CHAPTER 7

THE DISTRIBUTION OF WEALTH

Our reasoning has led us to the conclusion that each labourer produces his own wages and that increase in the number of labourers should increase the wages of each. This at least is clear - that the cause by which, in spite of the enormous increase in productive power, the great body of producers are confined to the least share of the product upon which they will consent to live, is not the lack of capital nor yet the limitation of the powers of nature that respond to labour. As it is not therefore to be found in the laws that bound the production of wealth, it must be sought in the laws that govern distribution. To them let us turn.

Land, labor and capital are the factors of production.
In return to these three factors is the whole
produce distributed.

The produce or production of a community is the sum of the wealth produced by that community. It is the general fund from which, as long as previously existing stock is not lessened, all consumption must be met and all revenues drawn.

Production does not merely mean the making of things, but includes the increase of value gained by transporting or exchanging things. There is a produce of wealth in a purely commercial community, as there is in a purely agricultural or manufacturing community; and in the one case as in the others, some part of this produce will go to capital, some part to labour and some part, if land has any value, to the owners of land.

As a matter of fact, a portion of the wealth produced is constantly going to the replacement of capital, which is constantly consumed and constantly replaced. But it is not necessary to take this into account, since it is eliminated by considering capital as continuous, which, in speaking or thinking of it, we habitually do. When we speak of the produce, we mean therefore the wealth that is produced over and above what is necessary to replace the capital consumed in production; and when we speak of interest, or the return to capital, we mean what goes to capital after its replacement or maintenance.

It is further a matter of fact that, in every community that has passed the most primitive stage, some portion of the produce is taken in taxation and consumed by government. But it is not necessary, in seeking the laws of distribution, to take this into consideration. We may consider taxation either as not existing, or as by so much reducing the produce. And so too of what is taken from the produce by certain forms of monopoly, which exercise powers analogous to taxation. After we have discovered the laws of distribution we can then see what bearing, if any, taxation has upon them.

Rent, Wages and Interest

The three factors in production are land, labour and capital, and the whole produce is primarily distributed into three corresponding parts.

Three terms therefore are needed, each of which shall clearly, express one of these parts to the exclusion of the others.

Rent, as defined, clearly enough expresses the first of these parts - that which goes to the owners of land.

Wages, as defined, clearly enough expresses the second - that part which constitutes the return to labour.

But as to the third term - that which should express the return to capital - there is in the standard works a most puzzling ambiguity and confusion.

Of words in common use, the word interest comes nearest to expressing the idea of return for the use of capital. As commonly used it implies the return for the use of capital, exclusive of any labour in its use or management.

Profits an Ambiguous Term

The word profits, as commonly used, is almost synonymous with revenue. It means a gain, an amount received in excess of an amount expended, and frequently includes receipts that are properly rent while it nearly always includes receipts that are properly wages, as well as compensations for the risk peculiar to the various uses of capital. Unless extreme violence is done to the meaning of the word, it cannot therefore be used in Political Economy to signify that share of the produce which goes to capital, in contradistinction to those parts which go to labour and to landowners.

Adam Smith well illustrates how wages and compensation for risk largely enter into profits, pointing out how the large profits of apothecaries and small retail dealers are in reality wages for their labour, and not interest on their capital; and how the great profits sometimes made in risky businesses, such as smuggling and the lumber trade, are in reality but compensations for risks that in the long run reduce the returns to capital so used to the ordinary or below the ordinary rate. Similar illustrations are given in midst of the subsequent works, where profit is formally defined in its common sense with, perhaps, the exclusion of rent. In these works, the reader is told that profits are made up of three elements - wages of superintendence, compensation for risk, and interest or the return for the use of Capital.

Thus neither in its common meaning nor in the meaning expressly assigned to it in Political Economy can profits have any place in the discussion of the distribution of wealth among the three factors of production. To talk about the distribution of wealth into rent, wages and "profits" either in its common meaning or in the meaning expressly assigned to that term) is like talking of the division of mankind into men, women, and human beings. With profits this inquiry has manifestly nothing to do.

We want to find what it is that determines the division of their joint produce between land, labour and capital; and profits is not a term that refers exclusively to any one of these three divisions. Of the three parts into which profits are divided by political economists, namely compensation for risk, wages of superintendence and return for the use of capital, the third falls under the term interest, which includes all the returns for the use of capital, and excludes everything else; wages of superintendence falls under the term wages, which includes all returns for human exertion, and excludes everything else; and compensation for risk has no place whatever, as risk is eliminated when all the transactions of a community are taken together. Consistently with the definitions of political economists, I shall therefore use the term interest as signifying that part of the produce which goes to capital.

