Front Page Titles (by Subject) PART II: USANCE AND RENT - Economics, vol. 1: Economic Principles
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PART II: USANCE AND RENT - Frank A. Fetter, Economics, vol. 1: Economic Principles 
Economics, vol. 1: Economic Principles, (New York: The Century Co., 1915).
Part of: Economics, 2 vols.
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USANCE AND RENT
AGENTS FOR CHANGING STUFF AND FORM
§ 1. Variety in the objects of desire. § 2. Increasing range of choice and use of goods. § 3. Historical view of increasing indirectness of uses. § 4. Goods with indirect uses. § 5. Direct and indirect uses of the same good. § 6. Various changes affecting value. § 7. Agencies for altering stuff or material. § 8. Agencies for changing the form of things. § 9. Natural members as agents in effecting changes of form. § 10. The use of tools by man. § 11. The gradual improvement of indirect agents. § 12. Tools and machines. § 13. The age of machinery.
§ 1. Variety in the objects of desire. It has been shown that market-price rests on, or results from, valuations; and that valuations are the reflection of the choices made by men among the objects of their desires. These objects are of the most varied nature, and are capable of the most varied uses. The desires for these uses of goods, to which the explanation of price has been traced, are neither fixed nor simple things. They change from moment to moment and are the resultant of man’s whole nervous constitution, of his education and his social surroundings, and of the objective environment in which he finds himself. The features of the environment which are of the greatest import in affecting the strength of desires are the kinds and quantities of goods and the conditions under which they are to be had.
Every valuation, as it involves a comparison of two things, implies some regard to the conditions of supply. Every process of comparison as we have seen (Chapter 2) is more or less a matter of impulse; but it is generally likewise more or less a matter of calculation. The range of a man’s choice is more or less far sighted in accordance with the range of his intelligence, his experience, his knowledge, and his forethought. To appreciate more fully the various sorts of relationships which exist between things and the desires of men, we should now make a further study of economic goods to see what are the conditions affecting both their quantity and the mode of their uses.
§ 2. Increasing range of choice and use of goods. The simplest form of life known to us, a unit of protoplasm, reacts in certain ways to the things it touches, reaching out to absorb some and withdrawing to escape others. This quality in the cell of living matter is the most primitive aspect, or element, in economic choice. As organisms develop, they become capable of reflex action, a muscle being moved as a nerve is stimulated, and thus action becomes more and more complicated, developing from simple reflexes to instincts and finally to judgments and to calculated courses of conduct. Every increase in the complexity of nervous structure increases the complexity of a creature’s environment. The creature is in touch with more things and in more ways, and is adjusting its life to these things and the things to its life. This means making more and more indirect and complex valuations.
With man this process had already, at the dawn of history, attained a much higher stage of development than it ever has had in the case of any animal. This is shown by man’s use of fire, tools, dress, houses, domestic animals, etc. The process became greatly hastened through the invention of more elaborate tools and more complex and efficient ways of doing things and by the development of tastes and habits of life, requiring more and more material objects as conditions for their continuance. It is obvious that in our modern civilization man has become dependent upon the uses of things in more complex ways than ever before; but further study and analysis are needed to enable us to see more clearly the real nature of this relationship between goods and man’s desires.
§ 3. Historical view of increasing indirectness of uses. Now the relationship of goods and their uses to desires presents several important aspects, the first that we shall consider being that of technical relationship, or directness of use. The reader will recall at this point what was said (in Chapter 3, sections 12, 13) on the direct, present uses of goods. It is goods of this kind in our economic environment to which men first give attention. This narrow circle of our economic environment, however, which is in immediate relation with psychic income, is surrounded by broad zones of goods less immediately related in time, or in space, or in mechanical working. It will aid us to see the conditions more clearly if we take a historical glance at the development of man’s command over his economic environment.
Primitive man had a very scanty stock of goods, the uses of which were direct—food, ornaments, clothing, a hut, etc.—and he had another scanty stock of goods with uses less direct—indirect or instrumental goods, such as his weapons, tools, dogs and horses to be used in the chase, etc. From very early times men have been discovering more indirect yet more effective ways of doing things so that they could get more direct goods, or better goods, or could get them with less labor, or in more agreeable ways. A poor man to-day may enjoy the use of a large variety of goods (some being his own and a much greater mass belonging to others), while the modern man of “means” brings about the gratification of his desires by the agency both of a great amount of goods with direct uses and of a great number of goods with indirect uses. Society as a whole may be thought of to-day as in the situation of a man of means.
Man alone regularly makes use of external objects as indirect agents to get what he wishes—not using merely his own bodily members. Primitive man saw the cocoanut hanging above his head out of reach. When he picked up a stick to throw at the branch, the nut was removed one step from attainment, the stick was an economic good with an indirect use. Slowly through thousands of years the processes of industry have come to involve more and more steps or links. The Indian with a crude knife fashioned his bow and arrow, fastened the flint and cord which were the outcome of still other processes of industry, and shot the bird which satisfied his hunger. To-day in many cases it is only at the end of a long succession of technical steps that men attain the objects which directly yield the uses they desire. They take the indirect way of doing things not because they prefer indirectness for itself, but merely because experience has taught them that it is the easiest and the most effective way of getting what they desire.
§ 4. Goods with indirect uses. Some of these goods with indirect uses are so near to having direct uses that we hardly recognize that they do not have. It is the draft of air rather than the fan, which is the direct cause of the pleasant coolness; the fan is a necessary indirect agent. It is the air-waves striking on the ear which cause the agreeable sound, while the violin, the bow, the skilful hand, are agents one step removed mechanically.
In a multitude of cases the concrete, direct good and the thing valued simply as an agent to get it, are only a single step removed from each other. The land and the trees in the orchard are agents to get the fruit of the harvest; the spinning machine and the loom are agents to make cloth. Again, the good may be removed by many steps or processes from psychic income, much as in the story of the house that Jack built: the charcoal heats the fire, the fire melts the iron, the iron forms the hatchet, the hatchet cuts the tree, the tree forms the boat, the boat is used for catching fish, the fish is used for food, and that is the cause of man’s desire for everything that went before—charcoal, fire, iron, hatchet, tree, and boat. Again, several objects may be complementary agents, that is, may be needed together to obtain one direct use, as the charcoal and iron and some other tools must be brought together to make the hatchet; the boat, a pole, a hook, and bait must all be used together to catch the fish.
§ 5. Direct and indirect uses of the same good. Many goods yield at the same time direct and indirect uses for the same or for different persons. The pitcher on the table as an ornament pleasing to the eye is of direct use, while in holding the water to quench our thirst it is of indirect use. In many other cases the one thing has two or more kinds of uses at once, and the proper distinction is that between direct and indirect uses of a good, rather than between direct and indirect goods. The wagon carries a load of produce to market and a happy family to the circus at the same time; a train may carry both passengers and freight; a stove may warm the room and at the same time cook the dinner, etc. Again, the good may be used indirectly at one time and indirectly at another; the horse which plows the field to-day may to-morrow draw the owner’s carriage. In still other cases two or more uses, either direct or indirect, are possible, but are mutually exclusive: the tree may be kept to bear fruit, may be burned as fuel, turned into lumber for furniture, or used to make a workbench to be used to make still other goods.
Directness, like valuation, has relation to some one person in each case. There are many things, commodities of trade, which in their physical substance and form are ready to be used directly, yet which in the course of trade are still indirect goods to their possessors. As yet they are merely the means of earning a business profit (have an indirect use), but they will later render direct uses to the final consumer.1 Retail and wholesale stores, cold storage and other warehouses, are filled with goods of this kind.
Such facts as these make it clear that concrete goods can not be rigorously classified as either direct or indirect. Any particular good may under different circumstances be used either directly or indirectly. Therefore, the classification of directness and indirectness applies properly to uses rather than to goods, and it is a matter of much importance in our study of economics to keep this thought clearly in mind.
§ 6. Various changes affecting value. Desire is directed upon concrete goods, but in the logical view it is all the uses together which, as experience corrects false impulses and hopes, constitute the cause of all the desires men have for the objects and forces of the outer world. Nothing which is not in some casual relation, near or remote, to desire, has value. The vine which Tantalus is unable to reach magnifies his misery. A captive, chained to a rock, gets uses only from the things within his reach. Men living in savagery and ignorance starve amid the possibilities of plenty. Chained by their incapacity and by their improvidence to a little spot of earth, they do not see clearly, either in time or in space, the economic relations about them. Men begin by valuing goods for their direct uses, but the valuation comes to be extended over all the goods having indirect uses, which by instinct, experience, habit, association of ideas, etc., have come to have a connection with desire.
The nature of the uses rendered by goods may be considered here in connection with the thought of the four aspects of choice as already suggested.2 It was seen there that choice presents itself in one of four aspects, a preference for a kind of goods (stuff), for goods of a particular form, or at a certain place, or at a certain time.
Now the various uses which are accomplished through the indirect instrumentality of goods may be divided into four general classes: (1) stuff changes, (2) form changes, (3) place changes, and (4) time changes. The blast furnace helps to convert the ore into pig iron. The sawmill cuts the log into boards. The steamship carries grain across the ocean. The greenhouse hastens the growth of flowers and vegetables so that they may be brought earlier to market.
It is almost needless to say that such changes have results in the realm of value. For the increase in value which is expected to result from these changes, of course, gives the motive for bringing the changes about. If grain were not, to some one, more valuable in Liverpool than in New York there would be nothing to gain in shipping it three thousand miles across the ocean. If the log were as useful as the boards, the labor and materials put into the sawmill could be turned in other directions.
It must be observed, however, that all four considerations—stuff, form, place, and time—are factors that enter into value whenever value exists. If a particular thing has value, that value is due partly to its composition, partly to its form, partly to its being where it is, and partly to its being available at the particular time. A change in any one of these factors might bring about a change in the value.
§ 7. Agencies for altering stuff or material. Man can not create a single atom of matter. He must work with the materials which nature puts at his command.3 In what sense, then, may we say that man can change the stuff or material of which things are composed? There are many chemical and biological processes instituted by man which bring about changes in the chemical content and material composition. One of the most important ways in which man makes alterations of this kind is in tilling the soil. The farmer plants the seed in carefully prepared ground in such a way that the proper conditions of air, light, and water permit plant-growth, and cause the regrouping of the chemical elements of the soil into new forms of organic matter. The first rude cultivation of the soil was a step beyond the achievements of any animal. It meant the purposeful increase of the kinds of stuff man desired, by a method very different from the gathering of honey by the bee or the hoarding of nuts by the squirrel.
Another important way of making changes in the composition of materials is by breeding and raising domestic animals. Animal growth transforms the food elements into new substances, such as wool, hides, furs, feathers, fat, eggs, bristles, etc. Still another way is seen in the chemical processes of manufacturing, such as iron smelting and other metallurgical operations, tanning, the dyeing of clothes, and the preparation of food as in baking, fermenting, distilling, etc.
To make possible all the changes which man desires in the composition of things, an enormous equipment of indirect agents must be permanently maintained—such things as cultivated soil, agricultural implements, seeds, animals, fertilizers, chemical agents, vats, caldrons, furnaces, fuel, etc., etc. All these things are of value to man (among other reasons) because of the changes in stuff or material which they help to bring about.
§ 8. Agencies for changing the form of things. The alterations in the materials of which things are composed that do not involve chemical or organic changes may be classed under the heading of changes of form. It is probably best to class here most of the operations in the so-called extractive industries (other than agriculture). Such are the processes of mining or of quarrying in which organic or mineral materials are blasted, dug, or broken into sizes and shapes convenient for removal; and the process of forestry in which timber is cut and prepared to be taken from its place of growth. There is always, however, a considerable amount of place change involved in these processes. Here, certainly, with form-change may be classed the grouping or arranging of things in new physical relationships—such mechanical operations, for example, as cutting, sawing, splitting, grinding, putting together with nails, screws, or glue, roughening, polishing, etc., etc. Changes of this sort—as well as chemical changes—play a large part likewise in the processes of agriculture; for example, in plowing, in hoeing, in cutting grain, in trimming trees, and in shearing sheep. Some of the most familiar and typical instances are found in manufacturing establishments, such as sawmills, planing mills, and factories for shaping wood, iron, leather, clay, and other materials. A large part of the preparation of food involves changes of this kind. The performance of all these operations involves, of course, an enormous equipment of indirect agents—in the home, on the farm, in shop and factory. This includes a large part of the stock of tools and machines, tho many of these are used also in effecting changes in stuff, place, and time.
§ 9. Natural members as agents in effecting changes of form. In the course of evolution animals have developed special organs which enable them to bring about changes in the form of things. The foot, the paw, and the tail, subserving largely the purposes of locomotion, are also of use in making physical changes in the environment. Animals have teeth to crush and cut; claws and nails to scratch and tear, pick and bore; hoofs to strike; horns and tusks to pierce, push, and crush. The sword of the swordfish, the proboscis of the mosquito, and the trunk of the elephant are highly specialized organs for acting upon the environment.
Compared with many animals man is in many respects poorly equipped with such natural weapons and agents. The human hand, however, is perhaps on the whole the most adaptable and effective agent which nature has produced.
§ 10. The use of tools by man. Man is the tool-using animal. The intelligence which directs and guides the hand has enabled man to contrive external agents of the most marvelous ingenuity and power. The first tools, as is shown in every anthropological museum, were but natural objects taken to increase the efficiency of man’s body in acting upon the outer material world. These first inventions were evidently hit upon almost by chance, and yet probably not without some dim perception of the fitness of indirect means to attain the ends desired. The stone held in the hand multiplies many fold the force of the blow. The chance piece of sharp or jagged flint is vastly more effective than nails or claws in cutting and tearing. Boulders and stones shaped by nature or very slightly modified were the first rude hammers, axes, and knives. The log used as a roller under a heavy load seems to have been the earliest form of the wheel.
Even such primitive appliances greatly extended man’s control over the world about him. With the stone ax thrown from the hand he could kill animals in full flight. The spear enabled him at a safer distance to kill some of his most dangerous enemies. The bow and arrow and the use of fire must have made his supremacy far more secure. For thousands of years, however, the first tools changed but slowly. It was difficult to get beyond the simple, natural implements picked up by chance.
