Front Page Titles (by Subject) Chapter XXII: The Law of Economic Causation applied to the Products of Concrete Instruments - The Distribution of Wealth: A Theory of Wages, Interest and Profits
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Chapter XXII: The Law of Economic Causation applied to the Products of Concrete Instruments - John Bates Clark, The Distribution of Wealth: A Theory of Wages, Interest and Profits 
The Distribution of Wealth: A Theory of Wages, Interest and Profits (New York: Macmillan, 1908).
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The Law of Economic Causation applied to the Products of Concrete Instruments
As capital always consists in goods, it should be possible to account for the whole earnings of it by tracing the amount that is specifically created by each productive instrument. Studies of capital proper should be confirmed at every point by parallel studies of capital-goods, and they can be. There is a simple way of showing the causal connection between all-capital and all-interest, by showing the detailed connection between each piece of capital-goods and its concrete product, or rent.
In the classical idea of rent there is something which is contrary to popular notions on the subject In practical life, almost any concrete instrument of production may become a rent earner; and the thing that is most frequently spoken of as securing this kind of income is a building. One may, for example, "rent" an office, an apartment, a dwelling, a warehouse, etc. Although the hiring of any one of these involves hiring a certain quantity of land, that quantity is frequently minute and is not prominent in the minds of the parties to the transaction. In popular usage, the term rent also designates the earnings of many things to which no land is attached in the letting: one may, for example, "rent" a ship, a carriage, a horse, a tool, or any other of a hundred concrete things.
This use of terms in popular speech rests in reality on the distinction between capital and capital-goods. Interest is the fraction of itself that permanent capital earns; and the capital in the case, while it is certainly not thought of as a disembodied abstraction, is nevertheless regarded as permanent wealth, the concrete and changing forms of which are left entirely out of sight. Interest is not a fraction of buildings, ships, horses, etc.: it is a fraction of the permanent fund that an endless series of such shifting things embodies.
With rent, on the contrary, it is the concrete forms that come into prominence. Every instrument that helps to constitute the permanent fund of capital earns, during its active existence, a certain definite quantity of wealth, which can be measured in a lump sum. The axe may earn two dollars; the spade, four dollars; the boat, fifty dollars; the building, a hundred thousand dollars, etc. In all this there is no idea of a percentage connected with these earnings. We can, however, reduce that part of the gross product of an instrument which is really a net income to a percentage of the value of the instrument. If we do this, we shall have reduced the rent, with a certain deduction, to the form of interest. If we make a distinction between the gross earnings of the instrument and the net earnings, by deducting from the gross earnings the amount that is necessary to replace the instrument when it is worn cut, the net earnings can be treated as interest on the value of the instrument. If we follow the usage of the market, we shall, then, use the term rent to include the whole gross earnings. Thus, the rent of a house is what the tenant pays for it. But, if the landlord keeps the house in repair and replaces it when it is worn out, merely from what the tenant pays, he must set aside a sinking fund for that purpose; and only what is left will become an available income.46 If we make this calculation in the case of every instrument in use, we shall have the net earnings of all the capital-goods that exist, and we can reduce this amount to the form of interest, by comparing it with the amount of the capital that the goods embody. We can, for this purpose, get the net income of the instruments in dollars, estimate the aggregate value of the instruments in dollars, get the ratio between the two quantities and, stating the ratio in a decimal fraction, have the rate of interest—the percentage of itself that capital earns in a given time. If, on the other hand, we simply make a list of all the instruments that are in use, without reference to their value, and compute the lump sums that they can earn in a given time, we shall have the gross earnings of the instruments in the form of an aggregate rent. This rent, however, includes a sinking fund that offsets the wear which causes deterioration of the whole mass of instruments during this time. In dynamic conditions land usually increases in value, while in a static state it does not. But even in a static state most things deteriorate by use. If we deduct the sinking fund thus made necessary from the gross rent, we have what we may term net rent, or the part of the gross rent that is really income. This is what the owners of the instruments can use with impunity for personal consumption.
