Value and Income [Reprint 2014 ed.] 9780674429505, 9780674499416

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VALUE AND INCOME

LONDON : HUMPHREY MILFORD OXFORD UNIVERSITY

PRESS

V A L U E AND INCOME ARTHUR ELI MONROE, PH.D. HARVARD

UNIVERSITY

CAMBRIDGE HARVARD UNIVERSITY PRESS 1931

COPYRIGHT,

193 I

B Y T H E P R E S I D E N T AND F E L L O W S OF HARVARD C O L L E G E

P R I N T E D IN T H E UNITED S T A T E S OF AMERICA

PREFACE HE theory developed in this book is not a simple one. Though I have tried to be clear and to eliminate unnecessary novelties in the way of terminology, much that is complicated remains.

I do not see how this can be

avoided without being misleading. T h e interplay of forces underlying economic phenomena is so intricate a matter that only misguided complacency can find simplicity in it. I t is better to face the facts. This complexity arises in some measure from the necessity of taking account of certain non-permanent elements in the social and technological background of economic life, which gives a relative character to some of our conclusions. Some readers may be surprised to find this cardinal doctrine of the Historical School in such strange company — in a book expounding " p u r e theory" in the abstract deductive manner which many followers of that tradition are inclined to belittle. I think there is a good deal to be gained, however, from bringing the two points of view together in this way, tempering the absolutism of theory with the realism of the Historians, buttressing and testing the criticisms of the latter with hard-headed logic. M y indebtedness to earlier workers in this field will be apparent to readers familiar with the development of economic thought. Scarcely a page of even the most unconventional of these chapters could have been written withV

vi

PREFACE

out their work as background, as inspiration, as irritant. I t is generally so in studies of this kind. Whenever I have been conscious of direct borrowing I have tried to give credit in the footnotes, b u t I fear t h a t many such points have escaped me. For these as well as for less direct obligations I hope this general reference will not seem grudging acknowledgment. T h e theory of interest and some parts of the theory of cost set forth here have already been published in the Quarterly Journal of Economics. Α. Ε. M. HARVARD

UNIVERSITY

January, 1931

CONTENTS I.

WANTS, COST,

CHOICE

3

Interest and Preference Cost and Choice II.

MARKET

3 8

PRICING

15

Demand Schedules Partial Monopoly Multiple Market Price The Market for Unfinished Goods III.

LABOR

AND NORMAL

VALUE

The Causes of Scarcity The Value of Scarcity Products The Objective Factors in Cost IV.

LABOR

AND NORMAL

VALUE (continued)

Unfinished Goods Cost of Production and Value The Nature of Normal Value V.

VI.

RENT

J4

54 57 61

AND V A L U E : AGRICULTURE

65

65 67 73

L A N D AS A C O N S U M E R S '

GOOD

THE

DEPLETION

OF R E S O U R C E S

The Differential Factors The Rate of Exploitation Intensive Exploitation Mining Royalties VIII.

35

36 37 43

The Uses of Land Producing One Commodity Producing Several Commodities The Problem of the Margin Market Pricing VII.

16 24 29 34

INVESTMENT

AND INTEREST

The Sources of Interest The Yield Schedules for Savings The Rate of Interest Interest and Value vii

81

81 84 90

90 91 97 99 103

103 112 124 127

viii

CONTENTS

IX.

X.

LABOR'S

SHARE:

RENT

DEDUCTION

{continued) The Concentration of Ownership The Interest Deduction

THE

SUPPLY

XII.

THE

NUMBER

The The The The

OF L A B O R

158

" Encouragement of Industry " Desirability of Income Costs of Labor Lesson of Experience

159 165 170 175

OF L A B O R E R S

180

The Number of Idle The Growth of Population

180 181

THE

SUPPLY

OF L A N D A N D S A V I N G S

188

The Supply of Land The Supply of Savings XIV.

THE

DISTRIBUTION

XVI.

XVII.

XVIII.

WAGES

188 194

OF T H E F A C T O R S

The Distribution of Labor The Distribution of Land The Distribution of Savings Risk and Risk-bearing XV.

132

. . . 133 . 137

144 144 154

LABOR'S SHARE

XI.

XIII.

THE

The Communistic and Individualistic Systems The Contractual System

201

"

OF M A N A G E M E N T

The Management of Labor The Management of Investments The Supply of Management Risk-bearing

UNCERTAINTY

AND P R O F I T

The Nature of Profits The Burden of Uncertainty

ENTERPRISE

AND P R O F I T

Types of Enterprise Charges for Labor and Uncertainty-bearing The Supply of Enterprisers Entrepreneur Expenses

VALUE: INDEX

A RECAPITULATION

201 211 212 214 222

222 231 232 235 238

238 242 250

250 252 255 257 260 277

VALUE A N D I N C O M E

C H A P T E R

I

WANTS, COST, CHOICE INTEREST AND

PREFERENCE

T IS characteristic of living mind," says Professor Perry, " t o be for some things and against others." 1 These attitudes of favor and disfavor are not simply a matter of pleasure and pain. Pleasure is no force in a life that is indifferent to it. T h e y are the product or manifestation of various organic dispositions — reflexes, instincts, complexes, and the like — the nature of which is even now only too obscure. T h e discovery and analysis of these underlying factors is the special task of the psychologist. For the economist the problem presented by these "interests," as such attitudes are sometimes called, is rather their relation to what has been traditionally regarded as the primum mobile of economic activity — man's wants. We shall therefore begin our study of value with a brief analysis of those aspects of "interest" which bear upon this question. Implying, as they do, a tendency to create, conserve, or the opposite, interests lead to action. Such interested action always has an object, some goal the attainment of which will satisfy (complete) the "governing propensity" from which the interest arises. These objects are of almost infinite variety — material and non-material, worldly and other-worldly, transferable and non-transferable, enduring and ephemeral. N o t all of them, therefore, come within the purview of the economist; but many of them, or the means of attaining or avoiding them, do raise the very problems with which he is concerned — scarcity and the devices we adopt to cope with it. Interests are the distant

I

I General Theory of Value, p. 115. Throughout this chapter my indebtedness to Professor Perry's work is very great.

3

4

VALUE AND INCOME

and primal source to which the desires, wants, and demands of the market-place are to be traced. B u t we cannot pass directly from one concept to the other. Desire, in the sense of the underlying force which is inferred from the act of purchase, 1 is not merely an interest from a different point of view. Still less are wants and demands — desires focussed, so to speak, upon particular commodities or services. Interests are transmuted into these more immediate economic forces by complex and mysterious interactions which are difficult indeed to describe. I shall venture only a few pages concerning their general nature. T h e first and most obvious complication is the fact that an interest often has more than one object. Hunger, for example, is seldom, if ever, for a single kind of food; prestige, the goal of so much human endeavor, is likewise generally achieved in a variety of ways. As a consequence many wants, as the economist knows them, may have their roots in one interest. On the other hand, several interests may converge upon a single object. Protection from the elements, delight in color, self-expression may all contribute to the appeal of a particular article of clothing. 2 As Professor Clark put it, when we buy a commodity, we obtain a bundle of "utilities," not one kind only. 3 T h e desire which we infer from the purchase of such things — a very large group, indeed — can not be identified with any one interest. This case should not be confused with another which has some elements of similarity. There are many commodities which are wanted for more than one reason; they have different " u s e s , " as we say. Here several interests converge upon a given kind of thing, or the supply in a given market, not upon a single unit of it, as in the above ι Cf. Knight, Quarterly Journal of Economics, xrxix, 381. 2 Of course, it is not always a matter of addition. Interests may conflict, some drawing us to the object, others repelling, as in the case of the man who likes a good cigar but suspects it of injuring his health. 3 Distribution of Wealth, ch. xvi.

W A N T S , COST, C H O I C E

5

instance. T h u s gasoline m a y be purchased for use as a motor fuel, as a cleaning fluid, as an illuminant, and so on; b u t no unit of gasoline affords more than one of these services at a time. T h i s v a r i e t y of uses and the different degrees of importance which consumers attach to them are an important cause of the fall of prices as supply inc r e a s e s — much more important, in fact, than " d i m i n ishing u t i l i t y " regarded as a reflection of waning response to repetitions of a given stimulus. 1 In markets, of course, the different uses m a y be in the minds of different buyers, i.e. it m a y not be true t h a t any one buyer's w a n t for the good is derived from more than one interest. T h i s relation between interests and wants, complicated and indirect though it is, points to some conclusions concerning the latter which are of great significance for the economist. In the first place, few, if any, of our wants can be regarded as permanent attributes of man or of " h u m a n nature." For although the governing propensities underlying them have great stability, interests themselves, the more immediate source of wants, are subject to m a n y modifying influences. Particular objects of interest generally owe their appeal in some measure to contributing factors outside the individual. H o w m a n y wants owe their existence to the power of tradition; how m a n y spring from man's penchant for following the crowd; how m a n y rest upon the frail foundations of suggestive advertising! A s individuals we acquire most of our wants, and m a n y of them are thrust upon us. A s a society we develop more and more new ones with every advance of civilization. 2 Of greater importance, however, from the economic standpoint is the fact t h a t interests v a r y in intensity: weaker in some persons than in others, or perhaps absent entirely, interests m a y also v a r y from one time or place to 1 Cf. Dickinson, Economic Motives, p. 242. 2 Cf. Dickinson, op. cit., pp. 158-9; Knight, Quarterly Journal of Economics, xxzix, 400-401.

6

VALUE AND INCOME

another in a given individual. Thus one man may be indifferent to the glory of color or the thrill of sound upon which another eagerly feeds his spirit. Again, an interest tends to fade when it has been recently satisfied or when the possibility of attaining its object has come to appear hopeless; and indifference often passes into approval or aversion as personality unfolds. Some interests, moreover, are stronger than others, winning if there is conflict, preceding if one must yield. Our wants reflect all this, and the literature of economics is full of marvelling references to their "infinite variety." Akin to these variations in intensity, though essentially different, is the phenomenon of preference: one object of a given interest will be chosen rather than another, if both are available. The hungry man is not hungrier for meat than for fish, for beef than for pork, for steak than for the proletarian stew; he prefers one dish to another. These preferences, like interests, are not always the same. They vary from time to time, place to place, individual to individual. How to explain them is a question upon which even the psychologists hesitate to commit themselves. The economist must be content to accept them as facts known from observation. These considerations lead us to the concept of a wantscale — an order of importance which different goods and different units of any one good have for the individual. From the very nature of the factors which underlie it, this can not be a clear-cut series of gradations. Weaker interests compete with stronger but partly satisfied ones; the preferred object of one interest with the less preferred of a more powerful one; the nearly hopeless with the nascent. Much vagueness and overlapping are inevitable. Small wonder, then, that we are often helpless before alternatives, literally not knowing what we want. Nor is it to be regarded as permanent; experience is constantly remolding it in all its parts, as new interests are acquired and old ones disappear.

WANTS, COST, CHOICE

7

Nevertheless, such a want-scale is a real and effective force in every man's economic life. Its nature in any individual must, of course, be inferred from his actions; b u t we may be sure it is there, something more than complete indifference to the objects t h a t come within his ken, though probably falling short of continuity from highest degree to lowest. T o be of much practical significance, moreover, it must refer to a period of time rather t h a n a momentary state of things; for some interests, though powerful, are intermittent, and m a n y depend on what has gone before. Such as it is, it is the basis of our choosing. For we must choose. Few of us have so curbed desire t h a t one life will afford us time or energy enough to do all the things t h a t appeal to us, quite a p a r t from the need for external resources; and this latter condition forces even more drastic limitations upon society as a whole and the great majority of its members. There is not enough to go round. Everyone, therefore, must face the question of what to leave out. T h e problem is a double one: w h a t wants shall be excluded altogether, and how fully the others shall be satisfied. Our decision will depend on w h a t arrangement enables us to make the most of our opportunities. This is not because it is " i r r a t i o n a l " to choose the less instead of the greater, b u t rather because such action is inconsistent with the very nature and origin of our wants. J u s t as the stronger of two incompatible interests will gain control, so the stronger will crowd out the weaker, if both can not be satisfied out of available resources. We m a y say they are practically incompatible. If the same amount of time, energy, and other resources were needed to provide every good t h a t men desire, or rather every unit of such goods which may be consumed separately, the allocation of available means would be a fairly simple matter. Each individual would satisfy the w a n t highest in his scale, then the next, and so on down as far as possible. N o other course would be more advanta-

8

VALUE

AND

INCOME

geous. B u t it is b y no means so simple; different wants make v e r y different inroads on our resources. I t is therefore entirely possible t h a t the satisfaction of a given w a n t would necessitate the exclusion of other wants of greater aggregate importance. A beautiful fur coat m a y mean the sacrifice of several new frocks. Only b y taking such facts into account can we achieve the maximum fulfilment of our interests. W e must " c o u n t the c o s t s " before we act. C O S T AND

CHOICE

T h e term " c o s t " has been considerably manhandled in economic discussion. In popular speech it is used to refer generally to w h a t is given up or surrendered or sacrificed in order to obtain something else. Unless we can use it without deviating too much from this traditional meaning, we had better not use it at all. Such things as pain, disutility, and resistance, which economists have frequently identified with cost, do not meet this requirement; they are not w h a t we give up in order to get the things w e want. 1 T h e resistance concept is open to the objection of ambiguity as well. I t is used to refer to the reluctance of those who furnish the factors of production, and to the competition of rival users of those factors. W h a t e v e r we m a y think about the importance of these forces in economic life, it seems better not to refer to them as costs. O u r present problem, then, is to analyze the influence of cost, in the sense of things sacrificed, upon choice; in other words, upon an individual's use of his resources. N o w costs are of various kinds, and since these do not all play the same role in the process, it will be helpful to begin by distinguishing between them. T h e t w o most useful bases of classification are ( i ) the nature of w h a t is foregone, and (2) the purpose for which I According to this view the expression "opportunity cost" is somewhat misleading, since it implies that there are other kinds of cost, whereas all costs are opportunities foregone. Cf. Knight, Quarterly Journal of Economics, xxxviii, 592-3·

WANTS, COST, CHOICE

9

this is done. 1 According to the first, there are three principal types of cost, which may be designated as satisfaction costs, consumption costs, and efficiency costs. Satisfaction costs comprise those uses of our time and energy which we forego when we engage in " p r o d u c t i v e " activity — what Adam Smith meant when he spoke of a man's laying down "his ease, his liberty, and his happiness." 2 Consumption costs are those acts of consumption which are excluded when we utilize productive resources for a particular purpose — the book we can not buy if we go to the theatre, the motor car we can not have if we decide to spend the summer abroad. 3 Efficiency costs are those increases in productive capacity which are precluded when resources are used in a particular way — the useful tool in which our savings can not be invested if we choose fine raiment instead, and similar losses which sometimes attend the use of the other factors of production. There are, it is true, certkin resemblances and relations between these classes. T h e first two, satisfaction costs and consumption costs, obviously both include things which men desire and which would count as part of our "psychic income" if we did not have to sacrifice them. T h e second, however, refers only to produced objects of desire, the vendible commodities and services which we call economic goods, while the first has to do solely with feelings and desirable activities. T h e second and third classes are related in a different way. T h e significance of sacrificed efficiency lies, of course, in the proportionate curtailment of consumption which it involves. It is impossible, however, to analyze the latter without a preliminary study of the former, because of important differences in the factors that control them. 1 The following classification somewhat resembles that suggested by David Green in an article on cost published many years ago (Quarterly Journal of Economics, viii, 226), but Green did not analyze its relation to value further. 2 Wealth of Nations, Bk. I, ch. v. Cf. also Knight, Risk, Uncertainty and Profit, p. 63. 3 Cf. Henderson, Supply and Demand, p. 166.

ΙΟ

VALUE AND INCOME

When viewed according to the purpose for which they are incurred, costs fall into two principal categories — costs of production and costs of acquisition. The former, as the term implies, are those sacrifices — of any of the above three kinds — which are the necessary condition of producing a given good, or in more technical terms, of increasing the sum of utilities. The latter are those possibilities which the consumers of a good forego in order to obtain it by way of exchange. For our present purpose this distinction is of no significance, since choice is influenced in the same way by costs of both these types, but we shall find it important later. 1 Let us proceed, then, to consider how the three kinds of cost distinguished in our first classification affect the decisions of the consumer. The cost involved in any act is obviously compounded of two factors — a quantity factor and a quality factor. T h e consumption cost, for example, incurred in producing a given commodity depends not only on how much we esteem other forms of consumption, but also on the amount of such consumption we are sacrificing. The latter, in turn, depends on the amount of resources required to produce the commodity in question and all other goods for which they could have been used. This is not a matter of opinion or feeling but of hard technical fact. Similar reasoning applies to the other kinds of cost of productions There are objective factors in every cost.2 The concept is meaningless without them. The costs, therefore, of satisfying the want highest on my scale are the satisfactions I must forego in order to perform the labor required to produce the good in question,3 and the consumption I must sacrifice if I devote this 1 See Chapter II. 2 Professor Bye seems to have some such distinction in mind when he says that the "physical elements" and probably the "psychic elements" of cost are "absolute" (Quarterly Journal of Economics, xli, 34); but his analysis is along different lines. 3 Professor J . M. Clark (Economics of Overhead Costs, p. 364) holds that giving up leisure does not involve any cost until the necessities of physical existence and a reasonable stock of energy have been provided. This seems to me less accurate than the position taken in the text, though it does not affect the result.

WANTS, COST, CHOICE

II

amount of labor to this purpose. T h e latter is not one magnitude but many, for many other things might have been produced. If any of these costs — satisfaction or consumption — exceeds the first want in importance, the satisfying of this want would mean choosing the less rather than the greater. I can do better by using my time differently. For some of the wants high on one's scale, such as food and shelter of a simple and inexpensive kind, the satisfaction cost will be less — perhaps much less — than the consumption cost. It will not be a question whether work is worth while, but what is the best thing to produce. In due time, however, the point will be reached where the reverse is true: the consumption gained exceeds that sacrificed, indeed, but both are less than the satisfaction cost involved. T h e additional labor is no longer worth while. 1 Where this point shall be depends on a great variety of circumstances which we shall consider more fully when we take up the problem of wages. 2 It should not be inferred that the production of economic goods is all that is involved here. Only such goods are usually included in this category as may be exchanged, but there are many others which also make demands upon our limited resources. T h e man who devotes time to exercise, whether for pleasure or for the sake of his health, does not produce any vendible commodity, but he faces the same kind of problem — is his health or his play worth more than the things he could get by using his time for other purposes. T h e presence of these wants for goods of a non-economic character merely adds to the possibilities which must be considered in the weighing of costs. T h e y affect the result, not the process, of our choosing. It may seem to some readers that the above reasoning requires us to assume an excessive amount of calculation in human affairs, a volume of "psychic bookkeeping" far 1 Cf. Davenport, Economics of Enterprise, p. 60. 2 Chapter X I .

12

VALUE AND INCOME

greater than the workaday world exhibits. T h e case, however, is not so bad as it appears. We do not have to come to a decision anew every time we satisfy a want. Unless the good is a novelty, or we are conscious of appreciable changes in the conditioning factors, we simply repeat our last decision. Experience builds up a tolerably satisfactory set of working rules. Calculation, moreover, being a form of effort, itself involves satisfaction cost, and we resort to various expedients to avoid or minimize it. M a n y of our "decisions" are not really made by us but adopted from others, through imitation and tradition; while many of those we do make are only roughly formulated. I t may be better, for example, to satisfy a given want to satiety, especially if it is no great drain on our resources anyway, than to bother about the slight gain to be had by a different expenditure of part of the amount involved. 1 Moreover, the maximizing of results implied in this analysis must not be understood too literally. For one thing there may not be any maximum attainable. What with the vagueness and overlapping of the gradations of our want-scales and the different amounts of labor required to produce different goods, it may well happen that several choices appear to be equally advantageous. Habit is likely to be a big factor in such cases. Then, too, even if there is a theoretical maximum, we can not be confident that it will be attained. T h e necessity of purchasing some things in certain amounts or not at all, and the existence of conventional units of sale in other cases, may result in some relatively ineffective use of resources, and therefore something less than the ideal disposal. This is especially likely where durable goods are concerned, since the want which leads to the purchase of them may not prove as lasting as the goods themselves. Again, we can not assume complete freedom of action. Such powerful deterrents as tradition, law, family ties, and the like may prevent the individual from making that use I Cf. Professor J . M. Clark in the Journal of Political Economy, xxvi, 23-j.

WANTS, COST, CHOICE

13

of his income which really most appeals to him. These vary in force in different societies, but it may be doubted whether they are ever entirely absent. In the above analysis I have spoken as if men satisfied their wants at the expense of their own efforts. History is replete, however, with instances of men who have been under no such necessity, who have depended, instead, on the labor of others — not labor received through exchange, but tribute exacted by virtue of force or tradition. As a corollary of this, other men have had control of less than the whole of the labor they performed, often considerably less. This does not affect the general principles governing choice; resources are still limited and the cost of using them for any purpose must still be weighed. In this case, however, the person receiving the tributary labor has no satisfaction costs to reckon with. I t is as if he were using some scarce gift of nature. Thus we find that cost not only controls the allocation of resources among the various forms of consumption — what we call spending our income, but also determines how large that income shall be — the extent to which the application of labor to production shall be carried. This latter adjustment or equilibrium is the great basic factor in the economic activities of every society, from the simplest to the most complicated, and we shall have occasion to return to it more than once. It is no affair of the economist's to criticize the decisions which men reach on this question of leisure versus consumption. His task is the ample one of showing how income and values are affected by them. The foregoing analysis, though developed in terms of an isolated individual providing for his own wants, is also applicable to the now more typical case where men resort to exchange for some or all of the things they use. The problem is then more complicated, however; it is not cost of production which the consumer must take into account, but cost of acquisition — the sacrifices involved in buying

14

VALUE A N D INCOME

a given good. Now this cost does not, even in the long run, always depend simply upon the amount of labor the •producers of these things expended upon them. T h e buyer may surrender a day's labor for an article which was made in a couple of hours. In other words, the objective factors in cost of acquisition and cost of production are not the same. Once these are known, however, cost of acquisition plays the same role in choice that cost of production does under the simpler conditions we first considered — no want is satisfied if the cost exceeds it in importance. There are two reasons for this absence of equality in the exchange of labor. T h e first is temporary scarcity or excess of certain goods in proportion to the demand for them. It is a commonplace that this, by raising or lowering the prices of the goods in question, has a favorable or unfavorable effect upon the earnings of their producers and thus stimulates a better adjustment of production. In the meanwhile, however, these laborers will not exchange with others on even terms. T h e other reason is that, even in the long run it is impossible to overcome the relative scarcity of some things. In both these cases, it is evident, the advantage enjoyed or disadvantage suffered by certain producers depends on the relation between the supply of their products and the demand for them. It is therefore most important, whether we are concerned with long-run or short-run problems, to understand how demand is related to the price of given stocks of goods. This is the subject of the next chapter.

CHAPTER II MARKET PRICING

I

F a supply of some good is to be disposed of in a given market, the price will have to fall low enough to appeal to some buyer, or group of buyers, who will not pay more and whose purchases are required to afford an outlet for all the sellers. Every seller will have to be content with this, if buyers seek to make the best bargains they can, 1 and no seller need take less. This important general principle is subject to certain qualifications, b u t these do not impair its fundamental significance, and for the first steps in our analysis it will be simpler to ignore them. How low the price of the market must fall depends, in the nature of the case, on the amounts which the individuals present in t h a t market are willing to buy at different prices, the aggregate of these amounts indicating how much the market as a whole will take at these prices. In other words, market price depends upon the nature of demand. Our first problem, then, will be to analyze this factor. I t should be noted at the outset that demand is not one of the primary economic forces. As Professor Davenport has pointed out, 2 it is not merely a reflection of the relative intensities of our various desires (even allowing for differences in money incomes), but a willingness to exchange on given terms, derived from a comparison of the things to be given and received. In the terminology adopted in the 1 Since "bargaining" may involve cost to some buyers, especially non-marginal buyers, there may not be a complete equalizing of price; i.e. the market may not function perfectly. 2 Economics of Enterprise, p. 93. I do not think it is quite accurate, however, to say that " t h e thing in prospect is to the thing foregone as 1 is to I . " Equality does not afford a basis for choosing one thing rather than another.

IS

16

VALUE

AND

INCOME

first chapter, cost of acquisition underlies it. Hence it can not be regarded as simply a quasi-mechanical reaction to a stronger stimulus. T h e alternative is not merely felt, it must be known. T h e buyer must know how much of the various goods foregone he could have obtained with the price he offers. Now what is it that is being offered ? T h e conventional answer — that goods are really bought with goods — is true enough, but it does not get at the root of the matter. T h e buyers of a commodity pay for it ultimately in various things. A series of goods-offers, however, does not afford an adequate basis for " c l e a r i n g " a market, unless they are all expressed in some one good. There is no direct way of discriminating between offers of ten pounds of butter and four yards of cloth in a general market, and hence no way of singling out the highest bidders. A common medium is necessary. In practice the offers are expressed in money, but that is only a mechanism. W h a t men really offer in markets is productive power, either labor — their own or labor due them as tribute of some sort — or the equivalent of labor in means of increasing labor's output, i.e. the use of land or savings. I t is in this sense that " p r i c e " will be used in the reasoning that follows. 1 DEMAND

SCHEDULES

Demand appears in markets in the form of a schedule, the market schedule being the sum of the schedules of the individual buyers. T h e individual schedules are of two sorts — the primary and the derived. T h e former expresses the prices which the buyer is willing to pay for a series of units of the commodity: how much for one unit, how much for one more, and so on. T h e latter gives the number of units which the buyer will take at a series of prices — the familiar demand schedule of value theory. I t is the one by which the price of a given stock is proxii For the relation between " p r i c e " and " v a l u e " see page 33 below.

MARKET

PRICING

17

mately determined; but since it is necessarily derived from the former, we must begin our analysis with that. T h e price which a man will give for one unit of a good must be such t h a t the consumption or satisfaction (whichever is greater) t h a t he will have to forego, if the exchange is made, will h a v e a weaker appeal than this one unit has for him; t h a t is, the cost of acquisition must be less than the " u t i l i t y " of the good acquired. 1 T h i s cost, it should be noted, is not any of the utilities the buyer could obtain with w h a t he offers to give in exchange, but the addition he could make to his other consumption, if he did not b u y the good in question. T h a t is all there is at stake. T h e role of substitutes is important here. If t w o goods were capable of satisfying exactly the same want, they could never sell a t different prices, provided people knew of their existence. Such a difference in price would be incompatible with an intelligent weighing of costs. I t is more often the case, however, that a good which we call a substitute for another does not quite meet this test. I t m a y be the less preferred object of a given interest, or it m a y lack some quality which was the object of one of the interests which concentrated upon the other good. T h e importance of these differences is often a matter of individual feeling. Where one buyer is content with a c o p y of a picture, so long as he can not tell the difference, another m a y be greatly influenced b y the opinion of experts that it is not the original, j u s t as some people set great store upon hand-made articles, without being able to say just why. In other cases the buyer is misled, sellers contriving b y skillful advertising, impressive packaging, and similar devices to suggest that products are different which are really identical. 2 T h e less the buyer feels these differences to be, the more effective the substitute. In any case the opportunities foregone in the w a y of such things 1 If the b u y e r can m a k e the good himself, as often must be true when trade is in its infancy, he will not be willing t o p a y more than the labor he would require for this purpose. 2 C f . J. M . C l a r k , Journal of Political Economy, x x v i , 16.

ι8

VALUE AND INCOME

must be included in cost of acquisition along with alternative forms of consumption essentially different from the one under consideration. For a second unit of the good he will be willing to pay less, partly because he expects to " e n j o y " it less, partly because the same price would now entail the sacrifice of more important opportunities than the first did. T o keep cost of acquisition lower than the utility acquired, the price must be doubly reduced. The first of these reasons is not simply a matter of diminishing response to successive repetitions of a given stimulus — a point too much emphasized in discussions of value. We may buy our oranges by the dozen but we do not consume them that way, and the vanishing desire of the surfeited does not explain why we will not buy more unless they are cheaper. I t is more likely to be due to an analogous but different cause — the fact that an "interest" is weaker when it has been satisfied recently. We know that some of the dozen will, when eventually consumed, be worth less to us. 1 The confusion would be avoided if we viewed each day's budget as a unit. Then it would be clear that we are not dealing with the diminishing utility of a stock in the sense employed by the Austrians. In other cases the second unit may be wanted for a less important purpose, such as the use of salt to kill weeds. Finally, there is the decline of prestige. If a good is so plentiful that buyers have to be induced to take more than one unit, there may be little distinction attached to the possession of it. In the case of some goods, it is evident, the price offered for a second unit will be very low, so low that it is negligible as a factor in the market. Few buyers of washingmachines, for example, have more than a very slight interest in owning a second. The market schedule for such goods will be almost entirely a reflection of differences in I T h e prospect of future scarcity may serve to raise the prices buyers will pay for additional present units.

MARKET PRICING

19

personal taste and differences in incomes; differences in the appeal to individuals of successive units will have little to do with it. The demand for some goods may collapse entirelyafter a certain point—no more is wanted at anyprice. 1 The second reason for the offering of a lower price for a second unit — the greater importance of the sacrificed opportunities — has usually been ignored or ruled out as negligible. Marshall, as is well known, argued that we spend such a small part of our incomes on any one good that the "marginal utility of money" is affected in very slight degree as a result of what we offer for any one unit — so slight that there are " f e w practical problems" where this factor needs to be allowed for. 2 T o this reasoning, it seems to me, there are two objections, apart from the question of the importance of the exceptions.3 T o begin with, as Marshall admitted in a note on the passage referred to, we cannot add demands without correcting for this error. Since each demand is a little too large if we do not allow for the increasing marginal utility of money, the sum would also be too large. In other words, the total demand for commodities would be greater than the total income of society. This difficulty is of more than theoretical importance. It points to another more serious one. The increase in consumption costs (or marginal utility of money) is not due solely to the fact that something has already been allotted for the purchase of the first unit, but also to the fact that still more has been allotted for the purchase of other goods which stand higher in the buyer's want-scale than the second unit of the good in question. A man's price-offer for a second suit of clothes, for example, is lowered not only by reason of his purchase of the first 1 The demand for goods intended to be used as gifts does not differ essentially from demand for personal use. The elements in it are the same —· diminishing importance of the interests involved and increasing importance of the alternatives to such use of resources. 2 Principles, p. 132. 3 It seems to me that they are more important than Marshall believed. Houserent, for example, is a heavy item in most budgets.

20

VALUE AND INCOME

one, but also by reason of his desire for a hat, a pair of shoes, and an overcoat, before he provides for another suit. We can not properly omit this second factor in the decline of a buyer's offers for successive units of a commodity. I t must be admitted t h a t such price-offers are frequently the result of a pretty blind kind of choice. Perhaps one or more of the alternative forms of consumption which present themselves have never been tried by the buyer, either because sampling is impossible or because it is too much trouble. 1 In such cases, since interests are fallible, experience may either bring disillusionment or increase the appeal of once unfamiliar alternatives. Most of us can remember instances where satisfactions loomed greater in prospect than they proved in the event; and business men know well t h a t demand often has to be " built u p . " As a consequence it may be necessary, for some problems, to regard demand, not as a short-run, immediately effective, factor, but one which it takes time to reveal. Allied to this is the influence of habit. A particular form or item of consumption may become so ingrained in our lives through repetition t h a t it continues to be " c h o s e n " without much regard for the costs involved. Demand then becomes relatively insensitive to changes in the factors which ordinarily underlie it — the importance of the want dependent on the good in question, the desirability of alternative forms of consumption, and the amounts of these latter which are involved. N o t until such changes become relatively conspicuous do they affect demand. And demand also tends to become inelastic under these circumstances: buyers not only continue to pay about the same prices for given amounts; they buy the same amounts in some cases, regardless of any but marked changes in price. In the light of the above reasoning it seems futile to speak of the possibility of immense price-offers for the first few units of certain very important articles of consumption, even on the part of the wealthy, as some writers have I J . M . Clark in Essays in Honor of John Bates Clark, pp. 56-7.

M A R K E T PRICING

21

done. T h e cost involved in such huge prices is altogether excessive. For it must be remembered that it is not demand for food or clothing that we are discussing, but demand for some particular means of satisfying these important needs. Even though a man were very hungry and greatly preferred wheat bread to rye, it is hardly reasonable to suppose that he would pay a price for a few units of white bread which would suffice to procure a year's supply of the less favored kind. T h e primary demand schedule as thus understood is the basis of the derived demand schedule, the schedule which supplies the data from which the conventional demand " curves " are plotted. If a man is willing to pay ten dollars for one unit and four dollars for a second, after taking into consideration all the possible alternative uses of his purchasing power, we must interpret these facts as meaning that he would be willing to buy two units at seven dollars each. T h e y are worth fourteen dollars to him in one statement of his attitude and must be so in the other. Marshall rejected this view of the matter on the ground that, since the purchaser took the second unit at seven dollars of his own free will, we must assume that he regarded it as worth seven dollars and not four. 1 B u t the reason why he felt inclined to take the second at seven dollars was that he did not have to pay ten for the first and therefore was not compelled to sacrifice such important alternatives in order to spend a given sum on a second. T h e price of the second is indeed, as Marshall urged, not conditional on the purchase of two, but the amount he is willing to pay for a second is conditional on the amount he will have to pay for the first. T h e consumption cost he is willing to incur in order to obtain the two units is the basic consideration, however we view his offers.2 Similar reasoning applies to the purchase 1 Principles, p. 126 note. Davenport apparently holds about the same view. Economics of Enterprise, p. 47 2 The "one-cent sales" sometimes held by retail shops are an attempt to emphasize the cheapness of the second unit when one buys two at a lower price for each.

22

VALUE AND INCOME

of additional units: from the amount he will give for three we derive the price at which he will take three, and so on. According to this view of demand and price it is evident that we must modify the Marshallian doctrine of consumers' surplus. T h e only buyers who obtain a commodity for less than they would have been willing to pay are those who would have purchased just as much, had the price not fallen quite so low. T h e y are the only ones to benefit from a strategic position in the market. T h e others pay for all they get. There are probably always some who enjoy this good fortune, for most individual demand schedules are discontinuous. It is only rarely that a buyer's price-offers for successive units are so close together that he will take a different amount of the good at every different price. Of course, we might regard consumers' surplus as the extra consumption we are able to procure as a result of reductions in the amount of resources required to produce certain things (i.e., in the objective elements in cost), but that was not what Marshall had in mind. These individual derived schedules are added together to obtain the market schedule which determines how low the market price must fall in order to effect a sale of the whole available stock. 1 If plotted as a curve this always has a "negative slope." There are three reasons for this. T h e first is obvious enough: the individual schedules or curves of which it is composed are nearly always of this character, as we have just seen. Second is the familiar fact that different interests are not equally strong in all individuals. A few of the more elemental wants doubtless come high on everyone's scale, but there is no great uniformity in the case of the others. And even if two men have an equal interest in a given class of objects, their preferences may vary. Finally comes difference in resources. If two buyers have different incomes, the cost involved in a given priceI Strictly speaking the seller's demand schedule for the good — how much it is worth to him for his own use — should be included in the general schedule. Ordinarily this makes little difference.

MARKET PRICING

23

offer is not the same for both of them: to one it means the sacrifice of less important wants. Based historically upon physical differences, supplemented by control of tribute labor, such differences in income are now characteristic of the buyers in every market. The market schedule is more likely to be continuous than its constituent individual schedules are. The latter, being the reflection of a great variety of factors, are seldom alike, and their irregularities tend to offset each other as a general thing. The elasticity of the market schedule — its relative sensitiveness to price changes — is also likely to be different from that of the individual schedules, for analogous reasons. As I have said, the combined schedule determines how low a price must be accepted by all sellers in order to "clear the market." By the same token it also determines which of the would-be buyers (and what part of every buyer's demand) must go unsatisfied, so far as this market and supply of this particular good is concerned. There is therefore a kind of analogy between the function of markets and costs of acquisition in a social sense and the röle of cost in the individual economy. The analogy is only slight, however. In the case of individuals, cost is the proximate factor in the allocation of resources and the exclusion of less important wants from participation in a scarce supply; in markets it is not necessarily the less important wants that are thus excluded, but may be only the less able ones — those felt by purchasers whose means are slender. Moreover, there is nothing to be gained for theory by pushing the analogy very far. It is enough to note that demand effects the apportionment of limited resources among competing users. Beside this, of course, demand has the important function of directing productive activity into the channels where it is wanted.

Η

VALUE

AND

PARTIAL

INCOME

MONOPOLY

T h e above reasoning is subject to an important qualification. T h e conclusion t h a t the price in a given market will fall as low as may be necessary in order to sell the least wanted unit of the available stock is true only if we assume t h a t no contributor to the supply is willing to forego the sale of his holdings or any part of them. If any part of the supply is withheld from the market, a higher price may be obtainable for the remainder. Under what conditions is such withholding likely to occur? I t is clear t h a t if each would-be seller has only one unit of the good to dispose of, the entire supply will be thrown on the market; for no unit can be withdrawn without leaving some seller with his entire stock on his hands, and none of them will be willing to accept this in order to ensure a higher price for the others. On the other hand, if the entire supply is controlled by a single seller, i.e., if a perfect monopoly exists, everyone knows t h a t only so much of the available supply will be sold as will yield the largest aggregate return to the owner. T h e higher price received for each unit more than makes up for the smaller number sold. Now neither of these two states of affairs is typical of most markets. I t is more common to find sellers in possession of several units, often a great many, but none of them enjoying a complete monopoly. This is true not only of commodity markets but also of labor markets and capital markets. Everywhere the single-unit seller is the exception. This results in some interesting complications which few theorists have noted or seen fit to analyze. 1 T h e extent to which the price-making process will be affected depends principally upon three factors — the number of individual sellers compared to the total stock; the number holding single units or very small amounts; the nature of the demand. T h e first of these factors sets an upper limit to the price which can be obtained in t h a t I The discussion of duopoly by Cournot, Edgeworth and others may be noted as an exception.

MARKET PRICING

25

market. Every holder will insist upon selling at least one of his units, whatever his views as to the general advantages of curtailing supply. N o t to do so — assuming fractional sales to be impracticable — would reduce his receipts to nil, which he certainly can not regard as the best course for him personally. There is thus a certain minimum amount sure to be offered for sale, i.e., one for each seller; and the price required to " c l e a r " the market of this much is the highest that can be expected under the conditions. Whether the price will be as high as this depends upon further circumstances. If any holder has reason to believe that by lowering his price he will be able to sell enough more units to increase his total receipts, he will adopt this course, but not otherwise. Now his ability to better himself in this way is by no means a foregone conclusion. I t may be that the fall in price brought about by his every attempt to sell more units is so great that there is no increase in his sales which would be to his advantage. In other words, it is a question of how elastic the demand is below the point where every seller disposes of one unit. The amount offered for sale may or may not be less than the supply actually available. If there are several reductions in price which would increase the individual seller's total receipts, the one which yields the largest return will be adopted and supply restricted accordingly. So far this sounds much like the case of the ordinary monopolist. There is an important difference, however. Under the conditions we are now considering, the amount which the market is called on to absorb, when any holder tries to sell one more unit, is not one unit but one for every holder. For it can not be supposed that the others will not cut prices if one does; they have to, if they are not to lose even their one customer. The individual holder, therefore, is in the position of a monopolist who can vary his sales only by blocks of units, not by units. In other respects he faces the same conditions as an unrestricted monopolist.

26

VALUE A N D INCOME

T h e demand is the same, and an increase of sales which is to the advantage or disadvantage of one will also be to the advantage or disadvantage of the other. And every holder, be it noted, has the same incentive, or lack of it, for cutting prices. T o put the matter more concretely, let us suppose a market with the following demand schedule: Number of units

Total selling price

400

$720

500

750

600

840

700

910

800

960

900

990

Ι,ΟΟΟ

Ι,ΟΟΟ

Ι,ΙΟΟ

990

I,200

984

I,300

910

1,400

840

I,SOO 1,600

75°

640

Here the best course for a monopolist would obviously be to set his price at one dollar and sell a thousand units. If the available supply were in the hands of four hundred persons, the maximum price would be #1.80, that being what can be obtained for four hundred units — one for each holder. A n attempt by any of them to sell another unit would bring four hundred more into the market and lower the price to $1.20. T h a t means $2.40 for each holder, which is better than selling one unit at $1.80. T h e sale of a third unit by one (and consequently by each) holder would lower the price to $.82, which yields a total of $2.46 to each seller; and a fourth would lower the total to $1.60. Twelve hundred units will be offered and the price will fall to $.82. This example makes clear the importance of the number of persons who control the supply of a commodity. Where

M A R K E T PRICING

27

each holder has more than one unit it is quite possible that the efforts of each to make the most he can of his opportunity will lead to some withholding of supply from the market and a price higher than would have been reached through the competition of one-unit holders. This price may or may not coincide with that which a monopolist would set under the same conditions. Since expansion of sales must be by blocks of units, the amount which it would best pay a monopolist to offer may be out of the question. In the above example the ideal amount, one thousand units, cannot be expected from four hundred sellers. T h e amount offered will either be more than the monopolist's ideal, as here, or it will be less. Where the number of sellers is greater than the number of units which it would be to the advantage of the monopolist to sell, market price will always be lower than the monopoly price. If the demand is very elastic it may well happen that the best thing any seller can do is to throw his entire stock on the market. A further refinement of analysis is required where the available stock is very unevenly divided among the different holders. Suppose, for example, that a stock of a thousand units is held by twenty persons who have five units apiece and five others who have roughly equal shares. Unless the demand is extremely inelastic it will probably be worth while, even for a monopolist, to sell more than a hundred units, i.e., more than the total of the small holdings. How much greater than this the amount actually offered shall be, therefore, depends upon what the other five holders find it to their advantage to do. With such a small number of sellers, and therefore such small blocks of units as the necessary increments of supply, it is very likely that the monopolist's most profitable volume of sales will also be theirs. T o some readers this reasoning may seem rather farfetched. Does it not assume greater perspicacity and fuller knowledge of market conditions than we can reasonably

28

VALUE AND INCOME

expect? Perhaps. But anyone who is familiar with districts where apartment houses or office buildings have been "overbuilt" knows that the managers of these properties often maintain rentals surprisingly steady in the face of continued vacancies. Is this simply because there are not enough tenants to go round ? Rarely. There are usually a considerable number who would be glad to come in from inferior quarters, if the price were low enough. The reason is more likely to be that the managers realize the impossibility of getting more tenants except at rentals which would, if granted to all, lower their total returns. 1 Why should manufacturers be supposed to act differently? Of course, where there are many sellers there are more likely to be some whose bad judgment leads them to cut prices too low, forcing the others to follow in self-defence, and perhaps drawing the whole available supply into the market. Moreover, even prudent men may, for a time, be unable to foresee the effect upon prices of a given sales policy on their part, being in the dark about the demand or the number of other potential sellers, or both. They do, however, realize that their rivals will imitate their attempts to extend their sales, and they try to gauge the effect of this upon prices. Under stable conditions they can acquire something more than guesses to act upon. It may be true that every determination of market price is theoretically an independent event, but there is no ground for assuming that every market is made up of sellers (or buyers, for that matter) who have never been "through the mill" before. The importance of this qualification of the theory of market value needs little pointing out. It is becoming more and more difficult in these days to find any commodity which is not controlled, at least in large part, by a few large sellers. Even where the per capita output is not very great, relatively speaking, the sale of the product is in the hands of a few — the managers of great corporations. I In this case, and many others, the minimum amount which will be offered is more than one unit from each owner, because of the burden of overhead expenses.

M A R K E T PRICING MULTIPLE MARKET

29

PRICE

This analysis of market price, it must now be noted, is concerned with a single commodity. It assumes that the resources needed to obtain units of all other goods are known and therefore may be made the basis of estimating the amount of sacrifice (consumption cost) involved in any price offered for this particular good. Such an assumption, however, is not legitimate unless the buyer satisfies all his other wants by producing for himself. If he buys other things too, they are also in process of evaluation, and hence the consumption cost of any purchase is indeterminate so far as they are concerned. We cannot tell how much of them we shall have to forego if we pay a given amount for something else. Only by assuming given prices for other things, it would seem, can the market for any one good be given any meaning. This in turn seems to make the whole problem circular, — the price of A depends on the price of B , which depends on the price of A, — and some writers have rather despairingly concluded that it was in fact hopelessly so.1 The circularity, it seems to me, is more apparent than real. In order to escape from the dilemma here presented we must retrace our steps a little and analyze the demand for several goods taken together. For simplicity let us take two, the principle being exactly the same for a larger number. The primary demand schedule of the individual buyer now depicts how much he will pay for one unit of either A or B , whichever comes highest in his want-scale; then how much more for a unit of A or B , whichever comes next in his want-scale; and so on. Thus: For one A, $10.00 For one B, 8.00 more For second B, 6.00 more For third B, 2.00 more For second A, 1.00 more For fourth B, .50 more I Davenport, op. cit., pp. 109, 113.

30

VALUE AND INCOME

From these figures, as explained in the preceding section, it appears that the buyer's derived schedule for A is: ι unit a t 2 units a t

#10.00 5.50

and his schedule for Β is: ι unit a t

$8.00

2 units a t

7.00

3 units a t

5.33

4 units a t

4.12

These schedules, combined with the similarly derived schedules of other buyers, give the market schedules for A and Β respectively. The only costs of acquisition taken into account are thus the ones based on the buyers' own potential productive capacity (consumption costs) and the satisfaction costs they incur by engaging in productive activity. 1 Hence the prices of the two goods are not based upon each other, but are simultaneously determined from the relevant data. We must beware, however, of identifying this logical simultaneity in any way with the realistic process of pricing. Prices are not, and can not be, determined simultaneously in practice. Even if we could bring ourselves to believe that buyers in general ever have such systems of interlocking price-offers in mind when they decide upon their purchases — imagine the complexity of such systems under modern conditions — we should still face the stubborn fact that buyers can not be in two places at once and do not all assemble in the same market at a given time. Therefore the total demand schedule for A analyzed in the preceding paragraph never impinges directly upon any market for A. In every case the value of A is determined I For the modern highly specialized worker, who often seems literally unable to produce anything that he himself would care to consume, the latter is obviously the more important consideration; but in any long-run view of the valuation process the former would by no means be negligible.

MARKET PRICING

31

by the buyers then present, not by all in the community who are willing to pay a price for that good. This will be clearer if we examine the process a little more closely. The natural, and indeed the only, thing for the would-be buyer to do when considering how much he can offer for a given good is to assume that the prices of other things, which he must weigh as alternatives, are likely to continue in the future what they have been in the past. This may well be erroneous, and under highly dynamic conditions is almost sure to be. When he discovers this, he may in strict theory need to shift some of his expenditure back to these previously consumed things in order to make the most of his opportunities. This, in turn, will raise the price of these goods and induce a further but slighter reverse movement and so on until the prices to be expected theoretically from these multiple demand schedules have been more or less closely approximated. This process is not so complicated and burdensome in practice as it may sound, especially in the long run. For one thing, the prices of other goods which we assume in arriving at a price-oifer for any particular good are often found to vary but little. The error involved in assuming them constant may therefore be negligible. Many are pretty conventional, to the retail buyer at least; others are controlled by public regulatory authorities; and some are fixed by monopolists. Producers, moreover, especially large producers, often watch the trend of demand carefully and endeavor to anticipate it, thus keeping supply and demand in a very stable relation to each other and prices very close to "normal" for the most part. 1 In cases where a scarce agent of some kind is involved, i.e., an agent which can not be increased in response to demand, a shift of demand from one commodity to another may really mean a change from one use of the same agent to another. Hence there is no change in the price of the latter and none in the prices of the commodities into which it enters. I T h e concept of normal or long-run value is discussed in the next chapter.

32

VALUE AND INCOME

Akin to these considerations is the fact that the prices we shall have to pay for some items in our consumption are determined for a considerable period of time by the nature of the contracts by which we provide ourselves with these things. For example, if it is customary to lease living quarters for a year at a time, the tenant properly regards the price of a day's or month's shelter as a given quantity in planning his other expenditures during the year. Similar reasoning applies to all sorts of durable goods which are purchased at infrequent intervals or even only once in a lifetime. People buying such things on the instalment plan often realize this only too well. Of course, these differences in the frequency of purchase would be of no significance, if we could suppose that men budgeted their incomes for long periods ahead and adhered to these plans. Some rough budgeting is attempted, no doubt, before the purchase of durable goods is decided upon, but it can only be approximate; unforeseen situations or opportunities are almost certain to occur. Finally we may add to this list of factors which lessen the apparent complexity of the price-achieving process the discontinuity of many individual demand schedules. Most people consume many things which they would buy in just about the same amounts if the price were different, unless the difference were considerable. If the price we assumed for these goods in planning our other purchases proves to be erroneous, no great readjustment in our buying is called for. We can afford to bid a slightly different price for the good which, for the problem in hand, is the one in process of evaluation. There are many goods, too, which we do not expect to buy at all, unless their prices fall a good deal. A change in our buying because of changes in the prices of these goods may be only a remote contingency. It would seem, therefore, that the quasi-circular process by which the valuation of goods is effected is not so inconvenient or misleading as to make it unreasonable to rely on its guidance; all the more if we remember that it is very doubtful

MARKET PRICING

33

whether there is any one disposition of a man's resources which will bring results appreciably greater than could be obtained otherwise. If there is no one maximum, it is easier to attain a satisfactory adjustment despite minor errors. Our conclusion, then, is that the price-making process is circular in its mode of operation, but rescued from real circuity by the normative demand schedules which we can properly regard as implicit in the data. Moreover, it must also, to a large extent, be treated as sequential. From this it seems to follow that equilibrium may, in fact, never be attained. Since the process is neither simultaneous nor instantaneous, we cannot be sure that all the factors involved in it will remain stable until it has time to work itself out. Before the theoretical norms can be attained, there is good reason to believe the problem will have become a new one. The prices for different goods arrived at in this way are the basis from which values are inferred. The value of a good is its power to command other goods in exchange. This cannot be determined directly, except for a separate pair of traders, not really a case of marketing at all. The only way to discover it is by comparing the prices of goods in terms of some common medium. T o many readers this will probably seem a reversal of the true relationship. This is because price has come to mean, among English-speaking economists, at any rate, a sum of money — a magnitude which, being dependent upon the purchasing-power of the money unit, seems less fundamental than the exchange ratio itself. If we think of price in terms of the real buyer of all things — productive power — this difficulty disappears. T o avoid confusion, however, I shall hereafter use the more familiar term value instead of price, what is true of the one being always true of the other.

VALUE AND INCOME

34 THE

MARKET

FOR UNFINISHED

GOODS

T h e foregoing analysis seems to make no place for a great body of transactions which do not involve consumers and their demands — the purchase and sale of raw materials, semi-fabricated products, and labor for all sorts of services having no appeal -per se to consumers. How is market pricing controlled in such cases? W h a t is the nature of the demand which determines the prices at which these markets are cleared ? Demand here is entirely derivative. Nobody wants such things except as a means to an end — the production of consumers' goods for his own use or for sale. What buyers, therefore, are willing to pay for various amounts of some raw material — the demand schedules underlying the market — depends upon what the finished goods which can be made of these amounts of the material are worth, to the buyer or to the consumers to whom he expects to sell. Of course, it is not the whole of this sum. T h e buyer must deduct such amounts as he will have to pay, for his own or hired labor, in order to complete the process of production and render the goods ready for consumption. 1 Under dynamic conditions both of these figures — the value of the finished goods and the amount to be deducted for supplementary expenses — have to be estimated, and there is room for considerable error, but that is the way it has to be done. T h e demand for unfinished goods must be derived from the anticipated value of the consumers' goods into which they enter. What this amounts to as a long-run matter will be considered in the next chapter. I Ignoring, for the moment, the further deduction which must be made to pay for "waiting," i.e. interest.

CHAPTER III LABOR AND NORMAL VALUE

T

HE analysis developed in the preceding chapter was concerned entirely with the price of a given supply of goods. Even for those aspects of the problem which we found to depend on time for their full development we assumed that the same volume of goods continued to be offered in the market until the price-making forces had worked out their effects. Supply, in other words, was taken for granted. If this were, in fact, a purely fortuitous matter, if we could believe that producers proceed blindly about their affairs, the task of the value theorist would be finished at this point. No such view, however, is compatible with the sound principle that men seek to make the best use they can of their resources; in an exchange economy, to devote their energies to those activities which will pay them best. We must therefore analyze the forces which govern supply, the reasons why some goods are plentiful and some are not. In the nature of the case, this is a problem of long-time or normal adjustment. I t not only may take time to discover what consumers are willing to pay for a given amount of goods, but the transfer of productive resources to the more favored lines may be even slower. I t is the price to be expected when this has been accomplished that interests us here. A complete understanding will not be possible until much later in our study — after we have dealt with the complexities of income sharing. In this chapter we shall consider the price system of an economy where labor is assumed to be the only factor in production, and where wages are the only form of income. 35

36

VALUE AND

INCOME

THE CAUSES OF SCARCITY If e v e r y c o m m o d i t y were the product of a single w o r k m a n , i.e., if every producer worked w i t h o u t assistance, the supp l y of a n y good offered for sale would depend, in the long run, ( i ) upon the number of people willing and able to d o t h a t kind of work, and (2) upon the a m o u n t of time required to make t h a t particular thing. T h u s , if there were a hundred such workers, and it took a d a y to make one of the articles in question, the supply for a n y one d a y could not exceed a hundred units; while the same number of workers could supply the m a r k e t with only one-fifth as m a n y units, if each unit occupied a m a n for five days. T h e second of these determinants, which I h a v e called the " o b j e c t i v e f a c t o r " in cost of production, is obviously a technical matter. T h e first, however, presents v e r y different problems. T o account for the number of workers engaged in a certain trade requires careful analysis, even under the greatly simplified conditions w e are now assuming. A s I h a v e said, it is p a r t l y a question of willingness and p a r t l y a question of ability to do t h a t kind of work. Unwillingness to engage in a particular branch of production arises from t w o causes. T h e first is the specially laborious or dangerous character of the work or some stigma which attaches to it. W h e r e such conditions are found, there is likely to be a permanent scarcity of workers in the trade, m a k i n g the product correspondingly scarce and more expensive under normal conditions. 1 T h e other reason for preferring one occupation to another is the greater income to be obtained there. If access to different occupations is perfectly free, as w e are still assuming, there will be a tendency for workers to m o v e from those which do not p a y so well and into the others until earnings h a v e been equalized. In other words, it will be found in the long run t h a t the number of workers willing to enter a given trade will depend upon how m a n y can find I The influence of these and similar factors upon the supply of workers in a trade is discussed in Chapter X I V .

