Libertarian Land Philosophy:
Man's Eternal Dilemma
Oscar B. Johannsen, Ph.D./center>
BOOK I: FUNDAMENTAL PRINCIPLES
Chapter 2 - Determination of Rent, Wages and Interest
To man has slowly come the knowledge that the expenditure of his
energies on the treasures of the land with the aid of his remarkable
tools is not merely a physical problem but is also one which
involves the marketplace.
How does he unite the two fundamentals -- land and labor -- so that
a torrent of wealth will pour forth in a never-ending stream? With
barely any conscious thought, the solution arose through a process
known as the division of labor. Men divide up the work to be
performed according to their capabilities, desires and
profitability.
If at all possible, men labor not only at tasks which please them
but which also yield them the maximum return. So diverse are men's
desires and capabilities that there are relatively few jobs which no
one will attempt. Even to repair the soaring spire which graces a
beautiful church, someone will step forward to assume that hazardous
assignment if sufficiently high remuneration is offered.
This does not mean that tasks automatically are performed most
expeditiously. Rather, there is a tendency by dividing up the work
among men of different abilities and desires that man's work is
performed most efficiently.
How best to use the land is much more difficult to determine than
how best to employ men's energies. In primitive areas, the solution
is relatively simple for it is largely predicated on physical
factors. The limitless oceans are employed for fishing; the fertile
valleys for agriculture; the wind-swept uplands for grazing. But, as
the division of labor becomes more minute and the utilization of
land more intensive, physical characteristics are hardly sufficient.
What use should be made of a piece of land, which can just as
easily yield petroleum, wheat or rye? Visions of liquid gold roaring
spectacularly into the firmament gives substance to the belief that
drilling for petroleum would he the logical choice. But actually
profitability is the determinant. If wheat yields the greatest net
return, then its yellowing stalks would be seen swaying in the
breeze much as a river of gold gently ripples its way across the
countryside.
Physical considerations count, of course. Coal cannot be wrested
from the earth where none is present, but the final arbiter is the
exchange mechanism.
Exchange is the child of the division of labor. In turn, money is
the perplexing offspring of exchange. And money gives birth, by
means of prices, to a system of comparing the desires of men for the
infinite variety of goods they produce. And prices close the circle
by reacting on the very factor, which gave rise to exchange "the
division of labor" for they aid in determining how to apportion
the labor through wage differentials. But prices do more. They
enable men to determine the best usage of land. Exchange, thus, is
the mechanism by which men determine not only the goods they wish
produced, but how best to expend their energies, how to allocate the
land, and how to apply capital.
By what means are these abstract principles put into effect? A
businessman, that is, an entrepreneur -- a particular kind of
laborer -- is the kingpin. He strives for the most efficient
division of labor, the optimum allocation of labor, land and
capital. He does this in an attempt to produce goods at the lowest
possible cost so as to make a profit.
This businessman-laborer, more often reviled than praised, is the
driving talent directing the activities of others. He is the
coxswain who sets the pace and guides the shell. Is a coxswain
indispensable? No, without him, the oarsmen could determine the pace
and direction, but not as well. Neither is the businessman
absolutely essential, but without his directing skill the results
would not be nearly as good.
Prices are invaluable to the businessman. They help him to
determine not only the optimum coordination of land, labor and
capital but also which products to produce. In the example cited, it
was the difference between the prices at which petroleum, wheat and
rye could be sold and the costs of the land, labor and capital
involved, which determined the article produced. Since wheat netted
the greatest return, that was the one chosen.
Some decry the return that the businessman receives as
exploitation; that he profits from doing nothing. But a coxswain,
while he does not row, is as important as any member of the crew and
may mean the difference between winning and losing the race. In like
fashion, the businessman is just as important as any laborer or
landholder or capitalist, and may mean the difference between the
success and failure of the enterprise.
Possibly, at this point a short digression on costs would not be
amiss since confusion is rife as to what they actually are.
Ordinarily a businessman considers his costs to be wages, rent and
interest. He subtracts them from his sales to arrive at his profit
but actually these items are not costs. Instead, they are shares in
the product. The landlord, the capitalist and the laborers are all
cooperating to produce wealth. As has been previously stated, the
wealth produced is divided among the landholders, the laborers and
the capitalists as rent, wages and interest.
The costs of production really are the expenditure of human energy,
the depletion of land and the wearing out of capital. Costs apply to
the productive phase of human activity, not the distribution
portion. Costs are related to land, labor and capital, and not to
rent wages and interest.
Clearly, the article, which is produced, is not a cost. The berries
picked by a native are not the costs to pick the berries. The costs
are the labor expended to pick them, the baskets worn out, the land
depleted. Wages. Interest and rent are the result of the costs
expended. And they go to the factors, which expended the costs, that
is, to the laborers, the capitalists and the landholders.
It is unfortunate that the word "costs" has been applied
to rent, wages and interest. By substituting this word for "share"
or "division", the tendency is for the laborers, the
capitalists and the landholders to look upon each other as
contestants for the wealth produced rather than as cooperating
parties.[1]
However, this erroneous labeling has been so deeply imbedded in
men's minds that it is probably impossible to dislodge it.
Therefore, the ordinary usage will be retained in this book as long
as it does not result in erroneous conclusions.
Though the businessman should use better terminology and consider
rent, wages and interest as shares rather than costs, nonetheless as
he looks at them objectively he is able to arrive at judgments which
help him to decide how best to apply land, capital and his labor and
the labor of other men to the production of wealth.
Does it surprise the reader that by looking at rent, wages and
interest, the businessman is able to determine what he believes is
the optimum utilization of land, labor and capital? It should not.
After all, production is the result of consumption. Man wishes to
consume. Therefore, he produces wealth. A man wishes to drink water.
Therefore, he goes to a brook and with the aid of a cup scoops some
up. Because he desired to consume wealth he produced it, not the
reverse.