Net rent is, then, nothing more than interest regarded from another point of view: it is an aggregate of lump sums, each of which represents the net earnings of some instrument. It is identical in amount with interest, and it becomes interest the moment that we reduce it to a fraction of the value of the instruments that earn it. In a static state, the only difference between net rent and interest lies in the manner of computing them. State how many dollars all capital-goods of every kind earn, above the cost of repairing and replacing them, and you have told what is the net rent of all capital-goods. It is the same as the whole amount of interest, but you translate it into a rate of interest by comparing it with the value of the capital-goods.
We shall regard the product of permanent capital as interest, the gross product of all capital-goods as gross rent, and this same amount, less the cost of replacing the goods, as net rent. Herein we are following practical usage in the choice of terms, and we are expressing a distinction that business men make between rent and rent-producers, on the one hand, and interest and interest-producers, on the other.
Science has proposed a different distinction between rent and interest. It has tried to confine the former term to the product of land,—and that, too, without taking account of changes in the value of land,—defining it as what a tenant pays to his landlord for the use of the "original and indestructible" properties of the soil. This usage probably would never have grown up, if the science of political economy had originated in America, where land has always been a commercial article, and where the man who buys a piece of it reckons whether he can get as good interest on his investment in that form as he can in any other. It is, then, obviously very important to know whether the usage that is prevalent in ordinary life is not, after all, really more accurate, and hence more scientific.
The two distinctions that are usually cited as differentiating land and other instruments are: (1) The quantity of land is absolutely fixed, while instruments may be multiplied; and (2) the earnings of land consist in differential quantities, obtained by comparing the yield of good land with that of poor. "The rent of a piece of land," says the definition, in effect, "is what it produces, minus the product of the poorest land in use that is tilled or otherwise utilized by the application of the same amount of labor and capital." The rigidly fixed amount of land, then, on the one hand, and the differential way of reckoning the product of it, on the other, are the facts on which science has based its practice of treating this agent as unlike capital and as distinct from it as an economic agent.
Let us see how much, in a static study, these distinctions amount to. That capital, in the aggregate, should be fixed in amount, is one of the conditions of the static state. This assumption, moreover, expresses what is true at any one moment in a dynamic state. The gross amount of capital in the world cannot be instantly changed, and the rate of interest at this moment is based on the gross amount existing at this moment. If dynamic changes were not to occur, the present amount would be the permanent one, and all capital could be treated, like land, as a fixed quantity. The idea that land is fixed in amount, and that capital can be increased at will and to any extent, is really based on an error which one encounters in economic discussions with wearisome frequency. It is true, indeed, that if one particular kind of instrument is highly productive, we can multiply the number of such things at will; and we shall, in fact, multiply it till we reduce the earnings of these goods. We thus bring the returns of the capital that is invested in them down to the rate that corresponds to the general earnings of social capital. The value of the instrument appears to be fixed by its cost, while the number of instruments of this kind is varied according to the earnings. A piece of land, on the other hand, earns an amount that the Ricardian formula measures; and the value of the land is the capitalization of the earnings. Land, of course, has no cost value, since it is furnished by nature. In this view, it looks as if, in the case of land, quantity were fixed, earnings fixed and value conformed to earnings. It looks as though, in the case of capital-goods, quantity were variable, value were variable and earnings were brought into a relation to the value by a change of quantity.
Let us look again and more carefully. What we are really comparing is land in general and capital in one particular form. In the terms of our table, we are noting the quantity of all land, as an all-around agent of social production, and that of the capital employed in a particular sub-group. In one case we are taking a social view, and in the other a local view. This is a method that has been adopted in many other connections—and never without confusion.
Let us, then, rather compare all land with all other capital-goods: let us take all society into the field of view. In every group and sub-group there is land, and in every one there is capital in the form of artificial instruments. Neither the one agent nor the other can be increased in the aggregate at will. At any one time, the amount of artificial capital in existence is as fixed as is the amount of land. Within any short time it is impossible to increase the general fund of artificial capital enough to make a perceptible difference in the conditions of social industry. At any one time we have to deal with a definite quantity of land, in combination with a definite amount of capital in artificial forms. Moreover, the distinction between land and other capital-goods, based on the notion that land cannot be increased and that other things can be, has obviously no validity in a static study; for the static assumption itself precludes all increase of capital.
