more regular and commodities could be placed on the
market at a smaller cost.
ECONOMICS.
129
Effect of Political Organization on Values.
The strength and stability of government has much to
do with the stability of values, for the greater the security
of property and labor, the fewer fluctuations of taxation
brought about through extravagance or excessive demands,
the more steady will values become. Every form of social
organization has its influence on values. The government
has not the power to create values nor to destroy them
directly, but it may so cooperate with individuals as to
regulate production. It may also by consumption increase
the demand for a commodity and thus advance its price,
or by a certain law increase or decrease the demand for
it, thus influencing the market. The action of the govern-
ment frequently does materially affect markets. A good
example of this is seen in the political uncertainty that
occurs just before a presidential election in the United
States: it influences business to such an extent as to
cause stagnation in certain lines. The turmoils of some
small nations frequently lead to a perpetual disturb-
ance in business, rendering capital and all investments
insecure.
Increased Productivity on Account of Organization.
Thorough economic and political organization will
greatly enhance the productivity of wealth, while on the
contrary poor organization leads to distrust and to expen-
sive and slow production. The influence of the firm, the
corporation, the trust, in the rapidity of production, is well
known. The grouping of people in well-ordered homes,
the creation of voluntary or involuntary groups wherein
division of labor is practiced, enhances the power of pro-
9
130 ECONOMICS.
duction. By organized effort wealth is rapidly increased,
because all of the forces of production are rendered highly
efficient.
References: Hadley, A. T., Economics; Ely, R. T., Labor
Movement in America ; Gide, Charles, Principles of Political
Economy ; Walker, F. A., Political Economy.
PART II.
DISTRIBUTION OF INCOME.
CHAPTEK I.
PRINCIPLES OF DISTRIBUTION.
Net Product.
The net product of industry is that which remains after
all expenses of production have been paid. By expenses of
production is meant only the waste or use .of capital,
which must be replaced, and the income over and above
this is called the net product. In considering a given
manufacturing plant from the standpoint of the technology
of wealth-getting, the net income would be that remain-
ing after all expenses of rent, interest, wages and expenses
of management have been paid. But it must be remem-
bered that the net product considered here is the amount
distributed among the different economic groups repre-
sented, namely: landlords, capitalists, wage-earners, and
managers; or in other words, into different shares, such
as rent, interest, wages, and profits. The methods of dis-
tributing the net product are worthy of consideration.
First, distribution of wealth in this connection has ref-
erence to ownership of property rather than exchange of
place or location on the earth's surface. Into whose hands
(131)
132
ECONOMICS.
does the net product of industry fall? In investigating
the principles of distribution is is well to assume their
operation under laws of free competition. We are not
concerned at present with the actual conditions of an
industry instituted for the purpose of making money, but
rather with the general laws arising from economic pro-
duction without interference with concrete conditions.
Indeed, all economic law that may be demonstrated to
be final and exact must operate under the conditions of
free competition. Every discussion of the abstract prin-
ciples of political economy recognizes this fact. Interfer-
ences which may be caused by monopoly or by government
are to be considered in a separate connection.
Nature of Distribution.
Mr. Mill held that production is natural and therefore
its laws may be observed, but that distribution is artificial,
consequently it is not possible to discover constant and
certain laws. It is true that production is less interfered
with by conscious human influences than distribution, the
latter being disturbed in its natural course of free com-
petition more readily than the former; but there is no
reason for assuming that there are not natural processes
in distribution as well as in production. The Socialists
advance the idea that natural distribution, like natural
production, is the only just method. The only difficulty
in all this discussion is to understand what is meant by
the term " natural." What the socialists consider natural
distribution is finally settled when they discard the
laissez-faire doctrine, or that of absolute freedom in com-
petition, and insist that the state should regulate this
just distribution, as it is the only body that has power
ECONOMICS.
133
to attend to it justly. Henry George states also that the
"just distribution of wealth is manifestly a natural distri-
bution of wealth, and this is that which gives to him who
makes it and secures to him who saves it." Here again
is the question of the use of the term natural. It is
evident that it is determined by purely a priori argument.
It may be assumed that there are natural economic
laws based upon the active conditions of economic society,
but they do not assume a state of nature, for society is
built up by a struggle against nature, or rather by the
mastery of nature. In other words, the economic law of
distribution does not in any way precede the construction
of economic society, and what might be natural distribution
under hand manufacture might be unnatural under power
manufacture. Yet, in the consideration of the main facts
of distribution, that is, into whose hands the net product
will fall under a state of free competition, and in deter-
mining upon what principles the net product of wealth
passes into certain hands, we may appeal to general laws.
Afterwards we may consider the exceptions to these laws
and inquire into their various interferences, for it is evi-
dent that these laws do not consider the necessities of
man nor the justness of distribution. They only ask what
happens, and why.