It is true that production comes first for you cannot consume
unless something is first produced, but it is what man wishes to
consume that determines what he will produce. Therefore, looking at
the rewards of production " rent, wages and interest" is a
perfectly natural way of determining what man wishes produced and
consequently how to allocate land, labor and capital.
But how is this general principle applied in the practical world?
The answer is simple. Profit is the determinant. Other things being
equal, the fact that one business is more profitable than another is
proof that it is catering more nearly to the desires of the people
than the other one is. It is producing the things which people have
a greater desire to consume. It is using land, labor and capital in
accordance with the people's wishes.
The fact that the determination of sales as well as the "costs"
of rent, wages and interest are in terms of money, i.e., prices, has
a number of important consequences. One of the most important is
that businessmen usually absorb the risks of an enterprise.
As an example, an entrepreneur might have made a contract with a
landlord, a capitalist and other laborers in which it was agreed
that the landlord would get 30% of the product produced, the
capitalist 10%, the laborers 50%, with the business receiving 10%.
Let us assume that 10,000 barrels of petroleum were produced and
sold at $1 a barrel. Then the landlord would receive his 30%
($3,000); the capitalist his 10% ($l.000); the other laborers their
50% ($5,000); and the businessman his 10% ($l.000). It is obvious
that they are all cooperating in producing petroleum and the amount
of money divided depends on the price of the oil. While such an
arrangement might be made, the following is more likely.
Instead of setting up proportions, the businessman will contract to
pay a certain amount of rent, interest, and wages in money. The
price at which the petroleum will sell is now his risk. If the price
turns out to be 50 cents instead of $1. He suffers any loss. Since
he absorbs the risk, naturally he expects and is entitled to a
greater return than if he and the others all shared the risk. For
that reason, he agrees to pay them amounts which would be less than
if they were partners. If he was quite certain that when produced
the oil would sell at $1 a barrel, he might offer to buy the shares
of the others on the basis of $.90 a barrel. So, he might offer
$2,700 to the landlord, $900 to the capitalist and $4,500 to the
laborers. If they decided there were no better alternatives, they
would accept.
If he does sell the oil for $1 a barrel, he winds up with a greater
profit than if all had shared in the risk. He would receive $1,900.
($10,000 less the sum of the rent, interest and wages; ( $2,700 +
$900 + $4,500= $8100)
It is at this point that many erroneously assume he is acquiring
unconscionable profits. But note, the $1,900 consists of his wages
of $1,000, to which he certainly is entitled, plus the extra $900
which is the compensation for the risk he assumed. The others were
only too willing to let him earn this extra money in return for
their not having to assume the risk of the oil selling at a low
price. The additional $900 consists of $300 in rent, $100 in
interest, and $500 in extra wages.
Thus, the profits of a businessman are his wages, plus possibly a
combination of rent, interest and additional wages which the others
cooperating with him could have earned if they had wished to assume
the risks involved.
If oil sells at a very low price, the businessman discovers that he
has paid the others too much for their shares. To continue to
produce, he must offer them less. It they agree, then he can stay in
business if he can sell the oil at a price sufficiently high so that
he can give to the landlord, the capitalist and the laborers the
payments agreed upon, while still leaving himself with a share which
he believes is worth his while.
Each makes his determination on the basis of the alternatives to
which the land, capital and labor could be put. If they find no
better alternatives, they will accept the lesser shares. If they
refuse, then the production of petroleum ceases at that location,
and the land, labor and capital are directed to other uses.
But the most important question of all is still unanswered. How are
the relative proportions which each of the cooperating agents
receive determined? We have merely assumed what they would be, but
have not stated by what means they were determined.
The answer is simple. Supply and demand yields the answer. While
this is true enough, it explains little. How do laborers,
capitalists and landlords know approximately what they can demand?
Of course a businessman utilizes the economic data available.
Through calculations, he arrives at answers which guide him in his
venture. But how was it determined that a piece of land in the
center of town can be rented for $1,000 per square foot while
another piece of the same size at the edge of town can be rented for
only $75? Why are the prices not reversed?
The means by which entrepreneurs determine what rent they will
offer is by making a comparison with land they are presently
utilizing. For example, a businessman studies a parcel of land and
decides it has greater potentialities than the land he is using. He
believes that after paying wages and interest on the new site he
will have left $3500 with which to pay the rent and give himself a
nice return. He is presently earning $500 so he will wish to make at
least that much on the new parcel. Therefore, he can offer to pay a
rental charge up to $3,000 and be no worse off.
What rent would he otter? As little as possible. If he offers $2500
and no one overbids him, he would obtain the use of the land at that
figure. However, we will assume someone else thought along similar
lines. This competitor believes that on the new parcel he can pay as
much as $3100 in rent and wind up with an income equal to that which
he is presently earning. Thus, the second man raises the bid to say
$2,900. While the first man could go up to $3,000, he probably would
consider that it was not worthwhile as he would merely net what he
is already earning, so he would drop out of the bidding. Thus, the
second man would rent the site for $2,900 it no one else overbids
him.
Although the comparison each man makes is with his present
situation, actually the comparison is between the productivity of
the land in question and the best free land available. Businessmen
are not aware of it, but they are really part of a chain reaction
which regresses to the best free land available, usually called the
margin of production or margin of cultivation. If they were advised
that the rent they are offering is dependent upon this margin, it is
doubtful if they would know what you are talking about. They would
insist that all they are doing is making a comparison with their
present situation.
However, that the comparison is really with the margin is easy to
demonstrate. If land is available from which 100,000 barrels of oil
could be drawn, and if there was plenty of such land available which
could be had merely for the asking, then no rent could be charged.
No one will pay any rent for land, no matter how productive it is,
as long as he can obtain other land which is equally as productive
for nothing. It was because there was no comparable land available
for the taking that the men were willing to pay rent.
The comparison between the best land and the margin could be a
direct one. For example, after paying wages and interest, a
businessman operating on free land might net $500. If on the best
land available he believes that after paying wages and interest he
will net $1500, he would be willing to rent that land at any figure
up to $1000. as this would still leave him the $500 presently being
earned. This would be a comparison between the best land and the
poorest.
