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 UNIVERSITY OF CALIFORNI 
 
 LOS ANGELES
 
 WEALTH 
 
 ITS PRODUCTION AND DISTRIBUTION
 
 A NEW SERIES ON 
 ECONOMICS 
 
 Crown 8vo 
 
 The following are the first of a set of volumes dealing 
 with the fundamental principles and method of Political 
 Economy in a concise and simple manner. 
 
 Their object is to explain the essential facts and theories 
 of that science, and its important bearing upon human 
 welfare in language not too technical or abstract, and 
 thereby to stimulate an interest in economic doctrine, and 
 to foster a study of the problems of wealth and poverty, 
 production and consumption, and of the causes which 
 govern the welfare of nations. 
 
 The series is edited by G. ARMiTAGK-SMiTH,D.Lit.,M.A. 
 
 A PRIMER OF NATIONAL FINANCE. 
 
 By Henry Higgs, C.B. 
 
 THE ORGANIZATION OF LABOUR. 
 
 By George O'Brien, Litt. D. 
 
 FOREIGN TRADE. 
 
 By W. Henderson Pringle, M.A., LL.B. 
 
 WEALTH : ITS PRODUCTION & DISTRIBUTION. 
 
 By A. W. Kirkaldy, M.A., B.Litt. Oxon. 

 
 
 WEALTH 
 
 ITS PRODUCTION AND 
 DISTRIBUTION 
 
 BY 
 
 A^W. KIRKALDY, M.A. 
 
 B.LITT. OXFORD, PROFESSOR OF ECONOMICS AND COMMERCE 
 UNrVERSITY COLLEGE, NOTTINGHAM 
 
 ■ 
 
 
 
 METHUEN & GO. LTD. 
 
 36 ESSEX STREET W.G. 
 
 LONDON
 
 13 
 
 First Published in 1920 
 
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 GENERAL EDITOR'S PREFACE 
 
 THIS book is designed to explain in a 
 lucid and popular manner the funda- 
 mental facts in the Production of 
 £ Wealth, a-nd the causes which regulate its 
 80 Distribution. It gives an analysis of the 
 % functions of Nature, of Man, and of Capital 
 go in the Production of Wealth ; and it traces 
 the conditions upon which the economic 
 progress of mankind depends. There is an 
 ° abundance of illustration from various fields 
 of industry, gathered both from study and 
 a the wide experience of the author and his 
 
 intimate knowledge of practical affairs, 
 c* This subject is a necessary introduction to 
 5 the further study of economic problems con- 
 cerning Trade, Commerce, Exchanges, and 
 
 Finance. 
 
 G. ARMITAGE SMITH. 

 
 CONTENTS 
 
 CHAf. 
 
 General Editor's Preface 
 
 I. Introduction .... 
 
 II. Economics .... 
 
 III. The Production of Wealth 
 
 IV. Land — a Factor in Production 
 V. Labour — a Factor in Production 
 
 VI. Capital — a Factor in Production 
 Index ..... 
 
 PAGE 
 
 V 
 
 I 
 
 12 
 21 
 
 31 
 
 62 
 
 Il6 
 M5
 
 WEALTH 
 
 ITS PRODUCTION 
 AND DISTRIBUTION 
 
 INTRODUCTION 
 
 ECONOMICvS has been looked upon as 
 a science ever since Adam Smith, in 
 1776, published his enquiry into the 
 causes of the wealth of nations. From that 
 time, at any rate, there have been conscious 
 economists in the world, but it would be a 
 great mistake to suppose that economics 
 came into being about the middle of the 
 eighteenth century. The subject matter of 
 economics is wealth, not, however, in the 
 narrow sense understood by the man in the 
 street, which is synonymous with abundance. 
 The real economist is he who strives to get at 
 the natural laws affecting man's material 
 well-being, and is not necessarily engaged, as 
 is sometimes erroneously thought, in trying-
 
 2 WEALTH 
 
 to show how either an individual or a nation 
 can become rich. From this point of view 
 the task before the economic investigator is 
 to unravel and make plain those natural 
 laws — as old as humanity itself — which con- 
 trol the material side of life. If these laws be 
 studied, noted, and observed, the individual 
 or the community, acting in accordance with 
 them, develops his or its well-being naturally. 
 If, however, either an individual or a nation 
 either ignores or acts in opposition to these 
 laws there must result loss and inconveni- 
 ence. 
 
 Thus at the outset of this short essay on 
 the production and distribution of wealth it 
 will not be amiss to devote a few pages to a 
 consideration of how man became conscious 
 that nature must be studied if he wished to 
 be really successful in business and com- 
 merce ; or if as a group he aimed at develop- 
 ing a nation that should be materially well- 
 balanced, harmonious, and contented. 
 
 Considered from the material side mankind 
 has passed through four great stages of 
 development. 
 
 In the first stage man was a hunter. He 
 lived by the chase, and a very hard life it 
 must have been. He had to " catch his hare 
 before he could cook it " ; and when he faced
 
 INTRODUCTION 3 
 
 the animal world equipped merely with his 
 own hands he was at a serious disadvantage. 
 But he must soon have learned the value of 
 a stick or a stone to help him bring down 
 some animal or bird. The first man who 
 used an implement to assist him in gaining a 
 meal little imagined that he was using 
 capital for the first time, or that he had 
 brought into use an instrument that was to 
 ease the heavy burden of toil and make the 
 development of the higher side of life a 
 possibility. As a hunter man lived on the 
 flesh of the victims to his skill, and he used 
 the skin of animals as clothing. 
 
 The hunting stage was full of interesting 
 economic problems, as fortunately can be 
 seen by visiting those parts of the world 
 where man still pursues the hunter's career. 
 
 How long hunting remained the great 
 occupation for the great majority of mankind 
 is a matter for speculation, but this stage 
 gradually shaded off into a new era and man- 
 kind entered upon the pastoral period. How 
 did man learn to become a shepherd or a 
 dairyman ? The question is more easily 
 answered by the imagination than by referring 
 to historical records. Was it woman who 
 first discovered that animals could be domesti- 
 cated ? It may well be so. Probably some
 
 4 WEALTH 
 
 hunter had killed a she-goat and the kids 
 refused to leave the dead mother. They 
 were perhaps taken as pets, and on attaining 
 maturity the utility of milk was discovered. 
 However it originated man found out that 
 certain animals could be tamed, and that in 
 that condition they were of greater value 
 than in the wild state. Man himself, too, 
 began to develop new qualities, family life 
 developed the kindly side of his nature, he 
 desired a less uncertain means of existence,, 
 and the new possibility was tested and de- 
 veloped. In a word a new era opened, the 
 pastoral stage was inaugurated. Not all at 
 once, but gradually the hunter developed 
 into the shepherd. 
 