Divisions of Net Product.
The great problems of economic society have been stated
as follows : first, how to create the largest aggregate of
utilities, or of wealth; second, how justly to divide this
amount; and third, how to make the product minister to
the permanent rather than to the transient well-being of
society. These problems go beyond the bare expression of
134
ECONOMICS.
economic law, and seek the ultimate of economic exist-
ence. With society putting forth its unconscious effort
to create economic goods, and each group seeking to ob-
tain the largest return for time and service in the
form of wealth, it is found that the net product falls
regularly into four categories: rent, interest, wages, and
profits ; to which is added sometimes, for the sake of con-
venience, a fifth category, called "anomalous" fortune,
which is only a term to represent the unclassified. But
how are we to determine the amount which will pass into
each separate category ? Is there a law which will deter-
mine this ? It is easy to observe that the amount which
goes to rent, interest, or wages, for instance, is quite a
constant quantity. It is also conceded that the average
profit from year to year remains about the same. But
what determines the quantity which passes into each of the
several categories ? The surplus which obtains on account
of excessive fertility or favorable location of land is called
rent. Kent is easily determined as the difference between
the return upon that land which will just pay expenses
of cultivation and the return from more fertile land. If
this principle is extended to other industries, monopoly
or proprietorship of fixed material or conditions, the rent
principle appears. Wages are held to be the reward of
labor, distinct from the earnings of capital or any other
agency. The laborer receives wages for his toil. The
manager of business receives profits as his reward for
ability to organize and superintend business. The capi-
talist receives interest on account of his ownership of
capital, and on account of the increase of the net prod-
uct due to the services of capital. The fifth category,
ECONOMICS. 135
which is sometimes used, that of anomalous fortune, would
include all those material goods not included in the pre-
ceding categories. The above statements represent the
factors of the four categories of distribution.
Undivided Net Product.
It sometimes happens that a small proprietor who man-
ages his own business receives the entire product, rent,
wages, interest, and profits. As for example, a small
farmer who owns his farm receives rent on account
of fertility and location, wages on account of his own
labor, interest on account of the capital he has invested,
and profits on account of the skill in managing his affairs.
Yet in economic analysis all of these divisions are clearly
discerned, for rent arises out of land whether a man
works his own land or that of another.
Law of Equal Returns.
In determining these divisions of the net products there
are certain laws which may be observed, although in prac-
tice, owing to certain interferences, they show nothing
more than tendencies. Indeed, a large number of economic
laws when put to final test show nothing more than gen-
eral tendencies ; yet these general tendencies are important
for consideration. Let us suppose that we have free com-
petition among all industrial people, and that we have
likewise perfect mobility of capital and labor so that they
will go wherever needed, and that there is sufficient land
to be called into operation when it is needed. Add to
these conditions one other, namely, that each knows what
other business men are doing or about to do; then we
shall find that the last increment of capital or labor or
skill will receive the same remuneration as the preceding
136
ECONOMICS.
increment of each most recently employed in any way.
That is, a dollar, or a day's labor, or a day's managing
service, will yield in each case as much in one business
as it would in another, and will be determined by the
remuneration of services in the last investment. Now
this arises out of the fact that these various factors of
production which are enumerated will seek the largest
possible return of wealth for a given sacrifice. For it is
easy to see that, under the conditions mentioned above,
labor will tend to go where it will obtain the highest
reward, and if perfectly mobile the equilibrium of demand
and supply will be established and wages in the same em-
ployment will be the same the world over. The same is
true for capital. For if men 'understand that other busi-
nesses are more remunerative, and if capital moves freely,
it will seek the highest rewards, but in its attempt to do
this the equilibrium of supply and demand will again be
established.
JSTow it is well known that capital, labor and managing
ability are not perfectly mobile, and it is also well known
that each man does not know what all other business men
are doing or are about to do. But there is a constant
tendency to realize this principle; that is, there is a
tendency in interest on capital to become the same no
matter where it is invested, for wages to reap a certain
average rate, and for rent to become more constant from
year to year. The interference of monopoly and govern-
ment destroys the mobility of capital and labor, and thus
modifies the action of the laws of distribution in relation
to them. Yet, upon the whole, equal returns to last in-
vestments appear to be more and more constant.
ECONOMICS. 131
Dynamic Law of Distribution.
