The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface
• Note.
• Wealth
• Chapter I: The Subject-matter of Economics
• Chapter II: The Fundamental Conditions of Wealth For Isolated Man and For Society
• Chapter III: Co-operation, Or Combination and Division of Labour
• Chapter IV: Population
• Chapter V: The Social Order
• Chapter VI: The Controlling Power of Demand
• Chapter VII: The Control of Provision For the Future
• Chapter VIII: Continuous Power to Demand, Or Income
• Chapter IX: The Classification of Incomes
• Chapter X: The Division of Income Between Owners and Workers
• Chapter XI: Incomes From Ownership of Property
• Chapter XII: Incomes From Work
• Chapter XIII: The Relation Between Individual Income and Individual Wealth
• Chapter XIV: The Wealth of Nations

CHAPTER X

the division of income between owners and workers

The use of the term “division of income” in the heading of this chapter is not to be taken as implying that there is in reality some great common income which is divided up into shares. There is, no doubt, a conception of the total income of all the inhabitants of the country, and perhaps even of the total income of all the people of the whole world. But this total is not a consistent whole which has to be divided between participants like a loaf which is cut into slices with a knife. It is a total more like the total of all the grains of wheat produced in a year. We can think of that total and talk of it as being divided or distributed between the consumers, without supposing that all the grains are ever brought together in a single barn or elevator and then parcelled out. This is what we have to do with income. We must recognize that the total is nothing but the sum of innumerable separate incomes of individuals and institutions, and a sum which cannot be expressed in any measure giving the bulk, weight, or number of the things or “satisfactions” of which the incomes consist, but only in figures which indicate the number of sovereigns or dollars or some such standard of value which is arrived at as the aggregate value of all the incomes, each being made up of the value of its different parts valued separately. An inquiry into the division or distribution of this total is really nothing more than an inquiry into the comparative magnitude of the different “shares.” It often happens that the “share” of a participant is increased by something which makes no difference at all to the other participants, or at all events no appreciable difference. In such a case it may still be a convenient fiction to suppose the addition thrown first into a common heap and then taken out again as an addition to the fortunate person's share, but we should never lose sight of the fact that it is only a fiction. The various incomes are to a large extent independent of each other. I only use the phrase “the division of income between owners and workers” because of the clumsiness of the alternative “the magnitude of the whole income falling to owners compared with that falling to workers,” with all the cumbrous phrases which would have to be brought in along with it to indicate changes in the comparative magnitude.

I have spoken of “owners and workers” rather than “property and labour” because it is very desirable to draw attention to the fact that the number of persons who own property and the number of persons who work may undergo a relative change which may cause the average owner to receive a less income in comparison with the average worker, although the proportion of the total income falling to the share of property has increased—and, of course, vice versâ, a change of relative numbers in the opposite direction may improve the position of the average owner compared with the position of the average worker, although the proportion of the total income going to the share of property has diminished. For example, if the total income has been 100 (million pounds, or milliard pounds, or whatever unit the reader likes to select), and property has been receiving 30 and labour 70 of this amount, and then property's proportion rises to 35 and labour's falls to 65, the average owner, instead of being better off in comparison with the average worker, will be worse off, if at the same time the number of the owners has increased by 50 per cent. while the number of workers has remained stationary; each worker will, it is true, be getting a slightly diminished proportion of the whole income, but the proportion received by each owner (on the average) will have been diminished still more. This is immensely important, since it means that the division between labour and property does not by itself settle the relative position of the owners and the workers. The individual workers may be better off in comparison with the individual owners when they are receiving in the aggregate a less proportion of the total.

With this preliminary caution we can proceed to ask what determines the division between property and labour in the aggregate, or, in other words, what changes we should expect to alter the division in one direction or the other.

We have to do with the aggregate annual value of all the property on the one side and the aggregate annual value of all the work on the other side. Those aggregate values are of course made up of the value of the units joined with the number or amount of the units in each. Consequently we must not suppose that the division between property and labour is as simple a matter as any ordinary bargain, and is “all a question of value” in the ordinary sense. In ordinary questions of value we have only to think of the values of units—the value of a horse, the value of coal per ton, of wheat per bushel. But in our present discussion we have to consider the annual value of all the property and of all the work. When we compare the value of pig-iron and of gold in the ordinary way, we have no hesitation in saying that, other things being equal, an increase in the annual output of pig-iron will reduce its value in gold, and so we may be tempted to say that an increase of labour will, other things equal, reduce the value of labour as compared with that of property. That would be true in a sense, but not in the sense appropriate to our present question. What we have to do is to consider the value of all the labour compared with that of all the property, and consequently we have to remember that while the increase in the aggregate quantity of labour has tended to reduce the value of a unit of làbour (however defined), it has at the same time increased the number of units, and this increase in the number of units may, it is true, have fallen short of counterbalancing the fall in the value of the unit, but it may also, on the other hand, have more than counterbalanced it: fifteen articles at tenpence each are worth more in the aggregate than twelve at a shilling each.

