Distribution as Determined by a Law of Rent
John Bates Clark
[Reprinted from the Quarterly Journal of
Economics, Vol.5, 1890-91]
Part 1
The law of rent has become an obstacle to scientific
progress: it has retarded the attainment of a true theory of
distribution. Yet it is itself capable of affording such a theory. The
principle that has been made to govern the income derived from land
actually governs those derived from capital and from labor. Interest
as a whole is rent; and even wages as a whole are so. Both of these
incomes are "differential gains", and are gauged in amount
by the Ricardian formula.
Wages and interest are incomes that may be treated as static
in their nature: they would exist if society were to remain in an
unprogressive state, with it forces in a certain balanced condition
that excludes internal changes. Disturb this equilibrium of forces,
make structural changes in society, create a condition in which labor
and capital begin to move from one point in the general system to
another, and you furnish opportunities for the creating of another
income that is distinctively dynamic. We shall call this pure profit.
It is a product of unbalanced forces, and exist, under natural law,
only while society is changing. eliminate those internal movements of
the industrial forces that we have indicated, and you destroy it. The
remaining product of social industry will then resolve itself into
wages and interest; and both of these are rent, or differential
product due to permanent agents. In this respect they are analogous to
the income from land as it appears in current theories, and they in
fact include that income with others. The true method of attaining a
law of distribution is not, therefore, first to eliminate from the
earnings of society the element of ground rent, and then to try to
find principles that will account for the remaining elements: it is to
eliminate what is not rent, -- namely, pure profit, -- by reducing
society to a static condition, and then, by a use of the rent law, to
account for all that remains.
Five changes of social structure need to be excluded, if
society is to be reduced to a static condition; and by a use of the
scientific imagination we will exclude them, and create that state.
These are: first, changes in the character of social wants; secondly,
changes in the mechanical processes of production; thirdly,
alterations in the mode of organizing industry; fourthly, shiftings of
labor and capital from place to place within the system; and, fifthly,
increase or diminution of the amounts of capital and labor in
existence. The movements in which the dynamic quality of actual
society consists would respectively be brought to a stand-still if we
should in some way make human wants constant in character and degree,
arts unprogressive, modes of organization stable, the magnitude of
different industries normal and permanent, and the total amounts of
labor and capital fixed. We must in this way create for our own
purposes an imaginary state, in which for a tine social forces and
relations are stable. Yet we make in this way a study that is
completely realistic, since the static forces are dominant in the
world of actual business. We isolate the, in order that we may know
their nature. In the end, -- though not in this article, -- we shall
take account of all essential changes that in reality take place, and
attain the dynamic laws of distribution.
The term "rent" has become synonymous with
differential gain by an evolution in language that needs to be briefly
traced. In popular speech rent is a payment made by one man to another
for the use of something: in scientific language it means not a
payment, but a product. The mere transfer of the stipulated amount
from hand to hand passes out of sight, and rent becomes whatever the
thing earns in the hands of the man who hires it. The rent of the farm
or the shop is the wealth that it brings into existence. To society as
a whole rent is always a product, and not a payment, since there
exists no outside party of the second part to whom the social organism
can let a thing for hire. In its conception of rent science takes the
social point of view.
Again, to the common mind, anything whatever may be a
rent-producer, provided it is let for hire; and to many persons the
typical rent is a payment for the use of a dwelling-house or a room.
Scientists have chosen to restrict the term to the product of land, on
the ground that the income afforded by things that are artificially
made tends to conform to the cost of making them. If buildings pay ten
per cent. on their cost, there will in due time be more buildings; and
in the end they will earn what is equal to current interest on the
amount spent in constructing them. Land is not produced, and has no
normal cost. It earns what it can; and that is an amount that is
independently fixed, according to the Ricardian formula. While the
annual income derived from a house tends to become a certain fraction
of the value of it, the market value of a piece of land tends to
become a certain multiple of its annual earnings. The cost of the
thing is the starting-point of the calculation in the one case, and
the income is the fixed element in the other.