It has already been stated that the divisions of the net
product into wages, rent, profit, and interest, if taken
at any given instant will represent a more or less constant
return to each, but if industrial processes are set in motion
the relations are liable to change from time to time. Thus,
the amount of labor, land or capital in the market at any
given time, varies, and hence yields a variable amount
to wages, rent and interest, respectively. Considering
productive enterprise in motion, land, labor, capital, and
managing ability will tend to be remunerative inversely
in proportion to their increase; that is, the one that has
the smallest relative quantity in the market reaps the
greatest reward at the expense of others. In other words,
if labor and capital remain the same in quantity and a
large amount of land be suddenly thrown upon the market,
rent will have a tendency to be low while labor and capital
are called into use, and will reap a relatively larger in-
come in proportion to services. Or, if land and capital
remain constant in quantity, and a large amount of labor
be thrown suddenly upon the market, wages will tend to
fall and rent and capital increase in proportion. Thus,
if capital is doubling itself in forty years and labor in
twenty, land remaining constant, wages will be lowered
and interest raised. It is in this way that a sudden in-
crease in the laboring population tends to lower wages, or
the taking up of a large area of agricultural land sud-
denly, lowers rent.
Nevertheless, under normal conditions of industry the
law of supply and demand is brought into operation and
the equilibrium of distribution appears. Thus, if a largo
138
ECONOMICS.
amount of labor is thrown into the market it seeks
employment, and if capital is available it employs
labor. If land is available it is also called into use, so that
they stand relatively in the same position as before. This
law manifests itself then largely in the irregularity of
social development, which is soon overcome by the reestab-
lishment of normal relations.
How the Gross Product is Distributed.
By gross product is meant the entire amount earned
in a given industry, or, if considered in the concrete,
of a given plant of said industry. It represents the entire
earning capacity of an industry as evident from its annual
output before expense of running or economic distribu-
tion has taken place.
In considering a specific business, the gross profits are
divided into : replacement, which means the making good
of the loss of capital which has been invested in any given
business; interest, which must be paid for the use of
capital to the man who loans it; insurance or a certain
sum set apart, taken from gross profits, to cover past or
future losses, because the revenue varies from year to
year. The wages of superintendence or management gen-
erally appear in the forms of salary; and finally, the
fifth element is called pure profit. This accrues to the
manager on account of superior wisdom in the manage-
ment of business. This represents the analysis of a single
business from an economic standpoint.
It is clear from the foregoing that the amount of profits
which each factor receives is not immediately dependent
upon the proportional amount each corresponding factor
in production supplies in the process of creating wealth,
ECONOMICS.
139
hence we must find some other determining cause. One
school of economists lias held that nature, labor and cap-
ital are the three sources of value, and from each one
there flows a stream of value coming from its respective
Diagram A
PROPORTIONAL 'DIVISION.
Managing
Ability.
Diagram C
Capital.
Manaqmq
Ability.
Diagram B
VALUE.
Variable . proportions
of
variable products.
source; that the amount and volume of this stream is
dependent upon the power of land, labor and capital in
production. (See diagram A.) It is held that there are
three distinct streams flowing from source to mouth ; that
140 ECONOMICS.
just the same amount of value as has flowed from each
source passes into the income of the persons who own
the soil, the capital, or furnish the labor ; that the force
of the stream of value is dependent immediately upon the
force of the stream of productive power; and that each
source thus represents a distinct productive power, with a
distinct quantity of economic goods, each having definite
value. This of course makes distribution a question of
production, which is scarcely true.
If we were to carry out the figure it might be said
that the truth lies in the fact that the three separate
streams of productive power when once entering into the
process of production spread out again into distinct
branches in their value-creating power. (See diagram B.)
That is, the stream comes under the influences of the causes
which create value, namely, the demand for goods, which
includes the ability and the willingness of men to take
economic goods at a certain market value. The value-
creating power in production depends upon the intensity
of men's needs and the quantity of means which they have
for supplying these wants. That is, the amount of income
flowing into these three separate categories will depend,
not upon the several amounts of powers of production, but
what has been separated out from the three streams in the
figure by the value-creating power of man; that is, we
refer it again to the law of supply and demand and market
valuation.
Another group of economists assume that labor is en-
titled to the entire product because it is the source of
value, and that labor would receive this product if it were
not for a band of robber landlords, capitalists and managers
ECONOMICS.
who suddenly appear to divide the returns of labor among
themselves. This argument cannot be maintained, because
labor is not the only cause of value ; nor would it be true
that after rent and interest had been separated out, wages
would take what was left : for indeed there is no residual
claimant, either in rent, interest, or profits. (See dia-
gram C.)
The problem may be stated thus : Interest is a varying
proportion of varying product of indiistry; wages repre-
sent a variable proportion of a varying product of in-
dustry ; rent is a varying proportion of a varying product
of industry; and profits are a varying proportion of a
varying product of industry.
