for transportation, etc.
The price at which an individual woodlot may sell, once in thirty or fifty years, may properly be conceived of as related to an annual rental, not collected at the time, but allowed to accumulate against the day of sale.
In old countries, where the value of wood and timber bears a much higher proportion to the wages of labor, than in new countries, and where the tracts so occupied are generally surrounded by dense populations, woodlots and forests are more commonly culled from year to year, instead of being cut off all at once. In such a condition, the Ricardian formula of rent would strictly apply to the several tracts supplying any given market, although, as a matter of fact, an owner would be likely to conduct the cutting of the wood and timber himself, or through his paid agents, on account of the difficulty, above referred to, of preventing waste and abuse on the part of a tenant.
283. The Rent of Buildings and of Permanent Improvements on the Land.—The so-called rent of buildings, exclusive of ground rent, is not governed at all by the economic law of rent, but by the principles which regulate the Interest on Capital, of which we are next to speak. A man owns a building lot, for which he could obtain a ground rent, that is, rent proper. Being also a capitalist, he erects a building thereon. Why does he so? Because he believes that, in addition to the rent of the ground, he can also obtain, for the occupation of the house erected thereon, a fair remuneration for the use of his capital, a remuneration equal (damage, trouble and risk of loss being taken into account) to what he would receive were he to put his capital into the form of live stock or rail-road shares, or government bonds. The building is an investment of capital. If his investment has been shrewdly made, he will receive from his tenants a sum which, in the view of the economist, consists of two parts, rent proper — ground rent—and interest. We shall see, in the next chapter, that these two elements of that remuneration are governed by widely different laws.
284. The Unearned Increment of Land.—We have seen how rent arises, under the private ownership of land, and what principles govern its amount and economic direction. We have seen that rent is purely a question between landlord and tenant, not between employer and employed, not between the producer and the consumer of agricultural produce. We have seen that, conceding the private ownership of land, rent must, so far as economic forces are concerned, remain in the hands of the owner of land; that it can only get into the hands of the tenant as a gift; that if it reaches the hands of the tenant, no economic forces will carry it into the hands of the agricultural laborer or of the consumer of food. It can only get there by a further gift or series of gifts.
We have also seen that, whenever the limit of cultivation is lowered, that is, whenever a less productive grade of soils is, by the increasing demands of population for subsistence, brought under cultivation, the rents of all previously cultivated lands are correspondingly raised, to the enrichment of their owners, not by reason of any increase in the yield of such lands, or by reason of any greater exertions put forth by the owners, but solely by reason of the necessity of cultivating a lower grade of soils.
Upon this view of rent, has arisen the question, Why should the private ownership of land be permitted to exist? at any rate, why should this incident of private ownership, the aggrandizement of the owner through the growth of the community, be longer permitted to exist? Why should not this “unearned increment of land,” to use Mr. Mill's phrase, go to the community, and not to any individual?
This demand has been made very vigorously, of late years, by a school of writers which embraces more than one economist of reputation. As the elements of the question are not purely economic, but embrace considerations of political equity and political expediency, I shall reserve all remark concerning it till we reach Part VI.
285. Definition of Interest.—We have seen one share out off from the product of industry—rent; one claimant satisfied—the landlord. The reader now sees why this topic was first treated. In economic theory, this is ever the first claim to be adjusted and paid. We can make no progress—not so much as by a single step—toward discovering the principles which govern the division of the product of industry among capitalists, employers, and laborers, until rent is taken out, until the claim of the landlord is satisfied. Hence the topic, Rent, comes first, in a treatise on the distribution of wealth.
We are now to speak of Interest: the share of the Capitalist in the product of industry.
In Part II. we inquired into the origin and office of capital. We saw that capital consists of savings out of earnings, the native powers of the earth, air and water not being regarded as capital. Wealth having been produced, some of it, much of it, must soon be consumed, in order to sustain the producing classes, and to repair the waste inevitably attendant upon production, and even upon the mere lapse of time. All of it may be so consumed, and will be, under the urgent and constantly recurring desires which wealth alone can satisfy, unless some motive for saving can be found which shall prove strong enough to withstand the impulses to immediate gratification, and to wrest a portion of wealth from the jaws of appetite. We have shown what that motive is, and how it manifests itself in a barbarous condition.
In an advanced state of society, the motive to saving is not so much found in the desire of the individual to accumulate tools and materials for his own handling, as in the desire to obtain interest from some one else, for the use of that portion of wealth whose consumption is thus postponed. To the varying strength of this motive with different men, and different races, we shall have occasion to refer further on.
286. Interest not Paid for the Use of Money.—It has been said that interest is the compensation paid for the use of capital. The usual form of statement is that interest is paid for the use of money. Broadly speaking, this is not true. Money, which is one of the many forms of capital, is, indeed, often the agent in effecting the loan of other species of capital. But in these cases, it is not the money, philosophically considered, that is borrowed: The interest paid is for the use of the capital obtained through that agency. One borrows %5,000, and gives a note for that sum, with interest. With this money he purchases live stock, machinery for his factory, or goods for his trade: these were what he wanted; these were what he really borrowed; these are what he pays interest upon. The money was solely a means to that end.
But money is not always, it is not in a majority of cases, in a highly advanced state of industrial society it is, indeed, rarely, the agent in effecting the loan of capital. The country merchant buys goods and gives his notes for two, four, and six months, promising to pay the price with interest. Interest on what? On money? No money passed in the transaction. What was borrowed was hardware and crockery, dry goods, and groceries. The young farmer buys cattle to stock his farm, and gives his note, promising to pay, with interest: not interest on money, for he has had none, but interest on the value of cows and working oxen.
287. The Rate of Interest.—Let us now inquire how the rate of interest is determined.
Since the use of capital is a matter of bargain and sale, or of exchange, what should determine the rate of interest but the demand for, and the supply of, loanable capital?
Here we see the futility of the notion, which, from time to time, obtains a strong hold on the public mind of America, and, indeed, of all new countries, that the rate of interest is to be lowered by increasing the supply of money through the issue of paper notes. Men wish to borrow that they may get control of the agencies of production: capital in its various forms. The amount to be paid for the use of capital will depend on its abundance compared with the occasions for its productive use. The issue of money will not increase the number of horses and cattle and plows, nor will it build shops and warehouses or construct machinery for manufacture or for transport.
If the people of a community be thriving and progressive, the demand for capital, to start new enterprises, or to enlarge those already established, will be very great. If the community be, also, young, having brought to new fields the social and industrial ideas, tastes and ambitions of an old society, the supply of capital will be scanty, and the rate of interest will rule high.
288. Is this high rate of interest a hardship? No, the hardship lies in the scarcity of capital. The high rate of interest becomes the active means of removing that hardship, through increasing the supply of capital available to meet the demand. A high rate of interest is not an evil, but the cure of an evil. How is this?
Capital is, as we have seen, the result of saving. Interest, then, is the reward of abstinence. A part, a large part, of all produced wealth must be at once consumed to meet the conditions of human existence; but the remaining portion may be consumed or may be accumulated, according to the will of the owner. The strength of the motive to accumulation will vary with the reward of abstinence. If that be high, the disposition to save will be strengthened, and capital will be rapidly accumulated; if that be low, that disposition will be relatively weak, and capital will increase slowly, if, indeed, the body of existing capital be not dissipated at the demands of appetite.
We do not say that the strength of the disposition will increase proportionally to the increase of remuneration; that it will, for instance, be one-fifth greater at six per cent. interest than at five per cent. Moral philosophy has reached no such precision in gauging motives. But it is certain that, among the same people, and at the same time, the higher the rate of interest the stronger will be the motives which lead to saving: the more rapid the accumulation of capital.∗
So we see that a high rate of interest, instead of being the cause of an evil, is really its cure; and that to depress the rate of interest, as, for example, by force of law, would be to retard the processes by which capital is supplied.
As a high rate of interest is not in itself an evil, so a low rate of interest does not necessarily imply a condition which is a subject of congratulation. A low rate of interest may mean that, in a thriving, progressive community, the accumulation of capital has gone on so rapidly as to outrun the occasions for its productive use. It may mean that the people are so dull, indolent and unambitious, or the state of society so disordered, that commercial and manufacturing enterprises are not undertaken, and no enlargement of traditional industries is looked for. A small amount of capital more than suffices for such scanty needs.
289. The Rate of Interest tends to a Decline.—Despite the urgent and ever-recurring demands for the consumption of wealth in various forms of self-indulgence; despite the occasional reversal of the course of accumulation, in the occurrence of war; despite all the effects of misgovernment and social disorder, wealth tends strongly to increase. Since the application of steam-power to manufactures and transportation, this rate of increase has been so great as even to transcend the demand for the uses of wealth in undertaking new industrial and commercial enterprises, and thus, with some temporary exceptions, interest has tended to decline.
In this respect interest differs markedly, we may say, essentially, from rent. The latter tends to rise, with the lapse of time, the increase of population, the growth of wealth. The former tends to decline under the same conditions. This constitutes one of the two reasons why the economist insists upon treating interest and rent separately in his discussion of the distribution of the product of industry. The second of these reasons will now be stated.
290. There is not any No-Interest Capital.—We have seen (par. 255) that the whole theory of rent rests on the assumption that there is a body of no-rent lands. These serve as the base from which to measure upwards the successive degrees of productiveness of the lands bearing rent.
In the theory of capital there is nothing to correspond to this. The economist does not find any no-interest capital. In theory, all capital bears an interest, and all portions of capital bear equal interest. If one portion, in fact, brings no interest to its owner, or brings an interest below that obtained by the owners of other portions, this is because of misadventure, due to accident or erroneous calculation, not to the nature of the capital itself.
Of course, it is anticipated by the political economist that the interest realized by portions of capital actually loaned will vary not a little, even within the same market, inasmuch as competition is never perfect in any sphere; but what has been stated shows how fundamentally the theory of interest differs from that of rent.
291. Is there a Minimum Rate of Interest? — We have said that the inducement to save diminishes, other things equal, as the rate of interest falls. Is there a point at which the disposition to consume wealth for purposes of comfort or luxury will equal in strength the disposition to acquire an annual income by saving wealth for productive uses, so that no further accumulation will take place, the savings out of earnings thereafter being only sufficient to make good the waste of production and keep up the stock of capital?
If there is a minimum rate of interest, it is very low. Fifteen or twenty years ago, six per cent. was the traditional rate of interest in New England, and probably few of us then thought that, if the rate were to go lower, it really would be worth while to “save.” We had become so accustomed to six per cent. that it had come to seem as if there were some law of nature that fixed that rate. Six per cent.? Why of course a man would get six per cent.? Yet since that time we have seen the rate of interest steadily fall, in consequence of the vast accumulation of capital, till now loans of capital are to be had on good security at four and one-half or even four per cent., while the government borrows all it wants at three and one-half or even three. The English government has long borrowed at three per cent. The government of Holland during the most flourishing period of the republic, was even able to borrow at two per cent.
292. Income from Investments, how Computed.—Misapprehensions regarding the actual rate of interest are not infrequently occasioned by the failure to note, what would appear very plain, that the amount of interest paid upon bonds or notes, and the amount of dividends declared upon shares of corporate stock, should be compared, not with a nominal par value, but with the sum actually invested in the purchase of such bonds, stocks, notes or shares, or else with the sum for which these would at the time bring, if sold.
Thus, we read in the newspapers, that the Boston and Maine railroad, in May, 1887, declared a semi-annual dividend of five per cent., being at the rate of ten per cent., a year.
This statement, by itself, might create the impression that investment in the stock of this road would be a peculiarly profitable one. A reference, however, to the stock quotations, in another column of the same newspaper, would have shown that the shares of this railroad were then selling at about %230, on the par of %100. A person, therefore, buying a share of this stock, in April, 1887, would have received but a trifle over four per cent., per annum, which was about the rate of interest then prevailing upon “bottom mortgages.”
On the other hand, a number of railroad companies, during the great speculative extension, 1868–1873, advertised to sell at seventy dollars, bonds for one hundred dollars, bearing seven per cent. interest. What, then, was the rate of interest promised on this investment? Seven per cent.? No: the rate of interest promised to be paid was ten per cent., and, even, as we shall see, more than that. The investor paid seventy dollars for a bond, to receive upon it annually seven dollars of interest, per year, until the bond should mature, and then to receive %100 in money, whereas he only paid down %70. In other words, he was, on the expiry of the bond, to receive a premium of %30, over and above an annual interest of ten per cent. The “present value” of this premium would depend on the length of time the bond had “to run.”
293. False Interest: Insurance of the Principal.—A great deal that is paid under the name of interest is not interest in the true sense, but is merely a premium for the insurance of the principal sum lent. Real interest only comprises that part of the payment made which would be paid, were the return of the principal, at the date of the maturity of the obligation, a matter of reasonable certainty. Absolute assurance can be reached in no human transaction; but where the risk is so small that it amounts to nothing in the mind of the lender, as in the case of British consols, or of a “bottom mortgage,” where the sum lent is only a half or a third of the value of improved real estate, we have an instance of real interest, pure and simple.
Whatever, in the same market, at the same time, is paid above this, for the use of capital, is of the nature of insurance against the risk of losing the amount lent. If the rate of real interest in London is 3 per cent., as determined by the price of consols, loans on various kinds of fair security may range from that rate up to 5 or 6 per cent.; while all the time notebrokers are “shaving” the “paper” of second and third rate dealers at from 10 to 20 per cent. discount.
294. Extra-Hazardous Risks.—The operation of the mind of the person who lends capital, at a high interest, upon poor security, is a familiar one. He sees the opportunity to obtain interest proper—the normal remuneration for forbearing to consume in immediate self-indulgence the wealth he has created, or come into possession of—without encountering any appreciable risk of losing the principal sum. But there is offered him a higher, perhaps a much higher, rate of interest, for a loan into which a chance of total loss enters. His mind balances the risk against the prize. The yearly value of the latter is definite. It is three, five or ten per cent. on the sum asked to be lent. Were he to receive this added interest for a sufficient number of years, he could even afford to lose the principal. He may receive the interest during the full term of the obligation, and then have his principal back again. He knows also that he may receive but one or two annual payments of interest, and then be compelled to recognize his investment as a total loss.
Of the degree of risk there is no measure. The ablest statistician, the first financier of the world, could give no mathematical statement of the chances for or against the ultimate repayment of the loan. The matter lies very vaguely even in the mind of the shrewdest banker or broker. He sees that there is great risk or little risk, very great risk or very little risk, or that the elements on which the ability of the borrower is to depend are altogether shrouded in uncertainty; but as to giving a mathematical expression to the value of the loan, based on the chances of loss, the man who does this is deceiving either himself or some one else.
