Front Page Titles (by Subject) CHAPTER XII: incomes from work - Wealth: A Brief Explanation of the Causes of Economic Wealth
The Online Library of Liberty
A project of Liberty Fund, Inc.
CHAPTER XII: incomes from work - Edwin Cannan, Wealth: A Brief Explanation of the Causes of Economic Wealth 
Wealth: A Brief Explanation of the Causes of Economic Wealth (London: P.S. King and Son, 1922).
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.
incomes from work
Why do some people receive large incomes in consequence of their performance of labour, others only small incomes, and others none at all?
This is not, as is sometimes erroneously said, all a question of value. Earnings differ not only because of differences in the value of a definite amount of service rendered by the worker, but also because of differences in the amount of the service rendered. It is obvious enough to all of us in private life that the comparative earnings of different individuals depend very largely on the comparative amount of labour which they perform. One man works hard, is “industrious” as we say, and earns a good annual income in consequence, another is lazy, rather enjoys being out of a job, and consequently earns very little. The only reason why this very important fact is often ignored in economic treatises is that it is so obvious that it does not occur to writers as worthy of mention. But it is not so obvious that the old do not find it constantly necessary to insist on it in their exhortations to the young. At one period they even thought it well to present boys with pocket-handkerchiefs on which the career of the industrious apprentice to the loftiest commercial position was depicted in lurid prints.
Differences of individual output of service may of course arise from other causes than differences of “industry.” Individuals differ largely in the physical and mental qualities given them by nature, and we expect the more capable to earn more in each occupation than the less capable, where the more capable and the less capable are equal in “industry.” Here again the only reason for overlooking the truth is its extreme obviousness.
But besides these differences between individuals following the same occupation, we find differences between whole classes of individuals following different occupations. There are low paid occupations and high paid occupations—or, at any rate, better-paid occupations. The difference here cannot be entirely attributed to differences of “industry” and natural endowments. Some few of the worst paid occupations are, indeed, largely filled up by lazy persons of small natural ability, and possibly some of the best paid are largely filled up by persons of more than the average industry and natural endowments. But there is little reason for supposing that these propositions can be applied to all the poorly paid and all the better paid occupations. Most of them are filled by very ordinary persons. Moreover, even if the propositions did apply, that would not account for the difference of remuneration. Even if road-sweeping were paid by the piece in strict proportion to the amount of service rendered, the most industrious and able man in the world could not earn £250 per annum by it. There is clearly something more at the bottom of the differences of earnings as between one occupation and another. The value of the work of an average person is less in some occupations than in others. But why?
In endeavouring to answer this question it will be well to clear away at the outset a deeply rooted misconception about the creative power of labour. It has been supposed by many people during the last two hundred years at least that labour creates value, or gives value to the things on which it is expended. This is an entire mistake. Labour certainly performs valuable services and produces or creates valuable things, but it is not because labour is expended upon these services and things that they are valuable. The proposition should be reversed: it is because it is known that the services and things will be valuable that labour is expended in producing them. This is quite obvious when we reflect that no amount of labour expended on a thing which is not wanted by any one will make it valuable, and that if the labour employed in producing some valuable service or thing is increased with the effect of causing more of the service or thing to be forthcoming, its value will fall. In fact, it would be truer to say that labour destroys value than that it creates it: every minute of labour given to the production of anything tends to reduce the value of such things by increasing their quantity. Labour then is generally remunerated, not because it creates value, but because it is generally devoted to the creation of services and things which are valuable.
Bearing this in mind, we can still see some foundation for the assumption, often made, consciously or unconsciously, that in the absence of reasons to the contrary we should expect all kinds of labour to receive equal remuneration. We should expect it, not because labour creates value, and therefore the product of equal quantities of labour should be of equal value, but because we should expect people to sort themselves out between the different kinds of labour in such a way that the services rendered by an hour of labour of each different kind would be equal in value. We should expect that as soon as any one kind of labour appeared to be better paid than another, people would crowd into the better paid occupation till the increase of the service offered brought down the remuneration to the general level. Freedom to choose and change an occupation would maintain one level throughout all occupations.
