Earned and Unearned Incomes, Inequality and Taxation
Harry Gunnison Brown
[1921]
Whence shall come the new
barbarians? Go through the squalid quarters of great cities and
you may see, even now, their gathering hordes. --
It is the delusion that precedes destruction which sees in the
popular unrest with which the civilized world is now feverishly
pulsing, only the passing effect of ephemeral causes. Between
democratic institutions and the aristocratic adjustments of
society there is an irreconcilable conflict. Here in America, as
there in Europe, it can be seen arising.
HENRY GEORGE
In Progress and Poverty (1879).
|
It is, then, for some one to
construct an economic science adapted not only to the
requirements of the facts but to the need of their amelioration.
To this end Economics must cease to be a system of apologetics,
the creed of the reactionary, a defense of privilege, a social
soothing sirup, a smug pronouncement of the righteousness of
whatever is-with the still more disastrous corollary of the
unrighteousness of whatever is not. . . .
When, in short, we have changed our calling from the painting
of Utopias and the capitalizing of dreams, and have, as
scientists, brought ourselves somehow into touch with fact, the
prosperous may no longer deride us or the disinherited curse.
There will need be no laughing then anywhere, and if there be
cursing, it will have changed its source.
H. J. DAVENPORT OF CORNELL UNIVERSITY
In The Economics of Enterprise.
|
INCOMES EARNED AND UNEARNED INCOMES, INEQUALITY AND TAXATION
The Conflict of Class Interests
The task confronting us through these essays is to discover whether
taxation can advantageously be used as a chief tool in the attainment
and perpetuation of economic democracy, and, if so, what system of
taxation is best for the end in view. Such an inquiry as is here
proposed, may well involve, as a first step, a consideration of the
nature of the economic system in and through which the people of the
modern world carry on their struggle for the means of existence. For
unless we suppose this system to be the best possible, it ought
clearly to be either modified in greater or less degree or superseded.
And whether the former or the latter change can be most effectively
brought about or can be brought about at all, by taxation, as well as
whether either sort of change ought to be brought about by any method,
can hardly be intelligently decided without an understanding of the
fundamental nature of the system of which the modification or
supersession is contemplated.
It is the failure clearly to comprehend the nature of the faults of
the existing economic system which has, in large part, made protest
and even revolt ordinarily so futile in really improving the
conditions of life for the common man to the extent that might else be
possible. Protestant or revolutionary groups have to meet, always, the
more or less solid opposition of the groups whose interests are
threatened by change and who know well how to protect these interests.
Individual members of the conservative groups may be liberal-minded
enough to favor reforms of a palliative sort, especially as many of
these reforms seem likely to cost them nothing. But few members of the
conservative, property-owning class seem able to contemplate without a
sense of shock or a feeling of indignation any proposal seriously to
disturb in its fundamentals that order or system of things (the
existing system of private property) in the meshes of which they have
been bred and to which they seem mainly to owe their material
well-being. To the support of that system in general, they will
usually rally. We need not suppose that they understand it in the
sense of being able to contemplate philosophically its faults and its
virtues. But they are not devoid of an understanding of how it works
to maintain them and of how to make the most, in argument, of certain
of its apparent advantages. Reputable economists in plenty are at hand
to support them and to make plausible by manifold arguments of
ingenious intricacy the claim that the present scheme of things is
good for the masses and that, anyway, the views of those who attack it
are associated with this or that "now generally discredited"
doctrine and so "fall to the ground" and "need not be
further considered." Young economists not infrequently get the
impression from their teachers that certain views are commonly
rejected by reputable members of the craft, and deem it not worth
while to investigate them. Subconsciously they come to feel that these
views would be likely to put them "outside the pale." For it
is not alone through inducing the fear of loss of teaching positions
(although this is a sufficiently common means) that the defenders of
the existing regime control the teaching of economic principles and
problems.
A task more difficult than that of the defenders of the present
system confronts those iconoclastic dissentients who must, to be
successful, get another system put in its place. These dissentients
have to rally the elements of discontent, of which, presumably, they
are a part, to the support of a more or less definite program. But
these elements of discontent are in large part composed of the
relatively untrained masses; hence they are even less likely than the
sufficiently ignorant propertied classes to understand the inner
nature of those arrangements which most of the propertied classes
defend and which it appears to be the interest of the masses to
attack; and they can not be expected to have a very intelligent
comprehension of the kinds of change needed or of the type of system
which may best be substituted for the one we have. The protesting
masses are likely to be attracted by something which sounds radical,
which appears to uproot the whole present scheme of things but which,
in fact, can not be made to work successfully in the existing state of
human nature. They are too likely to be the prey of the demagogue or
the fanatic. With a sense of having been unjustly ground down by an
economic system which has made others prosperous, they are likely to
favor absolute equality of incomes, regardless of differences in
efficiency, or to follow a Marxian philosophy and wish to terminate
all incomes from property just because these are not labor incomes. If
the propertyless masses succeed in acquiring temporary control through
revolution, they are likely to blunder from one radical step to
another without adequate regard to those elements of human nature
which make some things workable and others not, until the general
turmoil and poverty and disorganization discredit them far enough to
put their deposed masters back into the economic saddle.
Again, oftentimes a group of the propertied classes is enabled to use
the ignorance and discontent of the propertyless as a means of further
lining their own pockets even at the expense, partially, of the rest
of the propertied classes, as well as at the expense of the masses.
Thus, the tariff protected interests of a country, through their
organizations and organs, make it appear to millions of workingmen
that free traders are aristocratic enemies who would take the bread
from their mouths to benefit foreigners and that a high tariff system
is a necessary means of providing workingmen with jobs. Or those
property owners who are in debt and who can gain at the expense of
other property owners (their creditors) by a depreciation of the
monetary standard, may sometimes succeed in rallying to their support
millions of wage earners to whom such depreciation may mean, chiefly,
increased cost of living with no immediate corresponding rise of
wages.
It is not only the propertyless masses who can be thus put into a
false position. Class prejudice sometimes makes groups of the
propertied classes, whose interests, in a specific reform, are the
same as the interests of the masses, nevertheless oppose such a
reform. And so, in the case of a protest against various abuses in the
system of property, which, if effective, would limit mainly the
incomes of the wealthy few, these few are able to lure to their
support thousands of small property owners who might even stand to
gain by the proposed change, but whose prejudices are those of the
larger owners of property and who are easily roused to a belligerent
spirit by anything which can be made to appear to them as a threat
against a system of things which they have learned to regard as
sacred.
Hence, many of the great mass movements which seem to be democratic
movements, lose themselves in fallacies and confusions and never even
temporarily gain their objectives or, if their objectives are gained,
temporarily, become soon discredited and fall back out of the rays of
power and into obscurity. Real democracy is, therefore, to the
aspiring masses, as is the mirage to the worn traveller in the desert
- a hope, whose realization appears perpetually to recede. Real
democracy, in the circumstances of class interest and class prejudice,
must wait upon some development of intelligent understanding of the
economic system we now have and of the economic forces at work in that
system, on the part of those who are its victims. For, so long as the
victims of the existing economic system do not understand the faults
of the system against which they protest, well enough, specifically
enough, and discriminatingly enough to make workable reforms, so long
as they are intellectually incapable of doing aught but lumping
together for elimination unlike types of incomes, and so long as their
revolts are likely to be guided by a short-sighted selfishness, to be
directed by demagogues, fanatics and fools, and to result in a
turbulence and economic breakdown which brings poverty even to
themselves and discredit to their movement, worth-while reform is
hardly to be expected or hoped for. Aristocratic economic relations
must probably continue, even if they coexist incongruously with
democratic political institutions. Indeed, the exploited masses are
ordinarily in large part the dupes of the privileged interests as Well
as of their own ignorance, and support, through their own prejudices
and their own votes, those very economic policies by which they are
laid under tribute.