Definitions Restated

To recapitulate: Land, labour and capital are the factors of production. The term land includes all natural opportunities and forces; the term labour, all human exertion; and the term capital, all wealth used to produce more wealth. In returns to these three factors is the whole produce distributed. The part that goes to landowners as payment for the use of natural opportunities is called rent; the part that constitutes the reward of human exertion is called wages; and the part that constitutes the return for the use of capital is called interest. These terms mutually exclude each other. The income of any individual may be made up from any one, two, or all three of these sources; but in the effort to discover the laws of distribution we must keep them separate.

There must be land before labour can be exerted, and labour must be exerted before capital can be produced. Capital is a result of labour, and is used by labour to assist it in further production. Labour is the active and initial force, and labour is therefore the employer of capital.

Labour can only be exerted upon land, and it is from land that the matter which labour transmutes into wealth must be drawn. Land, therefore, is the condition precedent, the field and material of labour. The natural order is land, labour, capital; and instead of starting from capital as our initial point we should start from land.

CHAPTER 8

THE LAW OF RENT

The term rent, in its economic sense, differs in meaning from the word rent as commonly used. In some respects is the economic meaning is narrower than the common meaning, in other respects it is wider.

It is narrower in this: In common speech, we apply the word rent to payments for the use of buildings, machinery, fixtures, etc., as well as to payments for the use of land or other natural capabilities; and in speaking of the rent of a house or the rent of a farm, we do not separate the price for the use of the improvements from the price for the use of the bare land. But in the economic meaning of rent, payments for the use of any of the products of human exertion are excluded, and of the lumped payments for the use of houses, farms, etc., only that part is rent which constitutes the consideration for the use of the land. The part that is paid for the use of buildings or other improvements is properly interest, as it is a consideration for the use of capital.

It is wider in this: In common speech we speak of rent only when owner and user are distinct persons. But in the economic sense there is also rent where the same person is both owner and user. Where owner and user are thus the same person, whatever part of his income he might obtain by letting the land to another is rent, while the return for his labour and capital is that part of his income which they would yield him did he hire the land instead of working it.

Rent is also expressed in a selling price. When land is purchased, the payment which is made for the ownership, or right to perpetual use, is rent commuted or capitalized. If I buy land for a small price and hold it until I can sell it for a large price, I have become rich, not by wages for my labour or by interest upon my capital, but by the increase of rent. Rent, in short, is the share in the wealth produced which the exclusive right to the use of natural resources gives to the owner. Wherever any land has an exchange value there is rent in the economic meaning of the term. Wherever land having a value is used, either by owner or hirer, there is rent actual; wherever it is not used, but still has a value, there is rent potential. It is the capacity of yielding rent that gives value to land. Until its ownership will confer some advantage, land has no value. (In speaking of the value of land I use and shall use the words as referring to the value of the bare land. When I wish to speak of the value of land and improvements I shall use those words.)

How Rent Arises

Thus rent or land value does not arise from the productiveness or utility of land. It represents in no wise any help or advantage given to production, but simply the power of securing a part of the results of production. No matter what are its capabilities, land can yield no rent and have no value until someone is willing to give labour or the results of labour for the privilege of using it; and what any one will thus give depends not upon the capacity of the land but upon its capacity as compared with that of land that can be had for nothing.

I may have very rich land, but it will yield no rent and have no value so long as there is other land as good to be had without cost. But when this other land is appropriated and the best land to be had for nothing is inferior, either in fertility, situation or other quality, my land will begin to have a value and yield rent. And though the productiveness of my land may decrease, yet if the productiveness of the land to be had without charge decreases in greater proportion, the rent I can get, and consequently the value of my land, will steadily increase.

If one man owned all the land accessible to any community, he could of course demand any price or condition for its use that he saw fit; and as long as his ownership was acknowledged the other members of the community would have but death or emigration as the alternative to submission to his terms. This has been the case in many communities; but in the modern form of society, the land, though generally reduced to individual ownership, is in the hands of too many different persons to permit the price which can be obtained for its use to be fixed by mere caprice or desire. While each individual owner tries to get all he can, there is a limit to what he can get, this constituting the market price or market rent of the land and varying with different lands and at different times.

