in prices will tend to diminish the demand for land,
160
ECONOMICS.
which will cause its rent to fall. This must be taken
as a general law which is interfered with hy various
conditions of investment, for land will be held for year
after year when local interferences cause it to yield no
rent or indeed to fall below the margin of cultivation,,
simply on account of a prospective yield. In this way busi-
ness is tided over in difficult times until it pays. This,
however, does not interfere with the law of rent, for in-
deed were there no margin of cultivation except in theory,
the fact of the relative fertility of land and the difference
in the desirability of location would be sufficient to es-
tablish the law of rent.
Bent Does Not Enter into the Cost of Production.
It is assumed that the market price of an article is
not dependent upon the rent that .is paid, but rather
that rent is determined by the market price. This is
logically the correct view to take. High rents do not
give us high prices, but high prices make high rents. It
might be well to inquire carefully into the real nature
of this statement, to see what is meant. When Mr.
Ricardo enunciated this doctrine he talked about corn,
as if all kinds of produce whatsoever had been reduced
to one kind. If this could be true it would be actually
certain that high prices would give us high rent univer-
sally, and that high rents have nothing to do with high
prices, However, there is an indirect way in which high
rents may make high prices. Suppose there be a given
number of acres of wheat land and a given number of
acres of corn land. If the price of wheat should rise
until the wheat land was not sufficient to supply the de-
mands, they might encroach upon the corn lands and thus
ECONOMICS. 161
create a deficiency in the corn crop, for wheat would
raise the price of corn. That is, the high rent of land for
wheat might cause high prices for corn. To find out just
what is meant by this in a practical sense, let us take the
case of the mineral springs. (See Marshall's Principles
of Economics, Bk. VI, ch. 2.) Let us suppose of a series
of mineral springs that they are all owned by different
individuals; that they furnish a natural mineral water
which finds a market, and for which there is no available
substitute. There is a free competition in both buying
and selling. Suppose that the supply that is drawn from
each of them can be increased indefinitely by pumping,
but that the expense of this increases in proportion to
the additional supplies to be obtained by this process.
The owner of each spring will go on increasing his produc-
tion until the price of water no longer covers more than
the expense of an additional supply. That is, the last
gallon of water which the expenditure enables him to
raise when the amount raised by the whole number of
springs is just sufficient to meet the market, will be pro-
duced at an equilibrium price which will just pay for
its own production. The rental value of each spring now
will be the excess which this price affords over the expenses
of working it. That is, demand and supply here as before
regulate the price, but will not enter into the expenses of
production. But suppose, now, that the land occupied
by one of these springs is more desirable for a building
site, and some person should build upon it and thus de-
crease the supply of water. Immediately, as the water-
supply is contracted, the demand for the water is relatively
greater than the supply, and the price rises. Consequently
11
162
ECONOMICS.
the high rent of the ground used for some other purpose
increases the price of the commodity in the market. With
reference to agricultural products taken as a whole, the
law that rent does not enter into the cost of production
obtains. But, if there be a certain amount of land which
can be used for the purpose of raising wheat and a certain
amount that can be used for corn, suppose an increased
demand for corn should raise the price of that commodity
so that it would encroach upon the wheat land, taking
a part of it ; immediately now, supposing the demand for
wheat be constant, the demand will be greater than the
supply, and the price will rise on account of the excessive
rent arising from the corn land, which has therefore en-
croached upon the wheat land.
Kent and Free Land.
The principles of rent as enunciated above represent
the result of free land. So long as there are lands to be
taken up, the principle of rent is easily determined. There
must be a time, however, when all of the free land will
be taken which, under any ordinary circumstances, can
be used at all. As the margin of cultivation falls under
free lands, rent absorbs more and more of the entire
product; and as the rent increases, the margin of free
productivity continues to decrease, because lands of lower
grade can be used. When landlordism prevails and the
owner of the land fails to cultivate, but lets it out to ten-
ants, the land will yield no rent in the lowest scale of pro-
duction. There is a continual absorption of the entire
product until rent meets wages, and then there is a check.