The Price System and the Specialization of Producers[1]
We have now to analyze the existing economic system so as to see by
what processes it works and to what effect. This system is sometimes
called the price system (a term which would doubtless continue to fit
even if considerable changes were made in economic arrangements)
presumably because within its sway almost everything is the subject of
purchase and sale at a price. Not only food, clothing, furniture,
etc., and buildings and lands, but labor services, the use of land,
the use for fixed or indeterminate periods of sums of capital, are
commonly bought and sold. Prices are the inducements by which men are
persuaded to dispose of goods, to lend, and to produce goods for
disposal. Money is an intermediary in the exchange of any kind of
goods for any other kind. We produce and sell one or some things in
order that we may buy other things.
The price system, whether as we know it or as some variant of its
present form, is a system which leaves those within it largely free to
engage in such occupations and produce such goods as they choose. They
may, indeed, be often subject to the compulsion of circumstances but
they are not subject to any other compulsion. Coercive systems of
industry are not unknown to historians and to dreamers of Utopias.
Slavery was, and is, coercive. Feudalism, with its accompanying
serfdom, was coercive to the serf. The caste system of India is
coercive. And any variety of socialism which, in the desire of its
apostles to avoid the alleged evils of competition, should place men
in their jobs, would be coercive. Social reformers must, in fact, make
their choice between some form of voluntary selection of occupations,
which inevitably means competition for the apparently preferable
places, or coercion. There is no other possibility.
It is not difficult to see that a voluntary system must be in some
degree a competitive system. If, in a system which allows choice of
occupations, one line of industry pays better, all things considered,
than another line, those persons engaged in the second line are at
liberty to enter the first. But to enter it and sell their product
they have to bid down its price, i. e., compete. They then become
buyers of what they previously produced and to get this they may have
to bid up its price. Even a socialistic government which should direct
all industry must either coerce its subjects into their respective
lines of work or must so apportion the rewards in different lines of
production as to make voluntary choice yield the desired proportions
of various kinds of goods. In other words, the relative amounts of
potential competitive offering of services in different lines of
production, must be taken account of. Otherwise the system would break
down.
Whether such a scientific proportioning of rewards as would be
necessary for the successful working of the scheme of individual
choice of occupations, would in fact probably be adopted by a
democratically governed socialist state, or whether groups of the
citizens of such a state would inevitably drift into bargaining and
logrolling, directly or through their representatives, for unfairly
large returns at each others' expense, or whether socialists could
avoid a compulsory centralized direction of industry, we need not
inquire. Our present interest lies primarily in understanding the
nature of the existing system. In this system men engage in producing
those goods which they severally think it pays them best to produce,
in order to exchange them, through the intermediation of money or bank
checks, for goods which others produce; and if what men get for their
production seems too little and what they pay for the goods of their
desire seems too much, they have the option of becoming producers of
the latter goods of which they have been purchasers, thus tending, by
their competition, to rearrange the relative prices of these various
goods.
The fact that voluntary choice of industry tends thus towards
rearrangement of relative prices has led to the statement that
competition so affects prices of goods as to make the returns to the
persons in any one industry substantially equal to the returns to the
persons in any other industry. Such an assertion is true only in an
extremely general and indefinite sense. To illustrate the necessary
qualifications, let us suppose that A is producing wheat as the best
way of getting a living. He might instead produce beets and would do
so if that would pay him better. But in view of his individual likes
and abilities and the qualities and situation of his land, he can
make, perhaps, very much more at the business of wheat raising than he
could at raising beets. He may even, if efficient enough, be able to
make more money raising wheat than anybody else can make producing
beets. Nevertheless there are probably some persons whose abilities or
the characteristics of whose land, or both, are such as, at the
existing ratio of the price of wheat to the price of beets, would make
it more profitable for them to produce beets, and still others who
would find it about equally profitable to produce either. These last
would shift easily from wheat production to the production of beets or
vice versa, according as the first or the second kind of produce rose
in price in relation to the other. Those engaged in wheat production
will not necessarily receive returns exactly equal to those received
in beet production. They may receive either more or less according to
the circumstances. Thus, if wheat is much more desired than beets by
the community in general, the price of wheat will be high enough to
bring into wheat production thousands of persons (and their land or
the land they hire) who at a lower price of wheat would have chosen to
produce beets. Yet there will still be some who, because of their
special aptitudes and their preferences as to kinds of labor or
because of the qualities of their land, will continue to produce
beets. Their returns will be less than before. The returns of wheat
raisers will be greater. But the new condition, like the old, will be
one of equilibrium.
Similarly, an increased use of shoes and a diminished desire for hats
would, at least for a time, increase the remuneration of shoemakers
and decrease that of hat makers. If the only barrier to change of
occupation is the difficulty of learning a new trade, wages in the
trade for which there is now a greater demand need not indefinitely
remain much higher than in the other trade in order to keep more
workers in the former. But if the new work is permanently distasteful
to many of those drawn into it in order to satisfy the demand, then
the wages paid in it may have to be permanently higher, even if the
work involved is to a large number of those engaged in it, the most
agreeable work they can find. The persons who would have been in this
work, even at the old relation of prices, are therefore fortunate.
They enjoy surplus wages or profits above what would have been
necessary to induce them to go into the work. They may, and probably
will, enjoy larger average incomes than the persons who remain in the
other line. And yet there is a sense in which it can be said that
incomes in their line are not higher than in the other, viz., that
there are still, in the other line, persons who find it, all things
considered, preferable.
Such inequality-if inequality it should be called-as results from the
conditions above discussed, is an inevitable concomitant of voluntary
choice of industries. To make incomes equal, under such circumstances,
or to reduce the incomes of those in the favored line to what we might
consider the average level in the other line, it would be necessary to
make occupations coercive. Whether or not we can put greater burdens
on those who get the larger incomes than on those who, in either line,
receive smaller incomes, is a different matter, which we need not now
discuss. It suffices, for the present, to point out that public policy
can not advantageously be discriminatory as between industries, unless
the industry discriminated against is an undesirable one, e.g., the
manufacture and sale of harmful drugs, or unless it is, or partakes
somewhat of the nature of, monopoly.
There are, however, cases of difference between occupational incomes
which ought, in the opinion of many, to be in some way corrected.
These are cases from which the element of monopoly seems not to be
wholly absent. Thus, there may be many persons in a given line of
production, not because the pay is good and not because the work is
pleasant but solely because those who are in this line are
disqualified by lack of ability or lack of training for engaging in
other lines where competition is less intense. The prices of the
material goods or the services they turn out will be relatively low
because these goods or services are relatively plentiful, yet the
labor involved may be difficult and unpleasant. So far as the
explanation for the small per capita remuneration received, is to be
found in the lack, by many or most of the people concerned, of the
innate ability necessary for the performance of other, better rewarded
tasks, the difficulty lies in there being a relative surplus of people
who lack relatively desirable (in view of contemporary human needs and
tastes) physical or mental characteristics. The biologist interested
in eugenics would be likely to fear that partly to support such a
class from the surplus earnings of citizens whose characteristics were
better adapted to the satisfaction of the more important or of
relatively inadequately satisfied human wants, might involve counter
selection, an undue multiplication of the unfit. There may be, indeed,
too much counter selection as it is. If so, that is an added reason
for not adopting a social policy calculated to increase it.