§ 11. The gradual improvement of indirect agents. In the course of centuries tools and weapons gradually became more efficient. Flint and stone forms were copied in bronze and in iron. Their number and variety steadily increased. Better and more numerous hammers, axes, spears, bows, and arrows were made. Domestic animals were increasingly utilized for food, clothing, and for the carrying of burdens. As a rule the stocks of goods with indirect uses accumulated by primitive man differed little in physical character from his goods with direct uses. Many of them, indeed, were things having alternative uses, some direct, others indirect. It is likely that horses were used to carry men on their backs long before they were taught to carry other burdens or to draw heavy loads. The weapons of the chase were as much a means of sport as a means of securing food, and such things as clothing, tools, and weapons, and even horses and slaves, seem to have been regarded by primitive man as agents to use directly for enjoyment rather than as merely indirect means of getting other goods. This attitude of mind probably helps explain the custom of burying such things with the owner in his grave—a practice which greatly hindered progress, as it kept the primitive community in poverty. Where such customs were not in vogue man’s control over his environment developed through the gradual increase in his instrumental equipment from generation to generation.
§ 12. Tools and machines. It is not easy, perhaps not important, to draw a sharp line of distinction between the machine and the tool. Tools are portions of matter, such as bone, wood, iron, which man guides and directs in applying his energy to things. The simple hoe held in the hand and moved by man’s own strength was attached to the beast of burden and became a plow or harrow, still guided by man. A machine may be defined as a mechanical device by which power is applied in an automatically repeated manner, to change the place or form of things. A machine may be moved by the foot, but the hand is the great tool-using member. A simple, single piece, that can be taken into the hand, as a spade, a hammer, a knife, is clearly a tool; a combination of parts, such as wheels, levers, pulleys, etc., moving upon each other, is clearly a machine. It is doubtful whether the plow should be called a machine. The simplest machine is but a slight adaptation of the tool, by which power may be applied in an automatically repeated manner. The drag develops into the cart, a simple machine. The spinning stick, a tool used in ancient times, developed into the Saxon spinning-wheel of the sixteenth century, the form used when America was colonized. Wind and water were made to turn wheels to supply the power for moving tools, to grind the corn, and to lift the hammer too heavy for man’s strength. The use of power derived from nature, while not the most essential mark of machines, is the most characteristic feature of their modern development. Hand machines, such as the handpress and typewriter, have had important industrial results, but it is the use of power that has led to the results of greatest significance in recent times.
§ 13. The age of machinery. Inventions, new machines, and new processes, tho not frequent, were not unknown in the Middle Ages; but no one class of machines took possession of whole fields of industry. The great industrial changes in the Middle Ages generally grew out of political changes, or of changes of routes of trade whereby large industries were disturbed, or of changes in the use of land through new methods and the bringing into use of land in other places. The industrial changes in England at the end of the eighteenth century, and a little more tardily throughout western Europe and the United States, on the contrary, were due mainly to great mechanical inventions. The age of machinery is, therefore, said to begin with the eighteenth century. The development of the textile machines for cotton and wool spinning and weaving marks the beginning of the movement. Here for the first time were inventions in such numbers, of such a nature, and under such conditions that they were rapidly and widely applied, affecting the lives of a great number of workers. The steam engine at the same time opened up the long line of mechanical inventions by which wood and iron are shaped and wrought, and the iron industry underwent notable developments. Since that time have taken place in all western countries that rapid expansion in the use of machines and those notable changes in industrial organization which distinguish our era from all others.
AGENTS FOR EFFECTING CHANGES OF PLACE AND TIME
§ 1. Transportation. § 2. Location as an element in value. § 3. Relation of time to value. § 4. Indirect agents for hastening the uses of goods. § 5. Agencies for postponing the uses of goods. § 6. Increasing control of man over nature. § 7. Natural diversity both of direct and indirect goods. § 8. The improvement of technical processes and methods. § 9. The economic test of technical improvements. § 10. The psychology of indirect valuation. § 11. The element of time in the valuation of indirect agents.
§ 1. Transportation. The third way in which change can be effected by the indirect use of agents to bring objects nearer to the state of fitness to be direct goods, is by moving them from place to place. Indeed, it has been said that all of man’s part in stuff- and in form-change can be reduced to the changing of the place of things so that they may be acted upon by each other. Yet there is a distinction between the changes in form and in stuff, just considered, and the change in place, here indicated. Change of stuff is arranging things so that there is a readjustment in their internal composition; change of form is applying tools and forces to alter the shape of the objects (often by combining them with other objects); and change of place is the movement of an object, as a whole, in space to bring it to a different location. Two or more of these changes may be combined. Felling a tree is both a form and a place change, sawing it into boards is a form change, hauling it to market is a place change, carving it into furniture is a form change. When the thing thus moved, or enabled to move, is the man himself, the object that aids is a direct good. Such is the fallen tree bridging the stream, the floating log which saves the man from drowning, the boat on which he rides on the water, the horse carrying its rider, the sled drawn by dogs or by reindeer. When the agents are used to aid in the movement of other goods their uses are indirect.
The means of transportation have had a long and complex development. They compose to-day a mass of equipment comparable in extent and importance with the agencies that are used to effect changes in stuff and in form. The floating log has been replaced in turn by raft, canoe, sail boat, and steamship. The natural waterway has, where necessary, been deepened and widened, or has been artificially extended by canals, some to connect rivers and others to unite the waters of the oceans. The early trails through the woods have given place to wagon roads and to railways. The heavy oxcarts have been succeeded by wagons, railway cars, locomotives, automobiles, and flying-machines.
§ 2. Location as an element in value. From the first, of course, all these agencies must have been more or less vaguely recognized as useful and their results as valuable. The relation between location and value, however, tho obvious and simple in many concrete cases, has as a matter of general theory proved difficult of comprehension to a great many minds. Even careful thinkers long found it easy to attribute great importance to operations such as those of agriculture which appear to bring something physical into existence, yet to misconceive the nature of the changes made in value through manufacturing and transportation. This was the error of the eighteenth century economists of France—known as the Physiocrats—and it has been a recurrent error ever since. It seems to be naturally easy for men to conceive of value as inherent in things rather than as resulting from a relation between things and men. Yet the truth is so obvious that physical proximity is a very significant element in value. The treasure chest which is lost forever in the depths of the ocean has become and will remain utterly worthless to man. Brought to shore, where the treasure could be used, it might be worth a fabulous amount. So anything, to be of the greatest value, must at a certain moment be close at hand or at the right place. Clearly then those various agencies which move things from one place to another the better to meet the consumer’s desires, must be regarded as contributing factors in the value of the direct use obtained.
The logic of the matter is quite plain in the light of biologic evolution. Movement is necessary to the existence of animals. The animal, in the order of evolution a higher form of life than the plants, which are more fixed, goes to seek food and in so doing opens up a wider range of choices in life. With few exceptions the only way in which animals can better their economic environment is by moving themselves to a place where goods are more plentiful. In this matter of locomotion the birds have attained the highest point in evolution. Man, while he has by mechanical means greatly added to his own powers of locomotion, has also developed to a very high degree of perfection his ability to move other things. He transports them to the places where they can best serve his purposes, and by this means he adds enormously to his income. Transportation is thus one of the earliest and most natural of the ways in which man increases his income, and the elaborate equipment which he has developed for the transportation of goods finds its economic uses in the gratification of human desires. The subject of transportation, with its various ramifications, furnishes some of the most interesting problems of valuation with which the student of economics has to deal.
§ 3. Relation of time to value. As the days and hours succeed each other in the life of man, they bring with them a constant succession of desires, forming an endless stream as long as life itself endures. To meet and satisfy these desires a corresponding stream of goods is necessary. (See Chapter 3, section 10.) Nature furnishes man with the raw material for this stream of goods, and even to a limited extent provides fruits and other things all ready for direct use. But in combining and using the agents at his command, man must give much thought and effort to the end that the direct goods may ripen at the particular time when the need for them arises. All desire is related to a particular point of time, and man, in a variety of ways, controls the time at which the uses of goods become available.
One way in which this control is exerted is through the simple process of saving goods for future use. If the goods are durable, a present surplus, or even things which answer to strong present desires, may, if the claims of the future make a sufficient appeal, be reserved for use at some later time. Choices of this sort between present and future are constantly being made, and constitute an important aspect of our economic activity. A new machine may be driven twenty thousand miles in the first year, with a large resulting depreciation, and large expense for upkeep. Or its use may with care be extended over a number of years. The family may spend its full yearly income, or lay aside something for the future. The business man may work long hours to accumulate a fortune in his early years, or he may take more leisure and enjoyment as he goes along.
All the decisions in such cases depend on one’s mental attitude, one’s habit of life, toward present and future. Men differ greatly in this respect, ranging all the way from the spendthrift to the miser. At a later point in our study we shall have occasion to inquire more deeply into this matter.
§ 4. Indirect agencies for hastening the uses of goods. Our present concern is with the use of indirect agents for the purpose of controlling the time at which the uses of goods become available. Man contrives agencies both to hasten and to postpone the processes of nature, and thereby makes goods better or worse for his purposes. Greenhouses are built and equipped with heating apparatus in order to produce early vegetables and flowers; incubators and brooders are employed to provide the market with the tender broiler earlier in the season than the mother hen would do it; apparatus for making artificial ice is operated in the summer time in places where ice is sure to be a free good a few months later; southern fruits and vegetables are shipped north by fast freight to places which within a few weeks will have an abundant supply of their own home-grown produce. In all these cases the thing that man is striving to do is to make things available at an earlier point of time. And he employs a very considerable amount of apparatus (indirect agents) to accomplish his end.
Likewise the time of indirect uses may be hastened by the use of other indirect agents (of “lower rank”). The sapling is planted in the forest to hasten the process of nature in growing wood to be used in industry; the drying-kiln makes it possible to use the lumber newly cut; gas and electricity lighting the factory make possible overtime work to fill rush orders; fuel is burnt in the locomotive to bring to the factory the materials needed just then. A large part of the transportation by express is to bring machinery and supplies to the factory when urgently needed, and hundreds of dollars have been paid thus for the shipment of a single machine across the continent, when a few dollars would have paid the cost of shipment by slower freight.
§ 5. Agencies for postponing the uses of goods. Of as great importance perhaps are the various agencies for keeping goods in proper condition for use at some future time. Grain is regularly kept for months in barns and elevators where it is protected from the weather. Fruit, vegetables, dressed poultry, and other meats are preserved in refrigerators and cold-storage plants, and fruits and vegetables are also kept fresh by chemical means or by being “canned” in jars or other vessels from which germs are excluded. Large stocks of building materials and other things not ordinarily spoken of as perishable are nevertheless kept under roof to safeguard them from the elements. In some cases the indirect agent is many steps removed from the final gratification of desires. There are factories employed in making paint, cement, creosote, pitch, tar, roofing, etc.—things destined to be used in turn to make, repair, or preserve structures which shelter stocks of other indirect agents for uses that are still in the more or less distant future. There is method, of course, in the whole complex process. The end finally achieved is the production of “direct” goods at the particular time when they are most desired by men.
§ 6. Increasing control of man over nature. The technical processes of industry have been growing more complex, and the stocks of agents used in these processes have been increasing since the beginning of history, but never so rapidly as in the past century. This has resulted in an enormous mass and variety of indirect agents, the existence of which is an essential aspect of civilized life. Many materials are found in forms and in places where they cannot serve man’s purposes. Energy is found dissipating itself in ways useless to him. As man grows in power of control over nature, he strives to apply these forces and materials in such ways and at such places as will best serve his purposes and gratify his desires. If he can arm himself with the energies of mine and torrent, he can react with giant strength upon the material world. He refuses to accept passively its conditions and to live on its grudging gifts. He becomes its fashioner—in a sense its creator. His intelligence and his desires are more and more potent in determining the substance, form, place, and order of the physical things about him. He transforms the world in which he lives. Accompanying and guiding the complex processes of industry are numberless acts of choice and valuation. Man’s desires for direct goods and his resulting valuations motivate and direct his productive activity. The technical processes of production, in turn, have their reflex influences upon values. To arrive as fully as possible at an understanding of these interrelations is the task of the theory of value.
§ 7. Natural diversity both of direct and of indirect goods. One of the basic facts in the situation we are trying to analyze is the natural diversity of things. All the efforts of men in the most developed economy can not annul or obliterate the differences in the quality of goods. Desirable goods are limited in quantity and vary in quality. Hence they have value, and some are more valuable than others. If they were all alike, they would all have the same relation to human desires, and would all have the same value. Likewise durable material agents and sources of power are limited in quantity and vary in convenience of location and in their efficiency. As men seek to gratify their desires, they attach importance to these agencies for the achievement of their ends. Each is valued for its uses. Anything which is seen to have a relation, direct or indirect, immediate or remote, to the gratification of man’s desires, is brought within the circle of economic goods.
§ 8. The improvement of technical processes and methods. The invention, improvement, organization, and use of the various agencies which we have been considering, makes up the whole of man’s economic activity. This is, of course, a very broad field, difficult of comprehension as a whole. It comprises a vast range of technical achievement. In the list of those who, from the beginnings of human culture, have made contributions to the slow task of improvement, we should find Adam the gardener, Abel the keeper of sheep, Tubal-Cain, “artificer in brass and iron,” Jubal the “father of all such as handle the harp and organ,” Archimides, Gutenberg, Watts, Fulton, Elias Howe, Samuel Morse, Bessemer, Edison, and countless others, known and unknown—peasants, artisans, natural scientists, and practical inventors.
The technical improvements made by such men have been among the most important of the instrumentalities of economic progress. They involve in practically all cases some better combination or joint use of complementary agents. The technical problem is usually a matter of the most efficient proportioning, combining, or utilizing of different indirect agents.
In a mechanism, if one part is increased without increasing the other parts, a point is reached where it does not add to the result. If in the building of a bridge the weight of the floor is increased beyond a certain point, the rest of the bridge being left unchanged, the bridge is weakened instead of strengthened. If the weight of the iron in the framework is increased beyond a certain point without strengthening the piers, the structure as a whole is weakened. If the piers are greatly enlarged, the added materials and effort may not weaken the bridge absolutely, but they dam up the stream, and thus increase the force of the waters pushing against the structure. At the same time, in flooding the adjacent lands they cause another result which was not intended or desired.
A bicycle frame, like a chain, is no stronger than its weakest part; if the strength of all parts of the wheel and frame is in proper proportion to the strain they must bear, added weight to any single part weakens the whole machine. The development of the modern type of bicycle, by many experiments, is a good example of the adjustment of materials according to the principle of technical efficiency.