However, it probably rarely happens that such comparison is that
direct. The comparison is probably the best land, A, with the second
best, B. Then B with C, and so on until the poorest land "the
free land " is reached.
This chain effect is an example of the fascinating harmony existing
among diverse factors of our world, for it illustrates the tendency
for those with the greatest ability to wind up on the land of the
highest productivity. The most dynamic and resourceful man is the
one who recognizes the possibilities of the best land and is able to
utilize it properly so as to be able to offer the highest rent.
Other men, not quite so efficient, tend to resort to land of lesser
productivity, but within their capacity. Abilities tend to harmonize
with the opportunities available.
For simplicity's sake, up to now we have assumed that wages were
the same on the best land as on the poorest land. This is quite true
if consideration is narrowed to the same amount of work done with
the same skill. However, the better land requires more skill, more
imagination, possibly greater speed, greater mental agility as well
as superior judgment. The tendency, therefore, is for the best
salesmen to wind up working on Fifth Avenue in New York. The finest
opera singers appear in the great cities. The most efficient bank
clerks are in the financial houses and banks in the great
metropolitan areas. This is a tendency. It is not a hard and fast
rule. Nonetheless, one could almost determine the type of people who
will be working at a particular location by the rent it commands,
and vice versa. If the people are intelligent, efficient and
hardworking, it is quite likely the rent of the land on which they
are laboring is high.
It appears almost as though Nature, having created us with
different capacities, provided us with opportunities to match those
abilities. The man with mediocre ability works on land of limited
opportunity. By so doing, he probably is happy since he is not
working over his head. If he attempts to work at a location which
requires greater skill than he possesses, he probably will become
frustrated, nervous and unhappy. The great ball player winds up in
the big leagues. The fair ball player winds up in the minor leagues.
Other things being equal, both will probably be happy if their
abilities tend to match their opportunities.
That one has greater natural ability than another is a fact of
life. Such is the way in which we are made, possibly for a good
reason. While it may be human to envy these with great abilities, we
should be pleased that they exist as they are so beneficial to us.
The lovely aria sung by an opera star is a thrill to all who cannot
sing a note. The efficient and skillful workers who aid in
increasing production to the point where the prices of the goods
produced drop, benefit us all in these lower prices.
An example which may give more meaning to this question of rent has
to do with the difficulties of the miners in Alaska in the gold rush
days of the early 20th Century. They paid no rent for panning for
gold as long as there was plenty of gold-bearing land, which as far
as anyone could tell was as good as any in use, and which they could
obtain by merely staking it. Only when the land was all parceled out
and it became obvious that some land had more gold in it than other
parcels, did rent arise.
A miner who panned two ounces of gold a day on his land and who
believed that for the same expenditure of effort he could obtain ten
ounces on better land would be quite willing to pay rent for it. How
much rent? Up to eight ounces, for that would leave him with the
same quantity that he was presently earning.
Thus, he would offer some figure less than eight, say four ounces.
This would leave him with six ounces, a huge improvement over his
present wages. However, it would not be long before the rent would
tend to rise to a figure close to eight ounces because other men
would compete for that land. After all, even if seven were offered,
a miner earning only two would be better off for he would now be
netting three ounces.
When all the gold-bearing land in Alaska was staked out, then free
land ceased to exist. But increasing numbers of men flooded into
Alaska with dreams of striking it rich. But how could their dreams
be realized if there was no land on which they could work? It is a
sad fact that few people recognized that land represents
opportunity- the opportunity to use one's talents. So when
institutional or other factors prevent men from having access to
land, their talents lie idle, wasting away.
For the men pouring into Alaska, the problem was a serious one. Men
must eat to live. To obtain food they had to pan for gold, so they
had to get land on which to work. This meant they had to make
whatever deals they could with those holding the land. They would
rent whatever land was up for lease. With competition intense, rents
rose to the maximum. The rents tended to be the difference between
whatever could be produced on the parcels leased and the level of
subsistence. True, the subsistence level was rather good. For those
coming to Alaska from America the standard of living was fairly
high. Rather than go below the traditional level, they probably
would have resorted to violence. In India, the subsistence level is
very low due to generations of abysmal poverty. Therefore, if
Indians had emigrated to Alaska they would have agreed to have taken
much less, with the result that the rents would have been that much
higher.
It is quite important to recognize that the accessibility or lack
of accessibility to land affects all wages, and not merely the wages
of those who directly use land. As long as there was plenty of free
land in Alaska. if a man could pan two ounces of gold a day, that
represented the level below which wages for other occupations would
not go. Not all panned for gold. Some rendered services. For
example, some men and women established laundries. Those working in
the laundries demanded at least two ounces of gold daily for they
could earn that much panning for gold on the free land.
Wages are determined by what a man can make on the best free land
available. And when the best free land is highly productive, wages
will be high in all fields. For example, inasmuch as an unskilled
man could earn two ounces of gold per day working in a laundry or
cleaning tables, a mechanic would naturally feel he was entitled to
more. He might demand four ounces. Physicians could probably demand
ten ounces.[2]
What mechanics and physicians received would depend upon the supply
of and the demand for their services. In other words, the incomes of
people in varying occupations are determined by the supply of and
demand for people qualified to render the services desired, but the
incomes are also related to the wages which can be obtained on the
best free land available.
The people in the various occupations can be thought of as being in
a ship which rises and fails with the tide. They are positioned in
some degree of order, much like a pyramid, with common labor at the
bottom of the ship and the professional men, such as physicians and
executives, at the top. The relative positions will change as the
demand for the people available to render particular services
varies. For instance, specialists in making buggy whips may earn
much greater wages than a common laborer. However, with the advent
of the automobiles, such men are no longer needed. Since demand
falls, so will their wages. While the drop in wages may not fall to
that of the common laborers' unless there is absolutely no need for
their services, it will fall below those of people with other
skills, as a chauffeurs.