But human beings are probably not, innately, so different in ability
that most of the present inequality can be thus accounted for. There
are doubtless very many persons whose natural aptitudes would enable
them to undertake better paying work than they are at present engaged
in, if only they had the requisite training. Sometimes early
disinclination to study and sometimes the cost of education have been
the obstacles that have kept them from rising out of the ranks of
common labor. If, indeed, learning can be secured only by the children
whose parents have large incomes and if large labor incomes can only
be secured by those who are able to get considerable training, we have
a vicious circle of cause and effect. Perhaps this is one of the
reasons- though the need for intelligent citizenship and leadership in
a democracy is surely another-why it is generally assumed in
progressive democratic countries that a system of public education
should keep educational opportunity at least within the possible reach
of nearly all. Nevertheless, there are probably limits to the burden
which the public ought to be required to assume, even for the spread
of education. For one, and a most important, explanation of unequal
wages is unequal birth rates. If wage receivers who are unable to earn
much because those in their lines are too many, and because the goods
or services produced in these lines are therefore too plentiful, were
to limit their families, each, to the number they could comfortably
support, their excess of numbers, even if few among them worked up
into a "higher" economic class, would, in a few generations,
cease to be a cause of low remuneration. Higher wages in such a group
would result from smaller numbers in it. And higher wages, together
with smaller families, would enable the members of the group
individually and even without public assistance, to give their
children better training. But if the masses of people will not
practice birth limitation, while certain groups do practice it in
order that their fewer children may be better reared and trained, then
there is grave doubt whether the latter class ought to be heavily
taxed in order that the children of the former may have equal
opportunities. Continuous increase of population, since natural
resources are limited, tends towards diminished per capita production.
Hence a policy of providing for the training of the children of those
who multiply rapidly, by drafting the surplus incomes of those who do
not, though it may indeed equalize incomes, is almost certain to
equalize them downward; while the spread of birth limitation among the
classes which suffer-while others gain-from their surplus of numbers,
tends to equalize upward.
Earned and Unearned Incomes - Wages and Profits
In the previous section the endeavor was made to explain only the
inequality which may result between different occupations or lines of
production, in the price system. So far as we discussed wages, our
interest lay in the relation of the wages of unskilled to the wages of
skilled labor. We did not attempt to show how the interests of
different economic classes, e. g., laborers and capitalists, in any
one line of production are related to each other. The persons
connected with the production of each kind of wealth or service are
divided into classes or sub-groups having interests more or less
diverse. We shall consider these sub-groups as three. There are those
who perform the labor, those who provide the capital and those who own
the land, used in carrying on the production. The corresponding
incomes are wages, interest, and land rent.
The wages of labor are received for labor services. They depend on
demand for and supply of labor and, ultimately, on the (marginal)
productivity of the labor. If the services of a workman add more to
the productivity of an industry than he receives in wages, it becomes
profitable to employ him, and demand for his services is likely to
result in increasing these wages. (Though custom, prejudice,
immobility of labor, and lack of means for exact measurement of the
amount and value of work done, may make the readjustment slow and
rough.) If, on the other hand, a man's services appear to be of less
value than his wages, then these services are not likely to be in
demand unless and until the wages fall. Taking the case of a group of
wage earners of equal ability, we may reasonably suppose that any
establishment which could use their services would tend to employ more
of them at a lower wage than at a higher wage, for it would tend to
employ them up to such a point that the gain from hiring more was
zero. And wages must be low enough so that substantially all the labor
force of a community (emigration aside) could get employment among all
the manufacturing, mining, farming and other establishments. Without
our insisting, however, on all the technical points of economic
theory, it should be clear that wages are paid for services rendered,
that their amount is fixed by demand and supply, and that demand and
supply so operate as to make wages higher when labor productivity is
large than when it is small. We have already seen why wages may be
higher in one line than in another in connection with our study of the
relation of the prices of some goods to prices of other goods. It
should be clear, also, that the more efficient workers in any given
line will be able, on the average, to command higher wages than those
who are less efficient.
Among incomes from labor ought to be included those returns to the
owners and managers of industry, above interest on their capital and
rent on their land, which economists sometimes call profits. These are
the rewards of self-directed labor, as contrasted with wages the
amount of which is more or less contracted for in advance. Hence they
are even more sensitive to the efficiency of the worker at his job
than are ordinary wages. But they are certainly none the less the
rewards of effort and are not to be confused with the income which the
employer gets by virtue of his ownership of property.
Incomes from labor are often assumed to have some special
justification as distinguished from incomes from property. Socialists,
for example, assert that labor alone produces value and argue for the
termination of all incomes from property. And while it may be doubted
whether this sect, if in control of our economic life, would be very
tender with those incomes from labor which we call profits, they
would, if consistent, necessarily be more tender with those incomes
than with interest or rent.
Whatever may be true of most labor incomes, it is certain that some
incomes from labor are unearned, if the test be the giving of a quid
pro quo to those from whom, in the last analysis, the incomes in
question are drawn. When, for example, a group of men successfully
form a monopoly in order to raise the price of their goods or
services, to the public, above a normal competitive return, the
reasonable presumption is that this excess above a competitive return
is unearned. So, also, when, though monopoly is not formally or
completely established, methods of business are adopted which are
calculated to eliminate even an exceptionally efficient producer, the
additional incomes received by those adopting these methods are to be
regarded as unearned. So-called unfair competition is in this
category. Thus, a business concern may, as the National Cash Register
Company was proved in court to have done, misrepresent a competitor's
goods;2 it may, if it controls the major part of the business in its
line, so that most dealers will feel obliged to handle its goods,
eliminate smaller even though more efficient producers by ordering
dealers not to sell the latters' goods on penalty of not being allowed
to handle its goods; or such a concern may make arrangements with
transportation companies to discriminate in its favor and against its
rivals, in the matter of freight rates, thus again, despite the
possible superior merit or greater cheapness of the latters' goods,
eliminating them from the market. Income secured as a result of such
(now, in the United States, outlawed) methods of competition, clearly
is not to be regarded as earned.
But the case is different with the owners and managers of a concern
which increases its business and displaces many of its rivals by
virtue of the superior quality or cheapness of its goods, a
superiority resulting from more intelligent selection or use of
machinery, better adaptation of tasks to men, better organization of
work, or other waste-saving proficiency. Business and income so
secured are an index of superior service to the public and are not, as
in the cases previously discussed, a badge of dishonor.
The incomes of employees, like the labor incomes of managing
employers, may also be either earned or unearned, according as those
from whom they are ultimately derived - usually the consuming
public-do or do not receive an equivalent in goods or services.
Earned and Unearned Incomes - Interest[3]
Incomes from property may be either from capital or from land. We
shall consider, first, those from capital. As with incomes from labor,
they may be either earned or unearned. This assertion, of course, runs
counter to the socialistic view that interest as such is always
exploitation. According to the doctrine of orthodox socialism, labor
produces all value. From this premise it is argued that those who
perform the labor should get the entire product. Since they do not get
the entire product of industry, the present economic system is
asserted to be one of robbery. Of course, as a matter of sound logic,
it is impossible thus to distinguish between labor and capital. While
it may be true that nothing or next to nothing can be produced by
capital without labor, it is likewise true that next to nothing can be
produced by labor without capital. Labor without buildings, roads,
machinery and tools would, indeed, be helpless and might easily
perish.
So much the socialist would perforce admit, but he would perhaps
reply that, although labor must use capital, capital is but the child
of labor, that capital is only an intermediate step between the
putting forth of labor and the securing of the full product of labor.
This reply, however, hardly gives a full account of the matter.
Capital is always a surplus above the needs of present consumption.