Let us see where, if ever, the distinction holds good: let us take a limited view, confining ourselves to a particular sub-group. Is it true, even here, that land cannot be increased, and that capital in other forms can be? The distinction has as little application here as it has in the general view. We can, of course, move more land into this sub-group by taking it out of others. Land is, in the economic sense, mobile; since we can cease to use land for one kind of product and devote it to another. In exactly the same way, we can increase the amount of capital in artificial forms—we can take capital out of one industry and put it into another. In the particular sub-group on which we are concentrating attention, we can have more tools and machines, if we want them. If we are looking at the shoe manufacturing business, we can have as many stitching machines, pegging machines, etc., as we wish; but we can have them quickly only by diverting capital from other forms of investment. In a static condition of society, however, we never shall do this, for an economic influence prevents it.
Is there a limit on the amount of land that, consistently with economic laws, we can use in this industry, and no limit on the capital that we can thus consistently puat there? Is there an economic consideration that virtually says: "For the best results you must have exactly so much land in this business, while the amount of capital that you may have is an uncertain and variable amount? On the contrary, the quantity of land is fixed in exactly the same way as is the quantity of capital in other shapes. Land is mobile; artificial capital is mobile; and the law of variation that we have described in an earlier chapter determines exactly how much land there shall be in each sub-group, and exactly how much capital in other forms there shall be.47 Put in too much land, and the product of the land, estimated in goods, is reduced, the value of the gods is reduced, and these two influences act concurrently to make you take out the excess. Put in too much capital in other forms, and the same thing happens. The unit of capital then produces too few goods, and goods of too small value. Hence the excess vanishes.
The result of the action of this law is that there is, in every sub-group, a normal amount of land and also a normal amount of capital in other forms. If you change either amount, you change it for the worse; for, when you apportion either your land or your other capital badly, you get a smaller income. One peculiarity of land is here to be noticed, in connection with the fact that artificial capital has no special adaptation to any particular industry. It changes its outward forms freely, as it goes out of one industry and into another. There is nothing about its form that ties it permanently to one occupation. Some forms of capital, indeed, are very durable; and when capital is invested in them, it cannot easily be taken out. Not all the capital can be withdrawn from such an investment without a great deal of delay, for it is there to stay till the instrument wears out. In general, however, there are enough kinds of capital-goods in every industry that are quickly perishable, requiring frequent renewal, to make it possible to change the form of the capital quickly and without much waste.
Land, on the other hand, has to be moved bodily, when it is moved at all. It is possible to change the form of improvements connected with it, though doing this too quickly involves a waste; but the land itself has to be transferred from group to group as it is. We cannot wait for one kind of land to perish and for a different kind of land to take its place. The process by which we can move capital without waste, if we take time enough to do it, is not available in the case of the indestructible elements in the soil. When we move land from sub-group to sub-group, we take it, with all its qualities as they are, from one to the other. Land has, moreover, its special adaptations, and it never develops its full productive power unless those adaptations are respected. Land that is good for grazing or for forestry is not equally good for wheat cultivation, land that is good for market gardening is not equally good for building sites, and land that is good for building sites for one purpose is not equally good for building sites for another purpose.
This fact makes it necessary to modify the law that apportions land among the different sub-groups. That land which has a special adaptation for one use may be devoted definitely to that use, with no moral possibility of taking it out of it. If it is necessary to reduce the quantity of land thus employed, that which should be taken out of this department of business is land that is less preëminently adapted to it. There is, for example, some land so well adapted for grazing and so ill adapted for tillage that taking it out of the former use and putting it into the latter would be a pure waste. On the other hand, there is a great deal of marginal land that is adapted to either use. In making the adjustment of quantity between the two industries, we respect the peculiarities of the land that has marked adaptations and move only that which can be used indifferently for either purpose. Some land, too, is so supremely well adapted to be used in building sites for mercantile structures that we can never think of using it for anything else. There is, however, marginal land that is as well adapted for mercantile uses as it is for residence uses; and when we reduce the amount of land that is devoted to the one purpose and increase the amount devoted to another, we do it by transferring some of this indifferent land.