LABOR A N D NORMAL VALUE

37

a market for that product at a price high enough to afford them as good an income as can be obtained elsewhere. Now it is evident that this price will be lower in proportion to the number of units a man can produce in a given time. T h e man who spends two days on an article must sell it for twice as much as another man receives for what costs him only a day's labor, if they are to obtain the same incomes. 1 Apart from differences in the attractiveness of different occupations, therefore, commodities would tend to command prices in proportion to the amounts of labor expended on them, i.e., in proportion to the "objective factors" in their costs of production. B u t suppose men are not free to enter any occupation they choose. Will there not be fewer able to engage in some branches of production than would be willing to do so, considering the incomes obtainable, thus causing prices to deviate from the norms indicated by the above analysis? This is not a necessary result. In order to attain an equalization of incomes, we do not have to have a society of Admirable Crichtons. There may be plenty of people unable to do a certain kind of work, but if enough can do it to bring supply up to a certain proportion to demand — which obviously need be no great number in some cases — incomes will be levelled as surely as if every man were literally able to turn his hand to anything. Even this degree of mobility, however, is not always present; something prevents the incomes of some workers from sinking to the amount with which others must be content. Passing over, for the moment, the causes of this, 2 let us consider its effects upon the price system. THE

V A L U E OF SCARCITY

PRODUCTS

When all the laborers who can engage in a certain kind of work have been attracted to it by the high earnings re1 The tendency of incomes to equality has been too much neglected in value theory. Cf. Franz Oppenheimer, Wert und Kapitalprofit, pp. 30 ff. 2 Cf. pp. 207-209 below.

38

VALUE A N D INCOME

ceived by the pioneers in that industry, 1 the markets will set a value on the supply available which may be regarded as normal for the given conditions. Assuming still that the laborers do not assist in the making of any other product and receive no assistance themselves from laborers of other grades, that value will depend on how many units of the good in question can be produced by the finally available labor supply; in other words, on the objective factor in cost of production — the amount of labor expended on each unit of the good. There are thus two causal elements in value under these conditions: the objective factor in cost and the relative scarcity of labor. T h e latter is measured by the ratio between the earnings of these laborers and the earnings of laborers not similarly sheltered from competition. This wage-premium is in no sense to be regarded as causal. It is wholly the result of the fact that the laborers get the value of their product and that happens to be high. 2 T h e price of this product will be to the prices of other things in a compound ratio of the respective amounts of labor required and the earnings of the laborers employed. B u t this is a wholly unreal case. Scarce labor-groups who can engage in the production of only one good are extremely rare, and laborers who turn out their product without assistance from the members of other groups are even rarer. This complicates the problem, so far as the measurement of relative scarcity (that is, wages) is concerned, but it does not alter the nature of the two causal elements in value. There are three general cases to be considered: (i) where the scarce labor is used for one purpose and receives assistance from other labor; (2) where it is used for several purposes and does not receive such assist1 T h i s implies t h a t the whole demand e v e n t u a l l y manifested impinges upon the small early supply. T h i s is not correct, since demands usually grow from c o m p a r a t i v e l y small beginnings; b u t demand keeps far enough ahead of s u p p l y t o keep earnings a t t r a c t i v e l y high. T h e process is thereby prolonged, and the continuance of abnormal conditions m a y be mistaken for evidence of equilibrium. 2 C f . L a v e r g n e , Theorie des Marches Economiques,

p. 78.

LABOR A N D NORMAL VALUE

39

ance; and (3) where it cooperates with other labor in several branches of production. I shall take them up in this order. In the first case, the supply of the product eventually available is obviously limited by the number of the scarce laborers — what they can make with the help of their more plentiful assistants. T h e value set upon this supply by the market does not determine their earnings directly, since they have to surrender some of the selling price to their collaborators. T h e market evaluates only the combination. 1 How much they can retain depends on how much must be paid in order to obtain enough of the more plentiful labor to cooperate with this particular group. T h e demand for this cooperating labor, so far as the commodity now in question is concerned, is of a peculiar sort. I t is not willingness to buy a varying number of units at a series of prices, as ordinarily, but a desire for a fixed number of units (determined by the number of scarce laborers for whom assistants are needed), at any price below a certain maximum. 2 T h e buyers are willing to pay whatever they must in order to avoid exclusion from the market. T h e value ratio in this case is therefore doubly compound, the first term being the sum of the two different wage-rates, each multiplied by its objective factor. For example, an article made in two days by a laborer receiving ten dollars a day with the aid of two laborers whose wage is five dollars a day will exchange for two articles made wholly by the cheaper labor and requiring four days apiece to make. T h e wage-rates, as before, are not causal but indices of scarcity. It is quite possible, of course, that more than two grades of labor may be required for the production of a given commodity, and that more than one of them, therefore, 1 C a r v e r , Distribution of Wealth, p. 143. 2 T h e m a x i m u m , it is evident, is the v a l u e of the product minus enough to p a y t h e laborers in the other group at least as much as t h e y could earn in some other occupation. If t h e y do not get t h a t much, the whole group will not d e v o t e themselves to this industry.

4°

VALUE AND

INCOME

receives a scarcity wage. W h i c h is the one t h a t is the residual claimant among those to be paid out of the total value of the product; in other words, which is the scarce group? T h e r e can be only one, according to the above reasoning. In any particular case, i.e., as a factor in the value of a given consumers' good, it is the labor group which sets the effective limit on the production of t h a t good. T h e other groups involved, though not plentiful enough for all purposes, are able to furnish coöperators for more workers than there are in the scarce group. T h e y , in turn, set a limit upon the production of things in which they cooperate with still more plentiful labor, and so on. T h e wage premium of only one of the labor groups drawn upon for the production of a particular good is determined residually from the value of t h a t good. W h e n one of the cooperating groups in a n y industry is the limiting factor in the production of some other good, its wage depends upon the value of that good. I t is this which provides the elastic element in the demand for this kind of labor, thus making determinate the price which it can command. 1 T h i s is not to say t h a t the wage premium received b y a group of laborers is not at all affected b y the need for this labor in industries where it is not the scarce factor. T h a t constitutes an addition to the remaining demand for that labor, and no such addition is without influence. If to a demand for ten units a t five dollars each there is added a demand for five units a t a n y price less than twenty-five dollars each, we have in effect a demand of fifteen units a t five dollars, and this is bound to affect the price a t which a given supply is disposed of. In the second of the cases distinguished above — scarce laborers making several commodities without assistance — it is obvious t h a t the supply of no one of the products is determined by the available supply of that labor. Hence I If all the demand were of the peculiar kind mentioned above — a certain amount wanted at any price — there would be no determinate " c l e a r i n g " price for a given number of laborers, i.e. for a scarce group.

LABOR A N D NORMAL VALUE

41

we must seek further for the factor which proximately governs value. T o do this we must analyze the process by which would-be users of the various products are excluded from the market for this labor. Fundamentally it is a question of how the total demand schedule for it is made up. For enough of it to make one unit of any of the products, the demand price is the market value of that one unit, and the demand price for each unit of the labor required will be that value divided by the amount of labor. 1 From the market value of larger supplies of the product we derive demand prices for larger amounts of the labor. This series of demand prices is combined with similar series derived from the demand for the other products, to obtain the total demand schedule for this labor, which determines what demands are weakest and therefore excluded. N o w it is evident from the nature of the constituent elements in this demand that the supply of each product must be restricted to such an amount as can be marketed at a price equal to the objective factor in its cost of production multiplied by the wage-rate which clears this particular labor market. Willingness to pay this much for a unit of the product is the condition of not being excluded from the market. 2 T h e prices of the different products will be to each other as the objective factors in their respective costs of production, but to the prices of goods made by other labor in the compound ratio of objective cost factors and wage-rates. T h e third of our cases — labor cooperating with other labor in several branches of production — introduces no new analytical problems. T h e demand from each of the uses for which the labor is used in cooperation with other labor is derived residually as in the first case, and these demands are combined in the manner described in the pre1 There is no demand, even in theory, for a first unit of labor, so far as this product is concerned, or any other product which requires more than one unit of labor. 2 It may be noted that this also effects that allocation of resources between rival uses which is the true function of cost of production.

42

VALUE AND INCOME

ceding paragraph. The prices of the various products will here reflect three factors: the relative scarcity of the special labor required, the amount of that labor expended upon a unit of each commodity, and the amount and price 1 of the other labor needed to cooperate with it. Of course, it would be absurd to imply that anyone ever thinks out these relationships as a basis for action. It is not necessary that anyone should. B u t the cost computations which men do make and the market reactions which are thereby engendered tend to bring about the distribution of resources and the resulting system of values which this analysis leads us to expect. Merely normative these demand schedules admittedly are, but they are no less significant on that account. They are our only guiding thread through the labyrinth of values. T h e wages of certain groups of laborers have played an important role, as an index of scarcity, in the foregoing analysis. It does not follow, however, that commodities made by such laborers will always be higher in price than the products of cheaper labor. They are more expensive than they would be, in the long run, if no scarce labor were needed to produce them, but they may be cheaper than others made by less fortunate laborers. I t all depends on the objective factors in their costs. If each of the scarce workmen can turn out a large volume of goods, the total amount produced may bring a very low price per unit, but this price, when multiplied by the individual worker's output, may mean a very large income. T h e same result appears when the units produced by each worker are not numerous, in a literal sense, but can be used by a large number of consumers. A " movie s t a r , " for example, may make only one " p i c t u r e " a year, but the hundreds of thousands who are willing to pay a moderate price to see it enable her employers to pay her a handsome salary. T h e time required by all the processes involved in this I Some of the cooperating labor, as we saw above, may be scarce for other purposes, and therefore receive a wage-premium.

LABOR A N D NORMAL

VALUE

analysis of valuation raises some difficulties which may well be considered before we turn to the other aspects of our problem. The conclusions we reach by this kind of reasoning are true only if we can assume that men continue to have the same interests and preferences, that is, that demand remains unchanged. We all know, however, that such stability is not characteristic of the modern world. Imitation and the desire for variety keep demand in what is, relatively speaking, a constant state of flux. Other changes in the underlying factors are also likely, especially if the period of adjustment is very long. Irreparable losses from the experimentation involved in this equilibriumseeking, the impairment of natural resources, the accumulation or destruction of durable wealth, and similar developments must be regarded as normal concomitants of the passage of time. The results foretold by our theory can therefore never be expected to come to pass; they tell us what would happen if the conditions with which we started lasted long enough. If understood in this way, they are very useful, however, for they help us to understand the significance of economic changes and perhaps to modify them to our own ends. T H E OBJECTIVE FACTORS IN COST

The theory of long-run price developed in the preceding sections assigns an important r6le to what I have called the objective factors in cost of production. For the sake of simplicity I made certain assumptions which are not quite in accord with the facts, namely, that changes in the amount of a commodity produced do not affect the amount of labor which producers have to expend on each unit of the supply; and second, that all workers able to make a given good produce on substantially even terms, each requiring the same amount of time as every other. We must now consider the modifications which a more realistic view of industry will make necessary in the theory. They are not fundamental. They complicate the statement of

44

VALUE AND INCOME

the principles, but they do not alter the basic forces at work or change the nature of their influence. Let us begin with the first problem — the relation between the volume of production and the amount of labor needed to produce a given commodity. Experience shows that, as the production of some things expands, it is not necessary to put so much labor into each unit of the supply; the objective factor in cost decreases. This should not be confused with what is ordinarily meant by large-scale or " m a s s " production. The latter is a question of the size of the plant or producing organization, while we are concerned here with the amount of a commodity brought to market, whether by small producers or large ones. The two are not unrelated, as we shall see; but they are not the same thing, and failure to distinguish between them is the source of considerable confusion. Moreover, it is only volume of production in the market sense, not size of plant, which combines with demand to determine price. An increase of production, in this sense, affects the objective factor in cost by permitting the organization of laborers in more effective ways. The economies thus effected may arise in connection with any stage in the long series of operations we so glibly lump together as the " production" of a commodity; and it may be either the scarce labor or the more plentiful cooperating labor that is used to better advantage. In both cases the results differ according to circumstances. It will therefore be well to consider these two aspects of the problem separately. The importance of distinguishing between the different operations comprised in the production of a given commodity can be illustrated by a simple example. Suppose the demand for some article, say compasses, is so small in a certain society that only three men can earn the going rate of wages by devoting themselves to making certain brass fittings for the compass cases. It is evident that, even if these three men combined in a single producing organization, they could not achieve many economies through

LABOR A N D NORMAL VALUE

45

greater subdivision of tasks, better planning, and the like. A group ten times as large, however, might accomplish a good deal along these lines. Whether a still larger group could effect even greater economies in this particular part of the compass-making process depends upon technical considerations. There is no " t e n d e n c y " about it. If not, then no further expansion of production would bring any further reduction in the objective factor of this part of cost. T h e extra output would be obtained by duplicating the most efficient organization, i.e., the thirty-man groups. 1 I t is this change from three-man to thirty-man or larger producing groups which people generally think of as increasing the scale of production. This is, indeed, what makes it possible to perform a given operation with less expenditure of labor.2 It is not correct, however, to speak of it as correlated with, or dependent upon, the size of the industry as a whole, except in a very limited sense. Unless the industry attains a certain size, it will not be possible for even one of the thirty-man, more efficient, groups to find adequate employment in making these brass fittings; but after that the correlation may cease. If this is the most efficient sized organization, no more economies are to be had at this point from further expansion of the compass industry. T h e most efficient group may, of course, be a very large one and therefore be practicable only after the industry has attained great proportions. This means that for any smaller expansion of the industry the fittings in question can be produced most efficiently by a single group, i.e., this operation tends to become monopolized. In practice there are probably not many such instances. Economies do not result from every increase in the size of 1 If such groups required management of an especially rare grade, they could not, of course, be duplicated indefinitely. Cf. Chapter X V . 2 I do not mean to imply that economies in labor are the only advantage of large-scale plants. The role of machinery in this connection will be discussed later. (See p. 120 below.) There is also the possibility that some highly skilled labor, too expensive for use in the smaller group, may be a source of added efficiency in the larger group.

46

VALUE AND INCOME

the producing group, and it is rare that the most efficient group is large enough to leave no room for competitors. This particular process, as I have pointed out, is not the only stage in the production of compasses where larger groups may be able to produce more efficiently. The making of other parts and accessories, the production of the required materials (or any stage therein) and the marketing operations also offer possibilities. These economies, however, are not necessarily contingent on the same expansion of production as those just described. It is impossible, on purely a priori grounds, to predict that a given increase in the output of some finished good will permit a more efficient organization of the producers engaged upon a particular contributing operation. In the above example, for instance, an increase of demand big enough to justify a productive organization of thirty men, and thus making certain economies available in the production of the brass fittings, might mean an almost negligible increase in the demand for brass. I t is quite possible that the additional material may be produced by further duplicating of some organization which has already been duplicated to supply it for other uses, no larger organization being capable, in the existing state of technical knowledge, of producing brass more efficiently. Then no economies in the production of brass parallel those obtained in the making of fittings, when the production of compasses attains a certain volume. I t may be a greater or a smaller production that is the sine qua non of obtaining economies in the brass-making part of the process. This suggests a further complication. Neither the total volume of brass production nor changes in the total can properly be regarded as entirely dependent upon the size of the compass industry. The former is adjusted to the needs of all the industries using brass, and may be very considerable, though few compasses are produced.1 CerI Practically all retailing operations (an essential part of "production") are in this position.

LABOR A N D NORMAL VALUE

47

tain economies contingent upon the expansion of output may therefore be obtained which can not be attributed to the size of the compass industry. Nor can we say that changes in the latter bring changes in the amount of brass production. An increased demand for compasses may be at the expense of some other brass-using branch of industry, leaving the total demand for brass unchanged. There is certainly no justification for assuming the contrary. An increase of demand does not arise out of thin air, and always involves readjustments. 1 There are thus two reasons which make it uncertain whether a given expansion in the production of a consumers' good will affect the objective factor in cost for a particular part of the productive process. Such an increase may not involve any increase in the volume of operations at this point, because of offsetting changes in other branches; and even if it does require an increase of activity here, it may not open the way to the introduction of more efficient producing groups. These results are possibilities; they do not arise in the nature of things. Conversely, a decrease in the volume of production does not necessarily involve an increase in the objective factor at any point in the process. T h e reader who is familiar with Marshall's work will not need to be reminded that there is a certain resemblance between the above analysis and the distinction which Marshall drew between external and internal economies. I have not adopted his terminology because it does not seem to me significant. T h e important thing is not whether a particular operation is performed inside what happens to be the conventional unit of management in a given situation. Nothing that contributes to the providing of bread can properly be regarded as external to bread-making. T h e practice of regarding wheat-growing, oven-building, bread-baking, and so on as different industries is a misI I t m a y arise f r o m an increased willingness t o w o r k , b u t even this usually entails changes elsewhere in the consumption of goods.

48

VALUE AND INCOME

leading one. D e m a n d , the great governor of production, is meaningless in all these cases except as a derivative of the demand for bread. I t is to increases in t h a t demand t h a t we must trace back every economy achieved as a result of production by larger groups anywhere in the chain of production, and there is little to be gained by ignoring this essential unity. W h a t does m a t t e r is t h a t the different contributing operations are not all dependent on the same volume of bread production for attaining the maximum economies which increasing the size of the producing organization makes possible in their case. A t whatever point in the productive process they are obtained, these reductions in the objective factor in costs may apply either to a scarce kind of labor or to the more plentiful labor which enjoys no such advantage. If the scarce labor is used for only one purpose, there is not much point in discussing the effects of increases in production. All the available labor is sure to be devoted to this branch of industry anyway, and the most efficient sized producing groups which are known will be the only ones whose labor cost plays any röle in value. Changes in the demand will affect only the wages element in the compound ratio which the price of this commodity must bear to other prices. T h e objective factor will not be affected. This is not true, however, when the scarce labor is used for more than one purpose — by far the more usual case. Here, it is evident, an increase of one product is entirely conceivable, despite the inflexibility of the total supply of t h a t kind of labor. Under these circumstances it may happen t h a t a shifting of more of this labor into one of the industries for which it is used, as a result of increased demand there, may make f u r t h e r economies of organization available. This will strengthen the position in the market for the scarce labor of t h a t p a r t of the demand arising from this use of it. T h e demand prices for additional units of the product are divided b y a smaller figure when the amount of labor required to produce a unit is

LABOR A N D NORMAL VALUE lowered by the introduction of more efficient producing groups. 1 Less of this particular demand will therefore be excluded from the market. More of the product in question will be produced, and its price will be lower, as a result of these economies. 2 When the economies obtained from increasing the size of the producing groups apply to the cooperating more plentiful labor, the results are similar to those just described. T h e effect of any saving in the amount of such labor needed is to lessen the deduction which must be made from the demand prices for successive units of the finished product in order to derive the demand prices for various amounts of the scarce labor. 3 A n increase in the production of some one of the commodities upon which these workers cooperate 4 will therefore strengthen the position of this part of the demand for the scarce labor. More of the commodity will be produced than would be in the absence of the economies, and its value will be lower than it would have been otherwise, though probably not lower absolutely. These points will perhaps be clearer if we apply them to the compass making used as an illustration a few pages back. Suppose the men who make the brass case-fittings are the scarce labor element in the industry, the limiting factor on the production of compasses, and that they are also the scarce factor in some other industry, say lock making. If the demand for compasses should increase enough to require the services of thirty rather than three of these laborers, they might be able to reduce the time spent on one set of fittings from three days to two days. 1 C f . p. 4 1 above. 2 Unless the increased demand for this c o m m o d i t y is not offset elsewhere and therefore forces u p the wages of the scarce laborers. In a n y case, the price of the c o m m o d i t y will be lower relatively to the prices of other things made b y this labor, t h e y being a little scarcer and it being a little more plentiful, relatively, than before. 3 C f . p. 39 above. 4 H e r e again it is necessary to assume t h a t there are competing uses for the scarce labor involved. Otherwise there can be no question of greater need for the cooperating labor and the possibility of resulting economies.

5°

VALUE AND INCOME

Assuming that the compasses sell for twenty dollars apiece and that ten dollars has to be paid for the cooperating labor, ten dollars is the demand price for enough scarce labor for one compass, i.e., two days' labor, or five dollars a day. Obviously if it had required three days to make a set of fittings, no economies being obtainable, the derived demand price for a day's labor would have been only $3.33, which would have been too low to be included in a market cleared at $5 per day. Fewer laborers could have been obtained for making fittings, and fewer compasses could accordingly have been produced. On the other hand, suppose the economies applied to the cooperating labor, that only eight dollars worth of it is needed for one compass when this scale of operations has been reached. Then the residually derived demand price for enough scarce labor to make one set of fittings (i.e., three days labor) will be twelve dollars instead of ten — four dollars per day instead of $3.33, which will not only strengthen the compass industry as a bidder for the scarce laborers, but also lead to higher wages for the latter. There is a stronger demand for their services and their number is as restricted as ever. The above reasoning leads to two general conclusions. In the first place, it seems to be unwise to generalize too readily concerning " l a w s " or "tendencies" in this connection. Such expressions imply that there is something about the elements involved which justifies our regarding a decrease in the objective factor in cost of production as correlated, in the nature of things, with expansion in the volume of production. T h e fact that economies generally become available at one point in the productive process when the output of a given consumers' good reaches a certain amount, at another point when the output has reached a larger amount, and so on, lends color to this view, but does not really support it. A given increase in production may not lead to economies anywhere, and after a certain point no such increase may affect the objective factors,

LABOR A N D NORMAL VALUE

51

nothing remaining but to duplicate already utilized, and, as matters stand, unimprovable scales of operation. It is a purely technical question. T h e other aspect of the relation between the objective factors and volume of output — differences in the efficiency with which the producers in a given branch of industry do their work — presents a very different problem. These differences may arise from any one of three causes: the strength and speed of the individual workers, the effectiveness with which they are organized, and the quality of the natural resources which they utilize. T h e last of these will be discussed later. 1 If men differ with respect to the amount of product they can turn out in a given time, no matter what kind of work they engage in, some of them, obviously, will earn more than others. T h e values of the things they make, however, will not be affected. T h e workers receiving lower wages can not better themselves by avoiding one occupation in favor of another; the relative supply of different goods remains the same. B u t if their handicap is only in a particular occupation, the situation is very different. When this is the case we have to deal with an "efficiency cost," a sacrifice of efficiency in order to obtain a given good. T o obtain the services of these inefficient workers under these circumstances it is necessary to pay them the going rate of wages in other occupations. This affects the price of the finished good by causing production of it to be more restricted than would have been necessary otherwise. There is something akin to the scarcity of certain kinds of labor which we discussed earlier; not scarcity in the sense of a limitation on the amount of product which can be produced at all, but a limitation on the amount which can be produced on given terms of labor cost. If the more efficient laborers were plentiful enough, the others would not have to be brought in. I Chapters V and V I I .

52

VALUE AND INCOME

T h e extent of the restriction thus imposed on the production of the good in question will be made clear b y a simple illustration. Suppose there are a hundred men capable of making five units apiece of a certain commodity in a d a y , and t h a t these five hundred units will sell for a price which, after paying for the required cooperating labor, will yield each worker a net return of t w o dollars per unit, i.e., a wage of ten dollars a d a y . If wages elsewhere are appreciably lower, say eight dollars a d a y , there will be a tendency for laborers to transfer to this trade, if they can better themselves thereby. M e n who are able to make only four and a half units of the good in a d a y will be tempted, b u t only a few will find it worth while. A s soon as the increase of supply has forced the net return per unit down to $1.85, wages will be nearly equalized so far as they are concerned, and there will be nothing to cause the price to fall a n y lower. T h e more efficient workers are therefore partially sheltered from competition and are able to obtain wages of about $9.25 per d a y (5x^1.85) or considerably more than the (approximately) $8.00 with which they would h a v e had to be content otherwise. 1 Differences in effectiveness of organization are analogous to the differences just considered. So far as they are due to causes which affect all branches of industry in the same degree, i.e., to the proportions in which different grades of managerial ability are available in the society, they do not affect values b u t incomes. Here, however, it is not the wages of the more efficient workers which are higher. Since their greater o u t p u t per m a n is not due to any superiority on their part b u t to the ability of their leaders, it is the latter w h o benefit from it. 2 B u t if these differences in organization are peculiar to a particular industry, capable managers being plentiful elsewhere b u t for some reason permanently scarce here, the situation will be different. 1 The net yield per unit would then be only about $1.60 ($8.00-^5) and the selling price this amount plus the wages of the cooperating labor. 2 This phase of the problem is discussed in Chapter X V below, especially pages 224-231.

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53

Workers will be unwilling to enter these relatively handicapped lines of work unless the values of the products are high enough to offset the smaller output per unit of labor. I t is much as if the whole industry were subject to a higher objective cost factor. The influence upon value is less direct, however, and cannot be fully explained until we take up the question of wages of management.

CHAPTER

IV

LABOR AND NORMAL VALUE, UNFINISHED

Continued

GOODS

HE discussion of the preceding chapter, especially the first section, make sconsumer demand an integral factor in the determination of long-run values. I t is therefore applicable only to goods which consumers desire, i.e., " f i n ished goods." These, however, are not the only things which enter into exchange; an immense variety of goods not ready for immediate consumption — raw materials, labor operations, products on the way to market — are bought and sold daily. Such transactions presuppose some kind of pricing and some level to which long-run forces tend. What determines long-run values here? In a fundamental sense they are not the result of any independent price-making process; they must be regarded as implicit in the relations and interactions which account for the prices of finished goods. In the above analysis a certain share of the price of consumers' goods is assigned to every worker who takes part in their production, whether as scarce labor or cooperating labor. T h e share of those workers whose contribution is in the form of raw materials may be regarded as the total price of the raw materials they furnished, if they produced them without assistance, and the price per unit is this total divided by the number of units. Thus, if a given worker receives five dollars as his share of a certain consumers' price, and his services were embodied in five units of some raw material, we can say that the long-run price of this material is one dollar per unit. If, as is much more likely, the raw material was produced by two or more kinds of labor, the total price of the raw material involved is the sum of the shares received

T

54

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55

by the laborers who assisted in its production, and the value per unit is this sum divided by the amount of raw material. Few raw materials, of course, are used for only one kind of consumers' good. According to this reasoning, therefore, a given raw material may derive its value from more than one price-making process. T h e price of pig iron, for example, would be implicit in the pricing of motor cars, of cutlery, of steel-frame apartment houses, and scores of other consumers' goods. This involves no logical difficulties. Only one long-run price is conceivable for a given raw material, it is true, but that is just what we get by this method. Whether the labor used in the production of pig iron is cooperating labor or scarce labor with respect to any finished good, it must be assigned the same wage, as a contributor to this good, as it is assigned in the pricing of any other good. All our conclusions have involved this assumption. 1 Thus, the same wage for pig iron producers being implicit in all the consumer prices, and each worker's output being the same, the derived unit price is the same in all cases. Strictly speaking, therefore, it is incorrect to think of the long-run prices of unfinished goods as being the result of an independent process. T h e y are simply the implications of the sharing of returns and the technical conditions of production which we have to take into account in explaining the prices received for consumers' goods in the long run. I t is not necessary, however, to make such a drastic break with tradition in order to deal with this problem. T h e above theory can be cast in a form which will seem less strange to readers who have been accustomed to the other point of view. We may, for example, regard the production of pig iron as being limited by the amount of some particular kind of labor used in making it. Applying the theory developed for consumers' goods, its long-run price would be to other prices in the compound ratio of the amount and wages of I E.g. pp. 39 and 41 above.

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this labor plus the amount and wages of the more plentiful labor required to cooperate with it. Further than this, however, the parallel with consumers' goods can not be carried. The wages of the scarce laborers — the index of their scarcity — can not be derived residually from the demand price of the total supply of pig iron they are able to produce. There is no direct demand for raw materials, and we can not derive it from the demand for the finished goods into which such materials enter. I t might seem that we could do so by subtracting the amounts which must be paid for the labor required to complete the production of the consumers' goods. This, however, would involve us in circular reasoning, in some cases. Where some of the labor needed for these additional processes is the scarce labor with respect to that particular finished good, its wage is the unknown element in the problem and is derived residually by subtracting the amount paid for the (cooperating) labor which produced the pig iron — the very laborers whose wage is here in question. We cannot turn around and derive the value of pig iron, and thus the wages of the laborers who produce it, by taking the wages of the first group as a given quantity. On the other hand, although this is true of the causal relationships ultimately underlying value, it does not follow that the residual determination of the value of raw materials is of no significance. During the interval before the forces governing normal price have had time to work out their full effects, such a method of determining how much to offer for various amounts of raw material is the only one which is practical. Taking the latest recorded prices of the finished good and of the labor required to complete it, as a starting point, and estimating as well as he can the effect on them of the operations he and his competitors are planning, the would-be buyer of the raw material decides how much he can afford to pay. If his estimates on any of these heads prove to be wrong, he will

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revise his offer next time, and eventually the true norm will be attained. These procedures, however, do not tell us why the norm is at one point rather than another, which is the real problem of long-run value. They only describe the trial-and-error process whereby it is reached in entrepreneur economies.1 COST OF PRODUCTION AND VALUE

The reader who is familiar with the history of value theory will have noted the subordinate role in the above analysis of a concept hallowed by long tradition — cost of production. The omission is significant. In my opinion, cost of production, in the proper sense of the term, is no such dominating factor in the determination of value as it has often been pictured. Before passing on to the next aspect of our problem, it will be worth while to look into this question a little more fully. According to the view developed in Chapter I, cost of production must be distinguished from another concept which has often been treated as synonymous with it — the outlays of the entrepreneur. The latter are not without significance in the economic process,2 but they cannot be regarded as costs of production in a social sense. What the entrepreneur "gives u p " in order to obtain the resources needed in his enterprise are indeed costs from his point of view; but they are not what society must forego in order that the goods he "produces" may be available for consumption. He would be under an equal necessity if something else were produced. I t is only in performing the function of risk-bearing that he gives up anything for the sake of production. The real costs of production are the opportunities, in the way of satisfactions, or consumption, or efficiency, foregone by the producers of a particular good or as a result of its production. Our task, then, is to inquire whether any of these affect values. 1 Cf. pp. 257-259 below. 2 Cf. what is said on this point in Chapter X V I I .

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The three kinds of cost of production are best considered separately. Let us begin with satisfaction costs. Suppose labor were perfectly mobile and that nobody thought it worth while to work beyond the point where labor begins to be irksome, using that term broadly. Here there are no satisfaction costs, and hence the products of labor must either command no price at all, or their price must be determined by some other factor. The first possibility must be ruled out, for the products are scarce and can not be made more plentiful without incurring satisfaction costs. If the producer, therefore, should give up his product without a quid p r o quo, he would have to reduce either his consumption or his satisfactions — a choosing of the less rather than the greater. Moreover, he must receive a product requiring as much labor for its production as the one he surrenders; that is, goods will normally exchange in proportion to what I have called the objective factor in cost. Only in this way can laborers working different amounts of time to produce different goods obtain the equal earnings which would certainly result under conditions of perfect mobility. Cost of production does not govern value here; it is the objective factors alone which control. If we move a stage nearer reality by eliminating the assumption that no labor is irksome, the problem becomes more complicated. In the first place, we must distinguish between general irksomeness — that which is felt by laborers of all kinds as they extend their efforts beyond a certain point, and particular irksomeness — that which characterizes only the labor of those engaged in certain branches of production. The latter, unless men are completely indifferent to such aspects of their work, can not but affect values.1 Men will avoid the more irksome kinds of work — we are still assuming perfect mobility — and the I There are, however, many unpaid costs in the world — the noise, smells, smoke, etc., of certain industries. They do not affect the laborers employed in these industries alone. Cf. Watkins, Industrial Combinations, pp. ioo-l.

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things produced b y such labor will rise in value until the extra compensation which this affords the laborers checks the exodus. Whether this extra compensation can be regarded as strictly proportional to the differences in irksomeness of the different occupations seems to me very doubtful, for reasons which I shall not attempt to develop here; but I think no one will deny that the presence of this kind of cost is certain to affect values to some extent. 1 B u t no such reasoning can be applied to the general irksomeness of labor. This affects only the scarcity or plenty of labor as a whole, that is, the amount of work which a given laboring population is willing to do; and, as Professor D a v e n p o r t has pointed out, the scarcity of a productive factor does not explain the scarcity of particular products made with the aid of that factor. 2 T o explain the value of a given thing, we must explain w h y that thing is plentiful or the contrary. Only in those extremely rare cases where a good is made from some one resource which has no other use, can we say that the supply of a good and the supply of the factor used in making it are traceable to the same causes. In the case we are now considering we m a y be certain that goods would exchange in proportion to the labor expended upon them, regardless of the general disutility which attended some of the efforts involved; for, whether men like to work or not, they seek equality of wages wherever possible, and that is attained only when the man who has spent two days on a given article can sell it for twice as much as his neighbor receives for that on which he spent only one day. A s in the previous case, where there were no satisfaction costs of production, it is the objective factors in cost which govern value. If more valuable goods are found to involve greater satisfaction ι Cf. what is said on this point in Chapter X I V . 2 Economics of Enterprise, p. 192. We cannot say, with Marshall, that the supply price of a good is the a m o u n t " required to call forth the exertion necess a r y " for its production. (Principles of Economics, p. 142.) The supply price of labor, if there be one, is not a factor in the value of commodities made by that labor.

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VALUE AND INCOME

costs, it is simply as a result of the greater amounts of the productive resources used. Let us now abandon our other assumption' and consider the case where labor is not only irksome but lacking in mobility. Incomes, of course, no longer attain complete equality, and therefore some workers — those whose products remain relatively scarce, because competition is impeded — exchange on better than even terms with other less fortunate producers. T h e value of goods is not in proportion to the objective elements in their costs. T h e significance of satisfaction costs is even further diminished; for although the particular irksomeness of labor continues to affect the supply of some commodities, and hence their value, the general disutility of labor is now not proportional to the value of goods even as a resultant. We can not infer t h a t the more expensive good had the greater satisfaction cost of production. Another influence upon value has been introduced, which economists since the days of Cairnes have fully recognized — the relative scarcity of certain kinds of labor. T h e objective elements in cost, though they do not lose all their influence, no longer govern alone. T h e second variety of cost of production — consumption cost — has even less influence upon value. Like other costs, it depends partly upon an objective factor — the amount of productive resources used. From the standpoint of the individual producer in an exchange economy, it is simply the opportunities in the way of income which he sacrifices in devoting himself to this branch of industry rather than any other. (This, apparently, is all t h a t many people have in mind when they speak of " o p p o r t u n i t y costs.") In a relative sense it may be said t h a t this is a value-making force. If cost exceeds return, i.e., if one occupation pays less than others do, men will leave it, if they can, until the greater scarcity of its product has raised earnings there to the general level. I t is not the absolute amount of the sacrificed consumption, however,

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that counts. Whether a day's work yields large returns or small in other industries, workers will not be impelled to transfer to them unless they offer better opportunities. Whatever the consumption cost of working at a given trade, the product of a day's labor will always exchange for the product of another man's day, so long as men are free to choose. T h e real function of consumption cost of production, as we have seen, is the allocation of resources among rival uses. This influence upon the supply of goods has led some to conclude that cost of production in this sense is a factor in the determination of value. T h e reasoning is fallacious, however, since the varying amounts in which different goods are produced are accompanied by, and indeed the result of, corresponding differences in the demand for these goods, so that supply and demand remain in the same relation to each other and value is unaffected. Consumption cost of production determines the volume in which particular goods are produced, under given conditions of demand, but not the ratios at which they exchange. Efficiency costs of production are incurred in three ways — in using labor or land or savings for particular purposes where they are subject to some disadvantage from which they are free in other uses. T h e first of these cases we have already considered in connection with differences among different individual workmen. 1 T h e other two can be most easily discussed after we have analyzed the functions of land and saving. 2 THE

NATURE

OF N O R M A L

VALUE

We are now in a position to return to a question which was left unanswered at the beginning of the preceding chapter — what is to be understood by the terms "normal" and "long-run" as applied to values and prices. T h e common practice of treating them as a kind of contrast to 1 See pp. 51-52 above. 2 See pp. 76-79, 127-128 below.

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market values is rather unfortunate. As careful economists well understand, all real prices are market prices, since all goods must pass through the market in order to reach the ultimate consumers. The prices that would prevail in the markets of a society where demand was stable, natural resources all discovered, and technical experimentation at an end are the normal prices for that situation. It is a question of time. By a process of many small adjustments, and subject to delays from various degrees of partial monopoly, a system of prices would be arrived at which might be said to "fit the facts." In a sense, therefore, it may be called an ideal or hypothetical system, since no modern society ever maintains a given set of relevant conditions long enough to permit the complete attainment of the ideal price system implicit in them. But though ideal in this sense, it is not objective. The physical environment and technical development of the society do not determine and impose it like weather or the tides. I t is unthinkable apart from the demand for consumers' goods which motivates that society's economic activities. These objective factors do play a part — an important part — as we have seen, but they do not exercise independent control over the price system. As long as labor is not perfectly free to move from one occupation to another, demand will be a factor in long-run price. The long cherished hope of finding an objective basis of value was an illusion. Nor can this long-run price be regarded as permanent. Even if wants were as stable as it is sometimes believed they were in earlier days, and the physical environment conditioning man's quest for goods to satisfy his wants were completely stable, the price system would be subject to continuous readjustment. There are two reasons for this. In the first place, demand, which is an element in every system of normal prices, is partly dependent on the distribution of income; and this, in turn, is partly a result of the price system, since the wages of scarce laborers are

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derived from it. Hence the attainment of the price system implicit in one set of facts brings about a change in some of these facts (demand) and calls for a new price system. A f t e r a time, of course, the readjustments may become so small as to approximate stability, especially as demand becomes more dependent upon accumulated wealth. T h e other reason for regarding the price system as fundamentally evolutionary is the relation between the distribution of income and the supply of the factors of production. Though this relation is by no means as simple as it is sometimes made out to be, 1 there seems to be no reason to doubt, both on theoretical grounds and as a lesson from experience, that the income obtained by those who furnish the resources used in production — labor, land, savings —· has some influence on the amount they so contribute. B u t these incomes depend on the price system. Hence the attainment of a given system of normal prices not only tends to introduce changes in the underlying demand situation, as we have just seen, but also affects another of the factors which have a part in the value-making process — the supply of productive resources. Here again, however, the process tends to reach a stage of comparative stability, the adjustments being so small as to be negligible. This reasoning is not open to the charge of circularity which has been brought by some writers against analyses purporting to explain a given price system. 2 T h e dependence of demand on price and of price on demand which is involved here is a temporal sequence, not a circle in logic. We begin with a demand situation — the result of a previous distribution of income or, if we go back f a r enough, of the physical capacity and will to work of the still isolated worker — and from that in the course of time attain a system of prices which both " f i t s " the facts we started with and modifies them, thus inaugurating another process of price-making. Similar reasoning applies to the supply of ι Cf. Chapters X I - X I I I below. 2 Cf. p. 29 above.

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the factors. N o doubt it would be very erroneous to think of this as a continuous process reaching back to the dim and tentative beginnings of barter. It has been interrupted times without number by violence, catastrophe, and fraud, and resumed again from a starting-point that would never have been reached otherwise. This is the way it works, however, in the absence of such interference. One further point deserves notice in this connection. I have spoken of normal prices as those to be expected eventually, if such things as taste and natural resources remained stable. How legitimate is such an assumption? I t is not a question whether these factors may change — we know well enough that they do — but whether they can remain unchanged, whether they are really independent of the other transformations going on. In a literal sense it is rather difficult to think so. A n individual's tastes and wants do not lurk enduringly " i n the back of his h e a d " until an increase in his income gives them their opportunity. Increase of income and change of status often bring new wants into being and cause old ones to fade unexpectedly. T h e supply of natural resources, moreover, is also affected by the price-making process. Apart from the search for new supplies which keen demand is sure to engender, there are the losses resulting from the experimentation which almost always precedes the attainment of equilibrium, and from the wasting away which the use of some things entails. These qualifications, however, are slight. Though the world — our world at any rate — is indeed thoroughly dynamic, there are no serious logical objections to assuming virtual stability of wants and resources for some analyses.

CHAPTER

V

R E N T AND VALUE: AGRICULTURE THE USES OF LAND N discussing inequalities in the output of different contributors to a supply, in Chapter III, one of the reasons for such inequalities was reserved for separate consideration — differences in the natural resources utilized in production. These differences have a double significance. They are an important factor in the values of goods produced under these conditions, and they have a profound effect upon the distribution of income. This and the next two chapters will be devoted to these and allied problems. It is a familiar fact that some things can not be produced unless man has access to certain resources contained in the crust of the earth we live on. Labor alone is not enough. These necessary factors in production may be conveniently referred to as " l a n d , " and the goods in question may be said to require "land-using" operations. Not all goods, however, are of this sort. Personal services of all kinds, for example, do not require the use of any more land than would be needed if society dispensed with such services entirely. The servants, it is true, must have food and clothing — products which do fall within the land-using category, but that would be the case anyway. T h e addition of personal service to the consumption of the community does not increase the need for land. There are great differences, moreover, in the amount of land required for different operations. T h e refining and manipulation of raw materials makes relatively negligible demands upon the community's supply of land — none at all where these operations are performed in the home. It makes little or 6s

I

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no difference whether we eat fruit fresh or preserved in some elaborate way. Land may contribute to production in either of two ways: by supplying certain natural products which men remove and use up, and by acting as a continuous coöperator in some productive process. The first is illustrated by coal mines, oil wells, and all industries which bring about the depletion of some natural store; the second by farming and fishing operations of all kinds. It must be admitted that the line between these two classes is not perfectly clear-cut. A farm may be so operated that its natural fertility is eventually exhausted; and the cutting of heavy timber is as irreplaceable for a time as the using up of ore deposits is permanently. The point is that neither farming nor lumbering needs to be conducted that way. In both cases land may be so utilized that it affords assistance in production indefinitely. Such resources as mines, however, can not be so managed. These two aspects of the use of land present different problems. The second — continuous cooperation in production — is a little less complicated, and will therefore be taken up first. Alongside of these uses, and competing with them, is another of an essentially different sort — a consumer use. Among the things men want is a space to live on, a place to play on, a bit of land to hold their bones — in short a considerable list of purposes which can not be called assisting in production. The land is wanted for its own sake as a consumers' good. The wide sweep of green lawn surrounding a dwelling house was not required for the production of the house; the house could be built flush with the street line and shelter its occupants just as adequately. T h e lawns are there for the same reason the verandas or oak floors are there — because the occupant wishes to have those things and is willing to pay enough to get them. I t is the same with parks, golf links, church sites, and the like. These uses of land present some peculiar problems, and we shall consider them separately.

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PRODUCING ONE COMMODITY T h e production of consumers' goods requires the continuous cooperation of land for t w o purposes: as the basic f a c tor in the production of certain materials, and as sites for buildings in w h i c h the various operations involved in w o r k i n g up these materials and m a r k e t i n g the products m a y be performed. T h e former are sometimes referred t o as the " e x t r a c t i v e i n d u s t r i e s . " T h e t e r m is a little misleading, however, because it implies t h a t something is " t a k e n o u t " of the land in the sense t h a t ores are t a k e n o u t of mines, and thus gives the impression t h a t these t w o uses of land m a y b e regarded as essentially alike. If a n y special term is needed to describe the use of land in the production of materials, the expressions " a g r i c u l t u r a l u s e " or " c o n t i n u o u s production u s e " are preferable. W h y is inferior land ever utilized for these purposes? W h y is the o b j e c t i v e factor in the cost of land-using operations ever raised a b o v e t h a t necessary on the best land? So far as the agricultural uses are concerned, the answer has long been familiar to economists: the relative scarcity of good land and the f a c t t h a t such land can not serve as cooperating f a c t o r for an ever increasing number of workers w i t h o u t some decline in its efficiency. If it were not for this second f a c t a scarcity of good land would be of no significance. A d d i t i o n a l supplies of goods requiring land-using operations would be obtained b y p u t t i n g more laborers to w o r k o n such land. A s it is, however, the a t t e m p t to use the good land in connection with more and more labor would e v e n t u a l l y encounter an obstacle. A f t e r a certain point the application of a given q u a n t i t y of labor does not add so m u c h to the o u t p u t as earlier applications of the same size. P r o d u c t i o n encounters " d i m i n i s h i n g ret u r n s . " T h e o b j e c t i v e f a c t o r in the cost of the good is therefore higher, w i t h respect to this operation, and the o n l y alternative is the use of poorer land where it is also higher. T h e use of land as sites for business buildings meets with

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similar difficulties. Everybody knows that a given staff of workers can do a larger retail business on some sites than on others. Nearness to transportation lines or to points which many potential buyers habitually pass for other purposes, freedom from surroundings distasteful to customers, and other factors make great differences in this respect. Factory sites differ in the advantages they offer in the way of power, transportation for materials, for finished goods, and for employees, fire risks, and the like. A well located office building saves time and trouble for its tenants and enables them to do more business in a given time. Diminishing returns are also a factor here. It is possible, of course, to build higher and higher buildings for use in retailing, but the greater cost of building and serving the added floor space, the loss of light and space on the lower floors, and the relative scarcity of street show windows in such buildings eventually offset the greater turnover per employee, and make it better policy to provide further accommodation for retailers on less desirable sites. In office buildings, too, after a certain height is reached, depending on technical conditions, additional floors do not pay, except in the way of advertising in some cases or the gratification of personal and civic pride. Factory buildings, especially where heavy machinery has to be used, can rarely be built to advantage beyond five or six stories. I t is better to expand operations by using land not quite so favored. This decline of " r e t u r n s " as more and more laborers use a given plot of land does not work the same way in all cases. I t may come gradually or abruptly, at an early point or only after many laborers are employed. 1 T h e later and more gradual the action of diminishing returns, I I t may be that a small number of workers will not do so well on a given area as a larger number. T h a t does not mean that we have a decrease in the objective factor in cost as production expands. The smaller number of laborers can use a smaller area of land and increase their efficiency to the maximum for land of a given quality. Cf. F. M . Taylor, Principles of Economics, pp. 139140.

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the slower the resort to inferior land will be. In agriculture it is generally found that the falling off in the output of additional labor is not very great at first, and that considerable increases in production are possible without a striking rise in the amount of labor required for each unit. In any case, apparently, there is a point beyond which more laborers add only a negligible amount to the output, being only " i n each other's w a y . " Office buildings can generally be carried to a greater height without increases in the cost of the additional floors than factory buildings can. If buildings of great height are forbidden by law, the effect is to force the use of inferior land more promptly, unless these restrictions are offset by economy in the use of land for streets. This is usually the case, the narrowness of the streets being the reason for the restriction on building. Another point to be noted is that an increase in the number of workers using a given tract of land may make possible the introduction of a more efficient organization of the staff or the use of machinery, with a resulting gain in output under given conditions. This may offset the natural limitations of the land, in some measure, and thus cause diminishing returns to appear more gradually; 1 but it is no permanent check on the tendency. T h e widespread use of inferior land is evidence enough that the better land does not offer unlimited possibilities. T h e effect of all this on prices depends on the extent to which land-using operations enter into the production of a particular good. Some consumers' goods, as we have seen, do not require any of these operations, and those that do require them differ widely in this respect, even when some of the operations involved in their production are identical. A bit of fine lace, for example, may be made of the same kind of raw material as a piece of plain towelling, but far more labor is expended upon it in operations which require I J. B . Clark, The Distribution of Wealth, pp. 163-164.

7°

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INCOME

little or no land. T h e importance of marketing costs is much less for some commodities than for others. T h e simplest w a y to analyze the influence of these differences is to compare a good which requires the use of land with one which does not. L e t us first consider the case where the laborers performing the land-using operation are the scarce laborers with respect to both goods. T h e good requiring the use of land will be a t a disadvantage in competing with the other for the scarce labor, and less of it will be produced than would have been produced otherwise. Its price will be higher. T h i s is because its demand price for this labor is diminished, as more of the finished good is p u t on the market, not only b y the fall in price, which the other commodity suffers as well from this cause, but also b y the f a c t t h a t the residuum of this price has to be divided b y a larger objective factor. 1 In other words, the additional finished goods require more of the scarce labor per unit. T h e price of the land-using good is thus k e p t high enough to p a y the scarce laborers w h o work under the greatest handicap, i.e., on the poorest land, as much as those employed upon the other good. T h a t is the condition of being included in the m a r k e t for this labor. 2 In the compound ratio expressing the relation between this price and the price of the other commodity the wage of the scarce labor will be multiplied b y the objective factor in the cost of the least effective workers performing the landusing operation involved. If the scarce labor receives eight dollars a d a y and the cooperating labor four dollars a d a y , the price of a good requiring a d a y ' s labor of each kind will be to the price of a good requiring a d a y ' s labor from the cooperating group and a d a y and a half from those of the scarce group who use the poorest land in the ratio ( 8 + 4 ) : (12+4). T h i s price, it is evident, is more than enough to keep the 1 Cf. pp. 40-41 above. 2 Cf. p. 41 above.

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laborers using better land from leaving the trade. A t their (higher) rate of output a lower price would suffice to give them the same wages as producers of the non-land-using commodity earn. This difference Marshall called " p r o ducer's surplus." It is not due to any special efficiency on the part of some laborers, or to specially capable leadership, as in the cases considered in a previous chapter, 1 but to the superior quality of some of the land used. T h e owners of such land get it in the form of " rent." If it is cooperating labor, rather than scarce labor, which requires the use of land, the price of the finished good is also affected through its position as a competitor for the scarce labor. If more of the land-using good is produced, not only will more cooperating labor be required but also more per unit for the additional output. Thus the price of what one of the scarce laborers can produce in a given time has to be reduced by a larger amount in the way of compensation for cooperating labor, while the other commodity is under no such necessity as more of it is produced. T h e land-using commodity is at a disadvantage in the market for the scarce labor as a result of the peculiar conditions attending the use of land, less of it will be produced, and its price will be higher. As before, this price will afford a producer's surplus on the output of part of the land-using laborers. T h e price of the finished good and the amount of the producer's surplus will depend, in both the above cases, upon the extent of the demand for the finished good. T h e larger the demand the poorer the land that can be used, and hence the greater the difference between the output of the least effective producers and that of the more fortunate. For when demand is larger a given supply of a good can be sold at a higher price, offsetting either the greater sums which must be paid for cooperating labor, or the greater amount of scarce labor for which the residuum must provide a demand price, when poorer land is used. 1

Pages 51-53.

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In more familiar terms, when the demand for a commodity is great, a given amount will sell for a price high enough to cover greater expenses for labor in any of the contributing operations. Demand, it should be noted, is used here in relation to land, not to other wants or to population. Thus a community of only a few thousand people settled on a large territory may have a relatively large demand for wheat, as compared with its demand for non-land-using products, and large for a population of that size, without ever having to resort to any but its best land. In our previous references to the extent of demand it was not necessary to attend to this distinction because its significance was much less. So far as scarce labor is concerned, it is of no consequence. A small community will have a proportionately smaller number of such workers, and demand will bear the same relation to them whether regarded as a total or per capita matter. In its effects on the objective factor in cost, however, demand had better be regarded as a total. In a small society the number of people needed to satisfy the demand for a given commodity may be too small to achieve the greatest economies that are technically possible. Demand in this sense is largely dependent on the size of the population, but there are some wants, particularly those commonly provided for as a public function, which arise only as societies attain considerable size. Land-using operations give rise to commodities and services which, though really paid for out of the prices received from consumers, are marketed separately in practice. The prices of such materials and services, as I have maintained in the preceding chapter, are implicit in the relations which account for the prices of finished goods. Where the use of land is involved, the laborers whose share of the consumers' price gives us the total price of the raw material supplied 1 are those working on the poorest land which it is feasible to use under the existing conditions. What they ι Cf. pp. 54-55 above.