295. With the great majority of lenders no calculation whatever, deserving of the name, enters into the negotiation of loans where more than double interest is paid. The capitalist is simply tempted beyond what he is able to bear, or else, if a man of another temper, the enhanced inducement becomes of itself a reason for refusing to lend his money, and he shuts the door upon negotiation. Look at the hundreds of millions, the thousands of millions, that have been sunk in railway shares and mining stocks by persons who had not the smallest qualifications for estimating the value of the risk, but whose prudence gave way under an offer of ten, or twelve, or twenty per cent. Writers on Interest are too much given to assuming that the losses sustained in extra-hazardous investments are balanced by the gains, and that the “average rate” is somehow maintained. The fact is, few lenders are capable of making any computation of the value of the risks they take; few even go through the form of doing so.
The only thing that can be said with assurance is that the vast majority of lenders on extra-hazardous risks are losers. The high rate of interest proves a snare. Tempted by the offer of 12 or 20 per cent., they take risks for which 40 or 50 would be inadequate. Interest is paid, dividends are declared, just long enough to complete the subscription, just long enough to secure the last gudgeon in the pool. And it is often astonishing to note the class of men who contribute to a scheme which is in its very terms an insult to common-sense. Bought wit is the best wit; but in this matter, experience seldom suffices for wisdom. The susceptibility to humbug is perennial in the human breast. After a dance of folly, in which figure “The Periwig Company, and the Spanish-Jackass Company, and the Quicksilver-fixation Company;” in which prospectus vies with prospectus to see which shall be the more preposterous; and in which investor vies with investor in recklessness, there comes, indeed, a resting spell, more through exhaustion of means than through acquired prudence; but the first tingle of reviving activity in trade starts the fever of speculation anew, and the knaves find the dupes as numerous and as credulous as ever.
296. The Wreckers of Trade.—The foregoing remarks apply to the great majority of investors who take extra-hazardous risks. Yet there are in every large commercial community those who reap enormous rates of interest with only rare losses to offset their gains. These are men with preternatural sagacity to know when it is safe to trust a rogue, how far to ride with a spendthrift towards his ruin, just the point at which to leave a tottering house whose foundations they have undermined by drains of exorbitant interest, just the moment at which to “unload” a stock; men with the cunning to secure themselves against loss, whoever may suffer; men who have the hardness to exact the last penny of their dues, at whatever distress to the debtor. Such men are the wreckers of trade. Their gains are great, for they reap the enormous profits of extra-hazardous risks, yet seldom lose in the principal sum lent. Rarely, indeed, is an embarrassed firm saved by their aid. Resort to them is the almost certain precursor of ruin. It serves to delay the catastrophe a little, only to make it utter and remediless at the last.
297. Double Interest.—The foregoing remarks apply only to extra-hazardous risks, where, to put it roundly, more than double interest is paid. With investments or temporary loans inside this limit, a different rule obtains. The rates of interest paid are still graded with little real appreciation of the degrees of risk taken; the sums obtained as insurance can not be assumed to be proportioned to the hazard; yet it is generally possible for an investor or lender to say, this is more safe than that: the adverse chances here are few and small; are many and great there.
But there is a more marked difference between extra-hazardous and ordinary risks in the loan of capital. With the former, the rates obtained are, as a whole, taking all classes of investors or lenders together, below the actuarial value of the risks taken, and such loans and investments, in spite of the acuteness of the professional money-lending class, result, as a body, in loss. With ordinary risks, the rates of interest are, on an average, above their true value, as estimated from the basis of bottom mortgages and government loans.
For example, in England, a few years ago, the return from capital invested in government bonds was about 3.3 per cent.; while the savings banks realized on their investments, which may be assumed to have been made in a conservative spirit, 4½ per cent., and the average return to investors in railway stocks was 5 per cent. Now, here is an undeniable case of disproportion. Any shrewd and sensible man, selling £100,000 of consols, investing the proceeds in the shares of ten reputable railways, and compounding through a term of years the extra 1
per cent., per annum, would create a fund far more than sufficient to offset any losses he might sustain in an individual case. This disproportion is due first, to the estimation, higher than an actuarial value, placed by large classes of investors upon the feeling of security, the absence of all apprehensions and occasional alarms, and, secondly, to the favor extended by the courts to the investment of trust funds in government bonds.
298. Differing Rates of Interest in the Same Market.—We have laid down the proposition (par. 132) that in one market, at one time, there can be but one price for equal portions of the same commodity. The plain facts of interest seem to controvert this proposition. In the same market, at the same moment, the price paid for the use of capital may range from three per cent. upwards, to five, to ten, to twenty. Is this because between the portions of capital so loaned an economic difference exists, which creates a preference for one over the other, as when several different grades of flour are sold at several distinct prices? No, the capital loaned may be, in all economic respects, uniform. A man having %30,000 on deposit in a bank, may, on the same day, buy %10,000 worth of “governments” which pay four per cent., invest in “railways” paying six per cent. dividends, to the same amount; and loan the remainder at ten per cent. on personal security. Manifestly, between the three portions of capital loaned or invested, no economic differences existed.
To what, then, is the phenomenon noted due? In part to the cause discussed under the last head—the insurance of the principal sum lent. Twenty years ago there were on the stock market, in Lombard Street, three kinds of government securities: English consols, bringing, then, three and a quarter per cent. interest on the investment; Russian bonds bringing five and a quarter per cent., and Turkish bonds bringing ten and a half per cent. Every day large amounts of these bonds were bought by Englishmen. Doubtless, some purchasers bought portions of each kind of securities.
Inasmuch as the possibility of the English government becoming bankrupt, or tending to repudiation, is never admitted by an Englishman, the dividends received by holders of the “consols” constituted pure interest, the reward of abstinence. The added two per cent. obtained from the Russian bonds represented the value, as viewed by the purchaser, of the insurance of his capital against the risk of loss attendant on loaning it to the government of a people, possessing great natural resources, indeed, and bound together by a strong national feeling, but rude in manner, primitive in industry, with their political questions largely unsolved, and having points of possible collision with England. But while the Englishman demanded five and a quarter per cent. per annum from the Russian government, as the consideration for his loan, he exacted just twice that consideration from the Turkish government, though a government bound to Great Britain by the strongest ties of self-interest, because both the resources and the good faith of the Turkish government were reasonably suspected, and its existence was dependent on support from foreign powers.
299. Imperfect Competition in the Money Market.—We have in the foregoing paragraph used the expression, “as viewed by the purchaser.” Hereby is indicated a consideration, which, while it is of importance in any market, is of especial importance in the market where capital is loaned, the so-called money-market. In quoting Prof. Jevons' statement of the reason, why, in the same market, at the same moment, all equal portions of a perfectly homogeneous commodity must bring the same price, we added that this proposition assumed perfect competition, all the conditions of a good market being fully realized. Now, perfect competition only exists where there is ample and accurate information. In bargains relating to the use of capital, so little is known by the parties respecting the supply of and the demand for capital, especially where usury laws drive borrowers and lenders to shifts and evasions; so much more are men disposed to conceal the fact and the extent of their borrowing than of their buying; so much does the repayment of the principal depend, in spite of law, upon the good faith of the borrower, that the market for the loan of capital can rarely be called a good market.
All bargains in the “money market,” as the market for the loan of capital is popularly called, take place necessarily upon information imperfect at the best, often of a private and confidential nature: hence it frequently happens that, in the same market, at the same moment, loans, upon equally good security, are made at different rates; while it is not at all unlikely to occur, that, of two loans of unequal value, as to security, the more hazardous may be made at the lower rate of interest.
300. Differing Rates of Interest in Different Markets.—Of course, all that has been said of differing rates of interest in the same market holds good of different markets; but, wholly in addition of the causes which produce those differences, is reason found for different rates in distinct markets. Thus it is notorious that, for long terms of years, the loan of capital could be obtained, upon what was locally regarded as approved security, for 4 per cent. in London as freely as for 6 cent. in New York, or 8 per cent. in Chicago, or 12 per cent. in Iowa, or Kansas.
Whence these differences? In some degree, doubtless, these successive additions of interest, as capital passed westward, were of the nature of insurance on the principal sum lent. In each case, the security might be as good as could ordinarily be obtained in that community. Security, however, is a relative term; what would be deemed ample security in one place would not pass the scrutiny of lenders in another. The older the country the greater, other things equal, the permanence of economic relations; the more does industry settle down within traditional limits, and acquire a definite and calculable rate of increase; the higher the value assigned to commercial reputation, the more carefully are the men selected who are to control the agencies of production and trade, the fewer the chances of revolutionary changes in business.
301. Disinclination of Capital to Emigrate.—But not all, or even the greater part of the differences which have been noted, are due to this cause. It is the disinclination of capital to emigrate, which allows such wide differences in the local rates of interest. This disinclination is due to various causes. In part, it is the continuing effect of old laws, now generally abrogated, discriminating against aliens. In part, it is due to the suspicion that strangers may not be fairly dealt with by courts and by officers of the law, in case of seizures or foreclosures. In part, it is due to the apprehension of the effect of international hostilities, which cause a suspension of interest-payments, if not forfeiture of the principal. In part, it is due to the fact that investments made at a distance must generally be made through an agent, upon whose good faith or sound judgment may depend the fate of the principal invested.
While these and other causes may operate, singly or in conjunction, to create local differences of interest, the main cause of such differences is found in the inertia of the owners of capital, making them ready to accept lower rates upon the spot than could perhaps be obtained with no less safety, through inquiry and effort at a distance, and, secondly, in the necessary lack of information as to prevailing rates of interest and existing degrees of security for the principal.
I remember to have read somewhere an estimate by an economist of reputation, fixing this “disinclination of capital to emigrate” at two per cent. It is doubtful, however, whether the matter is subject to any such form of statement. The disinclination to invest capital abroad must differ among men of different races; it must differ with differing conditions respecting the communication of news, and respecting international relations. Indeed, it must differ widely with differing moods of the public mind. At times, it may disappear altogether under the excitement of speculative mania, as in the days of the South Sea Bubble, and in the year preceding the English crisis of 1825. It sometimes seems to be the case that loans and investments are made abroad more freely than at home, probably because it is less easy to detect the fallacy of schemes bearing foreign names, and relating to distant lands.
302. Definition of Profits.—We have now seen two shares cut off the product of industry—rent and interest; two claimants satisfied—the landlord and the capitalist.
We now come to inquire respecting the share of the Employer, who organizes and conducts production, deciding what shall be produced; in what amounts, of what varieties, materials and patterns; and to what persons, at what prices, and on what terms of payment, the products shall be sold.
303. The Entrepreneur or Employing Class.—We have seen that in a primitive state of industrial society the employer does not appear. When, however, the forms of production become many and complex; when the hand-tool is replaced by the machine; when many persons, of various degrees of skill, strength and intelligence, are united in the same industrial operation; when the materials consumed are gathered from distant lands, and the products, in turn, are distributed widely to consumers not known to the producer, and are sold largely upon credit; when, moreover, a few simple, standard styles give way to ever-varying fashions, in material, in form, in color: in such a state, the employer, the master, the entrepreneur, becomes a necessity of the situation. He performs a function which is indispensable to a large and varied production, and for so doing receives a remuneration which we call profits.
304. Unfortunately, as it seems to me, the entrepreneur or employing function has not been adequately treated, if, indeed, it has been in the smallest degree recognized. English and American economists, in general, have chosen to regard the capitalist as the employer of labor, that is, as employing labor merely because of the possession of capital, and to the extent only to which he possesses capital. We have just now said that, in an early stage of industrial society, the employer does not appear in distinct shape. The possession of capital there constitutes a sufficient qualification for the employment of labor.
In the later stages of industrial development, the mere possession of capital no longer constitutes the sole, or even the main qualification for employing labor. The laborer no longer looks to the employer to furnish merely food and tools and materials, but to furnish, also, technical skill, commercial knowledge and powers of administration; to assume responsibilities and provide against contingencies; to shape and direct production and to organize and control the industrial machinery. So important and difficult are these duties, so rare are the abilities they demand, that he who can discharge these will generally find the capital required. If he be the man to conduct business,∗ food, tools, and materials will not, under our modern system of credit, long be wanting to him. On the other hand, without these higher qualifications the mere possessor of capital will employ labor at the risk, almost the certainty, of total or partial loss.
The employer, the entrepreneur, thus rises to be the master of the situation. It is no longer true that a man becomes the employer of labor because he is a capitalist. Men command capital because they have the qualifications to employ labor. To men so endowed, capital and labor alike resort, for the opportunity to perform their several functions and to entitle themselves to share in the product of industry. By this is not meant that the employer is not, in any case, or to any extent, a capitalist, but that he is not an employer to the extent only to which he is a capitalist, nor is he an employer at all because he is a capitalist.
305. Use of the word Profits by English and American Economists.—As the English and American economists generally leave the entrepreneur out of their discussion of production, so they leave out of view the share of the entrepreneur in treating of the distribution of wealth. “Profits” come to mean only the remuneration for the use of capital, what we call distinctively interest; or, if it be recognized that the man who organizes and conducts industrial operations receives something over and above the mere return upon that portion of the capital employed by him which he owns in his own right, that something is disparaged by being termed “the wages of supervision and management.”
Now it is fundamental in my theory of distribution that the entrepreneur class, the employers of labor, receive a share of the product of industry which is so important, through its amount, that it can not possibly be omitted from consideration, and so widely different in the principles by which it is governed, that the term wages can not be applied thereto without inducing a wholly unnecessary and mischievous confusion of ideas, leading directly to false results.
To the entrepreneur's share of the product of industry I shall strictly apply the term profits. This use of the term, in my judgment, tends to promote clearer conceptions regarding the distribution of wealth in the modern industrial state.
306. Profits a Species of the Same Genus as Rent.—In my opinion, profits thus defined bear a strong resemblance to rent. In this view I follow Archbishop Whately, who, in the appendix to his treatise on Logic, declares that the rent of land is only a species of an extensive genus, although, as he complains, the English economists have treated it as constituting a genus by itself, and have either omitted its cognate species, or have included them under genera to which they do not properly belong. If this view is correct, the principles deduced therefrom will be of very great consequence, not only to political economy, but to social philosophy. Let us, therefore, state again the essential differences between Rent and Interest.