We shall see, when we get our ultimate measure of value, that there is such a thing as a unit of true capital in the form of land.48 For economic purposes, land is to be measured, not by the acre or by the square foot, but by units of productive efficiency. Thus, there may be much capital concentrated in a small piece of land in the heart of New York City, while there may be very little of it in a whole township in the Rocky Mountains. But the law that apportions land among different sub-groups so locates it that every unit of it—that is, every unit of the capital that it embodies—goes where it will do the most good. Land that is supremely well adapted to one use and ill adapted to another represents many units of capital in the one use and few in the other. Suppose, now, that it were necessary to take some land out of the former of these employments and to put it into the latter. Should we think of taking land that, in its present employment, represents ten units of capital and put it where it will represent only one no unit? That would be suicidal. We shall, in fact, transfer some of the land which represents one unit of capital where it is and will represent the same amount in the place where we are to put it. That is, we shall try to move land from sub-group to sub-group without rudely destroying the productive power that depends on its adaptations. Land that is worth more per foot or per acre where it is than it can ever be worth in any other sub-group, will stay where it is. Land that can be moved without any such waste as we have described will be moved freely, till an adjustment is reached which gives two results: (1) Land, as a whole, will be so placed as to develop its maximum productive power—which is equivalent to saying that it will embody the largest number of units of capital that it is capable of embodying. (2) All units of capital in land will, of course, be uniformly productive.
With this reservation about the kinds of land that will be chosen, to be taken out of one use and put into another, the principle that locates land among the different sub-groups is identical with the principle that locates capital in other forms among them. Capital, in all forms, is brought to a uniformity of productive power per unit: capital, as a whole, is brought to its highest efficiency. Mislocating capital of any kind is reducing the total efficiency of the fund. Locating capital of all kinds according to the law of apportionment that we have outlined gives to the whole of it the largest possible power to produce. In a static hypothesis, we assume that this adjustment is made and kept—that the quantity of land and of other capital in each sub-group is fixed.
We now have to see that the earning power of land and that of the other forms of capital are determined in exactly the same way. Here we take issue with the second claim of the classical economist concerning land—namely, that its earnings consist only of surpluses, or differential quantities, while the earnings of capital are determined otherwise. We shall find that two things are true: (1) The earnings of every kind of capital-goods can be brought into the form of surpluses, or differential quantities; and land is not unique in this particular. (2) The returns that capital of any kind can secure for its owner are determined directly and not residually. The positive power of each bit of land to create wealth fixes the rent of it, just as the positive power of each unit of capital to create wealth fixes the interest on it. The entrepreneur who hires land does not make over the rent to the landlord because, after paying other claims, he has a certain remainder in his possession. That fact would never compel him to part with the remainder. He pays over this remainder, indeed; but he does it because each bit of land has a positive power to produce, and the landlord can make the tenant pay the value of the specific product of it. If this particular sub entrepreneur will not pay for a piece of land what it produces, another will. Competition forces the user of any productive agent to give to the owner of it the amount that it brings into existence. What it earns for its owner is determined directly, not residually.
There are in use lands of every grade, and there are in use artificial instruments of every grade. The lowest grade of every instrument produces nothing, and is a no-rent article. Higher grades of every instrument, land included, produce something; and, if there is any advantage in calculating the amount of that something by saying that it is a product of the good instrument minus the product of the poorest one, that calculation will always yield a correct result, since the product of the poorest one is nothing.
This method of calculation reduces the rent of everything to a differential quantity; but whether there is any significance in the fact that it is such a differential quantity or not, depends on how the margin of utilization is located. What is it that fixes the grade of the poorest instrument in use, and determines that all poorer ones shall be neglected or abandoned? We shall see that there is a single principle which locates this margin everywhere—which determines how poor a grade of land it will pay to cultivate, how poor instruments it will pay to use and how poor a quality of laborers it will be profitable to employ. The product of any productive agent is, in fact, just what it can add to the marginal product of capital and labor. If the groups are in a normal condition, these marginal earnings are uniform in all of them and are the standards of social wages and interest. The product of any specific agent is what it can add to the product of the labor and the capital that work with it, when these products are thus computed on a marginal basis.
For measuring a unit of labor we need a standard, and we shall soon get it. Provisionally we may use, as a unit, a day's labor of a man of average quality. The term "average quality," it may be admitted, requires and will soon receive definition. Capital, also, has to be measured in units; and we may provisionally take, as a unit, whatever improvement can be made in the working equipment of any group by a certain number of days' labor of the standard or average kind. Additional labor put into the shops that make instruments of production will have the effect of turning out either more tools or better ones. In one case, they make a quantitative addition to the capital-goods; in the other case, they make a qualitative addition; but in any case they make an addition, and we now need to recognize the fact that this increase of productive wealth, which is due solely to the labor of a certain number of men working for a given time, can be treated as a unit of capital.