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receive divided by the amount of material or service they produce is the price of a unit of these latter. We reach the same result by taking the output of one of the other laborers as a basis, but we must not divide the wage he is able to retain, not being a landowner, by the whole amount of material he produces. T h a t would give too low a value for a unit of material. We must divide the total income assigned to landlord and laborer, in the above reasoning, by the amount of material produced by these two factors in cooperation. PRODUCING SEVERAL COMMODITIES

Our analysis so far has been in terms of a single land-using product. This assumption being entirely unrealistic, we must next consider what happens when two or more such commodities are demanded. The effect of the additional demand upon prices will depend upon how it affects the use of land. Two possibilities are to be distinguished: production of the second commodity may simply involve the replacement of one land-using operation by another, or it may require the service of more laborers in such operations. In the first case the demand for the second land-using commodity is at the expense of the first; in the second case it reflects a decrease in the demand for non-land-using commodities or for leisure. Where only a replacement of one land-using operation by another is involved, it is evident that no more land is needed, assuming that land can be used for any purpose, being perfectly homogeneous.1 Since no more land is required, the poorest land in use will be no worse than before. But where something more than such a replacement is involved, more land will have to be utilized, and this may have to be poorer land. Whichever of the two commodities, in the latter case, is supplied in part as a result of operations conducted on ι When it is a question of using a given raw material, say wheat, for a different consumers' good, this assumption obviously fits the facts. T h e land that contributes to the production of one good is perfectly suitable for the other. Homogeneity may also exist apart from this. Cf. p. 78 below.

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VALUE AND INCOME

this still poorer land will be as handicapped in competition for the scarce labor it requires as if it were the only landusing commodity and land of this poor quality were the only kind available. Its supply will therefore be restricted, and its price raised, as much as would have been necessary under those circumstances. The objective factor in its long-run price is permanently greater as a result of the conditions which led to the use of poorer land. The other good, even though none of the labor which contributes to its production works under such unfavorable conditions, is in no better position. Its price must be as high as if it were compelled to use land of the same poor quality. If it were lower than this (wages, as we must assume, being the same for like labor in both branches of production), landowners could obtain more rent by turning to the production of the dearer commodity. The superiority of their land is as great for one purpose as for the other. All land-using goods tend, then, under the conditions here assumed, to sell at the prices they would bear if all the land used in producing them were as poor as the poorest used for any of them. The objective factor in the ratio of their price to other prices is determined by the conditions which obtain on this poorest or " m a r g i n a l " land, so far as this aspect of their production is concerned. This does not mean that they will sell at the same price. One may require more labor under all conditions, and its price would therefore have to be higher anyway, assuming labor of the same grade to be used in both of them. The point is that each has the same margin to cope with. Nor does it mean that their prices will rise in the same degree, if changes in demand cause still poorer land to be utilized. It is only with respect to their land-using operations that this is true, and these differ greatly in importance in different goods. Resort to a poorer margin in the production of sugar cane will affect the value of table sugar relatively more than that of fancy confectionery. How poor the marginal land will be, and how great the

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75

producer's surplus on the better land, under these conditions, depends as before on the strength of the consumers' demands; not the demand for any one of the land-using commodities, but the demand for these things as a class. This, to be sure, is closely related to the strength of the separate demands, just as the total demand for a commodity depends upon the individual demands of which it is composed, but it is not to be thought of as identical with or dependent on any one of them. Equilibrium is reached when each commodity is produced in such volume that its price is equal to that required to maintain production of it on the poorest land that has to be utilized in order to produce all of them in these various amounts. An increase in the demand for any one of them, therefore, will make it possible to use poorer land for that one, and force all the others to adjust themselves to a new margin. The transfer of land from one use to another, which we have assumed in the above reasoning to take place with perfect freedom, is often in reality no such easy matter. The difficulties encountered are of three kinds: absolute unsuitability, where land simply can not be used for a particular purpose; relative unsuitability, where land can be used for a given alternative purpose but is not as efficient when so used as it is in other lines; commitment handicaps, where some permanent investment has been made in or on the land which renders it more adapted for some purposes than for others. 1 The last of these obstacles, being similar to the other two in net effect, will not have to be considered separately. Each kind of difficulty may hamper the transfer of all or only some land between two uses. If two commodities require the use of entirely different kinds of land, it is evident that production of one of them will involve no encroachment on the land used for the other. There will be no combining or interaction of the I If the investments are not literally permanent, the non-homogeneous character of land is, of course, to that extent only a temporary factor.

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VALUE AND INCOME

two demands. Each commodity will have its own margin and its own long-run value, depending on the demand for it and the amount of land available for the particular operation it requires. Here it is quite possible that an increased demand for land-using commodities as a whole may have no effect on the long-run value of some of them; the increase being concentrated on commodities using land of a different kind. In like manner, an increase in the demand for one good which is wholly or partly at the expense of another may lead to a lower price for the latter by causing the margin of production to fall back to better land. There is no tendency for prices to move together when the land-using operations involved in production can be carried out only on lands of a peculiar kind. A special case of this kind of obstacle is seen where the land required for the production of a particular good is not only essentially different from other land but is much more limited in amount. Here expansion of production beyond a certain point must be entirely by means of a more intensive working of land already in use. There is no more land available, even of inferior quality. This means that the objective factor in cost will increase more rapidly, and that with a given demand the long-run price will be higher than it would have been otherwise. The differential between marginal and other conditions of production being therefore greater, producer's surplus will be greater, and such lands may be very valuable. 1 Such complete lack of interchangeability, however, is not the most common case. I t is more probable that land suitable for one purpose can be used for other purposes too, though with some sacrifice of efficiency, land which is very good for the production of one thing being only fairly good for another, and so on. Obviously the amount of land which can be devoted to one use is here neither so completely dependent on the opportunities offered by the other I The relation between producer's surplus (rent) and land value is discussed in Chapter VIII.

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77

commodity as it is where the transfer of land from one use to another encounters no difficulty, nor so completely independent as it is where such transfer is impossible. The commodity which is in such demand that equilibrium is not reached until its land-using operations have been extended to land which is better adapted to the other commodity will be at a disadvantage, and its price will be higher in the long run, even though both require the same amount and grade of labor under the best conditions. The margin is forced lower in one case than in the other. T o take a concrete example, suppose there is enough land of first quality to provide for the production of a thousand units a week of one commodity and enough land specially adapted to another commodity to sustain the land-using operations incident to the production of a thousand units of that also, the amounts and grades of labor required being the same in both cases. If these amounts sell at prices high enough to encourage additional production poorer land will have to be used. 1 Let us suppose there is enough land of the second quality to accommodate all the extra laborers needed to bring equilibrium for the first commodity, price being then ten dollars, but that the demand for the other commodity is so great that land of the third quality will have to be used unless better land can be drawn away from the other use. If land thus transferred is of only third grade or less in its new use, it is plain that there is nothing to be gained by using it. The price of the first commodity will stay at ten dollars and that of the second at the level required by its margin, say twelve dollars. If the demand for the second were still greater, however, so that production on land of fourth or even fifth quality could be made to pay, it would be worth while for some of those producing for the other market to turn to the product in such great demand. Then I Ignoring, for the sake of simplicity, the possibility of obtaining some extra product by working the best land more intensively. N o difference in principle is involved.

7«

VALUE AND INCOME

the supply and price of the hitherto sheltered commodity would be affected, but it would still have an advantage over the other. Their prices and margins would never be equalized, despite the fact that, under the best conditions for each, they are produced on equal terms. I t is much more common, however, to find that only a part of the land suitable for a given use is not freely transferable to other uses. In such cases it is likely to be the best lands which are affected. They may not be at all adapted for any alternative uses or may offer less marked advantages for such uses. The latter situation is the more usual one. The inferior lands, on the other hand, are equally fitted for all the uses. They lack all the special qualities required for outstanding excellence in these uses — that is what makes them inferior — but their handicap is no greater in one line than another. This is true both of the agricultural and the business uses. The best wheat land is not first class for cotton growing, but as we go down the scale of wheat land we find that some of the poorer land will do passably for cotton. 1 A first-rate site for a building used by stock brokers will probably not be firstrate for a department store; while a fair site for either of these purposes may be about as good for the other. Unless the conditions of demand in such cases justify the use of these transferable lands for both the commodities, the price and rent systems, it is evident, will be independent. Poorer land can be used for one than for the other without making it worth while for any producer to transfer his land to that industry. But if demand is great enough in both cases to cause poorer land to be used, as is more likely, the rents and prices become interdependent. Each commodity must then sell at the price needed on the poorest land used by either of them. If one of the commodities is wanted in much greater volume than the other, I Or for some use that does rival cotton at some point. In other words, where we have many commodities using land the chances of some overlapping are greater.

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79

it may happen that only the former is forced to use the poorer land. T h e other will then be sheltered against the competition of its rival until the price of this is high enough to offset the efficiency cost involved in transferring land to the commodity in greater demand, just as if no land were equally good in both uses. This use of land for purposes to which it is not especially adapted may sometimes occur even when neither of the commodities, speaking generally, is being produced on harder terms than the other, i.e., when their price and rent systems are interdependent. Suppose luncheon facilities are desired in a district where all land commands a high rent from banks and similar institutions. As a site for a lunch room land here may be relatively mediocre. With only two or three hours' business a day it can not compare with many locations on relatively inexpensive side streets. If it is to be used for this purpose, the prices of the foods served must be high enough to offset this loss of efficiency, i.e. to pay the prevailing rate of rent in that district and the ordinary costs of the business. These prices will be higher than is charged elsewhere. If no one is willing to pay them, the venture can not succeed. It is as if the demand for luncheon facilities were so great in the community as a whole that it was necessary to utilize extremely poor sites. Then food prices would be high enough everywhere to cover this heavy efficiency cost. As it is the high prices apply only to a small section. T h e producer's surplus or rent which results from the conditions under which land has to be used in production is never to be regarded as causal except in cases such as the one just analyzed and others where an efficiency cost is involved. Here it may indeed be said that the necessity of using, for one of the commodities, land which is relatively better when used for the other is a factor in forcing up the long-run price of the former. T h e owners of this land are not tempted to use it for the less suitable purpose until the price of the commodity is enough higher to offset

8o

VALUE AND INCOME

the loss in efficiency upon which they must count if they change. A t lower prices the owner of a given plot of land can obtain more rent b y using it for the purpose in which it is most efficient, i.e., in which it is farthest above the margin. In all other cases, however, rent is wholly a result of the price-making process and has no causal relation to prices. Consumers' demand for land-using commodities interacti n g w i t h the available supply of land determines w h a t grades of land it is worth while to use and w h a t the longrun prices of these commodities shall be. T h e landowner's rent depends on the extent to which these prices exceed the amount which is needed to afford the going rate of wages to the laborers who use his land in production. T h e better his land, the lower the price which would have sufficed and the greater his surplus. A l l other attempts to treat rent as a cost, as an opportunity foregone, merely amount to saying that, when land can be used for several uses, it tends to be distributed among them in proportion to the intensity of the several demands. T h i s is a question of allocation, and that never explains the prices of the goods competing for the use of a given productive resource. 1 I

Cf. pp. 59-61 above.

C H A P T E R

VI

L A N D AS A CONSUMERS' GOOD THE

PROBLEM

OF T H E

MARGIN

EN land is desired for its own sake, it presents a very different set of problems. For one thing, the superiority of better land for such uses is not a question of any difference in the physical output of labor. T h e desirability of a residential site does not depend, except in very minor degree in some cases, upon the amount of shelter which a given force of laborers can furnish when using that land. I t has advantages in the w a y of attractive surroundings, accessibility, quiet, congenial neighbors, and building restrictions designed to maintain and promote these things, which make people prefer one district or plot of land to another. Like the silk lining of an overcoat or the icing on a cake, the site of a building is an added consumer's good. Its value, like theirs, is theoretically a separate one, though in practice it m a y seldom be marketed alone. Before we proceed with the analysis of pricing in these cases, we must inquire w h y inferior sites are ever used. Since land is not used here as an aid to production, the reason can not be that additions to the number of people using a given area eventually entail a decline of efficiency, a decrease in the output per unit of labor added. T h e decline which leads to the use of less desirable sites is a decline of attractiveness — of " u t i l i t y . " T w o people do not get twice as much satisfaction from living on a given site as one person would get from living there alone, after a certain stage at least. 1 There is therefore a parallel falling off I If the site were v e r y large, one occupant might prefer to share it with another, for the sake of having a neighbor; b u t if we assume a small enough plot to start with, sharing brings a loss of utility. This is the more reasonable assumption, since no one needs t o use more than this optimum amount. C f . p. 68 above. 81

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VALUE A N D INCOME

in the satisfaction derived from the residential use of land, as utilization expands, whether resort is had to more intensive use of better sites or to the use of additional sites. T h e latter alternative, as in the extension of the productive uses of land, becomes preferable after the former has attained a certain point. T h e margin of utilization which this analysis implies is not determined in the same way as the margin for productive uses of land. It depends upon three factors — the size of the population, the attitude of people toward sharing a plot of given size with other occupants, and the purchasing power of the individuals who make up the community. I shall discuss the influence of each of these in a general way, and then endeavor to show how they combine in a price-making process. T h e most obvious of them, of course, is the size of the population. However people feel about the amount of land they have to live on, and whatever the distribution of income among them, a larger society will have to use less desirable land, and crowd its better sites more closely. In a communistic society, for example, which had decided to assign its available land by lot, a quarter of an acre, let us say, to every citizen, some would have to be content with less desirable sites, if there were twice as many people to be provided for. It is the inevitable result under the given conditions. In like manner a community which permitted somewhat greater crowding on the better sites as an offset to their other advantages would also be forced to use poorer land for a larger population. As cities grow larger the lawns about the " t o w n " houses shrink to mere symbolic patches of green or disappear altogether, and many live in quarters that never see the sun — ample evidence that the alternative, the land which is available in more thinly settled districts, is also less desirable than it was before the city's expansion. T h e location of the margin in the first illustration above, it is evident, depends partly on the amount of land allotted

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83

to individuals. W h a t this shall be is not determined b y the nature of things, b u t is a matter of social and individual opinion. T h e adoption of a more liberal standard would have required the use of less desirable land and vice versa. Similar differences m a y exist between standards of the more flexible sort, with corresponding effects upon the margin. In one place people m a y be willing to p u t up with a high degree of crowding in the center of the town rather than live a t a given distance a w a y in the suburbs, 1 while in another place accessibility to the center of things is valued much less than " e l b o w - r o o m " and privacy. In the first case it will not be necessary to utilize such poor, i.e., such distant (or otherwise undesirable) sites in order to satisfy the demand for the residential use of land. T h e better sites being made to contribute more largely to the supply, a given population needs less land. T h e crowding or sharing of the more desirable land m a y take place in several ways. E a c h house m a y be built on a smaller plot; the streets m a y be narrower and w i t h o u t grass plots in the center or between the roadway and the sidewalks; houses m a y be built to hold t w o or more families, or m a y be superseded b y great blocks of tenements or apartments. T h i s is not wholly a question of taste. I t depends partly on the development of a technique for comfortable, decent, healthy living in compact groups — a matter in which there have been v a s t strides in modern times, with a consequent breaking down of the objections which people would otherwise have against living in the midst of great towns. N o r is it, apart from this, simply a matter of individual preference. T h e public sense of w h a t is wholesome and proper m a y override individual opinion and establish certain minimum standards. T h e effect is the same as if individuals adopted these better standards — a greater need for residential land. If the purchasing power of the community were distribI A person's views on this point, it is evident, depend on various factors, nota b l y transportation technique, which change in the course of time.

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VALUE AND

INCOME

uted equally, the above factors — size of population and attitude toward crowding — would determine the margin of utilization. If our communistic society wished to treat all alike in the matter of building-site utility, the better land would be shared among enough users to offset, in the existing state of opinion and technique, its greater advantages. But if it wished to favor some of its members in this respect, it would grant them a larger share of the better land, thus forcing the use of poorer land, in order to provide for everybody, than would have had to be resorted to otherwise. Analogous results ensue when some people have larger money incomes than others. MARKET PRICING

These factors in the demand for residential sites combine in a marketing and price-determining process which is closely analogous to that described in an earlier chapter but which requires some special analysis. As in market pricing generally, we have to begin with the individual buyer's (here more properly renter's) direct demand schedule. This is a question of what he will pay for land of a given quality, not for space in general. There is a separate market for each grade of land, just as there is for each variety of wheat or grade of wool. To construct a demand schedule we must adopt some unit as the basis of bidding. This must logically be the smallest amount of land which anyone could conceivably wish to buy or hire, i.e., the smallest amount which would be the share of a tenant in the most crowded type of building which is technically possible and legally permissible, perhaps no more than a square foot for the "cliff dwellers" of Manhattan. The individual's direct schedule gives the price he will pay for one such unit of the most desirable land, how much for one more unit, and so on. Like all demand prices, these prices are limited by the consumption cost of acquisition. No one will pay for the use of a given area of land an amount of purchasing power

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85

which would procure greater satisfaction if spent in some other way. There is a difference, however. It is not a question here of how much a man will pay rather than go without altogether, as in price offers for the first unit of ordinary consumers' goods, but how much he will pay rather than not have a unit of this land. If the community is not at all crowded, there will probably be land of fair quality to be had for nothing, so far as this use is concerned. His price offer for better land is therefore the amount he is willing to pay to get the advantage of the better site. For one unit of such land he may not be willing to pay anything at all. If the marginal land is not greatly inferior and he objects a good deal to crowding, the prospect of occupying a single unit of the better land may be less attractive than that of using free land, where he can have all he wants. It is not until the element of crowding ceases to offset the advantages of the land in other respects that he will be willing to make any offer; his bidding does not begin with one unit but with a certain minimum number, depending on the character of the free land available and the degree to which he values a more spacious way of living. For additional units — beyond this minimum — he will probably not be willing to pay quite so much per unit, though the decline may be slow at first. Thus his direct schedule reflects his tastes, his income, and the comparative disadvantage of the margin. Another factor affecting demand prices is the cost of constructing the building for which the land is wanted. If we assume, as seems logically necessary, that a man's desire for a house to live in is prior to his desire for any specially attractive site for it, it is clear that the more he expects to have to pay for his house the less he can spare for land to put it on. More important wants are at stake, making the consumption cost of a given price offer greater, when the higher wants in his scale make heavier demands on his resources. 1 This has a special application when the ι Cf. pp. 10-12 above.

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VALUE AND INCOME

cost of providing a given a m o u n t of housing is greater for some types of construction t h a n for others. If large and lofty apartments have to be made fireproof or require other special expenses as compared with equally serviceable smaller structures, this must be taken into account. Price offers for the small amounts of land required (per tenant) for such buildings will be a little lower as a consequence. On the other hand, if the maintenance of the larger buildings is more economical, price offers will be a little higher. F r o m these direct demand schedules are obtained the derived demand schedules — showing how many units of this grade of land the buyer will take a t a series of prices — which combine to give the market demand schedule. This determines the price a t which the market is cleared, i.e. the lowest price which needs to be accepted in order to find takers for the available supply of land of this quality. T h e land goes to those who are willing to p a y the most per unit, each obtaining as m a n y units — as large a plot — as he was willing to take according to his derived schedule, assuming, for the moment, t h a t there are no other bidders for the land except these buyers for residential purposes. Those who are excluded from this market compete with each other for the land next in desirability; this in t u r n goes to those whose price offers do not fall below the price required to clear the market; those who are excluded here compete for the next best land; and so on until everyone desiring land for this purpose has done as well as he can for himself. T h e bidder or bidders who are compelled to use the least desirable sites do not have to pay anything a t all for their land. There being none who wish this land for other purposes, according to our assumption, those who find themselves crowded to the bottom of the scale do not have to outbid anybody. I n a sense all these price offers, and all the prices resulting from them, are only tentative. T h e y assume t h a t land

LAND AS A CONSUMERS' GOOD

87

of a certain grade can be had for nothing, but nobody knows just what t h a t is until the results of these competitive markets are revealed. Only then do we know how much the wealthier bidders have been able to obtain for themselves and how far down in the scale of desirability the utilization of land has to be carried. If the prices offered prove to have been based on an erroneous estimate of what the marginal (i.e., free) land would be, the resulting market prices (rents) will be unstable. T h e demand prices will be revised and a new adjustment attempted. Equilibrium will be reached when demand prices based on a certain margin do in fact cause utilization to be extended just to this point. T h e assumption made in the foregoing with regard to competing uses for land suitable for residential purposes is entirely unreal. I t is seldom, especially in cities, t h a t such land has no other uses. Even if hopeless as agricultural land, it is almost sure to be adapted for some of the other productive uses — factories, offices, warehouses, and the like. This means t h a t there is an additional demand for any given grade of land, a demand which will prevail over the residential demand if strong enough. W h a t a user of this land could afford to pay for various amounts of it as a factor in production, 1 may be regarded as the demand from this source. This becomes part of the market demand schedule and may serve to raise the price a t which the market is cleared, thus excluding some or even all bidders for residential purposes. T h e site commands a rent for business purposes t h a t few or none of the latter will pay. In a similar way the business uses are competitors for every grade of land, and the better the land is for these uses the more of it is wrested from those who would use it as sites for dwellings. In any case, unless the demand for business purposes is wholly at the expense of the demand for residential purposes, which is unlikely, the marI This depends, of course, on the quality of the land that proves to be marginal under the conditions.

88

VALUE AND INCOME

gin will be forced on to poorer land, and both uses will feel the effects. T h e other consumer uses of land require little special analysis. If land is wanted for a park or a golf course, a church or a school, the people who desire to use these things will have, collectively, a price they are willing to pay for varying amounts of land in a given locality. Often there is a certain minimum amount needed, but it is always possible to use more than this to advantage if it can be had cheaply enough. These demand prices determine whether the bidders for this purpose shall be excluded from the market for a given quality of land, and how much they will obtain if included. From some markets they would probably be excluded altogether, even if the land were peculiarly suitable for their needs. A golf course in New York's "roaring forties" would cost too much for even the richest devotee. In many cases, however, the sites best adapted for a given consumer use are not those which are in greatest demand for business purposes. Sometimes the demand for land as a consumers' good is combined with the production demand. A man may prefer one office site to another, not only because he can do more business there with a given staff, but also because it has certain advantages in the way of light, air, view, and the like. A farmer who expects to use his land for a residence as well may also take these factors into account in the rent he will pay. Sometimes, moreover, the amount of land wanted for a given productive purpose is affected by considerations that are really reflections of consumer demand. A business man may take a large amount of office space, not because he needs it to carry on his business efficiently — though crowding may, of course, affect efficiency — but because he likes quiet, light, and perhaps a certain half-regal spaciousness. If he does, he may be willing to take more land of this quality at a given price, thus affecting the rent of this land perhaps, and the margin of utilization.

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89

According to the above reasoning it would seem correct to say that all consumer uses of land involve an efficiency cost. So far as its efficiency as a consumers' good is concerned, land is all alike; one plot does not satisfy the wants of more consumers than another. When land, therefore, which offers special advantages for some productive operation is transferred to the use of consumers, society may be said to lose these advantages; and unless the gain in utility which results from the transfer is great enough to offset this, it will be better to leave the land for use in production. It depends upon the keenness of the demand for the consumer use. This is not to say that all the rent paid for land used as a consumers' good is due to efficiency costs. Only so much of it can be thus regarded as would not have to be paid if the land were not also wanted for production.

C H A P T E R

VII

THE DEPLETION OF RESOURCES THE

DIFFERENTIAL

FACTORS

HEN land is used not simply as a cooperating factor of production but as an exhaustible stock or deposit of resources, it presents a more complicated problem than the cases we have just considered. The differential elements in the way of quality and situation which control the income from land in other uses are also operative here, in nearly the same degree of complexity, but they are by no means the only factors which have to be taken into account. Of almost equal importance is the fact that the limitations imposed upon consumption by the scarcity of lands of this kind are those of a fund rather than a flow. In agriculture we have to deal with a continuous series of cooperative services,1 a never-failing stream which raises no problems but that of making the most of what goes by. In mining and kindred industries, on the other hand, we are drawing on a pool and, within wide limits, can regulate the flow as we think best. The supply available at a given moment is not a datum but a matter to be explained. It will be best to begin with the first and by now more familiar aspect of the problem — the influence of differential factors. The most important of these, in most cases, is the situation of the land. The amount of labor required to produce pig-iron — and all the things into which that material enters — is less when the deposits of iron ore are located near the centers of consumption or have ready access to the cheaper means of transportation to those centers. The proximity of plentiful supplies of some important processing agent, such as coking coal in the iron industry,

W

I A t least it may be so managed as to be one. Cf. p. 66 above. 90

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91

is another source of advantage to some owners. A s in all such cases of differences in the objective cost factors for different parts of a supply, the price of the product must stay high enough to pay ordinary wages to those who produce on the hardest terms — more than enough to p a y such wages to the others. T h e r e is a producer's surplus which the landowner can appropriate. T h e s e advantages of location are, of course, not the only ones which a particular mine or deposit m a y possess. T h e extractive processes themselves m a y require less labor in some cases than in others. T h e ore m a y lie nearer the surface or in thicker seams; the metal content m a y be higher or free from admixtures which it is expensive to remove; drainage, ventilation, bracing, and the like m a y be simpler operations. A l l these things, it should be noted, are not primarily a matter of the size of the deposit, though this m a y be a factor in some cases. A large deposit is not necessarily easy to " w o r k " in any of these respects, even on the average; and if it i n v o k e s the sinking of deeper shafts, part of it m a y be v e r y difficult to extract. 1 T h e only a d v a n t a g e which a large deposit, as such, would seem to enjoy is due to the necessity of h e a v y investments in equipment in these industries. If an ore-bed is so small that it can all be mined in two or three years, it will be necessary to forego the use of some of the most efficient types of machinery or to " w r i t e o f f " their cost at a more rapid rate than would be necessary in the case of larger workings. In either case the physical superiority of the deposit will be more or less offset, and those of greater size will h a v e a certain advantage over it. THE

RATE

OF

EXPLOITATION

T h i s raises the question of the margin of exploitation. T h e long-run value of such products — and the amount of I This latter is sometimes referred to as analogous t o the " intensive c u l t i v a t i o n " of land — erroneously, I think. See p. 97 below.

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VALUE AND INCOME

income obtainable from a given deposit of them — will evidently depend, as in the case of other uses of land, upon how large a supply can be put upon the market before resorting to resources so poor that the operation would not repay expenses. Here is where the peculiar character of these industries has its effect. In agriculture the amount of product obtainable at a series of prices is a matter of physical fact, depending on the amount and quality of land available and the existing technique of production. Given these conditions, the margin of production depends upon the demand. In the case now before us, however, it is not so simple a matter. The amount of iron ore, for example, which can be put on the market at a certain price is no measure of the amount that will in fact be offered for sale. It all depends upon how rapidly the owners of deposits of this quality exploit them. The influence of demand and the supply of resources, being entirely analogous to the situation obtaining in agriculture, has generally been recognized, at least by implication, in analyses of mining incomes and the value of mineral products, but the third, so far as I am aware, has been completely ignored. This is surely an error. The amount which the owners of mineral deposits choose to put on the market in a given period has just as much influence upon the total supply offered as the extent of the deposits has. It must therefore be regarded as a third and coordinate element in the value of products of this class. Our next problem, then, is to analyze the factors which determine the rate of exploitation. If the entire supply of some kind of ore were in the hands of a monopoly, we should expect it to be offered for sale at such a rate per year as would maximize the amount obtained for the whole in the course of time. This does not present quite the same problem as an ordinary case of monopoly. In the latter the object will not be to obtain the highest possible price per unit but the price which, taking into account the amount which can be sold at that

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figure, will yield the largest total return in a given period. The potential supply for the period in excess of this will be allowed to go to waste or prevented from coming into existence. But a mineral deposit is a different matter; it is all going to be sold anyway, sooner or later. Hence the highest price per unit will yield the largest total for the stock. The monopolist will market each year only so much as will, in the existing state of demand, sell at this maximum price. I t does not follow that this will be a single unit. In large markets it is entirely possible that there may be several buyers willing to pay the same high price rather than go without altogether. A commodity of this kind, moreover, is rarely dependent upon a single market for its outlet. Being durable and requiring little or no special care in transportation, it has access to many markets or, as we often say, a "world market." Under these conditions it is still more probable that more than one unit can be sold at the maximum price. In any event the rigor of this conclusion is greatly modified by certain further considerations which the monopolist must take into account. These have to do with his costs or expenses. Many of the outlays which the owner of resources of this kind has to make in "realizing" on them are the same whether he does so at a rapid rate or a slow one. The labor required for mining, smelting, transporting, and so on will be the same per unit in either case. But there are other burdens which increase with time. Expenditures for such things as prospecting, surveying, and organization have to be made at the beginning of the period of exploitation, 1 and interest on them has to be reckoned among the " c o s t s " of operation. The more slowly the deposit is put on the market, the greater does this item become. In like manner I Some of these, of course, may be made in vain in particular cases. Such losses ought, in theory, to be charged against the earnings of the successful ventures, before deciding whether mining as a whole yields a surplus. I t is doubtful, however, whether the existence of this risk has much effect upon the flow of productive resources into these industries.

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taxes, insurance on some parts of the equipment, and other expenses of maintenance pile up with the passage of time. Finally there is the interest that may be earned by investing the proceeds of sales made at earlier dates. This is something the owner can obtain by selling with less delay; the others are deductions from income which he can avoid by the same policy. The influence of these "carrying charges," it is evident, depends in part upon their size. The earlier marketing of the supply reduces the price at which some or all of the units are sold below the maximum which could be obtained by following a different policy, thus reducing the total selling price of the available stock — a fixed one, it must always be remembered. The greater the cost of waiting — i.e., the higher the rate of interest and the heavier the taxes — the more loss will it pay the owner to take by selling earlier at lower prices. I t is a choice between evils. If he waits, the interest and taxes mount up; if he sells sooner, he must take a lower price.1 The magnitude of these carrying charges, however, is not the only factor bearing upon the rate of exploitation. The decline in selling price per unit, and thus of total returns, which results from earlier selling depends, of course, on the nature of the demand for the commodities into which the raw material in question enters. If a considerable increase in immediate sales can be effected without lowering the selling price much, the loss thus incurred is more likely to be less than the cost of waiting, and a policy of delay will be less likely to pay. The speed with which existing supplies of such natural resources are put on the market, and hence the value of goods into which they enter, is dependent, then, under monopoly, upon two principal factors — the amount of the carrying charges and the elasticity of the demand. ι The importance of this aspect of the taxation of mines and forests is coming to be recognized more and more in this country as the necessity of conserving our natural resources is borne in upon us.

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But what is the point, the reader may well ask, of approaching the problem in this way? Are not these industries more generally competitive than monopolistic? The force of this objection depends upon what is meant by competitive. If it is only the absence of single-handed or unified control that is implied, we probably may concede that the point is well taken, despite the concentrative tendencies of recent years; but if it means that " p e r f e c t " competition reigns in these branches of production — that every seller has one unit to dispose of and no more — then it plainly must be denied. In the nature of things, a "deposit" of minerals must be thought of as a stock of units, and the owner of it can not be regarded as the single-unit seller assumed in theoretically perfect competition. Even though he sells only one unit in each market period, he is in a position to sell more, and his reasons for not doing so are of the first importance. What we have, then, in these industries is a situation analogous to that considered earlier in connection with market value — a condition of semi-monopoly. 1 Now in all such cases the individual owner faces a more complicated problem than he does under perfect competition. I t is not the easy alternative of selling or not selling, of taking something or nothing, but the question of what selling policy will bring the largest total return. For the mineowner, however, the question is not whether it will be better to refrain from selling a part of his holdings once and for all — the problem of the semi-monopolist in a given market — but whether it will be to his advantage to withhold some of his supply from the present market. If he does decide to adopt this policy, it will be, as in the case of a simple market, for reasons no different from those which actuate the complete monopolist — here the burden of the carrying charges and the elasticity of the demand. I t is not at all certain, however, that this will result in the same rate of exploitation that would be adopted by a ι See above, p. 24.

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monopolist, or indeed any restriction a t all. F o r one thing, there is a minimum rate for any given set of conditions, and this m a y be greater than the monopolist's. J u s t as every seller in a given market must be supposed to sell a t least one unit of his stock, so no owner of a mineral deposit can be expected to refrain altogether from exploiting his holdings for present sale in order t h a t the market price m a y be kept higher. 1 H e would not, it is true, entirely forego the sale of t h a t one unit, as the self-sacrificing seller would in a single market, for he can sell it later; b u t he would incur a loss through waiting which would h a v e the same unwelcome effect upon his total receipts. T h e minimum amount, therefore, which will be offered for immediate sale is one unit for each owner, which m a y well exceed the amount which a monopolist would choose to m a r k e t under the same conditions. T h e maximum average price per unit obtainable for a given supply of such resources depends, therefore, upon the number of owners b y w h o m they are held. E v e n this maximum m a y not be reached. If a seller has reason to believe t h a t it would be to his advantage, in view of the burden of his carrying charges, to m a r k e t more than one unit immediately a t a reduced price, he will adopt t h a t course. A s in the case of the monopolist, the elasticity of the demand is an important conditioning factor, since it determines how great a fall in price will be caused b y an a t t e m p t to transfer a given amount of sales into the immediate present, i.e., to avoid a given amount of carrying charges. T h e r e is the complication, however, analogous to the one noted in our analysis of semi-monopolistic markets, t h a t additions to the amount offered for immediate sale must be b y blocks, not b y units — an extra unit for every seller. If one cuts his price in order to increase his present sales, t h e y all must follow stilt in self-defence. T h i s means t h a t some rates greater than one unit from each owner m a y be out of the question because they can I As pointed out below, he may do so for other reasons under certain conditions.

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not be obtained from equal contributions from the existing number of owners. Among the rates of exploitation excluded in this way, it is evident, may be the only ones involving any postponement of production which would increase the receipts of the owners as a whole. T h e best thing they can do is to produce as rapidly as physically possible. This result is more probable when the number of owners is large. N o t only is the minimum output in a given period larger under these conditions, but the chances that any advantageous restriction will be feasible are smaller. T h e tendency to early exploitation resulting from a given weight of carrying charges is accentuated. Nor is this all. T h e small owner who attempts to spread production over a long period of time has other burdens beside carrying charges. T h e expense and trouble of marketing the small output which this policy would involve may be disproportionately high. In extreme cases, where there is "free e n t r y " upon natural resources and the investment required for beginning operations is not great, something approaching demoralization may result, as in the oil industry in recent years. All this, of course, applies only to owners whose holdings are worth working at a given time. As many a disillusioned investor can testify, the others do not have to worry about rates of exploitation. T h e line between these groups is not a fixed one. It varies not only with changes in demand but also with changes in the volume of production which those whose resources warrant utilization at all decide to maintain. Anything in the conditions underlying the industry which encourages greater production for immediate sale tends, by lowering current prices, to drive some hitherto marginal operators out of business. T h e latter may, in fact, contribute to their own undoing. INTENSIVE

EXPLOITATION

T h e reasoning up to this point has proceeded on the assumption that the amount of product obtained from a

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given mineral deposit depended simply upon its size and richness. This is by no means the case. T h e method of working is almost as important. More elaborate methods can decrease the amount of mineral left in the "workings," increase the amount of metal obtained from the ore, change the proportions between joint products in favor of the more valuable one. Here, it seems to me, is what may properly be called the intensive working of mineral deposits. More resources are applied to a given natural agent, i.e., a given body of ore, with a view to getting more wanted things out of it, just as more labor may be applied to a given plot of ground in order to obtain a larger output of wheat from it. B u t the term is not applicable to operations designed to get at less accessible portions of a deposit. This is really a case of working another (and poorer) part of the available natural supply, not a more elaborate processing of a given resource. Ore that lies deep below the surface is at a disadvantage in the same way that a deposit far from good transportation is; working it is extensive not intensive exploitation. These more elaborate methods are not only more expensive, but the expense increases faster than the additions to the product, after a certain point at least. In other words, the working of mineral resources is subject to the law of diminishing returns. As a consequence of this, we have, as in other uses of land, an intensive as well as an extensive margin of exploitation in these industries. As more and more thorough working of the ores is adopted, the point will eventually be reached where the added product costs more than it is worth at prevailing prices. Anything, therefore, which raises the price which can be obtained for a given amount of the product, or which reduces the rate at which the owners of mineral deposits exploit them, will make it worth while to introduce more intensive methods. In extreme cases it may even pay to re-work ores which have already been subjected to simpler and less effective processes.

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As in agricultural operations, the intensive margin m a y be the only one bearing upon price in a particular case. Under certain conditions of demand, the extent of the available deposits, and the rate at which these latter are being exploited, it m a y well happen that there is no deposit in a given country — perhaps even in the world — which is so poor that it barely pays to work it up to the point of diminishing returns. Some part of the product of every mine will then be produced on better than marginal terms — at a cost below the prevailing price — and every mine will therefore yield some producer's surplus. Where a country furnishes only a part of the supply and there is a " w o r l d m a r k e t , " this situation is no mere theoretical possibility. MINING ROYALTIES T h i s conclusion throws some light, I think, on a question which has been much debated — the nature of mining " r o y a l t i e s . " 1 I n a country where there were no marginal mines in the strict sense, but only marginal extensions of intensive exploitation, and where every mine therefore yielded something over and above the expenses of operation, it would be natural to think of the mine owner's income as derived from a uniform return for every ton of ore, let us say, removed from his property, rather than from varying returns, of the same aggregate amount, from part of the ore removed. Under a system of absentee ownership it would make no difference in the long run to bidders competing for the privilege of working a particular deposit whether their offers were expressed as a lump sum or as a pro rata payment on the amount which could be sold a t a given price during the period in question. Being based on the same data — total output, price per unit, and total expenses — the two offers come to the same thing. F o r short periods, however, the second method would have ι See an article by John E . Orchard, Quarterly Journal of Economics, xxxvi,

290-318.

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some advantages, protecting the lessee against interruptions to operation, temporary market slumps, and the like. Hence the frequent adoption of the " r o y a l t y " system. With this practice in general use and all owners receiving such payments, it would be easy for the belief to gain a footing — as it did in England in Ricardo's day and since — that the income from such property is of a special order, paid not merely in respect of the differential advantages possessed by some deposits but also for something to which all could lay claim. This something, it seemed reasonable to conclude, is the depletion of the stock, the taking away of the owner's property. This conclusion seems to me open to question. T h a t something is taken from the land there can be no doubt — it is an assumption of the foregoing argument; but whether it has any value, i.e., whether the product is worth more in every instance than the labor required to make it available for the market, is quite another matter. Unless there is always some reason, whatever the current price of the product, which prevents deposits which would barely repay the expense of operation from being exploited, there will be no such universal surplus of selling price over expense of production. Now it is indeed conceivable that such reasons may exist, but it is going too far to say that they are the normal condition in these industries. I t depends, like so many of the questions discussed in this study, upon certain underlying social and political conditions which are not always the same. Where all mineral deposits are regarded as the property of the one who owns the land in which they lie, and where practically all such lands have a value for other purposes and have therefore passed into private ownership, the owners of deposits which would be " m a r g i n a l " at prevailing prices may have a motive for refusing to work them or allow others to do so. If they look forward to a day when prices will be higher, the better deposits being exhausted,

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and their holdings can be worked at a profit, they may all think it better to wait. There is no interest on the income currently available to deter them, for there is no income to be had from such lands; and no deterioration or similar losses threaten the buried stock. There is only the taxgatherer to disturb their peace of mind — a m a t t e r of no moment when taxes are levied only on actual income. T h e England of the nineteenth century exemplified these conditions: all its mineral lands long since gathered into the hands of private owners, most of them rich, far-sighted "builders of families." B u t where mineral deposits are regarded as the property of the state, or considerable areas of such deposits are open to anyone who thinks it worth while to work them, this policy of delay is unlikely to be adopted. I n the one case special taxation or other a t t e m p t s to claim for Caesar w h a t belongs to Caesar are fairly probable; in the other the flow of productive resources into whatever channel promises to afford anything above w h a t can be earned elsewhere can be depended on to bring marginal deposits into use. T h e fact t h a t they will not last forever or t h a t they might yield a surplus to a later generation does not have any weight with the laborer or capitalist seeking the best possible utilization of present (and all too perishable) productive power. If anything, it is the other way. Optimism has opened more t h a n one marginal mine. Under certain conditions, then, there may be no strictly marginal mines in operation; every deposit being worked m a y yield something above expenses. Even in these cases, however, it is not clear t h a t there will be no marginal increments of product included in the supply marketed. If a deposit is good enough to more than pay expenses on the whole o u t p u t when worked by moderately elaborate methods, the owner has seldom anything to gain by withholding the additional content of the ores from exploitation. I t is true t h a t he might, like the owner of a marginal deposit,

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leave it for extraction later when prices are more favorable — b y re-working; b u t the cost of such re-working is likely to be so h e a v y t h a t there m a y be little hope of ever being able to sell the product a t a price high enough to cover it. If he works the deposit himself, he will use about as elaborate methods as are feasible; if he allows others to work them for royalties, the rate he can get will not be high enough to deter the lessee from doing the same. T h e latter is sure to allow himself some leeway when he makes his offer. I t seems to me, therefore, that the grounds for regarding the income from mineral lands as partly a special category, a p a y m e n t for depletion, are not very impressive. O u r reasoning thus far has assumed static conditions, i.e., t h a t all the factors affecting demand and supply are known and can be depended on. In reality, of course, this is never quite true. T h e r e m a y , for example, be uncert a i n t y as to the extent of the deposits of a given mineral. T h o u g h unknown, additional supplies m a y be suspected; and when known in a general w a y , their exact nature and extent m a y be unexplored or their accessibility m a y be subj e c t to unpredictable changes as a result of technical, social, or political developments. T h e invention of new processes which would make feasible the working of poorer deposits or the more intensive working of deposits already fit for exploitation is another possibility which must be reckoned with in estimating the probable volume of future supply. E v e n if the trend of demand could be regarded as fairly dependable, the owner of mineral deposits is therefore compelled to make some of his decisions in the dark. T h e more confident he is t h a t there are no potential supplies of much importance throwing their shadow over future markets, the safer will it seem to restrict present production and trust to future prices to make good the carrying charges, with something to boot. Were it not for the growth of demand, t h a t rescuer of so m a n y prophets, underestimate of these future possibilities might lead him into costly error.

C H A P T E R

VIII

I N V E S T M E N T A N D INTEREST HERE is a third and increasingly important kind of income received in modern economic societies which has so far only been hinted at in our analysis — the return to investors. Like rent it constitutes a deduction from the total output of industry, which those who furnish the labor required for production are unable to obtain where private property and competition prevail; but unlike rent it is not associated with the use of superior natural resources. Wherever investment enters into the process of satisfying wants, it makes its appearance. This has a profound effect upon values as well as upon the distribution of income. I t is simpler to begin with the latter aspect of the problem — the rate of interest.

T

THE

SOURCES OF

INTEREST

Opportunity for the gainful employment of savings is afforded nowadays by three principal uses, or rather groups of uses, for each has several subdivisions. 1 In the first place there is what we may call the consumption use: savings are employed to provide some form of consumers' goods, either for individuals who could not buy them with their own resources, or for societies which could not have them otherwise. Next is the use of savings to finance some phase of the complicated process whereby goods pass from the producer, in the narrower sense of the term, to the ultimate consumer. This we may call the commercial use. Finally there is the use of savings to provide the advances required for "roundabout" methods of production — hereI These uses are often referred to as "demands" for savings. The term is a little misleading, since it suggests that only loaned savings are involved in the interest problem. 103

VALUE A N D INCOME after referred to as the production use. 1 Each of these uses and its various subdivisions presents a threefold problem: what is the source of interest or, in other words, w h y a premium can be gained by the investment of savings; how the earning power of savings is affected by variations in the volume of funds seeking investment; and finally whether there have been any significant changes, historically, in the importance and market effectiveness of the different uses. T o attempt to analyze investment as a whole, as is ordinarily done, throws the forces at work into a confusing blur and yields a theory which is neither realistically adequate nor logically satisfactory. The Consumption Use. There are three cases where savings are needed in order to provide consumers' goods; and since they do not give rise to interest in exactly the same way, it will be necessary to analyze them separately. T h e first will readily occur to most readers, for it has played a leading role in some theories hitherto advanced. It is seen where a man borrows in order to obtain immediately consumable goods in excess of what he could buy with his own present income. This we may call the current consumption use. Here the source of interest is the difference between the utility — using the term loosely — afforded the borrower by the sum borrowed, and the utility to him of the goods obtainable in the future with the same amount of money. This difference may be due, as Böhm-Bawerk pointed out, 2 to more intense wants in the present as compared with the future, or to the expectation of having greater resources in the future. Some of this extra utility the borrower is willing to surrender to the lender in order to obtain the loan, but not all of it, for in that case he 1 It should be noted that the different uses distinguished above do not run parallel to the ordinarily recognized types of investment. A given type of investment may provide for any of the three uses or a combination of them. The buyer of land, for example, may put the seller in a position to increase his current consumption, to build a house, or to buy farm machinery. See below, p. 126. 2 Positive Theory of Capital (Engl, transl.), B k . V , ch. ii.

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would be no better off as a result of his borrowing. Men do not make exchanges unless they expect to gain thereby. That the appreciation of future need which is involved in such calculations is often affected by underestimate of the future as such is a familiar point and I do not need to dwell on it here. Borrowing of this sort, as everyone knows, is of great antiquity. In even the most primitive communities there are occasions for it. When the Mosaic law forbids usury among the Jews and when St. Luke counsels "Lend, hoping for nothing again," this is the kind of borrowing that is meant. No doubt there were other uses for savings in those early days, and perhaps the disapproval of the moralists unfairly ignored losses sustained by lenders in foregoing these profitable uses of their savings in some cases; but loans were seldom made for these other purposes. Hence, if there was any tendency in those days towards the emergence of a market rate of interest — which is doubtful—the current consumption demand was the dominant factor. The second type of consumption use has been as much neglected as the first mentioned has been stressed. In order to provide the satisfactions afforded by durable consumers' goods, a certain amount of waiting is necessary. For after the supply has reached a certain size, if not from the outset,1 the cost of producing such goods exceeds the value of the immediately derivable satisfactions, and the balance of satisfactions is not forthcoming until later. The necessity of using the scarce factor, savings, keeps the supply of the good smaller, and its value higher, than would be the case otherwise. The source of interest here is therefore the difference between the total satisfaction afforded by the good during its lifetime and its cost in terms of the utilities foregone in devoting labor to this particular purpose. In a I I t is conceivable that the value of a single use might exceed the total cost when the supply was very small. Cost is used here in the sense of sacrificed alternative uses of the labor required.

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VALUE AND INCOME

money economy it is the difference between the wages paid the laborers who produce the good and the total selling price of the series of uses the good yields. This use of savings we may call the durable consumption use. At this point we must consider an objection which has been much stressed by some economists. Why is the whole value of the series of uses not " i m p u t e d " to the labor that produced the durable good which yields them? In other words, why is there any surplus above the wages paid the laborers? No point in the whole interest controversy has been the source of so much confusion as this. I t is easily cleared up, however, if we base our reasoning upon a sound understanding of the nature of cost. The production of the goods in question is analogous to the case of production with the cooperation of a scarce kind of labor, discussed in a previous chapter. Here the scarce factor is savings, and production can be expanded only up to the limits of that factor. Only so much of the value of the supply thus made available need be given the laborers as will pay them the same wages they have received hitherto. They have no better alternative to turn to, since the demand for the durable good entails a corresponding shift of demand away from other commodities. And why should the possessors of the scarce factor, savings, pay the cooperating laborers more than they need to? This kind of investment is also of great antiquity. I t was an obvious and effective way for an individual or family enjoying present prosperity or productive efficiency to make provision against a day of need or to lay the foundations of future economic greatness. In general, however, it did not play any considerable role in the lending of savings. The borrowing (or renting) of durable goods or the money to buy them developed slowly, and even in modern times was limited to a small range of things until the development of the instalment technique greatly increased its scope. Its growing availability to the saver himself, however, made it increasingly important as an alternative to

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actual lending, and thus gave it considerable weight, as an indirect factor, in the market. Finally comes a third consumption use, also of great antiquity — the production of goods which, because of the very nature of the processes involved, can not be made available immediately after labor has been applied, or which can not be supplied in a given quality without such waiting. Most kinds of natural produce require at least a season's interval between some of the labor and the consumption of the finished good; many are of much slower growth; and many are not ready for use until after a further period of processing, as in the case of wine and lumber. M a n y manufactured goods as well are produced by processes which are necessarily time-consuming, not in the sense that the moving of raw materials and finished goods from one point to another takes time, which should perhaps be regarded as a commercial operation, but in the sense that the physical operations have to be prolonged. Fine shoes, for example, are left on the lasts for a week or more in order to insure better service to the wearer. T h e supply of such goods is kept smaller by this necessity of using the scarce factor savings, and there is a surplus of value over cost which the owners of the scarce factor can appropriate. The Commercial Use. T h e attention which has been bestowed on the use we now have to consider has been strangely out of proportion to its importance. T h e great and increasingly complex processes required for the conveyance of goods to the ultimate consumer from the place where they received their "finishing touches" in a technical sense, and the equally important operations involved in bringing materials and semi-finished goods from one body of workers to another, are not only expensive, as we are all aware from daily and often undiscriminating complaint, but they take time. This means, of course, that somebody has to wait, that savings must be invested in these processes. Every treatise on marketing recognizes

ιο8

VALUE A N D INCOME

" f i n a n c i n g " as one of the marketing functions, b u t interest theorists have passed it over in almost complete silence. Perhaps this has been due to a belief t h a t marketing is only a phase or necessary a d j u n c t of the roundabout method of production. I t is true, as we shall see, t h a t there are important similarities between this demand for savings and t h a t derived from the " c a p i t a l i s t i c " process; b u t t h e y are not identical, and there are both theoretical and practical advantages in dealing with them separately. T o discover the source of interest in this case we must first distinguish between t w o kinds of marketing. First, there is the transporting of goods from the areas where they are produced to areas where they can not be produced. T h i s exchange based on the " g e o g r a p h i c a l division of labor," like all exchanges, involves the acquisition of w h a t is more desired in return for w h a t is less desired. If there were no barriers to its accomplishment, it would be extended to the point where the gain had reached the v a n ishing point. T h e r e is a barrier, however, which checks the extension somewhat short of this — the necessity of enlisting the services of savers. This, then, acts as a limiting factor and tends to maintain a discrepancy between the value of the goods given and t h a t of the goods received in this exchange, i.e., between the cost 1 of the acquired goods (in terms of values foregone) and their value when finally disposed of. T h i s surplus of value is the source of the interest earned on investments of this type. T h e other kind of marketing is the handmaid of the division of labor, not of the inevitable (largely geographical) sort j u s t mentioned, but of the kind adopted for the sake of efficiency. L i k e the first kind it not only requires labor — a v a s t army in the modern world — b u t also time; and this need, as before, constitutes the limiting factor in extensions of this desirable technique. T h e source of interest, however, is different. I t is in the increased physical efficiency of labor applied in these w a y s over unspecialized I Including, of course, the labor required for the physical processes of transfer.

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workers. Out of what else can interest come? T h e laborers do not get any lower wages — the process could never be introduced if it entailed that; and the products they make do not cost the consumer any more than they did before the better method was adopted. There remains, of course, the possibility that the laborers might manage to appropriate the results of their increased efficiency. This question I shall leave till the following section, where we shall see that the result depends upon circumstances. Of these two commercial uses for savings the first was for centuries the more important. Long before the modern factory had made any great inroads on the simple intrahousehold division of labor and the local making-to-order craftsmen of the towns, rare products of many distant lands were being brought to Western Europe, by means as slow as they were expensive. This offered an ever-increasing field for the investment of savings, not only by the saver himself, as in the case of durable consumers' goods, but also through intermediaries. T h e contractual loan (mutuum), it is true, was frowned upon by Church law, but the sleeping partnership afforded the saver a comparatively ready outlet in commercial channels. Thus investment of this kind was subject to something approximating market forces. T h e other kind of commercial borrowing did not attain great proportions until modern times. T o day, however, when large-scale production and the localization of industry have separated the consumer from the producers of nearly every article he consumes, it probably makes larger demands than the first on the savings of many countries. T a k e n together the two commercial uses are averyimportantfactorinthe market for loanable funds. The Production Use. T h e last of the three groups into which I have divided the uses for savings is familiar to all students of economics. In many discussions of interest, indeed, it has been given almost exclusive attention. Unfortunately, however, these analyses, elaborate as some of them have been, have dealt with the problem in such un-

no

VALUE AND INCOME

realistic terms that they have not only failed to convince a considerable group of thinkers but have missed some of the most significant elements in the problem. T o begin with, they have generally ignored the fact that the roundabout or savings-using process of production may be inaugurated for two very different reasons. T h e first, both in point of time and of present importance, is because these processes enable laborers to turn out a larger amount of goods in a given time — they increase the physical efficiency of the workers. T h e second is because these processes enable us to produce certain goods with less, or none, of the skilled scarce labor required to produce them by more direct methods. This is nowadays a very important reason for the introduction of machinery in many cases. Gains of both kinds may, of course, accrue from a given change to more roundabout or " c a p i t a l i s t i c " methods, but it is necessary to analyze them separately, since they do not work in the same way. Let us begin with the less important form. If a certain good formerly produced in limited amounts by a scarce group of workers can be produced equally well by a more plentiful and therefore less expensive group, there will be a difference between its market value and the cost of the labor required to produce it, until the supply is increased beyond its former proportions. T h e market value remains the same, the supply being unchanged, while the labor cost has fallen. This excess of value over cost would lead to increased production, falling market value, and eventual elimination of the surplus of value, were there no obstacle to the adoption of the new method. B u t there is an obstacle — the necessity of using savings, the new process being a roundabout one. If this limitation prevents the equalizing of cost and value, the scarce factor, savings, will be the gainer. In this case, however, the laborers who have to be enlisted for the new process may benefit somewhat, for this may involve a greater total demand for the labor of their group, with no new recruits to offset it.