The rent of land arises whether land is free or unfree;
there is no difference in this respect so far as the principle
of rent is concerned.
ECONOMICS. 163
Economic Significance of Bent.
Rent must always be allowed for in any financial calcu-
lation whatever. The constant increase in rent in propor-
tion to the returns from agriculture has alarmed some
people, who seem to believe that rent eventually will ab-
sorb the entire product. Fortunately, in our own country
sixty-five per cent, of the farms are still owned by those
who work them, and whatever increment of rent arises
goes to the owner.
References: Walker, F. A., Land and Its Rent; Clark, J. B.,
Capital and Its Earnings; Commons, J. R., The Distribution of
Wealth; Ricardo, D., Principles of Political Economy; Patten,
Simon N., The Premises of Political Economy.
164
ECONOMICS.
CHAPTEK III.
WAGES AS A FACTOR IN DISTRIBUTION.
Labor the Cause of Wages.
When we speak of wages in the scientific sense, we
mean the earnings of common labor; all high fees and
salaries should be excluded. The rewards earned by
peculiar talents, education, or training, are sometimes
classified along with profits. However, the line must not
be drawn too closely when we consider the general subject
of wages, for in a general sense it is payment for services
rendered. The salary of a railroad president at $25,000
a year is a return for services. But the wages question
scientifically considered should not include such a salary
as wages. But labor is the cause of wages. The payment
for the services rendered by the combined action of body
and brains is wages. They are earned by the laborer.
He earns his own wages each day he labors, and when he
ceases to do this he is not employed. Hence it is some-
times said that the laborer pays his own wages.
Pure Wages Distinguished from Gross Wages.
The return to common labor is called pure wages, which
should be distinguished from gross wages, which might
include extra rewards and services.
Real and Nominal Wages.
Economic wages are real wages, not nominal. By real
wages is meant the purchasing power of a day's labor;
by nominal wages the amount received in currency.
ECONOMICS.
165
A man may be receiving two dollars a day in one country
and for the same service a man receives one dollar in
another, yet they may have the same real wages; for it
is possible that the man who receives a dollar a day buys
the same articles for a dollar that would cost the other
man two dollars. The real wages in different countries
do not vary so much as the nominal wages, hence people
in making comparisons of wages frequently omit to prop-
erly distinguish between real and nominal wages.
Wage-Fund Theory.
Some of the older economists held that there was a
certain sum, a part of capital, set aside for the payment
of wages, and when this sum was exhausted no more
laborers could be hired until it was replaced. This wage
fund was continually growing as economic society and
wealth accumulated, and the number of laborers that
might be employed was limited by this fund. Accepting
this theory, it was an easy manner to determine the rate
of wages by simply dividing the amount of the wage fund
by the number of laborers. This method would set a limit
upon the rate of wages to be paid. Mr. Mill advocated
this doctrine in his earlier years, but abandoned it some-
what later. The faet is that the source of wages is the
earnings of the wage-earner, and the wages come out of
the product which he makes every day. Instead of giv-
ing him his share of the product at night or at the close
of the week, the employer advances in the form of money
the laborer's wages each day or each week. Of course in the
wages system the rate is determined by the employer and
laborer by contract before the labor begins. But when the
laborer's earnings will no longer pay for his wages he
166
ECONOMICS.
will cease to be employed. There is a point at which
the wage-fund .theory and the labor theory practically
coincide, for wages are limited by capital. The amount
of capital seeking investment by way of buildings, machin-
ery, etc., determines the number of laborers to be em-
ployed, and hence fixes the rate of wages. If capital is
not available, laborers will not be employed. On the other
hand, if laborers are thrown on the market they will tend
to decrease wages by competition, and the capital under
such circumstances indirectly determines the rate. Now
the wage-fund theory supposes that a certain sum is set
apart for the payment of wages, and that no more laborers
can be employed until this is. replaced. If we consider
this replacement working at a rapid rate, it simply asserts
that capital limits wages. However, there is a wide dis-
tinction in theory, for in the economic sense wages must
come out of the earnings of labor instead of being paid
out of the surplus of capital, which is used for other
purposes. The point of view is entirely different, and
the different results are of great importance in the theory
of wages.
