Review of the Book
Economic Science and the Common Welfare
by Harry Gunnison Brown
John R. Commons
[Reprinted from The American Economic Review,
Vol. 15, No. 3 (September, 1925), pp. 480-485]
This book is significant of the transition now going on in economic
theory from the subjective analysis of marginal utility to the
objective analysis of market prices. Part I is a highly realistic
description of the price system and gives the beginner the difficult
but important concept of the general price level and the relation of
banking, business cycles, prosperity, depressions, monopoly,
competition and tariffs. But part II takes us back to the subjectivism
of economic theory of twenty to thirty years ago with its
individualism and its marginal utilities and disutilities. It should
be said, however, that in part II, Professor Brown is trying to get
away from the mysticism of the past and to belittle such subjective
concepts as impatience, pain, pleasure, etc., but he cannot rid
himself of his own debates of fifteen years ago, and hence an
otherwise realistic and vigorous analysis of the "ultimate
determinants of value" is confused by the terminology of
psycho-analysis.
I take it the source of this reversion to subjectivism is failure to
apprehend that most of the individualistic analysis that requires
subjective concepts could be presented just as forcibly in objective
terms of habit, custom, and common law. For example, "impatience,"
which he belittles as a cause of interest on capital, is, objectively,
nothing more or less than the prevailing customs of the community,
including its laws of property. Professor Brown reduces impatience to
a minor place and exalts to the major place the "productivity of
capital"-or rather the "productivity of marginal waiting"
by eliminating the high rates of "impatience" of primitive
peoples and pre-capitalistic eras (II, p. 135 passim) and by showing
that, in modern times, impatience is a purely subjective,
individualistic feeling which plays small part when the individual is
choosing between the opportunities actually open to him on the
markets. The individual impatience is merely adjusted to the
prevailing rates of interest, and it is the forces of demand and
supply, of present and future goods that determine the rate of
interest (II, pp. 118ff).
By eliminating "impatience" in these two ways he makes "productivity
of capital" the main determinant of interest, though he does not
deny a functional relation between productivity and impatience. Had he
carried this functional concept throughout its historical process, he
could scarcely have belittled the part played by habits, customs and
laws, which keep up the rate of interest. Indeed, upon his theory of
the major importance of productivty of capital (marginal waiting) it
could plausibly be held that the precapitalistic rates of 20 per cent,
40 per cent or 50 per cent interest were due to the greater
productivity of capital in those remote or barbarous ages. If 50 per
cent interest is the prevailing rate, then only those exceptionally
rich resources will be developed whose productivity at prevailing
prices yields an income of 50 per cent, such, for example, as the
sea-faring ventures in which Shylock invested, or the richest of the
resources of Turkey or the Urals, and it could absurdly be said that
the "cause" of the high rates of interest was the high
productivity of capital. As a matter of fact, modern capitalistic
production has come in through reductions in the current rates of
interest owing to - greater certainty of the future, the negotiability
of debts, enforcement of contracts, international treaties, and other
devices of constitutional government and business practice which have
enlarged the habits of thrift and investment. This merely signifies
that capital has gone down to lower and lower levels of productivity',
coinciding with lower and lower levels of the current rates of
interest. Professor Brown concedes, as we have said, the functional
relation of productivity and impatience, but, had he followed his
admirable beginning in part I, of objectivity in the shape of prices,
he would have had the functional relations of four variables of human
activity, all of them objective and measurable efficiency, scarcity,
futurity, and custom-such that a change initiated in the dimensions of
any one would produce changes in some or all of the others.
For he has made use throughout of a scarcity concept of cost in place
of the older productivity, or efficiency concept, which enables him,
with admirable fitness to the facts of business, to bring out these
functional relations of productivity and scarcity, namely the concept
of "opportunity cost," first expounded by Davenport and
implied in Fetter's substitution of "choices" for pains,
pleasures, and impatience. The "cost of production" of a
particular commodity, with Brown, is not the positive outgo of pain,
effort, man-power, or money required to produce it, but is the
alternative income on the markets which a given outgo will yield and
which must be sacrificed, owing to scarcity of instruments of
production, if the particular commodity in question is to be obtained.
He shows that this "opportunity- cost" of production
influences demand no less than supply (II, p. 55) and applies it
throughout to interest, wages and the rent of land. The strength of
this concept of negative cost, however, in contrast with the classical
and hedonic concepts of positive cost, is concealed by the "marginal
utility" subjectivism with which it is expounded. Were he to have
worked it out in objective terms of price, as he prepared himself in
part I to do, I believe he would have presented a more convincing
method of economic analysis, reflecting accurately the practices of
business.