In fact, of course, this single level is not found to exist.
In the first place it is obvious that there must be frequent temporary departures from any such level in consequence of the abrupt and unexpected changes which take place in demand and in the knowledge of methods and the possession of means of production. Owing to all kinds of reasons the demand for any particular product is subject to considerable variations which no man can be expected to foresee, or at any rate which the large number of persons concerned certainly do not as a matter of fact foresee. New methods of production are constantly being discovered which diminish or increase suddenly the demand for particular products of labour, though the demand for the ultimate result remains the same: for example, the invention of petrol-driven cars diminished the demand for persons capable of driving and taking care of horses, though it did not diminish the demand for the service of carrying passengers by road. Climatic variations constantly lead to a shortage or a superabundance of particular products, with the result of diminishing or increasing the demand for the services of particular classes of workers. All these changes, however, would not create any permanent differences between different occupations. It is a matter of luck whether one occupation or another is affected by them, and so in the long run we should expect substantial equality between all the various occupations so far as these causes were concerned.
Some changes, nevertheless, are “always going on”: they are not, like those just discussed, beyond human foresight. Such is the change which, throughout modern history, has caused agricultural labour to be a declining proportion of the whole of industry. So far, the returns to agricultural industry have steadily increased, and as Adam Smith remarks, “the desire of food is limited in every man by the narrow capacity of the human stomach.” Consequently, the fact that it has become easier to produce food for the number of human beings which has actually existed at any moment has led to a smaller proportion of human effort being required for the production of food. Isolated Man in such conditions would have found some of his time set free from the production of food, and would have been able to devote the time saved either to increased leisure or to larger production of other things. Associated men find that a smaller proportion of their number suffices to feed the whole. Agriculture, therefore, offers a less expanding field of employment than other occupations taken as a whole. Though this phenomenon can scarcely be described as beyond human foresight like an earthquake or an abnormal drought, it is a thing which, down at any rate to the present or very recent times, individuals could scarcely be expected to provide for by any action. Agricultural workers have thus been at a steady continuing disadvantage compared with workers in general: the conditions under which they live having been more favourable for the bringing up of children than those of many other workers, there has always been an over-supply of young persons available for agriculture. Many of them have, of course, been kept out of agriculture, and have supplied would-be reformers with the theme of “the exodus from the country to the towns,” but their extrusion has been an effort which has been inevitably depressing to country labour.
Secondly, it is probable, we can scarcely say more, that the persons following certain occupations are worse off than others owing to a permanent tendency on the part of ordinary mankind to miscalculate chances. Adam Smith thought that people generally overrate their chances of exceptional good luck in such a way that they overcrowd the occupations which offer a few very high prizes. He says very justly: “That the chance of gain is naturally overvalued, we may learn from the universal success of lotteries. The world neither saw, nor ever will see, a perfectly fair lottery, or one in which the whole gain compensated the whole loss; because the undertaker could make nothing by it. In the state lotteries the tickets are really not worth the price which is paid by the original subscribers, and yet commonly sell in the market for 20, 30, and sometimes 40 per cent. advance. The vain hope of gaining some of the great prizes is the sale cause of this demand. The soberest people scarce look upon it as a folly to pay a small sum for the chance of gaining ten or twenty thousand pounds; though they know that even that small sum is perhaps 20 or 30 per cent. more than the chance is worth. In a lottery in which no prize exceeded twenty pounds, though in other respects it approached much nearer to a perfectly fair one than the common state lotteries, there would not be the Same demand for tickets. In order to have a better chance for some of the great prizes, some people purchase several tickets, and others small shares in a still greater number. There is not, however, a more certain proposition in mathematics, than that the more tickets you adventure upon, the more likely you are to be a loser. Adventure upon all the tickets in the lottery, and you lose for certain; and the greater the number of your tickets, the nearer you approach to this certainty.”