Determination of the Bate of Wages.
There are various theories of wages. Some workmen
and certain philosophers are always demanding the whole
of the product for the laborer. They hold that the men
who create the goods have the use of them. They imagine
that gains are obtained by capital in an unjust way,
but are in error because they fail to recognize that capital
performs any service whatever. Those laborers who at-
tempt to break down the wage system by methods of
cooperation are the first to learn that capital is necessary
to carry on any business whatever. Generally speaking,
ECONOMICS.
167
the rate of wages is determined by supply and demand.
The more laborers in the market, the demand remaining
the same, the lower will wages be. This is the general
theory underlying the whole system of wages, although
it is true that wages may be reduced to a more specific
theory, which will be determined hereafter.
Residual-Claimant Theory.
One of the commonest theories for determining the
rate of wages is generally known as the residual-
claimant theory. It has been advocated by Professor
Walker and other able economists. It holds that the net
product of industry divides itself into rent, profits, wages,
and interest. That when rent, profits and interest are
satisfied, wages take what is left. When asked if this
is true why the amount of wages is so small, it is replied
that by some power of capital or managing ability a large
proportion of income has been directed away from its
natural source which would otherwise have fallen naturally
to labor. In reality there is no residual claimant in distri-
bution. Wages are a variable proportion of a variable
product, and so for rent and interest, both being variable
proportions of variable products. While the net product is
distributed between rent, wages, interest, and profits, the
proportion upon which it is divided does not depend upon
the residual-claimant theory, but rather upon the value-
creating power of each factor in production, and this
throws it all in the province of supply and demand.
Iron Law of Wages.
In attempting to ascertain whether there is a natural
law of wages, Turgot announced that "in every kind of
labor the workman's wages must fall to a level solely de-
168 ECONOMICS.
termined by the necessities of existence." J. B. Say and
Ricardo somewhat later used almost the same words ; and
the socialists, taking up the idea, expanded and empha-
sized it. This is what is known as the iron law of wages,
or, as it is sometimes called, the brass law. It means
that wages must be regulated by the value that is abso-
lutely necessary for the support of the laborer and his
family. There must be sufficient to give food, shelter,
and protection; to keep up repairs, so to speak; and to
replace the laborer with another when he wears out. This
means that the Chinaman living upon rice and with small
amount of clothing and little protection receives wages
accordingly, and that the American laborer who reduces
his style of life to the same condition must likewise live
upon a few cents a day. The law as a law is not true,
though it does show a tendency in determining the rate
of wages. If we take it that the workman's wages will
never rise above what he absolutely requires to live upon,
the facts in the case overthrow it. For different kinds of
work receive different wages ; also, different wages for the
same work are paid in different countries. But, says one,
this rate of living is taken according to the standard of
life that it is necessary for him to maintain. If this be
true, then the law of wages is not such a terrible thing
as it appears to be. If it means that laborers are ground
down to the bare necessaries of human existence, and
that the normal rate of wages is just sufficient to
sustain life and reproduce their kind under the most
favorable circumstance, the law is not true. But in a
broad sense the theory is more or less true, for wages
must sustain life or work ceases. On the other hand,
there is a point beyond which wages cannot rise without
ECONOMICS.
169
discouraging business operations. Between these two
points, the upper and the lower, are developed the real
scientific laws of wages.
Scientific Law of Wages.