Here is a seemingly radical distinction; but it will vanish,
as our analysis proceeds. It is true, indeed, that the income derived
from buildings conforms to the cost of making them; but this simply
means that, if buildings are especially productive, there will occur a
transfer of wealth from other forms of investment to this one. Men and
working appliances will be diverted from the making of various other
commodities, and will be directed to the creating of the one that is
more profitable. This is merely a movement tending to equalize
interest in its various forms of investment. In the industrial field
as a whole there is a current rate of interest; and, by making now
more of one thing and now more of another, society causes each to
earn, in the long run, about the prevailing percentage. This
equalization of the earnings of different forms of capital is a
process that has a secondary significance. Of primary consequence is
the question. What fixes the general rate to which the interest on "money"
invested in a building tends to conform? What determines the earnings
of capital as a whole? We shall see that it is a law of rent.
Buildings, indeed, tend to earn, in proportion to their cost, as much
as is on the average earned by tools, ships, engines, mercantile
stocks, etc.; but the general earnings of all these things are fixed,
like ground rent, by the Ricardian law. In the end we shall see that
this law applies primarily to the general fund of invested wealth, and
only secondarily to land. What we have here to emphasize is the fact
that the supposed law of interest that governs the income afforded by
a particular made instrument resolves itself into a mere equalizing
tendency, -- a movement that causes interest at one point to equal
interest at another. One artificial thing may, as an investment, pay
as well as another. What they all pay is determined by the law with
which the Ricardian study of land has made us familiar.
The study of the earnings of land has revealed the general
principle of differential gain; and the word "rent" has
lately been used in an abstract way, as meaning any gain whatever that
exemplifies this principle. "Rent of ability" and "consumers'
rent" are now familiar terms. Scientific language here cuts loose
from historical moorings. There is nothing in the conscious thought of
the business world that corresponds to this mathematical idea of an
income made up of surpluses or differences. To the practical man rent
is nothing if not concrete. It is the lump sum that he gets every year
from some material possession or other. It is the dollars per annum
that as an owner he gets out of a house, a farm, a machine, etc. It is
therefore doubtful whether, in the end, the various other gains that
come to men in accordance with the differential law will continue to
be called by the name that is popularly used in so concrete a way. In
the present study, we use the term "rent," in order that we
may bring our analysis into connection with recent scientific studies,
and, in particular, in order that we may have all the benefit that it
is possible to derive from the Ricardian theory. Ground rent is a
useful type of the two static incomes that we have to examine.
The most interesting of recent applications of the principle
of differential gain is the study of "Consumers' Rent" by
Professor Marshall. This is something that practical men think of, but
not in any connection with the product of land, buildings, etc., and
therefore not in a way that would ever suggest the use of the term "rent."
This gain that consumers realize is rent simply because it result from
that principle that the case of land has made familiar to us. There is
a similarity between the personal gain that a consumer realizes by
buying a necessary article cheaply and the income that a landlord gets
from his estate. Labor spent on the poorest land in cultivation earns
wages only. This is marginal labor, and the product of it affords the
standard from which may be measured the earnings of similar labor
expended elsewhere. In tilling a better field the worker creates a
surplus above this standard product, and the excess is the rent of the
superior field. It goes to the owner of this field, since the man who
tills it gets the same wages as the marginal worker.
There is another variety of marginal labor that set a
standard from which differential gains may be estimated: it is the
last increment of labor applied to the good land itself. Agriculture
is subject to the law of diminishing returns: the early increments of
labor expended on a given area are more productive than the later
ones, and the last increment of all creates a product that is equal to
that created on the land of poorest quality. This is a marginal
product, in a more refined sense of that term; and it is entirely
absorbed by the wages of the man who creates it. The farmer gets
nothing for himself out of the last increment of hired labor that he
puts upon his land. All earlier increments create surpluses above the
standard set by the last. The sum of all these surpluses is the rent
of the land; and it goes in the first instance to the farmer, since
the earlier workers are paid at the same rate as the last. By the
competition of different farmers this sum is handed over to the
landlord. This variety of rent, the surplus created by early
increments of labor expended on a given field, is the best type of
differential gain.
Consumers' rent is realized in an analogous way: we get it
when we buy for a dime the loaf that nourishes us. The benefit derived
from the first dime that we spend is very large as compared with the
benefit derived from the last one. Our purchases arrange themselves in
a series, in the order of their importance. In spending our income we
first make sure of what is imperatively necessary, then get what is
desirable, and end by getting that which affords the smallest
gratification afforded by anything that we buy at all. The things that
come early in the list have a high "subjective value" as
compared with those that come later, since they render a far more
important personal service. This excess of utility in early purchases
is a differential service rendered to the purchaser, or a consumers'
rent. It may be illustrated, for an average man, by a dinner where the
articles are selected from a menu on the European plan. A substantial
dish renders the largest personal service to the consumer; while the
delicacy that he hesitates in ordering represents the marginal
purchase. If the two chance to be of equal cost, the former dish
affords a large consumers' rent. It will be seen that the radical
difference between this gain and the income from land is that the one
is subjective and the other objective. This advantage that comes from
the buying of cheap and highly serviceable articles is purely
personal, resolving itself into an effect on the sensibility of the
user. Now, there are, in fact, other forms of subjective rent that are
equally important. All of them together constitute a generic variety
of differential gain, that is related to ordinary rent much as
subjective value, in recent studies, is related to objective.
