Copyright
Thomas Nixon Carver.

Principles of political economy online

. (page 34 of 48)
Online LibraryThomas Nixon CarverPrinciples of political economy → online text (page 34 of 48)
Font size
QR-code for this ebook


larger inducements are offered in the towns, more of them
leave the farms and less land can then be cultivated.

Another way of approaching this problem is by considering
the wages of farm labor. When farm labor can be had at a
low cost, some land can be cultivated profitably which could
not be if the same kind of labor cost more. Wherever farm
labor is cheap, we actually find that there is little land going
to waste except the very poorest. Where farm labor is expen-
sive and hard to find, we actually find fairly good land going
to waste. Only the best land can be profitably cultivated by
expensive labor. It must be remembered, however, that labor
is not necessarily expensive merely because wages are high.
Very efficient labor may be cheap even though it is paid high
wages, and very inefficient labor may be expensive even though
it works for low wages. With this explanation it ought to be



THE RENT OF LAND 413

clear that, with a given demand for farm products, poorer larid
can be cultivated if labor is abundant and cheap than would be
profitable if it were scarce and dear.

Different grades of land. A partial illustration of the doc-
trine of rent can be found in a study of the following figure
and the explanation which follows it. It is only a partial ex-
planation, however, because it omits the law of diminishing
returns. This lack will be corrected in the subsequent illustra-
tion and explanation.



Grade


A,


yielding


1000 units


of


product


to 100


units


of


labor.


Grade


B,


yielding


900


units


of


product


to 100


units


of


labor.


Grade


c,


yielding


800


units


of


product


to 100


units


of


labor.


Grade


D,


yielding


700


units


of


product


to 100


units


of


labor.


Grade


E,


yielding


600


units


of


product


to 100


units


of


labor.



Let us assume a miniature community possessing five grades
of land, as indicated in the above figure. On the best grade of
land, which is of limited extent, 100 units of labor will pro-
duce 1000 units of product; on the next grade, 900 units of
product ; on the next, 800 units of product ; etc. If the de-
mand of the community were for only 1000 units of product
and there were only 100 units of labor, only the best grade
of land could be used. Until it was all in use there would
be no rent. But if the population were to increase so that
there was an increase in the demand for products and also in
the supply of labor, grade A would not continue to be suffi-
cient. If, for example, the demand were to increase so that
1500 units of product were needed, some of it would have to
be produced on the second grade of land, which would thus be
the marginal land. On this marginal grade, however, each unit



414 PRINCIPLES OF POLITICAL ECONOMY

of labor would produce only nine units of product, whereas on
the best grade it would .produce ten units. Clearly each pro-
ducer would rather work on Grade A than on Grade B. Be-
cause of this preference he can be persuaded to pay something
for the privilege of working on Grade A. Approximately one
unit of product for each unit of labor would be paid for the
privilege of farming on Grade A. An owner of a portion of
Grade A who works it himself is better off than an owner of a
portion of Grade B. This excess of his income over that of an
equally good worker on Grade B is rent just as truly as though
he received it in cash from a tenant.

If the demand for products continues to increase until it
requires 2500 units of product, some of Grade C will have to
be brought into use. This would now be the marginal grade.
On Grade C, however, each unit of labor produces only eight
units of product. Rather than work on this land, producers
would be willing to pay something for the privilege of working on
either Grade A or Grade B. Each unit of labor would be will-
ing to pay approximately two units of product for the privilege
of working a portion of Grade A, or one unit for the privilege
of working a portion of Grade B, rather than be forced to cul-
tivate land of Grade C. In either case it would have as much
left as it would have if it got the whole of the product on
Grade C without any deduction for rent. If we go on assum-
ing an increase in the population, and a consequent increase in
the demands for products and in the number of units of labor
available for the cultivation of land, we shall find each of the
Grades D and E in succession brought into cultivation, and
the rent going up correspondingly on every grade except the
marginal one.

