ECONOMICS. 145

wages received by one unit of labor would be sixty. If
the population under normal conditions should steadily
increase until it was doubled, we might assume that the
product would be doubled and we should get two thousand
instead of one thousand ; that twenty units of land would
yield one hundred sixty units of interest; twenty units
of capital, three hundred twenty units of interest ; twenty
units of organizing power, three hundred twenty units of
profits; while twenty units of labor would yield just
double what they did before, or twelve hundred units of
wages, the average wages for each normal unit remaining
sixty, and so for each other factor in production. If, on
the contrary, we should have a sudden influx of a lower
grade of labor, the product would not be doubled under
other similar conditions. Suppose now that the product
amounts to only eighteen hundred instead of two thousand.
In this case fifteen units of land would yield one hundred
thirty-five units of rent ; fifteen units of capital would
yield two hundred seventy units of interest ; fifteen units
of organizing power two hundred seventy units of profits.
The total to wages then would be the difference between the
sum of these and eighteen hundred, or eleven hundred
twenty-five. But the labor having been doubled, namely,
twenty units, the yield here of wages is only fifty-six and
one-fourth to each unit of labor. While the entire amount
of wages by the influx of cheap labor has been increased,
the rate to each individual has been diminished. It might
likewise be shown that land, capital, and organizing power
receive a diminishing product per unit through the intro-
duction of a large amount of unskilled labor.

This harmonizes the two apparently opposing theories
10



14:6 ECONOMICS.

respecting wages, and makes them complements of each,
other. (1) That wages of all laborers in similar employ-
ments are determined by what the laborer can produce
who works on the margin of cultivation or the margin of
utilization. Here the laborer receives as wages the total
product, and if other laborers receive more than he, he
would leave the margin to compete with them and the
margin would rise. Hence the equalizing tendency of
wages brings them all down to the marginal laborer who
works upon the poorest opportunities.

(2) The other view asserts that wages are determined by
the standard of life of the laborer. The general rate of
wages in any country, class or industry is the standard
of living of the most expensive families furnishing a nec-
essary part of the supply of labor in that country, class,
or industry. The first is the objective law of wages, the
second is the subjective.

Both of these laws are subservient to the law of supply
and demand, and the value-creating power of the pro-
ductive process. The larger the supply, the lower will
be the marginal product compared with the labor of pro-
ducing it. Hence, whatever controls the supply of labor
controls the marginal value of its product, which deter-
mines the general rate of wages.

It is held by some in this connection that the manager
of business, the entrepreneur, is the residual claimant,
and that the large products of industry are absorbed in
profits. But it will be found under free competition that
profits are governed as specifically by law as interest, rent,
or wages. The gross profits of any business are made up
of what we term the replacement of capital, the insurance,



ECONOMICS. 147

interest, wages of superintendence, and what we may call
pure profits. Pure profits are the only kind which should
be classified along with pure wages, economic rent, or eco-
nomic interest. Mr. Walker attempted to show that the
profits received by different employers in the same enter-
prise vary according to the law of rent, and that there
are certain industries that, having paid interest, wages
of superintendence, insurance, and replaced the prin-
cipal, the capital, there was nothing left for the
entrepreneur; and for this lowest class of industries
there was a constant gradation to the highest, which paid
a large return of net profits on account of superior position
or management. That there are certain industries that
pay no net profits, every one knows ; that there are others
in the same line that pay small net profits, is evident;
while there are still others that pay a large return in
profits. It is also evident that unless a manager of any
business can pay the expenses of that business he will
not continue in it, except it be through a short period of
hard times in order to tide over business to better times,
or to keep from losses. But under free competition the
total amount of profits going to the entrepreneur or man-
ager in any given line of industrial operation will depend
again upon the demand and supply, or the subjective
valuation of the goods produced, by the consumers of
those goods; and, secondarily, upon the competition of
the number of entrepreneurs or managers seeking invest-
ment in any given line. But there are so many disturbing
elements which modify profits that it has the appearance
of being less steady than any other return in business.
Thus, in case of a drouth or a failure in business, wages,
rent, or interest, is each steadier than profits.



