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SCI LIBRARY

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?