 As a hunter man had no fixed abode, nor 
 did he settle down as a shepherd. He 
 wandered about with his flocks and herds 
 seeking pastures new and, the necessary 
 water supply. Then he noted the qualities 
 of certain grasses, shrubs, and trees. He 
 found that by care and attention new quali- 
 ties were developed in certain forms of 
 vegetation. To benefit by these it was neces- 
 sary to remain for a period in one spot, and 
 so land settlement commenced. Gradually 
 the advantages of farming became recog- 
 nised, and man began to combine his
 
 INTRODUCTION 5 
 
 care of animals with the cultivation of the 
 land. 
 
 While these changes were taking place it 
 became plain that some men were more 
 skilled in certain occupations than in others. 
 One man could hunt or fish or kill animals 
 more skilfully than another. The making of 
 primitive tools, weapons, and clothes also 
 lent itself to this same phenomenon. In the 
 manufacture of flint arrow-heads or axes one 
 man excelled. He could produce not only a 
 more satisfactory weapon than another man, 
 but in less time. The practice of separate 
 occupations was seen to be an advantage, 
 and with this, exchange commenced. The 
 secret of exchange is the possessing of a 
 surplus that is not required for one's own 
 use. The successful maker of flint tools and 
 weapons was possibly only an indifferent 
 hunter or shepherd, but the useful articles 
 his skill produced were eagerly demanded by 
 those who could use with advantage instru- 
 ments, for the making of which they had 
 little skill or taste. 
 
 Thus before mankind was very old a very 
 interesting economic condition had come 
 into existence. 
 
 Moreover, as man progressed materially 
 and intellectually he began to realise how
 
 6 WEALTH 
 
 unsatisfactory exchange in the form of barter 
 is. How many arrow-heads should be given 
 for a sheep skin ? If one man built a wattle 
 hut for a man who owned cattle, but had no 
 taste even for primitive building construc- 
 tion, how could the latter recompense the 
 builder for providing the hut. Man felt the 
 need of a standard of value and a medium of 
 exchange long before he could have explained 
 what he wanted. From experience of the 
 methods utilised nowadays among the hunt- 
 ing fraternity in far-off countries it is obvious 
 that in the hunting stage there was a rough- 
 and-ready form of money found in the skins 
 of animals. Some were rarer than others, 
 and gradually a chain of values in furs would 
 be agreed, and skins began to be used as 
 currency. This method of using the obvious 
 things of everyday life as media of exchange 
 adapted itself to the succeeding stages — 
 sheep and cattle, corn and fruits of various 
 kinds were readily accepted and made use of 
 as money. The final stage was reached when 
 it dawned upon mankind that something 
 outside ordinary consumable foods was neces- 
 sary to provide a convenient form of money. 
 By this time mankind discovered the utility 
 of metals, and among these the precious 
 metals gradually won their way as the most
 
 INTRODUCTION 7 
 
 convenient articles to serve as the circulating 
 medium. When mankind had arrived at this 
 stage the economic situation was becoming 
 increasingly full of interest. For nearfy all 
 the economic problems occupying attention 
 now were emerging or had emerged. Some 
 men were naturally thrifty, others thriftless. 
 The latter began to realise that the former 
 had advantages of which their improvi- 
 dence had deprived them. How could they 
 enjoy the results of thrift ? The fatal policy 
 of borrowing began. Debtor and creditor 
 experienced new sensations. A credit was 
 found to confer power — a debt was apt to 
 sap a man's independence. So dangerous 
 did the position become that early lawgivers 
 gave their attention to the problem. The 
 usurer had begun to flourish, and his power 
 to be realised. Indian, Semitic, and Greek 
 sages pronounced their opinions in no veiled 
 language on the proceedings of the fore- 
 runners of the modern money-lender. Aristotle 
 declared that as money was a sterile sub- 
 stance the exaction of interest on money 
 loans was unnatural. Moses, with far-seeing 
 eye, declared that the exaction of interest 
 from a brother Jew was wrong, but not from 
 a Gentile. The economist by this time was, 
 at any rate, semi-conscious — the stage of the
 
 8 WEALTH 
 
 unconscious economist was over — and hence- 
 forward there was to be a growing desire to 
 elucidate phenomena which were pressing 
 themselves upon the attention of the world. 
 
 From another side the problems of life 
 were becoming increasingly complicated. 
 The family had developed into the tribe, the 
 tribe into the race. In South-Eastern Europe 
 the city state had made its appearance. The 
 simple barter of earlier days had developed 
 into trade and commerce. Slavery had been 
 introduced into the social system, and many 
 of the less pleasant occupations, especially 
 those deemed unworthy of the attention of 
 those enjoying citizen rank, were left to the 
 slave element. As has already been hinted, 
 politics began to evolve economic theories, 
 and some of these were destined to affect 
 mankind even to the present day. It was 
 then that the contempt of the professional 
 man for trade and business took its rise, a 
 contempt which in its origin might have had 
 a certain amount of justification, but for 
 which under ordinary conditions there is no 
 excuse. 
 
 The fourth stage dawned as gradually, 
 perhaps more gradually, than its predecessors, 
 and man entered upon a new epoch. Trade 
 and commerce, industry and manufacture
 
 INTRODUCTION 9 
 
 were to become the chief material interests 
 of mankind. 
 
 When the renaissance awakened a sense of 
 nationality, and the social divisions in Europe 
 became vertical instead of horizontal, govern- 
 ments ambitious of extending their frontiers 
 found themselves faced with the necessity to 
 provide the sinews of war. To provide a 
 taxable fund, industry and commerce pro- 
 mised better than agriculture, and so kings 
 and nobles gave their attention to fostering 
 new industries and to promoting trade both 
 at home and abroad. 
 
 Then commenced to be laid the founda- 
 tions of a policy which was destined to play 
 a great part in the world's history for some 
 centuries. The aim was to build up a strong 
 self-contained, self-sufficient state, and the 
 policy adopted in Western Europe is known 
 as the Mercantile System or Policy of Power. 
 So far as England is concerned the policy 
 dates from the fourteenth century. Under 
 Edward III new manufactures were intro- 
 duced into this country. 
 
 Manufactured goods produced more wealth 
 than the production of raw materials. The 
 supply of goods and materials to the Conti- 
 nental markets, if carried on by English 
 merchants and in English ships, was seen to
 
 10 WEALTH 
 
 afford the maximum of increase to the 
 national wealth ; hence the Navigation Laws 
 introduced during the reign of Richard II. 
 Gradually the system concreted itself, and 
 its greatest exponent was Cromwell. Navi- 
 gation Laws, Corn Laws, Statutes of Appren- 
 tices, the Poor Law, and other similar legis- 
 lation made up a definite policy whose object 
 was the building up of a great and powerful 
 England. A scaffolding was erected, thanks 
 to which a fair building was achieved, and 
 England became a great power on land and 
 sea to be reckoned with by competitors for 
 world-power, who were in their turn elabor- 
 ating similar policies for the same purpose. 
 
 This country was the first to realise that a 
 scaffolding is only erected to be dispensed 
 with, and England's growth as a colonising 
 and commercial power is to a great extent 
 due to her readiness to discard or modify, 
 before it becomes petrified, any policy which 
 shows signs of having outgrown its original 
 utility. 
 