INVESTMENT A N D INTEREST

III

B u t when the capitalistic process is one which increases the efficiency of labor, the source of interest will be, as in the second commercial use discussed above, the extra physical productivity of the workers. T h a t is all it can come from. 1 If nobody in the community desires any more of the good produced by the new process in question, the labor " s a v e d " can be utilized for the production of other things or to provide more leisure.2 Until both these alternatives have lost their savor, there is no ground for doubting that the increase in physical productivity will also bring an increase in " v a l u e productivity." Both of these uses for savings attained their present proportions relatively late. N o t only was the lending of savings for such purposes comparatively unimportant until pretty recent times but even investment in such uses by savers themselves developed very slowly before the Industrial Revolution. There were tools to be made, a certain amount of producers' machinery, and some permanent equipment for use in productive processes, but taken together these were less important than either the consumption use or the commercial use of savings. N o theoretical analysis, therefore, can serve as an adequate basis for explaining interest rates or judging public policies and moral standards in earlier days which makes the production use the overwhelmingly predominant factor in the problem. In addition to these two types there is a third which, though not ordinarily thought of as a form of roundabout production, has more in common with it than with either the consumption or the commercial use — investment in the making and improving of land. As we have seen, lands of better than marginal quality return an income to their owners, called rent. If more land of this kind can be brought into existence, it too will yield an income. Such ι The possibility that the workers, not the savers, may be the sole beneficiaries arises here as in commercial borrowing of the second class. Cf. p. 109 above. 2 T h e only reference to this aspect of the problem which I recall is in an article by A. F. McGoun {Quarterly Journal of Economics, xxxi, 556), where the suggestion is credited to Professor Taussig.

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additions to the land supply have long provided a channel for the investment of savings. In these cases, however, the deferring of consumption must be permanent — the savings can never be withdrawn. 1 THE

Y I E L D S C H E D U L E S FOR S A V I N G S

Our next problem is to analyze the effect upon the earning power of savings of an increase in the amount of funds seeking investment, i.e., we have to explain the nature of the yield schedules derived from each of the sources of interest pointed out above. It will save time and bring out some interesting relations if we group these different uses according to a classification not employed in the foregoing discussion. Some of the uses of savings already analyzed, it will be remembered, served to increase the physical efficiency of labor, whereas the others did not increase the efficiency of labor but simply enabled it to flow into morewanted channels. In each of these two categories an increase in the supply of savings produces its effects upon the rate of interest in ways which are essentially different from those observable in the other class, while within the group there is general similarity. It will therefore not be necessary to analyze each of the subdivisions in detail. In the following discussion I shall give only brief consideration to all except one of the most important forms in each of the two groups. The Scarcity-Reducing Investments. T h e most important, though perhaps not the most interesting theoretically, of the uses included in this group is the providing of durable consumers' goods. T h e nature of the yield schedule derived from this use can be most readily understood if we begin with the situation where only enough savings are available to provide a very small supply of the good in question, perhaps only a single unit. T h e difference between the value of the uses afforded by this small stock and the cost of the labor which produced it will accrue to I Income from this source is to be explained like rent.

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the owner of the necessary savings as interest, and the ratio between this sum and the sum required to compensate the laborers will be the rate of interest earned. In terms of a demand schedule it is the rate which a borrower of this limited supply of savings can afford to p a y if he has this particular use for them in mind. N o w if more savings become available, there are only t w o things the owners can do with them, disregarding for the moment all other uses of savings except the durable consumers' goods now under consideration. T h e y can provide more of the same good for which the smaller supply of savings was used, let us say houses, or other durable goods, let us say automobiles. If they adopt the first course, the value of the uses afforded b y houses will fall more or less, the supply being larger; and since the labor cost of building a house remains as high as before, the difference between the value of a house and its cost — the source of interest — will be less. Borrowers can not afford to take the larger supply of savings off the market at as high a rate as they could p a y for the smaller supply. If savers turn to the production of automobiles, on the other hand, their earnings m a y be as high as in the other investment or m a y be less. (If they were higher, of course, the original small supply of savings, if large enough, 1 would have been employed for automobiles before any houses were built.) In the first case some additional savings can be invested without any decline of earnings, b u t in the second case this is impossible. T h e alternative to building more houses is also inferior to the opportunity afforded b y the first house (or few houses). I t all depends on the strength of the demand for automobiles and the cost of producing them. In any event the point will eventually be reached where an increased supply of savings can not find employment except at lower rates of return. In other I This is an important point. N o matter how profitable an investment may promise to be, it does not become a factor in the market until enough savings are available to finance it.

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VALUE AND INCOME

words, the yield curve for savings, so far as the durable consumption use is concerned, is negatively inclined, though it may not fall with every increment of supply. This, then, is the general principle which applies to all the varieties of scarcity-reducing investments: the yield they afford declines with the expansion of investment, because the value of the goods they provide falls while the cost of producing these goods remains the same. 1 T h e rate of decline depends on the elasticity of the demand for the goods produced with the use of savings. Wages, it is important to note, are not increased by such investment, though the wages of certain groups of laborers may be favorably affected by this shift in production. 2 Indeed there is nothing out of which an increase in wages could be paid, labor being no more productive than before. T h e alternatives facing the saver in the above case have analogies in all the other kinds of investment and there are considerable advantages in distinguishing carefully between them. In the first, it will be noted, additional outlet for the gainful employment of savings is found in extending or duplicating a given productive activity; in the other it is a different use of savings (in the same general class) which is resorted to. T h e first, then, may be called duplicative investment, the second, alternatioe, investment. Each form, as I have said, is found in every class of investment. T h e yields of the other scarcity-reducing investments behave in much the same way as the one just discussed. In the current consumption use of savings, for example, the margin between the utility afforded by the present goods obtained by borrowing and that of the goods which will have to be foregone later, in order to repay the loan, diminishes as the borrower obtains more and more of any given good (duplicative investment) and also as he obtains 1 Apart from such economies as may result from increased output. Cf. pp. 44-50 above. 2 Where this is the case the yield on the investment is somewhat diminished. If it is wiped out altogether by such wage increases, that particular use of savings has no power in the market for savings.

INVESTMENT AND

INTEREST

other less important goods to add to his present consumption (alternative investment). A lower rate of interest must therefore be accepted in order to induce borrowers to take larger supplies of savings off the market. It would be unwise, however, to push the purely rational part of this analysis very far. Probably few borrowers for current consumption make, or indeed are able to make, a dispassionate appraisal of the advantages and the costs of the bargains they make with lenders. In the grip of a great emergency, or perhaps an overmastering desire, they grasp desperately at any opportunity of obtaining present resources and count almost no price too high. Nearly all of them are non-marginal buyers, i.e., there is no rate within the bounds of their experience which would cause them to withdraw from the market. They want a certain amount at any price below a more or less vague maximum. Governments borrowing in time of war are in this position; they are willing to pay whatever appears necessary in order to exclude a sufficient amount of rival borrowing from the market. 1 If such uses of savings were the only source of demand, a rational theory of interest would be only a distant approximation to reality. As it is, however, non-marginal users are absorbed in a broad market which offers ample scope for the marginal calculations of rational theory. The application of the foregoing analysis to the remaining types of scarcity-reducing investment — commerce in goods which can be produced only in certain places, roundabout processes which diminish the need for certain scarce kinds of labor, production of goods which require an interval of time between the application of labor and the consumption of the product — presents no special difficulties. In the first — inter-regional trade — the value of the good in question falls in the importing region as funds become available to finance larger shipments of it (duplicative I Government borrowing for other purposes is likely to be in much the same position.

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investment) and resort must be made to the importation of other goods (alternative investment) which either yield less gain at the outset or will do so eventually as more and more of them are imported. In the second — the saving of scarce labor — duplicative investment may not cause the earning-power of savings to diminish from the start. The margin between the cost and the value of the commodity produced by the new method will not diminish until the value falls or the cost rises. The fall in value will not ensue until a larger supply has to be marketed than was produced by the scarce grade of labor formerly employed; the rise in cost will not result until the wages of the laborers now employed are raised by the increased demand for their services. This depends upon what becomes of the displaced scarce laborers. If they are all absorbed in the group which is displacing them —- which is unlikely — the increased demand for the latter will be offset by the additions to their number, and their wages will not rise until this counteracting factor has exhausted its effects, i.e., until duplicative investment expands production of the commodity beyond its former volume. As in the other cases, alternative investment — here the displacing of scarce labor in the production of other goods — serves to check the decline of earnings on investments of this type and causes the yield curve derived from this source to slope more gently downward. The Ε fficiency-Incr easing Investments. The uses of savings we now have to discuss, though analogous to the foregoing in some respects, involve some peculiar problems and bring very different social consequences. Of the two — roundabout production increasing the efficiency of labor, and commercial borrowing arising from the division of labor — the first has been the center of much controversy, not always of a very fruitful kind. I shall therefore deal principally with that, pointing out the application of the analysis to the second more briefly. Let us begin by considering the process when applied

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on a minimum scale. Suppose a machine has been invented which increases the o u t p u t of wheat per unit of labor employed, including the labor expended on the machine itself, and that just enough savings are available to provide one machine. W h o will benefit from the increase in productivity thus effected — the men who make the machine, the men who operate it, or the saver who provides the necessary funds? A n d how shall we measure the gain? A s for the first point, there can be no doubt that in the long run neither group of workers will be great gainers. D u r i n g the period of transition, it is true, the gain m a y be diffused, since some increase of wages m a y be needed in order to induce the laborers to take up the new w o r k ; b u t this is not inevitable, and would be temporary in any case. T h e saving which we have assumed involves the withdrawing of purchasing power from consumer markets, and the workers who formerly produced for those markets will suffer a decline in earnings unless some of them find employment elsewhere. I t will not be necessary to offer higher wages to obtain men to make the machine. Other workers, however, m a y not be under such pressure. T h e y do not face diminished demand and lower wages in their old employments, except where industry is organized b y entrepreneurs. (In the latter case an entrepreneur's offer of a different kind of employment, i.e., operating the machine, has the same effect on these laborers as the saver's change in spending had on the others.) I t m a y be necessary, therefore, to offer a slight increase in wages in order to enlist the services of men to operate the machine, to overcome the inertia of the laborers. T h e r e is no relation between this increase and the amount of gain expected from the use of the machine. I t will generally be much less; if it should happen to be even greater, the investment is impractical. T h e r e is a second factor which m a y also reduce the amount obtainable b y the saver. Some of the workers needed for the new process m a y have to be drawn from a

ιι8

VALUE A N D INCOME

scarce group of workers for whose services there has been no corresponding decrease in demand elsewhere as a result of saving. This means that there is now an increased demand for their services and that their wages will rise, thus reducing the amount of gain obtainable by the new process. Apart from these two exceptions, neither of which is an inevitable result of introducing the machine, the saver will be able to appropriate the whole increase in physical productivity. T h e amount thus retained is usually expressed as a rate, i.e., a ratio between the investment and the return it yields in a given time. Strictly speaking, this is a comparison between two amounts (hours) of labor — the amount required to make the machine and the amount which would have been required, by laborers working unaided, to produce the additional goods obtained by the new process. T h e latter amount is often referred to as the labor "saved." If it takes a hundred hours, for example, to make a machine which increases the output of the labor involved from one hundred units to one hundred fifty units, the rate of interest will be fifty per cent for the period in question, if it would have taken fifty hours to produce the fifty extra units by the old method. Now the period of " w a i t i n g " to which the rate has reference depends partly upon the nature of the process, partly upon the rate at which the laborers work, i.e., the length of the working day or similar period. T h e shorter the day, the longer it will take to obtain the returns from a given machine, and hence the lower the rate of yield, unless we assume that the length of the day makes no difference in output. 1 T o take an extreme example, if the workers in one community, though no more efficient than those in another, work only half as many hours a day, being satisfied with a simpler scale of living, a machine costing a given I This aspect of the shorter day accounts for a good deal of employer opposition to it. Their incomes are reduced by it, because it lowers the yield either on investments generally or in some line to which their funds are committed for a considerable period.

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amount (hours) of labor will yield only half as much per year when used b y them. I t is not used to such good advantage. B u t suppose there are more savings available than are needed to finance the making of a single machine. T h r e e possible w a y s of utilizing the additional funds present themselves: to provide more laborers with machines of the same kind (duplicative investment); to provide machines of some different kind (alternative investment); to provide the laborers already using the machine with more machines of the same kind. T h e last, which is made much of in some expositions of productivity, should be carefully distinguished from true duplicative investment. I t is really analogous to the second, involving a new organization of production, and the same analysis applies to it. M o r e o v e r it is far below the others in importance. I shall therefore not deal with it separately. W h a t will happen to the earning power of savings, if duplicative investment is resorted to? If this means employing still more of a scarce group of workers, it m a y lead to a further increase in their wages, b u t otherwise the return on investment will suffer no decline a t first. If such investment continues to expand, however, the point will eventually be reached where, despite the most perfect mobility of labor, any further extension of the machine-using process will necessarily encounter obstacles. For although the transfer of workers into the making of machines presents no difficulty, saving having reduced the demand in consumer markets correspondingly, the recruiting of workers to operate the machines is a different matter. T h e r e has been no decline in the demand for their services, and if any of them should enter wheat-growing they would see those who remained in the old occupations earning higher wages than ever. In order to induce them to m a k e the change it will therefore be necessary, not only to overcome their inertia, if t h a t is operative, b u t also to raise their wages still further.

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VALUE AND INCOME

This means t h a t the savers will have to surrender some p a r t of the physical surplus, if they have been getting all of it, and a larger p a r t of it otherwise. T h e extent of this concession is increased by the decline in the value of the machine-made commodity, as the amount of it marketed, i.e., a p a r t from the share claimed by the savers, is expanded beyond its former proportions by the influx of additional operators. T h e workers must be given a larger p a r t of the physical o u t p u t in order to keep the value of their share from falling below the level of earnings prevailing in other industries. H o w much the yield from the investment will be affected depends upon how m a n y new operators are needed, i.e., how large a supply of funds is seeking investment, and upon the elasticity of the demands for the various commodities involved. 1 We thus arrive a t the double proposition t h a t , so far as this avenue of investment is concerned, an increase of savings eventually results in a general rise of wages and a fall in the rate of interest. T h e decline in interest does not begin a t once — not until the production of wheat, excluding the savers' share, exceeds its former volume; b u t when once started it is continuous, unless checked b y alternative investment. This reasoning assumes t h a t the size of the initial investment is relatively small, t h a t it renders assistance to only p a r t of the laborers already in the industry. I n most cases this is true, b u t there are exceptions. Where the industry is a small one it may happen t h a t some machine which would be very effective there can not be fully utilized unless the producing group is larger. If it is not fully utilized, its yield will be lowered, because of the smaller a m o u n t which it adds to the o u t p u t of labor in a given period; if it is fully utilized, production will have to be expanded beyond the power of the market to absorb witho u t a fall in value and an adverse effect upon the yield — I If the demand for the product can be increased by advertising, the decline of earnings may be postponed. Witness the heavy advertising of machine-made cigarettes. The development of "off-peak" sales also affords relief.

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over-duplication from the start, so to speak. I n either case the investment may be impractical until the interest rate falls for other reasons or the market for the product in question expands. A similar difficulty is encountered when the producing units or plants have to be small, for technical reasons let us say, though the industry is a large one. Before considering the effects of alternative investment it will be well to translate the foregoing analysis into the terms of a money economy. There are two possible cases — first, where the currency expands in proportion to the increased productivity effected by the introduction of the roundabout process, and second, where the currency does not expand at all or not proportionately. Since the first of these is much the simpler, it will be well to begin with that. Under these conditions the increase in the money supply will prevent any general fall in prices and there will be no permanent changes in the relative prices of commodities until duplicative investment has reached the point where wages are forced upward. At the outset, however, there may be various complications. T h e additional money is paid the beneficiaries of the increase in productivity— savers, scarce laborers in receipt of higher wages, other laborers perhaps — and puts them in possession of just enough purchasing power to buy the surplus of wheat, if t h a t happens to be what they want. I t is probable, however, t h a t they may not w a n t just t h a t . There will therefore be "over-production" of wheat for a time, since it is impossible to effect the needed redistribution of productive capacity until after the recipients of these new incomes have expressed their preferences by the way they spend their money. 1 T h e value of wheat will therefore fall, bringing losses or reduced earnings to those in the industry, and stimulating a shift to the production of more-wanted things until earnings are equalized again — a process likely to be both slow and disagreeable. T h e extension of dupliI In growing countries like ours the normal increase of demand tends to offset this temporary overproduction to a large extent.

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cative investment brings further complications of a similar kind, which will be obvious to the reader who has followed the argument thus far. If the currency does not expand in proportion to the increase in physical productivity, the general level of prices will be lowered. A t first the brunt of this change is likely to be borne by the industry where the efficiency-increasing processes are being introduced, since it is prone to overproduction anyway in this stage, as we have just seen. Other industries will also be affected, however, and money wages will eventually decline, though probably only after years of heart-breaking struggle. When this readjustment has been accomplished, the money-cost of making a given machine will be less, the money-value of its extra productivity will be lower in the same proportion, and the ratio between the two — the rate of interest — will be what it would have been, had these monetary complications not intervened. Difficulties of the kind just considered seem to be almost inevitable concomitants of the extension of capitalistic production. T h e development of credit, it is true, has greatly facilitated the expansion of purchasing power to accompany increases in production, but the technique of adjustment is still very inadequate. Scientific calculations, shrewd estimates, wild guesses, and not a little blind confidence in our lucky stars all enter into it today. It is too much to expect that it should function perfectly. Either too little currency expansion or too much — each with its attendant evils — is the probable result. Thus the adjustments necessitated by the expansion of capitalistic production engender, under present currency systems, some of the most serious and most puzzling of our economic problems. Duplicative investment is the core of this phase of the interest problem, but it is not the only factor in the decline of the interest rate as the supply of investment funds increases. As we noted above, the saver has the alternative of using his money to finance some other roundabout

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process. T h e machine which increased the productivity of wheat-growers may be applicable to other branches of agriculture, or a different kind of machine may be introduced into some branch of industry. I;f any of these investments increases the physical productivity of labor as much as the first one, the point when duplicative investment brings lower interest and higher wages will be postponed. A n additional volume of saving can be absorbed in providing this equally productive equipment for the laborers already employed in the industries in which it is applicable. If the new processes do not increase physical productivity to the same extent as the others, they will not check the decline in the interest rate immediately, but only after it has fallen to a point where these alternative investments offer equally favorable opportunities. Another stage of duplicative investment will then set in at this lower level; and interest will eventually fall again until a still less productive alternative checks it for a time. 1 T h e yield curve for savings arising from the efficiency-increasing type of investment descends by a series of broad flat " s t e p s " alternating with more or less gentle slopes. T h e resulting increase of wages is also by steps rather than continuous. I t goes without saying that equilibrium between the numerous forces involved in this analysis is attained slowly and often as a result of costly errors. Only experience can reveal just how much is added to the physical output of labor by a given new process, and only experience, likewise, can furnish the necessary data on such questions as what savers will do with their new incomes (their interest), or how the relative value of products (and hence laborers' earnings) will be affected b y the necessary transfers from occupation to occupation. Overproduction of certain commodities and underestimate of labor costs imperil the gains of the innovators, even in otherwise stable societies. Add to this the confusing cross-currents of crop failures, changes ι Duplication being less extensive in these less productive investments, values and earnings are less affected than in those cases where it can be started earlier.

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of taste, monetary maladjustment, and the like, and we may well wonder whether complete equilibrium can ever be expected. Nevertheless, every force and motive here assumed is steadily at work, and every needed fact can be and is eventually determined in farm, factory, and marketplace. The foregoing analysis can be applied with little modification to those commercial investments upon which many applications of the division of labor depend. Production in that line where the gain in efficiency is greatest will expand as more of the funds required for marketing become available (duplicative investment), the surplus product going to the savers. Eventually, as in roundabout production, the process can not be extended any further without reducing the production of other things, increasing wages all round, 1 and lowering the share of the product which the savers can retain. Introduction of the process in the production of some other commodity (alternative investment) may delay this decline but can not permanently prevent it. Finally, the complications arising from the necessity of currency adjustments which we discussed in connection with the roundabout process are also encountered here, though they probably have never caused so much difficulty. There is an increased supply of goods flowing from industry, and the currency must expand proportionately or there will have to be a readjustment in the price level. THE

R A T E OF

INTEREST

The schedules showing the earning power of various amounts of savings in the different types of investment analyzed above are analogous to the individual demand schedules of value theory, and like them are combined in a general or market schedule which determines the point at which the market will be "cleared" of a given supply, I It is worth noting that the two forms of investment discussed in this section are the only ones which tend to raise wages. Those who extol the advantages of instalment selling might well ponder this point.

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i.e., how low the rate of interest will be forced b y the inv e s t m e n t of a given amount of funds. All the elements in this general schedule are on the same footing; none " c o n t r o l s " or " g o v e r n s " the resulting rate of interest in a n y special degree, unless it be b y virtue of greater volume in some cases. N o r is it proper to speak of marginal uses or demands for savings. T h e r e m a y be several investments affording a given yield a t the start, and every investment tends to be brought, b y duplication, to the level of all the others. V e r y considerable additions to the supply of savings m a y , and nowadays generally can, find an outlet without any fall in the rate of interest. T h i s characteristic of the total schedule of investment yields has t w o interesting corollaries. I n the first place, the sensitiveness of the market to additional supplies of savings diminishes as the volume of funds grows larger. T h e decline from one " s t e p " in the curve to another becomes more gradual. W h e n duplicative investment has been carried as far on any level as is possible w i t h o u t lowering the yield, the descent to the next level depends, not only on the further duplication of this level, b u t also on the extension of all previously inaugurated uses for savings. Further duplication in these, having been checked b y the intervention of the use represented b y the last level, is feasible as soon as the latter begins to show a decline. T h e savings markets of rich countries tend to be v e r y stable. In the second place, the fall of earnings as duplicative investment proceeds becomes more and more irregular. T h e additions to the investment fund are unable, in the later stages, to finance expansion in all branches uniformly, the cost of efficient plants being large and m a n y industries offering opportunities for such expansion. Borrowers who have not y e t felt the depressing effect of increased production m a y be able to obtain funds for replacements a t the lower rates which are now the only alternative for lenders, thus obtaining for a time a kind of " b o r r o w e r ' s surplus."

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One portion of the general schedule of yields obtainable by the use of savings deserves special mention because of the exaggerated importance sometimes attributed to it — the sale of rent bearers. T h e seller of such property is a seeker of present funds for some of the various uses analyzed above: the purchase of consumers' goods, the financing of marketing operations, production by roundabout methods. Whatever his purpose, he has a demand schedule, derived from it, of the premium he would be willing to pay for various amounts of savings. Its elasticity may be unity — in case he is determined to sell for what he can get; but it need not be so. He might want no more than a certain sum at any price, or he might be willing, if the price went low enough, to take more than his rentals would pay interest on, becoming a borrower of money as well as a seller of property. In any event his demand schedule becomes part of the total demand in the market to which he appeals for present funds, i.e., tries to sell his rent-bearer. If he does not want funds at more than five per cent and the market is " c l e a r e d " at six, he will make no sale — he is an excluded bidder; but if he is willing to pay six per cent rather than go without altogether, he can find a buyer for his property. In practice, of course, such sales are complicated by the fact that the market may have to evaluate the rentals themselves as well as the bearer of them, and that the duration of the rentals may be a matter of opinion, but that does not affect the principle at all. T h e owner of a house, for example, has a net income to sell which depends on how far duplicative investment has been carried in the construction of houses of that particular type. There may be much uncertainty as to how long it will continue at its present level, and even the latter may be hard to discover. If the owner accepts the market's opinion concerning these matters and is not an extra-marginal bidder for savings, he can arrange a sale, receiving the sum on which his rentals, after allowing for depletion, will pay interest at the market

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rate. 1 W h e n the duplication of houses has not m a d e much progress, because impeded in some w a y , the selling v a l u e of such property will be a b o v e the cost of reproducing it, i.e., a b o v e its long-run v a l u e . INTEREST AND VALUE T h e introduction of savings as a factor in production, it is e v i d e n t f r o m the foregoing, greatly complicates the v a l u e problem. N o t o n l y are values affected w h e r e v e r this factor enters into the productive process, b u t the effects are not all of the same order. I n some cases values are a l w a y s raised b y the use of savings, unless these are to be had for nothing, a condition hitherto unrealized; in other cases v a l u e s will be lower as a result of savings-using production, if there is a n y change a t all, never higher. M o r e o v e r , the relation between the a m o u n t paid as interest and the resulting v a l u e system is not the same for all commodities: if savings were so plentiful as to c o m m a n d no price, the effect would depend upon h o w savings were being used. W h e r e savings enter into production as an ingredient — something w i t h o u t which the operation can not be carried on — their influence is much the same as t h a t of a scarce kind of labor, which we considered in an earlier chapter. 2 Savings h a v e this role in three cases: the provision of durable consumers' goods, the production of goods requiring time-consuming processes, the division of labor based on special regional aptitudes. T h e supply of products dependent upon the use of savings for a n y of these reasons is k e p t smaller b y this limiting factor, and their values are therefore normally higher. T h e effect upon v a l u e in a particular case depends u p o n (1) the a m o u n t of savings re1 T h i s explanation of the familiar practice of capitalization differs from t h a t of the so-called psychological theory in denying t h a t the v a l u a t i o n of rentbearers is the heart of the interest problem. I t agrees with the contention of the supporters of this theory t h a t the rate of capitalization is not independently arrived at, b u t determined in a savings m a r k e t of which sellers of rent-bearers are an integral part. 2 Chapter III.

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VALUE AND INCOME

quired per unit of product and (2) the rate which has to be paid in order to obtain them. T h e importance of the first of these is easily grasped. If the provision of some durable good, for example, entails a great deal of waiting before the utilities it affords are all exhausted, it is evident that the difference between the cost of the labor which enters into it and the total value of its services must be higher, whatever the rate of interest, than it would have to be if interest had to be paid on a smaller volume of savings. Production of it can not expand so far, and its value can not fall so low, as would be the case otherwise. If two goods require the same amount of labor per unit of service rendered, the services of the one which repays the producer more promptly will tend to be the cheaper. If two goods are alike in the second respect but one requires more labor than the other, the value of the latter's services will be less above labor cost. Less has to be added for interest. All this is analogous to the lower objective factor in the cost of certain goods competing for the supply of a scarce type of labor. T h e influence of the rate of interest is equally clear. T h e higher the rate at which the available supply of savings is disposed of, the wider must be the margin between the cost of labor and the total value of the utilities derived from a given commodity of this class. In other words, supply will be more restricted and value higher as a result of the greater relative scarcity of savings. If savings were so plentiful that the rate of interest fell to nil, goods of this kind would exchange for others at the rates which would prevail if no savings were used in providing them. Like the wage-premium received by scarce laborers, the rate of interest is to be regarded primarily as an index of scarcity, rather than a causal factor. I t is true that the rate is much influenced by the demand for use as an ingredient in other goods and also for other kinds of investment; but the fact remains that the demand derived from a particular commodity is always an active factor in the total market situa-

INVESTMENT A N D INTEREST

129

tion, and that it might conceivably be the only factor, or the dominating one, in a given case. T h e effect of the use of savings is much different when efficiency-increasing processes are involved. Here, of course, it is not a question of making values higher than they would be otherwise but of lowering them. Savings are not required, for production, as in the above cases; they are employed because they make labor more effective. T h e goods concerned are not made scarcer but more plentiful. This result, however, does not ensue immediately, as we have seen, but only after the duplication of the savingsusing process has passed a certain point — after more is being produced, apart from the savers' share, than formerly. So far as the added output goes to those who furnish the savings, it has no effect upon value. T h e extent of the fall in value in any given case depends upon the same two factors which govern when savings are required as an ingredient: the amount of savings used and their scarcity as evidenced by the rate of interest. T h e former is only the other side of the increase in physical efficiency resulting from a given investment. T h e more savings needed to enable a given labor force to produce a given (increased) output, the lower the ratio between the labor invested (savings) and the labor " s a v e d " by the new process. T h e initial yield on the investment being lower, duplication will not start so soon or proceed so far, before the savings market is cleared, as would have been the case otherwise. Supply is therefore not increased so much and value falls less. Anything which prolongs the period required for an investment to " m a t u r e , " such as a shortening of the working day, has the same effect. In those branches of production where the initial yield on investment is marginal, duplication will not be carried far enough to affect value at all. In fact, the capitalistic process may not entirely displace the simpler one; handwork holds its own against the machine when the whole gain from the latter has to be paid out as interest.

I30

VALUE AND INCOME

The influence of the rate of interest likewise depends upon the way duplicative investment is affected. When the market is cleared at a lower rate, savings being relatively more plentiful, duplication is carried further in all those opportunities for investment in which the initial yield is higher than marginal. This means that all the commodities produced by these processes become still more plentiful and their values fall even more, as compared with non-capitalistic conditions, than they would otherwise. If the rate of interest should fall to nil, all goods produced by these efficiency-increasing processes would increase in supply until they exchanged according to the labor embodied in them. This, it should be noted, is not the value that would prevail if no savings were used in production — the rule where savings are an ingredient, as we have just seen — but a new (and lower) value reflecting the smaller amount of labor needed per unit when production is by capitalistic methods. As before, it is better to regard the rate of interest as an index of scarcity. It is causal for a given commodity only to the extent t h a t other demands for savings can be said to account for it. The use of savings in roundabout processes which eliminate or diminish the need for scarce labor is very similar to the above in its effect on value. The goods concerned are not made scarcer but more plentiful, and the extent of this change in each case depends upon the amount of savings used and their relative scarcity. Where the difference between the former value of the product and the cost of the (cheaper) labor used in the new process is greater in proportion to the investment required, in other words where a given economy requires a smaller investment, duplication will begin earlier and be carried further, thus causing values to fall more. The lower the rate which clears the savings market, the greater duplication in all better-than-marginal channels. What I have called the current consumption use of savings does not affect value at all, except perhaps indirectly.

INVESTMENT AND INTEREST

131

Since it really amounts only to a transfer of purchasing power from one consumer to another, it may entail no changes in either the methods or the apportionment of productive activity. In such cases, of course, values remain as before. It is more probable, however, that the borrowers will not want the same kinds of things the savers would have purchased. This may mean a change in the scale of production of some of the commodities involved sufficient to affect the objective factor in their cost, 1 and hence may bring about some change in their values. If such changes do occur, they will bear no definable relation either to.the amount of savings devoted to this use or to their scarcity, ι Cf. pp. 44-50 above.

CHAPTER IX LABOR'S SHARE: THE RENT DEDUCTION N A fundamental sense the reasoning developed in the

I

four preceding chapters affords an adequate explanation of the general level of wages. For when we have accounted for the shares received by the owners of natural resources and by those who provide the community's invested funds — the two great deductions from the total output of industry — the share received by the laborers, using that term in its widest sense, is in the nature of things also accounted for, so far as it is a question of dividing the product. It is what the other claimants are not able to appropriate under the conditions assumed. Whatever further explanation of general wages is called for is a matter of production rather than distribution, of revealing the causes and conditions which render the total output of industry large or small in a given case. From some points of view these latter are quite as important as the factors governing the division of the product, and I have no desire to minimize them; but as both their nature and their bearing upon the problem of wages are well understood, I shall not undertake any further analysis of them here. But although the elements of a theory of general wages are indeed contained in an adequate explanation of rent and interest, there are some matters which can be made much clearer by presenting these elements from a different point of view. In particular, the influence of changes in the supply of labor — the traditional approach to the wages question — is left largely to inference in analyses centering about the problem of value. The demand for certain kinds of commodities, which plays such a large part in these discussions of rent, is largely a function of the size 132

LABOR'S

133

SHARE

of the population, in any given state of popular taste, but it is confusing to emphasize this in explaining the value system of a given society. 1 T h e difficulty is even greater with respect to the relation between the labor supply and the investment fund. T h e role of institutional factors, especially in the case of rent, can also be brought out more effectively by a change of approach. THE

COMMUNISTIC

AND

INDIVIDUALISTIC

SYSTEMS

Let us begin by assuming that a given society has a fixed supply of land available for continuous cooperation with its labor in the processes of production. T h e reason for making this assumption is not, as the argument so generally runs, that the supply of land is, in fact, practically beyond our control, being increasable only with great difficulty, in exceptional cases, and in relatively insignificant amounts. It is true we can not change the area of the earth or greatly increase that part of it which lies above the surface of the sea, but that has nothing to do with the case. A community — or a world — which desires wheat is not concerned, in any important sense, about either of these limitations on its freedom of action. Long before they come into play, it must reckon with the scarcity of land as yet fit for wheat growing. Land that still needs to be cleared of stumps and rocks, drained, perhaps wrested from fierce nomads who scorn wheat, is as much out of the picture as the American prairies to the Europeans of the tenth century. And land that can be used after a fashion without such changes is no less a limitation — in the sense that all poor agents of production hamper our efforts to satisfy our wants. T h e reason for beginning our analysis by assuming a fixed supply of land is of a very different order. T h e operations whereby a community can increase its available supply of land suitable for the production of the things it desires, or improve the quality, i.e., the productiveness, of ι Cf. p. 72 above.

134

VALUE AND INCOME

the land it already has, all involve costs, often very heavy ones. Before these costs can be considered worth while, it is necessary to know what is expected in return for them, in this case the earning power of the land to be added to the community's supply, or of the improvements to be made in the supply already at hand. The earning power, i.e., the rent, of the new land or the improvements must be great enough to pay the going rate of interest on the investment required. Hence it is necessary to explain the rent of a given supply of land in order to account for supply, and therefore of rent, in the long run. I t is analogous to the relation between market value and long-run value.1 A second assumption with which we must begin is that the supply of labor per laborer is fixed. Now this is no more a fact than the inflexibility of the land supply. Changes in the hours worked per day, days worked per year, and so on, are not only conceivable but a matter of fairly common experience, socially speaking. But just as increases in the land supply depend upon the earning power of the land already in use, so changes in the amount of labor "supplied" by a given group of laborers depend on their wages;2 and therefore an analysis of wages at a given rate of work per laborer is a necessary preliminary to an understanding of wages in the long run. Our present problem, then, is the relation between wages and changes in the number of laborers, when the supply of land at their disposal and the rate at which they work are fixed. Three different ways of dealing with the community's land — and therefore with its power of producing an income of land-using commodities — may be distinguished, which may be designated as the communistic, the individualistic, and the contractual systems of control. As we shall see later, these are not usually found in a " p u r e " state, there being much overlapping, but it is easier to analyze them separately. 1 C f . what is said below (Chapter X I I I ) on this point. 2 T h e nature of this complicated and slow-working relationship is discussed in Chapter X I below.

LABOR'S SHARE

135

T h e essence of the communistic system is control of the distribution of income by the community. By this I do not mean t h a t incomes are equalized, though something approaching this is a common result, b u t only t h a t every person's share is determined by social fiat. Nor is communal production necessarily implied. T h e community's land may be assigned to individual cultivators in such proportions as will enable them, working a t the normal rate we have assumed, to achieve the desired result in the way of income. T h e periodic redistribution of land, which is a feature of many primitive economies, is doubtless in large p a r t for this purpose. Under these conditions the extension of cultivation to inferior land depends upon the effect of such a policy on the total income (product) of the community. Since everyone has a definite share in w h a t is produced, it is the total which all wish to see increased. Now this result, it is evident, will not follow, if any land is utilized upon which the product per unit of labor is less than the average product per unit of labor would be, if the whole community concentrated its efforts on the better land. T h e larger the population, the lower this average, because of diminishing returns as land is worked more intensively, and hence the greater tendency to resort to poorer land. T h e total income of the community will increase as its members become more numerous, b u t the average will fall. T h e second of the systems mentioned above — the individualistic — is historically more important t h a n the first. Although it is unsafe to generalize very freely concerning the evolution of private property in land, it seems to be fairly well established t h a t a very common stage in this development is t h a t where title rests upon use. A man, or more likely a family, retains the product of as large an area of land as he, or they, can fully utilize. 1 I n ι There is often a preliminary stage when this is taken in a very narrow sense, such as use as a dwelling-site, followed by a gradual recognition of more or less permanent rights to tilled fields.

136

VALUE AND INCOME

our own time in this country we have seen something analogous to this in the regulations under which a vast army of "homesteaders" acquired title to our public lands. I have called this the "individualistic" system because under it there is no renting of surplus land, no hiring of needed assistants. Each little economy goes its own productive way. The fortunate early comers in such a community, assuming it to develop from small beginnings, which is perhaps not so very far from the truth, would appropriate as much land as would enable them to obtain the maximum return from their labor. 1 This would be what a man or family could cultivate without encountering diminishing returns, for no one would apply any of his labor to more intensive (and less productive) cultivation of a given area when there was more land of the same quality to be had for the taking. Additional laborers, however, must sooner or later find only inferior land available, still later comers would have to be content with even poorer lands, and so on. The extension of cultivation to inferior land proceeds more rapidly than under the communistic system, not being postponed until intensive cultivation has lowered the average yield on the better land. Only the cream is taken. As a consequence the total income of the community is less.2 Now under these conditions there would obviously be differences in the incomes which men obtained as a result of their labor, after the community had attained a certain growth; and the larger the population, the greater the differences would be. These inequalities, moreover, would be accentuated in the course of time — assuming that titles to land are transmitted by inheritance — by differences in the size of families. There would be extremes, perhaps 1 Under such primitive conditions, no doubt, this maximum might not actually be attained. It is, however, the norm towards which attempts at a better adjustment would tend. 2 Another factor tending to lower this total is the possibility that the cultivators to whom lands fall by this method of selection may not be the most capable in the community.

LABOR'S SHARE

137

great extremes, of well-being after a time. We need not linger long over this situation, however, for when its results became onerous, relief was found either in the safety valve of migration or in some sort of transition, the details of which are everywhere obscure, to the third of the systems distinguished above — the contractual. The least fortunate members of the community either left for some promised land or became the tenants and employees of their more prosperous neighbors. Before we turn to the analysis of this third form of control, it should be noted briefly that the individualistic system may be combined with the communistic. Property in tilled fields and dwelling sites, expressing the simple equity of conceding to the individual the use of the things he has "mixed his labour with," may be sanctioned by society without permitting such resources as pastures and forests to be privately controlled, the latter remaining "commons." Here the rigors of the individualistic system are tempered by the greater productivity which, as we have seen, tends to characterize the communistic system. Historically such mingling or combination of elements is almost the rule. Perhaps this helped to make the individualistic system more tolerable, thus prolonging its life and giving the general concept of property which it embodies time to strike deep roots. THE

CONTRACTUAL

SYSTEM

The contractual system — the third of those distinguished at the beginning of this discussion —- will doubtless seem of greatest interest to modern readers, since it is the one with which they are most familiar. In a sense it may be said to represent a kind of compromise between the first two, granting to certain individuals an advantage which would be denied them, on such grounds, under the communistic system — the differential product of the superior lands to which they claim prior right, and opening the door for others — the unfortunate "last served" of

13«

VALUE AND

INCOME

the individualistic system — to better their lot b y sharing in the unexploited possibilities of the better lands, i.e., the extra productivity of which these are capable under more intensive cultivation than their owners themselves can apply. E v e r y owner is free to lease all or part of his land to others or to hire others to work a n y part of it for him; and a n y laborer is free to enter into such contracts, if he finds it to his advantage. In analyzing the forces which determine rent and wages under these conditions, it will be simpler to begin with the rather unreal assumption t h a t all income consists of a single homogeneous product, the only one produced in the community, reserving for later discussion the effect of a more complicated productive system. W e shall also assume t h a t all the land available is owned b y somebody. H o w these titles were acquired, and how m a n y owners there are, provided there is competition among them, need not concern us for the present. T h e interplay of the factors governing wages and rent m a y be viewed either as a demand for laborers b y landowners or as a demand for land b y laborers. In the one case we think of competing buyers, differing in their power, trying to obtain as large a share as possible of a homogeneous market stock, and thus arriving a t a price — wages — which will " c l e a r " the m a r k e t ; in the other, buyers of equal power are competing for resources of different degrees of merit, bidding up the price of each unit until there is no a d v a n t a g e to be derived from having the use of it. B o t h , of course, come to the same thing, b u t the first is preferable on t w o counts: it enables us to apply a t y p e of analysis already familiar from its use in explaining other m a r k e t prices, and it simplifies the problem of showing the connection between intensive cultivation and wages. W e shall therefore proceed along these lines, beginning, as in our discussion of analogous questions, with the individual demand schedule. T h e only motive, economically speaking, which a land-

LABOR'S SHARE

139

owner can have for hiring anyone to help work his land is the increase of his own income. If he employs no one, his income will be what he can produce on his land, or such part thereof as he can cultivate to the best advantage, 1 working at the customary rate we assume throughout this chapter. T o increase his income by taking on an assistant, he must pay him less than he adds to the product of the land. This addition to the product need not be less than the owner can produce when working alone. It depends on whether the adding of a second laborer to the staff working this particular plot means carrying intensive cultivation beyond the point where diminishing returns set in. If the employer's holding is too large for this, the hired laborer may not only add as much to the product as the former can produce unaided, but perhaps even more, division of labor making them both more efficient. Whatever the amount which this first helper would add to the product of the employer's land, it is more than he can expect to get as wages — more than that employer's "demand price" for one unit of labor. There is no point in hiring him unless the employer has something left, after paying his wages, which he would not have otherwise. How much the employer's gain must be we can not say on a priori grounds. This indefiniteness, however, is of no great practical importance in most cases, since a limit is set to it by the offers of other would-be employers. If this laborer were the only one to be had, and they knew that all except the highest bidder must do without him, and therefore obtain no surplus at all, his wage would not fall much below what he added to the product, whoever hired him. It all depends on how much must be added to income in order to impel the recipient to action. B u t of course there will ordinarily be more than one laborer to be had; there may, indeed, be far more seeking I If there is an initial period of increasing returns in the application of labor t o a given site, as seems probable, the rational procedure might well be to leave some of his land idle, concentrating his efforts until diminishing returns b e g a n to appear.

VALUE

140

A N D

INCOME

employment than there are employers, i.e., landowners. This raises the question of hiring more than one assistant — how much wages will a landowner pay for a second laborer, and so on. 1 Now a drop in a given wage rate will not induce an owner to hire more laborers unless this will increase his income more than the contrary policy, i.e., more than he can count on, if he does not increase his staff, but obtains them at the lower rate. This means that he will not hire a given number of workers at any wage which is equal to or more than the amount by which the product of his land is increased as a result of adding the nth worker to his staff. If one worker, for example, adds ten units to that product and a second adds eight units, the owner's income, over and above what he could produce alone, will be as follows at different wage rates: Hiring one laborer At

10

o.

9-5° 9

-SO 1

8.so 8 7-5°

Hiring two laborers —2 - i ο

1.50 2

ι 2

2

-5°

3

I t is evident that it is not to his advantage to hire a second laborer, under these conditions, until the prevailing rate of wages has fallen below the eight units which a second worker will add to the total product of his land. A t eight units or more he can do as well or better by hiring only one.2 In the figures used in this illustration it is assumed that diminishing returns set in with the advent of the second 1 Of course, it is not necessary to assume that it is a question of hiring another laborer for full-time work. Where holdings are small it is particularly necessary to reason in terms of "units of labor," rather than laborers, since the small owner may have little demand for a full-time assistant. This does not affect the general argument. 2 This is his maximum price for two laborers. Under pure competition he must offer it or risk exclusion from the market. See below (p. 144) for a discussion of semi-monopolistic conditions.

LABOR'S SHARE

141

employee. T h i s , of course, is not necessarily, or even probably, the case, unless individual holdings of land are v e r y small. If the employer has a large amount of land under his control, it m a y well be possible for him to hire a considerable number of laborers before a n y decline in the amount added b y successive additions to his force becomes apparent. Sooner or later, however, the grim tendency will appear. T h e n wages must fall in order to afford him a motive for increasing his force. W e thus arrive a t the concept of the individual landowner's demand schedule for labor: the number of laborers which it will be to his best a d v a n t a g e to hire a t each of a series of wage rates. T h e schedule of every owner will be " negatively inclined " — more and more laborers wanted only a t lower and lower wages — but otherwise they m a y h a v e little in common. T h e owner whose land is rich will be ready to employ some laborers a t wages which the owner of a poorer holding will regard as out of the question, even for a single helper; and the owner of land which responds well to intensive cultivation will require less drastic reductions of wage rates as an inducement to expansion of operations than the holders of more grudging soils. T h e sum of these individual schedules constitutes the market schedule for the given conditions — the number of workers who can find employment a t various wage rates. F r o m the nature of the elements which go to make it up, this composite schedule is simply a reflection of the quant i t y and quality of land a t the community's disposal. W h e t h e r a given plot is held b y one owner or a dozen, it will yield the same series of products and increments of product, in the aggregate, when more and more labor is applied to it. A s in all markets, competition will cause t h a t price (wage) to be settled upon which just suffices to t a k e off the supply, i.e., to leave no one without a j o b . T h e larger the population, therefore, dependent on a given supply of land, the lower must wages fall. In equilibrium they will be just below the amount added, per worker, to

142

VALUE AND INCOME

the total income of every landowner by the least productive expansion of operations which he finds it worth while to undertake. This "marginal product," it should be noted, is not an amount imputable to the presence of a single member of the community, in the sense t h a t wages would be less, and rents higher, if the laboring population were larger by one. I n most cases it is possible to absorb a considerable number of additional workers as easily as only one; some finding employment on land which produces so little t h a t its owners hired nobody at higher rates of wages — possibly a considerable area, others being added to the forces already a t work on better lands, for intensive operations impractical before — also a goodly number. T h e " d e m a n d c u r v e " for labor descends, in most communities, by broad flat " s t e p s , " not b y infinitesimal gradations. Wage rates do not have to be revised every time another boy reaches man's estate. I t should not be inferred, however, from w h a t has j u s t been said, t h a t there is always some land in every community which would not be worked at all if wages were any higher, i.e., which is wholly " m a r g i n a l . " On the contrary, if the population is large enough, in proportion to the available land, wages will fall so low t h a t land of every quality is being cultivated beyond the point where diminishing returns set in, and which would therefore continue to be cultivated, though less intensively, if it were necessary to p a y more in order to obtain the necessary labor. This means t h a t the total product of all land exceeds the wages paid the laborers, since all receive the low wage of the marginal contributor, or contributors, to the o u t p u t . I n other words all land, under these conditions, yields a rent. T h e above reasoning assumes t h a t labor is mobile, in the sense t h a t every laborer can move to any point where employment offers itself. I t is not a question of being able to do any kind of work — there is only one kind of work, one branch of production, in the community we are still

LABOR'S SHARE

143

1

considering — b u t of being free to work for any employer who offers a better price, i.e., on any land where the " m a r ginal p r o d u c t " would be greater. Such mobility has never been very great until p r e t t y recent times, and even now it is probably nowhere really complete, or even advanced enough to eliminate all appreciable inequalities. I n the past it has been hampered, sometimes almost to the point of disappearance, by law and binding custom, sentiments of affection, loyalty, and fear. Where such impediments to the movement of laborers exist neither rent nor wages may reach a maximum. This result is never attained unless every landlord hires as many laborers as he would find it profitable to do a t existing wage rates, and no laborer could increase his income by accepting employment with somebody else. I The complications arising when movement from trade to trade is not free are considered elsewhere (see especially Chapters IV and XIV). They do not modify the general reasoning of this chapter.

C H A P T E R

Χ

LABOR'S SHARE, Continued THE

C O N C E N T R A T I O N OF

OWNERSHIP

T THE beginning of the discussion of the contractual system of land utilization, it will be recalled, we postponed consideration of the influence exerted by the distribution of ownership, assuming merely that there was no monopoly. T o this point we must now return. A reduction in the number of owners in control of a community's land affects its wages-rent system in a fourfold way: through its effect (i) upon the utilization of land, (2) upon the use of land as a consumer's good, (3) upon the consumption of non-land-using goods, and (4) upon indulgence in leisure. In addition there are some minor effects of a technical character. T o some extent reference to these factors involves an anticipation of later steps in the analysis, but not enough to cause any special difficulty. The first of these points has to do with a matter we considered in the chapter on Market Value — semi-monopolistic control of supply. 1 Just as the individual seller of goods may refrain from throwing his entire stock on the market, if he has reason to believe that this course will enable him to obtain a larger total sum for what he does sell, so the landowner may be able to increase his total income from rent by analogous tactics. Such restriction of supply may be achieved in two different ways: intensively, by hiring fewer laborers to work a given amount of land; extensively, by keeping some land out of use altogether which could be profitably worked at prevailing wage rates. In either case wages will be forced down and rents will be higher on such land as is used. It will be simpler to examine the two possibilities separately.

A

I See above, pp. 24-28. 144

LABOR'S SHARE

145

L e t us begin b y considering the effects of restriction in the extensive sense. Suppose only nine-tenths as much land is put under cultivation as would be utilized under purely competitive conditions, every owner withdrawing a proportionate amount of his land. Would this increase their several incomes (rents) ? Assuming that they make no attempt to reduce the intensive use of their lands, this will mean that they are now willing to hire fewer laborers at any given rate of wages — as many less as would be the case if they did, in fact, possess one-tenth less land. Whether this or any other degree of restriction will be to the advantage of the owners, depends upon how wages are affected. T h e y must fall enough (i.e., rents must rise enough) to more than offset the reduced amount of land in use. T h e following figures show the effect upon a given owner of such a ten per cent restriction under different conditions. 1 Ten acres used Wage 3 units

Output Wages Rent

100 units 60 " 40 "

Nine acres used Wage 2.80 units

90.00 units 50.40 " 39.60 "

Nine acres used Wage 2.50 units

90 units 45 " 45 "

If wages fall to only 2.80 units as a result of the withdrawal of land, rent is not more but slightly less on the land still in use; if they fall to 2.50 units, it is a different story. W h a t is it, then, which determines how far wages shall fall as a result of a given degree of restriction? Simply the character of the alternatives to which the surplus labor of the market must then turn — the offers which would be eliminated in the bidding if full competition prevailed. In part these offers come from the utilization of land too poor to be used if wages remained a t the competitive rate; in part from further expansion of intensive cultivation on the better lands, stages not productive enough to be worth while if land were more plentiful. Where the technique of intensive cultivation is not well understood or not v e r y I Ignoring the possibility of more intensive cultivation. This simplification does not affect the principle involved.

146

VALUE AND INCOME

successful on the kind of land or for the kind of product involved, 1 wages may fall pretty sharply when a relatively small amount of land is withdrawn from use, unless the opportunities offered by submarginal land are relatively extensive. This is not always the case. I t may happen that there is little such land ready for use, and little capital available for clearing lands otherwise suitable. The laborers rendered "surplus" by the restrictionist policy of the landowners then find meager comfort wherever they turn. But is it reasonable to believe that any such limitation of supply will ever be effected by competing landowners, i.e., without agreement among them? Under certain conditions it is by no means unthinkable, for reasons analogous to those set forth at greater length in the previous chapter just referred to. There is, it is true, a certain minimum amount of land sure to be utilized. No owner will leave all his land out of use; he will wish to set at least one man at work on it — himself — as long as wages do not exceed the output of one man thereon. Otherwise he would not only forego all rent on his land but accept lower wages from another than he could produce on his own land. This, however, does not tell us directly how much land each owner will insist on utilizing. I t depends on what gives the largest output — the amount of land of t h a t grade upon which one laborer can produce most. This and the number of owners determine the minimum supply of land that will be cultivated. Now, of course, each landowner would like to utilize all his land at the low rate of wages resulting from this maximum restriction of supply; and any one of them could more or less closely approach doing so, if all his rivals would forbear attempting the same thing. What he would add to the total supply of land would not raise wages (and lower rents) very much, unless his holdings were relatively large. He knows perfectly well, however, or will promptly learn I We are still assuming t h a t only one good is produced. the argument, however.

This does not affect

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from experience, t h a t a n y a t t e m p t on his part to expand his operations — b y offering slightly higher wages, in order to a t t r a c t more laborers — will be duplicated b y his competitors; they must do so in self-defense. A given expansion b y him, therefore, entails a larger increase in the market supply of land — depending on how m a n y there are to follow his example — and a correspondingly greater rise in wages. If his rent a t the higher wage rate thus brought about would be less than it was before, he will h a v e no motive for trying to get more of his land into use. 1 Similarly for every further stage of expansion. A stable situation m a y be reached before all the available land is p u t on the market, thus depressing wages below their fully competitive level. A n increase in the number of landowners is therefore doubly significant in this connection. I t increases the mini m u m amount of land sure to be utilized, thus raising the minimum below which wages cannot fall; and it increases the size of the " b l o c k s " b y which expansion beyond this minimum must take place, thus reducing the probability t h a t any policy short of full utilization will prove advantageous. W h a t e v e r may be said about the desirability of small holdings on technical, political, or social grounds, they are a safeguard against a real danger t h a t lurks, despite the outward lineaments of competition, in all concentrated control of supply. T h e same sort of reasoning is applicable to restriction in the intensive sense. If all landowners reduced b y a tenth the number of laborers they would put to work on a given plot of ground a t a given rate of wages (i.e., one-tenth below the number they could hire, without failing to increase their incomes, a t t h a t rate), the labor m a r k e t would have to be cleared a t a lower rate — wages would fall. T h e " s u r p l u s " laborers would have to find employment on I N o t e t h a t it is not a question of hiring more or fewer laborers b u t of putting more or less land at their disposal. T h e y are all hired a n y w a y , and he m a y be supposed t o hire his share — t o c u l t i v a t e his actually utilized land more intensively.

