Rent, Wages and Interest

The Law of Their Relation

Edward White

[An address delivered at the Henry George Congress.
Reprinted from Land and Freedom, November-December 1936]

In teaching political economy certain fundamentals must be strongly impressed upon the students, for there are points wherein the least wobbliness causes confusion and results in the propagation of error.

Political economy shows us that wealth is produced from natural resources, termed land, by human effort, termed labor, aided by various instrumentalities, termed capital. Frequently it is stated that the product wealth is divided into three portions, rent for land, wages for labor, and interest for capital. This statement accords with common speech, but it is incomplete and tends to obscure the actual relationships involved.

Ordinarily people speak of rent as payment by a tenant to a landlord, of wages as payment by an employer to a workman, of interest as payment by a borrower to a lender. These statements do not accord with basic facts but reflect superficial appearances only, like the conventional statement that the sun rises in the east.

Rent, wages and interest are receipts, not expenditures. Primarily they are received by man from nature as a result of wealth -producing activity on the part of man. Only secondarily and only in part can they properly be viewed as payments by some men to other men.

The point can be illustrated by simple facts of common knowledge, the significance of which we are apt to overlook.

Wealth being the product of human exertion applied to nature with the aid of capital, it is plain that the individual who undertakes productive activity receives in the product the entire quantity of wealth resulting from the union of land, labor and capital, and it is plain that this product is received from nature, not from man.

To use an illustration stripped of non-essentials, consider some man who undertakes some productive activity on some location and uses some capital. As a result of his exertion (labor) applied to natural resources (land) with the aid of certain instrumentalities (capital) there is a product (wealth). Part of the product is due to the man's exertion; this is the wages of labor. Part of the product is due to the man having a superior location; this is the rent of land. Part of the product is due to the capital which the man used; this is the interest of capital.

After the man has received wealth from nature as a result of productive activity on his part, the product is usually, but not always, shared with other men who permitted or aided the activity. Here is where confusion enters, because at first glance we see this secondary act of sharing the product take place in the form of payments commonly called rent, wages or interest; it is only by closer attention that we see the producer first receive from nature the entire product out of which all shares must come. So do we see the sun rise in the east; it is only by closer attention that we perceive the revolution of the earth.

Not always is any sharing of the product involved. The producer who owns the location where he labors does not pay rent, but receives rent from nature in the form of wealth to the extent of whatever advantage his location gives him. Self-employing labor does not pay wages, but receives wages from nature in the form of the wealth produced. The producer who owns the capital he uses does not pay interest, but receives interest from nature in the form of wealth due to his use of capital.

If the producer needed only the labor power of himself, that portion of the product resulting from labor is his wages; if he needed the labor power of other men to aid in part or all of the undertaking, the wage portion of the product results from the labor of all the men involved, and that wage portion must be shared among them according to the part performed by each.

If the producer had only to choose a more productive location upon which to labor, the rent or superiority differential of his location comes to him as an advantage over other men who used less productive locations; if he must first buy permission to use a better location than he could use without permission, part of all or the rent portion of the product, must be paid to the person whose permission was bought.

If the producer owned the capital he used, that portion of the product due to the use of such instrumentalities comes to him as the interest of his capital; if he had to borrow capital from others, part or all of the interest portion of the product must be paid to those whose capital he used.

Of the three, rent seems to be the most difficult to grasp. It must be understood that rent is a differential expressing the greater productiveness of superior land. Take farm land for example. If there is plenty of it available on any of which a farmer can produce twenty bushels of grain to the acre, and there is some better land on which the same application of labor and capital will produce twenty-five bushels of grain to the acre, there exists a differential of five bushels per acre in favor of the better land. The man using that better land receives from nature five bushels more per acre than is received by other men using twenty-bushel land, and he receives this additional five bushels, not as a result of labor or capital, but as the result of location. This holds true in all forms of productive activity, although not always so readily perceived. The storekeeper on a busy down- town street does a tremendous volume of business, not because of the labor or capital involved, but because of location. The more advantageous locations are comparatively scarce, which leads men to bid for them and offer a premium for their use. This results in the phenomenon of land value, or a purchase price reflecting the opinion of men as to the advantage secured by using particular locations.

The principle of the illustration given holds true in all the subdivisions and through all the ramifications of human activity in producing wealth, although it may not always be seen clearly. There is a necessary series of steps between the raw material in nature's storehouse and the consumption of finished products by consumers. If these steps are taken by one person at one place, it is not difficult to see the whole picture, but where efficiency requires subdivision of labor, and different steps are taken by different sets of people in different localities, the complexity of the process may obscure the basic principle.

The producer of raw materials, the processor of raw materials into finished products, and the distributor who takes the final step in production by placing finished products in the hands of consumers, all deal with the location factor, land; the human factor, labor; the assisting factor, capital; and all receive from nature a product due to the union of these three factors.

When this relationship is grasped, many difficulties vanish.

The notion that rent enters into price, or is an element of cost, is seen to be an inversion of the natural order, for obviously rent is in effect a reduction of cost, the user of a superior location producing at less cost per unit than those using inferior locations.

The notion that wages are paid to labor out of capital or by capitalists is also seen to be an inversion of the natural order, for obviously wealth must first be produced before there is anything for labor to have or to share in.

The notion that interest is extorted from producers is seen to be an inversion of the natural order, for obviously it is nature that pays interest, and it pays it to the user of capital by yielding a product that is due to the use of capital.

This discussion is intended to emphasize and somewhat amplify points to which Henry George called attention in Pogress and Poverty, but which he did not enlarge upon because not essential to his inquiry. This discussion is not in any way an improvement on or correction of Henry George, but may serve as a correction of some who have failed to grasp the teaching of this greatest [unreadable].