148



ECONOMICS.



Bights of Property.

The theory of the rights of property is frequently dis-
cussed by economists, and it has its place here in distri-
bution, for it has a great influence in this part of economic
life. Some economists have held that the right to hold
property is based upon labor. According to their ideas,
the man should be the owner of the things created by
his own exertion. If this theory is put into practice it
leads to absolute confusion, for when a man possesses a
house, a forest, or a farm, it may not have been his own
labor that created any one of these ; nor in the goods that
fill a store do we find any evidence of the creative power
of the owner. From a legal consideration the origin of
the right of property is not discussed very fully. Lawyers
have taken the right of property as a fact, and the rights
of property are secured only through the power of the
state. To define property by its attributes, accepting H
as a fact, is the extent of the legal conception. Certain
persons have advanced the theory of natural rights, hold-
ing that property is merely an extension of human per-
sonality over external nature. This is a very imperfect
conception, for it leads to the assumption that all people
are property-owners. The occupation theory ascribed
property rights to the one who first obtained possession
and whose property was finally recognized by his asso-
ciates. Doubtless this is the atomic theory of the origin
of property, though it has been much extended. The indi-
vidual and collective ownership of property in the early
period points to the idea of occupation as the first recog-
nized title. It is evident that there is some truth in each
one of these theories, but that the real test is in the prop-



ECONOMICS. 149

erty rights as evidenced in the Roman law and the French
civil code, and as such is recognized in all modern civil
and common law.

The rights of property have much to do with distribu-
tion. Certain property is rapidly consumed and the in-
fluence of ownership is very light; other property lasts
a long time : indeed land itself lasts forever, which makes
a vast difference in distribution. Other forms of wealth
or property, such as government stocks or bonds, last as
long as governments themselves. These highly perpetual
classes of goods descend by will or inheritance from one
person to another, and the distribution of wealth is thus
very much affected. There are persons who are scarcely
capable of earning a respectable living single-handed, yet
they -inherit fortune from a distant relative; the result
is a distribution of wealth, and a net product of industry
soon begins to flow through rent or interest. To avoid
this principle of distribution by means of inheritance, the
socialist sought to dispose entirely of inheritance ; that is,
to abolish it. People who complain bitterly about inequali-
ties of economic distribution are opposed to inheritance,
for it tends to perpetuate and aggravate these inequalities.

The exercise of the rights of property may be by a
private person or individual, or, through the operation
of the law, by a group of individuals in corporate capacity.
The rights of property as exercised by corporations vary
somewhat from the rights of property of individuals, for
in all corporations we find that the majority rule; while
the members associate themselves in a group under contract
to carry out different kinds of work, they also agree to
submit to whatever policy is adopted by the majority or



150 ECONOMICS.

the policy of the states making the corporate laws. Also,
the extension of powers granted these corporations by the
states gives them superior rights, such as the right of
eminent domain and the income arising therefrom. The
ownership of public property is manifest through what
are known as political corporations, the general policy
of the state being to manage the property for the people
at large. Here then we have a variety of ownership
which has grown up through custom, and its authority
and right need not be questioned. The only facts to be
observed are, as to whether there is a definite description
of the property, and whether a legal title can be shown to
give to it all the rights and privileges of property. The
right of property cannot be rationally questioned, although
many people who attempt to carry out their socialistic
theory and deny the right of interest in order to maintain
their position are forced to deny the right of property
in their attempt to defend their absurd position.

Monopoly Privileges.

There are however certain monopoly privileges granted
by the state, which also interfere very much with the
distribution of wealth. These are generally in the form
of patent rights, copyrights, trade-marks, and franchises.
They are sometimes called artificial monopolies, because
they are created by the state. They are not a source of
wealth or a means of production, but merely an exclusive
control given by the government over a certain enterprise,
the entire profits of which may be directed into the hands
of one who owns the right or privilege. But as these
may be bought and sold, from the personal standpoint of
the distribution of wealth they are property rights.