A variation of the same principle is seen in chemical combinations. Exact proportions of materials must be used to get a certain result. Increasing one ingredient will not increase the desired product. Either the added part, not entering at all into the compound, remains as a useless or an injurious impurity, or it unites to form a product different from the one desired.
Thus it is in all the practical arts. The farmer must have rain to water the crops, but too much may ruin them. The cook must have fuel for heat—enough to bake but not enough to burn. The smith watches the glowing metal and puts it upon the anvil when it is just at the welding point. The laundryman puts a tinge of blue in the white clothes; with less or more the clothes are either too yellow or too blue. The painter must use the proper proportion of oil and white lead or the paint will not be durable. The plasterer must mix neither too much nor too little sand with the lime if he will make a lasting coating on the wall. The potter seeks to have the heat of the kiln exactly right to give the perfect glaze to the stone- and china-ware. There is this technical problem of the right proportion quite independent of the value of the goods. The idea of economic utilization arises when man recognizes these technical facts and their relations to value in his use of a limited supply of agents.
§ 9. The economic test of technical improvements. It is a notorious fact, however, that not every improvement of technical method is advantageous from the economic point of view. The Patent Office at Washington is a veritable graveyard of ingenious inventions that are not commercially profitable. The inventor, in order to gain material rewards and at the same time to benefit mankind, must study not only the technical side of his problem, but the question of value as well. Many technical improvements of method cost more than they are worth. The market may be too small to warrant the increased investment, or many other difficulties may stand in the way.1 The ultimate test determining whether a new process or a new device is better to use than the old one is not technical, but economic. It must effect a net increase in value. If it occasions extra costs, the additional advantages must more than offset them.
§ 10. The psychology of indirect valuation. We have now pointed out the logical relationship between the desires of man and the valuations which he puts upon indirect agents. Nothing seems more simple or obvious than that the agent is valued as an agent—as an instrumentality in the gratification of desire. However, it is well to recall that the process of valuation is not always as logical and as consciously calculated as it would seem. The reactions of men are in large part impulsive, instinctive, imitative, and habitual, rather than rigorously logical. But experience and reflection alter the choices and extend their range. The desire which at one time was aroused only by the direct good, becomes more or less spread over all the indirect goods connected with it. Thus men, without deliberately and consciously reasoning on the matter, desire directly many of the things which technically are of only indirect use. In many cases instincts have probably evolved to affect desire for indirect goods whose real relation to desires is never fully perceived or understood by the person choosing. The desires of civilized men have become diffused over, and now pervade, the immense complex equipment of the economic world, and both the direct and the remotely indirect goods color the feelings and influence the conduct of men. They are alike the objects of desire. Hesitation and conscious calculation do, however, occur in some choices, and have occurred in many other choices which have now become habitual. And in all highly organized business, where production is for the market, the business man calculates not only consciously, but laboriously and with great care, both the desires of consumers and the relation of indirect agents to those desires.
§ 11. The element of time in the valuation of indirect agents. There is one more important aspect to the problem of the valuation of indirect goods. If the value of the indirect use is but the reflection of the direct use, it might, on first thought, seem that it should always be of the same magnitude. If an agent, A, used indirectly, produces a limited number of direct uses, x, y, z, it would seem that the sum of their values should be the same as the value of the agent, A, itself. If the indirectness of the process were the only factor in the case this would be true. As a matter of fact it normally requires a certain period of time for the direct use to be obtained. The uses of an agent are frequently spread over many years. Because of this lapse of time the value of the agent A at the present moment is not by any means the same as the aggregate value of its uses in the future when they will occur. The element of time introduces a different problem which will call for consideration at a later point in our study of the problem of value.1
CONSUMPTION AND DURATION
§ 1. Consumptive and non-consumptive uses of goods. § 2. Direct uses, consumptive and durative. § 3. Indirect uses, consumptive and durative. § 4. The single consumptive use. § 5. No economic goods absolutely durable. § 6. Inevitable depreciation. § 7. Using up of agricultural land. § 8. Artificial durability of agricultural land. § 9. Varying rates of depreciation of machinery. § 10. Repair of tools and machinery. § 11. Economy of repairs. § 12. Production as betterment and repair of nature.
§ 1. Consumptive and non-consumptive uses of goods. We have in the last two chapters considered two essential aspects that every use of a good exhibits. We have seen that every use is more or less direct or indirect (roundabout), according as the good acts directly upon the person using it or indirectly transmits its effect through some other good; this is the technical relation of uses (and of goods) to desires. We have seen next, that a use may be either present or future in varying degrees (and in either case may be valued); this is the time-relation of uses to desires. We now come to the consideration of yet another aspect of use, namely, the effect that the use has upon the duration of the object yielding the use (called the use-bearer). This may be termed the duration-relation of goods to desires. The apple is eaten and gone; the picture continues for years to impart beauty to the room. The lemonade quenches thirst once, the glass in which it is served may be used many times. The use that destroys the good (or its possibilities of further use) is a consumptive use. Coal is consumed and becomes ashes, smoke, and gas, as it is burnt to create heat for comfort, for cooking, and for steampower. The white gloves are consumed when they become soiled (unless they can be cleaned). There is, of course, no physical annihilation of matter in any of these cases, but merely a change in the qualities that relate the good to desires. The essential test of economic consumption lies in the effect that use has in unfitting the use-bearer for the rendering of subsequent uses.
In contrast with the thought of consumption of a use-bearer is the thought of its duration. In contrast with the consumptive use, which uses up the use-bearer, is the durative use which leaves the use-bearer more or less capable of rendering subsequent uses. These ideas are abundantly illustrated in what follows.
§ 2. Direct uses, consumptive and durative. Direct goods that are momentary gratifiers, yielding only a single use, and being destroyed in the using, are represented by multitudes of consumable foods and drinks in cellars and in pantries, on tables, in restaurants, hotels, and saloons; by matches, candles, oil, gas for lighting, fuel for heating houses; by cigars, fireworks, and many other things which appeal directly to the senses. The use of these things when it occurs unites the three qualities; it is direct, it is present, it is consumptive.
A dwelling is an example of a good for direct use which is durable and gives off throughout a period of time a series of direct uses. The durability of houses is not absolute or uniform, but is more or less, varying from the Indian tepee to the marble or granite palace that will stand for centuries. Houses are subject to wear and tear, and thus undergo a slow consumption, but this, with care, is so slight that it often is less than the deterioration from disuse. The supply of housing, while insufficient for some classes of our population, is to-day enormous—winter houses and summer houses, city and suburban, private houses and hotels, churches and theaters. All are more or less durable, and are direct goods, excepting as the owners use them in business as a source of rent or of profit. Every durable agent, of course, contains future as well as present uses. That is the essence of the idea of durativeness. Direct, present, and durable (in a degree) are also furniture, pianos, organs, and musical instruments of every kind, carriages and horses, bicycles, automobiles, boats, and many other material agents used for enjoyment. Especially good examples of this class of goods are those whose appeal is to the eye—pictures, statuary, and other contents of private and of public museums. Very similar in this regard are all grounds with improvements used for residence purposes, all yards, trees, lawns, playgrounds, public parks and reserves for sightseers such as the Yosemite Valley, Yellowstone Park, and Niagara Falls, and mountains covered with forests held for private or public pleasure in hunting, fishing, and camping. Nearly all the material equipment used in education is marked by this grouping of qualities, as well the school grounds as the school books, libraries, furniture, and apparatus for illustration and instruction. Among the most lasting of the goods which man has shaped by his action are great engineering works—railroad tunnels, bridges, aqueducts, roadways, canals between rivers, lakes, and oceans (Panama, Suez, etc.). These, so far as they are used by passengers, are giving direct uses. Ornaments and other goods made of the precious metals are among the most durable of the direct goods man possesses. Other kinds of ornament, such as feathers, laces, and ordinary clothing, while less durable than most of the foregoing examples, share the quality of durability in a degree and with care may be made to yield very lengthened series of uses.
§ 3. Indirect uses, consumptive and durative. We turn now to illustrations of indirect uses which are consumptive or durative in varying degrees (and, of course, either present or future). Many of the objects that yield indirect uses yield at the same time direct ones; indeed, this is the rule rather than the exception. Other examples of consumptive goods used indirectly are: the oil giving light in the factory, the ice in the refrigerator. These are present uses and are also capable of direct use. The oil in a tank, and the ice in the icehouse contain future consumptive uses. A dynamo producing electricity is yielding a present durative use and, as it is capable of continuing to yield similar uses, it contains also future durative uses. Further examples are most tools, implements, and machines, and all houses, lands, engineering works, and all transportation agencies that are used both directly for passenger service, and indirectly in carrying freight.
§ 4. The single consumptive use. The distinction between consumptive and durative uses should be kept clearly apart from that between direct and indirect uses. As a matter of fact, directness of use is essentially a technical rather than an economic quality. It is equally important to keep the matter of the “timeliness” of a use distinct from either “directness” or “consumptiveness.” In connection with timeliness arises the very subtle problem of capital-value, which will be discussed at some length in Part IV of this book. Wrapped up with the question of durability is a problem to which we must give earlier consideration—the problem of usance-value. This will be taken up in Chapter 13. Our immediate task, however, is a somewhat further consideration of the nature of the distinction between consumptive and durative uses.
We have been employing the words consumptive and durative as contrasted terms. Strictly speaking, however, consumptive and durative uses shade into each other by almost imperceptible gradations. Even most of the more fleeting uses continue through an appreciable period of time. The great majority of goods in which man is interested are more or less durable in character. The things which may reasonably be said to have consumptive uses—that is, things which are consumed at a single use—are relatively few, tho absolutely numerous and important. Food, for example, is consumed at a single use; illuminants and fuel can be used but once; cut flowers quickly wither and fade. The materials of which these things were composed are dissipated in sewage, garbage, rubbish, dust, ashes, carbonic acid gas, etc., and can be reassembled—if at all—only with difficulty.
§ 5. No economic goods absolutely durable. At the other end of the scale are things which render their services for an extremely long period of time. All earthly things, however, wear out, change, or decay. Whenever man’s hand is withheld, nature takes possession of his work, regardless of his purposes. Dust gathers on unused clothes, and moths burrow in them. Shut up a house, and windows are shattered, roofs leak, and vermin swarm. To close a factory is to hasten the time when buildings and machinery will be piled upon the rubbish heap. The most magnificent and solid works of man have crumbled under the finger of time. The earth is strewn with ruins of gigantic engineering works, aqueducts, canals, temples, and monuments, whose restoration would be no less a task than was their first building. Everywhere vigilance and repairs are the conditions of continued uses of wealth. There are, thus, no economic goods which as usable wholes are absolutely durable. When we divide uses into those which are consumptive and those which are durative, we mean simply that the duration of the goods yielding the former is relatively brief, whereas the latter endure through a relatively long period of time. The line of demarcation between the two is not absolute or sharp.
§ 6. Inevitable depreciation. Changes go on in the substance of things which cannot be prevented by any attention to repairs. The wood in a framework will decay, the metals crystallize. There is also an unpreventable wear of parts that can not be replaced without replacing the whole machine. It is the aim of the modern manufacturers to make machines like the wonderful one-horse shay, every part of equal durability. The development in America of the system of “interchangeable parts” has greatly simplified and cheapened repairs, and has lengthened the working life of machines; nevertheless they go at last to the scrapheap. This general depreciation appears to be nearly avoided in large factories where there is serial replacement of the parts, but occasionally some invention or some improvement of process necessitates an almost completely new equipment. An old man said to me when I was a boy: “I built this house and have lived in it forty years; it was well built, has been repainted regularly, has never been allowed to leak a drop, and it is as good as it ever was. I see no reason why it could not be kept to eternity if always kept in repair.” But the same could not be said of the house now. There is a termination of the use-bearing power of nearly all kinds of goods, by this natural decay or by technical progress, and they have to be replaced by new stuff and by new forms.
§ 7. Using up of agricultural land. Even land, which men are prone to think of as everlasting, is in some of its most important uses subject to constant wear and loss of its valuable qualities. In agriculture the land furnishes not only standing room and a surface exposed to air, sun, and rain, but a store of materials fitted to nourish vegetation. Under the proper conditions of heat, moisture, and texture of soil, the plants, through the aid of bacteria, select and take up partly from the air but mostly from the soil, the chemical elements needed for their growth. Cultivation of the soil is regrouping and collecting the fertile elements, but harvesting the crop is extracting them from the soil. This process can not be continued indefinitely unless these elements are restored to the land. The barbarian lacked the forethought and patience to preserve the land, and his methods of agriculture used up the soil. After a few years he moved on, burned and cleared out another little space in the midst of the forest. The progress of men toward a settled life and a permanent agriculture has been accompanied step by step by the introduction of conservative (durative) methods of using the arable land. The temptation to revert to improvident methods has again and again shown itself as a result of the demoralization of war, of invasion by less advanced peoples, or of the opening of great areas of new lands.1
§ 8. Artificial durability of agricultural land. When a method of permanent agriculture has become firmly established in a community, guarded by ancient customs and by very careful contracts between tenants and landlords, agricultural estates, as wholes, are given artificially an appearance of great durativeness, altho the land, excepting as bare surface, is being repaired and remade continuously. The uses of the farm are estimated as a net sum, after deducting the cost of all the repairs. Agricultural land has constituted in western Europe in recent centuries the most permanent body of wealth, and thus it came to be looked upon mistakenly as a most perfect type of durative goods. Land-sites for residence and business uses, merely as standing room, are in most locations among the most durative of all forms of wealth; on the contrary, mineral deposits constitute a strikingly consumptive form of use-bearer.
§ 9. Varying rates of depreciation of machinery. There is a great difference in the length of the economic life of manufacturing appliances. The building is fairly durable; yet in good business practice an average depreciation-rate of 1½ per cent a year is allowed to offset a reduction in its value of over 50 per cent in thirty years, after providing insurance against the chance of loss by fire. Machinery differs greatly in durability; well-made, substantial machinery depreciates about 5 per cent yearly. The engines and boilers depreciate more rapidly than the running gear; the loose tools have to be replaced every second to fourth year; while the materials consumed in the industry must be repaired and replaced at every repetition of the process of manufacture. If a factory is to be maintained in its efficiency in a way to afford its owner a continuing income, everything about it must be from time to time repaired and replaced.
§ 10. Repair of tools and machinery. Separate tools are dependent for their usefulness on substance and form, and they gradually undergo changes which consume them—by decay, rust, wear, breakage, etc. They thus as a class are looked upon as consumptive agents. Yet the whole groups, the parts of which can be separately repaired, may be given artificially a large measure of durativeness.