Subjective rent is a fundamental element in the philosophy of
distribution. As a whole, it is the basis of the distributive law, and
it is the practical end of the productive and the distributive
processes. It embraces the total personal advantage secured by
industry.
Professor F.H. Giddings has recently called attention to the
increasing onerousness of successive hours of labor put forth by a man
in a single day. The first hour of work costs little or nothing, since
the weariness entailed by it is no greater than health and enjoyment
require. The fourth hour may entail a positive sacrifice, the eighth
imposes a large one, and the tenth and last is so wearying as to bring
the work to an end, unless by some complications of the industrial
system the man is forced to continue working. The mere wages of
another hour of service would not induce him to render it.
Now, for our present purpose, we need to notice that, if
wages are uniform through the series of hours, there is a special gain
derived from the work performed in the earlier and less onerous ones.
On the supposition that the man is working by the piece and can stop
when he pleases, he would naturally stop when he is so weary that
further work would cost him personally more than it would bring to him
in the way of gratifications.(1*) In the last fractional hour of his
labor he earns just enough to offset the sacrifice that this final
increment of labor costs; and, if circumstances force him to work
longer in order to retain his employment, he will rebel against his
fate and join an eight-hour movement. Here, then, is a point of
equilibrium of gains and sacrifices involved in wage-earning. The
final increment of labor put forth in a day costs the worker
personally just what it brings him. Earlier increments bring the same
wages, and cost the worker less. They afford a differential gain that
we may term laborers' subjective rent.
In a full analysis of the wages problem it will appear that,
if the number of workers be limited, the amount of work to be had for
hire depends on the length of the working day. The final increment of
labor offering in the market is the labor put forth in each day in the
latest working hour. By a commercial principle this final increment
offered sets the general rate of wages. We notice, in passing, that
the location of the no-rent period, or the point of equilibrium of
gains and sacrifices resulting from labor, has a determining influence
on the rate of wages. It fixes the quantity of work for sale.
Determined in amount as it actually is, labor at every period of the
day except the last insures a differential gain to the worker, and
this represents the entire personal advantage that he gets from
earning money by labor. Consumer's rent represents the entire
advantage that he gets in spending the money. Earning a dollar by work
that entails less than a marginal dollar's worth of weariness, and
spending or investing it in a way that affords more than a marginal
dollar's worth of gratification, -- these two operations insure to the
worker net personal gains. They represent the advantage afforded by
work and wages over idleness and starvation.
Labor is not the only sacrifice incurred in the creating of
wealth: abstinence entails sacrifices, and it increases the fruits of
industry. The part of the social product that is insured by capital is
traceable to a personal process that is costly. What is here important
is that acts of abstinence arrange themselves in a series, according
to their costliness, like the succession of hours in a working day.
Putting the last dime of a day's wages into the savings-bank entails
the present loss of the last and least of the gratifications that a
day's work might have secured. Saving a second dime cut more deeply
into the pleasures of the present, and the saving of the last
increment of income that is actually put into the fund of capital
entails the foregoing of a gratification that is so intense that
whatever can be had through this means in the future barely offsets
the sacrifice involved in waiting for it.
If we arrange the units of wages secured by the labor of a
day in order, according to the increasing personal sacrifice involved
in earning them, we shall have a series that, if placed in an inverted
order, will represent the increasing difficulty of saving them. It
costs the worker practically nothing to earn his first dime, while it
costs him about what a dime is subjectively worth to earn the last
one. The last dime that is earned is the first one that is saved.
Putting this one into the savings-bank cost the man subjectively
little, since it means only the foregoing of a luxury while saving the
first dime that is earned would mean the foregoing of bread itself.
Somewhere there is a limit where abstinence naturally ceases, because
the gains of it just offset the personal cost that it entails. Saving
that is practised before the limit is reached insures a net personal
gain that is the capitalists' subjective rent and corresponds in
quality to the laborers' subjective rent that we have already
analyzed.