 Towards the end of the seventeenth century 
 two events set Englishmen speculating with 
 renewed interest on economic subjects. In 
 1694 the Bank of England was founded, and 
 in 1696 it was decided that a re-coinage was 
 necessary. These two events produced dis-
 
 INTRODUCTION 11 
 
 cussions and led to the publication of economic 
 views. Men like Sir William Petty had a 
 few years previously been speculating and 
 theorising about the national wealth ; Petty, 
 indeed, made the utility of statistics known 
 to his generation by the publication of his 
 Political Arithmetic. The sanest of these 
 writings had a leaning towards a newer and 
 a freer pol^ ; thus free trade doctrines in 
 an embryonic form made their appearance, 
 and whilst meeting with scanty attention at 
 home were carried across the channel and 
 had a marked effect, which about the middle 
 of the eighteenth century showed itself 
 openly in the activities of Les Economistes, 
 or as we call them, the Physiocrats. These 
 men, in turn, had their effect on Adam Smith, 
 who, when conducting the youthful Duke of 
 Buccleuch on his grand continental tour, dis- 
 cussed economic subjects with the Physiocrat 
 leaders in Paris. The results of Smith's 
 thought and experience were embodied in 
 the book which he published some ten years 
 later — The Wealth of Nations. 
 
 13 ».
 
 II 
 
 ECONOMICS 
 
 EVERYONE becomes sooner or later 
 conscious that he has needs, and these 
 needs he finds can for the most part 
 be satisfied if he can obtain certain things. 
 When a man realises this he considers how he 
 may supply himself with the things of which 
 he feels the want. Experience soon teaches 
 that the most satisfactory way to obtain 
 what is required is to work for it. Thus 
 needs lead to efforts, and successful effort 
 tarings a man satisfaction. Those things 
 which a man strives after, so far as the 
 material world is concerned, can be summed 
 up in one word — wealth. 
 
 Political economy, or economics as it is 
 now more popularly called, is concerned with 
 wealth, its production, its distribution, and 
 its consumption. In a community where 
 wealth is produced under good conditions, 
 with harmonious co-operation among those 
 
 12
 
 ECONOMICS 13 
 
 who are occupied in its manufacture, where 
 the distribution of the wealth produced is 
 carried out with equity and fairness to all 
 concerned in its production, and where, lastly, 
 the community consume what has been pro- 
 duced wisely and temperately, there you get 
 a model community or State. This is a 
 counsel of perfection probably never realised 
 in this world, but it is an ideal for man to 
 strive after. A great deal of the industrial 
 unrest with which modern communities are 
 so familiar is really in essence a healthy 
 striving to attain to this ideal. That is one 
 of the hopeful sides of modern developments ; 
 indeed, the social and industrial history of the 
 nineteenth century in the United Kingdom 
 shows that though the progress may have 
 been slow, some people perhaps think too 
 slow, yet there has been a steady advance in 
 the desired direction. A comparison of 
 social conditions in the year 1800 with those 
 of the year 1900 proves that there has been 
 a gradual improvement in the distribution 
 of wealth and a growing appreciation of those 
 tendencies and laws the observance of which 
 can do so much in the promotion of the higher 
 side of human nature. The material, the 
 intellectual, and the spiritual are much more
 
 14 WEALTH 
 
 closely allied than is usually recognised or 
 taught. 
 
 Thus economics in ordinary everyday 
 speech is the study of man from a business 
 point of view. Be that man a statesman, a 
 lawyer, a doctor, or a manufacturer, be he 
 an artisan, a railwayman, a miner, or a sailor, 
 what is his contribution to the wealth of the 
 nation of whom he is a part, what does he 
 enjoy as a result of his work, and how 
 does he expend what he gains — in other 
 words, what standard of comfort does he 
 enjoy ? 
 
 The fieldfappearsj.'wide enough and is com- 
 plicated by that extraordinary phenomenon, 
 human nature. Yet it should be possible 
 to sketch a simple picture which, freed from 
 complications and the difficult problems 
 encountered in everyday life, may prove 
 helpful to workaday men and women. One 
 of the great needs to-day is clear and right 
 thinking on economic subjects. Far too 
 long has the charlatan, and the well-meaning 
 but ignorant reformer, been allowed to hold 
 the attention of men eagerly desirous of 
 knowing economic truths. 
 
 The first necessity is to gain a clear under- 
 standing of what is meant by the word 
 wealth. The man in the street has one very
 
 ECONOMICS 15 
 
 definite conception of wealth. To him it 
 means abundance. Given a man who 
 possesses a good motor-car, one or two fine 
 houses, a good business, and a satisfactory- 
 banking account, there, says the ordinary 
 individual, is wealth. Such a definition, 
 however, is not sufficiently definite for the 
 present purpose. It obviously does not 
 include all wealth and it is confined to a 
 generalisation concerning one man. More- 
 over, need abundance be an inseparable 
 characteristic of wealth, and how is that 
 abundance to be gauged ? 
 
 A well-known professor held that a know- 
 ledge of things was to be obtained by defining 
 the word wealth, and he was right. 
 
 Another economist, John Stuart Mill, has 
 given a good simple definition of the word 
 which will suit us admirably to commence 
 with. 
 
 " Wealth consists of all things useful and 
 agreeable having exchange value." If this 
 definition be accepted, the importance of 
 abundance disappears. Wealth may be a 
 very small as well as a very big thing. A 
 single pin, ten of which, even under the 
 profiteering conditions of war time, are given 
 as the equivalent of one farthing change in 
 a draper's shop, has exchange values, it is
 
 16 WEALTH 
 
 useful, and is therefore wealth. A single 
 sheet of paper, now worth considerably more 
 than in 1914, but still sufficiently cheap, has 
 exchange value and is wealth. So is a motor- 
 car or a fine yacht or an Atlantic liner. All 
 these material things, if they possess exchange 
 value, are wealth, and in the aggregate 
 make up the wealth of the community. It 
 is this wealth that we have to analyse : 
 how is it brought into existence, to whom 
 does it belong, what ought to be done 
 with it ? 
 
 There are some econQmists who would 
 include certain abstract qualities in the 
 wealth of the individual or of the community, 
 energies, skill, habits, and mental attain- 
 ments. To do so, however, would add an 
 unnecessary complication and need not be 
 considered in an elementary textbook— it is 
 sufficient for the beginner to know that some 
 of the best economic thought does incline to 
 include in wealth other than purely material 
 things. 
 