1st. A portion of the land cultivated for the supply of any given market, bears no rent; this we call the no-rent land. The rent paid for any piece of land is exactly measured, in theory, by its excess of advantages in production, over the advantages in production pertaining to the no-rent land. On the other hand, there is not any no-interest capital. It is true that a person lending capital may not only not obtain, in the result, any interest for its use, but may even lose the principal; but this will be due to violence or fraud, to flood or fire or stress of weather, or, else, to the unsuspected incompetency of the borrower to conduct business, all of which we may sum up in the word accident. There is no reason why such accidents should befall one portion of capital and not another, whereas there is a reason, in the nature of the case, why one piece of land should bear a rent and another not; why one piece should bear a high and another a low rent. Theoretically all capital bears interest; and, theoretically also, all capital bears the same rate of interest, exceptions being either, first, apparent only, as when an additional per cent. is charged, not as interest proper, but for the insurance of the principal, or secondly, those arising from the disinclination of capital to emigrate, from the ignorance or inertia of lenders and borrowers, or from the force of laws interfering with contracts of loan.
2nd. It follows that interest forms a part of the price of all products, but that rent forms no part of the price of agricultural produce (for the demonstration of this theorem, see par. 262), and that the amount received by the landlord, as rent, is not paid either by the agricultural laborer, or by the consumer of the produce.
307. Profits Governed by the same Law as Rent.—Having restated the essential distinction between interest and rent, I shall now undertake to show that profits, the remuneration of the entrepreneur or employer, partake largely of the nature of rent, being a species of the same genus. So far as this is the case, profits do not form a part of the price of the products of industry, and do not cause any diminution of the wages of labor.
The successful conduct of business, under free and active competition, is due to exceptional abilities or to exceptional opportunities. Whether due to exceptional abilities or to exceptional opportunities, my proposition could be equally well established, just as it makes no difference in the theory of rent whether a piece of land owes its superior advantages for the purposes of cultivation to higher natural fertility, or to closer proximity to the market to be supplied. Yet it can not be a matter of indifference to social philosophy, whether the power to command profits be due to exceptional abilities or to exceptional opportunities; and I may, therefore, be pardoned for pausing to point out that the former are far more efficient than the latter, in securing profits.
To justify this assertion it will be enough to refer to the well-known fact that a great majority of all business houses which have achieved notable success have been founded by men who owed almost nothing to opportunity. On the other hand, nothing is more familiar than the spectacle of great houses, deeply founded, which have enjoyed high prestige, wide connections and large accumulated capital, dwindling away little by little, if not brought abruptly to their downfall, under the successors of the original founder, simply because the management which had been strong and brave and wise, became commonplace, purposeless, timid and weak. All this is so familiar that I do not fear that any American, at least, will question the assertion that exceptional abilities have far more to do with the successful conduct of business, than exceptional opportunities.
Inasmuch as it would make no difference whether profits were due to exceptional abilities or to exceptional opportunities, while the former are, in fact, much the more important factor in the successful conduct of business, I shall, hereafter, for convenience and simplicity, speak of profits as due to exceptional abilities, just as in discussing the question of the use of the land, we speak of rent as due to differences in fertility, assuming, for convenience of illustration, all the fields under view to be in equal proximity to the market.
308. A Theoretical No-Profits Stage of Production.—If the number of men of exceptional abilities were sufficient or more than sufficient to do all the business that required to be done, of all sorts and in all places; if (2) these men, however much surpassing all other members of the industrial society, were among themselves equal in all respects which concern the conduct of business; and if (3) this class, so constituted and so endowed, were distinguished from all not of their class so clearly and conspicuously that no one having these exceptional abilities should fail to be recognized, and no one lacking such abilities in the full measure should esteem himself capable of conducting business, or be so esteemed, for the purpose of obtaining credit, we should have a situation closely analogous to that which we described(par. 255)in the case of a community near which was found an amount of good land, of uniform quality, adequate, or more than adequate, to raise all produce required for the support of the community.
The result would be, either that this class would, by forming a combination and scrupulously adhering to its terms and its spirit, create and maintain a monopoly price for their services in conducting the business requiring to be done, which is so improbable as to be altogether out of our contemplation, or they would, by competing among themselves for the amount of business, bring down its rate to so low a point that the remuneration of each and every one of this class would be practically equal to what he would receive if employed by another. This, which we might call the “no-profits” stage of industrial society, corresponds closely to the “no-rent” stage in the cultivation of the soil. The persons remaining in the conduct of business would earn their necessary subsistence, but no more. Economically it would make no difference to them whether they did this, as employers or employed.
309.—In fact, however, the qualifications for the conduct of business are not equal throughout all of a sufficiently numerous class. On the contrary, the range of ability is almost world-wide. First, we have those rarely-gifted persons who, in common phrase, seem to turn every thing they touch into gold; whose commercial dealings have the air of magic; who have such insight as almost to seem to have foresight; who are so resolute and firm in temper that apprehension and alarms and repeated shocks of disaster never cause them to relax their hold or change their course; who have such command over men that all with whom they have to do acquire vigor from the contact and work for them as they would not, perhaps could not, work for others.
Next below, though far below, we have that much larger class of men of business, of a high order of talent, though without genius or any thing savoring of magic, whose unqualified success is easily comprehended, even if it can not be imitated: men of natural mastery, sagacious, prompt and resolute.
Then we have the men who, on the whole, do well, or pretty well, in business: men who enjoy a harmonious union of all the qualities of the entrepreneur, though only in moderate degree, or in whom some defect, mental or moral, impairs a higher order of abilities; men who are never masters of their fortunes, are never beyond the imminence of disaster, and yet, by care and pains and diligence, win no small profits from their business, and, if frugality be added to their other virtues, accumulate in time large estates.
Lower down in the industrial order are a multitude of men who are found in the control of business enterprises for no good reason: men of checkered fortunes, sometimes doing well, but more often ill; some of them, perhaps, filling a place that would not otherwise be filled, but, more commonly in business because they have forced themselves into it under a mistaken idea of their own abilities, perhaps encouraged by the partiality of friends who have been willing to place in their hands the agencies of production, or intrust them with commercial or banking capital. The industrial careers of these men are not peculiarly happy, though the degree in which they suffer from the constant imminence of loss, perhaps of bankruptey, is very much a matter of temperament. Some take it extremely hard, and when they fall make no effort to rise again; others are irrepressible as Harlequin, jumping up, alert as ever, after being apparently hanged, drawn and quartered by the common executioner.
310. The No-Profits Class of Employers.—Now, in my view of the question of profits, we find, in the lower stratum of the industrial order thus rudely and hastily sketched, a “no-profits” class of employers. Notwithstanding all the magnificent premiums of business success, the men of real business power are not so many but that no small part of the posts of industry and trade are filled by men inadequately qualified, and who, consequently, have a very checkered career and realize for themselves, taking their whole lives together, a meager compensation, so meager that, for purposes of scientific reasoning, we may treat it as constituting no profits at all. Live they do, partly by legitimate toll upon the business that passes through their hands, partly at the cost of their ereditors, with whom they make frequent compositions, partly at the expense of friends, or by the sacrifice of inherited means. This bare subsistence, obtained through so much of hard work, of anxiety, and often of humiliation, we regard as that minimum which, in economics, we can treat as nil. From this low point upwards, we measure profits.
311. Profits do not form a part of the Price of Manufactured Products.—If this view of the employing class be correctly taken, it appears that, under perfect competition, that is, where the conditions of a good market are supplied, manufacturing profits, for instance, are not obtained through any deduction from the wages of mechanical labor; and, secondly, manufacturing profits do not constitute a part of the price of manufactured goods. All profits are drawn from a body of wealth which is created∗ by the exceptional abilities (or opportunities) of those employers who receive profits, measured from the level of those employers who receive no profits, just as all rents are drawn from a body of wealth, which is created by the exceptional fertility (or facilities for transportation of produce) of the rent-lands, measured from the level of the no-rent lands.
The price of manufactured goods of any particular description is determined by the cost of production of that portion of the supply which is produced at the greatest disadvantage (par. 137). If the demand for such goods is so great as to require a certain amount to be produced under the management and control of persons whose efficiency in organizing and supervising the forces of labor and capital is small, the cost of production of that portion of the stock will be large, and the price will be correspondingly high, yet, high as it is, it will not be high enough to yield to the employers of this grade any more than that scant and difficult subsistence which we have taken as the no-profits line.
The price at which these goods are to be sold, however, will determine the price of the whole supply, since, in any one market, at any one time, there is but one price for different portions of the same commodity. Hence, whatever the cost of production of those portions of the supply which are produced by employers of a higher industrial grade, they will command the same price as those portions which are produced at the greatest disadvantage. The difference, so measured, will go as profits to each individual employer, according to his own success in production.
312. Profits are not Subtracted from Wages.—Do profits, then, come out of wages? Not at all. The employers of the lowest industrial grade—the no-profits employers, as we have called them—must pay wages sufficient to hire laborers to work under their direction. These wages constitute an essential part of the cost, to the employer, of the production of the goods. The fact that these wages are so high is the reason why these employers are unable (their skill and power in organizing and energizing labor and capital being no greater than they are), to realize any profits for themselves.
The employers of the higher industrial grades will pay the same wages to their laborers. Why, in equity or in economics, should a laborer who works for a strong, prudent and skillful master, receive higher wages than one whose fortune it is to work for a vacillating, weak or reckless employer. The one laborer is as efficient as the other, and works as hard. The difference in production, which, in the one case allows rent to be paid, and in the other enables the employer to secure a profit, is due to no superiority in the quality of the labor or the capital employed, over that of the labor and the capital employed where no rents or no profits are realized. In the one case it is due to the superior fertility of the land, or its greater facilities for the transportation of produce; in the other, to the superior abilities or opportunities of him who conducts industry.
In the latter case, the employer, paying wages at the same rate to his laborers, and interest, at the same rate, to the capitalist, for so much as he has to borrow, and selling his goods, so far as they are of equal quality, at the same price as the employer who makes no profits, is yet able to accumulate a clear surplus after all obligations are discharged, which surplus is called profits. This is effected by his careful study of the sources of his materials; by his comprehension of the demands of the market; by his steadiness and self-control in the presence of temptations to extravagance or wild ventures; by his organizing force and administrative ability; by his energy, economy and prudence.
313. The No-Profits Employer.—A failure to discern the true relations of profits to wages has led to a mistaken appreciation of the interests of the community, and especially of the laboring classes, regarding the employers of labor. While the large profits of the successful employer have been the subject of much jealousy, and almost uniformly excite in the minds of the unthinking the sense of personal wrong, there is an entire lack of jealousy exhibited towards the unsuccessful man of business, who often receives a great deal of sympathy from the laboring class.
So far as the sympathy extended towards the unsuccessful man of business is of a personal nature, flowing from a kindly disposition towards the unfortunate, it is, of course, very amiable. But there is reason to believe that this sentiment is not wholly of a good origin, but is quite as largely produced by a misapprehension of economic relations. The laborers appreciate, in some degree, the cares under which the unsuccessful employer labors, the anxieties from which he suffers, the humiliation into which he is occasionally plunged. They know he has a pretty poor time of it on the whole, and they are not envious of him. On the contrary, they use his hard lot to sharpen their envy of the man who reaps large profits from the conduct of business and the employment of labor. They compare the rich rewards of the one, who, perhaps, in time, becomes worth his millions, with the meager recompense of the other, who, at the end of a long life of labor, has little to show for it all; and the comparison tends to heighten the feeling of loss and of wrong with which the gains of the former are contemplated.
If, however, we have rightly indicated the source of profits, not only is the unsuccessful employer deserving of no special economic sympathy, but his conduct of business, his control of labor-force and capital-force is at a great cost to the laboring class, as forming a part of the general community.
We saw that rents were measured upward from the productive level of no-rent land. If, therefore, that level is lowered, rents are, (par. 257) by that fact raised. Similarly, profits are measured upwards from the level of the no-profits class of employers; and any cause which brings incomeptent persons into the conduct of business, or keeps them there against the natural tendency of trade to throw them out, increases the profits of the successful employers, as a class, by enhancing the cost of production and, consequently, the price of that portion of the supply which is produced at the greatest disadvantage. This enhancement of price is at the expense of all who consume the goods so produced; the laboring class equally with others, in theory; probably in fact more than any other, on account of their limited ability to look out for their own interests in retail trade.
314. What Causes Help to Swell the Proportion of Incompetent Employers of Labor?—Shilly-shally laws relating to insolvency do this; bad money does this; truck does this; protection, in my judgment, does this. Each of these causes enables men to escape the consequences of incompetency, and to hang miserably on to business, where they are an obstruction and a nuisance. Slavery, in like manner, enables men to control labor and direct production, who never would become, on an equal scale, the employers of free labor; and it is not more to the inefficiency of the slave than to the incompetency of the master, that the unproductiveness of chattel labor is due.
The lower the industrial quality of free labor, the more ignorant and inert the individual laborer, the lower may be the quality of the men who can just sustain themselves in the position of employers. Men become the employers of cheap labor who would never become the employers of dear labor, and who ought not to be the employers of any sort of labor. The more active becomes the competition among the wages class, the more prompt their resort to market, the more persistent their demand for every possible increase of remuneration, the greater will be the pressure brought to bear upon such employers to drop out of the place into which they have crowded themselves at the cost of the general community, and where they have been able to maintain themselves only because the working classes have failed, through ignorance or inertia, to exact their full terms.
315. Importance of this View of Profits.—It is competent to any person to dissent from the view of the origin and measure of business profits I have presented; but it can not be gainsaid that, if that view be accepted as correct, we have here the keystone of the arch, which completes the structure and binds together the other members into a symmetrical whole spanning the entire field of distribution. We shall not, however, be able to appreciate all the consequences of this theory, until we have carried our studies through the subject of wages, the remuneration of labor.
316. Getting Rid of the Employer.—In the department of Production we described the function of the entrepreneur, or employer, the person who, hiring labor on the one hand, and borrowing capital on the other, initiates industrial operations according to his own plans, and with a view to his own economic benefit. Coming down to the department of Distribution, we have, but just now, inquired how the contemplated benefit is secured by the employer, and what are the limits of that benefit, which we term profits.
It has been said, in the course of this discussion, that this benefit obtained by the employer, his profits, has been the object of not a little jealousy and envy on the part of the laborers and capitalists to whom he has paid wages or interest. Those wages and that interest the recipients would be glad to see increased by some addition derived from the source from which the employer obtains his profits. This could only be done by the laborers and the capitalists combining to perform the employer's work in production, and thereby becoming entitled, or perhaps we had better say enabled, to claim his-share of the product in distribution.
317. Co-operation.—Organized and systematic efforts to get rid of the entrepreneur or employer have not been unknown. Among the many schemes for largely and rapidly improving the condition of the masses of the people, which had their birth in the period of social and political fermentation which we call the Revolution of 1848, none had fairer promise of substantial results than that known by the name of Co-operation.