Differences in productivity. The differences in the produc-
tivity of land may be represented or illustrated by the following
diagram if it is understood that lands of different grades are
ranged along the line OX, with the most productive piece of land
at the point O and absolutely barren land at the point X, with



THE RENT OF LAND



415



every variation between. If we measure the productivity of the
different parcels on the line O Y, the curve YB X may be called
the productivity curve. When a total product represented by
the surface OA YBC is to be produced, only the land between
O and C will be required. That at the point C will be marginal
land, and all between C and X will be unused. The line BC
represents the productivity of the marginal land, and the sur-
face YBA will represent the rent on all the other land in use.
Relation of diminishing returns to rent. This explanation,
however, is incomplete, as any explanation of rent is incom-
plete unless it takes into account the law of diminishing
returns. Even on the
best land in fact,
on any grade of land
different applica-
tions of labor and
capital produce dif-
ferent results. After
a certain quantity of
labor and capital have
been applied to the cultivation of a given piece of land, further
increase in the labor and capital do not yield proportionately
increased returns. 1 If this were not true, it would never be
necessary to cultivate any but the best grade of land. If, for
example, 200 units of labor on Grade A of the land described
in the figure on page 413 would produce 2000 units of product,
that would be better than to spread it over both Grades A and
B, where it would produce only 1900 units of product. Again,
if 300 units of labor would produce 3000 units of product,
and 400 units of labor 4000 units of product, and so on in-
definitely, we should have what are called constant as opposed
to diminishing returns. If constant returns could be secured
indefinitely, as stated above, it would never be advisable to
cultivate any land but Grade A of our illustration.

1 As shown in Chapter XXX, on The Law of Variable Proportions.




41 6 PRINCIPLES OF POLITICAL ECONOMY

But the simple and well-known fact is that increasing ap-
plications of labor and capital to the same land do not yield
constant returns, much less increasing returns. Instead of 200
units of labor yielding 2000 units of product on Grade A, and
300 units of labor yielding 3000 units of product, it is more
likely that 200 units of labor would yield 1 800 units of product,
and 300 units of labor 2400 units of product, or some such
quantity. If that were the case, it would be better to take
Grades B and C into cultivation rather than to put all the
increasing labor supply onto Grade A. Unless something like
this rate of diminution in the returns should result, the inferior
grades would never come into use at all.

The value of land to the community. Thus far we have
been considering the differences in the productivity of different
grades of land as the reason why rent is paid and the factor
which determines how much rent is paid for land of a given
grade. Another way of viewing it, which leads to the same
result, is to consider how much better off the community is
when a given piece of land is In cultivation than when it
is not. If there is an abundance of uncultivated land in every
way as good, location and everything considered, as the piece
of land in question, the only result of withdrawing it from
cultivation would be to bring into cultivation an equal quantity
of other land. In such a case the community loses nothing
when it is withdrawn from cultivation, nor would it gain any-
thing if it were brought back into cultivation. There being
more land of this grade than can be cultivated, some labor
must be withdrawn from other land when this piece of land
is cultivated.

If, however, there is a scarcity of land of the grade of the
piece of land in question, there is certain to be a decrease in
the total production of the community if it is withdrawn from
cultivation, and an increase when it is brought back into culti-
vation. If it is withdrawn from cultivation, the labor and tools
which were used in cultivating it must now find employment



THE RENT OF LAND 417

on other land. If it goes onto poorer land, such as has been
hitherto uncultivated, its product will be less. The production
of the community is decreased by the amount of the difference
between the product on the piece of land in question and the
product on the poorer land. If the labor and tools go onto
land which is already under cultivation, it merely adds to the
number of laborers and tools already on that land, and carries
the margin of cultivation a little farther. It will add something
to the product from that land, but not. an amount equal to the
total product formerly produced on the land which is now
thrown out of cultivation. The difference between the total
amount produced on the land now thrown out of cultivation
and the amount which the labor and tools could add to the
product from other land measures the loss to the community
when the piece of land in question is thrown out of cultivation,
and the corresponding gain when it is brought back into
cultivation. This difference, however, corresponds to the rent
of the land.