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lands which would otherwise be submarginal. This fall in wages might or might not leave the landowners with more rent. As before there is a certain minimum upon which every owner will insist, a degree of intensive cultivation which it would be against his interest to forego. I t is what will give the best results when a single worker applies himself to a given grade of land. No owner can be expected to spread his men more thinly than that over the land he brings under cultivation. This, however, is not affected by concentration of ownership. The latter affects the result only through its influence upon the size of the "blocks" by which the market supply must vary. On the whole this aspect of semi-monopolistic restriction seems must less important than the one discussed first. The second channel through which concentration of ownership affects wages and rent — the use of land as a consumer's good — need not detain us long. Beyond the very modest minimum required as a site for living quarters, this use of land is to be regarded as a luxury: it satisfies wants which are entirely dispensable and which generally stand pretty far down in our scales of importance. Such consumption, therefore, is preeminently characteristic of the wealthy; in some forms only the very wealthy indulge in it. Now one of the principal sources of inequality, of the emergence of favored masters of large resources, especially in early stages of social development, is the control of land. What nature denies to all with respect to physical and mental prowess, property in land may bestow — vast and disproportionate power to consume. Hence it is that a country where there is a landed aristocracy is likely to be a land of noble parks, great game preserves, and other pleasantly extravagant uses of the earth. The effect of this sort of thing upon rent and wages can not be fully explained without anticipating some later steps in our analysis. 1 For the present purpose, however, the more obvious aspects of it will suffice. So far as the I See pp. 152-153 below.

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149

production of income for the rest of the community is concerned the use of land as a consumer's good has substantially the same effect as withholding that much land from use altogether. In either case the land gives rise to no appreciable demand for labor. 1 T h e real difference between the two is that in the latter the land is kept out of use for the purpose of, and on condition of, increasing the income (rent) derived from the remaining land, while in the former the land is devoted to consumer's uses even though it involves a reduction of other income, provided the " c o s t " is not excessive. In the one case it is the income from the land in use that matters, since the idle land contributes nothing, even in the way of satisfactions, to the owner's income; in the other it is total income, including the satisfactions afforded by the "consumer's land," that the owner is interested in. T h e two reinforce each other; land withheld from restrictionist motives may prove to be not without utility, and the sacrificing of land to consumer's uses may have an effect upon rent which is as welcome to the owners as it was unexpected. 2 These effects of concentrated ownership tend to be counteracted, in varying degree, by the working of the two other factors mentioned at the beginning of this part of our discussion — the consumption of non-land-using products 3 and indulgence in leisure. It goes without saying that the latter is not possible, on any considerable scale, except for those whose incomes are large compared with their other wants. Large landowners, as we have seen, are more likely to be in this position than a larger number of owners in control of the same amount of land. T h e connection between the dispersion of ownership and the use of products, 1 T h e s e consumption uses of land m a y require labor for such things as gardening, watching, and so on; b u t it is on the whole a relatively u n i m p o r t a n t contribution to the demand for labor. 2 I t is probable t h a t the history of land utilization reflects a confused blending of these t w o factors, w i t h the rational playing a minor or belated role. I t is well, however, t o disentangle the forces at work. 3 F o r a discussion of this term, see p. 6 j above.

VALUE A N D INCOME or processes, which require no land is not so obvious. T o a very large extent such products and processes are in the luxury class — personal service, finely wrought materials, novelties brought from afar. I t is therefore in countries where there are people of large means that these things have their best market. T h e great landowner has always been conspicuous in this company. As I have said, these consequences of the holding of land in great " e s t a t e s " tend to counteract the influence of the first two aspects mentioned — to raise wages and lower rents. A n y shift of consumption in favor of those things which can be produced with little or no land relieves the pressure on what land there is, affords a better outlet for labor, lowers rents. T h e influence of leisure is analogous; indeed leisure might be regarded as a non-land-using good, in a loose sense. After all, so far as the community's need for land is concerned, it makes no difference whether a rich man lives a leisurely life himself or hires a retinue of servants to do it for him. It is doubtful whether these two aspects of the problem, even taken together, are of great importance; but it seems better not to ignore them, if we wish to keep our theory in contact with its institutional background. Whatever represses leisure and luxurious consumption, such as taxation and social disapproval, therefore tends to depress wages in some degree, 1 though doubtless not to the extent that measures favoring small holdings and curbing the use of land as a consumer's good tend to raise them. 2 It is hardly necessary to point out that the system of land utilization just discussed — the contractual — need not appear in a " p u r e " form, but may be combined with one of the other systems. Thus more or less important communistic elements may be preserved in the form of 1 Of course, the restriction of leisure and luxurious consumption m a y be desirable on other grounds. 2 I t should, perhaps, be added t h a t the large landowner m a y be more progressive in his methods and therefore exert a favorable influence on wages. I t is going too far, however, to say there is a tendency in this direction.

LABOR'S SHARE " c o m m o n s " — especially pasture lands and forests — after the contractual system has become established with respect to land used for tillage, dwelling-sites, mill-sites, and the like. This seems to have been the case over a considerable part of Europe during the long transition from the feudal order to the modern one. The individualistic system, too, may hold its own over part of society against the inroads of the newer system. The hiring of employees by landowners may be limited to a favored few, notably certain large proprietors of outstanding social or political position and others whose dignity is recognized by exemption from ordinary labor, such hiring of assistance being deemed, in other cases, evidence that the employer has more land than he can manage alone. Or only squatters and other late-comers to the feast may be in the employable class. Wherever such mingling of systems is found, it is evident, the analysis of rent and wages is a problem of peculiar difficulty. This brings up a minor complication in the analysis applicable to the contractual system. Suppose that only a part of the community's land is in the hands of private owners, the remainder being open, not as " c o m m o n s " to all the present population, but for settlement and ownership by those that follow them — something like the great scheme under which the public lands of this country have passed into the hands of millions of pioneers. Here the " m a r g i n " to which wages will fall is not the offer of the least willing landowners, but what a laborer can himself produce on land hitherto (i.e., before the increase in population) not utilized and hence not yet privately owned. In the one case it is only what the owner of such land must pay to prevent the competitor next below from superseding him, which depends on the productivity of the latter''s land; in the other case it is the full product of the marginal land. N o laborer need take less than that. 1 I T h e situation can be depicted in terms of a " d e m a n d c u r v e " for labor in equilibrium with a " s u p p l y c u r v e " for that part of the laboring population who could earn a living on the unappropriated lands.

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The significance of this qualification evidently depends on the extent of the differences between the successive stages of productivity encountered in the utilization — extensive and intensive — of land. If these differences are very slight, it will be of no practical importance whether we say the laborer gets what the marginal employer is willing to pay him or what he can produce on the poorest land which is cultivated. The difference would be negligible. But if differences in the quality of lands are considerable and the productivity of intensive cultivation decreases by sizable gradations, the situation is different. What the marginal owner has to outbid may be appreciably less than what his land produces. If we think of an "economy" which embraces a very large area, it is doubtless true that differences in degrees of productivity are too small to be significant, in most cases; but if we have a smaller community in mind, it is not so certain that this will be the case. We must now abandon one of the assumptions we have made up to this point, namely, that society's wants center on a single commodity,— a land-using one,— income being a homogeneous stream. Suppose a second good is introduced into its productive scheme — again a land-using one. How will this affect rent and wages ? If the demand for this new product merely replaces some of the demand for the first product, the effect may be nil, unless the new product requires land of a different sort.1 There is no need for any more land, and consequently no effect upon the margin of production. But if the introduction of the new commodity leads men to work harder — a common effect of giving variety to consumption — then the previously utilized lands may not suffice. Poorer land may be forced into use, depressing wages and raising rents. No doubt the importance in this respect of a single change in habits of consumption may not be great, but cumulatively they are by no means a negligible factor. I For an analysis of this complication see above, pp. 75-76.

LABOR'S SHARE

153

Suppose, however, that the new commodity is not a land-using one but a product, or refinement of a familiar product, which requires the use of no land or very little of it. A new element is now added to the demand for labor, reflecting, so to speak, a new method of producing income, a method not subject to diminishing returns and not varying in quality. It is as if a block of land possessing these characteristics had been added to the better-than-marginal land previously available. Wages rise until multiplication of the new product reduces the attractiveness of this alternative to the level of the old one. 1 Rents fall as the poorest land is abandoned. T w o further aspects of the relation between rent and modes of consumption may also be noted briefly. In the first place, the wants of a community are not independent of its size. Density of population brings new wants in its train, as every student of city management knows. On the whole these tend to be of the non-land-using variety — police, sanitation, paving, and the l i k e — b u t some are not. T h e crowded city must set aside "breathing spaces." In the second place, growth of population, by increasing rents, puts landowners in a position to increase their consumption of luxuries, including land itself, 2 thus increasing the pressure on the land to the disadvantage of labor's share of the product. This completes the list of the factors bearing upon the relation between wages and rent. With given resources available in the way of land, this division of product depends primarily upon the size of the population. N e x t in importance, in most cases, comes the nature of the community's wants. T y i n g in with this at some points but acting through separate channels in other respects, distribution of land ownership exercises a pervading though less powerful influence. And underlying it all is the cost 1 This evidently introduces a value problem. For a more complete analysis of this see Chapter V above. 2 Knight, Risk, Uncertainty and Profit, p. 118, note.

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VALUE AND INCOME

of increasing and improving the community's supply of land, to say nothing of man's willingness to work. Small wonder that it is necessary to "build u p " the law of rent piecemeal. Before turning to the other great deduction from the total product of industry, it will be worth while to consider a view of rent which has gained a certain following of late and is not entirely in harmony with the one developed in these chapters — the idea that the rent of land is simply a case of bidding up the value of a scarce agent, entirely analogous to the premium paid for scarce labor. This reasoning seems to me clearly inadequate. Rent in general, it is true, is much affected by the size of the population and the nature of their wants, in proportion to the land available. T h e fewer users or uses, the lower rents will be. In this sense it may indeed be thought of as the result of a more or less intensive competition between rival users, each striving to avoid exclusion from the market altogether and to obtain as large a share of the supply as he can. B u t this refers only to a kind of average or general level of rents; the rent of a particular piece of land depends on other considerations as well. Those who bid for it1 are not concerned merely about possible failure to get any land at all, but also about the possibility of having to use land of inferior quality. T h e price they are willing to pay reflects a double motive. In other words, the differential aspect of rent can not be ignored. 2 THE

INTEREST

DEDUCTION

In discussing interest (Chapter V I I I ) we saw that wages tend to be raised by an increase in the supply of funds seeking investment, population and the arts of production 1 I t will be recalled that, although the analysis of the preceding pages was in terms of bidding by landowners for labor, I pointed o u t that it would be equally correct to view it as a bidding for land by laborers. 2 I t is this mingling of elements, I believe, which has led some writers to regard all rents as " o p p o r t u n i t y costs." For a discussion of this question see above, pp. 79-80.

LABOR'S SHARE remaining the same. B y implication this means, of course, t h a t an increase of population would tend to h a v e the opposite effect on wages, if not accompanied b y a proportionate increase in funds for investment. T h e r e would be a larger number of workers to equip with the most productive instruments, a larger amount of trade to finance, more people to supply with houses and other kinds of durable consumers' goods. T h e fundamentals of the theory of wages are all here, so far as this deduction from total product is concerned. A s in the case of rent, however, there is something to be gained from a restatement of the case along different lines. T h e relation between wages and the growth of population, as well as the interplay of forces which accompanies such growth, can be made clearer. L e t us begin b y assuming the supply of investment funds to be fixed, not in a per capita sense b u t in an absolute sense — so m a n y days' productive capacity withheld from supplying immediately consumable goods and devoted to the wants of the future. T h e problem, then, is to discover how wages in such a community will be affected b y an increase in the supply of labor. I t will be simpler to regard the latter as roughly synonymous with an increase of population, the rate a t which laborers work being the same whether there are m a n y or few of them. 1 I t will be recalled t h a t the increase of wages which results from a greater plenty of investment funds is due to the flow of the latter into the efficiency-increasing uses. A s in all competitive markets, this flow depends in part on the strength of the " p u l l " exerted b y rival uses — in this case the scarcity-reducing investments. N o w on both these counts an increase in the supply of labor works to the disa d v a n t a g e of laborers' earnings. T o begin with the scarcityreducing uses of funds, which present on the whole the simpler problem, it is clear t h a t a larger population is likely I T h e effect of changes in the working d a y is discussed above, pp. 1 1 8 - 1 1 9 . T h e effect of changes in the number of people at work (see below, pp. 1 8 0 - 1 8 1 ) requires no special analysis. It should be noted, however, t h a t both depend, in some measure, on the rate of wages, which obviously complicates the argument.

iS6

VALUE AND INCOME

to have a larger demand for loans to finance current consumption, not a larger per capita demand necessarily, but a greater aggregate demand. There are more people who desire things they can not purchase out of their own present resources. Hence a larger amount can be devoted to this purpose, without reducing the present utility of purchasing power so much, as compared with future utility, and without having to accept the offers of borrowers whose present need is not very insistent. The " p u l l " from this direction is therefore rendered stronger and the flow of funds into the strategically important uses — the efficiency-increasing ones — is checked. The effect of an increase in population is even clearer with respect to durable consumers' goods. The demand for houses, pianos, and the like may not be proportionately greater when the community is larger, but it is practically certain to follow population growth pretty closely. More of all such goods can be sold at given prices. More funds can therefore be invested in providing these things without reducing the value of their uses any further, thus maintaining the margin above their cost. Again the demand for funds from the uses which compete with the efficiencyincreasing ones is strengthened. The case of goods which require time-consuming processes of manufacture and t h a t of goods transported from distant sources of production are no different. Where it is a matter of dispensing with skilled labor through the use of machinery, it is safe to assume that there will be a greater demand for such products, and hence a larger volume of production to provide with equipment, when the population is larger. From every angle, then, the investment of funds in the efficiencyproducing uses has to cope with stronger alternatives. But this is not all. The opportunities afforded by these latter fields also grow with the population. In every industry where " r o u n d a b o u t " methods can be applied there are more workers to be equipped with every type of machine; at every level of "productivity" the scope of duplicative

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157

investment is broadened. Thus the day is postponed when further investment will involve the attracting of men away from other occupations and the necessity of bidding up their wages in order to get them. Moreover, there are more workers in these other fields, and hence more of them can be induced to transfer to the machine-using industry without affecting wages so much. The financing of marketing — the marketing which facilitates efficiency-producing division of labor — offers a better field for investment in larger communities. There are more people engaged in these occupations, which means more trade to provide with funds before it becomes necessary to attract labor from other branches of production. It is clear, therefore, that with a given volume of investment funds available a larger number of laborers will share less fully in the increase of productivity resulting from capitalistic methods. In the nature of things, however, this aspect of the wages problem must be of varying importance. In a society where all investment was in the scarcity-reducing uses, a change in the population, savings remaining the same, would have no effect whatever on wages, apart from its effect on rent. I t would affect interest, since it would enlarge or contract the opportunity for investment in these scarcity-reducing uses, but wages would remain unchanged. T h e output of the laborer being the same, whether investment of this sort takes place or not, there is no addition to product to share with anyone. It is only to the extent that investment in the efficiencyincreasing uses of savings has developed in a society that the ratio between the investment fund and the labor supply is a factor in the determination of wages. 1

I T h e transition to the new adjustment, when population increases, is obviously a very complicated matter.

CHAPTER

XI

THE SUPPLY OF LABOR HE foregoing chapters have analyzed the effect upon wages of changes in the ratio or proportion between the factors of production. W e have seen that if the amount of land or of savings at the disposal of a community is increased, the earnings of these agents will be diminished, and the general level of wages will be raised, for reasons inherent in the nature of these factors and the way in which they cooperate with man in production. T h e " b a s e " from which such increases in wages must be understood to take place depends, of course, upon man's own natural endowments of skill, strength, perseverance, and the like, all of which affect his ability to wrest a living from his resources. Division of labor, in particular, is no constant, fixed in the stars, but an element which represents the accumulated experience of ages. It is from the wage level made possible by some given equipment of these things that we reckon changes as more land or more savings become available. B u t nothing has been said about the supply of the factors themselves; we have supposed them to be there and to take what they can get under the circumstances. In some respects this may be all the economist can do. For him they simply are there, the reasons for their existence in that particular volume being quite outside the scope of his analysis. We do not explain the ore deposits of Michigan or the patient marvels of Chinese craftsmanship. There are some aspects of supply, however, of which this can not properly be said, namely, the relation between the earnings of a given factor and its increase or decrease — a problem of many ramifications. With regard to this it is possible to reach some general conclusions by a priori

T

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T H E

SUPPLY

OF

LABOR

methods, though not always very definite ones. These form the subject of the present and the two following chapters. The supply of labor, in the sense of effective means of production, depends upon two elements — the number of laborers and the amount of work each laborer does. We therefore have a double problem: the effect of changes in the general level of wages upon each of these two aspects of supply. I shall begin with the second. THE

"ENCOURAGEMENT

OF

INDUSTRY"

The first step in our analysis must be to make clear just what we mean by a " r a t e " of wages. It is idle to discuss the effect of higher or lower wages, unless we refer to changes in the remuneration received by the same amount of labor in both cases. A wage rate assumes a unit of labor as constant as we can make it. The best unit would seem to be the hour. Neither the day nor the week is suitable, both meaning different things at different times and in different places. It is therefore wages per hour that we are concerned with in the following discussion.1 We shall also assume that the rate is the same for each unit furnished, i.e., for each hour worked. In practice this is generally the case, though there are exceptions. Extra wages for overtime work mean, of course, that more is received for some hours of the day's work than for others; but though provision for such extra payment is not uncommon, the amount of labor actually performed at these special rates is generally a very small fraction of the total supply. In the case of piece rates, on the other hand, there may be some decline of efficiency as the day goes by, reducing the earnings of the later hours. The interposition of even brief rest periods may do much, however, to counteract this. I Piece rates present a somewhat more complicated b u t not essentially different problem. T h e speed of work is then involved, in addition to the hours worked per day.

ι6ο

VALUE AND INCOME

T h e doctrine t h a t men tend to work harder when wages are higher has a distinguished lineage. A d a m Smith's remark t h a t " t h e wages of labour are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives," 1 has been echoed many times since his day. Despite its seeming reasonableness, however, it involves a serious confusion of ideas. If only those laborers who manifested greater zeal and industry received greater wages, then we might indeed speak of the latter as an encouragement of the former. B u t an increase of wages in any useful sense of the term — a return per unit of labor applied in production — is rarely contingent upon the number of units the laborer supplies. H e gets it anyway. Moreover, he receives a larger " reward," in the sense of total income or standard of living, even though he works no more hours t h a n he did when wages were lower. I t is clearly impossible to speak of better wages as an " e n c o u r a g e m e n t " to greater productive activity, in the sense which Smith seems to have in mind. N o r are matters much improved if we assume t h a t w h a t he was really trying to bring o u t was the necessity of paying higher wages in order to make it seem worth while to the laborer to undergo the greater fatigues of a longer day or week — a possible, though less probable interpretation. T h e reward-effort relationship involved in persuading men to work harder is no simple one. I t is not a question of paying enough to recompense a man for some general degree of disutility — more for a greater, less for a smaller — b u t of eliciting successive increments of labor by successive increments of reward. Later writers have not been unaware of this, b u t many of them are nevertheless in substantial agreement with Smith concerning the influence of changes in the rate of wages. Reasoning, correctly enough, t h a t it is necessary to pay more for the later hours of the day, since they genI Wealth of Nations,

Bk. I, ch. viii.

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161

erally involve greater irksomeness, they have concluded t h a t the w a y to provide this higher p a y m e n t — to furnish this greater incentive — is to raise wages. T h o u g h admitting t h a t additions to income tend to have a progressively weaker appeal for the recipient, they have believed t h a t this decline would not ordinarily be great enough to neutralize the effectiveness of the greater wage. O n the whole, this seems to be t'he line of reasoning followed b y Marshall. A t a n y rate, he is clearly of the opinion that, though " t h e more ignorant and phlegmatic of races and of individuals " m a y show an opposite tendency, the general rule is t h a t men " w i l l work the harder and the longer the higher the rate of p a y which is open to t h e m . " 1 Acceptance of this conclusion inevitably leads us into t w o serious difficulties. I t is certainly possible to assume a state of things — it m a y not be so v e r y far from the truth for some historical cases — where man's efforts to provide'himself with food and shelter are so ineffective t h a t nothing short of his utmost endeavors will suffice to " keep body and soul together." T o hold that such a man will work harder if wages, i.e., the return to him for a given a m o u n t of labor, are increased is absurd. H e is already working his maximum. In the second place, assuming t h a t this case is ruled o u t as pertaining only to a primitive and perhaps mythical " p a i n e c o n o m y , " this general rule of Marshall's implies t h a t as men progress in efficiency and consolidate their conquests of nature's powers, they m a y be expected to work harder and harder — surely as grim a conclusion as the " d i s m a l science" ever reached. Reason and experience rebel a t these larger implications of the doctrine. If there is any truth in it, therefore, it must be of narrow and special application. T h e amount of labor " s u p p l i e d " b y a given number of workers, in the sense of an average flow of productive capacity, depends upon the number of hours each works in a lifetime. T h i s , in turn, is the resultant of t w o elements ι Marshall, Principles, pp. 140-42; 528-9.

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— the number of hours worked per day, week, or other conventional period, and the average length of a worker's active life, which is partly a matter of the age at which work is begun, partly of the retiring age. T o discover the influence of wages upon the labor supply we must examine their effect upon each of these several channels, since the factors at work are not the same in all of them. Increasing the labor supply in any of these ways involves a problem of choice. In the terminology employed in an earlier chapter, 1 every unit of labor furnished, i.e., every hour worked, involves a "satisfaction c o s t " ; and like all costs these will never be voluntarily incurred, unless a return is expected great enough to more than offset the sacrifice made. W h a t is sacrificed is leisure and the satisfaction afforded by the various activities which would be possible if the time were not devoted to labor; what is gained is capacity to consume, together with such satisfactions as the worker may derive from his occupation itself, as a form of mental or physical activity. Here, as I have said, it is the addition to satisfaction cost and the addition to "psychic income" which have to be considered when deciding whether to work another hour per day, another year in the twilight of life, and so on. In theory the decision of an individual on any of these points may be different from that of every other individual. In practice, however, certain limitations on complete freedom of choice have to be recognized. T h e several channels through which the supply of labor is affected are not perfectly flexible. T h e length of the working day, for example, is so bound up with the smooth running of a complex organization in many cases, notably in factories, that the reactions of the individual worker to the rate of wages he receives are often confined to very narrow limits. H e must adjust himself to the group. T h e group, moreover, may find it difficult to register its modal judgment without organized effort, which is much more feasible in some I Chapter I.

T H E SUPPLY OF LABOR

163

cases than in others. It would be a mistake, it is true, to deny the individual any leeway at all, even in these highly integrated days, but the fact remains that the modern worker is more of a passive factor in this respect than his forebears. 1 T h e laborer's working life is also less a matter of individual choice in some circumstances than it is in others. T h e practice of legally prohibiting the working of young people below a certain age, though it may reflect some vague consensus of opinion, certainly runs counter to the views of many of those concerned. Their reactions simply do not count. Again, the age of retirement may be largely a matter of group and technical compulsion. T o retire from active work while in the fullness of one's powers may be a respected ambition in one society, an unexplainable aberration in another. T h e drastic speeding-up of industry, of which we hear so much nowadays, may add many an unwilling recruit to the " r e t i r e d " list. Within these limits, then, a man who finds himself able to earn more per unit of labor has these different courses open to him: he can make no change in any of his working habits, and thus enjoy a somewhat higher scale of living; he can curtail his working time, either by shortening his day (or week) or by reducing the length of his active life as a worker, 2 and continue his former standard of consumption; he can adopt just the opposite course on one or both of these points, increasing his labors and raising his consumption even more than in the first case. From a purely rational point of view, we might think of him as balancing the gains to be obtained against the rising costs entailed by each of these courses, and increasing his efforts until return no longer exceeded cost at any of these "margins." I t would be unwise, however, to press such reasoning very 1 Cf. Bohra-Bawerk, Annals of the Am. Acad, of Pol. and Soc. Sei., ν, 23-4; Marshall, Principles, p. 527, n. 2. 2 Of course, when the change in wages finds the worker already at work he can not change the age of entering industry — he can only consider earlier retirement. But the newcomers can, and in the long run that is what counts.

164

VALUE AND INCOME

f a r ; for, as we have seen, such nice adjustments themselves involve a cost, which is often not worth while. B u t some weighing of alternatives there must be, unless we are to assume t h a t the ordering of all these phases of life is left to chance; and in t h a t weighing and choosing one of the important factors is always the desirability of f u r t h e r additions to one's income. Now the significance of such additions does not depend to any appreciable extent upon the way they are obtained. Whether a man works longer hours or retires later in life, a given increase in his contribution to the labor supply (i.e., a given number of hours) will enable him to make a given increase in his scale of expenditure over the years —• his day-by-day consumption. If he plans to work as long as he is physically able, he need make no deduction from present expenditure to provide for f u t u r e needs; it may be larger by the a m o u n t t h a t he expects to earn during the years when he might have thrown off the burdens — if burdens they be — of active life. I t is the same with changes in the age of beginning work, though here the m a t t e r is much more complicated, as we shall see. In any case, it all reduces to a change in the general scale of consumption. Such distribution of income over time, it may be conceded, is never very perfect and often neglected altogether. T h a t , however, is of little consequence here. T h e question is how such planning as does take place is affected by changes in the rate of wages — whether, for example, a given population with given views and abilities in this respect will retire a t an earlier age, on the average, when wages are higher, or not. For we must take some planning for granted or admit a t once t h a t there is no relation a t all between the rate of wages and the supply of labor, so far as this channel of increase is concerned. I t is absurd to talk about a man's choosing whether to work after a certain age, unless we are willing to endow him with the will and the brains to prepare for an old age of leisure if he prefers it.

THE THE

SUPPLY

OF

LABOR

D E S I R A B I L I T Y OF

INCOME

A central point, then, in the problem of choice upon which the supply of labor ultimately depends is the desirability of additions to current consumption. If we could assume that such additions never decline in appeal to the recipient, it would follow that the reward received for the sixth hour at two dollars per hour would always be more desirable than that received for the fifth hour at one dollar per hour; and this would lead to the conclusion that an increase of wages, if great enough, could always be depended on to offset the rising cost of additional labor. No one, however, believes this to be true of income, as a matter of theory, and experience bears out the conclusion of theory. How else shall we explain the common practice of increasing wages by fifty per cent or more for overtime work? It seems hardly credible that an extra hour is half again as burdensome as the one which immediately preceded it. One of the reasons must be that something makes the extra income less highly prized. This is not the only difficulty, however. The extra income is not added to what the worker had before; it is added to a larger "base," namely, what he can earn without working any more hours. It is only when the higher wage applies to the extra hours alone that we can think of the wage paid for those hours as being added to what the laborer received previously. There is therefore a second factor working to reduce the utility of what can be earned by contributing more to the supply of labor when the rate of wages rises. The significance of this combination of factors depends, of course, upon the rate at which the desirability of additions to income declines, i.e., the extent to which the facts of a particular situation diverge from the supposed case where there was no decline at all. The following figures illustrate the effect of a less rapid decline in the utility of income:

166

VALUE AND INCOME INCREMENTS

OF

SATISFACTION HOURS

First hour Second hour Third hour Fourth hour Fifth hour

OF

Slowly Diminishing Appeal @gi.oo @gl.50 per hour per hour ΙΟΟ

98 96 94

92

149 14s 140

136

131

FROM

SUCCESSIVE

WORK Rapidly Diminishing Appeal @ SI.00 @ GL.50 per hour per hour IOO

90 80 70

60

I4S 125 IOO

80

55

I t is evident that the increment of satisfaction obtained from the fifth hour's work is less when wages are high than when they are low, where the utility of income diminishes rapidly. It will therefore be insufficient to induce any laborer to work a fifth hour who was unwilling to do so at the lower wage. When the utility of income declines slowly, however, the addition to "psychic income" obtained from both the fifth and the sixth hour's work is considerably greater at the higher wage, and therefore gives promise of being able to offset the greater satisfaction cost which these hours involve. The declining desirability of increments of income is a matter about which it is difficult to generalize, but there are no grounds for believing that it is always slow at all stages, still less that it always behaves in the same way. The truth of this is apparent when we distinguish the factors which affect it in a general way, i.e., apart from the peculiarities of individuals. Foremost among these is the variety and novelty of the things upon which the recipient of income can spend it. In a society where the consumer's money can buy a wide variety of tempting things, he is less likely to lose interest in having more of it than he would be if his opportunities consisted largely in buying still more of a narrow range of simple necessaries. Desire thrives on variety. The frequent introduction of novelties, especially where the ingenious wiles of advertising conspire to create "interest," reenforces variety with the lure of mild adventure.

THE SUPPLY OF LABOR

167

I t must be remembered, of course, t h a t the purchase of novelties does not always mean additional expenditure; it may only replace something else. Great as the appeal of the motor car has been for the American workman, it has meant in no small part the paring down of expenditures in many other directions — clothing, food, house-room, and the like —• quality being sacrificed, if not quantity. Where this is all t h a t takes place, the sustaining effect of new forms of consumption is considerably weakened. On the other hand, novelty in the sense of new styles and " m o d e l s " speeds up obsolescence and thus strengthens the consumer's desire for more income, just as if some factor had intervened to make his clothes or car wear out faster. There are two types of consumption, moreover, whose appeal fades less rapidly than t h a t of most others. Their prevalence in a given society, therefore, tends to add another sustaining factor to the desirability of income in general. These are consumption motivated to a considerable extent by some element of prestige attaching to it, and what has been called "vicarious consumption." T h e first is seldom absent from any community, but its role varies in importance. A leisure class, by giving a tone of gentility or romance to a commodity or service, may do a good deal to introduce it into the want-scheme of the masses and to keep it there. Such a class is thus an important agent in the " creation" of w a n t s — t o a large extent additional wants. 1 T h e second — consumption by others than the receiver of the income —- is more important in the case of those whose labor yields a high wage, but it is found in all classes. Even the poor spend part of their incomes on children and other dependents — often a large part. Among the well-to-do this may take the form of saving, i.e., consumption is deferred as well as vicarious. T h e satisfaction which a man derives from making provision for others in either of these ways may decline extraordinarily little as he obtains more of it. ι Hawtrey, The Economic

Problem,

pp. 2 2 6 - 7 .

168

VALUE AND INCOME

Of quite as great, if not greater, importance is another factor which is seldom mentioned in this connection — accessibility. I t does not do the laborer much good to have extra money in his pocket, if there are barriers which prevent or hinder him from spending it on anything but a limited number of things. Such barriers may be economic or non-economic. The latter range all the way from sumptuary legislation, designed to keep the workman " i n his place" and out of mischief, to bonds of custom, strong as they are subtle, which relegate certain forms of consumption to the category of things that are " n o t done" by his class. The democratic tradition, which makes it almost a civic virtue to "ape one's betters," has undoubtedly helped to sustain the workers' interest in adding to their incomes. The economic barriers are much more important and work in a very different way. What a man can buy with a given addition to his income does not depend entirely, or even chiefly, upon what is produced or known in the community where he lives. I t is largely a question of what he must pay for them. Hence it may well happen that, though there are many things which he would like even more than his present "marginal" purchases, there are none which he could buy with his extra wages that have any such attraction. But the situation may be much changed, if he can increase his income by a considerably larger amount. Doubling a man's wages does not merely enable him to consume a little more of the things he formerly purchased, plus a few new items still lower in his want-scale. I t raises his whole way of living to a different plane. I t is not an extra evening at the "movies," an extra gadget for the car; it is a larger house, a more commodious life in every respect, that he gains — almost all of them things that have a stronger appeal. This aspect of the matter seems to make it incorrect to regard the desirability of income as decreasing steadily with every added unit or even by ever-descending "steps." A fifty-per-cent increase in wages may mean more than five

T H E SUPPLY OF LABOR

169

times as much as a ten-per-cent increase, not less. There has never, it seems to me, been any basis for believing otherwise, except a fancied analogy with the diminishing utility of particular goods, backed up, perhaps, by the idea of a scale or hierarchy of wants. But we do not consume income as such; the comparison and satisfaction of wants become factors in its desirability only through the process of spending, and in this certain objective elements play a great part — the hard facts of cost of production and cost of acquisition. Two consequences flow from this peculiarity of income. In the first place, it is possible that a moderate increase in wages may lead to a falling off in the supply of labor, the workers preferring leisure to such increases in consumption as they could get by continuing at the old rate, while a larger increase would have a very different effect. It is this which explains the apparent anomaly of a situation where the hours of labor are decreasing over the years, as wages rise, while there is no such drop in working hours as we pass from the lowest paid groups to the highest. In the second place, increases in wages may have a different effect after a period of time than they had at first. The beneficiaries have to learn how to use their new opportunities. In the foregoing reasoning about the influence of wages it has been tacitly assumed that the laborers not only receive but retain the sums in question. This, of course, is almost never entirely true, and there are often considerable departures from it. The nominal wage may be reduced by tribute or taxation. In the first case it is only what is left that can be regarded as serving as an incentive to the worker, and the influence of increased earnings may be largely or even wholly neutralized in this way. It makes no difference whether the tribute is paid to a foreign country or to a purely parasitic class at home. The laborer receives nothing in return. Of taxes, however, this can not be said; they are spent for public goods and services of which the laborers are beneficiaries in some degree. But

170

VALUE AND

INCOME

these goods m a y not be the ones the laborers w a n t most; they m a y be w h a t a small minority thinks they w a n t or ought to have. T h e effect is then similar to the case referred to above, where the spending of money on certain goods is hindered b y barriers of a social character. T o all these complications must be added the vagueness of the whole system of interests and preferences which underlies human a c t i v i t y . A s we saw in the first chapter, there is no clear-cut scale of wants but much overlapping and indifference. I t is an error, therefore, to think of the margin of a d j u s t m e n t between the cost of labor and its reward as the result of a nice weighing of the desirability of added income, definite for a n y given individual when the other elements — the costs — t h a t enter into the comparison are known. T h e result in a particular case is often much affected b y more or less fortuitous circumstances. THE

COSTS

OF

LABOR

T h i s leads us to the second aspect of our problem — the relation between the cost involved in labor and changes in the supply of labor. T h i s is most conveniently analyzed according to the three w a y s in which supply varies. First the effect of lengthening the working d a y . W h a t is sometimes called the " c u r v e of f a t i g u e " is b y no means a simple matter. I t does not rise steadily throughout the d a y , b u t m a y decline, often quite sharply, after periods of rest. Hence it m a y be possible to increase the number of hours worked without raising the level of fatigue, i.e., w i t h o u t leaving the worker more exhausted or less able to resume work fully refreshed the next morning. T h i s is true both of mental and physical work, b u t especially of the latter. N o r is the " c u r v e " the same for all industries or in all environments. Swinging a s c y t h e does not tire at the same rate as riding a mowing machine; and work in extreme heat or humidity m a y result in great depletion of energy before the worker in more favorable surroundings begins to feel more than moderate fatigue.

THE SUPPLY OF LABOR

171

If we take a somewhat longer basis of reckoning, say a month or a year, the problem is even more complex. Working an extra day per month or an extra week per year does not necessarily involve a higher cost, in terms of fatigue, for the extra time than for the remainder, especially if there are adequate intervals for rest in both cases. If there is any increase in cost per unit as the supply of labor increases in this way, it is of a different order, namely, the loss of leisure and its opportunities. This aspect of satisfaction cost is also a pretty complicated matter. The desirability of leisure depends upon a number of things beside the pleasures of inactivity, real as these may be for some persons or under some circumstances. To a large extent it arises from the necessity of having leisure if one is to engage in certain forms of activity or indulge in certain forms of consumption. The business man may value his Saturday afternoons primarily in terms of golf; and Mr. Ford has lately pointed out the connection between the motor car industry and the leisure of potential buyers. In this latter respect, of course, the desire for leisure in which to consume things may clash with the necessity of work in order to provide ways and means; but where a man is already earning enough to buy certain things, the fact that the consumption of them requires time will make it all the less likely that a given increase of wages will induce him to sacrifice any more of his leisure. Of almost equal importance is the value of leisure as a mark of status. This may be general or special, i.e., it may stamp certain workers as particularly fortunate or it may apply to all. Thus the vacation period which is now conventional in some branches of industry, and almost universal for some income groups, is often prized quite as much for this reason,, at least by some of the beneficiaries, as for any other. It is said that in the more prosperous days of the past miners often took pride in being able to spend more time above ground than their fellows — it

172

VALUE A N D INCOME

marked them as strong and skillful experts. 1 And even when leisure is not the prerogative of any particular group of workers, it may be cherished as the badge of victory over a supposedly hostile employing class, especially if it was won as the result of a heavy struggle. Somewhat similar is the influence of religious sanctions. Where the desire for leisure derives from forces such as these, it is likely to be clung to with special tenacity. Giving it up — working longer hours — involves a heavy cost beyond a certain point. This element in satisfaction cost — leisure lost — does not increase very regularly as the supply of labor is increased. A n hour's work after lunch " s p o i l s " the afternoon for many purposes, and a man may be almost as reluctant to give it up as to work the whole afternoon. This is why a half-holiday is often more desired than an equivalent shortening of each day's working time. 2 Where the extra time added to the day means such late arrival home that the evening is " a s good as gone," the halfholiday may not be so popular. Rapid and economical means of transportation greatly reduce the importance of this factor. Finally it is to be noted that not all labor is regarded by those who perform it as intrinsically undesirable. It may be mentally interesting or physically exhilarating — within limits. Hence the resistance to performing it may rise quite slowly at first and then stiffen sharply. Where this turning point shall be depends not a little upon habit. It is much harder to work Saturday afternoon, if you have never done it. Even the importance of leisure is affected in this way. Habit thus acts as a powerful ally to status in causing the " c o s t c u r v e " for labor to rise sharply after a certain amount has been supplied. ι Houser, What the Employer Thinks, p. 143. 2 Employers who have introduced the five-day week for summer work by beginning operations earlier in the morning have often found that the employees preferred not to return to the old schedule of hours in the winter. Cf. National Industrial Conference Board, The Five Day Week in Industry, p. 53.

THE SUPPLY OF LABOR

173

If the rising cost of labor were in the nature of a sharply defined force, equilibrium might be reached at many different points — as many, perhaps, as there were individuals in the community. T o fit into the considerable degree of regimentation which productive efficiency requires, would therefore involve a good deal of hardship for many people, and probably few could hope to attain the really ideal adjustment. Fortunately there is a good deal of leeway in this respect, to say nothing of the income side of the comparison, to which reference was made above. Some sort of consensus of opinion is arrived at by a slow and only half rationalized process of give-and-take, and the minority conforms without undue violence being done to anyone's feelings. This probably makes it easier for the owners of capital, whose interest is against the shorter day, as we have seen,1 to resist sentiment among the laborers in favor of this policy. Increasing the labor supply by delaying the age of retirement raises another problem. It is probable that the physical burdens of labor increase, in most cases, after the worker has passed a certain age — not the same age for everyone, of course — and that the increase continues as the years go by. I t might seem, therefore, that the problem of obtaining more labor in this way was not greatly different from that of lengthening the day or week — a higher and higher cost which must be offset by greater and greater desirability of income increments. Such reasoning can not be pushed very far, however; for it must be remembered that these costs must be anticipated, this being the only sense in which work in old age can be regarded as optional and therefore potentially subject to the influence of wage rates. Such anticipation can rarely be anything but vague. N o doubt the worker has some realization of what the years will bring in the way of lowered resistance to fatigue, but it is little short of fantastic to believe that he visualizes this prospect as a fairly definite series of inl See above, p. 118.

174

VALUE AND INCOME

creasing magnitudes to be weighed against the pleasures of current consumption. T h e importance of the other aspect of cost — the loss of leisure — is a different matter. I t is true t h a t the retired business man often finds " t i m e hanging heavy on his hands," especially if his training has not provided him with any considerable range of interests; and it is no less true t h a t old age is often a period when those forms of activity and consumption with which younger men fill their leisure are less appreciated or less practical. B u t none of these difficulties affect the result unless they are realized during the years when planning for retirement takes place. And they seldom are. M o s t of us, fortunately, are invincible optimists. T h e sad fact t h a t many of these expectations meet with disappointment is irrelevant. W h a t does m a t t e r is t h a t if men w a n t leisure in order to do these things, their desire for it and unwillingness to give it up are not rendered less keen by the necessity of preparing for it beforehand. Whether such reluctance grows greater as retirem e n t is more and more delayed, i.e., as more labor is contributed to the supply, is p r e t t y doubtful. T h e relation between the rate of wages and the age of beginning work is even more problematical. So far as it is a m a t t e r for the individual concerned to decide, there would seem to be little or no reason for believing t h a t even the fatigue or pain aspect of cost increases with successive increments of supply, i.e., as work is begun a t an earlier and earlier age. T h e prospective worker has no basis for comparing the irksomeness of working during his eighteenth year and during his nineteenth. 1 I t is through others, through those with whom the decision in these matters is more likely to rest — parents, public officials, citizens in general — t h a t increased resistance to expanding the labor I The idea that a young man may choose whether to work or not during his early years is not so far-fetched as it may seem. Cases of borrowing to go through college or university are common enough, and so are those of young people who have inherited enough means to permit such a choice. In either case, subsequent consumption is sacrificed in order to have leisure now.

T H E SUPPLY OF LABOR

175

supply in this way is likely to manifest itself. They are the ones whose sensibilities are more and more touched as the age of beginning work is lowered. T h a t this is a powerful factor, in some communities at least, would seem to be shown by the frequency with which the period of compulsory schooling is extended as the world grows more prosperous. In view of these many conflicting factors, it seems quite impossible to lay down any general principle concerning the relation between wages and the supply of labor, even for a given society over a fairly short period. Small changes in wages do not necessarily affect supply in the same direction as large ones, and the complex elements that enter into the cost of labor are not the same for all income groups in a society or for the same group at different times. So much depends upon what has gone before — interests, tradition, status. Moreover, the different channels of supply do not always react in the same way to a given wage change. There may be some offsetting. The generous increase which enables a man to achieve a higher scale of living, and thus tempts him to work harder, may also bring social ambitions for his family which mean a smaller, not a larger, contribution to the labor supply from them; and the great gains obtained by modern methods of "speeding u p " may hold the worker to his present hours per day or week only because he knows that at fifty he must look forward to being "scrapped." And finally it is not safe to assume that a drop in wages will have just the opposite effect from a rise. Things that were once sought with only mild zeal may be clung to strenuously after they have been enjoyed for a while. T H E LESSON OF EXPERIENCE

Does the lesson of experience throw any light on this inconclusiveness? Of course it is always difficult to interpret such complex developments as modern industrial history presents, but I think the attempt is worth while here. In

176

VALUE A N D INCOME

general the evidence seems to indicate t h a t a moderate upward trend of wages leads either to no change in the working d a y or to a shortening of it, the latter, however, only in those cases where there will be no decline in total earnings — preferably some increase 1 — as a result. Certainly the movement in f a v o r of the shorter d a y , the shorter week, and longer vacations has been gaining ground during the v e r y period which has witnessed an almost continuous increase in the returns to labor. T h i s may, indeed, be due to changes in taste over the years, as Marshall believed, 2 and not to the working of a n y general principle. If all the new factors entering into the situation were such as to lead us to expect the trend observed, w e might well conclude that there was no ground for attributing it to the interaction of cost and reward as static forces. T h e r e are m a n y new developments, however, of which this can not be said. N o t h i n g is more striking in the countries enjoying the greatest industrial progress than the growth of advertising, and this, as w e have seen, is a powerful agent in sustaining the desirability of income and thus opposing the tendency to work shorter hours when higher wages make it possible to live as well without working so hard. T h e achievements of mass-production in enlarging the range of things the laborer can b u y with his income are notorious — again a factor opposing the choice of leisure. T h e spread of the democratic spirit is another characteristic of these years which has helped to make increases of income more desirable. I t is hard, therefore, to believe t h a t this whole trend toward shorter hours can be "explained a w a y , " leaving intact the proposition that higher wages normally attract an increased supply of labor into the market. T o me it seems rather to strengthen the contrary view, so far as moderate increases in wages are concerned. 3 1 Cf. Knight, Risk, Uncertainty, and Profit, p. 117. 2 Principles, pp. 680-81. 3 For further evidence along this line see an interesting note by H. La Rue Frain in the Quarterly Journal of Economics for M a y , 1929, p. 544. I t must

THE SUPPLY OF LABOR

177

Evidence as to the effect of wages on the length of the working life is even less conclusive. There seems to be little evidence that higher earnings are bringing an y earlier retirement; if anything, it is the other way, especially among those receiving the higher earnings. The gains in this direction have not been enough, however, to offset the declines elsewhere —• the total labor supply per capita is decreasing. At the other end of life the trend is quite different. The age of beginning work is increasing where it is changing at all. Much of this, to be sure, is due to the work of comparatively small groups and to a growing realization of the importance of adequate training, both to the individual and to society, but I think we must ascribe some of it to a pretty general consensus of preference. I t is one of the achievements of our prosperity. 1 In all the foregoing the efficiency of labor has been treated as an independent factor, unaffected by changes in the hours of labor or any of the other factors considered. But of course no one believes this to be strictly true. Hence we can not conclude our analysis of the relation between wages and the effective supply of labor without a brief reference to this point. Evidence is certainly not lacking that a shortening of the working day or week may be conducive to efficiency; and there is a widespread belief, though proof is seldom forthcoming, that vacations and holidays have a similar tendency. 2 On the other hand, there have been plenty of cases where shorter hours brought no gains in efficiency.3 Some of these failures, no be admitted, however, that not all demands for shorter hours are open to this interpretation. Some are only disguised demands for higher wages, and some are inspired by fear that there will not be work enough to go round. 1 Here again we must note the presence of other motives, notably the struggle to relieve unemployment among adults, in some countries. 2 The frequently noted post-holiday slump in efficiency is not to be regarded as opposed to this view. What matters is not the worker's " m o r n i n g - a f t e r " output but the effect on his work in the longer run. 3 This does not necessarily involve increased expenses of production, even when wages are not lowered. There may be other economies obtainable. C f . National Industrial Conference Board, The Five Day Week in Industry, pp. 44-45·

i78

VALUE AND INCOME

doubt, were due to unskillful management, especially in the way of measures designed to secure the cooperation of the employees, but there seems to be no reason for believing that they all were. But whether the tendency be regarded as general or only sporadic, its operation must obviously be limited. We can hardly suppose that no reduction of hours, however drastic, would reduce the total output, in the absence of inventions and improvement not only unknown but perhaps undreamed of. I t is much more likely that there is an optimum adjustment, which not all industries have reached, and which only lengthy experiment will discover. The influence of the age of beginning work is also obscure. I t seems clear enough that labor at a very early age, especially if the work is not properly adjusted to the physical development of the worker, may result in some impairment of health and thus of later efficiency. Loss may also result from the curtailment of training which such early entry into industry often involves — not only general or cultural but also specific industrial education. Here again it is doubtful if there is any general tendency at work. After a certain age, which varies considerably from individual to individual and from race to race, a given occupation is no more likely to cause injury to health than it will ever be later; and it is already becoming a serious question whether the training now given to many of the older boys and girls forced into school by our restrictive legislation is of any appreciable value to them, at least so far as their later efficiency as workers is concerned. The importance of lost training depends upon the kind of training lost. The same may be said of youth's lost leisure. If the working of young people during these years is to be opposed, it must be on other grounds than efficiency. Within limits, however, it can not be denied that early beginning of work has an unfavorable effect upon general efficiency. Efficiency is also affected by earnings. I t has long been

THE SUPPLY OF LABOR

179

realized that increases and improvements in the worker's food, clothing, and shelter are a factor in raising his physical and mental powers, up to a certain point; and it may be that the possibilities in this respect are greater than seems to be the case at first glance. The vigor and alertness of the American workman may derive in no small measure from our high standard of living. The effects of higher earnings are not all in the same direction, however; the things on which the workers spend their additional income may have an adverse effect upon their efficiency, as British experience with the liquor problem during the late war showed only too well. Such increases in efficiency are, in a sense, equivalent to an increase in the supply of labor per capita. They have much the same effect upon the average output of the population as a longer working day or any of the other factors in the labor supply which we have been considering. All this greatly complicates the problem of wages, rent, and interest, as Marshall pointed out. 1 It is to be noted, however, that an increase in efficiency does not always mean a change in the proportion between labor and the other factors of production. The efficient worker does not necessarily require more tools or land. Hence a rise in wages may increase the supply of labor in this indirect sense without setting any counteracting forces in motion. I Principles, p. 510.

CHAPrER THE N U M B E R OF

XII LABORERS

T H E NUMBER OF IDLE

HE influence of wage changes upon the number of laborers may be considered from two points of view: their effect upon the proportion of able-bodied persons who do no work or work only part of the time, and their effect upon the growth of population. The factors at work in the two cases are very different. The first is very closely akin to the problem discussed in the preceding chapter, since it has to do with the amount of work obtained from a given number of potential workers. I shall therefore begin with that. Broadly speaking, the non-working class is made up of two groups — those who are supported by the labor of others, and those who live on "funded incomes." The latter present no special problem. Their reasons for working a little, if wages increase, would be of the same sort as those which induce other men to work more under the same circumstances — the desirability of the additional income as compared with the cost of obtaining it. The other group deserves special attention. To some extent the factors underlying this channel of supply are much the same as those which govern the age of beginning work — family affection, social prestige, and the like. Loss of status, however, plays a more important part. The man whose wife does all her own housework, still more the one whose wife contributes to the family income by work outside the home, tends to lose caste in many communities. This means that there is a high degree of resistance to the increase of labor in this way, after a certain point. It is very doubtful whether this resistance shows any

T

180

T H E N U M B E R OF LABORERS

181

gradations for indrviduals, whether it is greater, for example, against a second day's work per week than it is against the first. But even if it is not, there are so manydifferences among individuals and classes in this respect that it is probably safe to assume that the general or market trend of cost is upward — that it requires a stronger and stronger inducement to obtain more labor in this way. Not much light on the question is afforded by experience. It is true that the great development of factory production has brought large numbers into the realm of industry who formerly were seldom counted in it — wives and daughters, especially; and there has been much lament over the inroads of a dismal kitchenette-and-can-opener economy among the urban dwellers of this country, as work outside the home increased. It must be remembered, however, that not all, perhaps no great part, of this can be called a new addition to the labor supply. Some of these newcomers into industry, no doubt, formerly spent a certain share of their time doing nothing or some genteel equivalent; but for most of them factory employment means only a change from one kind of work to another. They hire others — largely other factory workers —· to do countless tasks that formerly fell to their lot in the home. Moreover, such additions to the labor supply as are to be credited to this change in our habits are probably more than offset by the many reductions — small individually but large in the aggregate — which have been made in the duties of the average housewife. T H E GROWTH OF POPULATION

The doctrine that any rise of wages above the minimum of subsistence will in the long run cause an increase in population sufficient to bring wages back to that meagre level, in other words, that there is a kind of long-run "supply price" to which the supply of labor adjusts itself in any given state of the arts, has been definitely abandoned. Whatever may have been its validity in the day

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of its general acceptance, it no longer fits the facts. T h e attempt to find such a deep-lying secular governor of the labor supply has not, however, been given up entirely. T h e reasoning has simply taken a new turn. Subsistence has been replaced by the "standard of living" as the ultimate determinant of wages. According to this view, the population will not be maintained unless wages are high enough to provide for " t h e number of desires which, in the average person of the class in question, take precedence over that group of desires which result in the multiplication of numbers." 1 This proposition, it may be admitted, is almost as unassailable as that which underlay the subsistence theory — that men can not live and raise families unless they get enough food and shelter to sustain life. In one sense, however, it is much weaker than the latter. T h a t there is a minimum of subsistence does not have to be assumed — it is sufficiently demonstrated by grim experience of the race; but the existence of a standard of living, in the sense required to make the new doctrine fit the facts of modern history much better than the old one would, is not so demonstrated. T o a considerable and, I think, nullifying degree it rests upon pure assumption. T o make this clear it will be necessary to examine more closely the implications of this idea of a standard. There are, in general, three groups of "desires" upon which men spend their incomes. These are (i) consumer's goods, including the ministrations of servants of all kinds, (2) leisure, including that of their wives, children, and other dependents or the beneficiaries of their charity, (3) the provision to be made for their descendants or some of the other ends for which men accumulate fortunes. Now under all these heads some or all classes of society in the western world have enjoyed for several generations considerably more than can be regarded as physically necessary. And there is no tendency to a decline. T o account for this situi Carver, Principles of National Economy, p. 499.