Generically, co-operation is a term of wide application, and, in its use in political economy, may express the union of industrial agents in production upon any terms and under any system of organization. Since the period referred to, however, the term has come to have a limited signification, confined to an industrial organization from which the entrepreneur is excluded, and under which the product of industry is again to be divided into three principal shares, instead of four as under the entrepreneur system. I here only indicate the place which co-operation occupies in the scheme of Distribution, postponing the discussion of the scheme to Part VI.
318. Definition of Wages.—We have seen three shares cut off the product of industry. Of the four principal parts∗ into which that product is divided, under the entrepreneur organization, as existing almost universally in England, and as rapidly extending in the United States, on the continent of Europe, and in all progressive countries, there remains but one to be treated, Wages, the remuneration of labor.
Before seeking the law which governs wages, two distinctions require to be drawn very clearly, distinctions which the reader will need to hold strongly in mind through the whole course of our future discussion, the distinction, viz., between real and nominal wages, and that between the real and the nominal cost of labor.
319. Real and Nominal Wages.—Real wages are the remuneration of the laborer as reckoned in the necessaries, comforts and luxuries of life.
Real wages may differ widely, even when nominal wages are of the same amount, by reason of:
(a) Variations in the purchase power of money.
(b) Varieties in the form of payment, as when the board of the laborer, the rent of a cottage, the privilege of grazing a cow, allowances of certain quantities of food, drink or fuel, the right to take flour at miller's prices, one or more of these, are added to the money wages of the laborer. Such forms of payment are not of much importance throughout the United States, generally, at the present time; but in many European countries they constitute elements which can not be overlooked in discussing the question of comparative wages. In England, a series of acts of Parliament, extending over four hundred years, have successively restricted the right of the employer to pay wages in aught but the coin of the realm.
(c) The greater opportunities in some avocations than in others for extra earnings by the laborer himself or by the members of his family. Thus, Prof. Senior says: “The earnings of the wife and children of many a Manchester weaver exceed or equal those of himself. Those of the wife and children of an agricultural laborer, or of a carpenter or coal-heaver, are generally unimportant.” The true unit in the comparison of wages is evidently the family.
320. (d) The greater regularity of employment in some avocations than others. Varying regularity of employment may be due to (1) the nature of the individual avocation, (2) the force of the seasons, (3) social causes, (4) industrial causes, like strikes, panics, and so-called “hard times.”
In illustration of the foregoing causes, we have the widely varying rates of agricultural wages from one season to another, being often, e. g., more than twice as great in the third as in the first quarter of the year. This is due to both of the first two causes adduced. It is not alone the difference of the seasons which makes agricultural wages so irregular; in part, also, it is the nature of the operations involved. After the seed has been planted, time must be given it to grow, and this would be so were there no winter. So in the fisheries, it is not alone the stress of weather which obliges the laborer to lie idle during portions of the year, but, in part, the reproductive necessities of the fish. In other avocations it is the force of the seasons alone which makes employment irregular, as, for example, in the brickmaking, quarrying, carpentering, house-painting, and other trades.
Among social causes affecting the regularity of employment, as between country and country, may be mentioned the observance of festivals and religious rites, which among some peoples occupy a hundred and more days in the year.
(e) The longer duration of the labor power in some avocations and some countries, than in others.
Thus, Dr. Neison has shown that the mean mortality in England between 25 and 65 years of age, is, in the clerical profession 1.12 per cent.; in the legal, 1.57; in the medical, 1.81. In domestic service, the mortality among gardeners, is but .93 per cent.; among grooms, 1.26; among coachmen, 1.84. Of the several branches of manufacture, paper shows a mean mortality of 1.45; tin, 1.61; iron, 1.75; glass, 1.83; lead, 2.24; earthenware, 2.57. Among the different kinds of mining, iron shows a mean mortality of 1.80; tin, 1.99; lead, 2.50; copper, 3.17.
Dr. Edward Jarvis has shown that, on the average, an Irishman who has reached the age of 20, has 28.88 years to live; a Frenchman, 32.84; an Englishman, 35.55; a Norwegian, 39.61.
It is evident that if two persons begin to labor productively at the same period of life and continue at work until death, at the same nominal rate of wages, that one receives the higher real remuneration who lives the longer, inasmuch as the cost of his maintenance during the first unproductive years of life, must, in any philosophical view of the subject, be charged upon his wages during his period of labor.
321. Nominal and Real Cost of Labor.—Another distinction which requires to be observed is that between wages and the cost of labor.
In treating wages as high or low, we occupy the laborer's point of view. In treating the cost of labor as high or low, we occupy the point of view of the employer.
Wages are high or low according to the abundance or the scantiness of the necessaries, comforts and luxuries which the laborer can command. The cost of labor is high or low, according as the employer gets an ample or a scanty return for the wages he pays the laborer, whether these be low or high.
It is possible that an employer may pay high wages, and yet the cost of labor to him may prove to be low, by reason of the laborer's superior efficiency. On the other hand, the employer may pay wages on which the laborer can only live most miserably, and yet the employer be greatly straitened to get back these wages in the value of his product, so poor and wasteful may be the services rendered.
In Part II. we have explained at great length the causes which affect the laborer's efficiency.
It is probably true that, as a rule, the highest paid labor is that which costs the employer least. This is evidenced by the two facts that, generally speaking, employers, when they reduce their force, discharge their lowest paid laborers first; and that, generally speaking, it is the countries where the lowest real wages are paid which feel the necessity of imposing commercial restrictions to keep out the products of others. Thus, India, where the cotton spinner gets only 20 pence a week, is flooded by the cottons of England, where the spinner receives 20 shillings; and Russia, where the laborer in iron works receives but three roubles a week, has to protect herself, or thinks she must do so, against the iron of England, where the workman receives four or five times as much.
322. Relation of Wages to the Other Shares of the Product of Industry.—It has not been by accident, or whim, or from any notion respecting the comparative dignity of the several claimants to the product of industry, that rent, interest, and profits have been discussed before wages.
This order has been followed for a positive reason, which is that, in the theory of distribution here proposed, wages equal the product of industry minus the three parts already determined in their nature and amount. In this view, the laboring class receive all they help to produce, subject to deduction on the three several accounts mentioned.
323. Rent Deducted.—First, rent is to be deducted. On the lowest grade of lands there is no rent. On the more productive soils rent, at its economic maximum, equals the excess of produce after the cost of cultivating the no-rent soils has been paid. This rent does not affect the price of agricultural produce, and does not come out of the remuneration of the agricultural laborer.
We thus see that the first deduction to be made from the product of industry is of a perfectly definite nature, and that, on the assumption of active competition on both sides, the amount of that reduction is susceptible of arithmetical computation. Rent must come out before the question of wages is considered. The laborer can not get it, or any part of it, by any economic means. It must go to the land-owner, unless it be confiscated by the State, or ravished away by violence.
324. Interest Deducted.—Secondly, from the product of industry must be deducted a remuneration for the use of capital. That remuneration must be high enough to induce those who have produced wealth to save it and store it up, in the place of consuming it immediately for the gratification of personal appetites or tastes. This may imply, in one state of society, an annual rate of interest of eight per cent.; in another, of five; in another, of three.
325. Profits Deducted.—The third and last deduction to be made from the product of industry before the laborer becomes entitled thereto, is what we have called profits, the remuneration of the entrepreneur, the employer, the man of business, the captain of industry, who sets in motion the complicated machinery of modern production.
From the importance assigned, in this work, to the entrepreneur's or employer's function, the conclusion might be hastily drawn that production would be primarily for his benefit, that he, if any one, would be the residual claimant upon the product; that, paying the capitalist, on one side, enough, under the name of interest, to secure the use of his capital, and paying the laborer, on the other side, enough, under the name of wages, to secure his services, this man of business, captain of industry, merchant, manufacturer, or banker, would retain as his own all that remains. And so, indeed, in any individual transaction he does, owing to the force of contract, just as the farmer, under a lease, pays the owner of the soil no more in years when the yield is exceptionally large, and no less in years when the crops are short.
If, however, we have correctly indicated the source of the employer's profits, they are of the same nature as rent. As there are no-rent lands, so there is a class of employers who derive from the business they conduct a bare subsistence, at the cost of much anxiety, and perhaps also of discredit, many of them living mainly at the expense of their creditors. These we call the no-profits employers.
From this point, where profits, if any, are so small and so hardly earned that they may, for scientific purposes, be disregarded, upwards through many grades, we have employers who derive moderate profits, liberal profits, grand profits, monumental profits aggregating in a lifetime colossal fortunes, according to the degrees in which they bring courage, prudence, foresight, frugality, and authority over men, to the organization and conduct of business enterprises. If I am right in this view of the nature of the entrepreneur's function and of the source of his profits, those profits would, under full and free competition, not form a part of the price of commodities, and are not obtained by deduction from wages. In other words, these profits consist wholly of wealth created by the individual employers themselves, over and above the wealth which would have been produced, in similar industrial enterprises, by the same labor-force and capital-force under the control of employers of less efficiency.
326. The Laborer, the Residual Claimant to the Product of Industry.—These three shares being cut off the product of industry, the whole remaining body of wealth, daily or annually created, is the property of the laboring class;∗ their wages, or the remuneration of their services. So far as, by their energy in work, their economy in the use of materials, or their care in dealing with the finished product, the value of that product is increased, that increase goes to them by purely natural laws, provided only competition be full and free. Every invention in mechanics, every discovery in the chemical art, no matter by whom made, inures directly and immediately to their benefit, except so far as a limited monopoly may be created by law, for the encouragement of invention and discovery.
Unless by their own neglect of their own interests, or through inequitable laws, or social customs having the force of law, no other party can enter to make any claim on the product of industry,∗ nor can any one of the three parties already indicated carry away any thing in excess of its normal share, as hereinbefore defined.
327. The English Doctrine of Wages.—The view here taken of the Distribution of Wealth, under the entrepreneur organization of industry, differs widely from that held by the English economists, except as respects the single share of the landowner—Rent. According to those writers, the capitalist-employer is the residual claimant upon the product of industry. DeQuincey summed up the Ricardian doctrine in saying: “Profits are the leavings of Wages.”† From the entire product of the exertions and sacrifices of the industrial community, there is cut off Rent, as determined by the Ricardian formula. Next the laborer's share is ascertained in accordance with the Wage Fund,∗ the amount possibly to be paid in this way being irrespective alike of the number and of the industrial quality of the laboring class. The rest belongs to the capitalist-employer, as his own profits, so-called, consisting of two portions, one, due to the abstinence of the owner of capital, as such; the other due to the present, personal exertions of the employer, as such.
By this rule of distribution, no gain in the efficiency of the individual laborer, whether taking the direction of greater energy or of greater economy; no mechanical invention, no chemical discovery, however much the capability of production may be increased thereby, can profit the laborer any thing, except as it first enhances the profits of the employing class, and thereby adds to the capital of the wage fund, to be thereafter expended in purchasing labor.
328. In What Sense Wages are the Residual Share.—I have spoken of the laborer as the residual claimant upon the product of industry. That view of wages being new, even the phrase in which I have embodied it has been excepted to. Since the first edition of this treatise was published, certain writers have declared that there is no more reason for applying the term, residual, to wages than for applying it to any other share of the product of industry; that each share, in turn, comprises all which the other shares do not include.
The criticism of these writers is not just. It is competent to them to controvert the view of the origin and measure of business profits presented in the last chapter; and, in expressing their dissent therefrom, they will, of course, deny that wages constitute the residual share of the product. But no one can properly make question that, if this view of business profits be accepted, as correctly setting forth, in the large way, the facts of industry, not only is what is manifestly meant by the phrases, residual claimant, residual share, completely true, but also that those phrases themselves are perfectly accurate in the expression of that meaning.
329. Upon the theory of profits which has been expounded, the remuneration of labor, wages, is strictly the residual share of the product of industry, residual in this sense, that it is enhanced by every cause, whatever that may be, which increases the product of industry without giving to any one of the other three parties to production a claim to an increased remuneration, under the operation of the principles already stated; residual in the sense that, even if any one or all of the other parties to production become so engaged in any given increase of the product as to become entitled to an enhanced share in its distribution, their shares still remain subject to determination by positive reasons, while wages receive the benefit of all that is left over after the other claimants are satisfied.
330. The Operation of the Rule Illustrated.—Granting the correctness of the analysis we have offered, it is demonstrable that the product of industry may be increased without enhancing the share of all or of any of the other parties to distribution; and, even when the other shares are enhanced, it is possible and even probable that, on the assumption of perfect competition, the increase of product resulting from the introduction of any new force into industry will be greater than the sum of the increments by which rent, interest, and profits shall have been enhanced. If this be so, then the wages class will receive a benefit from any increase of the product of industry corresponding to that derived by the residuary legatee whenever the total value of the estate concerned is ascertained to have been, or from some unanticipated cause becomes, larger than was in contemplation of the testator when the amounts of the several specific bequests were determined upon.
331. Thus, to take the simplest possible case, let us say that the line ax represents the amount of the production of a given community. Of this total, ax, let ab represent the share going to the land-holding class as rent; bc, the remuneration of the capitalist class, under the name of interest; dx, the portion of the produce paid in wages; and, by consequence, cd, the part retained by the employing class as profits. Let it now be supposed that an instantaneous improvement takes place in the industrial quality of the laboring class, by which they become so much more careful and painstaking, more adroit and alert, more observant and dexterous, as to effect a saving in the materials used in each and every stage of production, with a resulting increase of ten per cent. in the finished product over what had been accomplished by more wasteful, clumsy, heedless operatives. This assumption is certainly not an unreasonable one, as regards the extent of the possible saving to be effected through even a slight improvement in the industrial quality of a laboring population. The total product will then be represented by the line ay.
Our question is, To whom will go that portion of the produce which is represented by the dotted line xy, under the normal operation of economic forces?
I answer, If our analysis of the source of business profits is correct, this will go to the laboring class in enhanced wages.
332. To whom else should it go? To the landlord class, in higher rents? No, clearly not, since the materials employed have not been increased, but the gain to production results from a better economy of materials, in kinds and amounts as before. Hence, no greater demand is made upon the land; hence, cultivation is not driven down to inferior soils; hence, rents can not be enhanced, rent representing only and always the excess of produce on the better soils above that of the soils of the lowest net productiveness under cultivation. The line ab, therefore, remains unchanged.