In the first place, then, let us suppose that a change takes place in the relative amounts of property and of work available without any change in the elasticity of demand for different things. Suppose, for example, that in a situation where property has been receiving 30.0 and labour 700, the number of workers is suddenly raised from 20,000,000 to 22,000,00. We may be sure that the additional 2,000,000 workers will cause some depreciation of labour as compared with property—that is, the value of an hour's labour will be less compared with the rent of a particular acre, the hire of a particular machine or house. But we cannot tell whether this depreciation of the unit will be sufficient to sweep away the direct effect of the increase of 10 per cent. in the quantity or number of units. That depends on the elasticity of demand for work and property. Property will certainly get a larger share, in the sense of absolute aggregate amount; the average proprietor, too, will find his position improved compared with the average worker. But all this is quite compatible with a rise of property's share only from 300 to 312, and of labour's from 700 to 763, which would mean that the percentages indicating the division between property and labour had altered from 30 and 70 to approximately 29 and 71, labour thus getting a larger proportion than before. On the other hand, of course, with a different elasticity of demand, property's share might rise to 330, and labour's only to 745, thus slightly changing the proportions to the disadvantage of labour.; it is even conceivable that the depreciation of the unit of labour might be great enough to more than counterbalance the 10 per cent. increase of quantity, so that property might get 400 and labour only 675, a smaller absolute amount as well as a much smaller proportion.

So far we have supposed alterations in the amount of labour compared with the amount of property, the conditions of demand being unaltered. Now let us reverse the supposition, and imagine the quantities stationary while changes in demand take place. The quantities remaining the same, if for any reason people with power to demand choose to direct more of their power towards the purchase of work and less towards the hiring of property, the aggregate value of work done in the year or the week, or whatever period is regarded as the most convenient to reckon in, will rise, compared with the aggregate annual or weekly value of the property; and, of course, vice versâ, if more demand is directed towards property the aggregate annual value of the property will rise, compared with that of work. The first change will mean that labour will get a larger proportion than before, and the second that it will get a smaller.

It is perhaps a little difficult to give actual examples of changes in either direction, but the following suggestions may be offered. (1) Increase of income is often a cause of change of demand as between different commodities and services, and it may, on the whole, perhaps make people inclined to spend a larger proportion of their income upon the use of land, houses, vehicles, pictures, and such things, and a less proportion in ways which tend to raise the value of work as compared with property. But the case is far from strong.

(2) Changes of taste or fashion are probably more important in practice. It is easy to conceive changes of this kind which would make a considerable difference. We might, for example, become so convinced of the desirability of living in fresh air that we abandoned the use of houses: the abandonment of houses would lead necessarily to the abandonment of such furniture as could not be waterproofed, and the income set free from the maintenance of these things would no doubt largely go to pay for the doctoring and massaging rendered necessary by the increase of rheumatism. Thus the change would be decidedly favourable to labour's share. Something of the kind has actually happened, though of course on a much smaller scale. At one time a rich man's taste for display was chiefly satisfied by the employment of large numbers of retainers; later this fashion largely disappeared, and lovers of display began to prefer palaces, pictures, and jewels. If Mr. Pierpont Morgan, instead of collecting art treasures, had chosen to spend his income like Warwick the King-maker, labour's proportion of the whole income would have been a little larger than it was. (3) Lastly, inventions of machinery and discoveries of new and better methods, without altering the ultimate consumers' tastes, cause changes in the relative demand for instruments and for labour. One invention shows how labour can be economized by the use of some elaborate machine, and thus tends to depreciate labour compared with the use of machinery and property in general; another discovery shows how to dispense with machinery, and thereby tends to cause labour to have a higher value in proportion to the annual value of property.

It is natural to ask what has been the net result of these causes in the past. Have they actually resulted in property receiving a larger or a smaller proportion of the whole income ? If we knew what had happened in the past we might have some guide for our expectations for the future.

Such statistics as are available suggest that the proportion has been nearly stationary for inhabitants of the United Kingdom during the last half-century. But this does not take us very far. The inhabitants of the United Kingdom are a special class which may not be typical of the whole world in this respect. Moreover, the period is too short to be of much weight. Looking at the matter with a long sweep of vision back to the earliest age in which we can regard property as existing at all, we can scarcely doubt that property's proportion has increased. In ordinary seasons labour brought in sufficient return to maintain the workers somehow, though no doubt not In a very luxurious manner; it is difficult to believe that on the top of this there was a 40 or 50 per cent. surplus for owners of property. The property was small; the land was there, but only slightly improved; the houses of the mass of the people were hastily-built huts, which have mouldered and blown away without leaving so much as a slight elevation of the soil on their sites; the means of communication were grass tracks, over which every man travelled on foot or on horseback; machinery for making goods scarcely existed. It is impossible to believe that the owners of such property as existed received as large a proportion of the whole income as they do to-day.

While it is thus probable that the proportion falling to property has increased, it 1s possible that the position of the average individual worker has improved in comparison with that of the average individual owner of property. Though there is no doubt a greater space than ever between the average worker and the richest man in the world, the increase in the absolute amount of the income derived from property has been so widely spread that it is quite possible that the increase per head is not so large in proportion to previous income as the increase in earnings per head has been. In this calculation we are thinking of workers and owners as such, so that a single person may appear in it both as worker and as owner. If we drop this abstraction and ask ourselves what is likely to he the effect of a growth in the proportion falling to property, we find much depends upon the diffusion of this proportion. If a few individuals get the whole increase, this will be more unsatisfactory than if the increase is widely spread.