Hence its creation involves not only labor but also a refraining from
the present consumption of the products of labor. In short, the
creation of capital involves abstinence, or waiting, or saving. The
person who, though he labors never so efficiently, consumes in current
gratification all that his labor produces (or an equivalent in other
goods for which the goods he has produced are exchanged), adds nothing
to the capital equipment of society. The only persons to whom society
owes anything for the benefits yielded by capital are those persons
through whose saving, as well as their labor, the capital comes into
existence. And if an increment of capital adds anything to the annual
output of the community's labor force, beyond what this labor force
would produce with that much less capital equipment, such an added
annual output of industry is certainly made possible by that person or
those persons whose saving, whose excess of production over
consumption, brought the capital into existence. And, further,
provided the person whose production and saving makes possible the
existence of the capital, gets, as interest on this capital, no more
than the use of the capital adds to the production of goods and
services which would have been possible without it, he cannot be said
to rob anyone, since no one is any worse off than if the accumulator
of the capital had never brought it into existence. If the socialist
would say, frankly, that, though the accumulator of capital makes
possible an addition to the annual product of industry above what all
the labor available and all previously existing capital would
otherwise produce, and is in that sense the real producer of this
additional annual product, nevertheless not he but the other members
of society ought to get this additional product, ought to exploit the
actual producer of it, we might disagree with the socialist but we
could at least understand him. But to say that labor alone produces
all wealth is economic nonsense. And in saying this, in the sense in
which he does say it, and basing upon it serious conclusions regarding
public policy, the self-styled scientific socialist reveals his system
as a pseudo-science. In this regard, nearly all types of socialism
seem to be on common ground. Interest appears to be anathema to
socialists of all or nearly all schools, not merely to those of
professed Marxian leanings. And guild socialism, the latest fad of
many socialist theorizers, is no exception.
Nor can the socialist easily distinguish between wages and interest
on other grounds, so as to justify one and condemn the other. He
cannot, for instance, make an ethical distinction by asserting that
wages are a reward for sacrifice and interest a payment not earned by
sacrifice. To be sure, saving may be, for many, a pleasure which they
would indulge were no interest paid. Particularly may persons whose
incomes are large, save considerable amounts for the benefit of their
children without being conscious of appreciable present deprivation.
But the labor for which wages are paid may also be, in some cases, not
only not a sacrifice, but a continuous source of pleasure. There seems
to be a notion, among socialists and some others, that the reason why
wages are paid and, also, the reason why wages should be paid, is
because labor is unpleasant. .It is true that the greater
unpleasantness of one kind of work than of another, when the latter
does not require a more rare type of ability than the former, gives
rise to higher pay for the former. But if all work were a delight - as
some work is to some workers - those who did the work would not on
that account consent to forego their pay. Nor would any employing
property owner be able to avoid paying wages for work done, so long as
labor was productive, since he would have to reckon with the
competition of other employers to whom productive labor would seem
worth hiring. It is because labor produces something that wages are
paid and not because labor is unpleasant. Similarly, it is because
capital and, therefore, in effect, saving, produces with labor more
than labor alone could produce, that interest is paid for the use of
capital in industry. The time has gone by when sacrifice as such can
be regarded as a virtue apart from any beneficial consequences it may
produce, or can be regarded as entitled, in itself, to any reward.
It does not follow that all interest is earned any more than that all
wages are earned. Capital, as well as labor, may be so used as to
produce a disservice rather than a service to the general public.
Capital may be invested in the means of corruption, in building up
political influence through which the public is exploited, in the
tools and machinery of noxious drug making, in the plant of a
periodical devoted to misrepresentation. If so, the interest received
cannot be said to be earned in the sense in which we are using the
term. So far as interest on capital and remuneration of labor are
received by persons who do not give for them equivalent service to
those from whom such interest or wages are in the last analysis drawn,
it would seem that the receipt of such interest and wages by them
should be prevented, if prevention is in any way possible. A democracy
can hardly afford to have a privileged class deriving large incomes
for disservices or even for negative services.
Under the plan of things laid down by orthodox socialists no
individual, as such, would be allowed to own capital to any
appreciable extent. Certainly no one would be allowed to own any of
the machinery of production. Hence, no individual could have any
motive in accumulating capital unless that motive were the common good
and he would not actually accumulate it unless the influence of such a
motive over weighed the personal and family sacrifice involved.
Capital would, therefore, under such a regime, presumably have to be
accumulated and maintained by the state. This would mean, in a
democratic community, that saving would have to be supported, or at
least tacitly agreed to, by a majority of citizens, in order that any
saving should be done, while under the present system capital is
accumulated even if only one person out of ten or one out of a
thousand is willing to make the incident present sacrifice.
Again, such state saving as the socialist would resort to is, for the
individual who is not in the majority, compulsory saving. He must
accept, in present consumable goods, only that part of the wages he
would otherwise get, which the majority permits, in order that the
remainder should be used for the maintenance or the increase of
capital. Or, on the other hand, in case the majority decides against
adequate saving, then the individual who would have saved must see the
community's productive equipment depreciate and the prospect of a good
living for his children progressively decline, without being able to
apply any remedy.
It is not the intention to argue that no form of socialism or
near-socialism could possibly be adopted which would work differently.
Thus, the state might operate all industry, but secure its capital
from the voluntary saving of its employees, and pay these employees
interest based on the per cent, advantage [marginal advantage, the
economist would say] of having their capital. Indeed, voluntary
choice whether to save or not, coupled with payment of interest in
accordance with the utility to the community of the saving, would seem
to be consistent with voluntary choice whether to work or not and in
what occupation to work, coupled with payment of wages in accordance
with the utility to the community of the work done. Compulsion as to
saving would appear to comport better with compulsory labor and
compulsory assignment to occupations.
Should any sort of quasi-socialized state be at all feasible on the
voluntary principle, the main question of expediency would perhaps be
as to the efficiency of such a state in serving its citizens
economically, in comparison with the efficiency of independent and
more or less competing business units. But objection to the private
receipt of interest on capital is so fundamental in the doctrine of
socialism - including guild socialism - that few socialists are likely
to urge any system which permits it.
Earned and Unearned Incomes - Land Rent
In beginning a consideration of land rent we may advantageously call
attention to a fundamental distinction, too often overlooked, between
rent and interest. It is sometimes said that the rent of land is no
less interest than the return on other capital, since the return on
land can be viewed as a given percentage on a given valuation, while,
on the other hand, the interest on other capital can be viewed as an
absolute amount in dollars per machine or factory, just as land rent
is viewed as so many dollars per building lot or per acre a year. But
more fundamentally there is a difference, despite the superficial
resemblance, between situation rent and capital interest. The return
on land should be looked at as an absolute amount measured and
determined by the surplus above interest and wages (the surplus over
production on the extensive or intensive margin), which can be
produced by industry on the land in question. It is not determined by
the value of the land. Neither has the value of land as such, i. e.,
its situation value apart from improvements, any relation to any cost
of production, since the land was not humanly produced. On the
contrary, the value of the land can be arrived at only by discounting
its expected future rents or returns at some previously found rate of
interest. Thus, a piece of land which would yield $5,000 per year net
rent (above taxes, wages of labor employed, interest on the capital
invested in buildings and other improvements, and insurance) would be
worth, if interest were 5 per cent., $100,000. Were the current rate
10 per cent., such a piece of land would be worth but $50,000.
With equipment of the producible and reproducible kind, however, the
relation between capital and income value is not the simple one above
outlined. The value of such capital, though not unaffected by the
value of its expected services, is very directly related to the cost
of its production. Buildings of a type costing $5,000 each will hardly
be put up to sell for much less, as a rule, by the builders. Nor, so
long as the alternative is open to him of supervising the construction
of a similar building, will a possible buyer care to pay a great deal
more. The value of a building is determined then, in large part, by
the expenses, such as wages, of producing the materials and of putting
it up; and these wages are determined, in the last analysis, by the
existence of alternative lines of activity open to the wage-earners,
while the other costs are determined by the alternative uses to which
the land or capital which must be used in producing the materials
might be put.
Since the value of produced and reproducible capital is thus in large
part fixed directly by its cost of production, the assertion that
interest is in large part determined by the rate of productivity of
capital does not involve reasoning in a circle. Interest is 5 per
cent, because, for one and perhaps the most important reason, capital
worth $10,000 will produce an annual net income of $500. It therefore
appears, to sum up our conclusions thus far, that the value of
produced capital depends in a considerable degree on cost of
production, that the ratio between the value of capital and its income
is an important factor in determining the general long-run rate of
interest, and that this rate of interest is an essential element in
the valuation of land.