Professor Brown's most significant use of the concept of opportunity
cost is in the treatment of rent. It is difficult or at least
unrealistic, in the Ricardian analysis of rent, to work out a law of
rent applicable to urban rents, since that analysis is based oIn th-e
positive costs in agriculture at the margin of cultivation, which
somehow then must be transferred t;o urban rents. But the simple
statement (II, p. 77) that the marginal cost of production of urban
land, if it were necessary to increase the supply of that land as the
alternative to increasing the supply of competing sources of income,
is so high that "land would have to get tremendously scarce and
high in value before it would be worth while so to produce it to any
appreciable extent," brings the matter of all land values under a
universal principle of scarcity, instead of Ricardo's principle of
productivity. Land is defined as "land space," which is not
reproducible in favored centers except at tremendous cost, the other
factors of production being labor and saving (wherein is included
fertility), whose products are reproducible at the costs of
sacrificing alternative products of similar quantities of labor and
saving (II, pp. 70, 108). Thus "land space" has no cost of
production except a prohibitively high marginal cost in competition
with other opportunities, while other objects of value, being
reproducible at cost, tend to have equal marginal costs for equal
quantities of labor and saving. It is difficult to see, on this
account, why Professor Brown should include "land space" as
one of the three factors of production, the other two being labor
(including business leadership) and saving. I can see how his "made
land" is a factor of production, in which case, however, it is
not different from any other product of labor and saving (II, pp. 78,
201 passim). But here is a factor, "land space," or "bare
land," which, by definition, is pure scarcity and not
reproducible, and,, as such, it should be looked upon as a factor
which places a limit on production rather than one which increases
production. It is a scarcity concept rather than a productivity
concept. It would be as consistent with his general line of thought to
designate monopolies as factors of production as to designate land
space a factor of production. He apparently retains here vestiges of
the old empirical classification of land, labor, capital and
enterprise. In the case of "enterprise" he has properly
merged it with labor, since it is mainly the managerial aspect of
labor (II, pp. 76, 108), but he retains land space as a factor of
production, although, according to his definition, as was true also of
Ricardo's definition, it does not increase production but merely
obtains something for nothing (II, p. 208).
Properly speaking, and consistent with his general analysis, there
are two human factors of production, labor and saving, each of which
is equally entitled to compensation because its practitioners actually
increase the quantity of products. "The waiting yields a service
to the community worth as much as the interest received, as truly as
the labor yields a service worth as much as the wages received"
(II, p. 192). But payment of land rent (payment for space not manmade)
adds nothing to the products. Herein, it would seem, he has not
carried out his own proper distinction between efficiency, or
productivity, which increases the supply of goods, and scarcity which
limits the supply. "Land-space" belongs to the scarcity
function, but labor and saving belong to the productivity, or rather,
efficiency function of economic theory.
The practical application of this analysis appears under the heading "Earned
and Unearned Incomes," the title to part II of the book. Land
rent is an unearned income, because it proceeds solely from scarcity
and is obtained by landowners neither because it adds any service to
the community nor requires any cost of production, except at the
margins of artificially "made land." He carefully excludes
fertility, since that is reproducible the same as buildings and other
improvements, and he also excludes amounts paid by landowners in the
form of special assessments (II, p. 212). With these exceptions, land
values are properly subject to special taxation.
Professor Brown takes certain alleged services rendered by city
landowners, among them being "foresight," but concludes that
"foresight used to give a service may earn remuneration.
Foresight used to obtain something for nothing seems hardly deserving
of any special protection" (II, pp. 216, 217). Likewise,
conceding that the expected increment in land values formerly aided
somewhat in the settlement of the West, he questions whether the
benefit of that increment was diffused, but concludes that the
important question is, not what occurred in the past, but whether the
grandchildren of the settlers are entitled to a permanent unearned
increment derived from the earnings of those who came later,
especially when the highly valued urban lands of the western cities
are considered (II, p. 220.) Income and inheritance taxes may be
carried so far as to put a check on saving, but a tax on bare-land
values does not check savings-it rather increases the amount of
savings in the form of improvements, etc. (II, p. 222). In general,
the land values which he would have subjected to the special tax are
not agricultural lands but are special sections where pure scarcity on
account of the growth of population, and not decreasing productivity
on account of the lowering of the margin of cultivation, has increased
their values, such as urban lands, mines, and power sites (II, pp.
228, 229). His method of analysis at this point is quite superior to
that of Ricardo and Henry George, since it makes scarcity the central
feature and not the reduction of efficiency at the agricultural margin
of cultivation. I believe it places the argument for special taxation
of bare-land values on stronger and better grounds than those that
have hitherto been offered by the followers of the Ricardian analysis.
I am surprised, though, that Professor Brown does not find anvthing
to suggest in the way of unearned incomes derived from the general
fluctuation of prices and the business cycles which he so excellently
describes in part I of the book. He gives good justification of
speculation as an instrument for smoothing out the risks of industry
which result from fluctuations of particular prices (II, pp. 28-31),
but does not give any weight to the unearned incomes derived from
fluctuations of the general price level. On this point he rather
allows himself to be shifted away from the question of earned and
unearned incomes, by giving his attention to the theoretical questions
of general overproduction and "long-run" tendencies,
holding, quite correctly with the classical economists, that there
could be no such thing as a general oversupply. Such a situation as
general overproduction is "unthinkable," because, "in
general, men sell only that they may buy." "The appearance
of superfluity" during a period of falling prices, he says, is
merely an effect of industrial breakdown rather than of too efficient
industrial functioning (I, p. 134 ff.; II, p. 47 if.). Yet, even so,
are not these periods of generally rising and generally falling prices
which shift the ownership of property from one class to another class
without the former's consent, a source of unearned incomes and
undeserved loss quite as important as the unearned increment of land?
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