Shall the line bc show any change? Shall all or any part of the gain xy go to the capitalist class, as interest? Again, no. An improvement in the industrial quality of the laboring class does not necessarily increase the amount of tools and supplies required in production. On the contrary, neat, intelligent, careful workmen require even fewer tools than ignorant, slovenly, heedless workmen, to perform the same kind and amount of work, since in the case of the former there will be a smaller proportion at any time broken or dulled or from any cause awaiting repair. Since, then, there is no greater demand for capital in the case supposed, there can be no increase in the rate or amount of interest; and the line bc will, therefore, not be lengthened.
Will the whole or any part of xy go to the employing class, as increased profits? If we have correctly discovered the source of business profits, this will not be the case. An improvement in the industrial quality of a given body of workmen would not require an increase in the number of employers; hence, would not, could not, enhance the aggregate amount of profits. On the contrary, an improvement in the industrial quality of the laboring class would tend, and would tend strongly, to raise the standard of business ability in the employing class; to drive out the more incompetent, thereby raising the lower limit of production in this respect, and thereby reducing the aggregate amount realized as profits.
We see, therefore, that the line cd will not be increased, in the case supposed; and, as we have proved the same respecting ab and bc successively, the whole of xy must go to lengthen the line dx, representing the amount previously received by the laboring class as wages.
333. We have thus far, for convenience of reasoning and simplicity of illustration, assumed that the economic effect of the improvement in the industrial quality of the body of laborers in view, is confined to an increase in the amount of the finished product through a diminution in that element of waste which enters, more or less, into all production of wealth. The same argument would hold good of an improvement in the industrial quality of the laboring population which should result in the production of goods of equal bulk and weight, but of a greater value through a higher quality, a more perfect finish, a nicer adaptation to the wants of the community. Not only is such an increase in the value of the product, which does not increase the amount of materials taken from the soil and hence has no tendency to enhance rents, possible, but instances of this character are, more than any other, representative of the modes of production in communities of advancing civilization. Articles are often sold for twice, thrice or ten times as much as other articles, containing the same amount of material, simply by reason of the skill and taste which has enhanced their value to the consumer. In all such cases, the increase due to the improvement in the industrial quality of the laboring classes would, under the principles laid down, go, entire, to the laborers themselves, granted only perfect competition.
334. But such an improvement in industrial quality would probably be followed, sooner or later, by an actual increase in the amount of material employed. In this case, what would be the distribution of the produce? The increase would no longer go entire to re-enforce wages. A larger amount of materials being used, a greater demand would be made thereby upon the productive powers of the soil; the lower limit of cultivation would be pushed downwards, a longer or a shorter distance, to supply the increased demand; and rent would be enhanced, as in all prosperous and progressive countries it certainly tends to be.
But the amount which would thus go to enhance rent—it might be much, it might be little—would still be limited by the Ricardian formula; and all the remainder would be applied, under the principles laid down, to increase the remuneration of labor, the portions reserved as interest and profits suffering no change.
335. But suppose, again, that the improvement in the industrial quality of the laboring class is carried to such a degree as to qualify them to use a higher order of tools, more complicated, more delicate, and hence more expensive; or to abandon the hand-tools, heretofore employed, for costly and powerful machines. Here we should have an increased demand for capital; and, by consequence, supply remaining, for the time, unchanged, interest would be enhanced. But the amount by which interest would be thus enhanced would not be the amount by which production was increased. On the contrary, the rate of interest would still be governed by the relation between the supply of and the demand for capital; and all the increase of product which was not thus taken would, under the principles laid down, go directly and exclusively to increase wages.
336. We may illustrate this by supposing a workman, who has hitherto been using a few coarse, simple, cheap and durable tools, in producing a low-grade article, to have qualified himself, by private study and practice, to use numerous, delicate and intricate tools, in doing a high order of work, in the same branch of industry. The cost of maintaining the stock of tools of the former kind might have been, including interest, repairs and occasional replacement, five dollars, a year. The cost of maintaining the stock of new tools might be fifty dollars a year. But the increased daily value of the product, due to the introduction of a superior order of workmanship, might be a dollar, or two dollars, a day. What I am insisting upon is, that, not only would the individual workman, in the given instance, if he intelligently pursued his own interest, secure higher wages, corresponding to the increased value of his production, minus the added cost of the service (which probably no one would deny), but that what would be true of the individual workman will be true of the working class, as a whole, so far as, by an improvement in their industrial character, they qualify themselves for a higher grade of production, higher in respect to quality or to amount.
And it is to be remembered, in this connection, that whatever the advantage which the added demand for tools or machinery may, in the immediate instance, give to the owners of existing capital, that advantage will steadily tend to decline. Thus, in the case supposed, the first equipment of the improved laborer for his new work, might cost %200, increasing the demand for capital to this extent, and thus raising somewhat the sum obtained in that community, that year, as interest. But the increase of production, might, as we have reasonably supposed, amount to even more than %200 annually; so that the supply of capital, relatively to the demand, might, after a single year, be greater than before; while the capability of accumulating capital during each succeeding year would be greatly enhanced.
THE CONDITIONS OF THE LABORING CLASS AS AFFECTED BY IMPERFECT COMPETITION.
337. The Economic Position of The Laboring Class.—In Chapter V. we set forth the relation of wages to the other shares of the product of industry, reaching the conclusion that, notwithstanding the formal attitude of the laboring class in industry, as hired by the entrepreneur class and working for stipulated wages, the normal operation of the laws of exchange is to make the former, in effect, the owners of the entire product, subject to the requirement of paying the definite sums charged against that product, on the three several accounts of rent, interest and profits.
338. What Will They do With it?—This position of the laboring class would seem to be a not ineligible one, conceding that the exigencies of modern production require the maintenance of the entrepreneur class.
We have seen what is the best the laboring class can, in theory, do for themselves, under the existing organization of industry: what is the most they can claim for their services. Let us now inquire, what, in fact, this class do for themselves in this respect; and if they fall short of realizing their full share of the product of industry, to what causes the failure is to be attributed.
The laboring class may do themselves an economic injury in either or both of two ways: first, through excessive reproduction, sexually, leading to over-population, involving the necessity of cultivating poorer and poorer soils, with the result of continually diminishing per capita production; secondly, through a weak, spasmodic, or unintelligent competition with the employing class.
The consideration of the former of these causes will be postponed till we reach the department of Consumption. The latter will form the subject of the following paragraphs.
339. Imperfect Competition.—A total failure of competition is impossible. No class will be found so stolid and inert as to make no exertions whatever to change a worse for a better condition. The impulse to buy in the cheaper and to sell in the dearer market will, in some measure, actuate every body of laborers. Yet the degree in which that motive is effectual will be found to vary widely as between men of different climes, and of different races. Compare the New Englander with the East Indian. The former, inquisitive, alert, aggressive, almost destitute of attachment to locality, quick to change his avocation, if a profit shall appear, and so gifted with mechanical insight and aptitude as to acquire the rudiments of any art in an astonishingly short time; occupying a country where the transmission of intelligence is incessant, and where the transportation of passengers and freight reaches the maximum of ease, security and cheapness; enjoying the advantage of a wide margin of living, and with no inconsiderable savings laid by from the liberal earnings of former years, is not likely to remain long ignorant of opportunities for improving his industrial conditions, whether through change of place or avocation, or likely long to allow such opportunities to remain unimproved. We get a measure of this freedom of individual movement in the census statistics, by which it appears that in 1880 nine and a half millions of the native population were living in States other than those of their birth.
340. The Immobility of Labor.—On the other hand, the East Indian, bound in fetters of caste, of superstition, of ignorance and poverty, occupying a country vast portions of which are traversed only by bullock-paths, abides in his lot, in spite of wretchedness and famine, as though rooted in the soil itself.
But we have not to go as far away as India, to find instances of a high degree of immobility in the population, in the face of strong and urgent reasons for migration. A century ago Adam Smith wrote:
“Eighteen pence a day may be reckoned the common price of labor in London and its neighborhood. At a few miles' distance, it falls to fourteen and fifteen pence. Ten pence may be reckoned its price in Edinburgh and its neighborhood. At a few miles' distance it falls to eight pence, the usual price of common labor through the greater part of the low country of Scotland, where it varies a good deal less than in England. Such a difference of prices, which it seems is not always sufficient to transport a man from one parish to another, would necessarily occasion so great a transportation of the most bulky commodities, not only from one point to another, but from one end of the kingdom, almost from one end of the world, to another, as would soon reduce them more nearly to a level.” So great did the resistance to the flow of labor appear to his eye, that he declared man to be “of all sorts of luggage the most difficult to be transported.”
341. It might be supposed that the increase during the century in the facilities for transportation and for the diffusion of information would have done much to remove the obstructions which, in Adam Smith's day, retarded the movement of labor to its market; but the force of ignorance, fear and poverty is not so easily broken. Prof. Fawcett in his Political Economy writes: “During the winter months, an ordinary agricultural laborer in Yorkshire earns thirteen shillings a week; the wages of a Wiltshire or Dorsetshire laborer, doing the same kind of work, and working a similar number of hours, are only nine shillings a week. This great difference in wages is not counterbalanced by other considerations. Living is not more expensive in Yorkshire than in Dorsetshire, and the Dorsetshire laborer does not enjoy any particular advantages or privileges which are denied to the Yorkshire laborer.”
Instances without number might be cited, showing the practical immobility of the agricultural population of England in the past; and in this respect, England may be taken as fairly representing the actual world about which the economist reasons, being in the mean between the people of North America and Australia, on the one hand, and those of Asia, on the other.
342. Change of Occupation.—So much for the movement from place to place, which is needed to meet the requirements of industrial competition. Of the movement from one avocation to another, which may be required for the same end, an even less favorable account may be given. An American will find it difficult to conceive how slow and painful is the process by which an overcrowded avocation is depleted or a growing industry re-enforced, in any of the States of Europe.
In his last and greatest work Prof. Cairnes sought to reach a measure of the rate of this movement in England. His result was substantially this: that only loss by death or disability could be relied upon to relieve the labor market in any branch of industry which was overdone, and that the sole disposable fund for supplying new laborers to new or growing branches of industry was to be found in the body of persons each year coming of age, industrially speaking. It would be easy to show that the “play” thus given to the labor market is far within the limits of those great oscillations of industry which labor must meet, fully and promptly, or suffer because it can not meet them. Moreover, it is doubtful whether Prof. Cairnes does not overrate this disposable labor fund.
So far from the members of the rising generation being perfectly free to move into avocations other than those of their parents, mill-owners are harassed by applications from their hands to take children into employment on almost any terms. The more miserable the parents' condition, the greater becomes the pressure on them to crowd their children somehow, somewhere, into service. Once in a mill, we know how little chance there is of the children afterwards taking up for themselves another way of life.
In the agricultural districts of England, gangs of children of all ages, from sixteen down to ten or even five years, were formerly organized and driven from farm to farm, and from parish to parish, to work all day under strange overseers, and to sleep at night in barns, huddled together without distinction of sex. The system of public agricultural gangs required an act of Parliament to break it up, and we have the testimony of the commission of 1867, that, in spite of the law, gangs were then still formed in some parts of the kingdom. So late as 1870, children were employed in the brickyards of England, under strange masters, at three and a half years of age. Account is given of a boy weighing 52 pounds, whose daily task covered fourteen miles; one-half of this with a load of clay weighing forty pounds, upon his head.
Such instances show graphically the error of supposing that parents who are tied down hopelessly to an occupation which affords but the barest subsistence, can freely dispose of their children to the best advantage, among a large class of occupations. Especially when we consider that, in the development of modern industry, trades become highly localized, shall we see the practical fallacy of this assumption. Even if we suppose the parent to be advised of better opportunities opening in some trade prosecuted at a distance, yet, years before the boy or girl will be fit to send away from home, the chance of earning a few pence in the mill where the parent works, will almost irresistibly draw the child into the vortex. The truth is, that until you secure mobility to adult labor you will fail to find it in the rising generation, and that among an ignorant and degraded population four-fifths, perhaps nine-tenths, of all children, by what may be called a moral necessity, follow the occupations of their parents, or those with whom fortune has placed them.
343. The Industrial Effects of a Failure of Competition.—If industrial movement may be thus tardy and limited, even among a people of Teutonic blood and enjoying free institutions, it becomes a matter of serious concern to inquire what are the effects of a partial failure of competition.
And, first, let us see just what it is that we look to competition, when active and complete, to accomplish.
We have defined competition to be the operation of individual self-interest among buyers and sellers. We saw that this implied that each man acts for himself, solely, by himself, solely, in order to get the most he can from others, and to give the least he must, himself.
Now, this may seem a very unamiable thing yet, rightly viewed, perfect competition would be seen to be the order of the economic universe, as truly as gravity is the order of the physical universe, and to be not less harmonious and beneficent in operation. If free and full, unqualified, unremitting competition could be secured, the results would be more honorable to human nature, as well as practically more advantageous, in the same degree, and for the same reason that absolute justice would be more advantageous and more honorable than partial justice patched up with charity.
344. The Economic Harmonies.—When we say that through competition one reaches his best market, does this mean that in that way he does best for himself alone? On the contrary, when one reaches his best market, he does not only that which is best for himself, but that which is best for others. He not only gets more than by resorting to any other market, but, in the very act of doing so, he gives more, also. If in that market his service or commodity bears a higher price than elsewhere, this is of itself a proof that his service or commodity is there in greater demand, more needed, the subject of an intenser want, than elsewhere. Consequently, were he to resort elsewhere, he would not only receive less himself, but would satisfy a lower want on the part of others, leaving a higher want unsatisfied.
345.—But the main office of competition is to preserve individuals and classes from destruction or industrial degradation, through excessive burdens imposed by authority, through natural catastrophes affecting the sources of livelihood, or through the gradual decay of commercial demand. Deal the heaviest blow you can with a hammer into a bin of barley, and you will not injure a single grain, though the hammer be buried to your hand, because every grain moves freely from its place, and the mass simply opens to receive the intruding substance and closes around and above it. Lay one of the grains upon a rock, and your blow will smash it into a paste. Let the stoutest ship that ever rode out a hundred gales have her bow lodged in the sands, and the oncoming waves of the first storm will break her up in a few hours.
In the nature of the case, blows must fall, from time to time, upon every industrial community or class. Whether these be due to wars or failures of the harvest, or to conflagrations and floods, or to the shifting of commercial demand, or to vicious legislation, labor has an ample security against deep and permanent injury, so long as its mobility is unimpaired. On whatever spot the blow may fall, complete freedom of movement, from place to place and from avocation to avocation, will cause the original loss to be distributed over the industrial body, while the forces of repair and restoration will immediately set to work to make good what has been taken away.