ECONOMICS. 151

There is another group of monopolies, that arise out
of the condition of modern industrial society. These are
sometimes called natural monopolies, because the monopoly
power arises out of economic conditions j although the
line of division is not strongly marked between them and
artificial monopolies, for indeed every natural monopoly
receives the sanction of the government by the means of
a franchise which makes it rely in part upon the state
for its existence. Land, in so far as it is a monopoly,
belongs to this class, and such great enterprises as rail-
ways, water-works, tramways, gas-works, telegraphs, etc.,
are classified in this group. Also, the modern manufac-
turing industries which have grown into gigantic corpora-
tions and trusts have derived such a momentum of power
and mastery over conditions as to be practically monopo-
lies. Summing up a review of natural and artificial
monopolies, Mr. J. K. Commons, in his book on The Dis-
tribution of Wealth, enumerates the following proposi-
tions :

1. They are not capital, but exclusive privileges of sell-
ing goods and services. This privilege is of paramount
importance in modern society, where goods are produced,
not for direct consumption by the producers, but for sale
and profit.

2. They furnish opportunities for the profitable in-
vestment of labor and capital.

3. Their value consists in the power they give to limit
the supply of their produce relatively to the demand
for it.

4. They may be united in more or less complicated
combinations in single enterprises. A railway, for ex-
ample, may possess monopoly advantages due to patents,
franchises, land, and good-will.



152



ECONOMICS.



5. They are, like capital, the objects of the rights of
property, and may therefore be subject to full and partial
ownership. In the case of artificial monopolies, the gov-
ernment creates the monopoly privilege, and then assigns
it to individuals, who may transfer it by deed or other-
wise. But in the case of natural monopolies, the monopoly
privilege arises simply by virtue of private property in
a certain peculiar kind of material object.

6. Good-will is partly a natural and partly an artificial
monopoly. It originates in the fact of private property
in material objects, such as a retail store or manufacturing
enterprise. In order that this may be done, the law must
make it an artificial monopoly. It does this, not by form-
ally creating a monopoly privilege, but by enforcing the
private contract of the seller not to engage in the same
occupation, according to the terms of the contract.

7. The public, as well as individuals, may be the owner
of land, capital, and monopoly privileges. The state, in
its various divisions, is a legal person, and as such is a
subject of the same rights as private persons. This in-
cludes full ownership, which may be the ownership simply
of material objects, as a postoifice building; or the owner-
ship of natural or legal monopoly, such as water-works,
streets, and the postomce business ; i. e., the exclusive right
to supply water, maintain streets, and carry the mails.

References: Commons, J. E., The Distribution of Wealth;
Thompson, H. M., The Theory of Wages; Nicholson, J. S., The
Principles of Political Economy; Hadley, A. T., Economics;
Marshall, Alfred, Principles of Political Economy ; Hobson, John A.,
The Economics of Distribution; Clark, J. B., The Distribution of
Wealth; Carver, T. N., The Distribution of Wealth.



ECONOMICS. 153



CHAPTEE II.

RENT AS A FACTOR IN DISTRIBUTION.

Bent in General.

Rent is called the normal return of land. Ricardo
asserted that it arose from the natural and indestructible
qualities of the soil; and this definition is quite correct
fundamentally, for rent arises from the use of the ground
alone. As Ely says, " The rent of land is the annual re-
turn of land itself " ; or, as Walker says, " Rent is the
surplus of the crop above the cost of cultivation on the
least productive lands contributing to the supply of the
market." Marshall says : " The rent of a piece of land is
the excess of its produce over the produce of an adjacent
piece of land which is cultivated with an equal amount
of capital, and which would not be cultivated at all if
rent were demanded for it." And Marshall continues to
say that "the economic rent of a piece of land is found by
subtracting from the value of the annual produce an
amount sufficient to return the former outlay with profits."
These are only different methods of expressing the nature
of rent. Andrews extends the principle of rent to general
monopoly, and says : " Rent in its broadest sense is any
kind of gain arising from monopoly, whether in land,
capital, or talent-income, which falls to any productive
agency simply because of its rarity."