It is but a short step to the conclusion that the accumulators of
produced capital may - and in many cases doubtless does - add to the
value of the annual aggregate income of society as much as they take
out of this income in interest; while the owners of land, as such,
contribute no service in return for their income. Whereas, in the case
of produced capital, the public (except in certain cases, numerous
enough no doubt, where the capital is wastefully or injuriously used)
pays the owner for a service which, without his saving (or the saving
of someone whose right to payment has been transferred to him) would
not have been enjoyed; in the case of land the payment is made for a
benefit which is dependent on no individual's saving or effort and a
benefit for which, therefore, no individual is responsible. In the one
case the community pays for a service which is actually rendered to
it. In the other case it pays people who have, in the capacity in
which they are paid, rendered no service.[5]
To avoid any possible misunderstanding, let it be emphasized that
land rent as here defined does not mean merely the sum paid by a
tenant to an owner, for the use of the land, but equally the amount
received by the person who himself uses his own land, in excess of
wages for his labor and interest on his capital. This rent comes to
him in money when he sells the goods or services which the land
produces. He is paid, thus, by others, for benefits which not he but
the land renders. The community, in buying from him, pays him for more
than the service he and his capital render them.
The nature of land rent and of the influences that bring it into
existence can not, perhaps, be better set forth than in the following
passage from Henry George's Progress and Poverty:[6]
"Here, let us imagine, is an unbounded savannah
stretching off in unbroken sameness of grass and flower, tree and
rill, till the traveler tires of the monotony. Along comes the wagon
of the first immigrant. Where to settle he cannot tell - every acre
seems as good as every other acre. As to wood, as to water, as to
fertility, as to situation, there is absolutely no choice, and he is
perplexed by the embarrassment of richness. Tired out with the
search for one place that is better than another, he stops -
somewhere, anywhere - and starts to make himself a home. The soil is
virgin and rich, game is abundant, the streams flash with the finest
trout. Nature is at her very best. He has what, were he in a
populous district, would make him rich; but he is very poor. To say
nothing of the mental craving, which would lead him to welcome the
sorriest stranger, he labors under all the material disadvantages of
solitude. He can get no temporary assistance for any work that
requires a greater union of strength than that afforded by his own
family, or by such help as he can permanently keep. Though he has
cattle, he cannot often have fresh meat, for to get a beefsteak he
must kill a bullock. He must be his own blacksmith, wagonmaker,
carpenter, and cobbler - in short, a 'jack of all trades and master
of none.' He cannot have his children schooled, for, to do so, he
must himself pay and maintain a teacher. Such things as he cannot
produce himself, he must buy in quantities and keep on hand, or else
go without, for he cannot be constantly leaving his work and making
a long journey to the verge of civilization; and when forced to do
so, the getting of a vial of medicine or the replacement of a broken
auger may cost him the labor of himself and horses for days. Under
such circumstances, though nature is prolific, the man is poor. It
is an easy matter for him to get enough to eat; but beyond this, his
labor will suffice to satisfy only the simplest wants in the rudest
way.
"Soon there comes another immigrant. Although every quarter
section of the boundless plain is as good as every other quarter
section, he is not beset by any embarrassment as to where to settle.
Though the land is the same, there is one place that is clearly
better for him than any other place and that is where there is
already a settler and he may have a neighbor. He settles by the side
of the first comer, whose condition is at once greatly improved, and
to whom many things are now possible that were before impossible,
for two men may help each other to do things that one man could
never do.
"Another immigrant comes, and, guided by the same attraction,
settles where there are already two. Another, and another, until
around our first comer there are a score of neighbors. Labor has now
an effectiveness which, in the solitary state, it could not
approach. If heavy work is to be done, the settlers have a
logrolling, and together accomplish in a day what singly would
require years. When one kills a bullock, the others take part of it,
returning when they kill, and thus they have fresh meat all the
time. Together they hire a schoolmaster and the children of each are
taught for a fractional part of what similar teaching would have
cost the first settler. It becomes a comparatively easy matter to
send to the nearest town, for someone is always going. But there is
less need for such journeys. A blacksmith and a wheelwright soon set
up shops and our settler can have his tools repaired for a small
part of the labor it formerly cost him. A store is opened and he can
get what he wants as he wants it; a post office, soon added, gives
him regular communication with the rest of the world. Then come a
cobbler, a carpenter, a harness-maker, a doctor; and a little church
soon arises. Satisfactions become possible that in the solitary
state were impossible. There are gratifications for the social and
the intellectual nature - for that part of the man that rises above
the animal. The power of sympathy, the sense of companionship, the
emulation of comparison and contrast, open a wider, and fuller, and
more varied life. In rejoicing, there are others to rejoice; in
sorrow, the mourners do not mourn alone. There are husking bees, and
apple parings and quilting parties. Though the ballroom be
unplastered and the orchestra but a fiddle, the .notes of the
magician are yet in the strain, and Cupid dances with the dancers.
At the wedding, there are others to admire and enjoy; in the house
of death, there are watchers; by the open grave, stands human
sympathy to sustain the mourners. Occasionally, comes a straggling
lecturer to open up glimpses of the world of science, of literature,
or of art; in election times come stump speakers, and the citizen
rises to a sense of dignity and power, as the cause of empires is
tried before him in the struggle of John Doe and Richard Roe for his
support and vote. And, by and by, comes the circus, talked of months
before, and opening to children whose horizon has been the prairie,
all the realms of the imagination - princes and princesses of fairy
tale, mail-clad crusaders and turbaned Moors, Cinderella's fairy
coach, and the giants of nursery lore; lions such as crouched before
Daniel, or in circling Roman amphitheater tore the saints of God;
ostriches who recall the sandy deserts; camels such as stood around
when the wicked brethren raised Joseph from the well and sold him
into bondage; elephants such as crossed the Alps with Hannibal, or
felt the sword of the Maccabees; and glorious music that thrills and
builds in the chambers of the mind as rose the sunny dome of Kubla
Khan.
"Go to our settler now, and say to him: 'You have so many
fruit trees, which you planted; so much fencing, such a well, a
barn, a house - in short, you have by your labor added so much value
to this farm. Your land itself is not quite so good. You have been
cropping it, and by and by it will need manure. I will give you the
full value of all your improvements if you will give it to me and go
again with your family beyond the verge of settlement.' He would
laugh at you. His land yields no more wheat or potatoes than before,
but it does yield far more of all the necessaries and comforts of
life. His labor upon it will bring no heavier crops, and, we will
suppose, no more valuable crops, but it will bring far more of all
the other things for which men work. The presence of other settlers
- the increase of population - has added to the productiveness, in
these things, of labor bestowed upon it, and this added
productiveness gives it a superiority over land of equal natural
quality where there are as yet no settlers. If no land remains to be
taken up, except such as is as far removed from population as was
our settler's land when he first went upon it, the value or rent of
this land will be measured by the whole of this added capability.
If, however, as we have supposed, there is a continuous stretch of
equal land, over which population is now spreading, it will not be
necessary for the new settler to go into the wilderness, as did the
first. He will settle just beyond the other settlers, and will get
the advantage of proximity to them. The value or rent of our
settler's land will thus depend on the advantage which it has, from
being at the center of population, over that on the verge. . . .
"Population still keeps on increasing, giving greater and
greater utility to the land, and more and more wealth to its owner.
The town has grown into a city - a St. Louis, a Chicago, or a San
Francisco - and still it grows. Production is here carried on upon a
great scale, with the best machinery and the most favorable
facilities; the division of labor becomes extremely minute,
wonderfully multiplying efficiency; exchanges are of such volume and
rapidity that they are made with the minimum of friction and loss.
Here is the heart, the brain, of the vast social organism that has
grown up from the germ of the first settlement; here has developed
one of the great ganglions of the human world. Hither run all roads,
hither set all currents, through all the vast regions round about.