 We restrict ourselves, then, to material 
 and exchangeable things. But Mill's definition 
 brought in a little word that requires some 
 explanation. What is value ? For this is 
 apparently inseparable from wealth. Thus 
 at the outset of our work we should get, at
 
 ECONOMICS 17 
 
 any rate, a preliminary idea as to what value 
 is. And here great care is necessary, for 
 value may be used in two very different 
 senses. Most things have both a use value 
 and an exchange value, and in order to prevent 
 misapprehension, it is now becoming the rule 
 to use the word utility for use-values, and 
 restrict value to exchange-values. It is 
 well, then, to bear in mind the special meaning 
 of these two words, utility and value. In 
 making exchanges, under modern conditions, 
 we employ money, one of the chief functions 
 of which is to serve as a circulating medium 
 or medium of exchange. Money values and 
 prices are of great importance, and in order 
 to realise that there may be a difference 
 between value and price, it should be pointed 
 out that for ordinary purposes it is well to 
 remember that whilst a value may be only 
 an estimate, price is a fact. For instance, 
 I purchase a motor-car for £500. The £500 
 is the money value of the car at the moment 
 of purchase and is a fact. If, after I have 
 driven the car a few weeks, I wish to sell it, 
 the original price may assist me in putting 
 a value on the car, but it will not necessarily 
 be the price I shall obtain. I probably value 
 my car at £450, but shall I obtain that sum 
 for it ? That will depend on a variety of
 
 18 WEALTH 
 
 circumstances. What is the demand for and 
 supply of cars ? What is its condition ? I 
 value it at £450, but a man may offer me 
 £400 cash for it, and if I accept the offer it 
 becomes the price of the car and is a fact ; 
 whereas my valuation of £450 was only an 
 estimate. 
 
 Values, either utilities or in exchange, 
 are most important, for in a manufacturing 
 business man does not create matter. He 
 changes the form or place of certain things 
 and thereby creates values. The economists 
 of the eighteenth century seem to have 
 credited mankind with the ability to create, 
 or at any rate to assist, in creating matter. 
 Science has since proved that this is im- 
 possible. Man can accumulate wealth and 
 he can add more value t& existing forms of 
 wealth. The recognition of this limitation 
 has had considerable effects, notably in the 
 conception of what is productive and what 
 is unproductive labour. 
 
 Another volume will deal more fully with 
 value ; here all that need be said is that value 
 emerges or is increased when in connection 
 with some commodity there is a combination 
 of human need and human effort, or to put 
 it another way, the cause of value and 
 exchange is utility combined with limitation
 
 ECONOMICS 19 
 
 in quantity. It is most necessary that this 
 fact should be clearly grasped at the outset 
 of an enquity into economics, for it was by 
 ignoring this that a certain group of social 
 reformers went astray. They asserted that 
 value was caused entirely by man's efforts, 
 implying that the cause and basis of value 
 is labour. When from this it came to be 
 assumed that labour meant manual labour 
 only, there developed the misconception that 
 as manual labour produces all wealth, all the 
 wealth that is produced ought to belong to 
 the labouring classes, and that all other 
 members of the community are either ex- 
 ploiters of labour or are living on the wealth 
 created by labour. As an illustration of this 
 important point, an episode may be mentioned 
 which occurred at a recent meeting where 
 employers and representatives of Trade 
 Unions were conferring. One of the labour 
 representatives in the course of his speech, 
 picked up a handsome cut-glass water bottle 
 that happened to be on the table, and 
 exclaimed : Think what labour does when 
 it produces such a beautiful and valuable 
 thing." ' Rather," said one of the employers 
 present, " think of the value of the brain 
 power and organising ability that first of 
 all designs and then makes it possible for
 
 20 WEALTH 
 
 labour to carry out such work " : thereby 
 illustrating the necessity for harmonious 
 co-operation between all human agents 
 necessary for the production of wealth.
 
 Ill 
 
 THE PRODUCTION OF WEALTH 
 
 HAVING defined wealth, we can 
 proceed to a consideration of how 
 it is produced. Pins, paper, corn, 
 and raw materials of all kinds have to be 
 produced or provided. How can this be done 
 in the best manner in each instance ? 
 
 There is one feature common to the 
 production of all forms of wealth. Whether 
 it be the making of pins, the construction of 
 a ship, or the growing of corn, you must 
 have a place to work in or upon, there must 
 be labour, either your own or some one else's, 
 and there must be tools and materials to 
 work with. Hence it is at once realised that 
 there are three things without which no 
 production of wealth can take place. These 
 three things the economist calls the factors 
 of production, and they are : — 
 
 (i.) Land — the place to work in or upon. 
 (ii.) Labour — the human effort prepared to 
 make ready the ground for agricultural pur- 
 
 21
 
 22 WEALTH 
 
 poses, and then sow and tend the crop till 
 ready for harvesting, or in the case of manu- 
 factures the labour is required to carry out 
 the operations necessary for changing the 
 form of the raw materials in order to produce 
 the finished article. 
 
 (hi.) There must be Capital — that is, ac- 
 cumulation of foodstuffs to feed the labour 
 employed, the raw materials out of which 
 the goods are to be made, and the tools and 
 machinery, the factories and other kinds of 
 premises and plant which must be available 
 before the work of production can be under- 
 taken. 
 
 The three necessary factors then are land^ 
 labour, and capital. Without all three, no 
 results can be obtained. These three factors 
 differ very much from each other. The first 
 two are the most nearly akin when the aim 
 is to produce foodstuffs or raw materials, 
 because they both do something actively. 
 Capital is a passive factor — by itself it does 
 nothing : the hand of man is required to 
 set it in motion. 
 
 Thus land and labour are said to be agents 
 in production, because they do something — 
 each contributing something which they 
 alone can do. Capital is said to be an instru-
 
 THE PRODUCTION OF WEALTH 23 
 
 ment in production because it needs to • be 
 set to work by the hand of an active 
 agent. 
 
 Thus there are three factors in production. 
 Two of them are agents and one is an instru- 
 ment. When these three factors are set to 
 work and something is produced, a number 
 of interesting phenomena emerge. Our task 
 is to observe the working of the three factors, 
 and to find out how they may be best set to 
 work in order to bring forth the best results 
 from every point of view. 
 
 Since experience teaches that this is a well- 
 ordered world, there should be methods of 
 procedure which will commend themselves 
 to common sense. 
 
 These common sense ways for setting to 
 work are really the laws natural to production. 
 If we discover them and observe them we 
 shall produce or manufacture in the most 
 natural or, as is sometimes said, the most 
 paying way. If through either ignorance 
 or foolishness we disregard them, and attempt 
 to work on a scheme of our own, ignoring 
 the teachings of knowledge and experience, 
 we shall inevitably suffer loss. We shall 
 not at the best do as well as we might have 
 done, and most probably our efforts will 
 result in failure. The best and most satis-
 
 24 WEALTH 
 
 factory results can only be obtained by 
 getting to know the natural laws of the 
 industry we are practising and then set to 
 work in conformity with those laws. In 
 other words, we must make use of past 
 experience, and only modify previous 
 practice when we are quite sure that we have 
 found a better way, more in conformity with 
 natural law. 
 
 Economic laws or the best way to proceed 
 in business can be ascertained. It has taken 
 mankind a long time and has cost many a 
 failure to discover them ; indeed, it is possible 
 that even yet we are only on the threshold 
 of our knowledge of them. The successful 
 man of business or the prosperous farmer 
 is the man who works in harmony with 
 known laws, and is on the alert to detect and 
 act upon new laws emerging under changing 
 conditions. 
 