If we consider the various industries in every line of
work, it will be seen that the natural or normal rate of
wages is determined by the lowest grade of industry in
any given line. As it has been stated, "general wages
tend to equal the last actual product by the last laborer
that is added to the social working force." This is es-
tablished on the principle that when labor will pay for
itself, it will be employed; if not, no labor will be em-
ployed. In this respect it has a resemblance to the law
of rent and profits. It w r ould not be proper to insist
that the normal rate of wages is caused by this business
on the margin of profits, but that the natural or normal
rate of wages is indicated at this point. It is merely a
process of excluding more complex elements and return-
ing to the simplest phase of industry in order to allow
wages to stand alone. If this indicates the normal rate
of wages, other more prosperous industries, or those de-
manding greater skill, might return a larger amount in
the form of wages. The normal rate of wages could be
determined in no other way, although competition in
the labor market brings wages to a general level in dif-
ferent groups.
Competing- Groups.
There are everywhere low-pressure and high-pressure
competitive groups of labor. Thus, in the iron industry
we find competition of groups of miners, smelters, pud-
dlers, etc. In the machine-shop there are competitive
170
ECONOMICS.
groups of men in specialized occupations. So in the
woolen industry, the general competition of all laborers
employed and a special competition among those especially
prepared for a given service. Also, it appears that in
the division of labor originally, these groups were formed
because each laborer had a special occupation. As the
division of labor becomes excessive, we find the tendency
for labor to become more mobile. That is, as it takes
but little time for a person to learn one thing, he may
pass more readily from one industry to another; thus
the barriers between industries appear to be broken down :
yet there are other things that interfere with the mobility
of labor. The specialization, requiring greater skill before
confidence is established, and also the fact that through
labor unions and methods of business, employers are not
willing to take up with persons who have left one industry
to enter another, make it quite difficult to render labor
mobile. Should a scarcity of labor appear, then it would
be easier for labor to shift from one occupation to another.
The result of competition in the high-pressure group is
to turn the surplus labor of some groups into others, and
to turn the surplus of all groups into the unskilled labor
group, which makes up the rank and file of the unemployed.
Wages thus are subject to a general law of competition
of all laborers, and a special law of special groups.
Influence of Labor Organizations on Wages.
The influence of labor organizations on wages is a dis-
puted point among economic writers. That labor organiza-
tions have had at least a general influence on wages, cannot
be denied. In so far as they have been successful in limit-
ing the supply of labor in a given field, they have sue-
ECONOMICS.
171
ceeded in raising the rate of wages. In so far as they
have created monopoly of labor, they have developed a
monopoly of wages. Yet it will be found that their
greatest influence has been in agitation, in creating a
demand for higher wages, and in strikes which have
resulted in forcing employers to pay a fair rate or what
the business would allow. While fundamentally the great
law of supply and demand must regulate general wages,
it cannot be denied that the influence of labor organiza-
tions has done considerable in keeping up the rate of
wages. Yet it must be conceded while they have advanced
wages, they have contributed somewhat to the army of
the unemployed by making it unprofitable to carry on
certain industries at the high wages demanded. Their
influence on wages from the direct standpoint of monopoly
Has been of a somewhat temporary nature; while their
influence by creating a higher standard of life and by
educating public sentiment through agitation and strikes
has tended to hold up wages.
Business Sense and Wages.
An important cause of the increase in wages has been
the business sense of employers. For instance, in the
care of horses two theories have been advocated, viz. :
that to work a horse very hard and get all you can out
of him in a short time is economy; to feed him well,
care for him properly and make him last longer is best
economy. The same theories were advocated in regard to
slave labor. If horses, mules and slaves yield a larger
return by excessive toil, which shortens life and gradually
lessens labor-power, it is not so true of labor. A laborer
well fed and well cared for will do more work and better
172
ECONOMICS.
work for the employer than one who is poorly fed and
poorly cared for. Hence it is best for the employer to
look after the welfare of his laborers, and it is not best
for the employer to have a grinding rate of wages for the
laborer. Many men have seen this, and have advanced
their own interest by taking good care of the laborers,
making them capable of earning a high rate of wages,
keeping them contented and happy, so that they are will-
ing to earn the wages and to interest themselves in their
employer's work; and finally, by paying a high rate of
wages. Thus we find that business sense has been looking
out for the laborer, and has tended to keep up wholesome
sentiment in favor of higher wages.