The law of rent. The rent of a piece of land, therefore,
is determined by the difference between what can normally be
produced upon it and what an equal amount of labor and cap-
ital can produce in less advantageous positions still open to
them. These less advantageous positions may be found either
by going onto the inferior lands still uncultivated or by crowding
onto land already cultivated.



CHAPTER XXXV

THE SOURCE OF INTEREST

What is interest? One of the most difficult and elusive of
all problems in economics is that of the interest of capital.
Interest may be defined as the income which goes to the
owner of capital, whether he uses it in his own business or
lends it to somebody else. This income may take any one of
several forms. The most common and clearly understood
form is where a definite sum of value, represented usually by
money, is loaned by the owner to someone else. The bor-
rower, in return for the loan, eventually pays back not only
the principal but a stated sum or percentage of the principal
year by year. The transfer of purchasing power from the
lender to the borrower, however, does not necessarily take the
form of money. It may be rather a claim upon some credit
institution for money, as when the lender gives the borrower
a check on the bank. The borrower then deposits this check
in his own bank and proceeds to draw his own checks against
this deposit. In a case of this kind no money is transferred,
and the borrower may not even see or handle any money.
Nevertheless there has been transferred to the borrower pur-
chasing power in the form of a claim upon the bank for money.
But the purpose of the borrower was not ultimately to secure
money. Money is to him only a means of purchasing some-
thing which he really wants, and if he can make the purchases
without actually handling the money, by handling credit in-
struments instead, or claims upon a bank for money, his pur-
pose is answered just as well. Aristotle pointed out long ago
that money serves merely as a claim upon society for a share
of the general fund of wealth in its possession. A credit in-
strument is only a more highly evolved claim of the same kind.

418



THE SOURCE OF INTEREST 419

In the second place, the capitalist may transfer to the
borrower, not purchasing power, but the material goods which
the lender desires and which he would buy if he were given
the purchasing power ; that is, the capitalist may transfer
to the borrower specific pieces of capital, such as buildings
and machinery, allowing the borrower the use of these pieces
of capital for a definite period of time. At the end of the
time they are of course to be returned to the lender. Mean-
while a definite sum is to be paid at stated periods for their
use. This sum is commonly called rent rather than interest,
and there are some reasons for this custom. In the first place,
the sum which is paid in the form of money for the use of a
group of material objects cannot be reduced to a percentage
basis until those objects are evaluated and their quantities
stated in terms of value. Suppose that the agreement was, to
pay five thousand dollars a year for a certain group of build-
ings and a mass of tools and equipment. The five thousand
dollars a year is not a percentage of the group of buildings.
If, however, the buildings are appraised and their value stated
as one hundred thousand dollars, then it is possible to reduce
the annual payment for their use to a percentage basis. It
might then be said that the borrower was paying 5 per cent
on the sum borrowed. Unless the transaction takes this form
it is more convenient to say that he is paying five thousand
dollars rent than to say that he is paying 5 per cent interest.
The chief reason for calling it interest is that economists have
formed the habit of speaking of rent as that which is paid for
the use of land, and of interest as that which is paid for the
use of capital. Since the buildings and the equipment are capi-
tal rather than land, that which is paid for their use would have
to be called interest, unless we change the definition of interest.

Distinction between rent and interest. There seem to be
some very important reasons for distinguishing between rent
and interest in this way. Land is a natural resource ; it is
not the product of human foresight or of human industry.