Wages in occupations for which there is the greatest demand and
which require the greatest skill or knowledge would tend to be the
highest, while in fields requiring no skill, wages would be the
lowest.
But all wages would be affected by the height at which the ship
floated above the bottom of the sea. If the tide was high, all wages
would be high, but if low. all wages would be low. The height at
which the ship would be depends upon the wages obtainable on the
best free land available.
For example, if in Alaska new lodes of gold were discovered on free
land from which miners could take ten ounces of gold daily, then
almost immediately, all wages in the various occupations would rise
relative to those ten ounces. Laundry employees would demand that
sum, otherwise they would pan for gold themselves. They might settle
for nine ounces because of the convenience of living in town and not
having to endure a miner's hardships. All other things being equal,
a common laborer's wage would tend to average about ten ounces a
day.
That would affect the wages and earnings of mechanics, physicians
and everyone else. A mechanic would now want more than four ounces.
Since his wage rate had been twice that of an unskilled laborers, he
probably would seek twice the new rate, or 20 ounces of gold.
Whether he received it would depend upon the demand for and supply
of mechanics. How much he would receive cannot be stated, but it
would certainly be more than ten ounces. Even if he were willing to
work as a mechanic at the common laborer's rate of ten ounces, his
wages would still have risen by six ounces. Thus, without his having
done anything differently, his wages would automatically have risen
because the best free lard available had a productivity which was
greater than before. And the physician could now demand much more
than the ten ounces he had been receiving previously. Possibly he
would get thirty or forty ounces depending upon the demand for and
the supply of doctors.
The same relationship holds true in reverse. As more of the free
land is preempted so that the best free land available is of lower
and lower productivity, wages will drop lower and lower. Now, the
mechanics and the physicians, although they had not done anything to
warrant a decrease in their incomes, nonetheless theirs would drop
also when the common labor rate dropped. People simply couldn't pay
the higher rates. It might be said that the ship had dropped with
the tide, so all were at a much lower level in relation to the
bottom of the sea than before. Within the ship, the relative
positions might be about the same, with the executives on the top
and the unskilled on the bottom, but the position of all with
reference to the bottom of the sea would now be much lower .
Unfortunately, most people are unaware that their wages are tied to
what men can make on the best free land available. They do not see
that the ship is rising or falling with the tide. All they are
acutely conscious of is what is occurring within the ship. It might
be envisioned as one completely enclosed with only a few portholes.
The people are all so busy scrambling and vying with one another to
raise their relative position that they never bother to glance out
the portholes to note that their height with respect to the bottom
of the sea is determined more by the rise and fall of the sea than
with their jockeying for position within the ship. Some who do
glance at the sea shrug their shoulders and say there is nothing
they can do about its level, so why think about it The net effect is
a mad scramble to rise within the ship. But this usually can only be
accomplished at the expense of someone else. The relatively minor
increase in height which might be attained is of little significance
when compared with what could be attained if the tide of wealth
continually rose.
A synoptic view of a developing country indicates quite clearly
that the tendency is for rent to go up as a proportion and wages to
decline. As the country grows, the production pie increases in size.
Therefore, rent and wages - the two grand divisions of the wealth
produced - increase in quantity. However, the proportions tend to
change at the expense of wages. Whereas in the early stages of
development rent might have taken 1/10th of the pie and wages
9/10ths, later rent might be 3/l0ths and wages 7/l0ths.
Matters are not quite as simple as the above might indicate for as
a country expands, complications arise. The newer free land may be
more productive than the older land. Thus wages would rise because
of the greater production on the free land. Wages might rise not
only as a quantity but as a proportion. However, as the nation grows
until all the land is enclosed, wages would tend to drop to the
subsistence level with rent soaring as a quantity. Possibly at this
point, the relative proportions would tend to stabilize. Wages would
probably tend to constitute the greater proportion of the annual
production for otherwise production would cease, but the proportion
would tend to be much less than in the early stages of a nation's
growth.
Inventions and more efficient managerial methods add to the
complications which becloud what is happening. These factors
increase the productivity of some or all of the land. Inventions
cause some land to become tremendously productive, but indirectly
may cause other land to become less so. The internal combustion
engine resulted in oil-bearing land becoming highly productive. At
the same time, it probably caused land which was for the raising of
horses to cease being used, dropping such land's productivity to
zero. There simply was no need for such land as the horse was
displaced by the automobile.
Inventions, education, discoveries and managerial techniques may be
likened to newly created rapids which tumble and roar their way into
the ocean of wealth overwhelming the older, more placid rivers of
wealth. The net effect is to help raise the ship somewhat.
Some gazing out of the portholes note that the ocean is now higher
and jump to the conclusion that what is necessary for raising the
ship is to have ever greater rivers of education, inventions and
discoveries. Such help, unquestionably. However, by concentrating on
these rivers, the man made institutional obstructions which tend to
prevent the level of the ocean of wealth from rising tend to be
ignored. Were these obstacles removed, not only would the level
rise, but more dynamic rivers of education and invention would
spring forth to reinforce the rise.
Most people are puzzled why wages tend to be higher in new
countries than in old ones. It is because as land is cheap most men
find it fairly easy to work for themselves. Therefore, they will not
work for anyone else for less than they can earn working for
themselves.
Wages are determined by what men can make working on the best free
land available as was demonstrated in the example of the gold
miners. In America wages are still much higher than in older
countries for the land is still relatively cheap. No doubt, this is
surprising to the reader since some of the most valuable land in the
world is in New York City. Yet relative to the area and productivity
of our nation, land, on the average, in America is cheaper than land
in most other countries. This is partly due to the fact that the
subsistence level is higher. Inasmuch as rent is the difference
between the productivity of the land in question and the best free
land available, since for all practical purposes there is no more
free land in America, rent becomes the difference between the
productivity of land and the subsistence level. In America, if a
piece of land will yield $100 in production a week, and if our level
of subsistence is say, $70 a week, then the rent would tend to be
$30. In England, as their subsistence level is lower than ours, say
$60, the rent for the same kind of land would tend to be $40. The
land, then, in England would tend to have a higher selling price as
it would return a greater yield.