Philanthropy and Wages.
Sentiment has much to do with economic relations, and
a well-administered philanthropy has a tendency to create
an interest in the laboring population and promote ad-
vocacy of higher wages. Yet it will be found that all
permanent movements in this respect are based upon busi-
ness relations and rest upon a business basis. The agitation
for higher wages in behalf of labor, although resting on an
economic basis, has its influence in raising wages.
Eight-Hour Day and Its Effect on Wages.
It is thought by many laborers that if the eight-hour
day should obtain, wages would remain the same for
shorter hours. Others hold that it would give means for
employment to a large number of laborers. In fact, the
eight-hour day in some industries would earn as high wages
as the ten, while in others it would fall much short. The
decrease in the number of hours of labor in general would
yield a relatively large return of wages per hour and a
ECONOMICS.
173
smaller return per day. Possibly with the general adjust-
ments of industry, wages would remain the same for an
eight-hour day as for a ten. Wherever the day has
been shortened to labor the appalling effects which are
generally pointed out in prospect have never appeared.
The increase in wages has kept its pace notwithstanding
the decrease in hours.
Gradual Increase in Wages.
One of the most striking phases of modern economic life
is the constant increase in wages. This of course has
varied on account of local disturbances and periods of
depression, while as a rule there has been a persistent
rise. In looking over the advance in wages in the United
States during the past fifty years, it will be found that
the rate of wages was very low when we had a high infla-
tion of currency. This was caused by ' the difference be-
tween nominal and real wages. It is an illustration of
the principle that in all movements of money involving
the rise or fall of prices, wages are the first to be affected
in the fall and the last to be affected in the rise. There-
fore a sudden and radical change in the currency has
a significant effect on the rate of wages.
Improvement of Wages by Legislation.
It used to be customary in England for the justice of
the peace to regulate wages for a given period. Indeed,
it was a strong theory in the early modern period that
fair wages should be established by law rather than to
be trusted to competition and demand. But this custom,
which was arbitrary and useless, finally gave way to free
competition, until in modern times no attempt has been
made to regulate wages in industry by legislation. Yet
ECONOMICS.
the protective power of legislation in creating better san-
itary condition, in insisting that the laborer has a right
in the product, and in guaranteeing his wages, has had
much to do with promoting the rights of the laborer, and
this has an indirect influence on wages. This is the only
real benefit that legislation can have to advance the rate
of wages.
Economic Signification of Wages.
The discussion of wages belongs to economic distribu-
tion. It is very important in the general economic effect
of society. Well-paid laborers are great consiimers, and
consumption creates a demand for goods. A body of well-
fed, well-paid laborers is in a measure a test of the pros-
perity of a country, and to a certain extent the index of
its civilization. This latter is especially true if the labor-
ers are honest, reliable, and of good physical and moral
health.
References: Clark, J. B., Possibility of a Scientific Law of
Wages; Wood, Stuart, Theory of Wages; Thompson, H. M.,
Theory of Wages ; Mill, John Stuart, Principles of Political Econ-
omy ; Walker, F. A., Principles of Political Economy; Taussig,
F. W., Wages and Capital ; Ashley, W. J., The Adjustment of Wages.
ECONOMICS. 175
CHAPTER IV.
INTEKEST AS A FACTOR IN DISTRIBUTION.
Nature of Interest.
Income that comes to capital is called interest. It is
sometimes used to designate the entire yield of capital
before current expenses, risks and repairs are taken out,
when it is then called gross interest. Net interest is
the result after these contingent expenses have been de-
ducted, and is the true income on capital itself.
Economic Interest and Loan Interest.
We should also distinguish between economic or natural
interest and contract interest. Economic interest is actual
return to capital on account of its value-creating power