In the choice of a profession, as he recognizes, not only overestimation of luck but also overestimation of their own ability makes young people over-inclined to think themselves suitable for the Bar and other professions where high ability meets with a very high remuneration. Hence, owing to this cause taken by itself, such professions tend to be overcrowded, and therefore worse remunerated than others, though of course other causes may overcome this tendency and render them actually better remunerated.
Thirdly, we must notice that pecuniary remuneration is not the only thing which people with free choice between occupations think it worth while to consider. They are guided also by their estimate of the agreeableness or disagreeableness of the work to be done and the various conditions accompanying it. If all kinds of work were equally remunerated, there would be no supply to the most disagreeable: every one would of course choose the most agreeable. The natural tendency to choose the agreeable and avoid the disagreeable in fact keeps down the pecuniary remuneration of the agreeable by increasing the supply of labour, and keeps up the pecuniary remuneration of the disagreeable by diminishing the supply of labour. In occupations of what we call “the same class,” this effect is very obvious. For example, while successful authorship in a few fields of literature is certainly highly paid, respectable average authorship receives what would be considered an almost incredibly low wage if the remuneration is worked out per hour of all the effort expended.
Fourthly, remuneration per hour is not the only thing to be considered in the choice of an occupation even when the choice is simply between occupations in which each hour's labour may be reckoned of equal agreeableness. People have to think also of the number of hours of labour which can be put in during a period of some considerable duration, such as a year. If we found an occupation which could not, owing to climatic or other reasons, be carried on for certain months in the year, during which it was impossible for those employed in it to find other equally well-paid employment, we should expect the supply of that kind of labour to be small enough to raise its remuneration per hour somewhat above that of other occupations of the same class in which employment was more continuous throughout the year. We should not necessarily expect the excess to be just and only just sufficient to bring out an equal average for the whole year, since on the one hand the holiday might be regarded as a certain advantage, or on the other hand Adam Smith might be right in supposing that the anxieties of the workless period would be more deterrent than the possibility of using it as a holiday would be attractive.
Fifthly, we must remember that we reckon remuneration per hour as “net” in the sense that we allow for any continuing present expenses, such as the upkeep of tools supplied by the worker, but that we do not allow anything for the expenses of original education or training required by the worker in order to fit him for his particular occupation. Now this varies enormously between different occupations, and we should consequently expect very great differences of remuneration, calculated in the ordinary way without taking account of this particular cost. We should expect, for example, that well-trained dentists would be better paid than well-trained navvies. The navvy would probably begin to earn something at fourteen or fifteen years of age, while the dentist could scarcely begin before twenty-five, so that there is a great difference in the cost of maintenance accumulated at compound interest when working life begins. On the top of that there is the special cost of training, which would be nil for the navvy and some hundreds of pounds for the dentist. The two amounts would have to be paid off out of earnings in about equal periods. If we take the working life of both occupations at thirty years, and the rate of interest at 4 per cent., the dentist ought to earn about £58 a year more than the navvy for every £1,000 by which his original cost of maintenance and training exceeded that of the navvy.
If this were all, and if we took cost of training as a deduction to be made at its face value, we might say that the differences of income received from labour in different occupations, so far as not accounted for by the miscalculations into which fallible human beings are necessarily liable to fall, were apparent rather than real for the most part, and that so far as they were real they were balanced by differences in non-pecuniary advantages and disadvantages. Thus there would be nearly a realization of the state of things pictured in Adam Smith's famous passage:—
“The whole of the advantages and disadvantages of the different employments of labour… must in the same neighbourhood be either perfectly equal or continually tending to equality. If, in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to choose what occupation he thought proper, and to change it as often as he thought proper. Every man's interest would prompt him to seek the advantageous and to shun the disadvantageous employment.”