420 PRINCIPLES OF POLITICAL ECONOMY

Buildings, tools, equipment, etc. are the products of foresight,
enterprise, and industry. That which the landowner receives
as rent for his land he receives because he has come into the
possession of a natural agent which neither he nor anyone
else produced ; that which the owner receives for the use of
buildings, tools, and equipment he receives for something
which he either produced or paid someone else for producing.
There seems, therefore, to be a wider difference between that
which is paid for the use of buildings, tools, and equipment and
that which is paid for the use of land than there is between
that which is paid for borrowed money and that which is paid
for buildings, tools, and equipment. In this discussion, there-
fore, we shall adhere to the distinction between rent and interest
which nearly all standard books on economics have followed.

In the third place, the income of the capitalist may be
secured from the use of capital in his own business. This,
however, is sometimes difficult to distinguish from profits.
Economists generally distinguish between interest and profits
in this way : the business man who has his own capital in-
vested in his business is allowed, the current rate of interest
on that investment ; if he labors or puts in his time super-
vising the business, he is also allowed a salary or wages of
superintendence ; if he has anything left over after allowing
himself interest and wages, this surplus is called profit or
profits. If he has not been particularly successful, the profits
may be negative ; in other words, he may incur a loss. That
means that his total income may not be as great as it would
have been if he had gone out of business, loaned his capital
at interest, and hired out at a salary as a superintendent.

Interest, therefore, as it is generally defined, includes that
which the owner receives for the use of a fund of purchasing
power which he transfers to a borrower ; that which he receives
for the use of a mass of material goods, buildings, tools, equip-
ments, etc. which he permits the borrower to use for a stated
period ; and that which he receives in return for the capital



THE SOURCE OF INTEREST 421

which he owns and which he uses, or has invested, in his
own business. Care must be taken, in considering these vari-
ous forms of interest, not to include too much. That which
the lender of a fund of purchasing power receives in excess
of the amount necessary to preserve the fund intact is inter-
est, and that alone. If any insurance is involved, this must
be deducted from the total amount received. Some very haz-
ardous investments appear to pay very high rates of interest.
This may be called gross interest, only a part of it being net
interest, the remainder being payments for risk and akin to
profits rather than interest. Again, when equipment itself is
loaned, rather than a fund of purchasing power, allowance
must be made for deterioration. Unless the capitalist main-
tains the quantity of his capital intact, and receives a surplus in
addition to this, he has not received interest. It might easily
happen that a part of the five thousand dollars received for
the buildings, tools, and equipment in the above illustration
was necessary to keep the buildings in repair and to recoup
the owner for the necessary deterioration. In short, interest
is the amount which the owner of capital receives over and
above the sum necessary to maintain the original quantity of
his capital.

Why is interest paid ? The problem of interest thus defined
divides itself into two parts : first, why is interest paid ? second,
what determines the rate of interest ? One answer to the first
question is that capital is productive. This could apply only
to what we have defined as productive as opposed to acquisitive
capital. That any kind of capital is productive has sometimes
been called in question. Something depends upon the mean-
ing of the word productive. No one has challenged the propo-
sition that tools are useful. Those who assert that capital is
productive mean absolutely nothing more than this. Those
who deny the productivity of capital invariably have some other
definition of the word productive in mind, and there is not
much to be gained by quibbling over the use of words.



422 PRINCIPLES OF POLITICAL ECONOMY

If tools are useful, it is pertinent to ask for what are they
useful ? They are useful for production, not for consumption.
With an adequate equipment of tools one can produce more
than one can produce with an inadequate equipment. The
formula, " More and better tools, more production ; fewer tools
or poorer tools, less production," supplies the farmer and the
business man with as good a theory of economic causation as
any logician has ever been able to invent. If I am a farmer
and perceive that with an additional horse I can grow a larger
crop than I could if I did not have that additional horse, I am
not likely to puzzle my head very much over abstruse questions
of economic causation. The fact that a larger crop will result
from my using another horse is a sufficient reason why I should
try to come into possession of that horse.

