The Fallacy of Profits

John Luxton

[A Reply to Professor Henry Pratt Fairchild. Reprinted from Land and Freedom, March-April, 1932]

Henry Pratt Fairchild (1880-1956) was a sociologist with strong Marxist orientation. He was a member of the faculty of New York University from 1919 until his retirement in 1945. The article being criticized by Mr. Luxton is available online in the archives of Harper's magazine; however, access is restricted to paid subscribers only.

The article "The Fallacy of Profits," by Henry Pratt Fairchild, in the February number of Harper's, is just one more example of the attempts of economists to lead a thinking public away from the real cause of depressions. The writer was greatly pleased with the way in which Professor Fairchild started out, and he found everything that the professor said for part of the journey to be unassailable from any angle.

The professor states a truth that should guide all students of economic problems when he states:

"Discover the way to restore purchasing power and you have discovered the remedy for the existing depression. Find out how few maintain purchasing power and you have found out how to prevent depressions in the future."

With such a good beginning it is a pity to be disappointed as one reads along. Gradually it dawns upon one that the professor in seeking to show that profits are not necessary in a more evenly distributed purchasing power has made the subject more difficult than simple, and one wonders why these leaders of thought seem to enjoy confounding the issue for the average citizen who is floundering about in a sea of perplexity, ready to grasp at any straw.

It is not necessary to go to much length to show that profits are unnecessary. The example of the child picking berries is as simple an illustration of land and labor applied to it as can be found. The berries are the child's wages. No profits enter into the simple demonstration of land, labor and wages. If there were two children at a picnic and one picked berries while the other picked wood for the fire or carried water there would be no profit in an even distribution. One would pick berries for two while the other would fetch water for two. When society and methods become more complex it is easy to see that inspite of all the complexities there should be no profits unless some one is getting something for nothing, and in the case someone is receiving nothing for something.

In a simple system of society any production over and above immediate necessities of life means a surplus to that applied to living needs when production is impossible because of unfavorable environmental conditions. This surplus is difficult to apportion in a vastly complicated society, but the basic principle is the same. If any individual or group of individuals gets any more of the surplus than is rightfully his, others get less than their share; they are said to be underpaid. Their purchasing power is less. The purchasing power of the others will be greater, of course, but when these others, individuals or groups, where a very small fraction of all the people it is idle to think that they will consume as many goods as the larger number with the smaller purchasing power would consume if their purchasing power were greater.

The professor could have explained this in less than two pages of Harper's and in language perfectly comprehensible to a high school student, but that evidently is not the way of most of our present-day economic teachers. He has to lengthen his article, and in doing so he makes some assertions that are open to debate if not downright fallacious. For example, he lists five factors of production namely, land, labor, capital, organization and ownership. Although the professor explains that organization is necessary to combine land, labor and capital into an effective unit, this directive skill, initiative and control are nothing but labor when everything is said and done, and, as labor, will share in the product of labor and receive wages. The sales manager, publicity agent, advertising manager, superintendent and any other of the directive force constitute labor just as much as do the lathe hand, fireman, engineer and porter. What is gained by calling organization a separate factor in production?

All honor to those who do not consider ownership a separate factor. It shows that some day we shall arrive at a better understanding of economics since we are not completely muddled yet by the mass of terms used by economists. One cannot think of ownership without thinking of something having been exchanged for the privilege, money or its equivalent in goods or service are the commodities usually exchanged. When ownership began with purchase or with money used to develop a business we speak of the money as capital invested, and as capital it receives in return for its use, interest.

No one can think of ownership being exercised as separate and distinct from the money value of such ownership, money of course representing wealth. Therefore the owner is always the capitalist, and whether he built up the business step by step over rough long, painful years, or bought a controlling interest by purchase of stock, or inherited it from his grandfather, the ownership represents capital invested, and thus we see that in spite of Professor Fairchild the only factors of production are three: land, labor and capital. When budding young economists realize that, it will be a day of hope for all of us.

The professor says that there is a vast amount of muddy thinking on the subject of wages. He belittles the phrase "labor's share of the product," and is at great pains to show us that labor never at any time has any ownership of any part of the product. He says that…

"only in a figurative and moralistic sense has labor any share in the product: out of the product labor receives its compensation. But this is not because of any ownership of the product but because labor's contract with the owner calls for compensation, and the owner has nowhere else to get it from than the product."

Does a modern and complex society alter basic principles? The product of labor in the simplest sense is wages. With complex methods it includes interest and rent. When no interest is exacted and no rent is paid the entire product of labor is the wages. The child picking berries again, his wages are the berries. If he borrows someone's basket he pays the owner of the basket with berries. This is interest and what is left is his wages. If he enjoys the privilege of picking the berries on cultivated ground he probably pays in berries picked for the privilege. This is rent. In modern society a shoemaker adds value to leather, thread, nails, etc., when by his labor he turns out a shoe. That part of the value of the shoe when sold, aside from the interest on the capital invested and the rent for the land, is the shoemaker's as his wages. He owns part of the product. Whether he gets all that is his is another matter. He receives his share in money, of course. What use is it for Professor Fairchild to becloud the issue by denying this truth? Labor does own a share in its product, and labor just about half sees it now in spite of the efforts of our pseudo economists who preach tariffs, overproduction, low standards of living and what not. One of the main causes of the current depression is the fact that labor's share has been diverted elsewhere.

The professor expresses a wish for a more even distribution of purchasing power. He says it is time to realize that this is essential to the maintenance of prosperity and the preservation of economic stability in the most realistic sense. How can that realization be brought about to the satisfaction of all of us when directors of economic thought in our high schools and colleges go to great lengths to mislead the youth by such befuddled thinking as Professor Fairchild exhibits in this article?

Profits are incompatible with a just distribution of purchasing power. That is what he wanted to say, and in doing so he stated untruths, the belief in which has enslaved man for centuries.

The real causes of depression are that for centuries labor has received less than its share of the product, thus allowing wealth to concentrate in the hands of a few with a purchasing power vastly in excess of their needs or their ability to use in a lifetime, and the fact that publicly created land values are allowed by law to be privately appropriated, thereby placing both labor and capital under a handicap. Any reference to the land owner in the article is conspicuous by its absence. Labor and capital have been the goats long enough. Where labor gets its wages and capital its interest without any part being taken for no service whatever there are no "profits," but such a condition will come only when the economic rent, the site value of land, is collected by the government for the benefit of society.