 When the factors of production have been 
 set in motion and a body of wealth has been 
 produced, we are faced with another set of 
 phenomena. For the wealth then produced 
 belongs to somebody, and who is that some- 
 body ? This brings us to the problems 
 connected with distribution. If three factors 
 have combined, and as a result something 
 has been produced, that wealth is due to the
 
 THE PRODUCTION OF WEALTH 25 
 
 factors that have been engaged. Something 
 is clearly due to each factor, and the problem 
 is how shall the result of the effort made be 
 so distributed among the factors that there 
 may be a fair and equal share given to each. 
 The share that goes to land is called rent, 
 the part due to labour is called wages, but 
 these are not always called wages. The 
 artisan gets wages, but the man who organised 
 may get profits, or a salary, or a commission 
 on results ; any of these are the return for his 
 organising skill and are the wages of the 
 labour of organisation. Capital, although 
 an instrument, has assisted the work, and 
 the result is partly due to it. Thus it is 
 entitled to a share, and this is known as 
 interest. 
 
 Hence we have three factors, and if these 
 are to work to the best advantage they must 
 work in accordance with known or ascer- 
 tainable laws. In addition to these laws we 
 want to discover the best way to divide up 
 the wealth which has been produced among 
 those who have worked together in its pro- 
 duction. Thus we are face to face with 
 problems of the most fascinating interest ; 
 problems affecting the welfare of every 
 member of a healthy community. For the 
 very continuance of the community, and the
 
 26 WEALTH 
 
 best material interests of its members depend 
 on our wisdom and skill in getting at facts 
 and then applying our knowledge in order 
 that society may be based on a system of 
 equity under which each member of the 
 community may receive his rightful share 
 of the wealth produced by the common 
 effort. 
 
 Could any study be more interesting or 
 more profitable ? And yet all too little is 
 known by the average man of a subj ect which 
 affects him at almost every point. A very 
 large proportion of the evils from which 
 we suffer, nay, most of the discontent 
 and frictions which keep the modern world 
 seething are due to ignorance of economic 
 laws and tendencies. This state of affairs 
 ought to be rectified. The fact that among 
 working men there is a growing desire to 
 study industrial history and economics is 
 of good augury for the future. When every 
 member of society makes it his business to 
 know his rightful economic position, when 
 he can apply his knowledge to know what is 
 the due of other members, then he will be 
 able not only to discuss questions of wages, 
 profits, rents, and interest with knowledge 
 and authority, but he will be in a position to 
 decide as to what his own place shall be in
 
 THE PRODUCTION OF WEALTH 27 
 
 the community. It may be asked, however, 
 who is to decide as to the relative proportion 
 in which the three factors of production shall 
 be employed in any given business enterprise. 
 This question leads to a consideration of 
 what the economist calls the Law of Sub- 
 stitution. This law affects all enterprises 
 connected with the production of wealth. 
 The farmer, the colliery company, the manu- 
 facturers all practice the law either consciously 
 or unconsciously. The successful man is 
 the one who applies it with knowledge, if 
 not perhaps that there is such an economic 
 law, at least from experience of the effects of its 
 working. Briefly stated it is to the effect that 
 when land is plentiful or cheap, but labour 
 and capital are scarce, wherever possible the 
 factor, land, shall be utilised in large areas 
 and labour and capital each or both shall be 
 used more sparingly. Or, on the other hand, if 
 labour be plentiful and capital scarce a greater 
 proportion of labour shall be employed ; or 
 should capital be plentiful and labour scarce, 
 then labour-saving machinery shall be utilised 
 to a greater extent. The following may be 
 taken as a practical illustration of the working 
 of the law in the case where land is cheap 
 and building is costly. . A manufacturer about 
 to plan new premises under these conditions
 
 28 WEALTH 
 
 will take a bigger area of land and build 
 simple one floor factories ; whereas if land 
 be dear and building cheap he will be content 
 with a small area of land and build a factory 
 of several floors. When the factory is ready 
 for installing plant and machinery, if labour 
 be plentiful and wages low but capital is 
 scarce and interest high, he will employ as 
 much labour as possible but will reduce his 
 expenditure on tools and machinery to a 
 minimum. In farming operations the problem 
 to be decided will be, shall I have a big area 
 of land and be satisfied with a light crop or 
 shall I take less land but by using greater 
 quantities of manure and by employing 
 more labour raise a heavier crop. Success 
 in either case will depend on right judgment, 
 or in applying the Law of Substitution 
 rightly. 
 
 A very good practical illustration of the 
 working of the law was given some years ago 
 when the American steel masters visited 
 Europe. During their tour on the Continent 
 they inspected a big steel plant in Germany. 
 One of the American steel masters was 
 astonished at the number of workmen em- 
 ployed. He informed one of the German 
 managers that he could reduce the cost of 
 steel production very materially by intro-
 
 THE PRODUCTION OF WEALTH 29 
 
 ducing certain machinery. The German 
 demurred and asked the American if he could 
 produce figures to support his contention. 
 Both parties went carefully into costs and 
 the German was able to prove that owing 
 to the low cost of German labour the 
 American labour-saving machinery, so neces- 
 saty in the States, would not be an 
 economy if utilised under existing conditions 
 in Germany. 
 
 It is the same law which influences the 
 manufacturer as to the ratio in which various 
 classes of labour shall be employed. For 
 instance, if artisan labour be relatively 
 cheap and the labour of superintendence 
 relatively dear, there will be a minimum 
 of foremen emp^ed ; if , however, ordinary 
 labour be relatively dear, the number of 
 foremen and supervisors will be increased. 
 The object in view is to employ each of 
 the factors to the best advantage. In arrang- 
 ing this there arise interesting points con- 
 nected with each factor, but especially in 
 connection with labour. This brings out a 
 manager's organising and managing skill, 
 for good organisation means that the organiser 
 realises this part of his problem and is com- 
 petent to deal with it. It is the organiser 
 of industry who sets in operation the Law
 
 30 WEALTH 
 
 of Substitution, and the continued success of 
 the business, once established, will depend 
 on the foresight of the organiser in knowing 
 when and where to modify the ratios in which 
 the three factors are employed.
 
 IV 
 LAND— A FACTOR IN PRODUCTION 
 
 ALL food and all the raw materials 
 used in manufactures come from 
 land or water. So far as food is 
 concerned, land gives us meat, corn, and root 
 crops, fruit and vegetables ; rivers, lakes, 
 and sea furnish us with fish. From the land 
 we mine coal, iron ore, and minerals generally. 
 The farm, the mine, and the fishery give the 
 great variety of products needed by man- 
 kind. 
 