The railway unites in a large degree the use of land surface with that of durable forms of metals. The roadbed, which is but the natural surface excavated or filled to a more suitable grade, is the most permanent part; yet every frost weakens, every rain undermines, a portion of it. Earthquake, landslide, and flood fill up the ditches, or tear down the embankments. Constant work is needed to keep it fit and safe for use. On the roadbed is the track, slightly less permanent, more frequently changed. The ties rot, and even the steel rails must be replaced in twenty or thirty years. The rollingstock is still less durable, and the different parts vary in length of life. It is said that the wheel-tires of a locomotive are renewed four times, the boiler three times, and the paint seven times, before the machine as a whole is rejected as entirely worn out. The oil used on the bearings, which is a necessary part of the running machine, has to be applied every day.
§ 11. Economy of repairs. In general the maintenance of repairs in durative agents is a large part of the practical art of the business manager, whether husbandmen or artizan. It is an art calling for as much judgment and skill as does any part of the management. The neglect of repairs may have different results in the different parts of the enterprise. Failure to replace separate, worn-out tools, while not preventing the future restoration of the plant to its full efficiency, causes the factory as a whole to be less efficient. Each part of the entire outfit being needed in due proportion,2 the want of any one tool causes a loss of the efficiency of the factory as a whole disproportionate to the missing tools. Failure to apply seed to the land causes the land as a whole to be useless for that year’s crop. The seed is a necessary part of the productive field, considered as a unit, and its annual application is closely analogous to repairs. In other cases, neglect of repairs increases the expense of repairs and cuts off future incomes. The adages, “A stitch in time saves nine,” and “An ounce of prevention is worth a pound of cure,” must be acted upon in every industry. The neglect to repair a roof causes damage to an amount many times the cost of a new roof. Failure to replace a bolt costing five cents may result in the rack and ruin of a machine worth many dollars. A handful of earth on a dike may save a whole country from destruction. In every business that is to be continued it is true that neglect or postponement of repairs causes a falling off of the value of the uses, usually far outweighing the temporary saving in cost.3
Neglect of repairs may be economical, however, when industrial changes have first reduced the demand for the agent and consequently the value of its uses. When the line of travel changes, it does not pay to keep an old hotel up to the same state of repair as when it had a great patronage. Old factories sometimes may better be allowed to depreciate, while the price of repairs is invested in more prosperous industries. In a declining neighborhood the houses fall into decay, the owners seeing that “it would not pay” to keep them up.
§ 12. Production as betterment and repair of nature. Let us take a general view of the topics of this chapter. The one general method of industry from the advent of man upon the earth to the present moment has been that of appropriating natural objects as they are found in the world. Man takes these objects, improves them where he can, destroys (consumes) some in the using, and repairs others as they wear out. That is all that “production of material goods” as an economic act ever can be—appropriating, bettering, conserving, and repairing natural objects. Production is drawing out, leading forth something that is already there. The supplies of goods were at first conditioned and limited by the soil and climate, by flora and fauna. Man’s part in “production” consisted at first in picking the fruits and in killing the animals which nature had produced. Gradually, however, man has intervened more and more at earlier stages of the natural processes, has guided and aided them.
The attempt has been made to divide economic goods into two classes, ascribing to the one class permanency and calling them the natural agents (the unproduced goods); and to the other the possibility of indefinite increaseableness, the artificial agents (the produced goods). This is a futile distinction to apply to goods in modern industrial countries, and it obscures the true nature of production. We take the original stuff of which everything is composed, whether arable field or house or watch-spring, as we find it in nature. Nearly everything not now underground (even land surface for business buildings, for residence, and for agriculture) is more or less artificial, that is, has in some degree been altered by man’s action in leveling, digging, shaping, fertilizing, etc. The minerals beneath the surface of the earth remain most truly “natural” until they are appropriated, when many of them as elaborated articles become the most artificial of all material goods.
Instead, therefore, of trying to classify concrete goods as artificial and natural, it is better to make a continuity classification and to distinguish the consumptive and durative qualities of goods which are found in varying degrees in all agents. We shall later see how, in a variety of ways, men take account of these differing qualities and adjust their acts and their valuations accordingly.
THE PRINCIPLE OF PROPORTIONALITY
§ 1. The principle of proportionality; its general nature. § 2. Cost and sacrifice defined. § 3. Sacrifice of effort a matter of proportion. § 4. Sacrifice involved in common use by several users. § 5. Gross and net uses. § 6. The doctrine of separable uses. § 7. More intensive utilization. § 8. More extensive utilization. § 9. Application of complementary agents at the two margins. § 10. The principle of proportionality in agriculture. § 11. Intensive use of ground space. § 12. Intensive use of tools and machinery. § 13. Intensive development of water power. § 14. Bearings of the principle.
§ 1. The principle of proportionality; its general nature. In what has been said in regard to scarcity as an element in value (Chapter 2) it was implied that value involves, in the simplest case of direct or immediately enjoyable goods, a certain proportionality between goods and the desires of men. The more abundant are goods, relative to the desire for them, the less is their value. Similarly, in connection with the principle of evaluation (Chapter 4), we encountered, in the relations between the stimuli and the reactions of the nervous system, a certain quantitative relation, or principle of proportionality. In the whole process of trade, also (Chapter 5, Trade by Barter), which is the adjusting of a ratio between two or more goods in a group of traders seeking to buy and sell, an element of proportionality is plainly involved. And still later (in the last three chapters, 9-11) in discussing the improvement of productive processes we have touched upon the important problem of proportionality in the use and development of indirect agents. We saw that the development of new inventions, new processes, etc., was largely a matter of bringing things together in the most effective way—that is, in the best proportions for the accomplishment of certain physical, mechanical, chemical, or other desired technical results.
§ 2. Cost and sacrifice defined. In our evaluations there are usually certain negative items variously referred to as cost or as sacrifice. In its broadest sense cost may be defined as that which must be given up to get another thing. This is its original, and still general, meaning. This would include, on the one hand, sacrifices of a purely psychic nature—disappointments, regrets, etc., caused by doing or by giving up a thing; and, on the other hand, the prices of things—whether expressed in money or in other goods. Usually, however, in business the word cost is given a more specialized meaning, and we shall take this in order to distinguish it from price in general on the one hand, and from sacrifice on the other. In this narrower connotation cost means the outlay (considered as a business expense and expressed in money terms) which a person must make in order to obtain a certain product from goods. Sacrifice may be defined as that less definitely measured, psychic, alternative good (whether of enjoyment or of freedom from effort) which must be given up to get another good. Finally, price is the good surrendered in a trade with another person.
Sacrifice is involved in every choice and in every price in barter or sale; but cost, in this business man’s sense, only when the outlay for a good up to date is compared with its value or with its selling price.
§ 3. Sacrifice of effort a matter of proportion. In the case of complementary agents (see Chapter 4, section 5) the valuation of each in any particular use is constantly affected by the valuation of the other. This always involves a problem of proportionality. The simplest case is presented by the use of one’s time and labor in getting enjoyment from a direct good. The sacrifice of time and labor are outlays which have to be balanced against the gross or total advantage afforded by the good. It is a sort of offset or deduction, and the real or net service or psychic income is the resultant of the action of the two complementary goods, the man’s effort and the material object. A piano is capable of being played upon steadily for twenty-four hours a day, but the player becomes weary after two or three hours, and values the uses of the piano for the rest of the day at zero. These uses must go for nothing if the piano is not played, but they are to be realized at too great a sacrifice. A case of this kind is presented whenever any durable agent in the owner’s hands is capable of affording additional uses which as a matter of fact are not availed of. Such uses lie beyond the boundary of economic utilization, for the owner has not the time to use them—or the energy, or the present desire.
Riches and poverty affect the estimate of sacrifice involved in the use of goods. The more highly the person is able to value his own time, because of his riches, income, etc., the more highly he values the earlier uses of duplicates to save his time, and the less highly he values the later uses of goods which tax his time. Each article in the scanty belongings of the poor is used a great deal; each article in the abundant belongings of the rich is used very little, and the goods of the middle class occupy positions ranging between these extremes.
§ 4. Sacrifice involved in common use by several users. It often may happen that the further uses contained in goods may be taken by another person, possibly by several, each of whom may bring to the use his freshest powers. This may enhance the usefulness of the good, but again sacrifice may result from the inconvenience of common use, and sooner or later the outlay-value exceeds the gross income-value of the uses thus secured. A book stands many hours untouched on the shelves of the library; it has potential uses for some one during every minute of the twenty-four hours but they can be secured only with inconvenience. When, as often happens, two or more persons wish to use the book at the same hour, time and energy are wasted. The greatest net uses, therefore, are seen to be to the first user and in the first hour, for these uses cost the least time and trouble. If the members of a family will take turns, one chair will serve for all of them; but if all are to be able to sit down together, a chair must be provided for each. Often it will happen that only one chair is in use, the other nine chairs being valued only for their potential uses. I knew two young men who owned a dress-coat in partnership, and as they had different evenings free from business all went well until both were invited to a reception which both were very eager to attend. In tenement houses there are sometimes let to lodgers beds or bunks that are never allowed to get cold, men working in the day occupying them by night, and men working by night sleeping in them by day.
§ 5. Gross and net uses. In cases of this kind each use of the chair, or the book, etc., is technically the same as every other use, but economically these uses must be looked upon as a series of unlike valuation-magnitudes. The value of each use is a net amount resulting from subtracting the outlay from the income-value. Even if the income-values remained undiminished by bringing in new uses, the outlay-values would be increasing, and the net use-value correspondingly lessening. A point is reached where the net value of the use falls to zero. Thus in Figure 20 if on the line BB7 be represented the height of successive gross uses and on the line CB7 the height of the successive outlays, net uses are B1C1, B2C2, etc., until at B7 there is no further net use.
§ 6. The doctrine of separable uses. We may think of the use of an object not as one undivided whole, but as a group of uses, separable each from the other. Likewise any one of these uses is separable from the use-bearer considered as a concrete object. Every economic good, the use of which can be spread throughout a period of time, may be looked upon as consisting of groups of uses. The simplest case of this results from mere physical divisibility. A basketful of peaches is eaten piece by piece; each peach may be counted as one use. In this case the use is consumptive: it is not separable from the using up of the use-bearer itself.
The truly separable use, however, is found in the case of a durable agent which continues through a period of time to render a series of durative uses. A very perfect example is a diamond necklace, the sparkle and charm of which is a use which is absolutely without detriment to the use-bearer (i.e., the necklace, tho perhaps not to the wearer). Many agents have this enduring quality more or less fully (see Chapter 11 on Consumption and Duration), and in all such cases the durative use may be treated practically and theoretically in economics as something separable from the use-bearer, in matters of valuation, of trade, and of price. The peaches may be gathered without harming the fitness of the trees to produce another crop. Shelter is furnished, once the house is built, without destroying the house more than disuse would, if it stood tenantless. The horse is the better if driven moderately each day, and the carriage lasts for years. In every such case, the use is something different from the “using up” of a limited number of goods, for there is left in the use-bearer the power to go on yielding indefinitely some more of the same product or use if it is kept in repair.
Some of the uses contained in a use-bearer may be actual or realized; others may be and may remain merely potential. Or they may all be realized in the course of a period of time, at the end of which the good is entirely consumed or worn out. The uses of a suit of clothes, for example, may be realized only day by day for a considerable period. Some men go on wearing a suit until it is almost completely worn out before discarding it; others discard clothing while there are still many possibilities of use in it. It may perhaps be safely asserted that the great majority of things have potentialities of which the owner for one reason or another does not avail himself. As already indicated, it does not pay to squeeze all possible uses out of a good. Uses 8, 9, etc. (beyond 7 in Figure 20), are quite possible of realization, but the attendant inconvenience or sacrifice is so great that they are valueless, and they will be ignored. The owner will not forego his sleep because he dislikes to have the piano go unused through the hours of the night.
In the case of a durable good circumstances may warrant a very slight utilization at one time and a very much more complete utilization at another. The factory which has been running on half-time may later be operated day and night to meet a great increase in demand.
§ 7. More intensive utilization. The uses of a good at a given time are actual or realized up to a point, limit, or margin beyond which further uses would not be worth the outlay of effort or of other goods. This point in the utilization is called the intensive margin. Using the thing more and more, while uniting other things with it, is using it more intensively. Getting more use out of the book by effort, out of the farm by applying more fertilizer, out of the factory by employing two or three shifts and working longer hours, out of the house by putting more people in it, is intensive utilization. The superior uses come easily, naturally; the inferior ones are to be secured only with increasing difficulty. When some change comes—such as an increase in demand for the product of an agent—which causes that agent to be more intensively utilized, this change is said to have lowered the (intensive) margin of utilization. The inferior grades of uses are being resorted to.
§ 8. More extensive utilization. This same change of demand may, however, bring about a simultaneous change of a different sort. If there are various agents of different degrees of excellence, and only the better grades are being used to meet this particular demand, then an increase in the demand is likly to result not only in a more intensive utilization of the superior agents, but also in the calling of some of the inferior agents into use. The best agents that are available at the time are used first, but as they are more intensively used, there is increasing inconvenience. This may be relieved by using either physical duplicates of the better agents or by using inferior agents. If there is more than one of a certain kind of agents, the duplicates are distributed so as to be where most valued by the owner. A man having two umbrellas keeps one at his office and the other at home; a student having two books of the same kind keeps one at his room and the other at the university; a farmer having two hoes keeps one at the barn and the other in a distant field, and by this method the additional units have higher uses than if they were used in the same way or at the same place as the earlier units.
It may finally be necessary to have recourse to agents which as a whole are inferior to the other agents, but whose first uses are better than the remaining intensive uses of the better grades of agents. This employment of inferior agents is also called lowering the margin of utilization. But it is a different margin with which we have to do—the margin between superior and inferior agents. It is the extensive margin. At the same time that an increase in demand causes the use of double shifts in the efficient factory, another factory, of inferior efficiency, which has been completely idle, may be brought into use, tho possibly not to its full capacity. There has then occurred a change or lowering of both margins. At the same time that the cultivation becomes more intensive on the better fields, it becomes more extensive if there are other areas which have just come to have valuable uses. The intensive margin of use is in the particular thing; the extensive margin is the line between the superior and the inferior good. The inferior agent which is not utilized is spoken of as “below” or “beyond” or “outside of” the (extensive) margin of utilization. The interrelations between the two margins are shown in the diagram.