We noticed in passing that, if the number of laborers be
fixed, the total amount of labor offering in the market depends on the
prolonging of the working day, or on the extending of what we termed
the point of equilibrium of gains and sacrifices into the later hours.
In like manner, if the number of abstainers be fixed, the amount of
capital that is to be had for hire depends on the foregoing of more
coveted pleasures, or on the crowding of the capitalist's point of
equilibrium of personal gains and sacrifices into the region of
increasing sacrifice. As the last hour of labor in a day figures as
the final unit in the supply of labor, and determines, in a way that
we shall soon clearly see, the rate of wages, so the last dime saved
in a day constitutes the final increment in the supply of capital, and
figures in a corresponding way in the adjustment of interest. Wages
and interest depend on the location of the two marginal lines of
subjective equilibrium of gains and losses entailed by production.
They are also the lines from which the two varieties of producers'
subjective rent are measured. These two rents are the differential
gains accruing from what we may term intra-marginal labor and
abstinence, or the working and the waiting that cost the men
personally less than do the working and the waiting that insure the
final increments of labor and capital.(2*) This subjective rent of
producers and consumers is the sole object of industry, statically
regarded. Wages and interest as embodied in money, or wealth in a
convertible form, are objective rent; and this is always a means to
the subjective end. Men exert themselves to get money: they realize a
producer's subjective rent in making it and a consumer's subjective
rent in spending it. If we can get a dollar at a small sacrifice to
ourselves, and spend it for a large personal gratification, we are
gainers; our industry is profitable.
Actual society is dynamic; and, when we study it statically it
is with no purpose of ignoring the changes to which it is subject. By
a series of static studies we determine the nature of the changes that
are actually taking place, as we might ascertain the movements of
particles of water in a stream by making a series of cross-sections of
it. This series of studies affords a theory of industrial dynamics.
In one instant of time none of the structural movement of
society are possible; and we will, as it were, artificially prolong
such an instant. We will create a period long enough to allow labor to
go on, and to get and consume its wages, and let the social structure
continue through the interval as it was in the beginning.
In actual life there is always too much labor and capital in
some industries and too little in others. The working groups are
always somewhere out of balance; and in our static study we may, if we
choose, leave them so. We may take society as we find it at a
particular instant, making too much of commodity A, too little of B,
about enough of C, etc., and suppose that it continues in this
unsymmetrical condition. Men and money ought to move from one place in
the system to another, but they do not. This would bc like making a
static study of the surface of the ocean by freezing its waves fast in
all their irregularity. A simpler way would be to reduce them to a
level; and the better plan for our study of society is to suppose that
the industrial groups are not out of balance. Capital and labor are in
normal quantities in them all. An equilibrium in the amount of capital
and labor in the different groups is artificially created at the
beginning of the period that we study, and is held throughout. The
relative amounts of silk, iron, etc., that are in process of
production are normal.
We need now to define the productive agent, social labor and
capital, if the use of the term "rent" in connection with
them is not to have a look of absurdity. Labor and capital, in current
theories, are the antithesis of the typical rent-producer, land. Yet
wages in the aggregate constitute the income derived by society from
its entire fund of pure labor energy; and interest is, in like manner,
the product of a fund of pure capital. Both are differential gains,
and completely amenable to the Ricardian law.
Capital may be studied from two points of view. Science has
used both, the one intentionally and the other unconsciously and
blunderingly. It has alternated in the same discussion from the one
view to the other, to the confusion of the analysis. In formal
definitions a concrete view has been taken, and capital has been
treated as a mass of instruments for aiding labor. It is tools,
buildings, materials, etc. In the actual treatment of the subject
capital has been regarded in a way that is more in harmony with
practical thought. It has been considered abstractly, as a fund or
quantity of wealth devoted to productive uses. In this view it is what
a business man has in mind when he speaks of his invested capital as a
hundred thousand dollars; and it is what the treasurer of a
corporation designates in the same way in his published statement of
assets and liabilities.