Marginal productivity of capital. It is true, as has been
pointed out and argued ad nauseam, that if I did not have
any plows or tools to use with the horse, he would be of no
use ; or if I did not have any labor to direct him, he would
not produce anything. This line of argument, instead of prov-
ing that the horse is not productive, merely proves that other
forms of capital, as well as labor, are also productive. In any
given situation, with any given type of equipment, find out
how much you can produce without any particular unit, say
the horse in question, and then how much you can produce
with it, and you have a measure of the productivity of that
unit in that situation. At any rate, it is a fair test as to how
much that unit would be worth when added to the rest of the
equipment. If there is another farmer whose equipment calls
for an extra horse, and if an extra horse will add more to the
product on his farm than on mine, the other farmer will bid
against me for the horse, and under the circumstances can
afford to pay more for it than I can. If he has n't the money
with which to purchase it, he can afford to pay a little more
for the use of the money than I can afford to pay. Apply
this test to each and every kind of capital required, not only



THE SOURCE OF INTEREST 423

on farms but in shops and factories, railroads, stores, etc., and
we get an idea of the test of the usefulness, or productivity,
of capital. It might very well be, however, that on another
farm, where there was a surplus of horses, the farmer in charge
would find that one more horse would add little or nothing to
his crop. Having a surplus of horses, what he would need
more than he would need an extra horse would be some extra
plows and harrows, or plows and harrows of a larger size, to
balance his equipment. If he understands the situation, he
will see that it is to his advantage to sell some of his horses
or else to buy other equipment. This balancing of the equip-
ment of industries goes on all through society and is one of
the fundamental problems of business management. 1

Here we must repeat a caution which was given in the
discussion of value. We are not to discuss the productive-
ness of labor in general or of capital in general, a,ny more
than we are to discuss, under the problem of value, the utility
of bread in general, meat in general, or water in general.
We are always concerned with definite units which may be
added to or subtracted from the existing supply. Therefore
we are not concerned with the productiveness of horses in
general, cows in general, or even capital in general, but with
the need for definite units of capital, such as one horse more
or less, one cow more or less on a given farm, one boiler
more or less in a real factory, and so on through the whole
range of industry. Wherever any producer finds that he could
use more capital of any form advantageously, he has a per-
fectly good reason for trying to get an additional unit of that
particular kind of capital. Whether we call it the productivity
of the unit of capital, or merely its usefulness, does not matter.

The opposite method of reasoning is involved in the state-
ment that if there were no labor, capital could not produce any-
thing. This is dealing with labor in general and capital in
general. It is likewise true, of course, that if there were not

1 Compare Chapters XV and XXX.



424 PRINCIPLES OF POLITICAL ECONOMY

any capital, labor would not be able to produce very much dur-
ing the next month or the next year, not, in fact, until it had
equipped itself with a new supply of tools. It might very well
happen that in any definite community, like the overcrowded
section of a great city, there would be more unskilled labor than
could possibly be used at that particular place. The formula
" More of this particular kind of labor, more product " would
not apply. When we speak, therefore, of the productivity of
capital, we do not mean that capital is productive under all pos-
sible circumstances, regardless of the surroundings. Neither is
labor productive in that sense ; it has to be located where there
is at least land available, and in order that it may be very pro-
ductive it must -have an adequate supply of tools. In short,
nothing is productive when it stands alone, unrelated to many
other things in the surrounding universe. Labor, of course, is a
more fundamental and primary agent of production than capital,
since capital is itself the result of labor, thrift, and enterprise.
But we are not, in a practical work on economics, dealing with
an absolutely primitive economic situation ; we are dealing rather
with the conditions which we find all around us, and with the
specific needs of specific industries and specific communities.
What does capital include? As capital was defined in the
chapter devoted to that subject, it includes something more
than producers' goods. It includes consumers' goods which
are loaned, rented, or hired in order to secure income for their
owner. In these cases the income of the capitalist is not due
to the productivity of the consumers' goods thus loaned ; it is



Online LibraryThomas Nixon CarverPrinciples of political economy → online text (page 34 of 48)