The Law of Rent

The relationship that determines under circumstances of free competition (the condition always to be assumed when tracing out the principles of Political Economy) what rent or price can be got by the owner is styled the law of rent. This fixed with certainty, we have more than a starting point from which we may trace the laws that regulate wages and interest. For, since the distribution of wealth is a division, in ascertaining what fixes the share of the produce that goes as rent, we ascertain also what fixes the share that is left for wages, where there is no cooperation of capital; and what fixes the joint share that is left for wages and interest, where capital does cooperate in production.

This accepted law of rent is sometimes styled "Ricardo's law of rent," from the fact that, although not the first to announce it, he first brought it prominently into notice. It is, that:

The rent of land is determined by the excess of its produce over that which the same application can secure from the least productive land in use.

The mere statement has all the force of a self-evident proposition, for it is clear that the effect of competition is to make the lowest reward for which labour and capital will engage in production the highest that they can claim. Hence the effect is to enable the owner of more productive land to appropriate in rent all the return in excess of what is required to recompense labour and capital at the ordinary rate - that is to say, what they can obtain upon the least productive land in use, or at the least productive point, where of course no rent is paid.

Perhaps it may conduce to a fuller understanding of the law of rent to put it in this form: The ownership of a natural agent of production will give the power of appropriating so much of the wealth produced by the application of labour and capital upon it as exceeds the return that the same application of labour and capital could secure in the least productive occupation in which they freely engage. This, however, amounts to precisely the same thing, for there, is no occupation in which labour and capital can engage that does not require the use of land; furthermore, the cultivation or other use of land will always be carried to as low a point of remuneration, all things considered, as is freely accepted in any other pursuit.

Deduction from the Law of Competition

Suppose, for instance, a community in which part of the labour and capital is devoted to agriculture and part to manufactures. The poorest land cultivated yields an average return which we will call 20, and 20 therefore will be the average return to labour and capital, in manufactures as well as in agriculture. Suppose that from some permanent cause the return in manufactures is now reduced to 15. Clearly, the labour and capital engaged in manufactures will turn to agriculture; and the process will not stop until, either by the extension of cultivation to inferior lands or to inferior points on the same land, or by an increase in the relative value of manufactured products, owing to their diminished production - or, as a matter of fact, by both processes - the yield to labour and capital in both units has, all things considered, been brought again to the same level. So that whatever be the final point of productiveness at which manufactures are still carried on, whether it be 19, 18, 17 or 16, cultivation will also be extended to that point. And thus to say that rent will be the excess in productiveness over the yield at the margin or lowest point of cultivation is the same thing as to say that it will be the excess of produce over what the same amount of labour and capital obtains in the least remunerative occupation.

The law of rent is in fact but a deduction from the law of competition and amounts simply to the assertion that as "rages and interest tend to a common level, all that part of the general production of wealth which exceeds what the labour and capital employed could have secured for themselves, if applied to the poorest natural agent in use, will go to landowners in the shape of rent. Is it not as plain as the simplest geometrical demonstration that the corollary of the law of rent is the law of wages, where the division of the produce is simply between rent and wages; or the law of wages and interest taken together, where the division is into rent, wages and interest?

Relation of Rent to Wages and Interest

Stated reversely, the law of rent is necessarily the law of wages and interest taken together, for it is the assertion that, no matter what be the production that results from the application of labour and capital, these two factors will only receive in wages and interest such part of the produce as they could have produced on land free to them without the payment of rent - that is, the least productive land in use. For if, of the produce, all over the amount which labour and capital could secure from land for which no rent is paid must go to land owners as rent, then all that can be claimed by labour and capital as wages and interest is the amount which they could have secured from land yielding no rent.

Thus wages and interest depend not upon the produce of labour and capital but upon what is left after rent is taken out, or upon the produce which they could obtain without paying rent - that is, from the poorest land in use. Hence, no matter what be the increase in productive power, if the increase in rent keeps pace with it, neither wages nor interest can increase.

The moment this simple relation is recognized, a flood of light streams in on what was before inexplicable and facts seemingly discordant range themselves under an obvious law. The increase of rent that goes on in progressive countries is at once seen to be the key that explains why wages and interest fail to increase with increase of productive power. For the wealth produced in every community is divided into two parts by what may be called the rent line, which is fixed by the margin of cultivation; that is the return that labour and capital could obtain from such natural opportunities as are free to them without the payment of rent. From the part of the produce below this line wages and interest must be paid. All that is above goes to the owners of land.


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