346. To Him That Hath Shall be Given.—This tendency to the diffusion of all benefits to the equalization of all burdens, and to the repair of all local injuries at the expense of the vital powers of the whole industrial body, is properly the subject of admiring contemplation by social and ethical philosophers. Frederic Bastiat has, in words of deathless eloquence, described this play of industrial forces, under the title of The Economic Harmonies.
But the political economist who undertakes the explanation of the actual phenomena of the industrial world, is bound to note, not only that the assumption of full and free competition, which underlies this theory of the self-protecting power of labor, is wholly gratuitous, as applied to vast portions of the earth's population; but, also, that, when the mobility of labor becomes in a high degree impaired, the reparative and restorative forces do not act at all. On the contrary, a new and antagonistic principle begins to operate, viz., the principle that “To him that hath shall be given, and from him that hath not shall be taken away even the little that he seemeth to have.”
Under the rule of this great economic as well as social law, industrial injuries once suffered tend to remain, and not to be removed. The wretch who has fallen is trampled on in the maddening struggle for place and pelf. In the case of the laborer thrown out of employment, for instance, there is always danger that self-respect, hopefulness and ambition, which we have seen (par. 76) to be most powerful factors in industrial efficiency, may fail among squalid surroundings. A less ample or nourishing diet, and less healthful conditions, submitted to for awhile, perhaps the contracting of distinctly bad habits through anxiety, disappointment and enforced idleness, may so lower his industrial power as to unfit him to render the same amount and quality of service as before. In such a case, not only is there no tendency in any economic force to repair the mischief that has been done, but even the occurrence of better times and new opportunities would not restore the shattered industrial manhood.
347. Economic Injuries Tend to Remain and to Deepen.—Irrespective of any thing catastrophic, the tendency of purely economic forces, under impaired competition, is continually to aggravate the disadvantages from which any person or class may suffer in the beginning. Defeat is an ill preparative for fresh conflicts. Every gain which one makes at the expense of another furnishes the sinews of war for further aggression; every loss suffered diminishes the capabilities of further resistance.
This principle applies with increasing force as we go downward in the industrial scale. Emphatically is it true, that the curse of the poor is their poverty. Cheated in quantity, quality and price, in whatever they purchase, they are unable to get even as much proportionally for their little as the rich for their larger means. The tendency of purely economic forces, therefore, is to widen the differences existing in the constitution of industrial society, and to subject every person or class, who may, from any cause, be put at disadvantage, to a constantly increasing burden.
348. What may help the Laboring Class in Competition for the Product of Industry.—Granting that perfect competition would do all that has been claimed for the working classes, realizing the very ideal conditions under which they should work, but, at the same time, recognizing the fact that, in industrial society as now constituted, competition is very partial and incomplete, let us inquire what, if any thing, can be done to help the laboring classes in their competition for the product of industry.
The answer of the economists of the laissez faire, or Manchester school to this inquiry is a very easy one. Freedom being the ideal condition, and society suffering from lack of it, let us have all the freedom we can get, at this time, and thus prepare the way for more of it in the time to come. Let us abolish every thing in the way of restraint or regulation, every thing in the way of concert or combination in industry, which we can abolish, and trust to the future for doing away with those obstructions which are now beyond our reach.
349. Economics and Politics.—This answer is so easy as not unfairly to arouse some suspicion. Do we deal in this spirit with the question of progressive freedom in government? Does any right-thinking man, with his eyes open upon the experience of the last hundred years, allege that progress is best to be effected by indiscriminately throwing off restraints? Is it not admitted that discretion and order must be observed in removing political checks and balances and limitations? Are there not, in any well-organized society, restrictions which correspond to certain human infirmities, of which we can not now hope to rid the race, in such a way that the existence of the restrictions increases the actual degree of freedom∗ enjoyed by the community?
350. The Burning Theater.—But if any reader distrusts an analogy drawn between economics and politics, let us take a case from real life, where all the elements can be easily and confidently grasped. Suppose a crowded audience to be seeking to escape from a theater which has taken fire. There might be time to allow the safe discharge of all in the house. If so, the individual interest of each person clearly would coincide with the interest of the audience viewed collectively, namely, that he should fall in precisely according to his position relative to the common place of exit, and should move just so fast and no faster, according to the rate of discharge from the building into the outer air. Yet, human nature being what it is, we know that there would be great danger of a furious rush for the door, which would lead to the serious retardation of the movement of the audience as a whole, and probably to many persons being trampled upon or burned.
Suppose, now, that, at the moment of alarm, a score of resolute policemen were to present themselves, what could they do? Clearly they could not cause the audience to be discharged more quickly, safely and harmoniously than would be the case did every person in the audience truly comprehend the situation and act coolly with reference to his own interest, as above stated. As compared, however, not with what the audience ought to do, but what they probably would do, the advent of the policemen would save many limbs and lives, perhaps avert a calamity that would have filled the world with horror. With discipline thus imposed upon men in such a situation, the procedure which would be for the interest of each and of all might go forward swiftly, surely and steadily, under authoritative direction. Discipline can, indeed, create no force, but it may save much waste.
351. Registration of Land.—But if any one is still disposed to distrust analogies drawn between things inside and things outside the sphere of economics, let us take the case of a regulation prescribing the registration of real estate and the recording of all transfers and mortgages of land. Such a regulation would be restrictive upon transfers. Transfers would require to be made in writing and after a definite form; certain words must be used to make the instrument effective; a certain delay must be submitted to; an office, perhaps at a distance, must be visited; copies must be made; a fee given. Yet who does not know that a regulation of this character, though in name restrictive, would in fact not retard but immensely promote the transfer of real estate. For uncertainty it would substitute the highest assurance; for the risk of losing the whole principal, it would offer a clear and indefeasible title, which would repay, many times over, the petty fee and the trouble required. The slow and costly transfer of real estate in England, where no such system exists, in comparison with the cheap and easy transfer of the same species of property in the United States, affords a measure of the force of this cause.
352. Always a Practical Question.—Perhaps enough has been said to show that the question whether a certain act, ordinance or social arrangement retards or promotes the movement of labor to its market, is a practical question, not to be determined à priori, except in the case of extreme measures, but to be considered and decided with reference to the existing condition of industrial society and to the actual infirmities or liabilities of the laboring population to which it was intended to apply.∗ A crutch operates only by restraint, and to a man of sound limbs can be only a hindrance; but it is a restraint which corresponds to the infirmity of a cripple, and may be the only means of enabling him to walk, or even of keeping him from falling hopelessly to the ground.
In application of these remarks, a brief discussion of the influence of Trades Unions and Strikes upon wages and upon the condition of the laboring class, will be found in Part VI.
353. Wages and Public Opinion.—When the writer first ventured, in 1874, to urge that respect for labor and sympathy with the laboring class might become a force in determining the market rate of wages, he was greeted with derision. He has reason to believe that in the intervening years the arguments then presented have worked their way toward a conviction of the public mind that the cause thus adduced is not an unreality, but one which actually operates with perceptible force within the field of economics.
Let it be observed that what is claimed is, not that compassion and sympathy will induce employers here and there to pay wages above the market rate, but that these sentiments may become a force in determining what the market rate shall be.
354. An Analogous Case.—And, in the first place, why this incredulity on the first suggestion of the subject? Is it not true that sentiments of personal kindness and of mutual respect between classes of the community have had a very important influence, in many countries (see pars. 266–76), in determining the rates at which land should be leased? If public opinion may be a very powerful, often a predominant, force in determining the rent of land, why should we not expect that it would have at least an appreciable force in determining wages?
355. The Reason of the Case.—But let us leave analogy, and turn to the reason of the individual case. How can the sentiments we have invoked become an economic force, and thus enter into the distribution of wealth between employer and employed?
Let us recall the principle, so often insisted on, that it is only as competition is perfect that the wages class have any security that they will receive the highest remuneration which the existing conditions of industry will permit. In the failure of competition, they may be pushed down, grade by grade, in the industrial as in the social scale. Let us recall, moreover, that the failure of competition may be due to moral as much as to physical causes; that if the workman from any cause does not pursue his interest, he loses his interest, whether he refrain from bodily fear, from poverty, from ignorance, from timidity and dread of censure, or from the effects of bad political economy, which assures him that if he does not seek his interest his interest will seek him.
Now I ask, can it be doubtful that the respect and sympathy of the community must strengthen the wages class in this unceasing struggle; must give weight and force to all their reasonable demands; must make them more resolute and patient in resisting encroachment; must add to the confidence with which each individual laborer will rely on the good faith of those who are joined with him in his cause, and make it harder for any weak or doubtful comrade to succumb?
And, on the other hand, will not the consciousness that the whole community sympathize with the efforts of labor to advance its condition, by all fair means, inevitably weaken the resistance of the employing class∗ to claims which can be conceded, diminish the confidence with which each employer looks to his fellows to hold out to the end, and make it easier for the less resolute to retire from the contest, and grant, amid general applause, what has been demanded?
356. The Lamentable Case of Hodge.—Let us apply these principles to an individual case. Hodge thinks—Hodge is a plowman, and has been getting twelve shillings a week—that he ought to have more wages, or, rather, for Hodge would scarcely put it so abruptly, he feels that it is dreadfully hard to live on twelve shillings. He has attended a lecture delivered by Mr. Joseph Arch from a wagon on the green. He is uneasy and wants to improve his condition. So far, then, he is a hopeful subject, economically. The desire to improve one's condition is the sine qua non of competition. Will these stirrings of industrial ambition come to any thing? Will the discontented plowman seek and find his better market?† This is a great question, for upon the answer to it depends the future of Hodge, and perhaps of his sons and grandsons. Let the Spectator (August 4, 1872), tell how he is assisted on his way and encouraged in his weak, ignorant, doubting mind, by landlord, bishop, and judge.
“The man has been, so to speak, morally whipped for six months. He has found no friend anywhere, except in a press he can neither read nor understand. The duke has deprived him of his allotment; the bishop has recommended that his instructor should be ducked; the squire has threatened him with dismissal in winter; the magistrate has fined him for quitting work, which is just, and scolded him for listening to lectures, which is tyranny; the mayor at Evesham has prohibited him from meeting on the green; and the lawyer—witness a recent case near Chelmsford—has told him that any one who advises and helps him to emigrate is a hopeless rascal.”
Now I ask, in all seriousness, is Hodge quite as likely to pursue his interest and persist in whatever that requires—which, be it observed, is no other than what the interest of the whole community requires—as if his social superiors were encouraging him to better his fortune if he finds a chance; as if the shopkeeper and the publican and the lawyer and the rector and the squire were not all ranged against him? Is it not possible that, for the lack of a little fanning, the feeble flame in Hodge's breast may die out, and he, giving up all thought of seeking his fortune elsewhere, return to his furrow, never to stray from it again?
TWO OTHER SHARES IN DISTRIBUTION.
357. We have discussed the distribution of the product, under the entrepreneur organization of industry. We have seen that this product is divided into four principal shares, rent, interest, profits and wages, corresponding to four classes of claimants. We have now to inquire what becomes of certain portions of the product, which do not appear to go into either of the four shares enumerated. And first of the amount taken by government.
358. Taxation.—There has long been a difference of opinion among economists, whether taxation should be a title in distribution or in consumption. Prof. Senior held to the latter treatment; Prof. Jevons favored the former.
The difference is just this: Shall we regard government as a fifth original claimant upon the product of industry, taking its share under the name of taxes, as the land-owner takes rent, the capitalist interest, the employer profits, and the laborer wages; or shall we regard the product as divided into four shares, out of each of which is paid, as one form of the owner's consumption of his income, a sum, greater or less, for the sustentation of government, just as out of each such share are paid sums, greater or less, for shelter, food, fuel, etc.?
The question is not a very important one in a general treatise on Political Economy, and neither decision solves all the difficulties of the case, since the functions of government are so various and so widely diverse.
On the one hand, it is said that government is a great producer and should be regarded as a claimant in distribution, taking its share under the name of taxes. Government builds and keeps in repair roads and bridges and breakwaters and perhaps, also, canals and railways, for the purposes of trade and industry. Government maintains a constabulary and court-houses and jails, that the honest and industrious may work without hindrance or even fear of molestation. Government does a great many other things which minister directly to the creation of values, vastly increasing the amount of the product over what it would have been without the intervention of this agency.
On the other hand, it is said that a great part of what government does has not the production of wealth as its primary object, and that much does not even contribute indirectly to that end, as in the case of the vast military and naval expenditures of the nations of Europe, which have for their purpose, not the preservation of civil peace, but to maintain the existence or extend the power of nationalities or of dynasties. Secondly, whatever the objects of expenditure, government does not obtain its revenue through the agencies of exchange, but by forcible collection, men contributing, not because government has made it worth their while to do so, not because government is prepared to render an equivalent, but simply because government demands the contribution and will have it. For these reasons, it is urged, the revenue of the State should not be treated as a share in distribution, but as a form of consumption.
359. As has been said, the question is not free from difficulties whatever course be taken. A thoroughly consistent treatment of the subject of taxation would require the appearance of this title in more than one department of political economy.
360. The foregoing would be the true logical treatment of taxation. In an elementary treatise, however, I do not deem it worth while to deal so elaborately with this subject, and will postpone to Part VI. whatever I have to say regarding taxation, except so far as it may be desirable to speak of the influence of government expenditures when we reach the department of Consumption.
361. The Speculating Class.—Incidental to all the processes of production and exchange is the chance of gain or loss through the rise or fall of prices during the interval between buying and selling; between making and selling. This gain or loss may be slight, in any given case, or it may be considerable. There were many manufacturers in the United States who made fifty or a hundred thousand dollars, clear, by the rise of cotton, on their hands, in 1861 and 1862, and this without intentionally speculating at all, but simply through holding a large stock for the purposes of legitimate manufacturing. At other times, the daily, weekly, monthly fluctuations of prices will be very slight, now all on one side, for a long time; now, all on the other side; then, oscillating backwards and forwards across what we may call the average price.
To a certain extent, these fluctuations of price may be trusted in time to offset each other, as regards any individual merchant or manufacturer. Yet after all the effect of this is exhausted, there will still be a chance of gain or of loss, which may be so considerable as to become an important element in determining the fact of profits, or even in deciding the solvency of the merchant or manufacturer, in spite of the strictest observance of the rules of prudence, and in spite of the greatest energy and industry.