 But all land is not equally fruitful either as 
 furnishing crops or minerals. And, moreover, 
 no sooner do we begin to study this natural 
 agent in production which we summarise 
 under the term land, than we become aware 
 that not only are there lands of different 
 degrees of fertility or productiveness, but 
 there are certain eccentricities connected 
 with any given area of land which become 
 apparent as soon as we begin to cultivate 
 it. Land that has hitherto been uncultivated 
 
 31
 
 32 WEALTH 
 
 is known as virgin soil. We begin to farm it, 
 and we find that the productiveness is 
 seemingly inexhaustible. Each season the 
 crop may grow larger, and for a time there is 
 an increasing return in reply to the work 
 and manure we put into this special plot of 
 ground. At first we are tempted to conclude 
 that there is a law of increasing returns from 
 land, and that all we have to do is to cultivate 
 more and more intensively as the demand for 
 the products of the land increases. After a 
 time, however, we find that although we 
 may not have reached the limit of productive- 
 ness on this special area of land, yet our 
 efforts are repaid on progressively harder 
 terms. 
 
 Two laws affecting land are gradually 
 forced upon our attention. The first of 
 these is known as the Law of Diminishing 
 Returns, the second is the Law of Rent. 
 
 I. John Stuart Mill gave his attention to 
 these phenomena and as a result enunciated 
 the Law of Diminishing Returns from land. 
 He found that up to a certain point the 
 return on each extra unit of labour and 
 capital put into the land was a more than 
 proportionate increase, but after a certain 
 time, although there might be a greater 
 aggregate crop, yet there was a smaller
 
 LAND— A FACTOR IN PRODUCTION 33 
 
 return for each unit expended in cultivation. 
 Mill, to illustrate the working of this law, 
 made use of an india-rubber band. He 
 pointed out that the rubber could be stretched 
 almost indefinitely, at first with but little 
 effort, but after a certain point had been 
 reached each additional inch you stretched 
 the rubber required an effort greater in 
 proportion to that previously needed. 
 
 You can stretch or develop the productive 
 qualities of land, but a point will be reached 
 after which added doses of capital and labour 
 will not earn a proportionally great return. 
 This is called the point of diminishing returns. 
 There may be a greater aggregate crop, but 
 there will not be so much for each unit of 
 effort employed as there was before the point 
 of diminishing returns was reached. Thus, 
 so far as agriculture is concerned, there is a 
 limit beyond which it is not profitable to 
 employ increased amounts of capital and 
 labour on any given farm. There might 
 result a greater crop, but there would be less 
 for each cultivator when the result was 
 distributed. To take a simple illustration 
 free from complications, imagine fifty acres 
 of land cultivated by five men, and for 
 simplicity's sake restrict the illustration to 
 land and men, leaving the use of capital on 
 
 3
 
 34 WEALTH 
 
 one side. The theory is that after reaching 
 a certain point in cultivation, the employ- 
 ment of extra labour may produce a heavier 
 crop but there will be less for each man at 
 harvest time. The five men working on the 
 fifty acres produced one thousand bushels 
 of corn — and the point of diminishing returns 
 had just been reached. Another man comes 
 along and joins the original five. Theory 
 says that there may be a bigger crop but 
 there will be less for each man when the 
 result is divided. That is to say, the six men 
 may manage to harvest eleven hundred 
 bushels, a greater aggregate return, but when 
 the crop is divided up between the cultivators, 
 instead of receiving two hundred bushels each 
 they will only receive a little over one hundred 
 and eighty bushels, a bigger crop, but less 
 for each man employed. If two more men 
 come along the quantity of corn harvested 
 may be increased to fourteen hundred bushels, 
 but although the crop is so much greater 
 there will only be one hundred and seventy- 
 five bushels each when divided up. By 
 continuing the experiment it would be found 
 that on an area of land capable of supporting 
 a few men in comfort, after the diminishing 
 returns point had been reached, you might 
 raise a considerably greater crop by employ-
 
 LAND— A FACTOR IN PRODUCTION 35 
 
 ing a larger number of men but they would 
 have to put up with a lower standard of living. 
 In practical life this can be seen in parts of 
 Western Europe where the land has been 
 parcelled up into small areas. The land 
 itself is very fertile and the crops produced 
 intensively are extraordinarily great, but the 
 cultivators are poor, in some cases living 
 under conditions inferior to those of wage 
 paid labourers. 
 
 An American economist attempted to dis- 
 pute the truth of this theory. He had a 
 certain amount of foundation for his con- 
 tention because he was examining conditions 
 in a new country where the action of the law 
 was only just beginning to be felt in some 
 agricultural areas. What he really did was 
 to explain the history of land settlement 
 in a new country, for he pointed out that 
 settlers usually cultivate the fertile swampy 
 soils last, as they avoid as long as possible 
 the expense of clearing and draining. Had 
 he investigated farming conditions in old 
 countries where the law had for long been in 
 operation, he would have told another tale. 
 Moreover, Carey himself confirms Mill's theory 
 when he admits that in a progressive com- 
 munity the price of the products of land tends 
 to increase. This, of course, occurs when the
 
 36 WEALTH 
 
 cost of production, that is the amount of 
 labour and capital required per unit of 
 production, increases. If additional labour 
 and capital resulted in a given area of land 
 producing more in proportion than it did 
 with a smaller expenditure, then there would 
 be an increasing return, showing that the 
 diminishing point had not been reached, 
 and prices would tend to fall. 
 
 The practical effects of the law can be 
 noted by studying the European corn market 
 during this past half century. As greater 
 demands were made on local grown food- 
 stuffs prices went on increasing. But after 
 the middle of last century, when owing to 
 inventions which improved and cheapened 
 methods of transport, Europe was able to 
 import foodstuffs from lands where increasing 
 returns were still the rule, prices in free 
 European markets fell, and in a free trade 
 market like that of the United Kingdom, 
 food became abnormally cheap. As, however, 
 population has grown in new countries and 
 greater demands are being made for food, 
 prices have practically ceased to decrease. 
 Not only the cultivation of virgin soil, but 
 the inventions of the chemist and the appli- 
 cations of science to farming may affect the 
 question. It is conceivable that another
 
 LAND— A FACTOR IN PRODUCTION 37 
 
 Carey may dispute the action of the law 
 should scientific discoveries have further 
 success. But, although new methods might 
 postpone the return of the law, they could 
 hardly do so indefinitely. 
 
 The effect of the law on agriculture and 
 mining is easily observable. For with mining, 
 when the minerals have to be sought at 
 lower levels, the output in return for each 
 unit of labour and capital becomes less. 
 A good instance of this is the Lake ore ranges 
 in America. At first the iron ore being on 
 the surface the cost of mining was com- 
 paratively small. A cheaply constructed 
 railway and mechanical shovels to fill trucks 
 produced iron ore at a minimum of expense. 
 When, however, the demand on the ore in 
 these ranges grew to an immense annual 
 quantity, the operation became less simple 
 and the ore cost more to mine. 
 
 The law then, after the diminishing point 
 has been reached, affects the cost of all 
 foodstuffs and raw materials. The farmer and 
 the miner are very directly affected. 
 