We should have to remember, however, that in this method of reckoning we should be understanding “advantageous” and “disadvantageous” in a somewhat unusual sense which would be likely to mislead unless carefully explained. We do not usually reckon the advantageousness of an occupation as, so to speak, net, after the deduction of cost of training. Being accustomed to see this cost defrayed, not by the person who takes up the occupation himself, but by his parents or by some charitable institution or by the state, we are not in the habit of regarding it as a disadvantage of the occupation. It is as a matter of fact no disadvantage to the person who pursues an occupation that some other person or institution had to pay for his training, unless he would have got the money if it had not bèen so spent. Doubtless where the cost is defrayed by parents this would often be the case, but there is no certainty about it, and we are consequently inclined to overlook the cost of training when we compare the advantages of different occupations.
Even now we are far from having probed the subject to the bottom. Even if we do reckon expense of training as a disadvantage, differences of earnings between different occupations cannot be entirely accounted for by differences of advantages other than earnings. Every one knows that the whole or net advantageousness of different employments is highly unequal. If equality prevailed, we should find well-to-do parents in doubt whether to make their sons civil engineers or naval stokers, doctors or road-sweepers. What we do find is a persistent, sometimes almost frantic effort on the part of all well-disposed parents to get their children fitted by training for a “class of employment” as good as or better than they themselves have followed, even if they have to pay the whole cost. They know very well that in the average of cases it “pays” much better in the interest of the child to spend money in this way than to put it into ordinary investments for his benefit.
It may be asked, “If this is so, why is not money spent in training more young people for the occupations of superior advantageousness until the competition reduces this excess of advantageousness to nil?” The answer is that the conditions of human life have not hitherto allowed the spending of money in this way to become an ordinary investment to which savings can be attracted in the ordinary way by the expectation of interest. They have not done so because Society has not thought fit to provide means by which money could be advanced to young people for their training on terms which would make the lenders secure of recovering their money with interest. In order to make them secure it would be necessary to legalize contracts under which children and young persons would undertake to repay money advanced for their education, and it would be necessary to provide machinery for the enforcement of such contracts. There would be great difficulties about this, as such contracts would be of the same nature as the contract under which a man sells himself into slavery, a thing which is regarded as “against public policy,” to use the phrase of English law courts. Whether it is possible or impossible to provide facilities for commercial investment in the training of human beings, they are not provided at present, and consequently this business has been left to parents, charitable persons and institutions, the Church and the State, who carry it on now, as always, in rather a haphazard manner. Parents spend money on their children's training and face postponement of the children's beginning to earn because they think it will “pay” from the children's point of view. If there were enough well-disposed parents with adequate means, therefore, the absence of commercial investment would not matter: enough young people would be trained for all occupations, however great the expense of training, to bring all to a common level of total advantageousness. There are, however, in fact not enough well-disposed parents with adequate means, and there is in consequence a permanently insufficient supply of persons trained to the occupations which require expensive training, and this short supply keeps the whole advantageousness of those occupations higher than that of the other occupations for which no expensive training or long postponement of earnings is necessary. The insufficiency of well-disposed parents with adequate means is to some extent counterbalanced by the working of the numerous charitable endowments of education which exist in civilized countries: the institutions to which these endowments belong act as fosterparents with adequate means. The Churches and the State, too, have done a little in recent times in this direction. But the Churches have never had the economic advancement of their charges primarily in view; they have taught in order that children might learn to read the Bible, or in order to prevent them falling into the hands of the irreligious or schismatic. The States have taken up education from motives which are complex and difficult to analyse, but it may be said quite safely that none of them have ever been moved by a desire to cheapen the products of the “better-class employments” by multiplying the persons qualified to pursue them. Consequently, while the charitable endowments of universities and upper-class schools have had an important influence in reducing the remuneration and cheapening the products of the better paid employments, the efforts of the Churches and the States have rather resulted in diminishing the remuneration and cheapening the products of the class of labour which requires a smattering of letters, but is scarcely above, if it is at all above the average. Attempts to increase the numbers trained for any high-paid manual employment usually encounter trade-union opposition. The trade-unionist of a skilled trade is in favour of steps being taken to break down the monopoly of the professional classes, but naturally objects to anything which makes it easier for the lowest class to break into his own circle.