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ation in terms of the standard-of-living doctrine it is necessary to show t h a t during this period men have considered their actual scales of living in these several respects essential to decent and tolerable existence, or to demonstrate t h a t we must assume this in order to explain the facts. A s for the second point, there is nothing whatever, either in the nature of the case or in w h a t we know about the elements in it, to require this assumption. I t is just as adequate an explanation to suppose t h a t men h a v e had a " f a m i l y s t a n d a r d " — d e f i n i t e ideas as to w h a t they must h a v e in the w a y of family l i f e — a n d t h a t their " standards " of living have simply been the resultants of these views and their earning power. T h i s , of course, means t h a t men do p u t something ahead of the satisfaction of their " d o m e s tic instincts," b u t not necessarily something which has to be purchased with economic income. If either of the t w o standards, then, is to be preferred to the other, it must be because there are independent reasons for believing in its existence. Are there any such reasons? So far as consumers' goods are concerned, it m a y be conceded t h a t a considerable share of those now enjoyed are deemed well-nigh indispensable b y the people concerned. Unless there is a fair prospect of being able to provide them, it seems probable t h a t reasonably foresighted men will hesitate to assume the responsibilities of marriage. B u t this is not the point. T h e real question is whether practically all the things t h a t have been entering into consumption during the last generation or t w o can properly be included in this category — not only the amount of food, clothing, shelter, personal service, entertainment, and so on, b u t the quality of them. I can not b u t feel skeptical. F o r the second group of things depending on the possession of income — leisure of one sort or another — the existence of standards roughly corresponding to w h a t is nowadays in f a c t enjoyed seems even more doubtful. I t would be a mistake to deny t h a t some present-day leisure is v e r y

VALUE AND INCOME highly prized, so highly that it may fairly be included in the standard of living. But not all of it is. Even where the desire for it has its roots deep in the past and it is prized as a mark of status, it may not take precedence over the "domestic instincts," for these too are no recent addition to the wants of man. Is it not more reasonable to suppose that men give "hostages to fortune" with equal readiness, despite changes in wages which entail some changes in the leisure they can enjoy? 1 It is difficult to deal in general terms with the third aspect of the utilization of income — saving for posterity. 2 For the less fortunate members of the community it is so unimportant anyway that it is hardly worth while to raise the question whether they have any minimum requirements in respect of it. If they leave anything to those who follow them, it is more likely to be by accident than by design. As we go up the scale of earnings, however, this becomes less and less true. Those whose labor yields them better returns do set a good deal of store upon accumulating some little patrimony for their children, and many of them have fairly definite ideas as to how much it ought to be. Of such people it may be true that ability to make provision for this — usually by means of insurance — is as necessary a condition of marriage as ability to maintain a given standard of current expenditure. How numerous they are, and how important relatively, it is impossible to say with any confidence, but I am inclined to think that their number is increasing. There appear, then, to be serious reasons for doubting whether the "number of desires" which modern man regards as his "standard of living" comes very near equalling his actual levels of consumption, leisure, and saving. Even if it approaches them in some respects, it falls considerably short as a whole. This means, on the one hand, 1 I t is true, as we have seen, that the individual may be hampered in changing his habits in this respect, but the group is not, and that is what counts. 2 Saving for old age, being a necessary concomitant of indulgence in one form of leisure, is sufficiently covered by what has been said under the latter head.

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that there is no little leeway within which a fall in wages would be " a b s o r b e d " without any effect upon the growth of population; on the other, that the present size of the population and consequent level of wages are not the result of control by such standards of living as there are. What has kept population in check is something far more complex and mysterious, which does not reveal itself to mere economic analysis. It should not be inferred from the foregoing that I mean to deny the existence of any individuals whose standards are such that they could not cope with a decline of wages except by sacrificing their ambition for a home and family. There may be some in every community, just as there may be others — perhaps many — for whom such an ambition is more fixed, more in the nature of a " s t a n d a r d , " than any other. B u t the former are not likely to be numerous enough, under most circumstances, to affect the trend of wages. It will be recalled that it is a corollary of certain aspects of investment that wages move downward by "steps," rather than by continuous gradations, as population increases in proportion to savings. 1 This means that only large changes in the population, as a rule, affect wages. Consequently it is more correct to say of any small fraction of the population, such as the one here in question ordinarily is, that they adjust themselves to the wage situation, without having any effect upon it. Nor do I maintain that there are no changes in wages which would affect the population. Since standards of living do exist — well above the subsistence level, though below the earnings level — it follows that large decreases in wages would be more than the general run of men could absorb. Their standards would be imperiled. Smaller declines than this, moreover, if suffered in quick succession, i.e., too rapidly to induce a downward movement of the standard itself, as men became accustomed to them, would have a like effect. B u t the kind of drop that men I See above, p. 123.

VALUE AND INCOME ordinarily have to deal with, say ten or fifteen per cent, would only result in a pruning of non-essentials, without reacting adversely upon numbers. It is equally unlikely that increases in wages would stimulate the growth of population, even if the increases were large ones. T h e possibility that standards may change in the course of time, to which I have just referred, raises difficulties with respect to the standard-of-living doctrine of a very different order. This instability of the standard, at least over considerable periods of time, has long been recognized, so far as consumption is concerned. 1 It is no less true, I think, of standards of leisure and saving. T h e history of the last hundred years has been marked quite as much by an increasing emphasis on the desirability of more freedom from toil, so far as the mass of men is concerned, as by expanding ideals of what kinds and quantities of consumers' goods are necessary for a satisfactory existence. T h e growth of leisure-requiring forms of consumption tends to accentuate this tendency. 2 Now the significance of any factor which produces its effects only in the course of time is impaired if it does not remain stable long enough to bring about the results expected of it as a static force. A governing factor must not be subject to change unless it works instantaneously. This is not to say, of course, that any instability robs such a governor of all its importance. T h e point is that instability diminishes that importance and, if great enough, may largely neutralize it. This is the situation here. T h e growth of population is only slowly responsive to the difficulty or ease of earning a living, when affected at all by it. In "progressive" minded societies the standard may change with comparative rapidity, especially upward. 1 Ricardo, Principles, ch. v ; Carver, Distribution of Wealth, p. 178; Knight, Risk, Uncertainty, and Profit, p. 154. 2 It may be that rising standards of saving for posterity have been a potent factor in the "race suicide" of the well-to-do in recent times. T o a considerable extent, however, the classes thus affected have not been dependent upon income from labor.

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Where this is the case the standard can not be said to govern the growth of population in any significant degree. B u t this is not all. We can not be sure of the direction in which the more or less slowly changing standard will move. If it were always upward, as has been the fortunate experience of our own country during most of its history, we could regard the standard prevailing at any given time as setting a kind of maximum to the future growth of the population, if not a more precise limit. T h e movement is not always upward, however; men can become reconciled to adversity as well as attached to things hitherto unknown. T h e lower the existing standard, the less probable such a decline. It is easier to give up luxuries, even conventional ones, than to cut down on some, at least, of the essentials. When the standard approaches the literal minimum of subsistence, nothing can be expected except stability or a change for the better. A n upward movement of the standard, on the other hand, is favored by everything which makes it easier for men to taste, and thus learn to like, the delights of better living — absence of class prerogatives, of sumptuary laws, of deadening conformity to the ways of the fathers. Our conclusion, then, is that although we can not regard the rate of wages as entirely without influence upon the growth of population, we must deny it any such steady and normal influence as is implied in the standard-of-living doctrine. It is a question of the limitations on the various means whereby men adapt themselves to changes in their earning power without sacrificing either the things they deem essential, or their hopes of domestic happiness. In exceptional circumstances these means may not suffice, but that is not the rule. T o make the standard of living a general governor of wages we have to assume too much. 1 I I pass over the " cost of p r o d u c t i o n " mode of stating the standard-of-living doctrine, which is sometimes presented as a hard " s c i e n t i f i c " v i e w of the m a t t e r . I t not only involves an improper use of the word " c o s t " b u t other logical difficulties as well, as Professor D a v e n p o r t has pointed o u t . — Quarterly Journal of Economics, x i x i i i , pp. 267-268.

CHAPTER

XIII

T H E S U P P L Y OF L A N D A N D SAVINGS THE SUPPLY OF LAND N discussing rent (Chapter V I ) it was pointed out that land is no more to be regarded as an inflexible element in the economic situation than labor or savings. T h e only reason for assuming it to be so is that this is the only w a y to attack the necessary preliminary problem of its market earning power. T h e case of land, therefore, raises a question analogous to the one considered in the preceding chapters, namely, whether the income accruing to this factor has any effect upon the supply of it, thereby causing the long-run level of this income to be the result of interacting forces of supply and demand. As a general thing this has not been the position taken by economic theorists. Though admitting that some land is indeed " m a d e " in a pretty literal sense, they have held that these additions to the supply are far too small, compared to the total, to have anything but an entirely negligible effect upon the relation between land and the other factors of production, and hence upon rent. Land is therefore said to differ from labor and savings in having no " s u p p l y c u r v e " or " s u p p l y price," even in the long run. T h i s reasoning, it seems to me, involves an erroneous idea concerning the meaning of a change in the supply of land. E v e n if we concede that the " m a k i n g " of land, in the sense these writers have in mind, is of very minor importance — and I think they underrate it somewhat — there remain other valid reasons for regarding the supply of land as flexible to a considerable degree. W h a t is significant in determining the rent of land is the amount actually ready to cooperate with labor in productive pro-

I

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cesses or to cater more directly to man's wants as a consumers' good. Land to which access is still barred in some way, however great the natural powers it may possess, is no more a factor in a given situation than a pound of radium which might be known to lie on the floor of the polar sea. 1 There are plenty of cases where land, especially as destined for particular purposes, is in precisely this position. Furthermore, the supply of land, in the sense of efficient means to an end, depends upon quality as well as quantity, and quality is also something which can be modified.2 Indeed, it is not too much to say, with Professor Knight, that historically speaking land has been produced as much as anything else.3 T h e extent to which these considerations would affect any given situation is partly a relative matter. If land is wanted largely for such things as wheat or grapes, the obstacles to the taking up of land as society grows will be greater than they would be if products less dependent upon a careful preparation of the soil were in demand; and the physical characteristics of the area at a people's disposal will also make a good deal of difference. T h e problems of a nomadic group will not be the same, in these respects, as those of a pastoral or agricultural one. Another factor is the nature of the prevailing technique of production. T h e Indian dropping his kernels of maize between the trees he has killed by burning their bark finds it a comparatively simple matter to "open up new land." Now what is the effect of an increase in rents upon these sources of increased supply — the " m a k i n g " and the permanent preparation of land ? It will be helpful to begin 1 E x c e p t as an element in " s p e c u l a t i v e v a l u e s . " 2 T h i s improving of quality b y means of investment is not to be confused w i t h more intensive cultivation. T h e latter is a matter of greater recurring expenditures. 3 K n i g h t , Risk, Uncertainty, and Profit, p. 160. Sidgwick (Principles of Political Economy, B k . I I , ch. vii) gives adequate recognition t o the importance of preparing land for use, b u t his o b j e c t is simply to show the impossibility of regarding rent as a p a y m e n t for the use of the " i n d e s t r u c t i b l e p o w e r s " alone of t h e soil. C f . also M a r s h a l l , Principles, p. 42a.

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by distinguishing two different sets of factors tending to raise rents: those which do not, per se, bring about a concomitant upward movement of interest rates, and those which do have this effect. In the former category are (1) an increased demand for products requiring the use of land, and (2) a decrease in the hitherto available supply of land, as a result of erosion, faulty or improvident methods of utilization, and so on; in the second, the chief case is an increase in the population. An increase in rents resulting from causes of the first type will make feasible certain additions to the supply of land which would not have paid expenses previously. These are of two sorts. On the one hand are those cases where resources of a high order have been left idle because the heavy investment, and therefore the heavy overhead charges, required in order to open them up for use exceeded the income to be expected from even such good land under prevailing conditions. Of this nature are many irrigation· projects. The land to be made available by them is indeed of high fertility, but the cost of providing the necessary water is excessive — a point sometimes passed over for political reasons. There may also be some lands, on the other hand, which have remained out of use, despite a lower cost of preparation than is required for those just, referred to, because their natural qualities are so inferior that they too would not yield enough income to pay the overhead charges required. The result, then, of an increase in rents tends, as long as there are any lands still undeveloped or any improvements in quality still unmade, to be an increase in the supply of land, which may, under certain conditions, be large enough to cause some reversal of the upward movement of rents. Where an increase in rents is the result of causes which tend to raise the rate of interest as well, it is obvious that there will be an additional obstacle to an increase in the supply of land. Interest charges on the investment needed in order to bring land of either of the two kinds just de-

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scribed into use will be proportionately higher. A given rise in rents will therefore be less likely to engender a countervailing change in the land supply. I t should be noted, moreover, t h a t some increase in the rate of interest may be encountered in the case discussed in the preceding paragraph, not as a result of the factors responsible for the rise in rents, b u t because of the increased demand for the existing supply of savings, i.e., for the purpose of developing new land. T h i s is unlikely to be a matter of any importance, since the interest rate, as we h a v e seen, is not v e r y sensitive to changes in demand. A further obstacle arises from the irrevocable character of investments for this purpose. Since it is impossible to undo a mistake, the possessor of funds will be reluctant about committing them to the development and opening up of land, unless he feels confident t h a t the income which land of that quality now yields can be counted on to continue undiminished for a long period in the future. Such expectations are, of course, much affected b y the temper of the business class. If we take a long-run view of social development, thinking of it as a growth from small beginnings, with a consequent upward trend of rents as the normal thing, this hazard to the investor loses the greater part of its significance as a factor in the general situation. Its influence upon local land development continues undiminished, however, especially with respect to residential and commercial property, where the trend of rents is generally v e r y problematical. A l l this, however, applies only to increases in rents. D e creases are a v e r y different matter. A s I have j u s t said, investments in the " m a k i n g , " preparation, or improvement of land are permanent. T h e r e is no possibility of recovering them, in case of disappointed hopes, b y neglecting replacements, even slowly. W h e n once made available, the land does not wear out from use. 1 A s long as it yields ι I t is conceivable t h a t the owner might allow the " o r i g i n a l p o w e r s " t o deteriorate in a t t e m p t i n g t o recoup his losses, b u t this would be a short-sighted policy.

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a n y rent a t all it will continue to contribute to production. I t is only when rent fails entirely t h a t it is in danger of being abandoned. If this finally results, land embodying a considerable i n v e s t m e n t m a y revert to t h e unsalable state f r o m which it was once withdrawn, and we m a y indeed say t h a t it is no longer a p a r t of t h e actual supply. E v e n here, however, t h e investor does n o t regain possession of his funds. T h e y are lost beyond recall. T h e r e would seem, therefore, t o be no tendency for a decrease in rents to set counteracting forces in motion. I t m a y be asked w h y we should not t r e a t these expenditures for t h e purpose of m a k i n g land available for use as simply a p a r t of t h e cost of producing t h e land-using goods in question. Increasing b y t h a t m u c h t h e costs on t h e land thus handicapped, t h e y would leave it in t h e position of no-rent land — yielding nothing above t h e cost of operation — until rents rose enough f u r t h e r to yield something more t h a n t h e interest on t h e investment. I n other words, w h y n o t include interest on w h a t t h e Physiocrats used t o call " a v a n c e s p r i m i t i v e s " in cost of production, and regard only t h e surplus above t h a t as rent? T h e r e are two objections to doing this. I n t h e first place, these investments can not, ordinarily, be a t t r i b u t e d to t h e production of a n y particular good, as other costs can; t h e y are for t h e purpose of increasing t h e supply of a factor, which is needed for t h e production of m a n y goods. I n t h e second place, so f a r as this item is concerned only a onedirectional variation of productive capacity is feasible in response to changes in d e m a n d . P r o d u c t i o n can expand, if d e m a n d does, b u t can n o t c o n t r a c t if d e m a n d falls off. I t is therefore impossible to regard this element as an influence bearing u p o n value by helping to control t h e supply of t h e finished good. T h e covering of this p a r t of cost is n o t a necessary condition of continued production in undiminished volume. N o r is a d j u s t m e n t to m e e t changes in t h e r a t e of interest a n y more feasible. If rates become lower in other investments, there can be an inflow into this

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channel; but if rates rise elsewhere, no outflow can occur to restore equality. T h e land supply today represents centuries of investment at varying rates of expectation. W e can have no assurance that the values of things produced with the help of this land yield in every case enough to pay the going rate of interest on the investment utilized. T h e land is there to earn what it can get. It was from considerations of this kind that Marshall was led to develop his justly famous doctrine of quasi-rent. T h e slowness with which some forms of investment can be withdrawn or increased, he pointed out, causes the return on them during relatively short periods to be more in the nature of rent than of interest, wholly dependent upon conditions of demand. T h e rent of land is only " t h e leading species of a large genus." 1 T h e argument advanced above differs from Marshall's only in the fact that he stresses the similarity between the rent of land and the yield of all relatively fixed investments, for certain time spans, whereas I have emphasized the permanent identity between the earning power of a particular type of such investments — those adding to the supply of land — and the income derived from the "original and indestructible powers" themselves. This does not mean that I value Marshall's point any less highly. On the contrary, I consider it indispensable for a proper understanding of income from investment. 2 From the nature of the barriers which stand in the way of our utilizing certain natural resources, namely, volume of investment required and consequent interest charges, it is evident that access to these lands will be as much facilitated by a fall in the rate of interest as by a rise of rents. In either case costs can be covered on projects hitherto impractical. Such a fall of interest, it is true, does not result from any of the forces governing rent, i.e., from the demand side, but it is none the less a factor in the supply 1 Principles, p. 412. 2 Cf. p. 126 above.

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of land. I t is analogous to a lowering of the objective factor in the labor cost of producing a particular commodity. In the one case, as in the other, additional resources flow into the channel where the improvement has occurred until equality of earnings has been restored. T H E SUPPLY OF SAVINGS

Saving and Interest. The size of the investment fund available in any community depends on the amount of savings added to it and the amount withdrawn in previous years, assuming no borrowing from outside. The magnitude of each of these flows is affected to some extent by the rate of interest and to a greater extent by a group of other causes which also vary from time to time and place to place. Let us first consider the influence of changes in the rate of interest. A good deal of ingenuity has been expended in analyzing the decisions of the man who surveys the probable trend of his future income and future needs and shrewdly maximizes the satisfaction derived from the money-income of his lifetime by transfers of consumption from present to future or vice versa. Although I cannot follow Professor Kleene so far as to say that all this is so much mythology, 1 I agree that it is an aspect of the interest problem which has been given far more attention than it deserves. The great majority of people do not save on the basis of any such rational balancing of gains and losses, but according to some convenient working rule which the experience of their families and friends and the special needs of their own case seem to recommend. No doubt it reflects a considerable amount of trial-and-error wisdom and even some special calculation, but it is rough-and-ready at best. Moreover, when once adopted, it is followed, however loosely, without much regard for any except very considerable changes in other conditions. The effect of changes in the rate of interest upon people I Profit and Interest, pp. 49-53.

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who manage their saving according to such general rules is not at all uniform. The man who saves a certain fraction of his income, except when he has to meet emergencies, will save more if interest rises, for the simple reason that his total income, which contains a larger and larger amount of interest as the years go by, is larger. On the other hand, the man who aims to accumulate a certain competence will do just the opposite, as Gonner and others have pointed out. 1 Smaller annual savings suffice when aided by higher interest. Again, the man who saves all above a certain amount which he deems adequate for his present needs will do as the first — save more when interest is higher. Some saving, finally, is probably induced by the mere desire to obtain interest, with little regard for the best distribution of income over time. I t is doubtful whether such savings are affected by ordinary changes in the interest rate. We can not, however, entirely ignore those savers who make a more systematic attempt to maximize their "psychic incomes." The generally accepted view that such people save more when the interest rate is high is true, it seems to me, only of a very small fraction of them, namely, those who would save nothing at less than the new (higher) rate. For the others the rational course is just the opposite. If the higher rate applied only to the additional saving which it seeks to elicit, or if it were made contingent upon such extra saving, 2 the case would be the same as that of the purely marginal saver. The additional postponement of consumption would, by disturbing his "equilibrium of consumption," to use Landry's phrase, 3 entail some loss of utility, and that loss would be compensated 1 Gonner, Interest and Saving, p. 75; J . B . Clark, Essentials of Economic Theory, ch. zx; S. and B . Webb, Industrial Democracy ( 1 9 1 1 ) , pp. 625-6. 2 After the manner of higher wages paid for overtime only. 3 L'Interet du Capital, ch. ii. Carver (Distribution of Wealth, ch. iv) reasons along the same lines. Also Rae's famous chapter on the " E f f e c t i v e Desire of Accumulation" (The Sociological Theory of Capital, C . W. Mixter's ed., ch. vi).

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by the interest received on that part of his savings. Higher interest would draw more and more reluctant savings into the market. B u t when the higher rate applies to all a man's savings, as it ordinarily does, the situation is very different. Suppose a man, counting on no interest, believed he would maximize his income by saving a certain amount each year for ten years. If interest now becomes available, his life's income will be increased, all the increase coming in the future if he continues to save at the same rate. It seems almost certain that he could get a better distribution of income by transferring some of the increase to the present, i.e., by saving less. His money income, though increased a little less as a result, would be applied to better advantage. 1 It has been objected that the savers considered in the above paragraph, so far as they save in order to provide for their own future consumption, would not be responsible for any net gain in the investment fund, since they would take out as much as they put in.2 In terms of a given year, the savings of the younger members of the community would be offset by the withdrawals of the older members. This view seems to me doubtful. We must remember that such saving has not always been the rule of life — reliance on one's kin for support in old age is the older practice — and that the savings made by those who introduce the rule are not offset at first by withdrawals by persons who saved for this purpose earlier. There are no such persons. T h e old are still being supported out of current earnings. Accumulation gets a kind of head start over consumption and keeps it as long as this kind of saving continues. T h e reaction of these savers to changes in the interest rate is therefore not without bearing on the investment fund. 1 This conclusion is substantially the same as that of Gonner (op. cit., pp. 6266). It seems to have made little impression on his readers, however, perhaps because he did not make it at all clear. 2 Mill, Political Economy, Bk. I V , ch. iv, Sec. 3; Wolfe, Quarterly Journal of Economics, xxxv, 16.

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T h e influence of the interest rate on withdrawals from the fund is no less complicated. Such withdrawals ma y be made by any holder of invested funds. He has at his disposal in a given income period at least the maturing results of past labor applied at his expense, and in most modern communities much more. For though his own investments may necessarily mature gradually, he can generally find other men seeking employment for savings who will take his unmatured holdings off his hands and put him in immediate control of all his principal. Every continuing society has such regular recruits to its would-be investors. Let us first consider those persons who make some systematic attempt to make the most of their resources. A man who, expecting no interest, had decided that a certain annual depletion of his principal would be the most advisable course, would find his present income increased more than his future income, if interest began to be paid on his invested savings. They yield less interest as time goes on, because they are being exhausted. It will therefore be to his advantage to transfer some income to the future — to consume his principal less rapidly. 1 On those owners of invested funds who follow a kind of working rule in dealing with their gross incomes the effect of a higher interest rate will be more varied. Those who spend all their net income but steadfastly refrain from trenching on their principal will obviously withdraw nothing at all; while those who prefer to maintain a given level of expenditure, even if it involves some "living on their capital," will be able to follow their plan without spending their principal so rapidly. T h e net effect on the investment fund of increases in the rate of interest will therefore depend on the relative importance of these numerous groups — an increase if certain of them predominate, a decrease if others do. Strictly speaking each situation presents a special problem, but a I Cf. Gonner, o p . c i t . , ch. vi, where the same conclusion is reached by a somewhat different line of reasoning.

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few generalizations are possible. As societies grow older and richer the number of persons and organizations dependent upon invested wealth for some or all of their needs increases. So does the number of those who will not spend any of their principal, partly because many bequests impose such a condition, partly because this simple rule for maintaining family prestige gradually becomes a tradition or, in extreme cases, an obsession. In younger societies, on the other hand, where more people are " o n the make," the types which save less when interest rises will be more likely to outnumber the others. T h e relation between saving and the rate of interest varies according to time and place. Indeed, I am skeptical of attempts to describe the supply curve for savings even for a given country at a given time. Saving and Other Factors. T h e transfer of present income to future by saving is designed, even in the rough-andready plans referred to above, to replace a smaller satisfaction by a greater. This comparison depends, of course, on the uses to which the sum in question can be put by the saver. If the future uses have a stronger appeal or sink more slowly in attractiveness, 1 saving will be promoted, and vice versa. T h e matter is exceedingly obscure. It is not simply a question of the diminishing satisfaction afforded by successive units of a particular good, or even of different items of personal consumption in the strict sense. For this problem the satisfaction of dying wealthy has just as much standing as that derived from food or shelter, if we believe men ever make sacrifices in order to obtain it. How the wants of the future, thus broadly conceived, compare with those of the present we can not say with much confidence. It depends a good deal on factors which v a r y in relative importance from one age or place to anI This is quite possible, whether men undervalue the future as such or not. If they do, the appeal of future uses is somewhat weakened and saving discouraged. Even if we grant that this is a universal human t r a i t — a n d I am doubtful about it — we must assign it a very minor role in the explanation of interest.

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199

other. N o t a few men save, nowadays, because a careless fate has failed to endow them with the imaginative capacity required for successful spending on a large scale. 1 Even the grim satisfaction of leaving their executors a larger task may exceed the rapidly failing opportunities of the present. It is possible that the intense and specialized character of modern business life tends to increase the number of such men. Public opinion is a potent factor in other cases. T h e owner of a large fortune may prefer the favor of a public expectant of benefactions and grateful for productive investment to any extensions of present expenditure. Prestige, power, ambition for self and others may also be counted among the satisfactions acquired through saving which pall but little as more and more of them become available. Where power is more readily gained and affection more adequately expressed by the building of fortunes, the appeal of the future uses will be stronger. T h e trend seems to be in that direction. Finally we must note a minor factor affecting the growth of the investment fund. As pointed out above, the introduction of the practice of saving to provide for one's own future needs gives accumulation a start over the spending of savings. Such conditions, therefore, as favor the spread of this practice will tend to increase the fund. When the family is of great stability and coherence, men are more likely to rely upon the labor of the younger members for support in old age and other need. T h e weakening of the family throws upon the individual the task of providing for himself — by saving. In these days only the very poor rely on anything else as a normal thing. A state old-age pension paid out of current funds is substantially equivalent to a return, in part at least, to the practice of depending on the labor of the young for the support of the old. T h e amount saved for this purpose will also vary according I N o t e t h a t this refers to spending in t h e strict sense, i.e., for current consumption. Analogous reasons, however, m a y lead the saver to invest in securities rather t h a n durable consumers' goods.

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to time and place. If it is customary to plan for a long period of "retirement," or if men wish to be able to relax during these years from the strict frugality of their youth, saving will be greater than in societies where ideals are different.

C H A P T E R

X I V

THE DISTRIBUTION OF THE FACTORS THE

DISTRIBUTION

OF

LABOR

F laborers moved with sufficient readiness from less remunerative occupations to more remunerative ones, we should expect at least a rough equalization of wage rates to work itself out in the long run. Such an equalization, as we have already had occasion to note in discussing value (Chapter III), does not in fact take place. A permanent scarcity of people doing certain kinds of work results in permanent wage premiums. This scarcity, it was there noted, may be due either to unwillingness or to inability on the part of those who obtain no such premium. T h e effect on value being the same in either case, the first step towards an understanding of that complicated problem is to analyze the effect of scarcity regarded as a given element in the situation. For market value that is all it ever is. B u t we can not leave the matter there. T o account for values as long-run phenomena, we must discover the reasons which keep the number of workers in some branches of industry relatively small. T h a t is the question which now demands our attention. Let us begin with those which underlie voluntary failure to enter a better paid occupation. T h e y are of two sorts, (i) those that make certain kinds of work relatively unattractive — a matter of greater satisfaction costs, and (2) those which make access to a given trade relatively expensive — a matter of greater consumption costs. Neither of these is entirely stable. T h e introduction of elaborate public educational systems, for example, obviously tends to open certain occupations to many people who could not hope to enter them if training were at their own expense; 201

I

202

VALUE AND INCOME

and standards of what constitutes demeaning or laborious activity, being partly reflections of social experience, also undergo change in the course of time. A double question now presents itself. Does the presence of these factors always tend to restrict production, and therefore to raise value; if it does, is the wage premium received by the group of workers thus restricted to be regarded as a necessary compensation in the quantitative sense? I t may seem at first glance as if both these questions ought to be answered in the affirmative. How can men be expected to enter such an occupation, unless it offers some advantage in the way of superior remuneration; and why should they continue to enter it after the extra reward has fallen too low to offset the extra cost which they have to incur? 1 Reasonable as this conclusion seems, it can not be accepted without many qualifications. I t involves too many assumptions of an essentially unreal character, and too many whose validity is not the same under all conditions. T o make this clear it will be necessary to analyze more fully the reasons for the voluntary scarcity of some kinds of service. The attractiveness of a given occupation depends upon a wide range of factors: the laboriousness of the physical activity involved, the monotony of the operations, the hours the laborer has to observe, the supposed servility of the work or the moral disrepute in which it is held, irregularity of employment, danger of injury, uncertainty whether success or only comparative failure will be achieved. Some of these will be discussed under the head of riskbearing in a later section of this chapter. T o a certain extent there is a balancing of advantage against disadvantage: short or convenient hours may offset greater laboriousness or some other undesirable aspect of the work. With respect to many of these points, moreover, unattracI Note that this is a matter of rates, i.e., earnings per hour. If two men receive the same daily wage, but one works longer hours than the other, they are not being paid at the same rate.

DISTRIBUTION OF THE FACTORS tiveness is not so much inherent as the result of the character of industrial leadership. Great improvement may be possible. The attitude of the workers towards some of them is also subject to change. The day when submission to the confining discipline of the factory was stoutly resisted by the majority of laborers has been succeeded by a very different state of things. If conditions of this sort are to have any effect upon the numbers in a particular occupation, and hence upon values, two conditions must be fulfilled. Other kinds of work must be accessible where the worker lives and with respect to the personal qualifications required; and, secondly, these accessible alternative occupations must not be such as to require the worker to sacrifice any special advantages in the way of skill, strength, and the like, which he may enjoy in the other. The necessity of the first condition is obvious. We can not think of the worker as withdrawing unless there is something for him to turn to. The second condition is no less important. If it is not fulfilled, a man can not abandon an unattractive trade without losing far more than he will gain. And by the same token, the unattractiveness does not keep him out. 1 These conditions are, unfortunately, all too frequently absent. The enormous development of the "territorial division of labor" in modern times has led to s.uch a high degree of specialization in some localities that the choice of occupations which confronts the worker is narrow at best, while the range of trades in which he can reap the advantage of his special gifts is even narrower. The fact that suitable openings exist in other parts of the country does not help much. Adam Smith's familiar remark that " a man is of all sorts of luggage the most difficult to be transported" points to an impediment which must still be reckoned with. I We can, of course, as a matter of analysis, say t h a t part of such a man's wage premium must be regarded as offset by the special cost he incurs, but t h a t is far from the same as saying t h a t he would not enter the occupation if his wages were reduced t h a t much.

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At the "frontiers," so to speak, of these specialized areas there is more freedom of choice, it is true; possibly enough to relieve the situation in the interior, but not necessarily so. T h e subdivision of tasks within districts which are highly " specialized " from one point of view, affords some further relief, but not much. T h e alternatives open to a given worker, though more numerous, may all be inferior ones. I t seems, therefore, somewhat over-hasty to lay it down as a general rule that special satisfaction costs attaching to a particular kind of work will act as a deterrent to would-be recruits to the trade and thus raise the value of the good into which that labor enters. Even if we waive this point, however, such a general rule is still open to question. We must remember that it is not what the observing economist thinks about the attractiveness of a given occupation that makes people avoid it, but what the workers who are in it think. Moreover, it is not necessary that all men should feel no aversion to it, in order to bring earnings down to the common level, but only that enough should be indifferent to its peculiar shortcomings. Now on most, if not all, of the factors which I have enumerated as causes of unattractiveness there is a pretty wide range of opinion. Even laboriousness depends partly on who is the judge; while such things as danger, irregularity, and monotony, if not gauged differently with respect to magnitude, are often looked upon very differently by different men. Danger does not repel everybody, nor does irregularity of employment — quite the contrary; and instances are not lacking where a foreman has been asked to restore workers to routine jobs from which he had transferred them to relieve the monotony. This means that we can not infer from the supposed presence of some unattractive factors, or even from the undoubted presence of certain others, that laborers will have to be lured into a particular occupation by the prospect of exceptional wages. Values may not be affected at all. Of course, if the demand is great enough, it may be-

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205

come necessary to utilize workers who do enter the trade with reluctance, and values will then reflect a certain degree of scarcity. The existence of a wage premium, however, does not prove that this has taken place and that at least some of the workers are receiving a necessary compensation for special costs undergone. I t only shows that there were not enough who were indifferent to the factors in question to bring wages to a complete equality with those in other occupations; the resulting premium may not be sufficient to attract any of those who do mind. And there is no objective test by which we can tell. The second part of our question — whether the wage premium tends to be just about enough to compensate the workers in those cases where special unattractiveness does retard entry to an occupation — brings up equally serious difficulties. For one thing, the knowledge which men must have in order to achieve such an adjustment may not exist, to say nothing of being in the possession of those who are supposed to use it. This is especially important with respect to the various kinds of risk, as we shall see later. The most we can say with regard to the influence of these elements of unattractiveness, it seems to me, is that they have some restrictive effect on production, and result in some margin above wages elsewhere — enough to make the workers feel that their special sacrifices are not entirely unrewarded. T o call this"compensation"is to imply too much. Experience, on the other hand, which might seem to give the worker something to fall back on, in default of generalized information, is often of little help. Before he has had time to get enough of it to serve as an adequate basis of judgment, he may have committed himself so heavily, may be so specialized in skill or otherwise involved, that he can not withdraw at all readily if dissatisfied. He is in about the same position as the man who can change occupations only by deserting a skilled trade for an unskilled one. It is doubtful whether the long run brings a much more accurate adjustment, even in moderately stable

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societies. T h e subdivision of tasks, by reducing the importance of slowly acquired proficiency, reduces the importance of this difficulty, but even now it is not to be ignored. Entrance into a trade or profession may be relatively expensive for two reasons: in order to obtain the training required it may be necessary to invest substantial amounts of money and time; 1 monopolistic groups may succeed in imposing heavy fees upon the admission of newcomers, or in setting up unnecessarily high standards of training, ostensibly with a view to improving the service furnished, but really to discourage recruits. T h e effect of these obstacles is partly similar to that of the distasteful factors just discussed, partly different. As with the latter, we can not be sure that they will have any effect on production and values. It is entirely possible that a man may face the alternative of spending money to enter a given kind of well-paid work or contenting himself with a rate of remuneration so much lower that his net income would be greater in the first case (after deducting the cost of training). Even though a considerable variety of trades paying as good wages are carried on in the region where he lives, there may be only one for which he possesses the particular qualities needed. He will enter the trade in question anyway. On the other hand, spatial accessibility is not so important here. Trained men, especially in the higher grades of work, do not expect to stay at home to pursue their callings. It is not necessary, therefore, that the alternatives to entering a profession requiring especially expensive training or imposing high fees for admission shall be near at hand in order to draw men away. T h e knowledge needed in order to make a reasonably accurate allowance for these expenses of entry may be inadequate here too. T h e amount of time an individual will have to spend in order to become proficient, still more the I Including, especially in certain professions, much time spent, at very low pay, in acquiring "experience."

DISTRIBUTION OF THE FACTORS

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time he will need to establish himself in "practice," 1 can not be considered certain; and the total returns with which these special expenses must be compared are problematical also, being dependent upon the number of years he is able to work as well as upon his annual earnings. T h e existence of outstanding "prizes," moreover, engenders overconfidence. On the whole, however, it seems probable that these difficulties are less important here than in the case of risk and irregularity. T h a t all this adjustment takes a long time goes without saying. T h e causes of involuntary failure to enter occupations which pay better wages are in part identical with those we have just considered. A n especially laborious trade, for example, may be avoided because a man lacks the necessary physical stamina, as well as from distaste. More important is the problem of financing the cost of training. For the poorer members of society this often constitutes almost as great an obstacle to entering certain occupations as would a lack of the necessary mental or physical qualifications. T h e provision of training facilities at the expense of the state greatly lessens the importance of this, but even under these circumstances the burden of waiting — several years, it may be — before earning power commences is sometimes more than a family can bear. In an even larger number of cases the obstacle is a matter of native gifts — a man doesn't take up a given kind of work because he is unfitted for it. Or it may be a question of quality — he can do the work, but his product is inferior. This, it should be noted, is simply a question of being born with certain capacities which are not possessed by other men. It makes no difference whether the ancestors of the person so endowed had these qualities or not. T h e only thing that counts, so far as production and value are concerned, is the fact that only a limited number come I A s a result of these variations between individuals, as Professor C a r v e r has pointed o u t (Distribution of Wealth, p. 182) the burden of training must be treated as an " i n c r e a s i n g c o s t . " Values will therefore reflect marginal expenses of training.

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VALUE AND INCOME

into the world with them and no more can acquire them. Of course, if it should appear that these comparatively rare qualities are not only received at birth but transmitted from father to son, as now seems to be the most acceptable view, the permanency of the wage inequalities which now characterize almost all societies would seem to be pretty certain. But the wage differentials themselves, i.e., the extent of these inequalities, would not be affected. The importance of these differences in natural endowments does not depend solely upon their own permanence. I t is much affected by other aspects of the economic milieu. The subdivision of tasks, which has been carried so far of late in some branches of industry, seems to demand less and less in the way of inborn traits. Production seems to resolve itself into fractions which are more and more accessible to mere training. It would be a mistake, it is true, to conclude that the barriers which now restrict competition between many groups in society are all destined to disappear as this technique spreads, but there seems to be reason to believe that marked developments along these lines are yet in store. The persistence of inequality for generations, in the face of such developments, is not improbable, however, since readjustment to the greater flexibility of labor is inevitably slow at best, and will be opposed by many whose present advantages are threatened. In addition to these two sets of factors impeding entry into certain occupations there is a third group which occupies a sort of middle position between them, less inevitable than inborn qualities, harder to combat than expense of training. Ignorance, inertia, the clutch of environment lay a heavy hand on all too many gifted individuals, even in these democratic days when we like to think the door of opportunity has been swung wide open. These can not be dismissed as mere "friction." Friction is something which slows up the working of economic forces, and in a shortrun view may even check their action altogether. Here we have something more than that to deal with — an ever-

D I S T R I B U T I O N OF T H E FACTORS

209

present, in a sense " normal," impediment to the mobility of labor. N o doubt it is no fixed factor in a quantitative sense, being tied up with various other flexible elements in the texture of society, but it gives ground slowly. Considerations of this kind have led many writers since the days of Cairnes to view the laboring world as composed of a relatively small number of "non-competing groups," between which there is little flow of labor and hence no equalizing of wages, but within which there is sufficient mobility to bring about substantial equality, apart from differences due to voluntary avoidance of certain kinds of work. T o me this description of things seems open to serious question. I t is not needed to explain the facts of inequality, and it is at variance with many other things we observe in the productive system. T o account for the wage situation which obtains in modern societies we do not need to assume anything except that the workers in certain trades are shielded from competition, and that the demand for their services happens to be so great that their earnings are not reduced to the level with which other men have to be satisfied. If it happens that the workers in some other line or lines receive about the same wages, it does not follow that this must be the result of competition, actual or potential, among the members of the whole group. I t is quite as reasonable to explain it as due to a coincidence — the workers in each occupation enjoy about the same relative degree of protection against an inflow of competitors. If the earnings of all those in a given "non-competing g r o u p " were reduced to complete equality, it would, of course, be hard to consider it a mere coincidence; but no such complete levelling of wages does take place. E v e n in the great unskilled " g r o u p " there are differences of no small importance, relatively speaking; and as we pass upward to the best paid workers, we find a wider and wider range of earnings within each group. I t is so wide among the professional men and business men that they constitute a group in little more than

2IO

VALUE A N D INCOME

a residual sense — what is left after the other groups have been distinguished. T h e hypothesis, moreover, seems to run counter to the facts. It certainly is difficult to think of physicians, lawyers, engineers, and so on competing with each other as one or the other profession offers an advantage in the way of earnings, and thus reducing all to a common level. Even in the long run such competition is by no means group-wide. It may be true that potential lawyers and business men, for example, can choose between these activities according to their relative promise, and that it is improbable, therefore, that earnings in them will remain far apart over generations. B u t is it reasonable to speak of such long-run competition between business men and physicians, between lawyers and artists? Does not such a view unduly minimize the importance of special aptitudes? Some individuals, to be sure, are capable of making a success in such diverse kinds of work, but they seem to be exceptional. 1 Nor is intra-group competition a wholly plausible assumption for the workers in less remunerative occupations, though mobility does seem to increase as we go down the scale. T h e development of "employment psychology" has shown that even for many tasks which at first glance seem to be mere routine, within the power of any normal person, special qualifications are highly desirable, from both the worker's point of view and the employer's. T h e former becomes discontented with his earnings or chagrined at his awkwardness; the latter only too often finds that he has spent considerable money in training round pegs for square holes. In view of all these doubts, it would seem to be unwise to insist upon an assumption which, as we have seen, is not needed to account for the facts. It is better to regard the workers receiving wages within a certain range as a statistical group rather than a competing one. I Cf. Davenport, Quarterly Journal of Economics, xl, 66-70.

DISTRIBUTION OF T H E

FACTORS

211

T H E DISTRIBUTION OF LAND

The distribution of labor among the different branches of production has a much greater influence upon values than the distribution of the other factors. In the case of land both voluntary and involuntary failure to enter certain lines have to be taken into account. The former is chiefly a matter of the special expenditures which have to be made in order to put land to certain uses. These must be distinguished from operating expenses. They are outlays made once and for all, analogous to those made for the training of labor. Nobody will use his land for these purposes unless the rent to be expected from it is enough more than the land would yield otherwise to compensate for the special expenses required. Under stable conditions the correspondence is likely to be closer than in the case of special costs of training, none of the factors being present which, as we have seen, make the adjustment of earnings to these latter costs somewhat difficult to achieve very accurately. The influence of ill-repute attaching to certain uses of land and of irregularity of earnings, the only further analogies to the repellent factors operative in the case of labor, is much more doubtful. Their effect will be nil, of course, unless landowners refuse to utilize their land in these ways or to rent them to others for such purposes. As for illrepute, there are doubtless always a certain number of owners who do avoid it. Their attitude will not have any appreciable effect, however, unless they are in a majority, not only among present owners but among potential buyers of lands fit for this particular use; in other words, unless such aversion is sufficiently widespread to make itself felt in eventual scarcity in that branch of production. I t is doubtful if this is the case. If the exploitation of land always had to be at the hands of the owners themselves, a bad name might deter them; but where an owner can hide behind a tenant, he may feel very differently. Then

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212

the only check on production is the attitude of those who are to do the work. T h e existence of involuntary scarcity of land for certain uses has already been referred to in dealing with the production of land-using goods. It is simply a question of physical suitability — soil, drainage, climate and the like. Such differences, like differences among laborers, will not affect values unless a particular kind of land happens to be relatively scarce. Then the only way to increase production may be to resort to very unfavorable intensive applications of labor. More commonly, however, it is also possible to use other land, which, though not ideally adapted to the purpose in question, will help to relieve the pressure on the limited supply of better land. THE

DISTRIBUTION

OF

SAVINGS

As we saw in the chapter on income from investment, the value of several classes of goods depends upon the extent to which savings flow into the productive channels from which these goods are obtained. In that discussion, however, it was taken for granted that such a flow would continue in each case until the yield on investment there had fallen to a common level. W e now have to take account of the fact that the process of equalization may never be completed — that investment in certain lines may encounter obstacles. In the first place, the investor has to reckon with much the same sort of distasteful factors as the laborer does — danger of loss, irregularity of income, social disapproval, and so on. Where the methods and objectives of production are undergoing transformation, unfamiliarity is also of great importance. Savers are, on the whole, a notoriously conservative class. Imperfect liquidity 1 and the taxation of income from invested funds are further deterrents. T h e first effect of a tax on funded incomes, for example, is not to discourage saving, as is often supposed, but to I Cf. Lavington, Economic Journal, vol. xxii, 401-407.

DISTRIBUTION

OF

THE

FACTORS

213

d i v e r t savings in some degree into investments which do not yield a n y income in the business sense, such as durable consumers' goods for the saver's o w n use or t h a t of his heirs. T h e barriers of unfamiliarity and uncertain liquidity h a v e greatly diminished in importance in modern times. Savings banks and similar institutions m a k e i n v e s t m e n t in a wide v a r i e t y of enterprise accessible to even the m o s t inexperienced; and the g r e a t d e v e l o p m e n t of organized security markets has made it so easy to " r e a l i z e " on investments t h a t the modern father " p r o v i d e s " for his w i d o w and children, not b y a c c u m u l a t i n g stocks of consumers' goods, b u t b y leaving them a f a c t o r y or p a r t of a m o r t g a g e on a railroad. W h e t h e r the existence of a n y of these u n w e l c o m e conditions will check i n v e s t m e n t a t all, and if so, w h e t h e r the resulting interest premium (i.e., excess o v e r other rates) tends to become fairly closely adjusted to the special burden thereby imposed upon the investor, are questions w e can not answer in v e r y general terms. T h e i r importance, as w i t h laborers in analogous situations, depends u p o n how large a proportion of the i n v e s t m e n t funds in the c o m m u n i t y is in the hands of people w h o are averse to placements h a v i n g a n y of these characteristics, 1 n o t upon w h a t the prevailing opinion or the opinion of certain other classes m a y be. A s w e shall see later, in discussing risk, where funds are not forthcoming in sufficient v o l u m e from investors w h o are not averse t o these factors, and an interest premium appears, it seems, on the whole, more likely to reflect a calculated a d j u s t m e n t to the realities of the situation t h a n is the case w i t h w a g e premiums arising in like circumstances. Investors m a y also fail to p u t their funds into uses affording a relatively high return because the o p p o r t u n i t y to do so is not freely open to t h e m . T h i s is due to the presence of one or the other of t w o groups of factors which v a r y in force in different periods — those which hinder i n v e s t m e n t I Note that it is not the number of savers but the share of savings that matters,

214

VALUE AND

INCOME

through the intermediary of others, and those which lessen the accessibility of certain investments to some savers themselves. If the machinery of investment is so imperfectly developed that the saver and the would-be user of savings find it hard to get together, or if they are deterred from doing so, the saver will be forced to resort to investments under his own direction which may yield less, perhaps much less, than is being earned elsewhere. Thus a wealthy merchant of mediaeval Europe might invest his savings, beyond what he could use in his own business, in jewels and rich furnishings while very profitable opportunities existed in other branches of trade. N o doubt these durable consumers' goods yielded something above their cost in most cases, but there were probably exceptions. On the whole, these obstacles seem to be less important, and to be declining more rapidly, than those responsible for involuntary immobility in the case of labor and land. R I S K AND RISK-BEARING

T h e static world which we have been assuming in tracing the factors which bear upon long-run values is not a world where disaster and disappointment are unknown. All it presupposes is stability of the factors which condition the production of goods — labor, land, savings — and of the technique which has been developed for utilizing them. There may still be losses — from fire, flood, and the like; mistakes are not unthinkable — from carelessness, forgetfulness, misunderstanding; accidents must still be reckoned with — from failure of men or materials; every recruit to the industrial army is something of an unknown quantity. These risks, to use a familiar if somewhat vague term, constitute a further burden upon production, and may therefore affect values. Their influence depends, first of all, upon whether they are general or special. T o some extent all productive processes are subject to them; they may strike anywhere. So far as this is the case, they do not concern us here. N o

DISTRIBUTION OF THE FACTORS

215

factor of production can avoid them by deserting one employment for another, and hence the proportions in which goods are available for consumers, and the value system, are not affected by their existence. The only course open to those who find them objectionable is to pay somebody else for bearing them. Their incidence is upon incomes, not upon values. 1 Not all risks, however, or even the greater part of them, are of this general character; either in kind or degree or both they vary from one branch of industry to another. Here the position of those who are reluctant to assume them is very different. The laborer or saver or landowner has alternatives to which he can turn, where he will be relatively free from these burdens. Of course, they must be real alternatives, as we have already seen earlier in this chapter; they must be accessible, and they must not impose a loss of income-status. If they exist and men do show a preference for them, the effect will not be confined to incomes. The proportions in which goods are produced will also be affected. The extent to which this shifting of the factors takes place depends upon (i) the nature of the risk, (2) the availability of insurance, (3) the persons upon whom the risks fall. We may distinguish three general categories of risk — danger of loss, uncertainty of outcome, irregularity of returns. In the first case we have to deal with what must be regarded as a net loss, from both the individual and the social point of view, a misfortune which will not be offset by better-than-average results, either in the subsequent experience of the individual or elsewhere in the society of which he is a member. Personal injuries and the destruction of property by fire are examples of such losses. It is a commonplace that the danger of these is greater for some occupations and for some investments than for others. The second type of risk is a matter of relative failure in a given use of the productive factors, of achieving some1 Cf. Chapter X V I below, especially pp. 245-247.

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VALUE AND INCOME

thing less than average success in a given profession or a given investment. 1 No matter how stable a society is, it may be impossible to predict — as things stand, it certainly is — whether a particular individual possesses the latent qualities which alone assure him a position of even tolerable mediocrity in certain kinds of work; and by the time he has found out, the disaster may be irreparable. I t is too late to change to something else where he could at least earn the average. From the individual's point of view it is a loss, whatever the conspicuous success of others may be. The greater danger of it in a particular case is a special burden upon those who enter this occupation, as normal to it, under the circumstances, as its laboriousness or illrepute. The same may be said of certain kinds of investment, notably the search for and exploitation of mineral deposits. Irregularity of returns, even assuming no uncertainty concerning the outcome as a long-run average, is a wellknown characteristic of certain employments of all the productive factors. I t is perhaps most conspicuous in the case of agricultural operations, where uncontrollable variations in rainfall, temperature, and other climatic factors combine with the ravages of pests and blights to make the returns from farming, and particularly some branches of it, more than ordinarily variable from year to year. These three kinds of risk are not sharply distinguished from each other. The third merges into the second as the coming of good and bad years is more irregular and their cycle is spread over a longer period. As these conditions become more marked the point is reached where the individual may well regard the whole career as a gamble. I t is not only irregularity he now has to count on but also uncertainty as to the total outcome. Both the second and third, moreover, verge upon the first. Failure to achieve average success, either because of inherent deficiencies or ι More rarely in a given employment of the soil, since adaptability is more easily discovered. Experiment does not involve the landowner so permanently.

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217

because of the vagaries of an irregular flow of returns, may involve the victim in actual loss. The earnings of a professional man or farmer may not only be less than the average but so low that he never gets back all that he expended of time or money in preparing for his venture. Such cases, though fortunately rare, seem to be not unknown. Now all of these hazards can be regarded as predictable in the mass — at least in theory — and hence as insurable. Where insurance against them is in fact available, there is greater probability both that they will cause production in the lines affected to be restricted in some measure, thus raising values, and that this restriction will be about enough to serve as "sufficient compensation." The existence of the risk and the amount of its burden — a "premium" covering a share of the anticipated losses plus the expenses of administration — will be more obvious. Of course, ignorance or overconfidence may lead men to neglect insurance, thus nullifying its effects in some degree. This spreading and standardizing of risks is not always available, however, even in otherwise stable societies. Although it is doubtless true that insurance is the natural, perhaps inevitable, method of dealing with the risks of a static society, there are objections to dismissing them with that. Insurance is neither a spontaneous nor an immediate development. Not only must a good deal of time elapse before a sufficient body of experience can accumulate, but a good deal more may be needed before any agency, interested or disinterested, has recorded this experience in usable form, to say nothing of the time it may take for enterprise to discover the opportunity afforded and then to overcome the inertia of a public inured to the old ways. Hence it may take about as long to achieve the organization of insurance as it does for the value-making forces to work out their effects, perhaps longer. This means that for some problems we may be as justified in treating

2l8

VALUE A N D INCOME

insurance as non-existent as if it were in fact impossible. 1 I t would be unfair, however, to push this point too far. For it must be admitted that, even before enough data are available to serve as a really accurate basis for insurance, enough may be at hand, and analogies with better known fields may be close enough, to permit the setting up of a tolerably workable organization. Those who then provide insurance must be paid something for risking their own wealth to some extent. 2 Such pioneering developments, it may be added, are in considerable measure dependent upon the stage of development a society has reached in many respects — the application of the insurance principle in other fields, the spread of the joint-stock technique, and the like. If ignorance, indifference, or tardy development cut off the risk-bearer from access to insurance, the effect upon values will depend partly upon what kind of a risk is involved, partly upon who bears it. On the whole, danger of loss seems most likely to act as a deterrent and thus to restrict production and raise the values of the goods so burdened. It is more likely to be known and lacks any countervailing possibility of gain. There are exceptions, it is true; not all men shun the thrill of danger. It is possible, therefore, that there may be enough ready to enter a particular employment to prevent any income-premium from appearing, or any which can be regarded as adequate. Uncertainty as to the outcome and irregularity of returns seem to me much less potent causes of restriction. T h e latter, however, as we have seen, approaches danger of loss under certain conditions, and hence may become an important factor. T h e former is very uncertain in its effects. Where some of those in a given calling reach conspicuous heights of success — where the prizes are large, 1 In Professor Knight's terminology, an " u n c e r t a i n t y " exists — practical rather than theoretical. Risk, Uncertainty and Profit, p. 285. 2 Cf. p. 242 below.