Let us refer once more to market values, and ascer-
tain how they are created. In order to simplify matters,
let us express the market value in terms of price, which
is the money measure of exchange value. People do not
exchange goods in a market without a probability of some
advantage derived from exchange. The strength of the
demand relative to the supply will fix the valuation of
goods in a market. Let us take a very simple case, a case
of a single transaction between two individuals. Suppose
Mr. A desires to buy a horse, and puts the same estimate
on the value of one hundred dollars that he does on the
horse. It is evident that he will not pay more than one
hundred dollars for a horse. His neighbor, Mr. B, has
a horse which he values at forty dollars. It is evident
that he will not sell his horse for less than this. There
is a possibility that an exchange will take place here
somewhere between forty and one hundred dollars.
Should it take place at seventy dollars, each man will
142
ECONOMICS.
have a gain of thirty dollars. That is, the price will lie
somewhere between the maximum valuation placed upon
the horse by the buyer and the minimum placed upon it by
the seller.
ISTow suppose instead of one man there are three bid-
ding for the horse ; suppose A, C, and D wish to buy the
horse. A, as before, values the horse at one hundred
dollars, C values it as equivalent to eighty dollars, while D
considers the horse worth to him only sixty dollars. It is
evident, although only one man can buy the horse, it is
available to any one of the three. B still values his horse
at forty dollars, and the others bid in competition for it.
When they reach $60, D drops out; when they reach
$80, C will drop out of the race, and A, who is willing to
pay $100, will buy the horse at the lowest margin possible
over what the next highest bidder offers, namely, $80. In
this one-sided competition, which frequently occurs, the
price is fixed somewhere between the valuation of the
successful bidder and that of the highest unsuccessful
bidder, with a tendency to approximate the latter.
Suppose now we take the third case, where we have a
number of buyers competing with a number of sellers
for a given article, which is a true market. Suppose there
is a case of six buyers competing for a barrel of apples,
and five sellers, each wishing to sell one barrel. Let us
say A will pay any price below $4.00 ; B any price below
$3.50 ; C any price below $3.00 ; D any price below $2.50;
E any price below $2.25; and F will pay any price below
$2.00. Of those who have the apples for sale, suppose
that X will accept for a barrel of apples any price above
$1.00; seller Y any price above $1.50; seller Z any price
ECONOMICS. 143
above $2.00; seller W any price above $2.50; and seller
S will accept any price above $3.00. It will be seen that
at $1.00 there will be six buyers and one seller; at $1.50
there will be six buyers and one seller; at $2.00 there
will be five buyers and two sellers; at $2.50 there will be
three sellers and three buyers; at $3.00 two buyers and
four sellers; while at $3.50 there would be five sellers and
only one buyer. It will be seen, then, from this state-
ment, that at $2.50 there will be as many buyers as sellers,
and that this number represents a majority of the num-
ber of sellers. At or near this point the market will be
fixed, because outside buyers and sellers have not influence
enough to modify prices. The price may be said to be
fixed then somewhere between the actual valuation of the
last buyer and the last seller. Now it is evident from this
that the entire product thrown upon the market must
vary, not so much with the combined force of powers
being used in production as the subjective value placed
upon these products, which is dependent immediately
upon the intensity of man's desires for the goods produced.
If we turn our attention to the division of this varying
quantity into wages, interest, rent, profits, etc., we must
consider each specific case.
If wages be considered, first, what is the wage-earner's
share of this varying proportion ? It will be determined
by the value-creating power as estimated by the market
valuation of goods, which is determined by the law of
supply and demand in combination with capital and land.
If there is no limit to the supply of laborers, while the
total amount of wages received may be greater than the
total amount of capital in any given production, the former
ECONOMICS.
will be out of proportion to the total number of laborers
employed, and the laborers themselves competing with each
other for this total amount may reduce wages on account
of the law of diminishing returns, down to the minimum
of living. That is, the individual laborer must depend
primarily upon the valuation placed upon the products of
his labor in combination with other forces, and secondarily
upon competition with his fellows for his share in the total
product. Nevertheless, in normal conditions of business
the rate of wages tends to remain somewhat constant, or
to improve with improving business and decline with
declining business. We can account for this in no other
way than from the fact that the presence of a large number
of able-bodied men seeking employment, other things
being equal, will bring into operation a larger amount of
available land and induce a larger amount of capital to
seek investment, all of which will require a larger amount
of managing ability. Therefore there is a tendency for
not only the total amount of wages under normal condi-
tions to remain about the same, but the rate of wages among
laborers of the same grade to remain more or less constant.
Especially is this true when we consider that of any staple
commodity in the market, the market price, though not
caused by the cost of production, has a tendency to approxi-
mate to this finally.*
Suppose now that the entire product in a given business
be one thousand, and that ten units of land yield eighty
units of rent, ten units of capital yield one hundred sixty
units of interest, ten units of organizing power yield one
hundred sixty units of profits, and ten units of labor yield
six hundred units of wages. It is evident that the average
* See Thompson, Theory of Wages.