 The question may be asked, to what extent 
 does the law affect the manufacturer ? The 
 answer to this question is easy, yet difficult. 
 In manufactures where it is possible to apply 
 a progressive system of division of labour
 
 38 WEALTH 
 
 (see p. 105) there is a continuous increase of 
 production. Given an expanding market 
 with a steadily increasing demand it is possible 
 to decrease the cost of production per unit. 
 But the application of division of labour is 
 limited by the extent of the market. Thus 
 there comes a time when standardisation, 
 admitting of repetition output, cannot be 
 carried further ; thus other things remaining 
 constant increasing returns would cease. 
 This, however, opens up a very large question 
 in advanced applied economics which need 
 not be dealt with here. The important thing 
 to be noted now is that since the law affects 
 the raw materials of manufacturing industries, 
 it must affect the manufacturer, and the 
 extent of this can be explained. For the pur- 
 pose of illustration it is best to take some 
 commodity which can be manufactured into 
 a variety of forms. Some of these may be 
 comparatively cheap, and others expensive. 
 The effect of the law can then be examined. 
 Iron supplies one of the best instances, for 
 iron can be used in any form from crude iron, 
 only one step away from the ore, up to watch- 
 springs which have passed through many 
 expensive processes of manufacture. A rise 
 of ten per cent in the price of iron ore will 
 very materially affect the cost of steel rails,
 
 LAND— A FACTOR IN PRODUCTION 39 
 
 but it would hardly be noticed by the makers 
 of watch-springs or even of knife blades or of 
 expensive steel instruments. 
 
 It has been calculated that five shillings' 
 worth of iron manufactured into rails would 
 be worth five and sixpence, but if the same 
 quantity of iron was worked up into horse 
 shoes it would be worth about twenty-three 
 shillings, whilst if it were made into knife 
 blades its value rose to be nearly one hundred 
 and fifty pounds. In all these articles it is 
 only the original five shillings' worth of iron 
 that would be affected by the law ; thus 
 while a ten per cent rise in iron ore would 
 affect the price of rails considerably, its effect 
 on knife blades would be imperceptible. In 
 other words, the further you get away from the 
 crude raw materials in the processes of manu- 
 facture the less is the action of the law felt. 
 
 II. Rent is paid for the use of agricultural 
 land, for the use of factories, and houses. 
 There are thus two general problems to 
 consider — country rents and town rents. 
 In order that we may understand what is 
 a rather complicated subject, we will con- 
 sider the theory of agricultural rent first. 
 And let us do so disregarding for the moment 
 the payment of money to a landlord. Some 
 people have a prejudice against landlords,
 
 40 WEALTH 
 
 and this might influence their judgment. 
 It has been agreed that land is one of the 
 factors necessary to production, and that 
 land is no mere passive factor, but an active 
 agent doing something in the work of pro- 
 duction. Thus for the present purpose let 
 us forget the landowner, and think of land 
 as though it were a living thing doing some- 
 thing active in the work of production, and 
 as such entitled to its share of what has been 
 produced. For what has to be discovered is 
 what share of the wealth produced is due to 
 the natural agent — land. 
 
 It was David Ricardo who really made 
 known the theory of rent. He did not invent 
 it, but he gave it currency. He explained 
 the method for measuring the pure economic 
 rent of land, and he traced out the history of 
 rent. Moreover, his theory has stood the 
 test of time, nor can there be any doubt as 
 to the truth of the law of economic rent as 
 made clear by him. He did this by using 
 hypotheses, by means of which he was 
 able to imagine a simple condition of affairs 
 and so got at simple facts. For the purpose 
 of his argument he assumed that there is : — 
 
 (i.) Perfect competition in the letting of 
 land.
 
 LAND— A FACTOR IN PRODUCTION 41 
 
 (ii.) That all farmers are of equal capacity. 
 
 (iii.) That farmers supply their own capital. 
 
 (iv.) That the rent paid does not include 
 
 any interest on capital sunk in improvements. 
 
 It is perhaps objected that these four 
 assumptions seldom, if ever, occur in practical 
 life. This may be so, and yet by making 
 use of these assumptions it is possible to 
 consider a simple problem, and if any 
 tendencies or laws emerge, their practical 
 existence can be tested by adding the com- 
 plications inseparable from ordinary experi- 
 ence. If you commence with a complicated 
 problem, progress may never be made, or 
 you may produce a theory that the average 
 man cannot follow. 
 
 To trace out how rent commenced, one 
 must go back to the agricultural stage and 
 picture an agricultural district where a 
 number of people have settled and formed 
 a village. These settlers till the surrounding 
 fields and produce their own corn supply. 
 When the village first came into existence, 
 and the heads of families were looking round 
 for land to cultivate, they naturally began 
 to work on the best available land close to the 
 village. There was probably plenty of this 
 best quality land, and so all those cultivators
 
 42 WEALTH 
 
 requiring land obtained what they wanted 
 and there was good land to spare. Under 
 these circumstances no one paid rent ; indeed, 
 the phenomenon rent had not emerged. 
 There was plenty of land for all, and all 
 could get land of equal fertility. The little 
 community, however, grew in number and 
 a larger supply of corn was necessary ; 
 eventually all the best quality land near to 
 the village was under cultivation. Up to that 
 point rent did not emerge. However, when 
 this point was reached the population of the 
 village continued to grow, and the amount 
 of corn required for food had also to be 
 increased. As soon as all the best quality 
 land was under cultivation several interesting 
 problems would arise, even though the simple 
 villagers remained unconscious of them. The 
 cultivators of the land would have to plough 
 up some second quality land to supply the 
 demand, and the corn grown on this less 
 fertile land would cost more to produce. 
 The price of corn would go up in the local 
 market, because there can only be one price 
 for one commodity in one market at one 
 time. Naturally the man who was growing 
 corn on the newly cultivated but less fertile 
 land could not sell it at a price based on the 
 cost of growing corn on the better land.
 
 LAND— A FACTOR IN PRODUCTION 43 
 
 All the corn would be sold at a price based 
 on the cost of growing it on the less good 
 land. Let us use modern money and measure 
 in order to get a simple illustration. Suppose 
 the corn had been selling at twenty shillings 
 a quarter — that price being based on the cost 
 of growing it on the best land, and now it was 
 found that the corn grown on the less fertile 
 land could not be sold at less than twenty- 
 five shillings a quarter. The market price 
 of all the corn would at once become twenty- 
 five shillings. So that those farmers who 
 were fortunate enough to be cultivating 
 the better quality land would be better off 
 than the other farmers to the extent of five 
 shillings for each quarter of corn produced. 
 That extra five shillings was not due in any 
 way to the farmers' skill. It was solely due 
 to the better quality of the land, and is the 
 economic rent of that land. It is the share 
 that the land is entitled to as an active agent 
 in production. 
 