Here, if you have anything to sell, is the market; here, if you have
anything to buy, is the largest and the choicest stock. Here
intellectual activity is gathered into a focus and here springs that
stimulus which is born of the collision of mind with mind. Here are
the great libraries, the storehouses and granaries of knowledge, the
learned professors, the famous specialists. Here are museums and art
galleries, collections of philosophical apparatus, and all things
rare, and valuable, and best of their kind. Here come great actors,
and orators, and singers, from all over the world. Here, in short,
is a center of human life, in all its varied manifestations.
"So enormous are the advantages which this land now offers for
the application of labor that instead of one man with a span of
horses scratching over acres, you may count in places thousands of
workers to the acre, working tier on tier, on floors raised one
above the other, five, six, seven and eight stories from the ground,
while underneath the surface of the earth engines are throbbing with
pulsations that exert the force of thousands of horses.
"All these advantages attach to the land; it is on this land
and no other that they can be utilized, for here is the center of
population - the focus of exchanges, the market place and workshop
of the highest forms of industry. The productive powers which
density of population has attached to this land are equivalent to
the multiplication of its original fertility by the hundred fold and
the thousand fold. And rent, which measures the difference between
this added productiveness and that of the least productive land in
use, has increased accordingly. Our settler, or whoever has
succeeded to his right to the land, is now a millionaire. Like
another Rip Van Winkle, he may have lain down and slept; still he is
rich - not from anything he has done, but from the increase of
population. There are lots from which for every foot of frontage the
owner may draw more than an average mechanic can earn; there are
lots that will sell for more than would suffice to pave them with
gold coin. In the principal streets are towering buildings, of
granite, marble, iron and plate glass, finished in the most
expensive style, replete with every convenience. Yet they are not
worth as much as the land upon which they rest - the same land, in
nothing changed, which when our first settler came upon it had no
value at all."
But, it may be said, at least many of the present landowners are
persons who have made their savings from what they have earned and
have chosen to invest their savings in land rather than elsewhere.
Have they not, in their savings, given the community as much value as
they draw in rent? The answer may well be that they have given, to
that part of the community from whom their rent income is derived,
nothing whatever. If A, who has saved $10,000, uses it to buy a piece
of land from B, he is merely paying B for the privilege, previously
enjoyed by B, of receiving rent from others for the use of something
which neither he nor any other individual produced and the use of
which would be equally available had no owner or purchaser of land
ever been born. In turn, B has now the $10,000 of accumulations and it
is quite possible that he may use it in some way that will increase
the annual product of industry. If so, the community, or some members
of the community, will come to be paying B, in interest on capital,
for,services which, without A's saving, would not have been available,
while they will be paying A, in rent, for benefits from the use of
land, which are not due to any individual's work or savings. If,
before, the community was paying the landowner B a rent while getting
no service that could fairly be regarded as coming from him now it is
making payments to both A and B, as rent and interest respectively,
and receiving services in return from only one. If, before, B the
landowner was a pensioner to whom the community gave something for
nothing, now A has become the pensioner, having bought out B, and is
receiving, from the rest of the community, something for nothing. For
it should be clearly evident that the $10,000 paid to B for the land
is not a service rendered to C, D, or E, who are the persons that have
to pay A for the use of the land. Yet much of emphasis is commonly
directed to the assertion that the land-using part of the community
ought to pay rent to landowners because these landowners have in many
cases paid previous landowners for the land and despite the fact that
none of the landowners in the series can be said to have rendered any
service to those from whom they collect rent payment. In other words,
it is asserted that C, D and E ought to be obliged to pay A for no
service rendered by him or by anyone, simply because A previously paid
$10,000, not to C or D or E, but to B. Is such a doctrine good
utilitarianism? Is its application good social policy?
The same principles apply in the case of such natural resources as
coal and iron mines, oil and natural gas wells and power sites. The
incomes derived by the owners of the steel trust and others from such
resources represent, not service, but the privilege of drawing tribute
from the masses as a condition to allowing these masses to make use of
the bounty of nature. And those enthusiasts for government ownership
of all natural resources, who would have the public buy up these
resources from their present owners at current values are simply
proposing that the tribute now collected as rent or royalties or
dividends shall be given an added sanction and shall be collected in
the future as interest on government bonds, to the payment of which
the government will be pledged. These natural resources had no cost of
construction. Their salable value is but the capitalization of
tribute. To issue government bonds for them is to make this tribute
rendering more irrevocable, perhaps, than before.
The suggestion has been made (most prominently and effectively by
Henry George) that the proper way for the community to deal with all
such unearned incomes is to appropriate them to public use by the
method of taxation. Whether or not it is possible or desirable to take
such unearned incomes by taxation, it should be clear that under the
competitive individualistic system of business, no other method of
preventing the individual receipt of such incomes is possible. If, for
example, when the owner and user of a piece of land were different
persons, the owner could be forbidden to charge as rent the surplus,
due to advantageous situation, yielded by that specific piece of land
above the ordinary returns to labor and capital, the user would
proceed to appropriate such surplus. For the fact that the titular
owner was not allowed to charge rent would not increase the supply of
the goods produced or marketed on the land, and, since price is fixed
by demand and supply, would not lower the price of such goods. The
producer or dealer who was fortunate enough to have, for nothing, the
use of a piece of land so good or so advantageously situated as to
give him a larger return than would cover his outlays for wages and
interest (including interest on his own capital) and pay for his own
time, would not, on that account, sell his output below the market
price charged by competitors. But even if he did, his competitors need
not lower their price, since there has been no increase in supply or
decrease in demand, and since, therefore, the demand on other
producers or dealers by consumers remaining unsatisfied, will be as
great as before. So, even if the favored producer does lower his price
(as it is safe to say he will not), that would merely pass the favor
to a privileged few of the consumers of the article. The price could
not be reduced to all consumers unless reduced by all other producers.
Furthermore, some of these other producers are producing under
conditions such that their labor and capital produce little or no
surplus for rent; they may be, for instance, producing on land so poor
for the purpose that it yields substantially no surplus.[7] For them
to reduce their price would be to curtail their wages or interest or
both. In that case, the attempt to terminate rent would result in
lessening other kinds of incomes of the producers of the goods in
question and giving these incomes to the consumers of the goods. But
these consumers can be no other than the producers of other goods. The
injured producers would, therefore, under a regime of free choice of
industry, change their occupations and the line of their investment.
In short, rent can not be distributed to all consumers of all goods,
and to give it to some consumers or to transfer it to tenants leaves
as large an element of special privilege in the situation as before.
Unless, then, appropriation or taxation of rent, by and for the whole
community, is possible, the situation is irremediable under the
competitive system of business.
It is perhaps desirable to add an illustration from the economics of
railroad transportation. Suppose two cities to be connected by a
railroad which runs through a narrow river valley. The traffic is more
than this line can handle. Another line is essential but the second
has to follow a winding and hilly route. The cost of carriage of goods
on the second road is necessarily higher. The first road has an
advantage of situation. It has an exclusive use of the better route,
from which it derives a substantial revenue. For it can and will
charge rates as high as does the winding hilly road and will still get
plenty of traffic. To require rate reduction of the first road will
not transfer this excess income to the general public. For, since this
river-valley road cannot carry all of the traffic, some shippers, at
least, must pay rates high enough to make worth while the operation of
the other railroad. Otherwise it will be abandoned - or never built.
And to reduce rates only on the river-valley road is merely to
transfer to a favored group of shippers, and not to the whole public,
this road's revenue from a natural advantage of situation and from the
growth of the community served. The excess income of the river-valley
road is situation rent. Taxation of rent by the public can be made to
secure, for the general benefit, as much of this income as it is
desired to get. Rate regulation can not.