The subsistence level cannot be underestimated for it may determine
at what point people will revolt. Since the American level is so
high, we revolted at the ballot box in the early 1930's at a stage
which probably amazed people in Europe or India. They would have
been content to live on quite a bit less. However, as we had not yet
become inured to their lower level, action was demanded. That
action, unfortunately, took the form of governmental welfarism. The
revolt might have become violent smashing some of the restrictions
which prevented men from having access to the land, such as occurred
in the American Revolution. Instead, the revolt, was channeled into
welfarism administered by the State.
War sometimes causes conditions to improve in a country, but this
will be true only if it happens to make it easier for men to have
access to the land. If it becomes quite cheap, the economic
situation will improve because wages will tend to be higher.
However, as production increases, land will become more expensive
and living more difficult. The great post-World War II boom in
Germany was the result of two factors. First was the removal of most
of the wage and price restrictions and rationing, as well as the
institution of a relatively sound money. This permitted a large
measure of private enterprise to flourish. Second was the fall in
the price for land due to the terrible war destruction. However, now
as land prices have risen, the Germans are being plagued by the same
problems as the British the Americans and most of the western world.
The fundamental laws which determine rent and wages are David
Ricardo's Law of Rent, and what amounts to its corollary, the Law of
Wages. The preceding analysis has been an attempt to explain them in
as simple terms as possible. To put them in technical terms, they
are:
The Law of Rent
The rent of land is determined by the excess of its produce over
that which the same application of labor can secure from the least
productive land in use.
The Law of Wages
Wages depend upon the margin of production, or upon the produce
which labor can obtain at the highest point of natural
productiveness open to it without the payment of rent.
The Laws of Rent and Wages are complimentary. They are really two
different aspects of the same thing- that is they determine the
natural division of the wealth which has been produced.
To put them in a simple equation, we have:
Production minus Rent equals Wages.
P-R = W
Rent comes first, then wages. This is borne out in our every day
life. In renting land we pay the rent at the first of the month, not
after we have used the space. However, our wages are paid to us at
the end of the week or month that is, after we have rendered our
services.
Strictly speaking as rent comes from production just as does wages,
rent should be paid after the wealth has been produced. However, the
custom has arisen of paying rent at the beginning of the production
period instead of the end. This is merely an indication of the fact
that rent is subtracted from production and what is left over goes
as wages.
Now, it must be emphasized that this is merely a very simplified
account of what occurs. We have assumed no differences in the skills
of labor. Also, the effect of inventions, education, capital,
speculation in land and other factors which complicate the picture,
and which are closer to reality have been deliberately left out in
order that an understanding of the fundamentals might be grasped.
Probably a few everyday example will aid in acquiring a better
understanding of these two simple but tremendously important natural
laws -- the Law of Rent and the Law of Wages.
In the United States today, for all practical purposes there is no
free land available. The land is all occupied or held under title by
someone. About the only land which is freely available to all are
the roads and streets, parks, deserts, tops of mountains, the
oceans, rivers and some lakes. This is free land which no one can
pre-empt and all can use.
Streets and roads, of course, represent a type of land which is set
aside for the transportation of goods and people and is ordinarily
freely available to all. Such land cannot be used for many other
productive purposes. However, some salesmen do use the streets in
their business. Aside from some police regulations which are
ordinarily minor hindrances, the streets and roads represent a form
of free land for these salesmen. They sell ice cream,, vegetables,
and household goods on the streets. Many important businesses have
been established in this way.
What are the wages of a salesman who canvasses from house to house?
They will be whatever he can make based on his commission. If he
makes $150 a week selling brushes and brooms to housewives, this is
obviously the result of his own efforts -- his own production.
What would someone else have to pay that salesman to work in a
store? It would have to be about $150, for by working on the streets
he can make that amount, He might be willing to take a little less,
say $140, since he would be saved the walking and working in all
kinds of weather. But by and large, after taking into account all
the factors of convenience and the type of work he likes to do. the
wages anyone else would have to pay him would gravitate around $150.
If police restrictions become onerous and prevented the salesman
from his canvassing, then with no free land available to him, he
would be forced to accept whatever he could get from anyone needing
a salesman. He could not demand something in the neighborhood of
$150. He would have nothing to revert to if he did not like what was
offered. His choice would be to take the best he could get or
starve.
That, unfortunately, is the condition in which most of the people
in the world find themselves today. Take what you can get or starve.
That is because most of the land which is productive is pre-empted.
There is little or no productive free land. And it is all part of a
natural phenomena. As land is occupied, rent tends to go up and
wages tend to decline.
That does not mean that man cannot make use of these natural laws
to his own advantage, just as he makes use of other natural laws in
building marvelous machines. Man does not decry the law of gravity.
He uses it. The fact that the laws of rent and wages decree that
rent shall go up and wages decline as man is forced to resort to
land of lower productivity is nothing over which to become upset. It
is something to study and analyze to determine how these laws can be
used to man's advantage.
The Eternal Dilemma facing man is how to divide up the unequal
opportunities of the land among the equal claimants to them with
justice to all. The Laws of Rent and Wages give us a clue toward the
solution of this problem.
A striking illustration of the fact that wages are determined by
what can be obtained on the best free land available is exemplified
by what happened to the miners in Alaska. As has been previously
pointed out, when all the gold-bearing land was staked out, wages
dropped to the level of subsistence at which the men there were
willing to exist. It is reported, however, that after this had
occurred someone discovered gold below the high water mark on the
shore. Now it happened that such land could not legally be staked
out for private claims. It was free to all. Naturally, all rushed to
work the land. What happened to wages? They rose to what a man
working on the shore could pan. Men working in laundries or on
claims owned by other men demanded and received approximately what
they could make panning for gold on the seashore. This lasted until
the gold on the shore ran out. When this occurred, wages dropped
again to the subsistence level.