Intensiveness and extensiveness of utilization are relative terms. The utilization of one machine or of one piece of land is more or less intensive as compared with another when more of other agents (e.g., labor) is used with or upon it; or the utilization of an agent becomes more or less intensive than it was before if more or less complementary agents are used than before. One might say that the use of an agent is intensive in one place as compared with another (e.g., land in New Jersey compared with that in Kansas), yet extensive as compared with still another place (with that in western Europe). In the same way extensive utilization is relative.
§ 9. Application of complementary agents at the two margins. It is not our purpose at this point1 to emphasize the fact (important as it is) that changes of demand occur, and that these changes cause the best economic proportion to change. Rather we use illustrations of change to make clear that in any given set of conditions there is a best proportion in which to combine agents. There is a right degree of economic utilization in that particular situation. Where this best proportion is attained, is a point of economic equilibrium, in the sense that there is in the situation itself (and until some other conditions change, as invention, increased demand, etc.) no motive to change the proportion. In such a case the effort is made to repeat the process, to maintain just that proportion which has been found to be on the whole best. If either of two complementary agents is used in greater or less amount than this best proportion, a loss results, something less than the possible maximum of value is obtained.
Now the case of the two margins always occurs when one of the complementary agents is present in more than one quality or grade, as respects stuff, form, or place. Then the supply of the complementary agent is distributed over the different grades of uses, now to the lower uses in the better agent, now to the upper uses of the poorer grades. In this way the effectiveness of each unit of the complementary agent is kept equal on the intensive and on the extensive margins of utilization of goods. As the value of the added product in the more intensive use of a particular agent decreases, a point finally is reached where it is better to transfer the outlay to another agent, to shift from the intensive to the extensive margin, by going over to the use of another field or of another machine not so good. As the effectiveness of the labor, of the machinery, of the lands, of complementary agents of every kind, that men have to apply to two grades of another agent is being compared constantly, the uses of the complementary agents are distributed along the two margins. The margin of utilization is marked by a line of uses valued at zero. When used to that point the total value obtainable from the agent is at its maximum. If utilization is less intensive the value of the last possible use is lost, and if it is more intensive there is a net loss on the outlay.
§ 10. The principle of proportionality in agriculture. The principle of proportionality applies to the use of agents in all kinds of business and determines the degree of their economic utilization. This general principle was first formulated in reference to land in agriculture, and for a long time was supposed to be peculiar to the use of that class of agents.2
The use of land in agriculture is conditioned on the presence of a top-soil of suitable mineral elements and texture, and on a proper surface, exposed to light, air, and sun, with the necessary climatic influences of temperature, moisture, etc. It was long ago seen that on such a piece of land a crop larger than usual could be obtained only with greater effort or expenditure.3
It is obvious to every farmer and gardener that he cannot indefinitely increase his crop, that two men cannot always produce twice as much as one man on a fixed area of land, and that in general the product does not vary either up or down in proportion to the labor and materials applied. Instead of 20 bushels to the acre, 25 or 30 bushels might be raised, but it would require more plowing, labor, seed, fertilizer, and other expenses, in value greater than the addition to the value of the crop. On the other hand a moderate degree of thoroness of cultivation is necessary to get any results worth while; and, besides, if a small crop is raised, the value of most of the uses of the land for that season would be entirely thrown away. Only 5 or 10 bushels per acre might be raised with less expense per bushel merely for labor and material, but there would be left no remainder to apply to the value of the land-uses. Between the wastefully small crop of 1 bushel and the wastefully large crop of 100 bushels an acre, there lies a point, more or less correctly ascertained by experience, where the largest net result is obtained, a point where by aiming to raise either less or more the man in charge gets a smaller net return (surplus of total price over expenses).
§ 11. Intensive use of ground space. The principle of proportionality applies to ground-space in all industries. Some space is needed for any activity, even for mere existence, and a limited area cannot afford an unlimited number of uses. If a large library is accumulated in one small room, a point is reached where there is scarcely room to stand, and much energy is wasted in trying to find the books. In a university the psychical product, education, may be limited by the need of space. School-rooms, laboratories, and college class-rooms, if used all day and all night, would accommodate several times as many students as they do; but the “wee sma’ hours” would not be popular; and, therefore, as students increase, buildings must be added. One cannot conveniently increase the business of a lumber-yard without a larger yard-space, or of a factory without a larger floor-space. But the added space may be gotten by spreading horizontally or piling up vertically. Even in agriculture vertical addition is possible by the use of greenhouses in which mushrooms are grown below the tables and tomatoes above, and where artificial heat gives a more intensive utilization throughout the winter. Therefore, with more space and also more time a single foot of ground can be made to yield half a dozen crops in the year. In the production of food, however, on account of the need of sun, light, and air, the limits of space are more quickly felt, and are less elastic than in most other industries; the difference, however, is one of degree, and not of kind. In mercantile, commercial, and manufacturing businesses 10 acres or 60 acres of usable floor-space may be had by putting a building of that number of stories upon an acre of land, and installing elevators and moving stairways, parcel carriers, and telephones. Not only is the initial cost high, but the cost of maintenance likewise, and it is economically warranted only when land-space is very high priced. Business adapts itself to this law, but does not escape its operation. Neither the law of gravitation nor the principle (or law) of proportionality is violated or broken when materials are lifted to build the upper stories. Both “laws” are at work, even when the building is rising from the ground.
§ 12. Intensive use of tools and implements. All the implements used in agriculture are subject to the limitation of the principle of proportionality. Why will not one hoe, one rake, one plow, one scythe, one horse, one wagon, do for all the farmers of a neighborhood? It might, in many cases, but it would be with much labor and time in carrying the things back and forth and in waiting for others to get through using them; it would require work to be continued all night, on Sundays and on holidays, and even then the plowing, hoeing, harvesting, and other farm operations could not be performed when most needed. Even now there is much loss in just these ways because, tho every farmer has at least one, and some have many, of these tools, there are brief periods when there are not tools enough. Why, then, not have more tools? Because they cost. Between the extremes of no tools and a multitude a balance is struck at a point where the last additional tool adds to the price of the crop at least as much as the tool costs. The mode of estimating these costs we have later to study more closely.
In manufacture, whether by hand tools in small shops or by machinery, in transportation, whether by boat or railroad, there is, in the mind of the manager, the same ideal point of equilibrium between the price of the uses to be added and the price of the other agents (labor, tools, materials) that must be expended to secure the additional product. To do nothing with a tool, implement, machine, for the purpose of saving the things that would have to be used with it, is to lose the use of it.
§ 13. Intensive development of water-power. In the development of water-power it is possible to combine the original source of water-supply with various kinds of other agents to generate more or less power. A waterfall may be made to yield, perhaps, 25 horse-power daily with a crude undershot wheel, 75 more horse-power if a dam is constructed and an overshot wheel is used, 150 more horse-power if an iron turbine replaces the wooden wheel, and 500 more horse-power if a large reservoir is built a half mile distant and the water conducted under pressure to a reaction wheel at the foot of the fall. The last is technically the most efficient, but economically its large cost will not be warranted until there is a large demand for power at that place.
§ 14. Bearings of the principle. It is plain that this principle of proportionality must be taken account of in all practical affairs by those who are directing the processes of productive industry, whether on a large or on a small scale. Their problem is both technical and economic. They must make effective technical use of goods, and they must combine things in ways that will pay. To the student of economics a clear understanding of this most fundamental principle of proportionality is essential to the solution of the complex problems of valuation. Things are not valued in isolation from each other. The great mass of complementary agents act and react upon each other. The valuation put upon one agent is due in part to the presence in certain proportions of other agents. Many evidences of this truth will appear to us as our study proceeds.
THE CONCEPT OF USANCE-VALUE
§ 1. Usance and usufruct: definitions. § 2. Usance-value of agents yielding products of like grade. § 3. Usance-value of agents yielding products of different grades. § 4. Effect of the presence of one agent upon the usance-value of another. § 5. Usance-value determining utilization. § 6. Time as a factor in usance-value. § 7. Usance-value and the margin of utilization. § 8. Usance-value of complementary agents.
§ 1. Usance and usufruct: definitions. As the use of a consumptive good involves the using up of the good itself, the value of the consumptive use is identical with the value of the good itself. But when the uses are separable, the problem of value presents more complicated aspects. The whole use of the good consists then of a sum of separable uses, capable of being separately evaluated. The concrete object which yields the uses may, by repairs and replacement, be treated as a durative use-bearer, capable of yielding either an unending or a definitely limited series of like uses. This theoretical possibility appears in a number of practical problems. It is involved in the careful use of any durative agent by the owner himself. It is the important consideration in the definition of the legal right of usufruct. In law, usufruct is “the right of using and enjoying the income of an estate or other thing belonging to another, without impairing the substance.” One heir may have the usufruct for a term of years and another heir have meantime only the reversionary right, which, however, entitles him to sue for waste if the substance of the estate is being impaired, as by cutting standing timber, neglecting repairs, etc. The tenant of a rented farm has the usufruct, but must not impair (with minor exceptions) the substance of the farm. The value of the usufruct in any given period may be called the usufructuary value, or usancevalue, as distinct from the value of the estate, or of the concrete object. We have now to consider how the usance-value is related to the value of the products, be they indirect goods, direct goods, or psychic income.
§ 2. Usance-value of agents yielding products of like grade. Consider the simple case where the products are themselves immediately enjoyable goods, such as fruit. The value of the use of the tree is simply the net-value (deducting costs of cultivation, etc.) of the fruit that the tree yields in the season. It is clear that if the farmer has his choice between a tree that yields 30 bushels and one that yields 20 bushels of like apples (this being the net difference after deducting costs), he will value the season’s yields of the two trees in the ratio of 3 to 2. The tree yielding the most fruit is counted by so much the better, and relative values are at any given moment expressed by the relative quantities of products.
In a like manner, orchards (groups of agents) may be evaluated. In the Santa Clara valley, as in other parts of California, there is a frostless belt, marked off by a narrow belt of uncertain climate from the lands where, because of the probability of frost, it is quite unsafe to attempt to cultivate the delicate orange-tree and other semi-tropical plants. The usance-values of the orchards show gradations corresponding with the average amount of net products from the frostless belt to the region of frost. In manifold ways differences in geological formation affect the use of land and the success of many industries. On one side of a little creek may be limestone land, on the other shale, and the limestone land produces larger crops and therefore has the greater value. The usancevalue is plainly a reflection or derivative of the net-value of the products yielded during the period, and if other things are equal the usance-values of two use-bearers in the same market will differ as do the quantities of like uses which they yield.
§ 3. Usance-values of agents yielding products of different grades. If now two agents be compared whose products are equal in quantity but of different grade or quality, the agents will obviously have different usance-values corresponding with the differences in quality. Take a well-known example in the case of land. A peculiar mineral quality in the soil of a vineyard may impart to wine a choice flavor that can at once be recognized by experts, while other fields, distant but a few rods, cannot by any effort be made to produce wine of the same rare quality. There is said to be a marked difference in the success of orchards and of vineyards lying only a short distance apart on the shores of the larger lakes of New York. Nearness to the water moderates the temperature, often prevents frosts, and hence insures the ripening and enhances the quality as well as increases the quantity of the fruit. Where the peculiar nature, slope, or location of the land is found to be the cause of the exceptional quality of its fruits, the land acquires an exceptional usance-value as compared with ordinary land in the neighborhood.
It is the same with the usance-value of all other material agents. The common nag and the thorobred horse, the loom for weaving rag carpets and one for weaving complex designs in silk, the scow and the yacht, are yielding uses which have differing values reflected to them from their final products, and accordingly they vary in usance-value. The same principle applies in the case of human services. The labor-income or the wage obtained by a man for his labor for a definite period is a reflection of the value of that labor to his employer, and eventually to the user of the product. In all cases the usance-value is a derivative.
§ 4. Effect of the presence of one agent upon the usance-value of another. Let us now consider the effect which the presence of agents of inferior quality may have upon the usance-value of better agents. It is clear (see Chapter 12) that if two agents are of different grades of excellence, the better agent will be first used; but when there is sufficient demand, the less efficient agent will be pressed into service. Tho inferior as a whole, it has uses which are better than the lower grades of uses of the better agent, and we can speak of these uses as competing with, or as being substituted for, the more intensive uses of the better agent. Regarding the various uses in both objects as separable, we see that the total supply available to meet a given demand is increased by the presence of the inferior agent. The use of the inferior agent limits the utilization of the one of better grade, and therefore limits or lessens its usance-value. If there is but one grade of agent, it is necessarily valued without reference to any lower grade. There may be at first enough of the higher grade of agents to produce all the fruit wanted of the better quality. If, then, there is an increasing demand, and the additional yield can be secured only with more intensive utilization, the value of the product rises. The presence of inferior grades, however, limits that rise, because use can be shifted to them. Within the limits of substitution the poorer grades reduce somewhat the demand for the better grades. The usance-value of the better agents is due primarily to their scarcity and (not less important) to the scarcity of the more effective uses in those agents; but the substitutable uses in other available agents have their part in determining the particular level of valuation in any economic situation.
§ 5. Usance-value determining utilization. Both the quantity and the quality of products thus unite to determine the usance-value of an agent. A smaller crop of apples of better flavor on one tree may equal or exceed in value the larger crop of another tree. In this case usance-values of similar things are compared. But through the value of the products they afford, very dissimilar classes of goods may be compared: the apple orchard and the peach orchard, the corn field and the field of potatoes. The constant comparison of usance-values leads to the applying of each agent to the particular use in which it proves itself to have products of the highest value, and to the shifting of the use when a sufficient change of value takes place in the product. For example, a field used for corn becomes, as population grows, worth more for market gardening than for residence sites, and later becomes worth still more as a business location at the center of trade. The land has various possible alternative uses at any moment, but that one is to be chosen which secures the highest net yield.