From the studies that we have already made, we know that such units of labor and such units of capital create definite amounts of produce. The product of a marginal unit is obviously a definable thing; for if labor, in any combination in which it finds itself, produces less than the marginal amount, it will get out of the combination. Also, if a unit of capital anywhere produces less than its marginal product, it will disentangle itself from the combination that has handicapped it, and will bestow itself at a point where it will be marginal capital and will get its normal return.
Now we are ready to locate the margin of utilization, not alone of land, but of all other instruments. There is land so poor that it adds nothing to the marginal product of the labor and the capital that are combined with it. If it were one grade poorer, it would yield less than this amount, and the labor and the capital would withdraw from it and would seek to locate themselves elsewhere on the margin of employment, where they could make normal earnings. This land is the poorest that can be used, without in some degree wasting the other agents. A better grade of land, however, adds something to the marginal product of labor and capital used in connection with it; and this addition is the true product of this land—the rent of the land. It is the gross product of the lend, minus the wages and the interest of the labor and the capital that work on it.
It seems, then, that wages and interest, rather than the product of the poorest land in use, tilled with a certain amount of labor and capital, constitute the standard by which the product of land is to be measured. The fact is that wages and interest locate the margin. They determine how poor a grade of land it will pay to utilize. We follow the gradations of land downward till we get a piece that adds nothing to the marginal product of labor and capital, which is the same as saying that a piece produces nothing more than wages and interest. There we stop. We thus extend the margin of utilization of land just to the point at which wages and interest are afforded. The term "gross product of marginal land, tilled with a certain amount of labor and capital" is a cumbersome expression for "the wages and the interest of that amount of labor and capital."49
The rent of anything else is, in like manner, its true product. It is what society would not have without it. If the labor and the auxiliary capital that are used on an antiquated ship, a worn-out machine or an old building can be just as well used elsewhere, by becoming marginal labor and capital, society gains nothing by using these things; and their product—that is, their rent—is nil. These instruments have lost their combining power, or their capacity to enter into a combination with labor and capital in a way that adds something to the independent product of these agents.
It is clear that we can always measure the rent of a good instrument of any kind, by comparing the product of it with that of an instrument that is at the point of abandonment. The rent is always the net product, minus nothing; and the poorest instrument is the one that produces nothing. There is, however, no value in this periphrase; and there is some danger in using it. It is simpler to say: The rent of any instrument is its net product. This, the only product that is imputable to it, is what it can add to the marginal product of the agents used in connection with it. This formula removes the danger that comes from supposing that the extension of the margin of utilization is the cause of an increase of rent. The truth is, that it is the increase of rent which extends the margin.
In pure theory one might even measure wages in the concrete way in which we are measuring the product of instruments; for he might apply the rent formula to men of different personal qualities. There are to be found workers with so little power to create wealth that it does not pay to intrust any capital to their hands. Rather than give to them a bit of land, with the tools and seeds needed for cultivation, it would be expedient to add the land to the holdings of some efficient producer, who already has an adequate amount of it. There the piece would be a marginal increment of land, adding itself to the other productive agents in the entrepreneur's hands, and it would make a net addition to his output of produce. This net addition would be the product normally imputable to the land. It would be a larger product than the land could create in the hands of the inefficient worker. Auxiliary capital, too, cannot profitably be left in inefficient hands. It is better to withdraw it and make marginal capital of it elsewhere. This application would afford the four types of rent to which attention was called in the thirteenth chapter.50 We applied the principle which is familiar in connection with land first to capital in its entirety and then to the social force of labor in its entirety; and we thus obtained a general law of interest and wages. We then applied this principle concretely to particular capital-goods, and in a like way we may apply it to particular men.
There are, in fact, few no-rent men in actual employment; and the reason for this is clear, since work involves a sacrifice, and it does not pay to incur the sacrifice unless the earnings be a positive quantity. In those times and places in which child labor has been employed, with little regard for the welfare of the victims, labor that was not at the no-rent point, but very near it, has been pressed into service. But, where the sacrifice entailed by labor is, in some way, neutralized by a benefit that work confers, labor which creates literally nothing may sometimes be employed. Lunatics or prisoners may be kept at work, in order that they may secure fresh air and exercise, even though the amount of capital that they use, if it were withdrawn from their hands and turned into marginal capital, would produce as much as it does when it is used by them. In such a case the product imputable to their labor is nil.