DISTRIBUTION OF THE FACTORS

219

in other words — there seems to be a well-demonstrated tendency for people to underrate the possibility of failure. Instead of being kept out by the one they are lured in by the dazzling promise of the other, and average earnings may even be below those of other workers of comparable grade. 1 Values are not raised and may even be lowered. A good deal also depends upon who the risk-bearer is. This is neither fixed in the nature of things nor a matter of chance. It results from law, custom, and the organization of industry. T h e danger of bodily injury, for example, may be a burden to the worker almost exclusively, under one legal code, to the employing capitalist or landowner under another; custom may make the farm laborer a heavy sharer in the vicissitudes of the industry or the reverse. T h e significance of this lies in the different attitudes of these classes to the various forms of risk. If the special risk attaching to a particular branch of production falls upon those who are less reluctant to assume it, the effect upon the volume of production, and hence upon value, will obviously be less. It is perhaps unwise to generalize very freely on this point, but I am inclined to think that laborers, especially those in the more common grades, are less repelled by danger of loss than either savers or landowners, as a rule. T h e causes of this we can only venture to suggest — indifference bred of familiarity, a less troublesome imagination, perhaps a tougher fibre somewhere. It is extremely difficult to judge particular cases, since real alternatives, in the sense above insisted upon, may be lacking, leaving a man no choice worthy of the name. Savers, on the other hand, are most sensitive to this kind of risk and most likely to receive an adequate return for it. N o t only are the facts generally better known, but investors and their advisers, especially where the concentration of wealth is considerable, are more likely to be in possession of them. Savers share with other classes, however, in the tendency to rush I Taussig, Principles of Economics, Vol. II, pp. 133-4.

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VALUE AND INCOME

in too freely where conspicuous prizes await the successful. 1 Large landowners and wealthy savers are least repelled by irregularity of returns, since their own well-being is less dependent upon a steady flow of income in general, to say nothing of the returns from any particular venture. 2 These differences in the attitudes of potential bearers towards the special risks involved in a particular branch of production make different supplies, and therefore different values, possible for that product, according to who bears the risk. From this it would seem to follow that production would eventually all be by that type of organization in which risk was borne by those willing or able to do it cheapest — willing, because of indifference or ignorance; able, because of a reduction of uncertainty by means of grouping, as in the case of insurance based upon inadequate data. Probably there is some tendency in this direction; but changes in the incidence of risk depend upon so many factors beside simple competition, and are therefore so slow, that it hardly seems safe to take the elimination of the more expensive risk-bearing for granted in all cases. The tendency is more important in connection with the general risks of industry, as we shall see in a later chapter. 3 The extra income received, on the average, by the bearers of the risks just discussed, as a result of the restriction of production, is even less in the nature of a compensation than the premium received in the industries which suffer the handicaps considered earlier in this chapter. T o call such a premium a compensation we must be able to assume that a would-be entrant or investor in a given industry is in a position to tell how much is being earned by those already in it. T h a t is the only way he can decide whether 1 Lavington, loc. cit., p. 399. 2 The reasoning of these paragraphs, it is evident, treats the risk-bearer as a participant in the production of the good in question. This is usually the case, but it is not essential to the argument. Every risk-bearer must, however, have resources of some kind — he must be a laborer, landowner, or investor somewhere. 3 Chapter X V I , especially pp. 245-247.

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221

the move is worth while. In the present case, however, he can not even determine whether any premium at all is being earned by the industry as a whole. The necessary data, in the nature of things, are not to be had. It seems idle, therefore, to speak of him as being willing to bear these risks at a price, and staying out of the industry unless he gets it, or even unless he gets something. I t is simply a case of being willing or not being willing. If those who are willing are few enough, they will receive a return for their risk-bearing. It will be more in the nature of a rent than a wage, however; it will be more conjunctural than compensatory in character. The same sort of reasoning applies to those who bear the uneliminated residuum of risk in the case of some insurance ventures.

C H A P T E R

X V

WAGES OF M A N A G E M E N T THE

MANAGEMENT

OF

LABOR

N THIS chapter we have to consider a special category of income derived from labor, namely, the earnings of those whose function is to coordinate and supervise the activities of the workers who carry on the technical operations — physical or mental — required for production. This type of wages is taken up separately, not because it involves any fundamental exception to the general theory developed earlier, but because it presents some special analytical problems and because it is so commonly associated, in theory and practice, with a very different form of income — profits — that much confusion has resulted. Although I do not wish to insist upon a mere question of definition, I think it is very important to distinguish sharply between earnings of management and certain other gains accruing to some of those who direct the course of industry. I have therefore applied the term " p r o f i t s " to the latter and reserved them for later discussion. As we saw in the chapters dealing with value, production is nearly always the result of cooperation between various specialized groups of laborers, and these cooperating groups are in turn combined with land and savings, either as a matter of necessity or with a view to greater efficiency. Now none of this runs itself; it requires the continuous attention of workers who, in a simpler organization of production, would not be needed and could therefore devote themselves to the technical processes of some craft. This necessity does not arise from the dynamic character of industry. It is not a question of devising new methods or introducing new products, but of maintaining smooth and

I

222

WAGES OF MANAGEMENT

223

efficient operation along accepted lines. Personnel must be selected, trained, and supervised, even under static conditions; materials must be tested for quality and kept moving in adequate flows; numerous unforeseen complications due to weather, personal short-comings, and the like, must be dealt with as they arise. N o society, however settled in its ways, is ever freed from these needs. Such managerial activity runs far down the industrial hierarchy. T h e humble foreman has as real a part in it, though perhaps a less important one, as the great " c a p t a i n " who directs the activities of thousands. Its essence is t h a t it contributes to organization, t h a t it helps to make a complicated — often a very complicated — cooperative process work. Such labor as must be considered mere watching is therefore to be excluded, unless the need for it is a consequence of the manner in which production is carried on. A roomful of Roman slaves making duplicates of a book or a gang of negro cotton-pickers do not require any less watching than they would if working in a more highly organized (and more efficient) way. From this point of view a certain part of what is commonly called "execut i v e " work is not management. In thus stressing the necessity of management under static conditions, I do not mean to imply t h a t it is more difficult, or nowadays more important, than the planning of new industrial developments. T o originate de novo, to say nothing of arousing the confidence and enlisting the help of needed allies, calls for the exercise of the highest faculties, and deserves ungrudging support. In the modern business world it absorbs the energies of the greatest leaders. But all this needs no pointing out. W h a t is more likely to be forgotten is t h a t the running of the vast machine which business genius has built up also requires time and talent in abundance. There is an interesting analogy between cooperative or organized production and production carried on with the help of savings. In both cases the reason may be either

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VALUE AND INCOME

that efficiency is thereby increased or that production is otherwise impossible. Let us begin with a simple case of the first kind — a group of laborers, using no savings, who produce a given good by working at various special tasks. I t makes no difference whether this division of labor is among a group who are closely associated together, as in a factory, in loose contact with each other, as in towns or districts where several complementary industries are located, or in no direct contact at all, as in the geographical subdivision of labor; but it is easier to analyze the problem in terms of the first situation. Now what determines the earnings of the manager needed to make this system work satisfactorily, assuming for the moment that only one is needed? One factor in this, it seems clear, must be the extent of the gain in efficiency. If the manager got more than that, there would not be enough to pay the laborers as much as they could earn without entering into any such organization. Can he get that much? T h a t depends. If there were only one man available who was capable of performing this managerial task, any group of laborers of the requisite size but as yet unorganized would be willing to pay nearly the whole amount by which their output would be increased, in order to obtain his services; or if we prefer to think of the manager as taking the initiative, he could obtain the cooperation of the group by offering them something more than they could earn by themselves. There is no additional demand for this labor, it must be remembered, but only a desire to have it work in a different way. Hence there is no necessity for bidding up wages except for the purpose of overcoming inertia. The increment of product which thus limits the amount that this one manager could obtain depends upon several factors. One of these is obviously the percentage by which the efficiency of each worker in the group is increased; another is the size of the group. A ten per cent increase for a group of a hundred men is more than a fifteen per cent

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225

increase for a group of half that size. Finally comes the kind of labor involved. It means more to raise the efficiency of skilled workers than to effect a similar result in the case of unskilled workers. T h e value of the added output •— the manager's share — is greater in the one case than in the other. 1 A n interesting corollary of this reasoning may be noted before proceeding with our analysis. Under the conditions assumed above, the superior efficiency of labor resulting from organization would have no appreciable effect upon values. If the whole addition to the output goes to the manager responsible for it, the supply impinging upon the previously existing demand for the good is obviously not increased and hence no change in price results, in the long run. T o put it somewhat more accurately, there is an increased output of the good in question, with a corresponding increase in demand (i.e., from those who get the right to the extra product) to neutralize its effect. 2 Hence it is not correct to assume that every change in the organization of labor which increases output will necessarily result in a lower price for the product affected. Such an outcome is contingent upon certain other elements in the situation. Suppose, now, that there are several men able to do this kind of work. These additional managers can find an outlet for their talents by duplicating the organization with which the first one has associated himself, unless the latter already embraces all, or practically all, the workers previously engaged in this branch of industry — a very unlikely condition — or unless there are too many of them. If there are no more than enough to provide the management required in order to organize all the workers already in the 1 I t makes no difference whether he wants the good produced b y the group or not. T h e point is t h a t he controls a certain percentage of their productive capacity. C f . the analogous point in connection with interest from " p r o d u c t i v e " investment. (See pp. m and 121 above.) 2 Assuming, of course, t h a t those who benefit b y the increase in efficiency w a n t the goods produced b y these laborers. If not, some of the latter will find it to their a d v a n t a g e t o produce something else.

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VALUE AND INCOME

industry in the new way, they will obtain the same reward as the manager of the first group did, and values will remain as before, the relation between supply and demand being unaltered. 1 B u t if the supply of capable managers is larger than this, as may well prove to be the case, a difficulty will arise. In order to provide a field of activity for this larger number, it will be necessary to attract workers from the production of other things, i . e . , things to which the organized technique in question is supposed not to be adapted. This will have two consequences. In the first place, a greater scarcity of the goods formerly made by these new recruits will result, with no drop in the demand for them, causing an increase in their value and higher wages for those who continue to produce them. T h e workers who have been induced to enter the organized industry will therefore be tempted to go back unless given higher wages. More important is the effect of this expansion upon the value of the good produced by the new cooperative method. T h e increase due to their greater efficiency is taken care of as before — as added income for the managers or the laborers themselves — but the increase due to the greater number now in the industry is a very different matter. T h a t impinges upon a demand no greater than before. T h e value of the good will therefore fall. 2 Both of these developments, it is evident, react unfavorably upon the earnings of the managers. Out of a product no greater per capita, i . e . , no greater than before the supply of managers and the number of workers in the industry had increased, the laborers must be paid higher wages for two reasons. On the one hand are the greater earnings now received by those still engaged in other industries; on the other is the fact that if the workers in the organized indus1 The monetary complications described in connection with productive investment (see pp. 121—122 above) would, of course, be encountered here as welL 2 The history of factory industry in New England affords an interesting example of this drawing of laborers from other lines — agriculture and domestic service, for example — into more highly organized productive groups.

WAGES OF M A N A G E M E N T

227

try were given only the same percentage of the product that they received before, the value of their wages would be less than it used to be (and a fortiori less than other laborers are getting) and they would desert the industry. T h e managers will therefore have to be content with a smaller share of the product or productive capacity of the workers in their organization. T h e extent of this decline in their earnings, and of the increase in wages, will obviously depend upon how many men take up the career of manager in this industry. This, it is important to note, is not simply a question of the number who possess the necessary talents. It is not to be expected that men will continue to work as managers, if the income they can obtain in that way is less than they could hope to earn in some non-managerial activity. 1 A limit is therefore set to the expansion of production in the branch of industry served by these organized groups, and to all the results upon values, wages, and managers' incomes which flow from such expansion. T h e alternative employments referred to here are not necessarily or even probably in the nature of manual labor, as some discussions of this point have seemed to imply. It is simply a question of what work the potential manager is capable of doing, and it may well happen that he is a person of outstanding mental or technical gifts who can succeed in some kind of well-paid professional work. If manual labor is, in fact, what he would have to turn to, the controlling income level will depend on how scarce — and high-priced — that kind of labor is. There has been a good deal of confusion on this point. In discussing the earnings of the entrepreneur, it has been a common practice to reason that the way to get at the amount properly attributable to his peculiar function — risk-taking, enterprise, or the exercise of some more mysterious faculty — is to deduct from his total income the amount he could earn " as a hired manager." Now this is I Cf. Hawtrey, The Economic Problem, p. 36.

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VALUE AND INCOME

true enough, if we regard it merely as a convenient device for determining what a man is probably worth as manager where he now is; but it is not true in the sense that the earnings of hired managers have any controlling influence upon the earnings of entrepreneur managers, and in any case it amounts to a dodging of the first real step in the problem. Wages of management can not be dismissed as a simple case of wages, still less as a given factor in the situation. T h e y require separate, and in this case preliminary, analysis. Another check on entrance into work as manager is the special cost of acquiring the necessary skill. This is mostly a question of time. T o a considerable extent the success of the manager depends upon judgment which can be acquired only in the " g r e a t but expensive school of experience." If this means that he will have to wait longer before achieving a given level of earnings than he would have had to do as a workman or professional man, he will be unwilling to choose this career, unless the income to which he can aspire is somewhat greater than the alternatives with which he compares it. On the whole, I am not inclined to consider this a factor of much importance. Most of these alternative employments themselves require about as much time for training and experience — it is only the extra time that matters, of course — and a good deal of the knowledge and judgment needed can be picked up before a man assumes the responsibilities of manager, i.e., while he is still a worker in the ranks. In the foregoing no account has been taken of the possibility that potential managers may vary in ability. Supply has been treated as homogeneous. Such an assumption, of course, is unwarranted. All along the line we find a considerable range of capacity. Such differences may be due either to inferior ability at a given kind of managerial work or to inability to do certain kinds at all. One man may be a better foreman, for example, or a more successful corporation executive than another; some men simply haven't

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229

it in them to fill the latter position even passably well. In either case their earnings will be less, since they are responsible for a smaller addition to o u t p u t ; and in either case, likewise, they constitute a threat against the earnings of the abler managers. T h e groups they are able to organize help to enlarge the total o u t p u t of the industry. Hence the organization of more and more of them, as more of these inferior managers seek an opportunity to exercise their talents, will force down the earnings of the others. A l l potential managers, in other words, are a part of the total supply seeking employment. T h i s is not to say, however, t h a t it makes no difference whether the more capable managers are plentiful or not, so long as there are m a n y w h o can do the work after a fashion. Suppose there are not enough of the former even to organize the workers in the industry already. T h i s means t h a t expansion beyond the point reached under the older productive methods must come, if it comes at all, as a result of the activities of the less capable managers. N o w the share of the product which they receive as compensation for their efforts, being smaller from the start, will sooner prove an inadequate inducement when its value falls as a result of increased supply. Expansion is therefore checked at an earlier point, the value of the product is k e p t higher, and the wages of the more capable managers are depressed less than would have been the case if the whole industry were organized b y men of this superior ability. I t is not likely, however, t h a t men having a gift for management will be confined to a single industry for an opportunity to do this kind of work, as we h a v e assumed in our reasoning thus far. I t will be possible to increase the efficiency of the workers in other branches b y the introduction of similar methods. T h e s e m a y be just as effective — increase efficiency in the same degree — as those available in the first industry or less so. A n d , analogous to the latter, there will be opportunities for w h a t m a y be called the more

230

VALUE AND INCOME

" i n t e n s i v e " application of managerial ability to a given labor force, i.e., of putting a given manager in charge of a smaller group with a view to achieving a further increase in per capita output. A l l these, it is evident, enlarge the field of employment open to potential managers, and therefore check the decline of managers' earnings, b u t they are not equally helpful. If they are on a par with those in the first industry, the point when there will be any decline in these earnings will be pushed t h a t much further back, j u s t as if the first industry itself had been larger and thus required more managers to organize its original complement of workers. If the alternatives are poorer, on the other hand, managers' earnings will begin to fall as promptly as if there were no alternatives a t all, b u t the drop will presently be checked altogether for a time. T h e filling up or " d u p l i c a t i n g , " to borrow a term used in connection with investment, of the less advantageous opportunities for organization proceeds as before — no effect on earnings a t first, then a decline as it becomes necessary to expand the industry beyond its former limits. T h e s e differences between industries in the extent of the gains to be had b y the application of management of a given sort have important consequences for value. I t is obvious t h a t if only relatively small increases in efficiency can be achieved b y organization in a particular case, management will not be obtainable in competition with other industries until the latter h a v e been expanded enough to lower managers' earnings there to the level this less fortunate indust r y can pay. In other words, duplication of organization and the forcing down of v a l u e will begin sooner and be carried further in the one case than in the other. 1 I t has been assumed in this reasoning t h a t expansion of a n y branch of industry beyond its former proportions, as more managerial ability became available, could always t a k e place b y drawing new workers from industries not y e t I Cf. the analogous point in the case of investment, p. 129.

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231

organized. In theory, however, it is possible to conceive a situation where all labor is working in these more efficient ways, and no more managers, therefore, could find employment for their talent by such "extensive" applications of it. T h e only thing to be done, under these circumstances, is to apply management more " i n t e n s i v e l y " — m o r e in proportion to the other labor involved. This will sooner or later show something akin to diminishing returns in the use of land: the increase in efficiency will be less and less for successive increments. T h e additional would-be managers must therefore accept lower pay. Competition between these latter and those who have been receiving better pay (i.e., before the increased supply of managers) will reduce the earnings of all managers to a new low level, with correspondingly favorable effects upon wages in general. 1 THE

MANAGEMENT

OF

INVESTMENTS

I t is not true, of course, as the above discussion might seem to imply, that management is required only for the successful functioning of organization among laborers. Productive processes into which savings enter are also in great need of it. So far as this is a need for managing ability in general, and not for any special variety of it, we may say that enough to pay for the necessary amount is one of the costs which have to be deducted in order to determine how much of the total value of the output is to be attributed to the use of savings. T h e more is wanted, the more will have to be paid to get it, since less will be left to meet the rival demand for it, i.e., the use of management for the organization of labor. Less will therefore be left to go to investors as interest. If some special variety of managing ability is required, the case is more complicated. In analyzing " p r o d u c t i v e " investment we saw that the opportunities afforded savers I As in the analogous case under investment, the yield of managerial ability in other lines is not reduced by duplication, but managers therein can not obtain the full yield because of the competition of managers enjoying only " m a r ginal" opportunities.

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VALUE AND INCOME

by this use of funds vary considerably in attractiveness, some increasing the output of labor more than others. Now anything that serves to check investment in any of the more " p r o d u c t i v e " channels, will have much the same effect as the non-existence of the latter — a fall in the interest obtainable for a given supply of savings. T h e necessity of management may be just such a limiting factor, not in the sense that investment in the better ways is prevented altogether, but in the sense that its volume is restricted. This will be the case when the special managing ability needed is not plentiful enough to enable "duplicative inv e s t m e n t " to go as far in this advantageous use of savings as it would go otherwise, i.e., if only ordinary management were called for. 1 T h e yield on this type of investment is then not forced to the common level. T h e surplus above the market rate of interest will go to the scarce factor responsible for its existence — the special kind of managing ability — in the way of higher earnings than managers in general receive. THE

SUPPLY

OF

MANAGEMENT

I t appears, then, that both wages and interest are affected by plenty and scarcity of managerial talent. Where there are more potential managers, duplication of all forms of organization will be carried farther, with consequent advantage to ordinary wage earners. In like manner a larger supply of managers in general will result in a smaller deduction (for wages of management) from the total product of savings-using processes, leaving more for interest; while a plenty of any special variety of managing ability required for particularly advantageous investments will lessen the pressure on other opportunities for investment and tend to sustain the interest rate. In other words, good management does more than increase the total output of industry; it tends to increase the earnings of all the claimants to that total. ι Cf. pp. 1 2 4 - 1 2 5 above.

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233

This makes it doubly worth while to consider the factors which affect the supply of managerial ability, apart from native gifts. One of these factors is educational opportunity. This makes it easier to pass on the fruits of experience from one generation to the next and to enlarge the heritage in the course of time. It may, of course, be difficult for individuals to get such training, even when the facilities exist, because of the expense involved. Everything which contributes to the development and accessibility of these facilities is therefore in the public interest. Another factor is the nature of social ideals. Where it is considered demeaning to engage in industrial pursuits, a good deal of ability is either entirely wasted or directed into channels which contribute little or nothing to social well-being. The amount of high-grade organizing ability lavished on warfare and preparation for it — enormous enough in any case — tends to be relatively larger where the industrial leader is under something of a cloud. And where the desire to get ahead is encouraged, less latent ability will remain unutilized. The opportunities open to those possessing this ability, and hence their earnings, will also depend in considerable measure upon social conditions. Most obvious, of course, is the extent of progress in the arts. It is of little avail to have the general talents needed for successful management, if the method or organization in which it would be useful is as yet undeveloped. Then there are more indirect social factors which bear upon this point. The extension of extrahousehold production — the transferring to factories of productive activities formerly carried on in the home — widens more and more in some modern societies the sphere of the manager's work. This is not simply another aspect of changes in the arts, though closely allied with it. I t goes deeper than that. It derives from changes in the family's status, from new ideals concerning the position of women, from growing ability on the part of ever larger numbers to throw off the drudgery incidental to many

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VALUE AND INCOME

household tasks, even from mere changes in what we vaguely lump together as " taste." T h e second of the reasons for needing management mentioned at the beginning of this discussion — simple necessity for production at all — can be disposed of more briefly. There are some things that can not be done by individuals working by themselves, either by reason of the physical magnitude of the task, or of the necessity of combining natural aptitudes which are not common to all men, even in a modest measure. In the one case what Bücher called " l a b o r in c o m m o n " 1 is needed, not division of labor. It is not a question of greater efficiency but of necessary combination of effort. In the other case we are not dealing with a division into parts of a task originally performed as a unit, but with the cooperation of naturally and intrinsically complementary factors — again not a matter of efficiency but of necessity. Now in most such cases there will be a need for some form of management, though probably not so high a grade of it as in the more complex forms of division of labor. Here, however, there is no increase of output to provide the manager's compensation. As in the analogous case discussed in connection with interest, it is only through restriction of production that the value of the output can be kept high enough to provide ordinary wages for the other laborers and leave any surplus to go to the manager. T h e production of goods requiring management for this nonefficiency reason will therefore expand only up to the point where the value of the product will pay the going rate of wages to the ordinary workers and as much to the managers as men of like talents are receiving for directing and supervising efficiency-producing productive groups. T h e necessity of using managers for the purposes here in question constitutes a kind of "efficiency cost," a sacrifice of capacity which must be made good by a corresponding increase in the value of the product concerned. I Bücher, Industrial Evolution, Wickett, transl., ch. vii.

WAGES

OF

MANAGEMENT

235

RISK-BEARING

In all the foregoing, it will be noted, nothing has been said concerning the mode of payment. Wages of management are assumed to be the same whether received contractually, like most other wages, or residually as a result of the manager's assumption of entrepreneurial functions. Fundamentally speaking this is the correct point of view. W h a t the manager is " w o r t h " — what he may expect to obtain as normal earnings under competitive conditions — depends upon his relation to the processes of production, not upon any accident of his contractual relations with the others engaged in those processes. Whether the laborers hire savings and management and keep what is left for their wages, or savers take the initiative, or both receive stipulated payments from the managers or some of them, it all comes to the same thing under static conditions — so far as the principal elements in the problem are concerned.^ T h e real significance of the mode of payment lies in its effect upon the distribution of risk. As we saw in an earlier chapter, the risks of industry may be either general or special in character, and they may be borne by any of the participants in production. T o an increasing extent the managers of industry, or a certain part of them, have been assuming this burden. As management comes to play a larger role in production and thus to condition the success of a given venture more and more, both laborers and savers are reluctant to undertake production by the more highly organized methods, unless they can be freed from hazards which they feel powerless to guard against. Payment for ordinary labor is now predominantly contractual, payment for the use of savings largely so, in many countries. There is nothing inevitable about this, however; it takes place because the people concerned prefer to have it that way. In fact, there are still many exceptions everywhere, and apparently long will be. T h e ordinary laborer, though guaranteed a definite wage, in one respect or another, for

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short periods, runs the risk of lost time and lost pay resulting from mechanical breakdowns or errors of planning on the part of the management, and often of physical injury. T h e saver, on the other hand, by investing in " e q u i t i e s " often becomes a heavy sharer in the risks of the enterprise, though his contribution to management may end with the signing of " p r o x i e s " or even fall short of that. And many managers, i.e., persons performing managerial functions, are now paid a contractual wage, often less subject to the ups and downs of business than the pay of other laborers, because fixed for a longer time ahead, both in amount and in regularity. With the growth of large-scale business, the number of these "hired managers" tends to increase until risk is largely concentrated upon a few investors and investor-managers. So far as risks are general the manager can not be expected to bear them any more than other men unless he is paid for it. T o some extent, however, this compensation does not take the form of a larger share of social income, but of a greater feeling of satisfaction which the manager — i.e., not the "hired manager" but the independent employer — derives from his status. If enough men esteem this highly, there will be no dearth of managers in trades or establishments where the risks are shifted to them, as long as their earnings (residual) do not fall below the average for men of the same grade. I am inclined to think that the general risks of industry are largely absorbed in this way. I t is only the risks of particular industries that are likely to overshadow the satisfaction which the independent manager's work affords him. Risks peculiar to a given industry have the same effect upon managers as upon any other laborers — they tend to discourage recruits for this work and thus to affect production of the good involved. I t is not the supply of ordinary labor and savings which diminishes, however, but the efficiency with which they function. T h e introduction of the more highly organized methods is either prevented alto-

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gether or duplication of them is checked at an earlier stage. The supply of goods from the risk-burdened industries is kept smaller. As in the case of laborers in general, however, it is doubtful whether all forms of risk do repel enough people to affect values, and still less clear that such premiums as are received for risk-bearing can be considered an adequate or necessary return in a quantitative sense. In like manner, any other factor which makes a particular industry less attractive to managers — as in the case of laborers generally — will affect production, values, and earnings in that industry.

C H A P T E R

X V I

U N C E R T A I N T Y A N D PROFIT THE

NATURE

OF PROFITS

LL THE forms of income arising in a static society, even taking a liberal view of the nature of the latter, have been accounted for in the foregoing chapters. In a sense, therefore, we might consider our task finished, since our chief object has been to discover the norms of value and income. I think it will be helpful, however, before attempting to sum up the conclusions reached, to turn our attention briefly to a peculiarly dynamic kind of income, which is often associated with the static shares and m a y therefore give rise to confusion. In the nature of the case, we are concerned here, not with long-run or normal tendencies, but with temporary and conjunctural magnitudes. W e wish to explain why these incomes ever appear, and what determines their size when they do. Central to the discussion is the concept of the entrepreneur. T h e essential characteristic of this participant in economic activity is the contingent character of his income. In contrast to the contractual incomes received by other persons, some or all of his receipts for a given period depend upon the outcome of some venture or ventures with which he is connected — the selling price of the product, the expenditures which have to be incurred, the volume of business secured, and so on. Nobody agrees in advance to pay him a definite sum in return for all he has to contribute to production. Even though the return for some, or even all, of the productive factors which he controls may be thus contracted for, he makes other commitments which leave the net result of his activities in doubt. This is not necessarily a phase of employer-employee

A

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and borrower-lender relationships. A solitary worker using his own capital m a y be j u s t as subject to the fluctuation of markets and the other unpredictables of a dynamic order as a great employer. In our d a y , however, the typical entrepreneur is either an employer, a borrower, or both. T h e complexities of the industrial system have reached such a high degree t h a t nearly all laborers and a large share of investors h a v e to make contact with the productive process through intermediaries w h o m they trust to discover the most effective w a y s to employ the resources they have to offer. U n d e r dynamic conditions this means t h a t they must either assume the responsibility for policies which they feel incompetent to judge, or contract out of their independent position b y becoming employees or lenders a t interest. Responsibility is thus concentrated more and more upon a special class. 1 T h e person w h o assumes this responsibility for a given venture m a y or m a y not h a v e a further interest in it, i.e., as laborer, manager, investor, or landowner. In theory, a t least, a man m a y hire all the productive factors required in a particular case at stated rates, planning to reimburse himself out of the eventual proceeds. Since these m a y not suffice for the purpose, he must, of course, have resources of some kind somewhere, or he will not be able to go ahead with his plans. T h e r e will be some among those with w h o m he must enter into engagements w h o will object t h a t his promise does not safeguard them against the possibility of failure. T h e point is t h a t these resources — his labor, his a c t i v i t y as manager, his savings, his land — need not be employed here. I t is enough t h a t he h a v e them to back up his contracts. Hence it m a y happen t h a t all he receives from a given enterprise is due to his entrepreneurial relation to it. If a loss is suffered, it will have to be made good o u t of his other income. H i s total income thus remains contingent. I K n i g h t , Risk, Uncertainty, and Profit, p. 271. T h e reader w h o is familiar with this stimulating w o r k will realize m y indebtedness t o it at other points in this chapter.

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F o r a considerable period in the beginnings of " i n d u s t r i a l i s m " the entrepreneur was almost invariably the manager of and the principal or only investor in the ventures for which he was responsible. T h e development of more and more complicated and " c a p i t a l i s t i c " methods of production in most branches of industry has rendered the problem of financing too much for the great m a j o r i t y of managers and the problem of management too much for the owners of an increasing share of society's savings — the heirs of the earlier leaders. A separation of function has therefore proved necessary. T h e manager's stake, i.e., his wages of management, being too small in most enterprises to guarantee the increasing interest payments on the savings which had to be borrowed, the tendency has been for the entrepreneurial function to fall more and more to the lot of the propertied classes, particularly certain individuals among them. T o d a y the typical entrepreneur is likely to be a m a n w h o puts some of his own funds into a given venture, borrows w h a t additional funds m a y be needed (often a m a j o r part of the total investment), hires the necessary laborers and managers, and looks to the residuum after these latter obligations have been m e t for the interest on his investment here. A l l or a large part of his remaining wealth m a y be invested in enterprises in which his share of the returns is contractual, not contingent. T h i s is the position of the ordinary shareholder in a corporation or joint-stock comp a n y . In practice he is often so completely bereft of power over the corporation's policies and fortunes that his assumption of responsibility in connection with it is rational only in the light of the protection he enjoys under the principle of limited liability. H e m a y risk relatively little. N o w whatever the relation between entrepreneurs and the enterprises with which they are connected, in a given stage of industrial development, they m a y , as a class, receive more than other men do for comparable contributions to production, i.e., for the performance of similar

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services, for investments of the same volume, and for the use of land of the same grade. Their incomes are not entirely accounted for by the return to the productive factors which they control. Some of them, it is true, may receive less than was to be expected on the basis of these latter, taking their careers as a whole, and many of them may do so at one time or another, and yet the group may show something in the way of an income-premium. This premium is profits. If it appears at all, it can only be explained in terms of the peculiar conditions which beset industry in a dynamic society and of the peculiar relation of the entrepreneur to production. This view of the nature of profits, though arbitrary to a certain extent, as all definitions must be, conforms fairly well, I think, to the requirements of a satisfactory economic terminology. On the one hand, it follows popular usage as closely as practicable by retaining the residual element that is commonly associated with the word. The idea that profits are something left over after the completion of an operation or " d e a l " is thoroughly embedded in our speech. On the other hand, it is scientifically useful in that it avoids the confusion which would result if we called the entrepreneur's whole residual income profits in those numerous, and indeed typical, cases where this income contains a return to some productive factor, which would amount to calling the same thing by different names under different circumstances. It singles out the share of such incomes due to special causes. Profits in this sense are derived from three sources: the bearing of uncertainty, a matter in which the entrepreneur is to be regarded as a passive factor with respect to the dynamic character of industry; enterprise, in which he is an active, originating factor; and monetary maladjustment, which is closely analogous to the first, from some points of view, but not entirely distinguishable from the second in some cases. Most entrepreneurs obtain profits from all three of these sources. Their relative importance is likely

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to differ pretty widely at different times and places, also for different individuals and different ventures. Each of them presents a double problem: how to explain such profits as do arise, and whether a profit may ordinarily be expected. THE

B U R D E N OF U N C E R T A I N T Y

The world is incurably dynamic. Even if a given producer (or group of producers) has no part in bringing this about, merely taking the world as he finds it, he must count on a certain instability or fluidity in the factors he deals with, just as surely as on vagaries of the weather. Human wants do not remain fixed upon certain objects, even if left to themselves by reformers and innovators; the proportions in which the productive factors are available also undergo change, especially in particular sections of the world or of a country; the social and physical environment may develop new traits of considerable economic moment; and, finally, the positive activities of certain people impose hazards upon the passive remainder which are just as real and just as inevitable for them as any of the others are. As a consequence, the outcome of industrial and commercial operations is necessarily uncertain. The losses to which they are exposed and the gains which may accrue from them are as unpredictable as they are unavoidable. Whereas certain of the risks characteristic of a static order may for a time be in the category of uninsurables, because of insufficient data or lack of the necessary initiative, as we have seen, these are destined in the nature of things to remain there, incapable of grouping or averaging. Even in the sense of a general burden upon all industry, the time, place, amount, and character of their incidence is unknown. Being inevitable this uncertainty must be borne by somebody, either shared by all who participate in production or assumed by a part of them — the entrepreneurs. It is not necessary to go into great detail regarding these hazards. They are familiar to all economists. A few gener-

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alizations, however, may help to bring out some interesting differences between the several types. Changes in taste, of which the shifting of demand from one good to another is at once the most conspicuous and the simplest illustration, affect the success of producers because of the time required for the redistribution of productive resources and for such repricing of these resources as may be entailed by the new conditions. Expansion of production in response to greater demand as reflected in higher prices never takes place instantaneously. So many of the commitments involved may be relatively long-term and heavy ones that even people who know the facts may proceed very cautiously to action, to say nothing of the forces of inertia and ignorance. In the meantime some branches of production enjoy exceptionally high earnings, while others sustain a series of lean years. Sometimes, moreover, the extra earnings of the favored industry are not enough to stimulate further production anyway. Another efficient producing unit would increase output too much, and a less efficient one would not pay. 1 When a shift in demand entails a repricing of a scarce factor of production, a further complication is introduced. The slowness with which production responds not only prevents the price of the product from falling to a level yielding only ordinary returns to producers, but also keeps the price of the factor in question from rising to the point it is destined to reach eventually. What a scarce factor receives under given circumstances depends upon how much can be paid for it by the marginal users at the time, not upon what a few users could pay or what even the marginal users will be able to pay later. There is therefore an additional temporary source of gain. Changes in the proportions in which the productive factors are available bring uncertainty in a different way. An I Often an intermittent phase of the growth of demand. T h e expansion of production does not parallel the change in demand but waits on the attainment of successive favoring volumes of it.

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increase in the per capita supply of savings may be taken as an illustration. T h e result of this tends to be a fall in the value of certain goods: those into which savings enter as an ingredient — the products of scarcity-reducing investments, and some of those which can be produced with less labor by means of roundabout processes — the products of efficiency-increasing investments of better than marginal grade. 1 So far as savings have been borrowed for a considerable period on terms which do not permit refunding, some producers will find that the actual yield on these funds is less than they have agreed to pay for them. Duplicative investment lowers the value of the product in the first case, and thus lessens the margin above labor cost out of which interest must come; in the other case there is the additional difficulty of rising wages as more workers have to be attracted into the industry. Such difficulties may not beset all producers. As the use of savings comes to play a larger and larger role in production, increases in the supply of savings have to be spread less and less evenly over the whole field of industry. Duplication of particular uses requires such a large amount of savings that the added supply does not suffice for all possible opportunities. T h e rate of interest — the marginal price-offer — is reduced by a given increase of savings, but the yield on some uses is not. There is therefore double uncertainty: whether the supply of savings will increase, and if it does, which particular uses will first feel the brunt of duplicative investment. For analogous reasons there will be opportunities for gain when savings become relatively less plentiful. In this case further complications arise from the slowness with which funds can be transferred from lower-yield to higher-yield uses. All this, it is evident, does not afford any explanation of profits as a net income-premium for entrepreneurs as a whole. It only tells us that there may be gains for some of them, losses for others. T o get at the cause of profits we I Cf. Chapter V I I I , especially pp. 127-131.

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must go deeper. And first of all it is to be noted t h a t it is chiefly general uncertainty t h a t we have to deal with here, not uncertainty which is peculiar to certain branches of industry. No doubt such special uncertainties exist. Their influence, however, has already been sufficiently indicated in an earlier chapter. 1 Moreover, like the uncertainties which sometimes characterize otherwise stable societies —where insurance is undeveloped — those in question here may be a matter of danger of loss, irregularity of returns, or unpredictability of individual success; but the lines between the different categories are here even less clear-cut. We m a y therefore consider them all together. Now since everyone engaged in production is subject to these uncertainties, nobody can escape them by changing his occupation or transferring his investments. T h e only course open to a man who wishes to be free from them is to find someone who will assume them in his place — by engaging to pay him a stated sum for what he has to contribute to production. However desirous he may be of making such arrangements, he will seek the best terms he can get. Uncertainty-bearing, like everything else, tends to be performed by those who will do it cheapest. Whether he will have to pay anything at all depends upon how many people there are who wish to escape uncertainty, how badly they want the service, and what sort of a supply the market has to offer them. This supply is not simply a matter of the number of people willing to assume more than their share of uncertainty for whatever they can get out of it as individuals or as a class. I t also depends on their capacity. In order to assure another against the vicissitudes of a dynamic society, a man must have resources enough at his command to make good any loss the other may suffer if things go badly. Now this depends upon how much the latter has at stake in the venture: his wages — great or small, according to his grade — which he may fail to receive; the rent of a choice site ι Chapter X I V , especially pp. 2 1 4 - 2 2 1 .

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that he may be deprived of; an investment that may be swept away in disaster. The last, in particular, is largely a reflection of general industrial development. What we may call the "supply of willingness" at any given time is therefore a compound of several factors, some of which are especially subject to change according to circumstances. If this supply is plentiful enough, none of those who feel uncertainty to be an undesirable burden will have to pay anything in order to escape it. The amount available will suffice for all. But if the supply falls short of this, competition will allot it to those who are willing to pay most for it, as in other markets. Those who do not think the service worth the "clearing" price will go without it — they will bear their own uncertainty. In theory the background of these decisions, the " b a s e " of calculation, is the income-distribution implicit in the total situation, assuming its dynamic elements to be eliminated or reduced to negligible proportions. In practice it is partly a matter of estimate, partly a reflection of a long series of cumulative adjustments. I t must be admitted, moreover, that the "demand prices" which we assume here are, on other grounds as well, more vague than those of commodity markets, aversion to doing a thing generally being less definitely conceived than desire for consumption. I t would be fantastic, of course, to think of this pricing as accomplished in a kind of "glorified auction" of competitors bidding for the service of uncertainty-bearers. Few prices are so determined, for that matter. In this case, however, the indirectness of the process is even more marked than ordinarily. An investor " s h a d e s " the rate of interest a little here, because he prefers bonds to preferred stock; a manager leaves a salaried position there, because he thinks he can earn a little more in business for himself and is willing to take his chances; and so on all along the line, in almost every walk of life, a ceaseless process of adjustment goes on between those who wish to be relieved of uncertainty and those who are willing to assume it. No

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doubt this falls short of achieving the uniform maximum price of ideal markets, but that is the only goal we can ascribe to it in general terms. As a result of it entrepreneurs may be able to hire the factors of production for something less than they prove to be worth, socially speaking, and to retain the difference for themselves. Since so much depends upon the " supply of willingness," we need to inquire into the factors which tend to make it plentiful or the reverse. These are chiefly three: special attractiveness of the entrepreneurial role, the presence of conspicuous prizes, and the concentration of wealth. T h e first has several aspects. For some men the excitement of the thing, the pleasure of the " g a m e , " may fully offset its disadvantages; others, especially those performing the higher grades of managerial work, may feel recompensed by the independence they enjoy as the responsible head of an enterprise; still others value the entrepreneur's strategic position for the securing of gains by means of enterprise or as a result of monetary factors. If these various attractive by-products, so to speak, could be obtained by the ordinary employment of productive factors, there would be no reason why anyone should be particularly eager to enter the ranks of the entrepreneurs. B u t they are not available elsewhere; they are sui generis. T h e influence of conspicuous prizes has been pointed out in an earlier chapter. 1 Here it will only be necessary to consider its relative importance. Although the fluctuations of the inherently dynamic factors to which the entrepreneur is exposed sometimes bring rich " w i n d f a l l s " to a fortunate individual, they are in general so small, and their effects are so widely diffused through the industrial system, that an individual is more likely to be the beneficiary or victim of a considerable number of minor ones, with results of only moderate degree one way or the other. It is from enterprise rather than uncertainty-bearing that the big prizes are obtained. I Pages 218-219.

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T h e concentration of wealth probably tends on the whole to favor the voluntary assumption of uncertainty. It is true that the possessors of large fortunes — especially inherited wealth — are often among the most conservative investors, and that many have been led by the pinch of want to take rash chances with their meager resources; but I think this is more than offset by the fact that a man of large means can take a given risk with greater equanimity because the deduction he will have to make from his personal comfort and general scale of living, if fortune fails him, is less significant to him than a similar loss of income or wealth would be to a poorer man. After a certain point, indeed, nothing is involved except the satisfaction he may derive from being able to save more or to keep his previous savings intact — not negligible matters, no doubt, but surely less important than many others depending on the possession of wealth and income. Monetary Maladjustment. T h e vicissitudes to which the business man is exposed as a result of fluctuations in the value of money are too well known to people who lived through the years of post-war adjustment to require extended description. In a general way, moreover, they are analogous to those just considered. T o some extent they may be regarded as inherent in our industrial order, not in the sense that they arise from unstable elements in man or his environment, but in the sense that the technique of adjustment is, and appears likely to continue, pretty faulty, whereas the necessity of adjustment is unavoidable in a society whose wealth is increasing. 1 In other cases the difficulties are of man's own making — more or less deliberate. Even here, however, they generally affect a good many innocent bystanders, just as the enterprise of certain pioneers often does. Three groups of cases may be distinguished. First are operations which involve the buying of commodities and the resale of them after an interval of time, with or without I Cf. pp. 121-122 above.

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processing. The irregularity with which particular prices respond to monetary changes may result in a margin between buying price and selling price which is more or less than enough to pay the entrepreneur for his labor as manager, or for the funds he supplied, at a money rate commensurate with the movement of prices in general. Then there is the familiar case of the borrower who repays a sum of money which has changed in purchasing power since he acquired it. Finally there is the slowness with which payments for certain factors of production come to reflect the value of money, either because of the nature of the markets where these matters are determined or because of mere inertia. Wages are notoriously subject to this " l a g , " but rent and interest are by no means free from it. It is doubtful whether the possibility of these gains and losses plays any great part in most men's attitude toward assuming business responsibility. After a severe experience of it, to be sure, they take it into account; but after a while the old tendency to regard the monetary unit as the one stable thing in a world of change reasserts itself, and it is uncertainty of the first sort and enterprise which dominate their thinking. In some important cases, moreover, one does not escape uncertainty by changing to a contractual relation to industry; he only bets on a different turn of the wheel. The buyer of bonds takes his chances as much as the buyer of common stock, but he benefits from a different change of prices.

C H A P T E R

XVII

E N T E R P R I S E AND PROFIT TYPES

OF

ENTERPRISE

HOUGH all entrepreneurs must be bearers of uncertainty, in the passive sense just considered, not all of them contribute to the dynamic character of industry by changing its methods or objectives. Many are content to carry on in the old ways. Hence some receive no profits from the source we now have to consider, the most interesting of the three. The activities of those who do seek gain in this way fall into three general classes: the introduction of novel products, the adoption of improved methods, and the devising of ways and means for turning developments not of their making to their own advantage. In the last case the entrepreneur is passive in that he has no hand in bringing about the basic conditions from which he benefits, but his gains come only because he is not content to leave all to chance. Like a man sailing a boat, he tries to make something out of every wind that blows. Gains are derived from the introduction of novel products primarily because of the comparatively sluggish character of the industrial system. When the first tentative supplies of such a good are put upon the market, they sell, assuming the experiment to be successful, at prices more than sufficient to pay the going rates of remuneration for the productive factors used. No more than these rates have to be paid, however, since the demand for the factors in the new use, i.e., the demand by entrepreneurs, is offset by the decline in those branches in which they were formerly employed. In due time, of course, expansion of production is to be expected, lowering price and bringing it into line with what must be paid for the factors; but as we

T

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have already seen, in discussing adjustment to changes in demand, such an increase of productive facilities is delayed by various powerful factors. This interval—and it may be a considerable one — is the entrepreneur's day of golden harvest. The gains resulting from improved methods are similarly shielded from the levelling effects of competition. Whether due to greater efficiency of labor, to economies in the use of savings, or to better ways of utilizing land, they are destined to be diffused eventually in the form of lower prices and larger real incomes. This, however, will not come about at once. The pioneers in introducing the better methods, adding relatively little to the total amount marketed, will not depress prices enough to offset the smaller amounts they have to pay (per unit of product) for the factors used. This surplus they can retain until the spread of the new technique increases supply. The factors can get none of it, except by monopolistic combinations whereby they manage to obtain more than the competitive rate. The strategy of profiting from the inherently dynamic character of economic society takes so many different forms that it is hopeless to try to list them all or even to group them in categories. I shall mention only two by way of example. Speculation is an attempt to foresee increases or decreases in the prices of commodities, resulting from changes in market conditions, before other men do, and thus to intercept a part of the gains which would otherwise accrue to the producers in the one case, and to the consumers in the other. Only in so far as it succeeds in doing this can it be a source of income. M y other example has already been touched upon in discussing interest. 1 The investment of new savings, it will be recalled, is not spread evenly over the whole field of industry, especially in societies where roundabout methods have already made considerable progress, but proceeds from one point to another as funds become available in the necessary ι Page 125.

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volume. Hence the marginal demand price for savings mayfall (lowering interest) before the yield of all investments has been forced down by duplicative investment. Entrepreneurs using borrowed funds in these unduplicated lines may, therefore, be able to refund their debts on more favorable terms than they offered originally, i.e., more favorable than they can still afford to pay. The difference goes to swell their own incomes. To these three types of enterprise may be added the possibility of instigating some of those changes which we considered above under the head of spontaneous dynamic elements. Practically all of them are susceptible to such manipulation. That consumer demands may be caused to shift from one good to another — not necessarily a new one — needs no demonstration in this country. Such tactics may, it is true, call forth reprisals, especially if the victims are few enough to feel the pinch severely and are able to organize for defensive measures; but all this takes time, and in the meanwhile those who have engineered the change, and hence foreseen its incidence, make money. Increasing the supply of labor by stimulating immigration from other regions, and taking measures to increase the supply of savings by means of foreign loans are other forms of enterprise which may pay their originators a profit. CHARGES

FOR L A B O R

AND

UNCERTAINTY-BEARING

The gains obtained by means of these various kinds of enterprise are not to be regarded as wholly profit. So far as the planning and execution of such innovations requires time and energy, as they generally do, there is a first charge against the returns — for wages. The nature of this can be grasped more readily if we assume that those who contribute this time and energy are hired to do it and paid a contractual wage, an entrepreneur assuming the burden of the uncertainty which attends all such experiments to some extent. To obtain their services it is necessary to pay them enough to attract them away from such other work

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as they are fitted for, i.e., work other than pioneering. 1 Whether this will absorb the whole of the gain from enterprise depends upon circumstances. T h e demand for labor for these purposes is of the peculiar sort we have encountered in connection with certain other problems: it is not demand for various amounts at a series of prices, but for a given amount at any price below a certain maximum. T h e amount depends on the number of entrepreneurs desirous of embarking upon such ventures; the maximum depends on how much they estimate the gains will be.2 T h e greater the addition thus made to the total demand for labor, the higher the price, i.e., the wage, at which the market will be cleared. T o put the same thing in a different way, we may say that a certain number of workers are withdrawn from current productive processes — cooperation with land and savings in production, as compared with planning — thus raising wages as a result of a changed proportion between labor and the other factors. This assumes that entrepreneurs have the whole industrial world to draw on for assistance, and that the only competition they encounter is the opportunity for employment afforded by current production. On the whole this is probably the correct view. T h e people who are wanted will usually be heavily represented among the professional classes and managers, especially the latter. Of course there are likely to be a few men of outstanding capacity, for whose services entrepreneurs compete among themselves, and who receive wages much above the general level, but that is another matter. T h e y are paid more because they are worth more, not because of a general scarcity of this kind of ability. It seems probable, therefore, that wages 1 Note that this does not make the earnings of these workers depend solely upon the strength of the alternative demand for them — never a justifiable procedure. It makes the gain from enterprise a coordinate factor. T h a t is what explains why they can be paid anything. 2 Payment for general research comes under this head, except insofar as the payers regard it as a form of philanthropy. Cf .Journal oj Political Economy, xxvi, 137.

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will not be forced up v e r y sharply and t h a t some share of the gains from enterprise will remain in the entrepreneurs' hands. If w e suppose the entrepreneurs to do the work of planning and executing these experiments themselves, instead of hiring others, the problem is no different in principle. T h e only difference is that their own labor is w i t h d r a w n from general current production, not some other workers'. W h a t wages are after this withdrawal must be supposed to enter into the entrepreneur's decision to devote his time to these activities. T h e r e is therefore the same amount to be charged against the gains of enterprise as before, assuming t h a t general wages are affected in the same degree b y a given reduction in the laborers available for current production, i.e., b y the absorption of a given number into enterprise. B u t not all these schemes are successful. T h e entrepreneur m a y find t h a t the results do not j u s t i f y the wages he paid those upon w h o m he relied for ideas and plans, or do not compensate him for the work he p u t in himself. Such failure is more than a m a t t e r of personal unfitness; it springs from elements t h a t lie deeper still, beyond the grasp of technical proficiency. A new product m a y not appeal to consumers; an advertising campaign m a y fall on inexplicably deaf ears; a duplication of productive investment m a y be carried too far, with disastrous effects upon the market. T h i s means t h a t the pioneer is beset with more uncertainty than other entrepreneurs. In addition to the general hazards inseparable from dynamic conditions, he faces others which are not less real because they are, in a sense, of his own making. In other words, this particular economic activity is subject to a special burden, analogous to t h a t discussed in an earlier chapter. 1 A s in t h a t case, this m a y have a deterrent effect, making people somewhat less ι Pages 215-221.

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inclined to attempt experiments. If it does have this result, if there are not enough entrepreneurs who are indifferent to the special uncertainty, the rewards of successful enterprisers will be increased, to the extent that greater numbers would have increased the deduction to be made for wages. N o t the whole of profit, in these cases, is to be attributed to uncertainty-bearing, but only so much of it as would disappear if the plans of pioneers were always successful. T h e special uncertainty to which enterprise is subject is greater in some societies than in others. T h e deep-seated, almost instinctive aversion which some peoples show for novelty of any kind not only hampers all attempts to introduce change but makes the outcome of any particular venture more problematical. Much the same may be said of the comparative reluctance with which the old but still serviceable is discarded in some communities. T h e trend of population growth is the ally of the innovator in one case, his foe in another. T h e mobility and the teachability of labor are other variable conditioning factors. T H E SUPPLY OF ENTERPRISERS

W h a t reasons, now, are there for expecting a relative plenty of enterprisers, and therefore low profits from this source or even none at all? For one thing there is the interesting, even fascinating, character of the work. For many men nothing is so effective a means of satisfying what used to be called the "creative instinct," nothing gives such scope for the imagination, nothing makes life so interesting. Then there is the enormous prestige which the successful business leader enjoys in some communities — his every opinion valued, his every move a matter of public interest and concern. And the prizes that fall to the lot of the successful are often so notable. These and other collateral advantages, it seems safe to conclude, will generally suffice

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to offset the special uncertainty to which enterprise is subject. Whether they will tend to eliminate all profit is another matter. If this were a problem in static analysis, the answer would be clear: the possibility of reaping gains by means of enterprise would attract recruits until the earnings of entrepreneurs, apart from any premium for the bearing of general uncertainty, would be no more than men of similar talents were earning in current production. But here things are different. What successful enterprisers obtain as a result of their activities is as varying a quantity as the quality of the plans they devise and apply. I t does not settle at any level, even as an average, and stay there until other entrepreneurs learn of it and bring it down by their numbers. There is nothing to attract or repel the would-be pioneer except his own hopes and his own taste for this sort of work. I t is impossible to speak of any levelling tendency. Everything depends upon the elements of the particular situation. The profits of enterprise are conjunctural. This dual theory of profits requires a further word of comment. Some readers may ask why it would not be better to apply the term to income from one of the sources distinguished here, let us say enterprise, and give a different name to the others. There is no objection to this as a matter of principle. My reasons for rejecting it are of a practical sort. In the first place, incomes from the three sources are usually pretty closely connected in fact. Profits derived from only one of them are very rare. Furthermore, the grouping on the basis of residual receipt is a familiar one, both in general usage and in theoretical discussion. Finally, there is the question of statistical analysis. For this it is certainly much easier to treat profits as the entrepreneur's whole residual income, after allowing for returns at the current rate for his labor, land, and savings. Though doubtless not so compelling as the reasons which justify a pluralistic theory of interest, these seem sufficient here.