§ 6. Time as a factor in usance-value. Each instant that an agent is in use may, if we choose, be counted a separate use, and usance consists of the sum, or succession, of net uses yielded in some limited period of time, as a day, a week, or a single season. It takes time for the separate uses to be realized. The series of uses bound up in an agent can not be secured at any single moment. If a fruit-tree were permanent, and the owner could wait through eternity for its yield, he would get an infinite yield of fruit. But in any finite period, there can be only a limited yield. When uses of different periods are compared, as this year’s use and the next year’s use, or the use during some year in the more distant future, another problem is involved, that of time-value. Moreover, time is an element in the comparison of the present values of products that are of various degrees of ripeness or readiness. A wagon can be used in June for hauling a family to the circus or for hauling a load of wood to the home to cook a meal the next December; or a horse may be used for an afternoon’s drive, or for dragging timbers to build a cottage to be used for a life-time. Here the usance is in the present, whereas one of the alternative uses is present and direct, and the other is indirect, resulting in future income. Inevitably the element of time enters in most cases into the estimate of usance-value. We must, however, postpone for a few chapters the fuller analysis of this factor.
§ 7. Usance-value and the margin of utilization. Usance-value, let us here recall, is a summation of the values of the separable uses contained in a good treated as durable (that is, kept in perfect repair). Its amount depends therefore on the values of the various, and perhaps numerous, separable uses, or products, some of them direct and others indirect. In this summation are the values both of actual and of expected uses. Merely potential uses that, in the existing conditions, are free do not increase the usance-value. Direct goods that were free may, however, become valuable. The poorer qualities of fruit that have been allowed to decay on the ground may now be carefully gathered, while the better qualities are used for special purposes. The total usance-value of the durative agent (the orchard), the value-summation of all the separable uses, would then be greater than it was before.
In the same way when the agents and their uses are indirect there is a point in the gradation from the better to the poorer agents where the materials and forces are left unused. Beyond or below that point the uses of machines, tools, and fields have no value, except for some prospective use. Outworn goods in manifold forms, old pictures, old clothing, having no longer charms even for a rummage sale, a great multitude of things unused and worthless, differing by only a shade from things that still are used and valued, form a valueless margin of wealth. Every rubbish-heap, rag-bag, junk-shop, and garret contains things once prized, now lingering on the margin of use or already become definitely useless.
Recall that there is an intensive margin of utilization, beyond which are certain potential uses in the things that we already have, which, however, in the existing conditions, lie outside the margin of utilization and of value. They may become valuable through any one of many changes in the economic situation. Their use now would involve an expenditure of other agents (labor, materials, etc.) that have a greater value than the product would have. Economic choice should go just far enough and not too far, either extensively or intensively, in the use of goods, if the maximum of usance-value is to be attained.
§ 8. Usance-value of complementary agents. In the foregoing discussion we have, for the sake of simplicity, spoken as if a single product were attributable to a single agent. In reality a situation as simple as this is rare, tho it may occur. Almost all products are the result of the uses of two or more complementary agents.1 When two or more agents are each indispensable to the existence of a valuable product, the lack of one agent makes the other agents valueless for that one purpose. The product cannot in any case be physically divided into fractions and the parts ascribed to the various agents respectively. But the valuation imputable to each under the existing conditions results from the demand and supply for each in all its uses together. This process of comparison is found even in the individual economy. Robinson Crusoe had to choose how he would apportion his labor (one good) and his limited stock of iron (another good) to make tools (the products). He would not apply all his agents to any one product (as hatchets), but he would, by the principle of substitution, apportion the agents among a number of products, hammers, knives, etc. There are thus, in this simple case, several series of evaluations. First, the successive units of the products from this process, as for example the hatchets, have a decreasing importance. Secondly, the successive units of labor applied to this one product would be limited by their value for other uses. Thirdly, the successive units of iron would have less value applied to this use and relatively greater value applied to different products. Each use is chosen in relation to all the alternative uses presented to choice at the moment, and a scale of values results that represents the equilibrium of choice. The choices may be made in a very imperfect way, but somehow they must be made by every individual working by himself, at whatever simple task. A large part of these choices are made easy through habit, custom, and imitation, by which the general scale of living and the industrial process are largely ruled.
When men come together to trade in markets, the problem of evaluating complementary agents becomes in some respects more complex, because of the variety of labor and of uses; but in some respects it is easier, because of the existence of current prices for all things, serving to give more exact expression to the value of alternative uses. Flour and water are needed to make bread.2 Assume that a loaf of bread has a value of 10. If the water is a free good, the flour has imputed to it the whole value of 10; but if the water needed is valued at 1 for some other purpose, as for sale at a price, then some readjustment of other values must take place. Either the value of the flour falls to 9, or that of the bread increases to 11, or an adjustment midway between these values is made. In this way occurs the adjustment of the value of complementary agents, each being valued in relation to all the other uses to which it could be applied. The total price of the products evidently must closely conform to the total price (actual, or estimated) of all the agents entering into the products. This measurement of money-costs and their adjustment to prices we shall have to study more fully later under “cost of production.”
THE RENTING CONTRACT
§ 1. Price of the separable use. § 2. Medieval land tenures and the usance of land. § 3. Land destruction and repair. § 4. The medieval rent-charge as a sale of income. § 5. Definition of the renting contract. § 6. Renting of agricultural land. § 7. Renting of urban real-estate. § 8. Renting of dwellings. § 9. Renting of real-estate for business uses. § 10. The renting contract in other cases. § 11. Buying the usance without the renting contract. § 12. Unsuitability of the renting contract in commerce. § 13. Definition of rent. Note on Various meanings of rent.
§ 1. Price of the separable use. Wherever there is a thing of value there is a chance that trade will occur between men, and that a price will result. In our discussion of price above (Chapter 7) we fixed our attention upon those cases where concrete objects with direct uses are traded as wholes, such as loaves of bread, apples, and horses. The owner of such a commodity must usually sell the whole object if he is to sell the uses that it contains. The price is built upon the valuations—in the minds of the various traders—of the totality of uses contained in the goods. Now the valuation of the uses separately—the conception of usance—makes possible the problem of price in a different form, that of the buying and selling of the separable uses, leaving the ownership of the durative agent unchanged. The simplest way to buy the uses of a thing would seem to be to buy the use-bearer outright—boat, horse, house, land, with all its uses. But the sale of the separable use may under some conditions be simpler and more advantageous to both parties than the sale of the use-bearer itself.
§ 2. Medieval land tenures and the usance of land. Doubtless the perception of this advantage led to multitudes of loose bargains for the use of personal belongings in earlier conditions of society;1 but the first great development of usance-trade was in the case of land. In ways and for reasons which need not be described here, land ownership in all the early civilizations was bound up with certain political rights and dignities. The land was not a personal possession, it could not be sold outright (in most cases); it must be passed on to the heir and successor of the landlord. The landlord got his income from those to whom the land-uses were granted. Even as late as feudal times in medieval Europe the whole social organization was built around land tenures.
Land and the things pertaining to it, such as ditches, houses, mills, cattle, and stock, constituted the wealth of the rulers and landlords. Land was granted to the vassal, or to the tenant or to the serf in return for produce, and for services, some military and some agricultural in character. The contract, expressed or customary, was known and carefully interpreted in all its items. The tenant was held strictly to his duty to keep the land in nearly undiminished fertility. A certain mode of using the land was enforced; certain limitations were placed upon the use of pastures, of forests, and of fields. Moreover, the tenant had an interest or equity in the land because the rent he had to pay was fixed by custom, not by competition, and always, probably, was less than a competitive price would have been. The landlord, therefore, could count in good part on the undiminished power of his land and stock from one year to another.
It would be a mistake to see in these early and medieval relations between a king and his vassals, and between land owners and the serfs on their estates, more than a vague and embryonic form of rent-contract. Political rather than economic relations were dominant; it was a time of status rather than of free contract.2 Originally in taking the land and pledging loyalty to his feudal superior, each vassal, high or low, assumed pretty definite obligations, some of a military, others of a political, others of an economic nature. But thereafter in the thought of that time there was but vaguely present the notion of contract in the modern sense as regulating the economic relations of the descendants, peasant and landlord, or landlord and his feudal superior. “Each man took his place in accordance with inherited and forced, rather than free, contracts.”3 But gradually there developed a more modern form of agreement between the owner of land and the tenant. Rent-payment by the tenant and wage-payment by the landlord for any work done on his domain by the peasants were counterparts in this development in which contract was gradually displacing custom, status, and inheritance.
§ 3. Land destruction and repair. It has been seen that all economic agents, considered as wholes, are more or less consumptive, and more or less durative.4 In practice and in theory they may be treated as either the one or the other. They may be treated as consumptive by letting them wear out, while spending all their uses within a certain period; thus are used food, fuel, lubricating oil, lights, and sometimes tools and machinery. All their value is looked upon as transferred to, or realized in, the product, in that period. On the other hand some goods are given, by means of repairs, an artificial appearance of durability, so that the whole agent is treated as having the durability of the most enduring part of it. It was in this manner that agricultural land came to be looked upon as indestructible.5 As mere land surface, or location on the earth’s surface, it is, except for rare catastrophes, such as earthquakes, volcanic eruptions, and floods, well-nigh everlasting in the view of mortal man. But it is something more than mere location that makes land useful, whether used for agricultural, forestry, quarrying, or mining purposes. Used for these, and even for residence and commercial purposes, it is quite capable of being used up and destroyed as a use-bearer. It is in large part not nature but man’s art in the careful use of land that enables it to be looked upon as an indestructible agent, yielding a permanent series of uses. A form of contract came to be used in letting the land for hire, that called for the return of the land in as good condition as when it was taken. The tenant had to replace the elements of fertility which he used up. It is clear that the main thing he buys from the landlord is what we have called the usance of land; but as he usually takes something more (through failure to repair and because of inevitable depreciation) he pays for this an additional price included in the gross rent.
§ 4. The medieval rent-charge as a sale of income. It thus came about that land, tho not as an economic good indestructible, was nevertheless in many cases so managed as to yield a continuing income. In medieval times this income or rent was realized in products and services, not in money. The fruits of the soil were consumed on the spot instead of being sold as now. Land was thought of as a place on which the tenant could live and from which the landlord could draw an income. The medieval estates were so tied up by legal conditions that they could not be sold outright, so means were found of doing practically the same thing. The owner, in some cases, mortgaged the annual rental by selling a rent-charge upon it. A rent-charge was an annual sum payable (in perpetuity or until redeemed) out of the yield of an estate. Thus, in the Middle Ages, not the land itself, the mill, the market rights, the forest, etc., were subject to trade, sale, and contract, but merely the usufruct, as a whole or in part, for a definite period. The sale of rent-charges has now only a historical interest, as loans now are made in other ways, the land being pledged as security for repayment. After this brief survey of the old land tenures we turn now to the modern method of selling the use of wealth of various kinds under the form of the renting-contract.
§ 5. Definition of the renting-contract. The renting-contract is the agreement of a borrower to pay a specified price for the use of a thing and, at the end of a specified period, to restore it in good condition or pay for its repair. In practical business it is necessary to have definite agreements to prevent disputes, and whenever a thing is rented there is a contract, either implied by custom or formally made, orally or in writing. The terms are all specified; the duration, whether for a day or perpetual, or at the pleasure of either party; the rent, whether cash, share of the produce, definite or contingent on some events; taxes, insurance, and repairs, what and how much to be done by either borrower or lender. In the case of things other than land, many other details must be specified. Some of these details may be merely implied in a higher gross rent, which covers ordinary wear and tear, ordinary risk of breakage, fire, etc., and ordinary risks of every kind (e.g., rent of piano, of theatrical wardrobe), the borrower being liable, however, for unusual carelessness in use.
The form of the renting-contract is observed by men in estimating the uses of their own wealth where no contract exists. If they count the gross product of an agent as a netusance, it is bad bookkeeping. In many cases it is necessary, therefore, for owners to observe the form of the renting contract in order to determine the net yield of durable goods.
§ 6. Renting of agricultural land. The employment of the renting-contract is determined by its advantages and disadvantages under particular conditions as compared with other business methods. Even in the renting of land for agriculture, the difficulties of the contract are great. It calls for a personal oversight that is burdensome to the landlord and annoying to the tenant, to make sure that repairs are made, that straw and hay are fed on the place so that the soil may not be impoverished, to ensure the purchase of other fertilizer according to the agreement, and hundreds of other details. The practice of making long leases obviates some difficulties and aggravates others. If improvements made by tenants revert to the landlord at the expiration of the lease, as was formerly the case in Ireland, there is little motive for enterprise; and if tenants’ improvements must be bought by the landlord, there are many occasions for dispute. Under fairly unchanging conditions as to prices and markets, long-time leases may be equitable; but during the wavelike change of food prices in the nineteenth century long leases increased the hardships to tenants in all countries in Europe and America. Despite these drawbacks, agricultural lands with their improvements continue to be largely rented, both in Europe and America. Of the nearly 6,400,000 farms in the United States in 1910, owners occupied 62 per cent, hired managers ran 1 per cent, and tenants operated 37 per cent (24 per cent renting on shares of the produce, and 13 per cent for cash). There were 2.3 million farm homes rented in 1910. But in America and Australia, far more than in the older countries, land changes hands by sale, and many persons prefer to go into debt for land, giving a note, secured by mortgage, and paying interest on the loan, rather than to pay rent.
§ 7. Renting of urban real-estate. The class of wealth that is now proving to be, on the whole, best usable under the renting-contract is land and buildings in urban locations. On the whole the difficulty of ensuring the durative character of city real-estate (land and building taken together) is less than in the case of agricultural real-estate. The land being used solely as solid surface, standing room, and not at all as a source from which the chemical elements of fertility are extracted, is (except in the most rare cases of floods and earthquakes) subject to no such physical deterioration. The buildings, however, make up a large part of the value of urban real-estate, and in many cases they are subject to depreciation and to dangers. The greatest of these dangers, that from fire, can be guarded against by insurance and thus converted into a regular cost of maintenance. Damages by rough usage may be offset by higher charges to the tenants. Rentals charged to careless classes of tenants, or to careless individuals, often are fixed higher than rentals to careful tenants. By these means and by careful oversight, tenements and residences, which have a large measure of consumptiveness, can be treated as durative agents more easily than can agricultural lands.