Suppose a new continent arose in the Atlantic ocean comparable to
what the United States was when Columbus discovered it. If this land
was as freely available as much of the land of the United States was
after the Revolution, many people would emigrate there. What would
happen to wages in America? They would rise to a point somewhat
comparable to what men could make on this new land after taking into
account all the inconvenience and trouble involved in living in a
new, raw country.
The discovery of America helped to alleviate conditions in Europe
and probably helped to raise their basic wages slightly. With
millions of people streaming to the United States to work on the
free land here, wages had to rise somewhat in Europe to keep the
people there. What complicated the situation, of course, was that
restrictions placed by governments made it difficult, if not
impossible, for some of the Europeans to leave. Thus, the free land
or America was artificially prevented from having its full effect.
Also, the difficulties of the long journey across the ocean, the
distaste for the more primitive way of life, and the reluctance to
break away from one's homeland, all helped to counter the effect of
America discovery. Nonetheless, as long as the United States had no
immigration barriers, it did have a significant effect. It might not
be amiss at this point to consider briefly the effect of increased
population. As more people entered America, they had to resort to
land of lower productivity. This caused rents to rise and wages to
fall. However, at the same time, the very fact that so many people
came here and cooperated with one another caused an increase in
productivity. This meant that the production on the margin of
cultivation (the best free land available) also rose, forcing wages
up. There existed two competing effects. The expansion to lands of
lower productivity tended to reduce wages and increase rent. At the
same time, this increase in population tended to increase
production, which in turn helped to raise wages.
Inventions and improvements in the arts have had a similar effect.
They tend to improve the land's productivity and raise rent and
wages as a quantity because there is more of the production pie to
divide. Ultimately, however, wages will fall to the subsistence
level as long as all the land is pre-empted. Of course, this is a
long term development.
The effect of inventions, population and many other factors act
simultaneously either to increase or decrease the productivity of
land. Were it possible to keep all factors constant and observe the
effect of one, as inventions, it would be apparent what was
happening, but this is impossible. Man's economic world is not a
laboratory. Instead, it is a dynamic and confusing one which
sometimes appears to operate without rhyme or reason. But, actually
it is a well-ordered one, but sadly distorted by man through his
lack of understanding.
Up till now little attention has been given to a highly important
factor. This is speculation in land. Whenever men enter upon a
virgin territory, they are perfectly conscious of the fact that with
the passage of time, if the land is at all productive, it will tend
to become more valuable. Therefore, they do not merely take as much
land as they need. Rather they take as much as they can get and
hold.
In the settlement of the United States, the pioneers staked out as
much land as they possibly could even though they could never use
all of it in a lifetime. Of course. the kingly rogues of Europe,
with a fine disregard for the Indians gave vast tracts of land to
their favorites. William Penn was given practically all of what is
now Pennsylvania in payment of a debt the King of England owed his
father. Lord Baltimore was given what is now Maryland. Often these
grants caused serious disputes. Settlers who came here and cleared
and developed the land often discovered that it might have been
given to some parasite of the monarch who claimed sovereignty over
that land. One of the causes of the American Revolution was the
dispute between the grantees of the English king and the settlers.
The grantees charged the settlers rent, and often even forced them
to vacate the land. American history is studded with the violent
clashes which ensued over the resolution of this problem.
Whenever people lay claim to title to a piece of land, they try to
justify it. In America, either they claimed they bought it from the
Indians, as in the classic case of the so-called sale of Manhattan
Island for twenty-four dollars, or they claim their rights to it
came from some king who had never even been in this country. These
royal brigands had no more right to award land to anybody than did
the man in the moon. They just arrogated the right to themselves and
backed up their grants with force. Since the Indians were powerless
to fight back, they were coolly ignored. The white man would have
enslaved them but as the Indians were primarily nomads they were too
independent. They fought until they were practically wiped out. This
was one of the most shocking cases of genocide in the history of the
world and it is only now that a glimmering of what occurred is
coming to light.
Because the Indians could not be enslaved, the big landholders in
the South encouraged the importation of Africans and made slaves of
them. With such vast holdings of land, the Southerners needed many
hands to work the land. If, instead, they had had smaller holdings
and had worked cooperatively with one another, they might have
increased their wealth by themselves. Certainly, they would not have
felt the need to make slaves of fellow human beings. Hypocrisy
reached an all time low when some of the same men who enslaved the
colored man issued the soul-stirring Declaration of Independence
declaring that all men are born with equal rights to life, liberty
and the pursuit of happiness.
This land grabbing and speculation in land has other extremely
deleterious effects besides those mentioned above. Not only can it
cause a serious drop in production, but often results in only a
relatively small portion of the better land being put into use. This
forces poorer land into production much sooner than necessary which
means that wages drop quite rapidly, certainly more rapidly than if
land were developed as it was actually needed.
Now, it is obvious that in the United States today. wages as a
quantity are, on the average, relatively high, certainly higher than
100 years ago. They are probably higher even after taking into
account the depreciation in purchasing power which has been caused
by the federal government's manipulation of the monetary system.
However, wages as a proportion of the wealth produced are quite
likely less than they were 100 years ago.[3]
In America increased population, increased cooperation, new
inventions and methods of production have helped to mitigate the
effect on wages as people were forced to resort to land of lower and
lower productivity. It may well be that this recourse to poorer land
was caused more by land speculation than by the increase in
population. It is a question if the United States would be spread
out the way it is today if it were not for speculation.
While wages are good in America, one would expect that with such a
tremendous increase in production as exists here that wages would be
excellent. The fact is that most of the people receive what might be
considered only a fair wage. It is true that the standard of living
is higher today as the people have more material comforts than their
ancestors had. However, much of this improvement has been occasioned
by mortgaging their future, as well as by a system of governmental
welfarism. To help the masses, the government takes some of the rent
as well as wages through taxation, which it then distributes to them
by means of various welfare programs.
