The Theory of Distribution

Francis Y. Edgeworth

[Reprinted from the Quarterly Journal of Economics, Vol. 18, 1904, pp. 159-219]

At the height of abstraction from which it is here attempted to survey the economic world, what appears the most salient feature in the transactions respecting land is the circumstance that the quantity of ground, or at least space,(55*) is limited, not capable of being increased by human effort. From this property flow most of the general theories relating to the landlord's share in distribution, -- that a tax on rent (proper) falls wholly on the land, that the remission of agricultural rent by landlords would not benefit the consumer,(56*) and other propositions often connected with the formula that "rent does not enter into the cost of production." Some remarks on that time-honored formula seem called for here.

It would not be consistent to have complained of the expression that "the entrepreneur makes no gain" as perplexing and apt to mislead, however innocently used by high authorities, and to pass over in silence this dictum about rent, against which and in favor of which much the same is to be said. Certainly, it is supported by very high authority, -- the authority not only of Ricardo and Professor Marshall, but also of Hume, who in the letter which he wrote to Adam Smith on the publication of The Wealth of Nations (the letter which, written a few month before Hume's death, may be considered his economic testament) says, "I cannot think that the rent of farms makes any part of the price of the produce, but that the price is determined altogether by the quantity and the demand." (57*) On the other hand, it can hardly be denied that the dictum in question is calculated to obscure the truth that "land is but a particular form of capital from the point of view of the individual manufacturer or cultivator;"(58*) that, as he doses land with capital and labor, so he doses capital and labor with land,(59*) up to a margin of profitableness. And, in fact, the similarity of the factors of production from the entrepreneur's point of view does not seem to have been apprehended in all its generality by the classical writers. Thus Fawcett, who may be taken as a type, when explaining rent seems to posit the size of the farm as something fixed and constant.(60*)

J.S. Mill argues that "there is always some agricultural capital which pays no rent," (61*) not noticing the counter-argument that there is a portion of land which pays no interest.(62*)

These imperfections belong now, it may be hoped, to past history. And yet that the description of rent as not entering into price is apt to prove misleading may be inferred from the many protests which eminent critics have raised against Professor Marshall's use of the time-honored phrase.(63*) Their criticisms attest the correctness of their own views rather than their capacity of appreciating the views of others. What should we say of critics who should think fit to read Mill a lecture on the errors of the Mercantile system, because Mill had employed the terms "favourable and unfavourable" exchanges! To have attributed to Professor Marshall the very error which he by his doctrine of the "Margin-of-building" has done more than any other economist to obviate would be unpardonable if it were not excused by the misleading associations of an unfortunate phrase.

To return to the real, from the seeming, import of the phrase, we see that, as the offer of land is in general attended with no real cost, a tax upon the payment for land does not disturb production.(64*) On grounds of distribution, too, a sort of income which increases without any effort on the part of the recipient is prima facie a suitable object for a specially heavy impost. On these grounds Mill's proposal to tax away the future unearned increment of rent is defensible, if accompanied with Mill's proviso, that existing interests should not be disturbed. For, as argued elsewhere,(65*) a special tax on existing incomes from land would violate the two principal conditions of a good tax: it would both tend to diminish the amount of production, and also to impair the equality in the distribution of burdens between the owners of incomes derived from land and from other kinds of property.

The practical importance of Mill's proposal is greatly reduced by the proviso with which it is accompanied. For, in order that the State may make a good bargain by giving the market price for a certain class of future goods, the State must be able to look further ahead -- must exercise the telescopic faculty of prospectiveness in a higher degree -- than the ordinary capitalist. And it may well be doubted whether this condition is fulfilled by the politicians who act on behalf of the State. We hear much of instances, like that of Chicago, where the value of sites is said to have multiplied some eighty-fold in half a century; but we hear little of proposals to buy up at their present market value the site of some future Chicago, unless, indeed, as part of a scheme for Land Nationalisation, which does not include compensation to vested interests. Unlike the husbandman, who plants trees the fruit of which he will not himself see, the advocates of a single tax and other socialist agitators grasp at the standing crop which has been sown by others, heedless whether cultivation in the future is thereby discouraged.

But, even if their outlook were as distant as it is bounded, there would remain the possibility that, though looking far ahead, they might not discern distant objects clearly. Mill cannot be accused of the shortsightedness which sacrifices the future to the present. He looked very far ahead. But he did not see what was coming, the fall of English rents. Actuated by the highest motives, he proposed an arrangement which was perfectly just to the landlords, and would have proved perfectly disastrous to the State.