§ 8. Renting of dwellings. There are in many cases strong reasons why it is to the interest both of the owner and of the tenant to bargain for the transfer of the usance rather than of the fee-simple (complete right of ownership) of city residences. With many changes in the modern citizen’s business and social conditions, thousands of families are often absent for a time from their regular place of residence, and while letting their own houses to tenants, they become tenants in the houses of others. Often the tenant may be a rich man who could easily buy the house, if hiring it were not more advantageous. Every year many thousands of winter homes of owners are let in summer while the owners are away, and many thousands of summer homes usually occupied by the owners are let where the owner is prevented by ill-health, or by business plans, or by travel from occupying the home himself, or is led by the desire for a change to go to some other place for the summer. The uncertainty of employment for professional, clerical, or manual workers, makes the buying of a house of doubtful wisdom in many cases, even where it would be financially possible. There are thus millions of families that are not would-be buyers of houses, but are nevertheless buyers of the uses of houses. There were 8.4 million homes other than farm homes rented in 1910 in the United States (that is homes in cities, villages, and the country districts, not occupied by one operating a farm). This demand is far beyond what can be met by the chance vacancies of owners’ regular dwellings, and it offers a field for a very safe kind of investment under their personal oversight for persons of small or moderate means.
§ 9. Renting of real-estate for business use. The renting-contract has marked advantages in the hiring of shops, stores, and office-buildings in cities. There the land has a well-nigh absolute durativeness, and the buildings may be built of very durable materials. Merchants often find it of advantage to move into larger quarters as business grows, or into a different neighborhood as the center of trade changes. Moreover, as active business men they often can keep their funds invested to better advantage in their business than by putting them into the purchase outright of a store-building, as the rate of yield on real-estate investments is usually less than that in commerce and manufacture.6 Many small mercantile businesses require only a small space, less than could be bought or built on to advantage in a large city, and many agents and professional men need merely office space. This large and regular demand for shops and offices calls forth the enterprise of investors to construct and maintain suitable buildings to let for these purposes. Hundreds of millions of dollars of the funds of life insurance companies, collected from policy-holders, are invested in this way, as well as funds of educational institutions and of business corporations. Thus it happens that many corporations with millions of capital are in the larger cities tenants in offices owned by other corporations which own office buildings, such as the Times Building, the Metropolitan Life Insurance Building, the Singer Building, the Woolworth Building, the Equitable Building, in New York City. The very size of such office buildings and their conspicuousness in public attention give to the offices in them an advantage in convenience of access and for advertising purposes greater than is possible under other circumstances.
The rapid changes that are going on in America bring about most varied conditions of ownership and tenancy in regard to urban industrial real-estate. Manufacturing on a small scale is often started in rented buildings even in small towns, and in the large cities this is more common. But the larger manufacturing firms and companies usually own the building and land in which their manufacturing is done. The special character of the machinery used and of the buildings required make this the better plan. Even then, however, the need of expansion often leads to the hiring of additional land, buildings, and offices. The extent to which the renting of real-estate for business purposes is practised now is thus in the aggregate enormous.
§ 10. The renting-contract in other cases. There has always been a strong motive for the renting of smaller objects of movable wealth, rather than their purchase outright, wherever the user has a need of an agent in an unusual place, or a temporary need of an exceptional nature. The traveler wishing to cross the stream needs the boat but once, and many other travelers will pass the same way having the same single-time need. Usually the payment in this case is in the form of a fee for both the boat and the ferryman’s services. The farmer would like to have an extra horse for a few days each year and can afford to pay well for its use, but could better go without the horse those few days than have the expense of keeping it throughout the year. He may gain greatly, however, if he can hire a horse at such times.
A hack or a taxicab is hired by the hour, a carriage from the livery stable by the day, a bicycle, a sewing machine, a type-writer, by the day, week, or month. Boats, guns, tents, jewelry, even diamond engagement rings, yield their joys under the renting contract. People frequently hesitate between the renting and the purchase of a piano, and in some cases renting is the more convenient and desirable way of securing its use. The purchase of a dress-coat or of a masquerade-suit to be worn but once, involves for some persons a needlessly large expense, when for a moderate sum the temporary use may be had, and the article may then be returned, little the worse for wear, to the accommodating clothier.
§ 11. Buying the usance without a renting-contract. When the owner or his employee has charge of the agent and directs it, there is usually not a renting-contract, altho the purchaser is buying the usance. When the use of the machine is a minor element, the transaction takes the form of hiring the man’s services, while he furnishes the needed machines. Thus the cabman, the truckman, the ferryman, the bootblack, the carpenter, are hired and paid for their labors along with the use of the wagon, horse, boat, brushes, and tools. These cases are midway between the hiring of a material use-bearer and the hiring of a laborer, having something of the nature of each. A case of the same kind on a large scale is seen in transportation by railroad or by steamship, where the passenger is getting by one payment a great complex of uses, of fuel, engines, machines, car or ship, services of engineer, seaman, conductor, or captain. It is a step further to the case where the customer buys the product of a factory. The sale of the yard of cloth is the sale of the raw materials, the uses of building, engines, looms, and the labor of various employees, all combined in one product. In some cases the usance (as of craftsmen’s tools) is sold under a labor- or wage-contract; in other cases (as of boats and trains) it is sold under a transportation contract, the price becoming chargeable as the usance is given; in other cases (as in manufacturing and mercantile business) the price of the usance is included in the contract of sale of products which the uses of agents have at an earlier time helped to produce. In none of these cases is there a renting-contract, for possession of the agent is not delivered to the buyers of the use, and the owner continues to be responsible for the repair and operation of the agent. It is merely a matter of convenience, reflected and fixed in custom, whether sale of usance shall be under the renting-contract or under some other form. With more or less of difficulty and of advantage its use might be extended to the borrowing and lending of many classes of goods where it is not now used.
§ 12. Unsuitability of the renting-contract in commerce. The renting-contract has always proved to be unsuited to most transactions of commerce and manufactures. As these classes of industry were developing rapidly in cities near the end of the Middle Ages and throughout the sixteenth, seventeenth, and eighteenth centuries, borrowing and lending in the form of or in terms of money was more and more employed, and in this respect there was a striking contrast between city industries and agriculture, where the renting-contract was almost universal.
The materials and appliances needed for manufacture and commerce are so manifold, and are so varying in quality, that the renting-contract is very cumbersome and difficult to enforce. A merchant embarking on a trading journey would find great annoyance in renting a ship and a stock of goods. He must agree to repay the loan in goods of the same kind and quality as those received, a contract most difficult to interpret and execute, and giving occasion to costly tests and countless disagreements. It was much easier for the merchant if he had not means enough for his enterprises to get others to go in on shares (a very common method) or to obtain a loan under the interest contract, i.e., either a money loan, with which to buy the goods, or an agreed price in money for all the goods borrowed. With the growth of industry and commerce, wealth increased in towns, more and more taking the form of goods which could not conveniently be rented, such as ships, wagons, tools, and stocks of merchandise.7
§ 13. Definition of rent. Let us now consider the term applied to the payment made under the renting-contract. The word rent comes from the Low Latin renta from renda, or rendita, in turn from redditus, that which is given, yielded, given back or returned. The French rendre (English render), to give or return that which belongs to one, was used very early. Chaucer used “rente” as income: “Cattle had he enough and rente,” “cattle” probably meaning chattels (goods, wealth) and “rente” meaning income. The larger incomes of that time were derived as payments from vassals or tenants of estates. Rental is a collective term for a number of rents; the total yield of an estate was called its rental, and a list of the various sources of income, including all payments due from tenants in money, produce or services, constituted its rent-roll.
The word rent has continued to be used popularly as the amount paid by one person to another for the use of material things which must be returned to the owner after the time of use agreed upon. We speak of the rent of a house, boat, etc., using the word as a synonym for hire. In the European languages the word is used generally in that sense, tho with various shades of meaning. In French la rente means the income from any kind of property; but corporate securities and national bonds particularly are called les rentes (probably because they are a form of investment yielding a permanent income), and one who has a fixed income from rents is called a rentier. In German the term Rente is used more broadly than in English, as an income of any sort, Grundrente meaning the rent of land, and Capitalrente (like Capitalzins) the income usually in English called (according to conditions) either dividends or interest.
With this usage and the problem in view, we may define rent as the price paid for the temporary possession and use of a more or less durative agent which is to be returned to the owner at the end of the specified period. Thus broadly understood, rent as a contractual payment includes not only the price of the true usance, but usually also something more to cover repairs, wear and tear, services of the owner in preparing and taking care of the use-bearer, collecting the rent, etc. It is useful to distinguish between the whole payment, the gross rent and the true, or net, rent which is that part of the payment that is left, after making due allowance for all the other items of cost. Net rent is the estimated price of the net usance.
In the next chapter we have to examine how the general principles of price are exemplified in the problem of rent.
Various meanings of rent. Various other meanings have been given to rent as used in economics which may be called to the student’s attention that he may be on his guard against misunderstanding. The English economists from Adam Smith on restricted the meaning to the most striking of the cases of rent, as seen in their day, and defined it in the words of Ricardo as: “The price paid to the landlord for the use of the original and indestructible qualities of the soil.” Most of the landlords of England did not themselves cultivate the soil, and their incomes were paid to them by tenant farmers. Where lands were cultivated by the owners, there was a value in the use of the land considered logically apart from the value in the cultivator’s own labor and from other costs; in other words, there was a usance-value in the land, and economists, having no name for this, widened the application of the word rent to include this as well as the price paid to a landlord. But they did not widen it to include the usufructuary value of other agents, and thus they contrasted rent with interest from money loaned, with the income (called by them profits) from agents employed in commerce and manufacture, and with wages of labor. The authority of this definition of rent has rapidly waned since criticism has shown its accidental origin and its illogical limitations. When it was recognized that there was a difference between the usance of an agent to the owner and the price paid to him by another for its uses, the attempt was made to call the former economic rent and the latter contract rent. But this has proved to be confusing and has never gained a place in popular usage. In business practice the term rent is rarely if ever applied to the usance, but only to a contractual payment for the use. In the attempt to remedy the lack of logic in the definition some economists have widened the term to indicate any advantage secured in exchange (the margin of advantage), using such expressions as consumers’ rent, producers’ rent, buyers’ rent, sellers’ rent, and thus have lost all touch both with the original economic definition and with popular usage. Our analysis puts an end to this variation and inconsistency, by its identification of the separable use as the object of valuation. Thus usance and rent are seen to be the value and the price aspects of the same problem.
PRINCIPLES OF RENT
§ 1. Divergence of actual rents from competitive rents. § 2. Gross and net rent to the owner. § 3. Different grades of fertility as affecting rent. § 4. Different costs of cultivation as affecting rent. § 5. Differences in location as affecting rent. § 6. The general doctrine of rent. § 7. Dependence of rent on proportionality. § 8. Rent and intensive utilization. § 9. Divergent subjective valuations of different bidders. § 10. Example of competing bids. § 11. Complexity of the situation lying back of each bid. § 12. Personal efficiency as affecting the valuation of agents. § 13. Variability of rents.
§ 1. Divergence of actual rents from competitive rents. Every rent paid by one person to another grows out of some agreement, explicit or implied, between two parties, and in a very general sense may be called a contractual payment. But the agreements in force at any moment differ in regard to the time that has elapsed since they were made, in regard to the conditions that existed when they were made, and in regard to the changes that have taken place meantime affecting the value of the uses of the wealth. It must often happen, therefore, that the rent which the borrower is obligated to pay is either more or less than the usance-value as estimated at the present moment. It is necessary to distinguish, therefore, the terms customary rents, lease rents, and competitive rents. A competitive rent is the rent that is (or would be) arrived at under the free operation of the actual competitive market conditions.1 A large part of the rents actually paid, especially for lands and houses, are not at this rate, but at a rate determined at an earlier date and under more or less restricted competition. Some may be customary rents which were fixed in former generations and are not subject to revision. Custom, in the case of a large part of the land holdings of the older countries of Europe, Asia, and Africa, prevents the landlord from charging all that the usance of the land is now worth. Presumably, when the feudal agreements were made in Europe a thousand years or more ago, there was a rough equivalence in the benefits accruing to the landlord and the tenant, respectively. In cases where the customary tenant and his descendants have the right to continue at a rate below a competitive rent, the tenant is to some degree a sharer in the ownership; the value of the usufruct is divided between the two parties. In communities where customary rents are common, a rent of the full annual value of the tenement, or near it, is called a rack rent. It often has resulted from some encroachment by the landlord upon the tenant’s rights, and therefore the term has an evil implication.
In other cases, notably in England, leases of agricultural land are made for periods as long as 30 years, and the tenants have often been the losers because, before the end of the time, the prices of agricultural products had fallen. Even in America city land is sometimes leased at a quit-rent for 99 years, and railroads are leased to other railroads for 999 years. Here the contractual rent actually paid each year varies greatly from what the competitive rate would be if fixed annually. The annual rent agreed upon at the signing of a long-time lease is not likely to be the competitive rent of the then current year, but rather an equalization of the varying rents of the whole period, as forecast by the bidders for the agents. Divergent actual rents for the same grade of agents may therefore exist side by side, according to varieties in customs and contracts.
§ 2. Gross and net rent to the owner. The renting-contract is rarely found in its pure form. Rarely is the borrower, or tenant, required to keep the agent in perfect condition; therefore when the rent is fixed, a certain amount of repairs and some provision for ultimate replacement is allowed for and included. The house-owner usually has to look after the fire insurance, nearly always has to pay the taxes, usually has to reshingle, repaint, and repaper from time to time, has often to employ a janitor, and where there is an elevator, to pay for its operation. Evidently the rent must cover all these items before we can speak of the remainder as a net income to the landlord. A large part of the rent of boats received by some boatmen is used to pay their attendants and the rent of the docks they use; and a considerable part of the rent received for the docks is expended by the owners to replace rotting piles and boards and otherwise to keep up the repairs. The owner nearly always has in mind certain costs of the business which must be deducted from the sum spoken of as rent. This difference between the borrower’s view and the lender’s view must not be overlooked in any specific case. The borrower’s idea of rent is what is generally understood by the term rent in a contract, namely, the amount he pays; the lender’s idea of rent is often the corrected amount, the net-rent which is attributable to the sale of the usance of the particular agent. This sum, since it is the price of the usance, is an absolutely net income. As far as can be foreseen it is an income “in perpetuity,” that is, accruing each year and likely to accrue each year into the indefinite future. But whether a given contract rent is gross or net is immaterial for our present purpose. In either case its amount is determined in the same way that the market price of present direct goods is determined. (See Chapter 7.) It is the resultant of individual valuations which, in a true market, mutually influence each other, and generate a market price. It is the price which brings as near as possible to equilibrium the amount offered and the amount demanded.