One thing, at least, can be asserted with positiveness, viz., that a
tax on the rental value of all land, however used, can neither be
shifted from one landowner to others nor from landowners as a class to
any other class. The reasons are that such a tax can in no wise limit
the supply of land or determine the direction of its use. It cannot
decrease the supply of land because land, as we have defined it, is
not humanly produced. If it were, a tax on it might decrease the
amount of it and so make rent higher. If the landowners who lease
their land charge higher rents for its use, tenants will endeavor to
economize in the use of land and some of the owners will find their
land idle and yielding no revenue. These will quickly reduce their
rent charges, the more so if unused land is taxed at the same rate as
used land, since only so can they avoid loss.
We may state the matter convincingly in a somewhat different way if
we call attention to the fact that the landowners were presumably,
before the tax was laid, charging all the rent they could get. There
is nothing in the tax to make tenants willing to pay more or land more
difficult to hire. Supposing the tax to apply also to unused land,
even more land will probably be on the market for hire than would
otherwise be the case, because of the loss to owners in leaving their
land idle. Hence, owners cannot raise their rents.
To put the matter in still another way, it may be said that rent is
the surplus which can be produced by labor and capital on any piece of
land above what that labor and capital could produce on the poorest
land in use,8 for which no rent is paid and which has either no value
or a purely speculative value based on prospects. A tax on the value
of land would not increase this surplus yield on the superior land,
and could not, therefore, increase rent.
Let us suppose that a tax is levied upon a piece of land because of
its value, because, that is, of its superiority over the poorest land
in use and in proportion to that superiority, and that the owner of
the land tries, because of the tax, to charge more rent to the tenant.
In that case the tenant may resort to poorer land on which the rent
and, therefore, the tax is insignificant or zero and leave without
rent and with his tax nevertheless to be paid, the too grasping
landowner. Such a prospect or its actual realization must cause the
owners of land to keep down their rent charges and to pay the tax
themselves.
8 Or, more fully slated in the terminology of economics, above the
amount which labor and capital could produce on either the extensive
or the intensive margin of production.
Since a tax on land values-or on land rent, for this comes to the
same thing[9] - cannot raise rents, it can in no way raise the prices
which tenants charge for the goods they produce or sell on the land.
But can it raise the prices charged by the owners of the land for the
goods they produce or sell on it when they themselves use their land?
Clearly not. Such owners will not, because of the tax, produce any
less of the goods in the production of which they are engaged.
Refusing to produce the goods would not relieve them of the tax. They
will produce as many goods as if there were no tax. And if the tax
does not make such goods any scarcer, their price will not be made
higher. In other words, if, before the tax is laid, landowners are
charging for their goods all they can get, the tax will not cause them
to charge any more for they cannot get any more.
If, then, we look at the matter of general land-value taxation from
any point of view whatever, we arrive at the same conclusion, viz.,
that a tax on land value or land rent is paid by the owner of the land
and by no one else, that the owner cannot because of such a tax raise
either his rent or the prices of his goods, but that, indeed,
productive land held out of use by speculators is forced onto the
market so that, if land rent changes at all, the direction of the
change is likely to be downward. Other taxes may discourage
production. But land-value taxation, so far as it has any effect at
all on production, operates to increase it and thus to reduce prices
or to raise wages or both.
9 Although the capital value is itself affected by the tax and falls
as the tax rises, while the rental value is relatively independent of
the tax. It is therefore simpler to tax economic rent than to tax
capitalized value. Indeed, a tax on rent of 100 per cent, would reduce
capitalized value to zero.
Inequality of Earned Incomes
Suppose, however, that it eventually becomes possible to do away with
all unfair business practices, to stamp out the industry of the
business highwayman, to break up, or regulate, or operate by the
public, all monopolies so that justice shall be done to the consumers
of monopolized goods, to make birth rates in different classes even
enough and educational opportunity general enough so as to avoid the
partial monopoly which the relatively few now have of valuable
training and skill, and to take by taxation for public purposes the
unearned income from land or sites. Would we then have the ideal
economic society? There would still be inequality. The man of
exceptional genius might still find it possible to secure very great
income, and the man who had received large inheritances from his
ancestors (assuming the passing of wealth to be substantially
unchecked) would have a large income earned, not by his own, but by
his parents' and grandparents' saving.10 It is conceivable that the
amount of inequality even yet resulting would be dangerous in a
democracy. Large incomes, even if fairly earned by the individuals or
families enjoying them, might possibly confer the power of corruption
and lead to the temptation to use such power for the gaining of
unearned income in the future. That the danger would be as great as at
present can hardly be credited, and we certainly need not now be
prepared definitely to advocate taxation of earned incomes on such
grounds. But the believers in democracy will insist that democracy
must at all events be protected, and if, by any chance, it should
develop that inequality, even of earned incomes, were great enough to
threaten democracy, sufficient limitations, by taxation of incomes or
inheritances or otherwise, ought probably to be put upon such
inequality.
Again, though all incomes be earned, it may be contended that the
utility of a unit of money (e. g., a dollar) to the man who possesses
many such units is so much less than its utility to the man who earns
few as to justify taxing the former more heavily and spending some of
the money really earned by the former, for the benefit of the latter.
This is the theory on which charitable relief is largely based and it
is also the basis of the so-called ability theory of taxation.
Clearly, however, there are dangers in carrying such a policy too
far. Those whose ability is high in one line may, to be sure, often be
persons of only mediocre ability in other lines of activity; but if
the line in which they show ability is one in which ability is scarce
relative to the use society has for it, such persons need to be
encouraged to make full use of their ability and it is furthermore
desirable that they should have descendants who inherit their capacity
for such efficient service. A system of taxing earned incomes which
should come too close to leaving individual incomes equal would almost
certainly discourage the revealing of ability above the average by
those who have it or are capable of developing it, unless invidious
distinctions of honor and rank in society were to take the place - if
they could do so effectually - of differences in creature comforts.
We need not say that the time can never come when the abler members
of a group will put forth their full efforts for the welfare of their
weaker social brothers and sisters, who, in turn, will gratefully
accept equality of incomes bestowed upon them by those whose
productive efficiency is greater than theirs. But it is not to be
assumed that this time has yet come, if it ever should or can.
Furthermore, it is greatly to be desired that society should breed
more largely from its abler than from its inferior members, that those
who have high special abilities, provided these abilities are of a
useful kind, should be well represented in posterity. It may indeed be
true that there is now altogether too much of a tendency for society
to breed from inferior strata rather than from the superior. But a
change in moral standards and ideals, a growing pride in the ability
to pass on worth-while characteristics, may some day change this.
Absolute equality of incomes among adults, on the other hand, would
negative it, unless those of higher ability were willing to take for
themselves and their children fewer and poorer creature comforts than
their efforts gave to their inferior brothers and sisters. Again,
incomes based on size of families would enable those persons who
irresponsibly have large families, together with their numerous
children, to exploit almost without limit those who, by themselves
having small families, endeavored to prevent population from
outrunning the possibilities of comfortable subsistence. Whether or
not, therefore, we might expect the efficient eventually to be willing
to put forth their best efforts that the inefficient might fare
equally well, it is not even to be desired that the efficient should
be willing to put forth their best efforts that the inefficient might
have as many or more children and as well cared for as those whose
superior ability produced a greater volume of goods.
A parallel argument can be made regarding interest on the
accumulation of capital. It is perhaps not even desirable that those
who save capital should have to see the interest earned by it go to
the support and increase of the children of the incapable and
unthrifty. And certainly one cannot but experience grave doubt whether
capital would be saved in anything like the present degree if no
income whatever were allowed from it either to the accumulator or to
his children.