The result is that the remuneration of labour is much more an hereditary matter than it would be if heredity only played its part by bringing infants with different original powers and qualities into being. Surroundings as well as innate qualities are hereditary. There are no absolutely insurmountable barriers preventing those who are born into poor surroundings from forcing their way into the best paid professions if they have exceptional ability and grit, and there is nothing to prevent exceptionally incapable persons born into good surroundings from falling into the lowest class of workers. But all the same, it is, as every one knows, a great advantage to the ordinary person in the matter of earning his living, to be the child of fairly well-to-do parents, and an enormous disadvantage to be the child of parents belonging to the poorest class.
Whether a child is born to parents who are well-to-do or to parents who are poor, it is an economic advantage to be born a boy rather than a girl. It is commonly observed that women's earnings are considerably lower than men's; it is often said that they do not average more than about half.
Now if there was only one occupation, and that occupation required heavy muscular exertion and none of those qualities in which women excel, we should have no hesitation in explaining the difference of earnings by the smaller output of the women. To many men, and perhaps to some women, this appears a sufficient explanation of things as they are. They see that in many occupations in which men and women compete the women's output is measurably less than the men's, and in regard to others, in which the output cannot be measured by the ounce or the yard, they argue that the very fact that men continue to be employed along with women, although the men earn more money, shows that the men are somehow worth more to the employers than the women, which must mean that at any rate their net produce is greater. This is quite sound as far as it goes, but it by no means covers the whole ground. There are, no doubt, many occupations in which men are superior to women. If the less well-paid women's work came cheaper to the employer than the men's work, women would rapidly, or at the least slowly, drive out men, just as men would drive out women if men's work were the cheaper: the employers who declined to move would be driven out by those who did. But there are also employments in which women are superior to men—to take an example about which no one has any doubt, we may give as an instance the care of children. In such occupations men do not compete, and if they tried to do so they would get few situations, even if they offered themselves at rates immensely below those at present earned by the women. The reason obviously is that in these occupations the men's output would be much inferior to the women's. Yet here, too, we find women's earnings low as compared with men's. We cannot compare them with the non-existent men's earnings in the same occupation; we must compare them with the earnings of men employed in occupations of the same class, in the sense of occupations which were open to the particular women in question (both men and women being employed), or which would have been open to their choice if they had been born boys (men only being employed). It would be absurd, for example, to compare the earnings of the average children's nurse with the earnings which we might suppose her brother might make as a nurse, and consequently to declare her earnings high. What we must do is to compare her earnings with the actual earnings of her brother in his occupation of, say, carting coal, and then we find that her earnings are low—at any rate when hours, loss of freedom, and other considerations are taken into account. Now, it is clearly no use to say that the woman earns less than her brother because she cannot heave as much coal; we might just as well say that he should earn less than his sister because he cannot wash as much baby.
The true explanation of the general inferiority of women's earnings, like every true explanation of any earnings, must combine the consideration of amount of output with the consideration of the value of a unit of output. The real reason why women's earnings are low in occupations in which the ultimate judge, the consumer, finds their output superior to men's, is to be found in the fact of the restricted area of employment offered by these occupations in comparison with the number of girls choosing them, which of course brings down the value of the output. The value of work being thus depressed in these occupations, not only are men driven out or kept out of them, but many girls find they can do as well for themselves by going into occupations in which men are superior, although they have to take earnings inferior to those of the men. This, of course, throws us back on the question why the area in which women are superior is so restricted. Like women, men are only superior within a certain area, but they have no need to invade the women's field, whereas the women do need to invade theirs. The number of women is certainly appreciably greater than that of men in the “old” countries from which there is migration, but the difference in the world at large, the real market, cannot be great enough to make much difference. It seems clear that the field within which women show themselves superior to men must be smaller than that in which men show themselves superior to women.