Since the American people are able to produce such huge amounts of
wealth, it has long been a puzzle why all the people are not
extremely wealthy. Only a relatively few are, and some of this
handful possess such fantastic quantities of wealth that it would
make even King Midas envious. There must be something terribly wrong
with America's system of distributing the wealth produced, and there
is. To have the government taxing production in order to distribute
it is clearly an inefficient and unsound method. There must be a
better method. There is.
Thus far, we have concerned ourselves with the two grand divisions
of wealth - rent and wages. We have ignored capital. However, as
labor invariably uses tools, it must pay interest out of its wages
for the loan of the capital it uses.
It appears peculiar to learn that interest comes from wages for we
have all grown up thinking otherwise. But then labor hires capital.
The landholders do not, nor do the capitalists. If a farmer rents a
quarter section of land from some landowner, he pays the landlord
rent from what he produces. The landowner certainly does not pay any
interest to the capitalist for any of the tools the farmer may use.
It is the farmer who has to pay interest for the loan of any plows.
reapers or trucks he borrows. And he pays this interest out of the
production which is left after he has paid the rent. Just as the
laborer gets his wages after he has produced, so the capitalist gets
his interest after his capital has helped in the production of
wealth.
To be more specific, interest comes from the increased wages which
labor obtains as a result of the loan of capital. If capital did not
help labor to increase its wages, labor would not use it. If a man
picking beans at the rate of 20 a minute by hand, finds that after
using a cutting tool he picks the same number or less, there is no
point in using it. Any amount of interest which he must pay for the
loan of the tool would mean that his wages were less than when he
worked by hand. Therefore, it is obvious that interest must come out
of the increase in wages which results from the loan of capital.
The reader may now ask, - Is there a natural law which determines
what interest will be?- yes, It is the same law which is really the
overriding law of Rent and Wages-- the Law of supply and Demand.
In its simplest form, the Law of Supply and Demand states that the
price of an article is determined by the supply of and the demand
for it, other things being equal. If the supply of the article
increases, then if the amount demanded is the same, the price will
tend to fall. If the amount demanded increases with the supply
remaining the same, the tendency will be for the price to rise.
Elaborate supply and demand schedules are often set up to illustrate
this law with demand curves and supply curves drawn on graphs. The
intersection point is the price at which the article is sold.
However, while these graphs may help one to understand the Law of
Supply and demand, they are completely fictitious. They do not
depict actual points in the world of reality other than the
intersection point. No one really knows the schedule of demand that
exists in the minds of people. And no one actually knows what the
supply of an article would be at various prices.[4]
The interest which labor will pay will depend upon the supply of
and demand for capital. If there is little wealth available to be
loaned as capital, the tendency will be for interest to be quite
high if the demand for capital is great. If the supply is large with
demand low, interest will tend to be low.
2) Now, it must be remembered that capital consists of tools. If a
particular tool is produced and is the only one in existence, the
capitalist could demand as interest all the increased production
except for a little which would still leave the laborer more than he
would have if he did not use the tool. In such a monopolistic
situation, the maximum interest would be just a little less than the
increase in productivity resulting from using the tool. This assumes
the tool could be utilized by different laborers on different
parcels of land. The higgling and haggling of the laborers for the
use of this single tool would tend to make the interest a maximum,
i.e., somewhat less than the complete increase in productivity.
In the absence of a patent, however, other capitalists would note
the excellent return, and would build similar tools. This
competition would force down the amount of interest which could be
demanded. The minimum amount would be something above zero; just
enough to induce capitalists to loan out tools. Therefore, in
loaning capital, the tendency is for the interest paid to be almost
all the increased productivity if a monopoly exists, whereas it will
be a minimum of just enough to make it worthwhile to loan tools if
vigorous competition exists. If there are no laws permitting a
monopoly, the supply of tools would tend to increase to a point
where the return from loaning out one kind of tool would be the same
as for loaning out another type of tool. Capitalists would be
constantly seeking those tools which would yield the maximum
interest. If the return for loaning lathes is greater than for
loaning reapers, more capitalists would start acquiring lathes to
lend. The competition would drive interest down to a point where
there would be no advantage in lending lathes over reapers.
The capitalist expects his capital to be returned in the same
condition in which it was borrowed. Strictly speaking, therefore,
such problems as depreciation and insurance are outside the
determination of the amount of interest paid. Those problems are
actually the concern of the laborer since the tool is in his
possession. For the sake of simplicity, therefore, in this
discussion of capital and interest, no consideration is given to
depreciation and insurance. We can assume an indestructible tool
which cannot be stolen.
Whereas in commercial parlance, rent and wages are reckoned in
terms of amounts of money, interest is ordinarily considered as a
percentage. To say the interest on capital is 5% annually is to say
that for every $100 invested in a tool, $5 is the amount of interest
received per year.
Inasmuch as under conditions of perfect competition and knowledge,
the rate of return tends to be the same on any and all forms of
capital, no doubt, the question will arise what determines whether
the rate will be 10%, 5% or whatever it is.
First it might be pointed out, however, that in a society
structured strictly on the concepts of justice, only wealth or
services would be loaned or bartered by private individuals, with
wealth being the most important. Services are usually paid for
immediately or shortly after having been rendered. Even if there is
some time lag between the service and the payment, no additional fee
is ordinarily charged.
Since interest is the return for the loan of capital, as indicated
above, it is the supply of and the demand for tools which determines
the rate. But this is not to say that consumptive wealth does not
have an effect on the rate. After all, ordinary wealth can be loaned
just as capital can. An individual throws a party and gladly pays a
fee for borrowing chairs, chinaware and cutlery. If consumptive
wealth was not loaned so that all loans consisted of capital, then
the interest rate would probably be lower than it is. It is a
question how great or small this effect is, but it does have some.
At the present time, there does not appear to be an answer as to
why the interest rate in a community is in the neighborhood of say,
5%, for many years, any more than there is to the question why the
price of pins may tend to be about l0 cents for a long period of
time. We are dealing with man-made as well as man-conditioned
products. Capital is a man-made product just as pins are. In a
society in which it is relatively easy to produce tools, interest
would probably tend to be low, all other things being equal. But in
one where it is difficult to produce capital, as on a frontier, the
interest rate would be high. It is well-known that interest rates
are higher in under-developed lands and on the frontier than in
highly developed areas.