It is to be hoped that no one will draw from the above remarks
relative to the competition of individuals within any community and
fitness to survive, the conclusion that any selective purpose is
secured by allowing the private receipt of what we have called
unearned incomes. Superior efficiency in producing worth-while goods
is a very different thing, in its relation to societal interests, from
superior craftiness in getting something for nothing. A society
composed of persons of the former characteristic would have at hand
the means for pleasurable existence on the part of all its members. A
society composed of persons of the latter characteristic would be one
in which each man's hand was "turned against his neighbor."
If all exploitive activities were terminated and if all unearned
incomes derived from advantages of situation, etc., as distinct from
unethical business practices, were appropriated by the public, the
individual receipt of unearned incomes would be impossible. It would
then be necessary to decide whether and how far the taxing of earned
incomes for the sake of using the funds to benefit those whose earning
power was small, could be regarded as a proper public policy. It is
entirely possible that if the receipt of unearned incomes by
individuals were henceforth completely prevented, the inequality
remaining would not be such as to justify further attempts at
leveling. For further attempts in this direction might be thought of
as involving the establishment of hew privileged interests, the
privilege in question being to those who produce least to enjoy
equally or more nearly equally than their productive efficiency would
seem to justify, with those who produce much.
However this and other problems ought to be settled, it is clear that
economic democracy is not to be attained without thought and that it
is unlikely to be attained in full all at once. Mobs and reigns of
terror will not introduce it. If it be true that the exploited masses
cannot trust the teaching of those lawyers, statesmen and others, who
constitute the intellectual defenders of things as they are, it is
also true that without intelligent leadership in statecraft and an
understanding, by their leaders, of economic principles, an
understanding which the socialist leaders certainly have not,
blunders, discredit and eventual rejection will be the probable fate
of those who might become the effective forces of reform.
Recapitulation
At the beginning of this essay it was pointed out that before
economic reform can be profitably discussed, there must be an
intelligent comprehension of the existing system of economic
organization. For the beneficiaries of the present system have their
intellectuals who can give it theoretical justification and they know
how, practically, to run it; while its violent overthrow by ignorant
revolutionary groups would be almost certain to be attended with
mistakes calamitous enough to discredit them and would quite possibly
result in the restoration of the temporarily outlawed system of
privilege.
Addressing ourselves to the securing of a birds-eye view of the
existing economic system, we found it to be one of division of labor
with voluntary specialization of individuals and their property in
different lines of production. Prices are the inducements by which men
are led to sell goods or to produce goods for sale. Compulsion might
be substituted but probably would not be popularly approved.
Competition tends towards partial equalization of returns in different
lines but does not necessarily result in complete equalization. Thus,
in any given relation of public demand for two different articles,
there may be some persons and some sites as to whom and whose owners
it is a matter of indifference whether they should be devoted to
producing the one article or the other. But there may also be persons
whose efficiencies are such that they secure much larger incomes where
they are than they could get in an alternative line or, perhaps, than
many persons in such an alternative line do get; and a parallel
statement can be made regarding the use of specific pieces of land and
the interests of their owners.
Inequality results, then, so far as returns to labor are concerned,
from differences of ability innate or acquired. So far as it results
from differences of ability which are innate, it is undesirable that
the multiplication of those of less ability should be encouraged at
the expense of those of greater ability. So far as inequality of
incomes is due to differences of opportunity, these differences are
partly a matter of education and partly a matter of comparative birth
rates. Low wages in any group are likely to be due to the numbers in
that group, competing for employment, and these numbers depend as much
on comparative birth rates as on the avenues of escape from the group
through education.
In present-day economic society incomes are divided into wages for
labor (including profits to self-employed labor), interest on capital
and rent on land. Wages of labor are earned or unearned, as the terms
are here used, according as they are received for an equivalent
service rendered. If, for example, the owners and controllers of an
industry derive a monopoly profit because their management has
resulted in the building up of a monopoly which exploits the public,
much of the so-called profit is unearned. So, also, both the
controllers of a business and their hirelings, if engaged in
corrupting legislators or in the practice of unfair competition can
not be said really to earn what they receive. The same distinction may
be made as regards income from capital. Interest is unearned when the
capital is used in antisocial and exploitive ways. It is earned when
the use of the capital confers an equivalent benefit upon those from
whom, in the last analysis, the interest is drawn.
As to land, its rent, resulting from natural advantages or from
advantages of situation relative to population centers (pure rent as
distinguished from interest on improvements), is clearly unearned, and
is no less unearned because the owner may have paid some previous
recipient the so-called value of the land for the privilege of getting
a return from the rest of the community for no service rendered. And
the rent of land is unearned whether the land is used in socially
desirable ways or not, for, in any case, the owner is in no sense
responsible for the existence or the advantages for business, of his
land.
Towards the end of the essay we raised the question whether,
supposing every kind of unearned income to be terminated or publicly
appropriated, it would be desirable for the community to tax large
earned incomes (or inheritances) at a high rate for the purpose of
preventing, in large part, what inequality might otherwise still
remain. For the view that this should be done could be cited a
conceivable danger to democracy from inequality even of earned
incomes, in case such earned incomes proved to be very unequal, and
the theory of charitable relief according to which units of wealth
give greatest utility to those whose wealth is small. But, on the
other hand, it seemed that efficiency, survival of the best, and
accumulation of capital might all be militated against by too great an
approach to equality. Indeed, equality of incomes itself, if
productive accomplishments are greatly uneven, is a form of privilege
in favor of persons who contribute less than they receive.
In any event, we are brought back to the conclusion that the
establishment of economic democracy is not a simple task. And it
cannot be successfully accomplished unless the great mass of the
disinherited who would fain establish a better system are led by men
of greater understanding of economic principles than is possessed by
present-day Marxian theorists. Unfortunately, it seems to be these
theorists who have attained chief influence and leadership among the
supporters of radical economic reforms.
The path of democracy is in truth a way of peril, beset with the
pitfalls of a too common ignorance and flanked by the ambushed forces
of privilege. Yet only through this pathway can there be any hope at
all of the eventual attainment of a better economic order. For
although, in a democracy, interested persons and classes are ever
seeking to confuse and mislead, in matters of economic policy, a
citizenry unduly prone to believe itself championing worthwhile reform
when it is really but subjecting itself to a more hopeless
exploitation; nevertheless government by any limited class would be
almost an absolute guarantee of the self-aggrandizement of that class
at the expense of all others. With democracy there is at least the
chance that education and the resulting growth of intelligence may
lead to better things. We need not - if we are scientists we
cannot-have the faith in democracy sometimes professed by the
practical politician anxious to flatter the common man into giving him
his support and vote, that "the people" will always know and
do what the general well-being requires. But we may have a limited
faith in democracy as the only possible pathway - if any such pathway
there be - to an economic system fundamentally expedient and just.
FOOTNOTES AND REFERENCES
- Cf. the Author's book on The
Theory of Earned and Unearned Incomes, Columbia, Mo. (The
Missouri Book Co.). 1918, Chs. I and II.
- The various methods of unfair
competition practiced by this company are described in Seager,
The Principles of Economics, New York (Holt), 1913, pp.
493-499.
- In The Theory of Earned
and Unearned Incomes, Chs. Ill and IV, the author has
attempted a more exhaustive study of interest on capital than is
here presented.
- Professor Edwin R. A.
Seligman, whose views regarding the ideal sort of taxation appear
to be fundamentally antagonistic to those presented in this book,
has, in the opinion of the present writer, signally failed to
grasp the distinction set forth above. See his Principles of
Economics, sixth edition, New York (Longmans), 1914, paragraph
beginning at bottom of page 391. For a further elaboration of this
and related distinctions, see the succeeding essay on The Rent
of Land and Its Taxation.
- Book IV, Chapter II.
- Or they may be producing on
what economists call the intensive margin.
- It must be admitted that
inheritance of property accumulated in a past when exploitation
was still possible would not always be inheritance of earned
property. It might very plausibly be argued, therefore, that a
taxation system adapted to a period of transition away from unjust
economic institutions should contain features which might not be
permanently desirable.
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