The existence of any no-rent labor enables us to make the rent formula general and to apply it to every concrete agent of production. Men, land and capital-goods of other kinds produce something that can be measured by this formula. The product of any one of them is the difference between what is created by the aid of it and what the same coöperating agents that are now combined with it could produce, if they were relegated to the position of marginal agents of their several kinds. This is one way of saying that the product of any agent is what it creates as a net income; and we can deduct the product created by the poorest agent of the kind,—which is nothing,—if we wish to do so. The product of any agent is, in short, what it contributes to the total output of industry; and the reduction of such a product to a differential sum is useless, since finding what any agent adds to the marginal product of other agents combined with it is all that is necessary.
The location of the several margins of utilization is effected by one comprehensive law. Entrepreneurs stop using anything, when they find that it adds nothing to the marginal product of other agents. Independently of all considerations of humanity, they would, from mere self-interest, stop employing the labor of a child or of a disabled person, if his work added nothing to the interest of the capital that they would have to put into his hands. They would likewise throw any instrument out of use, when it lost its combining power—its capacity to add to the independent product imputable to laborers and to other instruments combined with it. The margins of utilization of men, of tools, of land, etc., are all fixed in the same way; and they all advance and recede according to one universal law. While this advance and this recession are subjects of study under economic dynamics, we may note now the universality of the law that locates them at any one time. All depends on the quantities of the several agents that are brought together. If capital of all kinds, including land, were very abundant, it would be possible to employ very poor grades of labor. The abundant capital would mean a high rate of wages; and this might render unnecessary the work of children, invalids, cripples and aged persons. Abundant capital would, however, lead to the employment of such able-bodied persons as might formerly have been excluded from employment, because they were below the grade of intelligence or skill that, under the former conditions, was requisite. For such workers, increasing abundance of capital would extend the margin of employment.
Again, an abundance of labor would, so far as it went, insure the employment of poor lands, poor tools, poor buildings, etc. In practice, this would mean that perishable instruments would have a long lifetime. We should repair the old ship and sail it a year or two longer than we should if labor were scarcer; and we should likewise prolong the use of the worn tool, the rickety machine, etc. In a static state, there is in use a constant quantity of perishable tools of every kind. If a machine steadily deteriorates from the time it is made, and if we make one every year and use it for six years, we have six such machines in constant use. But if we use each one for seven years, we have seven in constant use. Much labor calls for a great number of instruments, and one way to get them is to use each one for a longer time. when the world is crowded with people, the margin of utilization of all capital goods is pressed far outward—just as, in familiar theories, is the margin of cultivation of land.
Nothing is really labor, in the economic sense, that consists in the effort of laborers who are below the marginal grade; and nothing is really capital that consists in instruments of any kind—land, tools, buildings, etc.—that are at or beyond the point of abandonment. True labor is always productive, though there may be unproductive effort. In the same way, true capital is always productive, though there are land and tools that are too poor to create anything. In the case of laborers, therefore, the marginal line separates persons who represent true labor from persons who do not; and in the case of instruments, the marginal line separates those that embody true capital from those that do not.
[46.]Where a building stands on land that is increasing in value, a crude kind of book-keeping treats the increased value of the land as an offset for the diminished value of the building, and therefore reserves no sinking fund from the earnings of the building for the replacement of the structure when it shall be worn out. The whole rent that the tenant pays is, in that case, not very inaccurately regarded as the rent of land and building.
[47.]See pp. 297-299. [Chapter 19, par. XIX.35-XIX.37—Ed.]
[48.]See Ch. XXIV.
[49.]This is not the only objection to using the old expression. A more serious objection lies in the possible implication that, if we were to extend the margin, we should necessarily increase rent, and should do it by virtue of the extension. A forced or blundering retention of the margin, however, would not add to rent. The location of the margin is not the cause of rent. The power of land to add something to wages and interest is that cause, and wages and interest are the true subtrahend to be used in determining rent.
[50.]See note on page 192.