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EXPENSES

This discussion of entrepreneur activities suggests a further question — what is the relation, if any, between the expenditures and receipts of the entrepreneur and the value of the product in which he is interested ? It will therefore be appropriate to conclude the present chapter with a brief consideration of this point. As noted earlier in another connection, 1 these sums, so long treated as the costs of production, have no part in determining the static norms of value. T h e entrepreneur is only a channel through which the real value making forces exert their influence. Except as a reflection of the objective factors in cost, what he has to pay out is entirely the result of what he is able to take in. Wage premiums, rates of interest, payments for natural resources — all are ultimately consumer-determined. It is not even correct to say that changes in his necessary outlays account for changes in values, being due to changes in the objective cost factors alone. W e can not regard the other elements in the problem as given unless we assume that every increase in the demand for a scarce factor for one use is offset b y a decrease in the demand for it for other uses. Expenses of production are at best a convenient device for demonstrating the influence of the objective factors. B u t in the attainment of the static norms entrepreneurs play a very interesting role, wherever production has attained any considerable degree of complexity. It is through the policies which they adopt in consequence of discrepancies between their outlays and their receipts that all the readjustments entailed by a disturbance of equilibrium are brought about. T h e losses and gains which in a simpler economic order would impel the owners of the productive factors — laborers, landowners, savers — to accommodate themselves to changed conditions here impinge upon the entrepreneur; and he is the first to feel the pressure when any factor becomes relatively scarcer than fori Page 57.

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merly. This aspect of the entrepreneurial economy may be discussed under three heads: allocation of resources, pricing of the productive factors, adjustment to the objective cost factors. It will not be necessary to analyze these in detail; the points can be made clear by a few typical cases. The allocation of resources may be illustrated by a simple case — the shifting of labor from one branch of production to another. The change in consumer demand which is the real impetus to this, and only justification for it in a competitive society, first manifests itself in the form of higher prices for the good to which demand has turned and lower prices for those which consumers are giving up. Assuming a previous state of equilibrium, this will mean loss to some entrepreneurs, profit to others. The former will therefore discontinue hiring laborers for the depressed industries, in some measure, and turn to the profitable ones instead. Unless the laborers are reluctant to change, and must be persuaded by wage concessions, the whole transfer may be accomplished without any effect on wages. Laborers move to a different kind of work, not because it pays better, but because jobs are easier to get there; in other words, because entrepreneurs are hiring men to make one thing rather than another. Profit, not inequality of earnings, becomes the immediate motive for the re-allocation of resources. The pricing of the productive factors is a little more complicated. Let us take the case of land. A development tending to raise the rent of land, say an increase of population or a change in demand in favor of land-using products, will raise the prices of some or all of the goods for which land is required. As before, this means a profit for some entrepreneurs and a tendency to enter the more prosperous industry. In this case, however, the newcomers can not enter on the same terms as those already in the business; they have to use poorer land, it may be supposed. Rather than do this they will endeavor to get some of the better land away from its present users by offering some

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of their expected profits to the owners, thus bidding up rents. T h e landowner gets his higher rent through the competition of profit-seeking entrepreneurs, rather than directly through the competition of producers. Similarly for scarce kinds of labor and for savings. Changes in the objective cost factors are more like the first case. Suppose an improved method has been devised which reduces b y a half the amount of labor required to m a k e a given commodity. T h e first effect of this is to reduce the entrepreneur's outlays, while leaving his receipts unchanged, thus affording a profit where none was t o be had before. Other entrepreneurs will therefore be attracted to the industry and production will expand until the entrepreneur's income per unit has fallen, like his outlay, b y one half, i.e., until the value of the product reflects the change in the conditions under which it is produced. A g a i n it is profit t h a t motivates the readjustment. T h e calculations and rivalries of entrepreneurs are thus of great interest to anyone w h o wishes to understand how the complicated productive mechanism of modern societies works, and to interpret the business a c t i v i t y which permeates and colors our whole civilization. W i t h o u t a study of these questions, moreover, it is impossible to run down the causes of certain phenomena characteristic of a dynamic order, notably the business cycle. I t is equally true, however, t h a t this alone will never give us adequate insight and reliable judgment.

CHAPTER XVIII VALUE: A

RECAPITULATION

I

N A majority of the preceding chapters there are references to the relation between value and the various other problems discussed. This is inevitable, so completely interdependent are the many elements which enter into the texture of economic life, but it may leave the reader who is accustomed to think of the value problem as a unified one somewhat confused and dissatisfied. In this chapter, therefore, I shall endeavor to bring together the conclusions already reached, omitting the arguments which support them and some of the qualifications which it is necessary to note in any careful analysis. I t is not simply as a matter of convenience, however, that this summary is placed at the end of the static analysis. I t belongs there. The common, almost conventional, practice of expounding a general theory of value before the problems of "distribution" have been so much as mentioned is thoroughly out of touch with the facts and seriously misleading. I t obscures the essential unity of the process whereby goods are evaluated and income shared, and imputes a spurious priority and independence to part of it. Since the earnings of every factor of production can be explained only in terms of the effect upon values, in the long run, of the introduction of that factor, the only way to get at the real meaning of the value system is to analyze step by step the mutual and cumulative interactions between it and the distributive system by which it has been attained. Only then are we ready for a general survey. MARKET VALUE

All values being proximately market values, i.e., values arrived at by a process of bargaining for the sale of specific 260

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stocks of goods, the first step in the value problem is necessarily an analysis of markets and market pricing. T h e wants or desires which manifest themselves in markets, and whose existence can, in a sense, only be inferred from the willingness of buyers to p a y prices, we found to be derived from " i n t e r e s t s , " dispositions of the mind reflecting the obscure and complex action of " g o v e r n i n g propensities." T h e y are not directly derived from them, however. A given interest, on the one hand, m a y give rise to several w a n t s ; a given w a n t , on the other hand, m a y result from the concentration of a number of different interests upon a single object. F r o m certain characteristics of these interests w e reached the concept of a kind of hierarchy or scale of wants, an order of importance, neither v e r y clear-cut nor permanent, which different things have for a given individual. T h e s e characteristics are (1) differences in the intensity of interests, and (2) preferences between the objects of a given interest. Some interests are normally stronger than others; some v a r y from time to time as conditions change or as satisfaction has been more or less recently achieved; m a n y depend upon the age and experience of the individual. Preference is not a matter of intensity; w e desire some things rather, not more, than others. T h e same interest or interests are involved. T h e importance of the want-scale arises from the f a c t t h a t we can not satisfy all our wants, partly because our external resources are inadequate, partly because life is too short and energy limited. I t is therefore necessary to choose among them, if we wish to make the most of our opportunities. T h i s choice is complicated b y the f a c t t h a t the satisfaction of different wants makes different drains on our time, energy, and other means. Hence we must " c o u n t the cost," lest w e sacrifice a greater aggregate of satisfactions in order to obtain a less. Calculation being itself a cost, however, excessive rationalization of choice is to be avoided.

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Such problems of choice underlie demand, the proximate determinant of market prices. Every would-be purchaser of a commodity has a certain price which he is willing to pay for one unit of it, another price for an additional unit, and so on. This is his "primary demand schedule." T h e price offers of which it is made up all reflect a weighing of cost — here cost of acquisition — none being reasonable unless the satisfaction expected from the unit in question is greater than the cost of obtaining it. Successive units normally elicit smaller and smaller offers for two reasons — the lower intensity of the desires seeking satisfaction and the greater cost involved in giving up further and more important increments of other income. From the data of the primary demand schedule we obtain the " d e rived demand schedule," showing how many units the individual will buy at a series of prices. Adding the data of the derived schedules of all persons desiring to buy in a given market gives us the market demand schedule — the number of units which can be sold at each of the several prices. Market price will be that which just suffices to obtain purchasers for the whole stock — to "clear the market." T h e ratios between the price thus arrived at and the market prices of other goods indicate the values of these goods, i.e., the rates at which they exchange for each other. Value is an inference from price. T h e pricing process requires that competing offers shall be comparable, and this is impossible where they are expressed in goods of various kinds. Prices in terms of a common medium are necessarily prior to values. This common medium is in practice generally money, since it is in that form that most people receive their incomes. Fundamentally, however, what a would-be purchaser offers is, under the simplest conditions, labor — his own or that of others due him as tribute of some kind. Under more complex systems of production this concept has to be expanded to include all forms of productive

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capacity, in particular the added efficiency obtained b y the investment of savings, which can always be expressed in terms of the simplest unaided labor. T h e necessarily experimental character of most early purchases of a commodity, and the feebleness of m a n y interests when they first arise, make it desirable to regard demand, and therefore m a r k e t price, as something more than the result of momentarily active forces. I t m a y take time to discover all the prices and values, for given stocks of goods, really implicit in a given situation. I n thus making demand depend upon cost of acquisition w e seem to involve the value system in circularity, wherever buyers are supposed to depend upon exchange for supplies of more than one good. T h i s difficulty is avoided b y viewing the pricing process as a multiple one. E a c h buyer, under these circumstances, has a demand schedule — prim a r y and derived — for successive units of all the goods being evaluated, in the order of their importance in his want-scale. Prices and values are thus arrived a t simultaneously. I t is only in a normative sense, however, t h a t these demand schedules are operative. A s a process, multiple pricing is necessarily circular. Various factors reduce the complexity and burden of this process. A n important qualification of the general theory of m a r k e t price arises when the stock to be disposed of is not held b y single-unit owners. T h e n it m a y happen t h a t the sellers, though competing with each other, will not find it to their advantage to throw their entire holdings on the market for w h a t they will bring. H o w low m a r k e t price will fall under these conditions depends upon three factors — the number of people b y whom the stock is held, the number whose holdings are relatively v e r y small, and the nature of the demand. T h e fewer the number of sellers and the less elastic the demand, the less likely it is t h a t m a r k e t price will be as low as it would be if the stock were held b y single-unit owners.

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VALUE

T h e transfer of resources into the production of the goods wanted by consumers being a process which requires time, we have to distinguish between the values which result as soon as consumers have discovered the real extent of their desires — which may also take time — and those which are to be expected when all such transfer of resources as is feasible has taken place, and which may therefore be regarded as relatively stable. These latter are long-run or normal values. T h e y do not constitute an objective system, in the sense of being imposed on society by its environment or by purely technical considerations, since man's demand for goods is an integral factor in determining them. Their permanence, moreover, is only relative. Apart from the thoroughly dynamic character of western economic societies, there are reasons for believing that a value system implicit in a given situation will, when once attained, show a tendency to transform itself. Demand being partly a result of the distribution of income, and this in turn being partly a result of the value system, a new situation develops in the course of reaching an adjustment to the old one. Moreover, the supply of the factors of production, an important element in the determination of values, is affected by the earnings of these factors, and these depend in part upon the value system. Hence changes in the conditioning factors arise as adjustment proceeds. This does not make the theory of value circular; only a temporal sequence is involved. A further difficulty is the improbability, on logical grounds, that wants and natural resources will remain unchanged during the process of attaining equilibrium, but this is of minor importance for many problems. T h e determinants of long-run value may be conveniently grouped under four heads, (1) the objective factor in costs, (2) the relative scarcity of the factors or particular variety of factors used, (3) the size of the output under equilibrium, and (4) the special burdens incident to the use of a pro-

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ductive factor for a particular purpose. I shall deal with each of these groups separately. The Objective Factor in Costs. T h e amount of labor required for the production of any good must always affect its value. If the conditions of production are otherwise identical, a good made at the expense of two days' labor will be worth twice as much as one which can be made in one day. This is a necessary consequence of the principle that no one will be content to continue producing one thing, if a larger income is to be obtained by turning to the production of something else. Unless the producer of the first good receives twice as much for a unit of it as the producer of the second receives for a unit of that, their incomes will not be equal. T h e influence of the amount of savings used in producing a given commodity is less certain. In the case of those goods into which savings enter as a mere ingredient, a sine qua non of production, the margin between the price of the necessary labor and the price of the product must be greater where more savings are required or a given investment is required for a longer time, if borrowers for this purpose are to pay the going rate of interest — a necessary condition for not being excluded from the market for savings. Duplicative investment will therefore be checked at an earlier stage in these branches of production, and the values of such products will remain higher. Where savings are used to increase the efficiency of labor the situation is very different. Such investments, of course, never cause values to be higher; no matter how large they are, they always " p a y their w a y " by increasing output per laborer. B u t the lowering of value, which generally results from productive investment, does depend in part upon the amount of savings required in a particular case. Those investments which increase labor's efficiency most in proportion to the savings used, i.e., those in which the initial " y i e l d " is highest, will be the ones in which duplication begins soonest and is carried furthest. T h e values of goods

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to which these specially helpful processes are applicable will fall more than the values of goods for which only less effective processes are available. The use of management to increase the output of labor is an analogous case. Like the productive investment of savings, it never raises values, but only lowers them as a result of duplication beyond a certain point. The latter is conditioned by the amount of management which contributes to a given volume of production. I t is where the greatest gain in efficiency is achieved in proportion to the managerial labor performed that managers will first apply their efforts and duplication will lower values most. Relative Scarcity of Factors. If any of the labor required for the production of a commodity is relatively scarce, i.e., not plentiful enough to bring its earnings down to the level of common labor, the value of the commodity will normally be higher than that of other things upon which equal amounts of more abundant labor are expended. The difference in value will be proportional to the greater wages received by the scarce laborers — a simple ratio, if the latter do all the work of producing the commodity in question; a compound ratio, if they are assisted by less expensive laborers, as is ordinarily the case. The wage premium of the scarce laborers is not to be regarded as causal, being the result of the demand for and relative scarcity of the goods in question. I t is only an index of scarcity. The land needed as a cooperating agent in some productive processes may also be relatively scarce. This means that there is not enough of the best quality to bring supply and demand into equilibrium without using any inferior land or producing any increments of supply under less advantageous conditions — due to diminishing returns — on the best land. Commodities thus dependent on the use of scarce land, whether for the scarce laborers or the cooperating laborers, will exchange for others in a ratio in which the objective factors are not those of average or typical conditions of production, but those which obtain on the

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poorest land, or under the poorest conditions, to which the existing demand makes it practical to resort. In other words, the marginal objective factors in cost are the controlling ones. The nature of the margin bears no simple causal relation to value, however, being in part the result of the demand for land-using goods. If a given supply of land is suitable for the production of more than one commodity — the usual case — the value of each of the goods will be as high as it would be if it were produced on the poorest land used for any of them, whether any such land is in fact used for its production or not. Competition will force the payment of rents by the users of better-than-marginal land, which will put them on a par with really marginal producers. The objective cost factor reflected in the value of a given commodity may therefore be greater than any actually observable in its production. Where the interchangeability of lands is not complete, i.e., where land is a less efficient agent in one use than in another, the commodity for which the demand is great enough to require the extension of production on to land which loses efficiency by the transfer from other uses will have to pay for an efficiency cost. Its value will be higher than that of other commodities produced on this land and requiring an equal amount of labor of the same grade under the most favorable conditions. The value of land for use as a consumer's good, must be as high as its value to those who desire it as an aid to production; but this does not mean that the value of land as determined by competition for productive purposes is to be considered the cause of its value for consumer purposes, since the demand from the latter source is a contributing factor to the total demand for land which determines rents and margins. The consumer demand for land depends ( x ) upon the size of the population, (2) their attitude towards sharing a given area of land with others, i.e., towards crowding, and (3) the distribution of purchasing power among the members of the community.

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W h e r e land is used as a store, rather than a continuously cooperating factor, the value of products derived from it will reflect, as in ordinary productive uses of land, the o b j e c t i v e cost factors which characterize operations on the least advantageous sources, or the most expensive refinem e n t of process on better land, which it is practical to utilize under existing conditions. T h i s margin, however, will be the result, not simply of the quality of the land available and the demand for its products, b u t also of the rate a t which the stores are depleted or exploited. T h i s rate depends upon ( i ) the burden of the carrying charges, especially interest and taxes, (2) the number of owners sharing the control of such resources, (3) the elasticity of the demand for the products, and (4) the prospects of discovering further sources of supply. T h a t the savings which enter so largely into modern productive processes are rarely, if ever, as plentiful as w e should like to h a v e them is a familiar enough fact. T h e effect of such scarcity upon the values of goods depends upon the function of the savings in each case. If the savings are necessary for production, i.e., to be considered an ingredient of the product, it is plain t h a t the difference between value and the cost of the necessary labor — the source of interest — will h a v e to be larger when savings are scarcer in proportion to the demand for them and therefore command a higher rate of interest. T h a t is the condition for not being excluded from the m a r k e t for savings. Production of all commodities requiring savings for this purpose will therefore be more restricted, under given conditions of demand, than it would be otherwise. T h e higher interest rate is no more the cause of the higher v a l u e of such goods than the higher wages of certain laborers is in analogous circumstances. O n e of the reasons it is high is the demand from this particular source; indeed it is possible to conceive of an interest rate wholly determined b y the demand for savings for these purposes. L i k e the wage premium, the interest rate is only an index of scarcity.

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Where savings are used to increase the efficiency of labor the influence of scarcity is more complicated. As funds increase, one result is the duplication of those investments already feasible, with a consequent increase of supply and lowering of value of the goods produced by these processes. T h e plentifulness of savings therefore has a bearing, not upon the value of all goods for the production of which savings are used with a view to greater efficiency, but upon the value of those which are fortunate enough to benefit by a better-than-marginal (in the physical efficiency sense) capitalistic process. It is not a question, of course, of how much values are to be increased as a result of the use of savings — more if they are scarce, less if they are plentiful — but of how much lower they will be than they would be if no savings at all were to be had. T h e productive use of savings, as we have seen, never raises values. Analogous to scarcity of savings is scarcity of the better grades of managerial ability. Where management is required in order that production may proceed at all, the case is simply one of production with a scarce kind of labor. T h e manager's wage premium will be an index of scarcity and as such enter into the ratio in which such goods exchange for others. Values will be higher because of the necessity of using this expensive labor. Management which serves to increase efficiency — to make possible more highly organized production — is a different matter. If there are plenty of men capable of managing the most efficient groups well, duplication of these groups will be carried further before the declining return to the managers checks transfer from rival occupations. Values will therefore be lower. As in the case of savings, it is a question of lowering certain values through greater plenty of a scarce factor, not of raising them less. Efficiency-producing management never raises values. Special Burdens. T h e factors which make some uses of productive resources less attractive than others are more important in the case of labor. T h e y are of two kinds: (1)

%ηο

VALUE AND INCOME

those which increase the satisfaction costs involved in labor, such as laboriousness, monotony, ill-repute, irregularity, danger, and (2) those which make access to the occupation relatively expensive — a matter of consumption costs. Some of these may be offset by specially attractive features of the work, and most of them vary in importance in different societies. The first class of factors does not necessarily affect values. There is no check upon entrance to the work unless two conditions are present: (1) other kinds of work must be accessible, and (2) these alternatives must involve no loss of wage status. Moreover, there will be no scarcity of men for these jobs unless enough people regard these conditions of work as undesirable; it is only relative supply that matters. If demand, however, is so great as to require the services of workers who do object to such things, all in these trades will receive a wage premium. Like the wage premium received by naturally scarce laborers, this will figure in the ratio in which the goods in question exchange for others. In this case, however, it is not simply an index of scarcity; it reflects the existence of a causal factor inherent in the nature of the productive process required. Whether this premium may be regarded as a necessary compensation for the extra burden of the work, in the sense that the supply of laborers would fall off if wages were any lower, is open to question. Lack of knowledge, the late revelations of experience, and the overvaluation of conspicuous prizes work against any nice adjustment of extra earnings to special satisfaction costs. Entrance into a trade or profession is made expensive in two ways: the cost in time and money of the necessary training; fees and "training" standards imposed by monopolistic groups. As with the first type of special burdens, these will not affect supply and value unless the worker has something else to turn to which does not involve a sacrifice of wage status. Though lack of knowledge and the other impediments mentioned above are also a factor here, their

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importance is less and adjustment of wages to special costs tends to be somewhat closer. Special burdens affecting particular uses of land and savings have less influence on values. If the preparation of land for a given use requires an exceptionally heavy investment, owners will hold off, restricting the effective sources of supply and causing values to be higher. T h e influence of ill-repute and irregularity of earnings is not great, unless the feeling against them is widespread, not only among landowners but among potential owners and renters, i.e., in the community at large. In the case of savings, investment in a given branch of industry may be made unattractive, not only by factors of the same sort as those which repel labor, but also by unfamiliarity, imperfect liquidity and the special taxation of certain types of income. On the whole the latter, with the possible exception of taxation, are decreasing in importance. T h e former, especially risk, persist; but since the return to investors plays a relatively small role in the value system anyway, the effect of these checks upon investment, though real, is relatively of minor importance. There is probably a more calculated adjustment to these special burdens than to any of the others. Size of Output. T h e question here is not how values are affected by size of plant but how they are affected by the total volume put on the market. Size of plant is involved only indirectly. Economies in the labor required for production may result from larger output at any point in the series of operations which constitute the production of a finished good, and may apply either to the scarce labor involved or to the cooperating more plentiful labor. A given increase in the use of the finished good may make possible economies at one point but not at any other. It depends upon whether the operations at a given point were already large enough to make it possible to adopt the most economical sized organization which is technically possible. After that point is reached, further expansion

VALUE AND INCOME does not bring further economies at that point but onlyduplication of the best organization. This optimum size is not attained at all points with the same volume of output of the finished good. Hence expansion may bring successive economies, first at one point then at another, and so on. There are few points in any productive series, moreover, whose volume of operations depends entirely upon the consumption of any particular finished good. Hence economies at any point can not be said to result from the volume of sales of any one product. We can not even say that an increase in the sales of one good will lead to increased operations at such a point and may therefore make further economies possible. The increased demand for this good may be at the expense of one of the other goods contributing to the volume of operations at the point in question. When the economies effected apply to the scarce labor required for producing a commodity, the latter is put in a stronger position in the market for that labor and will obtain a larger share of it. The residuum after paying the wages of the cooperating labor is divided by a smaller labor factor per unit. More will therefore be produced, and value will be less than would have been the case if these economies had not been obtainable. When the economies apply to the cooperating labor, the deduction in respect of this made from total selling price is lower, and the power of the commodity in the market for the scarce labor correspondingly increased. Again supply is larger and value lower than it would have been otherwise. Cost of Production. Cost of production has no such dominating role in the determination of value as has often been attributed to it. General costs of production do not affect value. They are of three kinds: satisfaction costs, consumption costs, and efficiency costs. Values would be the same as they are now, even if labor and saving, in their present volume, involved no burden at all. As long as men try to make the most of their resources, goods will exchange

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in proportion to the amount and kind of labor required to produce them, in a labor economy; and in a capitalistic economy the distribution of a given supply of investment funds, and the consequent effects upon values, will be the same whatever the costs of saving. Satisfaction costs of production, then, so far as they are general, affect the supply of the factors, not the supply or the value of particular goods. I t is only when special satisfaction costs attach to particular kinds of production, as in the cases discussed in a previous section of this chapter, that values reflect cost of production. The influence of consumption costs likewise depends upon whether they are general or special. In the latter case they do affect values, as we saw in connection with the expenses of entering a particular trade. In a general sense, however, the function of consumption costs is the allocation of resources among different branches of production, in the exchange economy as well as in the private or isolated economy. This allocation of resources, though a phase of supply, does not affect values, since it is a response to demand and therefore always in the same relation to it. Efficiency costs are always special in the case of land and labor. When we say that the efficiency of labor or land has been sacrificed for production, we mean that these agents have been used in particular ways with this result, not that it is a necessary consequence of their being used at all. Being a special burden, this has to be paid for in the way of higher values. Savings, however, lose their potency not only through being used for the production of particular things but also as a result of use in particular ways, i.e., for roundabout processes of one sort rather than another. The first is seen when savings are devoted to any scarcity-reducing use. The goods produced are more valuable because of the competing efficiency-producing use that has to be outbid. The second case is analogous to general consumption costs in its effect. I t allocates savings among competing efficiency-producing uses and insures the

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exclusion of the less capable ones. It has no effect upon value. UNFINISHED

GOODS

Strictly speaking there is no separate demand and no separate value system for unfinished goods. The demand for these things is derivative, depending on the value of the finished good and the amount which must be deducted therefrom for the wages and interest required for the finishing operations. As purely market phenomena, under dynamic conditions, the value of such goods is always in the nature of an estimate, since both of the elements from which it is derived have to be anticipated. In the long run, however, the situation is different. Here the values of unfinished goods are implicit in the relations and interactions which account for the values of finished goods. The share assigned a particular contributor to the production of a given consumers' good, in the general analysis of value, may be regarded as the value of the raw material he makes, and the value of one unit of it is this total divided by the number of units produced. If the raw material was produced by two or more kinds of labor, its total value is the sum of the shares received by all the laborers who took part in producing it. Since few raw materials are used for only one kind of consumers' good, a given material is likely to derive its value from more than one price-making process. This involves no logical difficulties. It is possible, however, to avoid such a complete break with tradition. We may think of a raw material as a separate commodity whose supply is limited by the amount of some kind of labor used in making it. Its long-run price will be to the prices of other goods in the compound ratio which holds for consumers' goods. The parallel with the latter can not be carried further than this, however, without circular reasoning. During the interval before the forces governing normal value have worked out their full

VALUE: A RECAPITULATION

275

effects, a trial-and-error process superficially like the valuation of consumers' goods has to be resorted to. Values, then, whether viewed as unique results of temporary market situations or as products of deep-seated normative forces, reflect an exceedingly complex interplay of objective and subjective elements. In the latter sense, especially, values are linked up with practically every phase of contemporary economic activity and no small part of what has gone before. A whole culture, one might almost say, is focussed in them. So numerous and intricate do these interactions appear when we try to explain the value system of an advanced industrial society — to say nothing of a "world e c o n o m y " — that the temptation is strong to abandon the quest altogether, and to be content with the half-truths and working approximations afforded by less comprehensive analyses, banishing our doubts and compunctions to the convenient " p o u n d " of ceteris paribus. For some purposes, no doubt, such a procedure is unobjectionable, but for others it means the sacrifice of too much of the social point of view which should be the distinguishing mark of economic thinking.

INDEX

INDEX Accessibility, relation t o desirability of income, 168; of alternative employment, 203, 206; of investments, 213 Admission t o trades, restrictions on, 206 Advertising, relation t o w a n t s , 5; effect upon substitutes, 1 7 ; of m a chine-made products, 120η.; growth of, 176 Affection, as motive for saving, 199 Agriculture, 65-80 Allocation of resources, 7, 13, 23, 4 1 η . , 6 i , 8o, 258, 273 A l t e r n a t i v e investment, 114, 116, 120, 124 A m b i t i o n , as motive for saving, 199 A r i s t o c r a c y , relation t o utilization of land, 148 A t t r a c t i v e n e s s of occupations, 202-203 Avances primitives, 192 Bargaining, a cost, 15 η. Beginning work, age of, 174, 178 B ö h m - B a w e r k , Ε . v o n , 104, 163η. Borrowers, gains of, from price changes, 249 Borrower's surplus, 125 Bücher, Κ . , 234 Building, restrictions on, 69 Business, use of land for, 67-68 Business cycle, 259 Bye, R . T . , ion. Cairnes, J. E . , 60, 209 Calculation, a cost, 12, 261 Capitalistic production, n o Capitalization, of income, 127η. C a r r y i n g charges, in mining, 94-96,268 C a r v e r , Τ . Ν . , 39η., ι82η., 186η., 195η., 207η. Choice, necessity of, 7, 261; relation t o cost, 8, 1 0 - 1 3 ; labor supply a problem of, 162

Circularity, of pricing process, 29, 3 1 33, 263; of value system, 63. C l a r k , J. B., 4, 69η., 195η. C l a r k , J. M . , ion., 12η., 17η., 20n. Class prerogatives, 187 Clearing of market, 23 Commerce, use of savings in, see S a v ings C o m m o n s , 137, 151 Communistic landholding, 135 Compasses, illustration from m a n u facture of, 44-47, 49 Competition, intra-group, 210 Complexes, 3 Concentration of ownership, see P a r tial M o n o p o l y Concentration of wealth, relation t o uncertainty-bearing, 248 C o n j u n c t u r a l gains, 221, 256 Construction, demand for land affected b y cost of, 85 Consumers' goods, in standard of living, 182-183, 186. See also D u r a b l e Consumers' goods Consumers' surplus, 22 Consumption, use of land for, 66, 8 1 89, 148-149, 267; use of savings for, see Savings C o n s u m p t i o n cost, 9, 19, 21, 29, 61, 84, 85, 201, 270, 273 Continuous cooperation, use of land for, 66-69 C o n t r a c t u a l landholding, 1 3 7 - 1 4 3 Cooperating labor, demand for, 3 9 , 4 1 ; use on land, 7 1 C o s t , nature of, 8; kinds of, 8 - 1 0 ; relation t o choice, 10-13, labor, 1 7 0 - 5 ; unpaid, 58η. See also C o n sumption C o s t , Satisfaction C o s t , Efficiency C o s t , O b j e c t i v e F a c t o r in Cost C o s t of acquisition, 1 0 , 1 4 , 1 6 - 1 8 , 2 3 , 3 0 C o s t of production, nature of, 10; re-

28ο

INDEX

lation to value, 5 7 - 6 1 , 2 7 2 - 2 7 3 ; of labor, 187η.; distinguished from cost of preparing land, 192; not entrepreneur expenses, 257 Cournot, Α. Α., 24η. Creative instinct, 25s Credit, relation to currency expansion, 1 2 2

holding, 1 3 5 ; under individualistic holding, 136; relation to demand for labor, 139, 1 4 1 Diminishing utility, relation to demand curve, 5; relation to demand price, 18; of income, 166-168 Disrepute, of occupations, 202; of land uses, 2 1 1

Crowding, relation to consumer use of land, 83, 85 Cultivation, intensive, 138, 139, 142, 189η. Currency, need of adjustments in, 1 2 1 , 122, 124 Current consumption, use of savings for, 104, 156

Distribution, wages as problem of, 1 3 2 ; relation to valuation, 259 Distribution of the Factors, 2 0 1 - 2 2 1 Disutility, 8 Division of labor, savings used for, 108; territorial, 203 Domestic instincts, 184 Duopoly, 24η. Duplicative investment, 1 1 4 , 1 1 5 , 1 1 6 , 122, 124, 125, 129, 130, 1 5 6 - 1 5 7 , 2 3 m . , 232, 205, 209 Durable consumers' goods, effect on maximizing of income, 1 2 ; relation to multiple pricing, 32; use of savings for, 1 0 5 - 1 0 6 , 156; yield on savings from, 1 1 2 - 1 1 3 ; value of, 1 2 7 Dwelling sites, early titles to land for, 135η.; in mixed systems of landholding, 1 5 1 Dynamic conditions, instigation of, 252

Danger, of occupations, 202, 204 Davenport, H . J . , n n . , 15, 2 1 η . , 29η., 59, 187η., 2ion. Deferred consumption, 167 Demand, nature of, 1 5 , 262; addition of, 19; building up of, 20; production directed by, 23; for unfinished goods, 34; for land-using goods, 7 2 ; relation to rent, 80; effect on rate of exploitation, 94, 95; increase in growing countries, I 2 i n . ; changes in, 243. Demand curves, 2 1 , 2 2 Demand prices, what is offered in, 16 Demand schedules, kinds of, 16; continuity of, 22-23, 32; elasticity of, 23; in markets, 22, 23, 30; for land for consumption, 84-86; of seller of rent-bearer, 126; for labor, 1 4 1 ; primary, 16, 2 1 , 29, 262; derived, 16, 2 1 , 30, 86, 262; multiple, 29, 30 Democracy, 168, 176 Density of population, wants depending on, 153 Depletion, of resources, use of land for, 66, 9 0 - 1 0 2 ; allowance for, 126 Desires, origin of, 261 Dickinson, Z. C., 5η. Diminishing returns, in agriculture, 67, 69; in business uses, 68-69; ' n mining, 98; under communistic

Dynamic society, 241, 242-244

uncertainties

of,

Economies of organization, 44 Edgeworth, F . Υ . , 24η. Education, compulsory, 175, 177η., 1 7 8 ; effect on mobility of labor, 2 0 1 ; effect on supply of managers, 233 Efficiency, relation to earnings, 5 1 , 179; relation to value, 5 1 , 225; relation to working period, 1 7 7 ; relation to manager's earnings, 224 Efficiency cost, 9; kinds of, 6 1 ; in use of labor, 5 1 , 273; in use of land, 7 6 79; 89, 267, 273; in use of savings, 273; in use of management, 234 Efficiency-increasinginvestments, 1 1 6 124, 129, 155 Elasticity of demand, conditions

INDEX affecting, 20; influence in partial monopoly, 25, 263, 268; effect on rate of exploitation, 95, 96; effect on rate of interest, 1 1 4 , 120 Employment psychology, 2 1 0 "Encouragement of I n d u s t r y , " 159— 164 Enterprise, 250-255 Enterprisers, supply of, 255-256 Entrepreneur, effect of offers by, 1 1 7 ; characteristics of, 238; separation of functions of, 240 Entrepreneur expenses, 257-259; not costs, 57 Equilibrium of consumption, 195 Equities, investment in, 236 Expenses of production, see Entrepreneur expenses Experience, light on labor supply from, 1 7 5 - 1 7 7 , 1 8 1 ; inadequate as guide to laborers, 205 Exploitation, rate of, 9 1 - 9 7 , 268; margin of, 9 1 , 98; extensive, 98; intensive, 97-99. External economies, 47 Extractive industries, 67 Factories, use of land for, 68; opposition to discipline of, 203; taking place of household, 233 Factors of Production, distribution of, 201-221 Family, stability of, 199 F a m i l y standard, 183 Fatigue, curve of, 170 Feudal order, transition from, 1 5 1 Forestry, carrying charges in, 94η. Frain, H. L a Rue, 176η. Free entry, influence on rate of exploitation, 97; influence on wages, ISI Friction, nature of, 208 Tunded incomes, labor by recipients of, 180; taxation of, 2 1 2 Future, appeal of income in, 104, 198; underestimate of, 105, 198 Geographical division of labor, 108 Gönner, E . C., 195, 196η., 197η.

281

Governing propensities, 3, 5, 261 Governments, borrowing by, 1 1 5 Green, David, 9η. Habit, relation to choice, 1 2 ; relation to demand, 20; relation to satisfaction cost, 172 Handwork, survival of, 129 Hawtrey, R . G., 167η., 227η. Henderson, Η. D., 9η. Hired managers, 227, 236 Homesteaders, 136 House-rent, in budget, 19 Houser, J . D . , 172η. Idle, number of, 1 8 0 - 1 8 1 Ignorance, as barrier to competition, 208 Imitation, relation to choice, 1 2 ; relation to demand, 43 Improvements, cost of, see Land; gains from introducing, 251 Imputation, of value, 106 Income, desirability of, 1 6 4 - 1 7 0 Increasing returns, from land, 68n., 139η. Index of scarcity, wages as, 39; interest as, 268 Individualistic landholding, 1 3 5 - 1 3 7 Industrial Revolution, h i Industry, encouragement of, 1 5 9 - 1 6 4 Inequality, in exchange of labor, 1 4 ; under individualistic landholding, 136; early sources of, 148; of earnings: voluntary, 201-207, involuntary, 2 0 7 - 2 1 1 ; permanence of, 208 Inertia, of laborers, 1 1 7 , 1 1 9 , 208 Ingredient, savings as, 127, 128 Inheritance, of special qualities, 207 Instalment selling, 106, 124η. Instincts, 3 Insurance, as carrying charge in mining, 94; feasibility of, 2 1 7 Interest, 103—131; relation to wages, 1 5 4 - 1 5 7 ; relation to land supply, 190; effect upon saving, 194-198; relation to management, 2 3 1 ; lag in, 249 Interests, 3, 4-6, 20, 43, 166, 261

282

INDEX

I n t e r n a l economies, 47 Inter-regional trade, 1 1 5 I n v e n t i o n , effect o n margin of exploitation, 102 I n v e s t m e n t , 1 0 3 - 1 1 2 ; t y p e s of, 104η.; in land, 1 9 1 ; accessibility of, 213; through intermediaries, 214; mana g e m e n t of, 231-232. See also A l t e r n a t i v e I n v e s t m e n t , D u p l i c a t i v e Inv e s t m e n t , Efficiency-increasing I n v e s t m e n t , Scarcity-reducing [Investment I n v e s t m e n t f u n d , size of, 194; w i t h drawals f r o m , 197 Irksomeness, of labor, 58 Irregularity, of e m p l o y m e n t , 202, 204; of income, 212, 216, 218, 220, 271 Irrigation projects, 190 K l e e n e , G . Α . , 194 K n i g h t , F . Η . , 4η., 5n., 8n., 9η., 153η., 176η., i86n., 189, 218η., 239η. L a b o r , distribution of, 2 0 1 - 2 1 0 ; object i v e f a c t o r in use of, 36, 37, 265; demand for, 1 3 8 - 1 4 1 ; market schedule for, 1 4 1 ; mobility of, 1 4 2 - 1 4 3 ; u n i t of, 159; costs of, 1 7 0 - 1 7 5 ; s u p p l y price of, 181; m a n a g e m e n t of, 2 2 2 231; charge against profits for, 2 5 2 254; d e m a n d for, b y enterprisers, 253; relative scarcity of, 266; s u p p l y of, 1 5 8 - 1 7 9 L a b o r in common, 234 Laboriousness, of occupations, 202 204, 207 L a n d , nature of, 65; its contribution t o production, 66; uses of, 6 5 - 6 6 ; used as consumers' good, 66, 1 4 8 - 1 4 9 ; h o m o g e n e i t y of, 73; transferability of, 7 5 ; specially limited varieties of, 76; consumer's unit of, 84; c o m p e t ing uses for, 87; used for parks, etc., 88; i n v e s t m e n t in i m p r o v e m e n t of, I I I ; fixed supply of, 133; cost of improving, 134; redistributions of, 135; titles to, 135; d e m a n d for, 138; monopolistic restrictions of, 144; u n i t of utilization, 146; m a k i n g of,

188; accessibility of, 189; deterioration of, I 9 i ; s p e c i a l cost of preparing, 2 1 1 , 2 7 1 ; relative scarcity of, 266; distribution of, 2 1 1 - 2 1 2 ; s u p p l y o f , 188-194 L a n d h o l d i n g , communistic, 135; individualistic, 1 3 5 - 1 3 7 ; c o n t r a c t u a l , 1 3 7 - 1 4 3 ; combination of s y s t e m s , 137 L a n d - u s i n g operations, 65, 69 L a n d r y , Α . , 195 Large-scale production, 44, 109, 120 L a v e r g n e , Β . , 38η. L a v i n g t o n , F . , 212η., 22on. Leadership, industrial, 203 Leasing, relation to multiple pricing, 32 Leisure, relation t o wages and r e n t , 1 4 9 - 1 5 0 ; loss of, as cost, 162, 1 7 1 , 174; in standard of living, 1 8 2 - 1 8 3 , 186; as m a r k of status, 171 Leisure class, 167 L i m i t e d liability, 240 L i q u i d i t y , effect on i n v e s t m e n t , 2 1 2 213, 271 L o a n s , for durable goods, 106 Localization of industry, 109, 203 L u m b e r i n g , use of land for, 66 McGoun, A. F., i n n . M a c h i n e r y , gains f r o m use of, 110; displacing skilled labor, 110 M a n a g e m e n t , nature of, 222-223; r e a " sons for using, 223; intensive application of, 230; extensive application of, 231; supply of, 232-234; as necessary ingredient, 234; o b j e c t i v e f a c tor in use of, 266; scarcity of, 269; wages of, 222-237 M a n a g e r s , influence of s u p p l y of, 2 2 6 229; differences in ability a m o n g , 228 M a r g i n of exploitation, 98, 99 M a r g i n of utilization, 77, 78, 82 M a r g i n a l increments, 101 M a r g i n a l laborer, p r o d u c t of, 140 M a r g i n a l land, 74, 87 M a r g i n a l mines, w i t h h o l d i n g of, 100101

INDEX Marginal operators, pressure upon, 97 Marginal product, on land, 142 Marginal savers, 195 Marginal uses of savings, 125 Marginal utility of money, 19 M a r k e t demand schedules, 22, 30, 262 Market price, 1 5 - 3 4 ; of consumers' land, 84-88 Marketing, cost of, 70, 97; kinds of, 108; financing of, 1 0 7 - 1 0 8 , 137 Marshall, Alfred, 19, 2 1 , 22, 47, 59η., 7 i , ι 6 ι , 163η., 176, 179, 189η., 193 Mass production, 44, 176 Medium of exchange, 262 Migration, 137 Mill, J . S., 196η. Mill sites, 1 5 1 Mineral deposits, influence of size of, 91 Mines, use of land for, 66; differences in, 9 0 - 9 1 ; special problems of small, 97. See also Exploitation Mining, nature of, 90; losses in, 93η.; risks in, 216 Mining Royalties, 9 9 - 1 0 2 Mobility of labor, 37; relation to rent and wages, 1 4 2 - 1 4 3 Monetary complications, in connection with management, 226η. Monetary maladjustment, as source of uncertainty, 248-249 Money, role of, 16, 262; value of, 249 Monopoly, price under, 24; price of minerals under, 92-93. See also Partial Monopoly Monotony, of occupations, 202, 204 Mosaic L a w , 105 Movie star, wages of, 42 Multiple pricing, 29-33, 263 Mutuum, 109 National Industrial Conference Board, 172η., 178η. Natural produce, need of savings for, 107 Natural resources, instability of supply, 64; differences in, 65 New England, growth of factories in, 226η.

283

Non-competing groups, 209 Non-land-using goods, 1 4 5 - 1 5 0 , 153 Non-marginal borrowers, 1 1 5 Normal value, nature of, 35, 6 1 - 6 3 ; relation to time, 42; stability of, 62 Normative demand schedules, 33, 42 Novelties, influence of, 1 6 6 - 1 6 7 ; gains from introduction of, 250 Objective factors in cost, io, 36-37, 38, 43-50, 67, 70, 74, 9 1 , 1 3 1 , 257, 259, 265, 266, 267 Obsolescence, 167 Office buildings, diminishing returns in, 68 Off-peak sales, 120η. Oil industry, demoralization of, 97 Oil wells, use of land for, 66 Old-age pensions, 199 One-cent sales, 2 1 η . Oppenheimer, Franz, 37η. Opportunity cost, 8n., 60 Orchard, J . Ε . , 99η. Organization, differences in effectiveness of, 52; economies of, 44, 46, 2 7 1 ; duplication of, 225, 230 Output, relation of value to size of, 43-50, 2 7 1 - 2 7 2 Overbuilding, 28 Overproduction, 1 2 1 , 123 Overtime work, 159, 165 Ownership, concentration of, 1 4 4 - 1 5 0 . See also Partial Monopoly Pain, not cost, 8 Pain economy, 161 Parks, use of land for, 88 Partial monopoly, 24-28; in mining, 95; in utilization of land, 1 4 4 - 1 5 0 ; effect on wages and rent, 1 5 3 , 263 Partnership, sleeping, 109 Part-time workers, 140η. Payment, significance of mode of, 235 Perry, R . B., 3 Personal services, relation to use of land, 65 Physiocrats, 192 Piece rates, 159 Pig iron, value of, 55

284

INDEX

Plant, size of, 2 7 1 Population, relation of demand to size of, 72; influence on consumer use of land, 82; wages dependent on size of, 1 4 1 ; wants dependent on density of, 1 5 3 ; relation to wages, 1 5 3 , 1 5 5 ; growth of, 1 8 1 - 1 8 7 Power, as motive for saving, 199 Preference, 6, 22, 43, 261 Prestige, relation to demand, 18; consumption motivated by, 167; as motive for saving, 199; of entrepreneur, 255 Price, nature of, 1 6 ; relation to value, 33, 262; market, 262, 263 Price level, relation to productive investment, 1 2 2 ; irregularity of adjustment, 249 Price offers, unreasonableness of immense, 20 Price ratio, of scarcity products, 38, 39, 4 1 ; of land-using goods, 70 Pricing, of productive factors, role of entrepreneur in, 258-259 Private property, in land, 1 3 5 Prizes, effect on earnings, 207, 218, 247; effect on interest, 220; effect on profits, 255 Producer's surplus, 7 1 , 75, 79, 91 Production, relation of value to volume of, 43-50, 2 7 1 - 2 7 2 ; capitalistic, 1 2 2 ; cost of, see Cost of Production; wages as problem of, 1 3 2 Production use of savings, 1 0 9 - 1 1 2 Productivity, differences between degrees of, 1 5 2 Profits, 222, 238-259 Property, labor theory of, 1 3 7 Prospecting, cost of, 93 Proxies, 236 Psychic bookkeeping, 1 1 Psychological theory of interest, 127η. Public opinion, influence on crowding of land, 83; influence on saving, 199 Quality of land, influence on wages, 141 Quasi-rent, 193

R a c e suicide, 186η. R a e , John, 195η. R a t e of Interest, 1 1 3 , 1 1 8 , 1 2 4 - 1 2 7 ; relation to value, 128, 1 3 0 ; as index of scarcity, 268 R a t e of Wages, 159 R a w materials, value of, 56, 7 2 - 7 3 , 274. See also Unfinished Goods Redistribution, of land, 1 3 5 ; of productive resources, 243 Reflexes, 3 Refunding, as form of enterprise, 252 Religious sanctions, effect on supply of labor, 172 Rent, 65-79; not causal, 79-80; as "opportunity cost," 80, 154η.; relation to efficiency cost, 89; relation to cost of improving land, 134; relation to monopolistic restriction of land, 145; relation to non-land-using goods, 1 5 3 ; relation to wants, population, and distribution of land, 1 5 3 ; differential aspect of, 154; as price of scarce agent, 154; effect of increase on land supply, 190; lag in, 249; relation of entrepreneur to, 258-259 Rent-bearers, sale of, 126 Repricing, of scarce factors, 243 Residential sites, differences in, 81 Residual claimant, which among several scarce groups, 40 Resistance, not a cost, 8; ambiguity of concept, 8 R e s t periods, 159 Retailing, relation to volume of output, 46η.; use of land for, 68 Retirement, age of, 163, 1 7 3 ; saving for, 200 Reworking, of ores, 98, 102 Ricardo, David, 100, 186η. Risk, of not achieving average success, 202; kinds of, 2 1 4 - 2 1 7 ; in mining, 93, 2 1 6 ; in use of savings, 2 1 2 , 2 7 1 ; insurability against, 2 1 7 Risk-bearing, 2 1 4 - 2 2 1 , 2 3 5 - 2 3 7 Roundabout production, 1 1 0 , 1 5 6 Royalties, in mining, 9 9 - 1 0 2

INDEX Saint Luke, 105 Sampling, difficulty of, 20 Satisfaction cost, 9, 30, 58-60,

162,

172, 201, 204, 270, 273 " S a v e d " labor, utilization of, i l l ; relation to rate of interest, 1 1 8 Saving, function in effecting transfer of labor, 1 1 7 ; in standard of living, 182, 184, 186; for subsequent consumption, 196 Savings, uses of, 1 0 3 - 1 0 4 , see also Investment; " d e m a n d s " for, 103η.; consumption use of, 1 0 4 - 1 0 7 , 1 1 4 , 1 3 0 ; commercial use of, 1 0 7 - 1 0 9 ; production use of, 1 0 9 - 1 1 2 ; importance of initial supply of, 1 1 3 ; market schedule for, 124; stability of market for, 1 2 5 ; influence of amount required, 129; effect of changes in per capita supply, 244; objective factor in use of, 265; supply of, 1 9 4 200; distribution of, 2 1 2 - 2 1 4 ; scarcity of, 268-269 Savings banks, 2 1 3 Scale of production, relation to size of industry, 45-46 Scarce labor, value of products of, 42; use on land, 70; elimination by roundabout production, n o , 1 3 0 ; effect on saver's share, 1 1 8 . See also Skilled Labor Scarcity, causes of, 3 6 - 3 7 ; importance in case of land, 67; index of, 39, 268 Scarcity of Factors, relation to normal value, 266 Scarcity products, 3 7 - 4 2 Scarcity-reducing investments, 1 1 2 1 1 6 , 155 Securities, markets for, 2 1 3 Seller's demand, relation to market value, 22η. Sellers, partial monopoly dependent on number of, 24-28 Semi-monopoly, see Partial Monopoly Shareholder, position of, 240 Shoes, time required in making, 107 Shorter day, effect on rate of interest,

285

1 1 8 ; effect on value, 129; resistance to, 1 7 3 ; movement for, 176 Sidgwick, Η., 189η. Simultaneity, of pricing process, 30 Situation, influence on value of mines, 90 Skilled labor, dispensing with, 156. See also Scarce Labor Small holdings, 147, 150 Smith, Adam, 9, 160, 203 Social ideals, influence on supply of management, 233 Speculation, as form of enterprise, 2 5 1 Speculative values, 189η. Squatters, 1 5 1 Standard of living, relation to population, 1 8 2 - 1 8 7 State ownership, influence on exploitation of mines, 1 0 1 Static state, risks in, 2 1 4 Status, leisure as mark of, 1 7 1 ; resistance to loss of, 180; importance to managers, 236 Steps, in yield curves, 1 2 3 , 1 2 5 ; in demand curve for labor, 142; in wage changes, 185 Streets, relation to utilization of land, 69 Subdivision of labor, 204, 206, 208 Submarginal land, 146 Subsistence, minimum of, 1 8 1 , 182 Substitutes, role of, in formation of demand, 1 7 Sumptuary Laws, 1 6 8 , 1 8 7 Supply of land, reasons for assuming fixed, 1 3 3 ; influence on wages, 141 Supply price, of labor, 1 8 1 Suspected supplies, influence of, 102 Taste, instability of, 64; changes in, 243 Taussig, F . W., i n n . , 219η. Taxation, influence on withholding of mines, 1 0 1 ; of funded incomes, 2 1 2 ; of investments, 2 7 1 Taxes, as carrying charge in mining, 94; as deduction from wages, 1 6 9 170 Taylor, F . Μ . , 68n.

286

INDEX

Temporal sequence, in valuation process, 63 Time, as cost of training, 206; risk of losing, 236 Time-consuming processes, 1 2 7 Titles, to land, 1 3 5 Tradition, relation to wants, 5 ; relation to choice, 1 2 Training, expense of, 206, 207, 270; standards of, 206, 270; for managers, 228 Transferability, of land, 75 Transportation, influence on value of land, 68; influence on crowding of land, 83; relation to satisfaction cost, 172 Tribute, relation to choice, 1 3 ; as deduction from wages, 169 Uncertainty, 242-245 Uncertainty-bearing, supply of, 2 4 5 248; pricing of, 246; charges against profits for, 254-255 Unfamiliarity, as check on investment, 2 1 2 - 2 1 3 , 271 Unfinished goods, demand for, 34; long-run value of, 5 4 - 5 7 ; market for, 274. See also R a w Materials Vacations, 1 7 1 Valuation, relation to distribution, 260 Value, see Contents; relation to prices, 33, 262; no objective basis of, 62; relation to duplicative investment, 1 2 3 η . ; relation to interest, 1 2 7 - 1 3 1 ; relation to special satisfaction costs, 202-205; relation to cost of training, 206; relation to risk, 2 1 5 - 2 2 0 ; relation to efficiency of management, 225, 230; changes in, 257 Value of money, slow adjustment to, 249 Value productivity, I I I Value ratio, for scarcity goods, 39

Variety, desire for, 43; influence on utility, 166 Vicarious consumption, 167 Volume of production, relation of objective factors to, 4 3 - 5 0 Wage Premium, 38,40, 203η., 205, 266 Wages, 1 3 2 - 1 4 3 ; relation to interest, 120; relation to monopolistic restriction of land, 145; relation to free entry, 1 5 1 ; relation to wants, distribution of land, and population, 1 5 3 , 1 5 5 ; base for measuring increases in, 158; nature of " r a t e , " 159; effect of changes in, 169; as compensation for special costs, 205; lag in, 249 Wages of Management, 222-237 Waiting, necessity of, 105; relation to rate of interest, 1 1 8 ; influence of amount required, 128 Want-scale, 6 - 7 , 1 1 , 19, 22, 29, 170, 261 Wants, relation to interests, 4 - 6 ; intensity of, 5 ; dependence upon advertising, 5 ; for non-economic goods, 1 1 ; relation to wages and rent, 1 5 3 ; creation of, 167; instability of, 242; origin of, 261 War, borrowing for, 1 1 5 ; diversion of management to, 223 Washing machines, demand for, 18 Watkins, M . W., 58η. Webb, S. and Β . , 195η. Wheat growing, illustration from, 1 1 7 Wolfe, Α. Β . , 196η. Work, rate of, 155 Working day, restrictions on choice of, 162 Working life, length of, 1 7 7 Yield schedules, for savings, 1 1 2 - 1 2 4 Y o u n g , restrictions on labor of, 163