Within this field, so far as the great body of business men are concerned, fortune holds undisputed sway. They lack the faculty to discern the signs of the future. They do the best they can to produce good articles cheap, to meet the demands of the public as to fashions and styles, to keep expenses down, and to avoid losses by bad debts. When they have done this, they have done all they can for themselves; and whatever gains or losses come to them through the fluctuations of the market, come as if wholly by chance. There are other men who have a rare power to apprehend in advance the movements of the market. It is always found that when materials begin to rise, these men have a large stock on hand. Let a disastrous fall occur, these men are never caught by it. Whichever way the market turns, it seems as though the sole object were to enrich these fortunate beings.
Of course, this is speculation; yet when it is carried on only incidentally to a legitimate manufacturing or trading business, we do not call these men speculators.
362.—In every progressive commercial community, however, is found a large and increasing number of persons who, either possessing this faculty of discerning the signs of the market, or flattering themselves they possess it, make a business of buying or selling according to their anticipations of a rise or a fall. These persons are not manufacturers; they are not merchants, in any proper sense; they do not buy from producers or sell to consumers; they are neither importers, jobbers, wholesalers or retailers; they have perhaps no stores or warehouses or stocks of goods; possibly, would not know by sight a sample of the commodities they deal in. They simply bet upon the market, having a well or ill-founded opinion of their own shrewdness and coolness in doing so. They may lose a fortune, or make a fortune.
The difference between the two kinds of speculation may be illustrated as follows: A miller who grinds two hundred thousand bushels of grain a year, may, if he have this peculiar kind of insight, by carefully watching the market, buy his wheat at two cents a bushel less than he would have had to pay for it had he bought it from time to time as he needed it for grinding. This is speculating. Moreover, after grinding, he may hold the flour weeks, or months, until he sees his chance, and then, by going into the market at the right moment, he may sell it at ten cents a barrel more than if he had sold it as it was made. This again is speculating. Now here is a saving in materials of %4,000, and a gain on the price of the product of, say, %4,000. After making allowance for interest on the extra capital required to “carry” the wheat and the flour, and for the cost of storage, the addition made hereby to the miller's profits for the year would be a tidy sum. On the other hand, a corn-broker may buy and sell twenty thousand bushels a week, buying and selling on all sorts of time, ten days, twenty days, sixty days, six months, every transaction being a bet upon the price of corn at a future date. When the broker buys, he bets that the price will rise; when he sells, he bets that it will fall. The men from whom he buys have as little corn as he has; the men to whom he sells would know as little as he what to do with actual corn, were any of it to come in their way.
Of speculating as a business, two things may be said. First, it is surprising what an enormous aggregate of transactions a man of little capital and no brains to speak of, may conduct in the course of his life, and yet neither lose nor gain much if only he confines himself to small individual operations. Secondly, not less surprising are the gains of speculation when conducted by a real master. Every year an appreciable portion of the product of industry passes into the possession of the men of this class. In every highly commercial country, the largest fortunes are those made by speculation. The fortunes so made, however, are not nearly so numerous as those made by trade and industry.
363. Speculation is not wholly without its advantages to the community. If corn is likely to be scarce and, by consequence, high, four months hence, the man who now begins to buy does, in so far, call attention to that probability. By raising the price he, so to speak, advertises for an increased supply to be brought in from the outside, and for greater carefulness in husbanding the existing stock. If beef is likely to fall in price, sixty days hence, the man who now sells does what lies in him to give notice of an excess of supply, and thus affords duller-witted holders opportunity to get rid gradually of their stock, instead of encountering an utter breaking down of the market a little later. In a word, speculation while confined within moderate limits is the agent for equalizing supply and demand and rendering the fluctuations of price less sudden and abrupt than they would otherwise be.
There are causes, however, which go to render speculation extravagant, carrying it beyond all reasonable bounds, multiplying the numbers of the speculating class and vastly increasing their gains, at the expense of the sober, productive industries of a country. Foremost among these is a vicious money system. The extent to which this cause engenders speculation may be seen in the history of the “Continental” money of the American revolution, of the “Assignats” of the French revolutionary period, and of the “Greenbacks” of the war of Secession. With prices fluctuating violently and rapidly, the opportunities for acquiring large wealth by speculation are increased ten-fold, it may be a hundred-fold. This is too much for human nature: too much for honesty, too much for prudence. A subtle poison runs through the veins of the community, turning the heart to crime and the brain to folly. The face of society changes, under such an evil passion, as suddenly and as fearfully as does the face of a man stricken with a deadly fever. On every hand breaches of trust testify to the weakness of the principles of virtue under such a strain, while honest and discreet modes of obtaining a livelihood are disparaged and abandoned for those which promise quicker and larger, even if illicit, gains.
364. Loaded Dice.—Of much speculation, it must be said that it is wholly beyond economic as well as moral sympathy. If all speculation is gambling, this is gambling with the dice loaded. By means of combinations and corners, the markets are often profoundly influenced in order to produce the very fluctuations on which the grain or petroleum or stock gamblers have made their bets. The mischiefs suffered by trade and industry, originating in this source, are monstrous, even incalculable. Whether they can in any degree be repressed by law, is a grave political question, with which we are not called to deal.
THE REACTION OF DISTRIBUTION UPON PRODUCTION.
365. Actual Production Compared with Productive Capability.—In a previous chapter (Chapter IV., Part 2), we considered the elements which enter into the productive capability of a community, and indicated, as the one most important question with which political economy has to deal, the inquiry, why it is that the actual production of any community falls so far short of what its land power, its labor power, and its capital power are jointly competent to effect.
It was there stated that only when we should have passed through all the departments of political economy should we be in a position fully to answer this question.
366. Even under the title, Production, however, we saw that grave liability to loss of force inheres in the industrial structure of society especially under the entrepreneur system, by which the labor power and the capital power of the community become committed to numerous highly technical employments, from which they can not readily release themselves, and, within those employments, become subjected to the direction of a comparatively small number of individuals, whose peculiarities of character, of habit, of station, seriously modify the application of capital and labor to production; whose mistaken aims, whose erroneous impulses, may divert these forces from that object; whose accidents of fortune may impair the energy of the industrial movement or paralyze it altogether.
Again, under the title, Exchange, we saw (Chapter VII., Part 3) that still further and even more grave liabilities to loss of industrial force inhere in that commercial system which, by separating producer and consumer, often by wide intervals, sometimes by half the circumference of the globe, introduces the opportunity for serious misunderstandings between these two classes; misunderstandings which, when intensified by panic, may at times result in a wide and long-continued suspension of productive activity.
367. We are now to inquire respecting the reaction of Distribution upon Production. Is here a liability to a still further loss of productive force? Discarding the terms just and unjust, or equitable and inequitable, as applied to the distribution of wealth, let us ask whether there is found, in a division of the product of industry according to certain proportions, between the several parties who have united in production, a sufficient cause for a smaller production of wealth in the future than would result from a division of the same product between the same parties in different proportions?
I think we have at various points, in our treatment of distribution, caught views of the subject which must have satisfied us that it is possible that the product of industry, in any given time and place, may be so divided among the persons and classes of persons who have contributed to its production, as to impair, in greater or less measure, the productive force up to that time existing; perhaps, even, to generate influences which shall thereafter act with increasing violence in reducing the productive capability of the community. It may be well, however, to stop a moment at this point and to treat distinctly and separately the possible reaction of distribution upon production.
368. The Landlord and the Capitalist have an Economic Advantage.—The consideration nearest at hand, in this connection, would seem to be this, viz.: that among the four several main classes of producers, there are wide differences as to the liability, to which these are respectively subject, of being so cut down in their remuneration, in any given time and place, as to suffer a loss of force thereby. Two of the four classes, viz.: landlords and capitalists, clearly occupy a position of what may be called economic advantage. They have at their command certain material agencies of production by withholding the use of which they can inflict a relatively greater injury upon others than they would themselves suffer. In the expressive phrase of children, they have their hands on “the upper end of the stick.” They are in a position to make bargains for themselves to the best advantage.
It is true that, unless the landlord find a tenant, he can have no rent. Yet a landlord who has five farms to let, may put a great pressure upon each and every one of six would-be tenants. Moreover, the landlord is, in general, much more wealthy than his tenant, and is thus able to stand longer out of his remuneration, in case there comes to be a contest between the two as to the terms on which the land shall be rented. I might add that, if a given farm be not rented at all, for a season, it may not be altogether a loss to the owner. The orchard will bring forth its crop of fruit without the intervention of a tenant; the grass will grow as thick and high as usual, on the “mowing”; the wood lots will all the time be acquiring value; the arable lands will have a rest which it might possibly have been good policy to give them, even at the sacrifice of rent.
Again it is true that, unless the capitalist lends his accumulations, he can not acquire interest; yet his loss by standing out of his interest, for a given season, may be far less than that sustained by the entrepreneur through losing the use of the capital on which he had relied. The latter person may have become so engaged that the failure to effect a loan, while it cost the capitalist but one and a half per cent. during three months, might require the entrepreneur to sell goods at a great sacrifice, or to give up some contract which promised to be highly advantageous.
Enough, perhaps, has been said to justify the assertion that the capitalist and landlord occupy positions of economic advantage, so far, at least, that they are not likely to suffer injury, except by violence or legal spoliation.
It is another question, whether the economic advantage enjoyed by these two classes is so great as to place it in their power to do an injury to other classes, that is, to cut down the shares going to those other classes, out of the product of industry, to such an extent as to impair their productive force, and, by so doing, to diminish the productive capability of the community.
369. Shall the Capitalist be Hampered?—In remarks on Usury Laws, which will be found in Part VI., I shall express the opinion that, in certain states of industrial society, the lending class have so great an advantage over the borrowing class, which, in such states of society, consists generally of distressed persons, as practically to place an individual borrower completely at the mercy of the usurer, who is able to exact a rate of interest which is not only irrespective of the economic service rendered through the loan, but soon becomes destructive of the borrower's credit and financial integrity, reducing him speedily and certainly to bankruptcy and perhaps to prison. Under conditions like these, I shall suggest that laws limiting the rate of interest, in protection of the would-be borrower, may not be as unwise and as unstates-manlike as they have generally been considered. On the other hand, I shall undertake to show, that in advanced stages of industrial society, where commee and manufactures are widely extended and are largely carried on by means of borrowed capital; where, therefore, borrowers are no longer distressed persons; but the most active and prosperous members of the community borrow largely, freely and of choice, as a matter of business and with a view to profit—in such stages of society laws limiting the rate of interest merely lay an extra burden upon those who are at a peculiar difficulty in borrowing. In the absence of such laws, those persons will benefit by the greater plentifulness of capital, the greater ease of borrowing and the consequently lower rate of interest, which, in general, result from freedom regarding contracts for loan, in a commercial or manufacturing community. The business classes, active, alert, aggressive in competition, will make rates of interest by which the less fortunate members of society will profit.
370. Shall the Landlord be Restrained?—In the chapter on rent, the opinion has been expressed that, in a community like the United States, or Canada, or Australia, the landlord may make the utmost out of his economic position without working industrial injury to the tenant, owing to the mobility of the population, their readiness and resourcefulness, their self-reliance and economic aggressiveness. In countries occupied by populations of a lower industrial character, we saw that, unless the constraints of law∗ or public opinion intervene, the vast economic advantage possessed by the landlord class, as against a peasantry ignorant, inert and perhaps numerically in excess, is likely to operate with increasing severity, to impoverish the tenant class and to ultimately reduce their industrial efficiency, through deprivation of necessary clothing, food and shelter, as well as through the loss of hopefulness and self-respect. We saw that this might go on until almost the last stage of human misery should be reached, as in Ireland, during the period before the great famine.
371. Invidious Treatment of the Landlord and Capitalist.— What might be true in a contrary case: how far laws prohibiting or limiting the payment of rent or interest framed, not with a view to offset certain weaknesses or unfortunate liabilities on the part of the tenant or borrowing class, but drawn in a spirit hostile to the owners of land or of capital, and designed to confiscate, for the benefit of other classes, or of the community as a whole, some part or all of what would otherwise be paid on these accounts: how far such laws might impair the productive capability of the community, we shall have occasion to discuss in Part VI., under the titles, The Unearned Increment of Land, and Usury Laws. I will so far anticipate that discussion as to say, that, while in commercial or manufacturing communities, the normal effect of severe restrictions upon the payment of interest is at once to diminish the accumulation of capital for productive uses, and to prevent the existing body of capital from being applied where it will do the most good, such laws are, in such communities, so easily evaded that their practical influence is not very great.
Secondly, the effects upon the cultivation of the soil of a reduction or confiscation of rent, by legal means, are not so clear as to be beyond dispute. The theory which underlies the land laws of nearly all states that can be called civilized, is, that the private ownership of land, with the incident of the acquisition by the owner of an “unearned increment” due to the exertions and sacrifices of the community as a whole, is essential to industrial progress; and that not only those who are so fortunate as to be among the owners of land, but even those who have been born into the world without a title to a foot of soil, are benefited, and largely benefited, by the fact of private ownership. At the same time, it probably would not be claimed by any one that the care and pains of the individual owner, to secure the proper cultivation and preservation of his land, are proportional to his share of the product. I see no reason to believe that a reduction of rent in the case of a given tract of land, through, say, some new economic force, would diminish the care and pains taken by the owner in respect to his property, so long as his interest remained still considerable.
There have of late years appeared certain writers who claim that private ownership is not necessary to the fullest use of the soil which forms the natural endowment of any community. At least, they claim, the incident of an “unearned increment” is not necessary. They assert that all of rent proper (exclusive, that is, of the returns to actual investments of capital, in improvements) can be cut away without impairing the productive uses of the soil, though they admit that so much of the former rent might advantageously be left to the so-called owner as would constitute a reasonable commission to him, as the agent of society, for taking all needed care and pains with respect to the land. I believe this view to be altogether erroneous; but it must be confessed that the error can not be shown as clearly and strongly as in the case of the argument for prohibiting interest. I shall defer to Part VI. whatever I may have to say further on this subject.
372. Distribution as between Employer and Laborer.—So much for the possible action of distribution upon production, through causes operating to affect the shares of the product of industry going, as rent or as interest, to the owner of land or to the owner of capital.
Of much more practical importance, in these modern times, is the influence exerted upon future production by the division of the remaining product between the employing and the laboring class. I shall undertake to show that greatly to change the proportions existing between these two shares, at any time, may be to set in operation causes which will affect the future productive capability of the community, it may be to a wide extent, it may be through long periods of time.