Contract Bent and Economic Rent.

It is necessary to distinguish between ordinary con-
tract or market rent and economic rent. A person enters



154 ECONOMICS.

into a contract to pay the owner of land a certain fixed
annual sum for the use of the land. For this sum the
tenant has the use of the land, buildings, ground on which
they stand, and all improvements. The sum which he
pays is composed of two chief elements, one the payment
for the use of capital invested in improvements, and the
other for the use of land itself. A piece of unimproved
property adjoining, of the same grade as the improved
land, rents for much less, which is probably the normal
rent. However, it may be possible that in making the
contract, on account of ignorance, or a sudden excessive
demand for land, or the pressure of custom in charging
high rents, the individual may have paid too much, or
more than the real rent of the land alone, known as eco-
nomic rent in the principal works of political economy.
A very good illustration of this economic rent is seen
in cities such as Baltimore and Philadelphia, where the
rent of the land is different from the rent of the house
which stands on it. A person may own the house but not
own the land, and thus pay rent for the land on which
his house stands, which would be considered as economic

rent.

Cause of Bent.

Rent arises from two fundamental conditions of land:
first, that of fertility; and second, that of position or
location. These two usually work in conjunction, and the
difference of position more frequently than the difference
of fertility represents the chief factor in determining
rent in towits and cities; while in rural districts fertility
of soil is a more important factor.* Lands that are favor-
ably located yield a larger return than those less favor-

* In case of ground rents of town lots fertility does not enter into the cause of rent,
it being determined by position alone.



ECONOMICS.



155



ably situated, and lands having a fertile soil which yields
a large product, yield a higher rent than poorer land.
'As the first use of the soil is tillage, it would appear
that the difference in fertility would he the first causa;
but as location respecting the market lessens cost of trans-
portation, the position of farm lands has much to do
with their market rent. In determining rent, Walker
insists on the consideration of fertility as the real cause

of rent.

Manner in which Bent Arises.

Suppose there are several tracts of land in the same
market, and that there is private ownership of land and
competition in its use. Eliminate all personal influences
save the desire to obtain the largest return for a given
sacrifice of capital and labor on the part of both landlord
and tenant. Of the tracts of land A, B, C, and D, which
are enumerated in the order of their fertility, D yields
just enough product to pay for the cost of cultivation;
that is, the wages of labor, interest on capital invested,
and remuneration for managing ability. Let us fix thia
yield at ten bushels per acre. It costs no more to cultivate
the tract C of more fertile soil than the tract D, hence
the expenses per acre will be the same. Suppose now
that C yields fifteen bushels per acre, it is evident that
the five bushels represent a clear gain on account of extra
fertility. So, if B yields twenty and A twenty-five, it is
evident that the rent is respectively ten and fifteen bushels
per acre. Should the prices of products rise so as to
make an increased demand, then other and less fertile
lands than D may be brought into use to supply the
market, and rent will appear in the tract D, for it will



156



ECONOMICS.



take fewer bushels to pay the cost of cultivation. On the
contrary, if prices should fall to any great extent, C will
no longer pay rent, but go out of cultivation unless it can
be used for some other purpose to sufficient advantage to
pay rent or cost of service. (See diagram H, fig. 1.)

DIAGRAM H.



Figure 1.



25 bu.


20 bu.


15 bu.


10 bu.


A


B





D


Rent, 15 bu.


Rent, 10 bu.


Rent, 5 bu.





Figure 2.



75 bu.
E



Figure 3.