Both views are essential in economic analysis: the common and
practical though abstract view is the more serviceable in the solution
of problems of distribution. Capital itself is in reality one and the
same thing in whichever way it is treated. Regard capital in the
concrete, and it will appear that the mass of things that constitute
it is changing at every instant: bread, clothing, furnishings, etc.,
are passing continually out of the stock; and new things are taking
their places. Men begin to eat, wear, and otherwise consume articles
that until now have figured as a part of some one's stock in trade;
and, while doing this, they, by their own industry, replenish the
stock from the other end. They produce new raw materials and advance
old ones at the same time nearer to completion. They wear out tools,
and make new ones. The essential fact is that the things that in each
brief period are taken out of the stock are of substantially the same
value as those that are put into it: the capital is therefore intact.
In actual life the amount of capital in existence changes slowly: in a
static view it is supposed not to change at all.
The things, then, in which society invests its fund of
productive wealth are changeful, while the fund itself is permanent.
The things lose their identity continually, while the fund retains it
identity, as does a river of which the component elements, particles
of water, are changing at every instant. In the concrete view that for
certain purposes it is necessary to take, social capital is a shifting
list of things always worth a certain sum; while, in the abstract view
that for our present purpose it is necessary to take, social capital
is a fund of wealth fixed in amount, though invested in a shifting
list of things.
An essential fact concerning what we may now term pure
capital is that its outward forms must change continually if the fund
itself is to continue to exist. Completed articles must be taken from
the stock, unfinished ones must be completed, materials must be
advanced towards completion, and new raw materials must be secured. If
the process stops, capital perishes. By means of these continuous
changes the productive fund is made to take the forms that
circumstances require. If an instrument is ill adapted to the service
demanded of it, it will be replaced, whenever it is worn out, by a
better one. Like the vital tissue of plants and animals, concrete
capital, except in the case of land, perishes and is renewed; and the
new tissue is sound and adapted to it purpose. In particular does the
new concrete capital adapt itself in form to the number of men who are
to make it serviceable. A large fund for the use of few workers takes
one set of forms, while a small fund for many workers takes a wholly
different set. A static view of pure capital represents it as constant
in quantity, and as used by a constant number of men. The tissue that
is restored by industry is therefore of the same kind as that which is
destroyed by use. Change in amount either the working force or the
capital, and you introduce a dynamic element into the situation, and
you make it necessary to change the outward forms in which the
productive fund is invested. Double to-day the capital of an isolated
society, and you will not simply duplicate it shovels, ploughs, looms,
etc.: you will give it new machines, more solid buildings, new
roadways, etc. With two thousand dollars' worth of pure capital per
man, the workers need to have in their hands a list of instruments
quite different in kind from those that served their purposes when
they were using a thousand dollars per man. Vary pure capital
quantitatively, and you change working instruments qualitatively.
As the capital that figures in our present problem is the
pure social fund of productive wealth, so the labor in our problem is
a corresponding fund of human energy. This is a fact as real and
important as the former one, and as fully attested by the current
thought and language of the business world. It is the interests, the
rights, and the struggles, not so much of particular laborers, as of
labor as a permanent force, that absorb the attention of practical
men. Workers are distinct from work. For the purpose of a study of
distribution they are related to it as capitalist are related to
capital. They own it, and therefore they justly claim its products.
They control the shape that the labor takes to the same extent that
the capitalist dictates the forms of investment of his "money."
A working man determines whether his labor shall take the form of
planting, of quarrying, of weaving, of writing, etc. Concretely
regarded, labor is a list of acts that men perform in the creating of
wealth. They are as unlike in themselves as are the tools that workmen
use. Planting, weaving, etc., are dissimilar outward forms of working
energy.
Abstractly regarded, labor is this fund of pure energy
itself, as changeful in its forms as is pure capital. As a fund, it is
kept intact by the young generation of workers who come upon the scene
and take the places of the older ones who depart. Laborers are
perishable, but social labor is continuous. This permanent fund of
human energy, ready to take shape in such concrete working acts as the
needs of industry may require, is the second generic element with
which a philosophy of distribution has to deal. The parallelism
between capital pure and concrete, on the one hand, and labor pure and
concrete, on the other, is a fact of primary importance.
We noticed that, if the working force be constant, capital
changes in kind whenever it changes in quantity. Labor is subject to
the same law. One man with a thousand dollars at his command will work
in a different way, will perform a set of acts different from those
that two men will perform if they have the same capital. To change the
labor force quantitatively, while other things remain the same, is to
change it also qualitatively. In a static view quantity and quality
remain constant. There is a fixed number of men, working at the same
trades and by the same processes. When a carpenter dies a carpenter's
apprentice replaces him, and uses the same tools in the same way.
Part
2
|