373. Beating Down Wages.—The economists of ten or fifteen years ago, urged very strongly that a reduction of wages could not prove of ultimate injury to the laboring class. Thus Prof. Cairnes says:
“Supposing a group of employers to have succeeded, as no doubt would be perfectly possible for them, in temporarily forcing down wages, by combination in a particular trade, a portion of their wealth previously invested would now become free. How would it be employed? Unless we are to suppose the character of a large section of the community to be suddenly changed in a leading attribute, the wealth so withdrawn from wages would, in the end, and before long, be restored to wages. The same motives which led to its investment would lead to its re-investment, and, once re-invested, the interests of those concerned would cause it to be distributed amongst the several elements of capital in the same proportion as before. In this way covetousness is held in check by covetousness, and the desire for aggrandizement sets limits to its own gratification.” And in a similar vein, Prof. Perry, of our own country, wrote: “If in the division between profits and wages, at the end of any industrial cycle, profits get more than their due share, these very profits will wish to become capital, and will thus become a larger demand for labor, and the next wages fund will be larger than the last.”
374. Had we already discussed the principles which govern the consumption of wealth, it would be easy to show that Professors Cairnes and Perry are mistaken in their view of the necessary effects of an enlargement of profits at the expense of wages, inasmuch as a portion of such enhanced profits, instead of becoming capital (that is, wealth devoted to reproduction), might become fine horses and houses, fine clothes and opera boxes; while another portion might take the form of coming to the office one hour later in the morning and going home one hour earlier in the afternoon.
But, passing by this point, the entire argument by which the English and American economists generally have sought to establish what we may call “the economic indifference of the rate of profits,” is still further defective, in that it neglects those very important considerations which relate to the possible degradation of labor: that is, the reduction of the laborer from a higher to a lower industrial grade.
375. The Degradation of Labor.—The constant imminence of this change, the smallness of the causes—often accidental in origin and temporary in duration—which may produce it, and the almost irreparable consequences of such a catastrophe, can hardly be set forth too strongly.
The assumption which underlies the statements I have quoted is that the laboring classes, while suffering economic injury from any source, will themselves remain firm in their industrial quality, and await the operation of the restorative and reparative forces which shall, in time, set them right.
The human fact, so often to be distinguished from the economic assumption, unmistakably is that there is, on the part of the working classes, unless protected in an unusual degree by political franchises, by the influence of public education, and by self-respect and social ambition, a fatal facility in submitting to industrial injuries, which too often does not allow time for the operation of the beneficent principles of relief and restoration. The industrial opportunity comes around again, it may be, but it does not find the same man it left: he is no longer capable of rendering the same service; perhaps the wages he now receives are quite as much as he earns.
376. Let us consider the possible effects of a considerable reduction of wages. If the amount previously received had allowed comforts and luxuries, and left a margin for saving, the reduction would probably be resented, in the sense that population would be reduced by migration or by abstinence from propagation, until the former wages should be, if possible, restored. But if the previous wages had been barely sufficient to furnish the necessaries of life, and especially if the body of laborers were ignorant and unambitious, the falling off in the quantity and quality of food and clothing and in the convenience and healthfulness of the shelter enjoyed would at once affect the efficiency of the individual laborer.
With less food, which is the fuel of the human machine, less force would be generated; with less clothing, more force would be wasted by cold; with scantier and meaner quarters, fouler air and diminished access to the light would prevent the food from being fully digested in the stomach and the blood from being duly oxydized in the lungs, would lower the general tone of the system and expose the subject increasingly to the ravages of disease. In all these ways the laborer would become less efficient, simply through the reduction of his wages.
377. The economists assert that whatever is taken from wages will increase capital, and hence quicken employment, and that this, in turn, will heighten wages. But we see that it is possible that what is taken from wages no man shall gain: it may be lost to the laborer and to the world. Now, so far as strictly economic forces are concerned, where enters the restorative principle? The employer is not getting excessive profits, to be expended subsequently in wages; the laborer is not under-paid; he earns now what he gets no better than he formerly did his higher wages.
This image of the degraded laborer is not a fanciful one. There are in Europe great bodies of population which have come in just this way to be pauperized and brutalized, weakened and diseased by under-feeding and foul air, hopeless and lost to all self-respect, so that they can scarcely be said to desire any better condition, and still bringing children into the world to fill their miserable places in garrets and cellars, and in time in the wards of the workhouse.
If such an injury as has been indicated may be suffered in respect to the physical powers of the laborer through the reduction of wages, quite as speedily may his usefulness be impaired through the moral effects of such a calamity. Just as the greatest possibilities of industrial efficiency lie in the creation of hopefulness, self-respect and social ambition, so the greatest possibilities of loss lie in the discouragement or destruction of these qualities. We have seen through what a scale the laborer may rise in his progress to productive power. By looking back, we see through what spaces he may fall under the force of purely industrial disasters.
378. The Argument from Self-Interest.—But we may at this point be called upon to meet an objection, founded upon the assumed sufficiency of the principle of self-interest. How, it may be asked, is it possible that employers shall fail to pay wages which will allow their laborers a liberal sustenance, if, indeed, it be for their own advantage to do so; if, by that means, the economic efficiency of the laborers will be thereby increased?
I answer, first, that the assumption of the sufficiency of self interest to secure wise action is grotesquely wide of the miserable truth regarding human nature, to whatever department of activity we have reference. Mankind, always less than wise and too often foolish to the point of stupidity, on the one hand, or of fanaticism on the other, whether in politics or in domestic life, in hygiene or in religion, do not all at once become wise when industrial concerns are in question.
The argument for feeding a hired laborer liberally, that he may work efficiently, applies with equal force to the maintenance of a slave; yet we know too well that everywhere the lust of immediate gain has always despoiled the slave of a part, often a large part, of the food and clothing necessary to his highest efficiency. The same argument would apply to the case of live-stock. Yet it is almost impossible, by any amount of preaching and teaching, by any number of fairs and premiums, to keep a body of farmers up to the point of feeding cattle well and treating them well. The world over, the rule regarding the care of live-stock is niggardliness of expenditure, working deep and lasting prejudice to production.
The foregoing would be a sufficient answer to the objection I have anticipated. On every hand we see true self-interest sacrificed to greed: why should it not be so in the case of the wages of hired labor?
But another and additional reason appears. It is that the employer has none of that security which the owner of stock or the master of a slave possesses, that what goes in food shall come back in work. A man buying an underfed slave or ox knows that when he shall have brought his property into good condition the advantage will all be his; but the free laborer may at any time carry to another employer whatever of bone and sinew and nervous energy he may have gained through liberal subsistence. There is, as yet, no law which gives the employer compensation for “unexhausted improvements” in the person of his hired man.
379. Beating Down Profits.—The foregoing comprises all I should three or four years ago have deemed it necessary to say, regarding the division of the product of industry between employers and employed, as affecting the future productive capability of a community. The normal position of the employer is so clearly one of advantage, in competition with the employed, that it would have seemed scarcely worth while to inquire into the industrial effects of a pressure put upon the employing class so severe as to reduce the profits of business below the point required to secure the fullest employment of the land power, labor power and capital power of the community.∗ Even the introduction of Trade Unions into the field of industry can scarcely be said to have done more than offset the naturally great advantage enjoyed by the employing class, in competition for the product of industry.
Within the last few years, however, attempts have been made, among us in the United States, to establish confederations of labor, more far-reaching, more thoroughly organized, more authoritatively controlled, than the now familiar Trade Unions. Should the avowed purposes of those most conspicuously engaged in these efforts be accomplished, in whole or in any considerable degree, it would appear that the economic advantage might not only be shifted from the employing to the laboring class, but might there be so much enhanced as to require us to contemplate an extensive reduction of profits as a possible cause of impairment to the productive capability of the community. The further consideration of this topic will be postponed to Part VI., where we shall speak of the Knights of Labor.
380. The Doctrine of Laissez Faire.—If such liabilities to an impairment of the productive capability of the community lie in the distribution of wealth, what becomes of the characteristic doctrine of the so-called Manchester School, laissez faire: hands off: leave economic forces to work, alike unaided and unhindered, in the assurance that the interests of individuals will be found to harmonize so far with the interests of the community as to secure the highest welfare of each and of all?
On this point my views can not be expressed so well by phrases of my own devising, as in the language of an eminent English economist.
“There is no evidence,” says Prof. Cairnes, “either in what we know of the conduct of men, in the present stage of their development, or yet in the large experience we have had of the working of laissez faire, to warrant the assumption that lies at the root of this doctrine.
“Human beings know and follow their interests according to their lights and dispositions; but not necessarily, nor in practice always, in that sense in which the interest of the individual is co-incident with that of others and of the whole. It follows that there is no security that the economic phenomena of society, as at present constituted, will arrange themselves spontaneously in the way which is most for the common good.
“In other words, laissez faire falls to the ground as a scientific doctrine. I say as a scientific doctrine; for let us be careful not to overstep the limits of our argument. It is one thing to repudiate the scientific authority of laissez faire, freedom of contract, and so forth; it is a totally different thing to set up the opposite principle of state control, the doctrine of paternal government. For my part, I accept neither one doctrine nor the other; and, as a practical rule, I hold laissez faire to be incomparably the safer guide. Only let us remember that it is a practical rule, and not a doctrine of science; a rule in the main sound, but, like most other sound practical rules, liable to numerous exceptions; above all, a rule which must never, for a moment, be allowed to stand in the way of the candid consideration of any promising proposal of social or industrial reform.”
[∗]If the tract were held by one person, or by several persons acting in concert, a monopoly would be established, and a rent might be exacted. What would be the limit of that rent? Two bushels an acre, inasmuch as one would do better for himself to take up for cultivation a portion of the 22-bushel tract, paying no rent, than give more than two bushels for the use of an acre of the more productive land.
[∗]It is not, however, wholly inappropriate to join the name of Ricardo to this doctrine, on account of the great force and clearness with which he expounded and defended it. Anderson's statement of the same principle, though perfectly correct, was so made as to attract no attention, and it was not till long after Ricardo made the doctrine famous, that it became popularly known that the substance of it was contained in Anderson's work.
[∗]Cottier rents are nominal in pecuniary amount, because these rents are fixed so high that it is impossible for the cottiers ever to pay them. The nominal amount of the rent far exceeds the whole produce which the land would yield.—H. Fawcett, “Pol. Economy.” This statement is probably somewhat too sweeping.
[∗]In general, taking all classes of producers into account, this will be so. Yet the effect of a reduction of the rate of interest is not wholly upon one side. Prof. Marshall very justly exhibits an effect of a reduction of the rate of interest, which, with a certain class of producers, might and probably would operate in the opposite direction.
[∗]“Many employers of labor, in some parts of England more than half, have risen from the ranks of labor. Every artisan who has exceptional natural abilities has a chance of raising himself to a post of command.”—Marshall's “Economics of Industry.”
[∗]Prof. Alfred Marshall says: “The earnings of management of a manufacturer represent the value of the addition which his work makes to the total produce of capital and industry.”
[∗]Certain minor shares in distribution will be treated in the next chapter. For the purposes of the present discussion they may safely be disregarded.
[∗]This is substantially the position taken by the lamented Prof. Stanley Jevons, of University College, London, who states that “The wages of a working man are ultimately coincident with what he produces, after the deduction of rent, taxes, and the interest of capital.” In this matter of Wages, Prof. Jevons emphatically repudiates the doctrines generally accepted in his own country, saying: “Our English Economists have been living in a fool's paradise,” and frankly ranges himself with the French economists, “from Condillac, Baudeau, and Le Trosne, through J. B. Say, DeStutt Tracy, Storch, and others, down to Bastiat and Courcelle Seneuil.”
[∗]With the exception, still, of the State and of the speculator, whom it has seemed best, for clearness of view, to remove altogether from the present discussion, and whose shares in the distribution of the product of industry will be elsewhere considered.
[†]“There is no other way,” said Ricardo, “of keeping profits up, but by keeping wages down.” “Profits,” said Mr. McCulloch, “vary inversely as wages; that is, they fall when wages rise, and rise when wages fall.”
[∗]A discussion of the Wage Fund Theory will be found in Part VI. A few years ago, I should not have presumed to pass by this point without undertaking a formal refutation of that theory which, till recently, had complete possession of the English Economists. The fact that, though now generally abandoned, it still holds its place in so many treatises on the shelves of our libraries, some of which are even now used as text-books in our Colleges, appears to require some notice to be taken of it.
[∗]“The modern English citizen, who lives under the burden of the revised edition of the statutes, not to speak of innumerable municipal, railroad, sanitary and other by-laws, is, after all, an infinitely freer, as well as nobler, creature, than the savage who is always under the despotism of physical want.” Jevons—“The State in Relation to Labor.”
[∗]“The outcome of the inquiry is that we can lay down no hard and fast rules, but must treat every case, in detail, upon its merits. Specific experience is our best guide, or even express experiment where possible.” Jevons—“The State in Relation to Labor.”
[∗]“Masters are always and everywhere in a sort of tacit, but constant and uniform, combination not to raise the wages of labor above their actual rate.”—Adam Smith: “Wealth of Nations.”
[†]In discussing his valuable agricultural statistics before the London Statistical Society, Mr. Fred. Purdy said: “It would appear that no commodity in this country presents so great a variation in price, at one time, as agricultural labor, taking the money wages of the men as the best exponent of its value. A laborer's wages in Dorset or Devon are barely half the sum given for similar services in the northern parts of England.” Among the causes of this Mr. Purdy cites “the natural vis inertia of the class.”
[∗]“The land of a country presents conditions which separate it economically from the great mass of the other objects of wealth—conditions which, if they do not absolutely and under all circumstances impose upon the state the obligation of controlling private enterprise in dealing with land, at least explain why this control is, in certain stages of social progress, indispensable; and why, in fact, it has been constantly put in force whenever public opinion or custom has not been strong enough to do without it.” … “And not merely does economic science, as expounded by its ablest teachers, dispose of d priori objections to a policy of intervention with regard to land, it even furnishes principles fitted to inform and guide such a policy, in a positive sense.”
[∗]Oddly enough, many economists who have been serenely confident that any possible reduction of wages, under pressure from the employing class, would not injure the body of laborers, holding that whatever might thus for the time be taken from wages must infallibly, and before long, be restored to wages, [see remarks of Profs. Cairnes and Perry above], have manifested the greatest anxiety lest profits should be unduly reduced through the encroachments of wages. Not a few of these writers have formally warned the laboring class against demanding higher wages, lest they should so reduce the profits of business as to impair or destroy the employer's interest in production. It is difficulty to see the consistency of these two opinions. If what is unduly taken from wages, by pressure from the employing class, is certain to be restored to wages, why may it not be that whatever is unduly taken from profits, by pressure from the laboring class, shall, in the end, be restored to profits? If the economic harmonies exist, they surely must “work both ways.”