There is probably no limiting factor on the rate of interest such
as exists in the case of land and labor. The rent of land is
determined by the supply of and demand for land, but rent is limited
by the productivity of the best free land available. Wages are also
determined by the supply of and demand for labor, but wages are also
limited by what laborers can earn working on the best free land
available.
The most we can probably say about interest is that it is
determined by the demand for and supply of capital, and the reason
it fluctuates around a certain rate in a certain area is an
historical one. It appears that the rate will tend to be a low one
in advanced societies and higher in less developed countries. But
how much higher will probably be determined by a host of factors
such as the character of the people, their willingness and ability
to construct a growing dynamic society, and the ease or difficulty
of producing and maintaining capital.
Economists have had a field day in attempting to determine the
underlying principles relating interest and capital. The results
have not been too satisfactory. Possibly this is principally because
the definition of capital used by most economists is so broad. For
many it consists of tools, land, buildings, inventories and money.
Some even include a laborer's skill and home. Essentially for most,
capital appears to be something upon which a return can be obtained.
Economists, therefore, are trying to determine a rate of return on
something which is treated as though it were a single item when
actually it consists of a host of factors which are generically
different. It is hardly surprising, therefore, that none of the
explanations of the determination of interest has met any universal
acceptance. It appears to be much easier to refute any theory than
to evolve one. Bohm-Bawerk, the noted 19th Century Austrian
economist, refuted quite devastatingly most of the theories of his
time, but when it came to giving his own positive theory of
interest, the result was not too impressive.[5]
The economically sophisticated reader may object that the Austrian
School views the market as a process. In it the actions of the
entrepreneur are paramount in enabling the participants to arrive at
a more satisfactory state. By noting different opportunities he
revises the prices and quantities which he will buy and sell. One of
the weaknesses of the market-equilibrium theory is the assumption of
perfect competition and. the lack or description by which prices are
changed. Possibly with increased understanding, the Austrian process
theory may displace the market-equilibrium theory as more realistic.
When economists finally adopt a scientific methodology with
rigorous definitions of their terms and carefully stated postulates,
it may be that a solution will be derived which will meet with
general acceptance.
For this writer's purpose, the correct principles which are
involved in the rate of interest are interesting but not vital. What
is important is whether interest is a justified return for the loan
of capital. When capital is carefully defined to be merely tools,
then, as will be subsequently shown, interest is justified.
If human beings are classified as capital, and the return which the
slave-owner receives from exploiting them is called interest, one
can hardly expect any decent human being to accept the arguments
that interest is a justified return for the ownership of capital.
Although, today, slaves are not considered capital, there is one
particular item which is usually considered by many to be the most
important form of capital, and that is land. But if land, as well as
tools, is treated as though it were capital, then the return for the
loan of land as well as tools is considered to be interest. But this
gives rise, then, to a legitimate question as to whether interest is
justified or not. For now we have two different items treated as
though they were one -- the fee for the loan of land and the fee for
the loan of tools. It does not follow that because it may be
perfectly justifiable for a private individual to obtain a return
for the loan of a man-made item, such as tools, that it is also
justifiable to obtain a return for the loan of a Nature-made item,
as land. In a subsequent chapter this point wilt be amplified.
Recapitulation
The rent of land is determined by the excess of its produce over
that which the same application of labor can secure from the least
productive land in use.
Wages depend upon the margin of production, or upon the produce
which labor can obtain at the highest point of natural
productiveness open to it without the payment of rent.
Interest is determined by the demand for and supply of capital, all
other things being equal.
As a consequence of the laws of Rent and Wages, as a country
expands, rent tends to rise as a proportion of the wealth produced
while wages decline. As a quantity both rent and wages tend to rise.
(Note: Inasmuch as the principles enunciated in this chapter with
regard to rent and wages are so important, a more complete
explanation is contained in Addendum I which the interested reader
is urged to peruse.).
NOTES
- It is interesting to note that those companies, which follow an
enlightened policy of constantly informing their employees of the
state of their enterprise and afford them a worthwhile share in
the business, seem to have less labor problems. By taking the
attitude that the employees are partners in the business, the
results appear more satisfactory than if the feeling is that they
are contestants for the profits.
- Those rendering personal services, as physicians and
entertainers, do not receive wages since wages are that part of
production which laborers receive for producing actual wealth.
Landlords, capitalists and laborers give some of their production
to those in the personal service field for the particular service
desired. The amount which those in the service field receive,
however, is related to production for the greater the wealth
produced, the more wealth which can be exchanged for services. For
purposes of differentiation, their income might be termed "earnings"
- It is difficult to prove that wages as a proportion have
dropped. Accurate statistics are not available, particularly those
which are over 100 years old. In addition, whatever statistics
exist most likely consist of income rather than of any breakdown
between rent and wages.
- In econometrics, which is a sophisticated discipline attempting
to measure economic relationships empirically, the problem of
identification particularly in demand-supply curves is a serious
one. Since the data available represent only the intersection
points of demand-supply curves, when one attempts to use such
statistics to trace out a demand curve the question which arises
is whether the curve is actually one or not. It may merely
represent what is known as a mongrel equation. This is a
relationship which is a mixture of the supply and demand
functions.
- One can, of course, apply directly the formula of marginal
analysis. Then, in a perfectly competitive market, based on the
fundamental concept of maximizing income, Price = Marginal Cost.
Thus, the price of capital (the interest rate) tends to the point
where the extra gain to be obtained from using one more unit of
capital is equal to the extra cost involved in using it. But, this
does not answer the question why does the interest rate in a
particular area fluctuates about say 5% for long periods of time.
But, as indicated above, this question may he as pointless as
asking why does the price for pins fluctuate say about 10 cents.
(Most any modern economic textbook will give an adequate
explanation of marginal analysis).
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