ECONOMICS. 157

Should there be discovered a large tract of fertile land
E, which would yield a return equal to C, D would go
out of cultivation if the fertile tracts could supply the
markets, otherwise D would be worked at cost. The open-
ing up of the fertile lands of the Mississippi valley and
the far West caused less fertile lands in New England
to go out of cultivation, or to be used for pasturage, in
which they paid expenses or else yielded a small rent.
(See diagram li, fig. 2.)

Difference in the Fertility of Soil.

As rent rises chiefly from the difference of the fertility
of soil, it is evident wherever land is in cultivation.
Thus, suppose a farmer has a tract of four hundred acres
of land which is divided into four different tracts of an
equal fertility. The most fertile lands are cultivated
first. If the returns from agriculture are sufficient, the
lands in the second grade of fertility will be cultivated;
and if prices continue to rise, the farmer may continue
to increase the area of cultivation until the entire tract is
cultivated. Here, as above, rent rises in the first instance
out of the differences of fertility of the land.

Favorable Location.

But if land were all of the same degree of fertility, its
difference in location would have a tendency to develop
rent. Now it is impossible to equalize the location of
land, whether it be agricultural land or city property,
for the desirability of location will always be observed,
even in the taking up of new lands in a large valley.
Usually, the first located has> a value superior to the
second, not only on account of fertility, but also of loca-



158



ECONOMICS.



tion. The ground rent which arises in cities is entirely
dependent upon location. On some streets we find rent
reaching fabulous prices, while on others it is much lower.
The farther business property is from the busy center
of the city, the cheaper the rent, unless it should be taken
from valuable residence property ; and residence property
varies in value likewise as it recedes from the desirable
and fashionable residence localities.

Limited Returns to Agriculture.

Intensive agriculture tends to retard the process of tak-
ing up new lands, and were it not for the fact that land
has not only decreasing but limited returns, a small area
would tend to supply all the demand for agricultural prod-
ucts; but there is a limit to which agriculture can be suc-
cessfully continued on any tract of land. Indeed, there
is a point to be reached when the application of labor and
capital will yield no return whatever. The tendency to
take up new lands does not always proceed with regularity.
In the first place, lands are not taken up always on account
of their immediate economic yield, but rather are secured
as an investment. Men enter a new territory far from
the market and take up lands which would not yield any
rent at all or even pay for the cultivation, obtaining only
a bare subsistence while cultivation is carried on, with
a prospect in the rise of the price of land somewhat later.
This is purely a business investment, and nearly all the
lands of the West have been secured in this way. It is
also true that when people have once established them-
selves on lands they do not abandon them for more fertile
lands, because they have invested capital in improvements
and they hold these lands even after they pay no rent.



ECONOMICS. 159

Margin of Cultivation.

That land which will just pay the cost of cultivation
and no more is said to he on the margin of cultivation.
(See diagram H.) Lands that are less fertile or less
favorably situated are said to be below the margin of culti-
vation, and will not be occupied. That is, land that will
pay wages for cultivation, profits for management and in-
terest on capital invested will be occupied and cultivated,
while land that fails to yield this return will not be cul-
tivated. It sometimes happens, however, that land which
will not be used for agricultural purposes may be used
for other purposes and thus yield a rent, or at least pay
for the cost of cultivation. It also happens that land is
occupied and cultivated by persons who spend partial time
upon it, using the remainder for some other purpose. In
such cases, land that would pay no rent for agriculture
might yield a return for pasturage.

Prices and Bent.

An increase in prices, if permanent and constant, will
tend to enlarge the agricultural area ; and this has a tend-
ency to increase rent, for, as it costs the same to cultivate
an acre of poor land as that of rich land, the lower the
margin of cultivation falls, the higher will be the rent,
because the annual return on the fertile lands is much
increased, and the difference in the cost of cultivating
the poorest land occupied and the returns of the most
fertile, is greatly increased. Consequently, high prices
as well as favorable location increase rent, simply because
high prices create a demand for land. The opposite is
true in the case of fall of prices. A long, persistent fall