Believers in the generally smaller capacity of women may attribute this, in part at any rate, simply to that smaller capacity. If women are, for productive purposes as a whole, inferior editions of men, it is only natural that there should be a smaller field of occupation in which they excel, although it includes the very large occupation of motherhood. But even if this be, in part, the explanation, it certainly is not the whole explanation. The pressure of competition in the occupations in which women are superior would be less than it is if it were not for restrictions which prevent women from entering many occupations in which they could, if allowed to compete, succeed better than they do at present in occupations in which they are allowed. If these forbidden occupations, of which railway clerical work in this country is a very obvious and important example, were unlocked for women, the women who entered them would be withdrawn partly from the occupations in which women are superior, and partly from the other occupations, while, on the other hand, the men kept out of the formerly reserved occupations would, by their competition in other occupations, tend to lower men's earnings, so that men's and women's earnings would tend to be more equal.
This enlargement of the field of women's employment is probably the most important of the means by which women's earnings could be raised in comparison with men's. It is obstructed not so much by law as by the inertia of employers and their fear of inconvenience from the active resistance of the men employed at present. It is hindered too by the cry for equal wages for men and women, as the most powerful lever for increasing the opportunities of women is taken away if they are not to do the work cheaper. It has been assisted by the invention of new machinery, such as the telephone and the typewriter. If such things had been invented long ago, and owing to the conditions of that time the occupations connected with them had been made men's employments, women would probably have still been shut out from them.
Besides enlargement of the field in which women can be employed, there are two other important ways in which their earnings might be raised. Firstly, the opinion of the consumer about the comparative quality of things produced by men and things produced by women might be modified in a direction favourable to women. At present, for example, many “consumers” of the service of waiting at table appear to regard the service as superior when performed by a waiter, even if the waitress handles an equal number of dishes with equal dexterity and dispatch. Opinions—or prejudices —such as these are clearly as capable of being changed as opinions about the beauty of tight or loose skirts, or tall hats and bowlers. A change of opinion or taste might have quite an appreciable effect in increasing the demand for women's labour and raising their earnings. Secondly, women's capacity as compared with that of men might easily be raised, with the effect of increasing their output in the occupations in which they compete with men, as measured not only by taste but by pounds avoirdupois or cubic yards. Girls as a rule do not have so much spent upon them as boys. If they were better fed and trained, their output would be bigger than it now is in occupations in which they compete with men: their average earnings in such occupations would rise more nearly to that of men, and their improved prospects here would relieve the pressure on the special fields in which women only are employed because they are superior to men. These special fields might even be somewhat increased in area, as the rise in the capacity of women might add to the list. In some occupations women may be just a little inferior to men at present, and a small rise in capacity might make them more than equal. It should be noticed, however, that an increase of women's output, if it was confined to the employments in which women alone are at present employed, might very probably reduce their earnings by cheapening the unit of output more than the amount per head increased.
The disparity of incomes between the sexes is one of the two most prominent features in the inequality of the distribution of income. The other is the hereditary character of the inequality. Any one can see that the distribution of income depends largely on the unequal inheritance of those natural qualities which enable one person to get more than another either by ordinary labour or by better judgment in the management of his property. Careful analysis shows that acquired qualities which have the same effects are also in great measure hereditary, owing to the fact that the children of well-to-do parents have much better opportunities of acquiring them than the children of poor parents. On the top of this comes the fact that property is mostly acquired by way of inheritance, and that it is easier for a person to acquire more by saving when he has already acquired a great deal by inheritance. The result is that when persons are arranged in a scale of incomes from the highest to the lowest, the receivers of the high incomes are easily seen to be chiefly the children of those of the last generation who received in their time the high incomes of that time, and the receivers of the small incomes to be chiefly the children of those of the last generation who received small incomes. There are no clear-cut classes, no definite boundaries over which no man may step. The able members of the poorest class are constantly rising to the top, and the particularly incompetent members of the richest class are constantly falling to the bottom; but all the same, among the bulk of mankind there is a continuous hereditary transmission of inequality of income the importance of which it is foolish to ignore.