§ 3. Different grades of fertility as affecting rent.2 The theory of rent, as usually presented, deals with very simple conditions, which may be illustrated as follows. Assume that there are several fields, all equally accessible to the market, and all requiring the same amount of labor and of materials for their cultivation. With a small population only the most fertile tract A would be tilled and there would be no rent. As soon as it became necessary to cultivate B, a rent of two bushels an acre would begin on A. Just as it became necessary to seek a part of the food supply on D, the rent on the C tract would be two bushels, on B would be four bushels, and on A would be six bushels an acre.
§ 4. Different costs of cultivation as affecting rent. Or changing our hypothesis we may suppose, in accordance with some cases that actually occur, that all the tracts yield practically the same gross product per acre, say 24 bushels, but require different outlays per acre because of hills, rocks, needs of supplying fertilizer, or any other reason. Under these conditions the rents would be the same as in the other case.
§ 5. Differences in location as affecting rent. Still another case is presented when fields are of equal fertility but are at various distances from the market where the product is used and the price is fixed. Let us suppose that the costs of transportation to the market are equal to the costs of cultivation in the preceding examples. This is represented in Figure 26. When it becomes necessary to resort to tract B for products on which the transport-costs would be two bushels per acre, a rent on A would arise equal to the freight charges; and so on as in the preceding examples.3
§ 6. The general doctrine of rent. The principle in each of these three simple cases is reducible to the one proposition, that the rent (in money) of an agent is equal to the excess of the price of its gross products above (money) costs (other than the rental) needed to obtain them and take them to market. This is equally true when the three conditions are combined in varying proportions, the excess being partly due to a larger product, and partly to lower costs either of cultivation or of transportation.
The comparison of quantities of products might be made in terms of bushels, pounds, tons, yards, etc., provided that all of the products were of the same kind and quality. Likewise the comparison of costs might be made accurately in terms of day’s labor provided labor were the only cost and were all of the one kind and value. But these conditions are rarely, if ever, present. To compare the items, therefore, it is necessary to express them all in common terms of monetary prices. A comparison may thus be made between the most varied products, and between costs of most varied kinds and the most varied kinds of agents.
The commercial rent paid by the user of a durative agent of any kind is a gross sum which usually is more (or conceivably may be less) than the price of a true usance, according as repairs and depreciation have been attended to by the borrower (see Chapter 14, section 3). A net or true rent, however, is that which leaves the use bearer in condition to yield an unchanging income (see above, section 2).
§ 7. Dependence of rent on proportionality. It may here be clearly seen that the origin and the existence of rent is dependent on the operation of the law of proportionality. If intensive use of field A met with no resistance there would be no motive ever to cultivate another field. A whole nation could be fed from the single acre of land. But in fact, applying more and more labor and other agents to tract A will not increase the crop of grain proportionally. In applying any fund of complementary agents a point is found where it is better to go over to the cultivation of the tracts B, C, D, successively, each less fertile (case 1), or more difficult to cultivate (case 2), or less accessible and costing more for transportation (case 3), than to go on cultivating tract A with more and more labor or, it may be, at higher and higher money costs. When this is done the return imputable to the additional (marginal) unit of cost on the intensive margin of cultivation in A just equals that of the additional unit on the extensive margin of B, C, D, etc. There comes about a static equilibrium, a best apportionment of agents to the different tracts under the existing circumstances. This best apportionment of complementary agents has, of course, the result of maximizing the net incomes from the various tracts. The better agents are more intensively cultivated than the poorer agents for the reason that in this way labor is most advantageously utilized. This difference in degree of use appears generally in the form of differences in the kinds of products as well as in the amounts, each agent being used for the purpose in which it promises to yield the maximum usance, and, consequently, rental. A may be given to commerce, manufacturing and residences, uses of varying degrees of intensiveness; B, to market-gardening, C, to ordinary farming, D, to grazing, forestry, and other extensive modes of use. And the simple guiding principle in the matter is this: that each thing is put to the use which seems to promise the maximum income. This, of course, is true of labor, buildings, tools and machinery of all kinds, as well as of land.
§ 8. Rent and intensive utilization. The origin and existence of usance-value and hence of rent is essentially due to the limitation of supply of uses in the better grades and not to the existence of poorer grades forming an extensive margin of utilization. If A were the only grade, rent must arise when it is used intensively. If in accordance with the principle of proportionality the successive units of labor (or of all money costs) are applied so that they become less effective, usance-value must arise. If now, B is there waiting to be used, the rent on A would have to equal about 2 bushels per acre before cultivation could go over to B. The effect of the presence of the poorer grade B, is not to cause the rent on A, but merely to check the rise of usance-value through affording a substitute good. And so, in turn successively lower grades of agents become part of the supply as rent rises, and thus they limit its rise. The problem of usance-value and of rent here touches on the border of the problem of the value of the complementary agent, labor, and may better be explained under wages.4 Rent is not an isolated price problem, but it is interrelated with that of the prices of all agents uniting to obtain a product.
§ 9. Divergent valuations of different bidders. In explaining the differences in the rents of agents we have thus far mentioned as affecting the result only the limitation and variation in the physical qualities of the agents themselves, whether it be the fertility of the soil, the height of the waterfall, the mechanical efficiency of the machine, the convenience of location, or anything else. These are solely objective differences, whereas there are many subjective (that is, human, personal) differences that influence the result, causing the individual bidders, either borrowers or lenders, to value a particular usance differently.
It has been shown how the valuations of bidders vary in the purchase of commodities, and it is no less true that the valuations of bidders for usances vary. Many circumstances make both the quantity and the value of the products as well as of the costs anything but a fixed, predetermined, unchangeable amount to the various bidders. A durative agent often has to its owner both a value-in-use and a value-in-exchange, a usance and a price, and the two may be approximately equal or very unequal. The owner of a farm may work it himself, or being old, or indolent, or incompetent, or more suitably occupied, he may prefer to let the farm to a tenant. Where the owner can himself manage the farm he has a reserve-valuation below which he will not let it to any tenant; whereas in the other case he is in the position of an urgent seller (of the usance) to the highest bidder (quality of tenant, security, etc., as well as amount of rent being considered). This does not mean that the rent is necessarily lower when the owner can not use the agent himself. The owner’s reserve-valuation may often be below the bid of others.
§ 10. Example of competing bids. If there are several tenants that would like to get a certain farm, their maximum usance-valuations might be as follows: A, $500; B, $475; C, $450; D, $425; E, $400. At the basis of each bid must be a forecast of the net usance that the bidder anticipates he could make from it; but he may bid less if he thinks that he can thus get the agent. Each bidder would count his own labor at the figure it would bring if elsewhere applied, and would estimate some return on whatever stock he expected to put into the business. Many factors of psychic income, varying with individual tastes, as liking for the neighborhood, conditions favorable to health, nearness to schools, etc., enter into the actual bid. With due allowance for these differences, A, who counts on a net usufruct of 25 more than B does, ought to be the more skilful farmer, but this is merely his expectation, and he may be mistaken. Even in this case, if A can give security or can convince the landlord that the rent will be paid, he may be able to outbid B and get the farm for a rent of $476. Then, if his forecast was correct, he would clear $24 by renting this particular farm; and in addition he gets the opportunity to apply his own labor and earn returns on his productive agents. This situation is represented in Figure 27.
§ 11. Complexity of the situation lying back of each bid. It should be noted that each bidder’s valuation implies a comparison of the agent with other agents more or less nearly equal to this one in its qualities and usance. The opportunity of a place to work, needed by each, would be lacking if there were but one farm to rent. But several farms are in the neighborhood, and the knowledge of their availability is a part of the circumstances influencing the bids, as is also the chance that each man has of moving elsewhere or of hiring out for wages. If in fact there were but one farm and no other possible place to earn a living, the maximum bids would rise greatly, for each bidder would reduce to the uttermost his estimate of the value of his own services to be deducted from the gross product. The interrelation between the amounts attributable to labor and to the farm is such that rent and wages mutually affect each other. In fact, as bids are made in view of an existing situation, rents reach some degree of equilibrium in a neighborhood. Each tenant has a farm and each farm a tenant, rents and tenant’s income being kept from year to year closely in accord with the level of individual valuations (see Chapter 7, sections 7-9).
§ 12. Personal efficiency as affecting the valuation of agents. In general it is true that the most skilful cultivator will make a more liberal allowance for his own services in his bid on every grade of farm, for on every farm his skill, tho in varying degrees, will enable him to get a larger net product than his competitors. Despite this higher valuation of his own services, the most skilful cultivator is likely to be the highest bidder for the best agents. The best agents used for a particular purpose tend to get into the hands of the best managers, for the better the agents to which superior skill is applied, the greater are its results as compared with less skill. Thus in many localities this distribution of ability in accordance with fertility is so marked that it is proverbial: “poor lands, poor men.” But when a man’s ability is of a special kind, either by natural talent or by training, he may be able to succeed well in one industry tho failing in another that calls for no more, but merely different, ability. For example a good general farmer may be a poor florist or market gardener, a good lumberman may be a poor furniture maker.
§ 13. Variability of rents. Rentals of farms, of regular residences and of stores, used from year to year, are comparatively stable. Summer rates for rooms in some college towns where there is a summer school are one-half the regular rates. Rents for unoccupied summer cottages rise quickly if the weather is warm early in the season, for tenants are willing to pay “anything within reason.” Livery charges in many places are higher Sundays than on week days; in college towns are higher both Saturdays and Sundays; and on festal occasions such as “Junior proms” and “Senior weeks,” antique equipages are drawn from hiding to lure incredible sums from the devotees of society. Decoration Day and Fourth of July, if it is pleasant weather, boat hire is likely to be doubled. In these cases the supply at any price can be only slightly increased, for the time, and the demand carries off the whole available stock at abnormally high prices. The rent appears to the regular patrons to be fixed arbitrarily by the seller; but a study of the conditions will show that the rate fixed is approximately the correct market-price for the conditions, one that just carries off the supply and leaves no efficient demand unsatisfied.
[* ]Psychic income may be represented as a narrow band at the base. Some direct uses are constantly being transmuted into psychic income. In turn many of these direct uses result from somewhat indirect uses, these in turn from more indirect uses, and the value of each and all of the whole series of uses rests ultimately on this basis of psychic income.
[1 ]This peculiar case is personal, “contractual” indirectness, resulting from a legal contract between men.
[2 ]See note on Aspects of things chosen, at end of ch. 2.
[3 ]Refer to ch. 3, sec. 1, on Inherent physical nature of things.
[1 ]See, for example, ch. 38, on Abstinence and production.
[1 ]Particularly in Part IV on Time-value and interest.
[* ]If degrees of directness are represented as ranging from a to d (as in Figure 18) then degrees of durativeness may be represented as ranging from 1 to 4 (4 being the consumptive use). These qualities thus are in two dimensions; for example, the use of a marble statue might be called a1, that of a tent a3, that of a match for lighting a blast furnace d4, etc.
[1 ]See ch. 35 for further remarks on the destruction and conservation of farm lands.
[2 ]See below on proportionality, ch. 12.
[3 ]See below on cost, ch. 28, and on time-value, ch. 20, and ch. 21, sec. 2.
[* ]The use a is the highest in the sense that it is the most easily obtained. Like results are to be had by the use of b to g successively only at greater costs; or less valuable results at the same costs.
[* ]The rectangles, M, N, O, P, Q, represent agents of various grades, each consisting of strata of uses. The best uses are a, b, and c, in M; but after M has been utilized intensively down to d, N will begin to be utilized at its highest point. When utilization goes down to f, O comes into use, and so on. Therefore it will be seen that until the intensive margin takes in d, M is on the extreme margin of utilization, and N is just outside it; when the intensive margin falls to g and h, P is inside the extensive margin, and Q is just outside.
[1 ]We are studying here the static problem. In Part VI, chs. 32-39 the dynamic problem is much more fully treated.
[2 ]Of this supposed peculiarity various explanations were given, such as the chemical qualities of the soil, and as the assumed durativeness of agricultural land, etc.
[3 ]Note the significance of the phrase “larger than usual.” Surely the crops may be larger some years than others, and especially large in those years when there is remarkably favorable union of rainfall, temperature, freedom from pests, etc. “Larger than usual” means larger than on the same, or on like, land under circumstances alike except in respect to intensiveness of cultivation.
[1 ]See above on complementary goods, ch. 4, sec. 5.
[2 ]Ignoring here for the moment, labor, yeast, salt, fuel, etc.
[1 ]See on the lack of definite notions of price among fellow-members of tribes in primitive society, selections from Herbert Spencer and from Sir Henry Maine, in the “Source Book in Economics,” pp. 3-14.
[2 ]For a description of the conditions prevailing in England just before the Norman Conquest in 1066 see Cunningham, “The Growth of English Industry and Commerce,” vol. I, p. 10 ff. The conditions, as he says, are “difficult to describe in modern terms, as these connote distinctions which only emerged at a later date.”
[3 ]Cunningham, idem, p. 129.
[4 ]Review in general ch. 11 on Consumption and duration.
[5 ]See especially ch. 11, secs. 7, 8.
[6 ]See ch. 26 on Enterprise.
[7 ]This simple difference in practice created and long fostered an illusion in the minds of economists, that land-rent was an income of a peculiar nature, governed by quite different laws from those that govern the income yielded by the machines, tools, and other agents in manufacturing and commerce. Various curious explanations of this contrast were given, all resting on the notion of some inherent differences in the kinds of goods, rather than in the form of contract. Traces of this notion still appear in the classification of wealth into land and artificial agents (often called capital) and in the assumption that rent and interest must in the very nature of things proceed from different classes of goods.
[1 ]See ch. 8, Competition and monopoly.
[2 ]Everything here said of fields as agents may be said mutatis mutandis of any other class of agents which are of different grades or which are used with different degrees of intensiveness.
[3 ]It need hardly be said that this figure represents a formal regularity of gradations of freight rates not to be found in reality. This is a schematic representation, not an actual photograph. If a navigable stream or a good turnpike, or a railroad, should run from D to M, then a point such as D more distant from the market in miles, would be much nearer, measured by costs, than would a point 2b from which goods must be drawn in wagons over dirt roads. The general principle is valid when expressed in reference to money-costs rather than with reference to actual miles; that the price of the usance conforms to the net price of the product after paying the cost of bringing it to market.
[4 ]This is the same principle explained above under usance-value, ch. 13, sec. 4, Effect of the presence of one agent upon the usancevalue of another. Essentially it is the principle of substitution; see ch. 4, secs. 2-4.
[* ]The various bidders for the usance of a particular agent have different valuations, A to E. The valuation of each bidder is his estimate of the total yield less the other costs of obtaining the products.