 It is possible to continue this story. The 
 village grows into a town, the two qualities 
 of land are no longer sufficient to produce 
 the needed corn supply, thus land of still 
 less fertility has to be laid under plough. 
 Eventually the worst land cultivated for the 
 market produces a corn that cannot be sold
 
 44 WEALTH 
 
 at less than forty shillings a quarter. By 
 that time the economic rent of the best land 
 has increased to about five times what it was, 
 and the second quality land has become 
 rent-bearing. The point that must be realised 
 is that rent emerges as soon as lands of 
 different degrees of fertility have to be 
 cultivated to supply the same market. If 
 the farmers own their farms this rent is not 
 observed. It is realised that some farmers 
 are more prosperous than others, and if the 
 question were asked, how is it that there is 
 this inequality as a result of farming, it would 
 be answered that some cultivators had the 
 advantage of farming better quality land. 
 But the extra prosperity is not due to the 
 human factor in production, i.e. the farmer, 
 but is due entirely to the good quality of the 
 land he is fortunate enough to have the 
 right to farm. Should the farmer who holds 
 this land retire, he can let his land at a rent 
 based on the extra fertility it possesses plus 
 an amount representing a return on the 
 labour and capital he has put into the land, 
 making it more eligible for farming. It is this 
 last amount that complicates the subject, 
 of economic rent. If a man has cleared a 
 forest, drained and hedged the land, put up 
 necessary buildings and established a farm
 
 LAND— A FACTOR IN PRODUCTION 45 
 
 in good working order, no one would grudge 
 him a fair return for the labour and expense 
 incurred. There is, however, in the ordinary 
 rent paid for a farm not only his return for 
 work done by the human factor, but there is 
 on land of superior quality an extra pro- 
 ductiveness which gives an annual return 
 not due to human labour. 
 
 Who ought to have the result of this extra 
 fertility is not the question we are discussing 
 here. What is for the moment necessary 
 is that it should be clearly understood that 
 there is this phenomenon in connection with 
 land of superior quality and that someone 
 will get the benefit of it. If the law was to 
 disallow the payment of rent, what would 
 happen would be that where a farm changed 
 hands the new tenant would get the advan- 
 tage of all improvements that had been 
 added to the land, together with the pure 
 economic rent. In other words, it is im- 
 possible to suppress the economic rent of land ; 
 it is a natural phenomenon which emerges 
 as soon as the demand for foodstuffs and raw 
 materials renders it necessary to cultivate 
 land of varying quality to supply a given 
 market. As to who shall have the benefit 
 of this natural phenomenon will depend on 
 the law and custom of the community in
 
 46 WEALTH 
 
 question. This raises the question of " un- 
 earned increment." For unearned increment 
 attaches to both agricultural and town lands, 
 though it is much more in evidence in the 
 latter. 
 
 Before leaving the question of agricultural 
 rent, let us consider an illustration from 
 practical experience. There is a farm of say 
 two hundred acres let at a rent of four 
 hundred pounds a year. Can it be said that 
 the economic rent of each acre is two pounds ? 
 By no means. The farm consists of pasture, 
 arable, and woodlands. And even among these 
 three classes of land are areas of different 
 values. If you begin to investigate into the 
 annual value of the farm and are assisted 
 by a man skilled in land value, many points 
 illustrating the above argument come into 
 notice. First of all there is the farmhouse 
 and buildings, the hedges, the drainage and 
 other improvements, which have been neces- 
 sary for the establishment of a farm. An 
 expert can assess the value, both capital and 
 annual, of these buildings and improvements. 
 Then, if you went over the farm acre by acre 
 with the expert, he would point out that 
 of the arable land some acres were worth 
 more than others, and the same would be true 
 of the pasture and woodlands. After a
 
 LAND— A FACTOR IN PRODUCTION 47 
 
 careful survey it would be possible to say 
 what was the true economic rent of each 
 acre. But while the crude average to the 
 superficial observer who only took into 
 account a farm of two hundred acres and a 
 rent of four hundred pounds a year, would be 
 two pounds for each acre, your careful 
 investigation would give a much more inter- 
 esting picture. It would differentiate between 
 what was due to the land and what was due 
 to man's thought and labour on that land. 
 In other words, it would enable you to say 
 what was the true economic rent of each 
 acre, and what was due as a payment for 
 capital sunk in the farm. Moreover, in the 
 case of most farms another interesting fact 
 would emerge. It would be pointed out by 
 the expert that some of the land, although 
 under cultivation, was not worth any rent. 
 It only just paid to cultivate it. This land 
 is said to be on the margin of cultivation, and 
 it serves as a measure for the rent of all land 
 of better quality. The land on the margin is 
 cultivated because the demand of the market 
 makes it necessary to do so, but it will not 
 bear any rent. The cost of producing crops 
 on that land is one of the factors, indeed, 
 the main factor in fixing the market price 
 of the crop produced. If demand for that
 
 48 WEALTH 
 
 special crop increases it may be necessary to 
 cultivate land of still less fertility. When 
 this is so, economic rent tends to rise. If, 
 however, demand for those crops decreases, 
 then marginal land falls out of cultivation 
 and a land of better quality becomes the 
 marginal land. In that case rents tend to fall. 
 Remember, then, that cost of cultivating the 
 land on the margin of cultivation is the factor 
 which tends to fix market price, and that no 
 economic rent is paid for the use of that 
 land ; where a payment is made for the right 
 to cultivate marginal land, it is interest on 
 capital sunk and is not true economic rent 
 at all. 
 
 Thus a definition of true economic rent is 
 that it is the amount paid for the use of the 
 productive powers of the land and consists 
 of the difference between the cost of pro- 
 duction on the land in question and the cost 
 of production on the worst quality of land 
 which is cultivated to supply the same 
 market. 
 
 Always remember (i.) that corn is not dear 
 because rent is paid, but that rent is paid 
 because corn being in demand commands a 
 high price ; (ii.) that no reduction would take 
 place in the price of corn even though land- 
 lords were compelled to return all rent to
 
 LAND— A FACTOR IN PRODUCTION 49 
 
 farmers and it was decreed that for the 
 future no farm rents should be exacted. 
 What fixes the price of corn primarily is the 
 cost of its production on the least fertile land 
 whose cultivation is required by the demand 
 of the market. 
 
 The cause of the payment of rent for 
 cultivated land is simply that with the 
 increase of population and the consequent 
 increasing demand for foodstuffs and raw 
 materials, inferior soils have eventually to be 
 cultivated, and the price of the supplies 
 needed by the community is primarily 
 regulated by the cost of production of that 
 portion of the supply which is produced at 
 the greatest expense. It must be borne in 
 mind that productiveness or quality includes 
 both fertility and situation. Transport facili- 
 ties have been greatly increased during the 
 past half century, but distance from a market 
 still affects the question, especially in times 
 of stress. From this it is possible to arrive at 
 the true economic rent of any plot of culti- 
 vated land. Indeed, from this survey of the 
 subject it should be possible to work out 
 both the history and the measure of rent. 
 
 The theory and practice of rent are on the 
 whole in accord ; it is, however, possible to 
 point to instances where there is an apparent 
 
 4
 
 50 WEALTH 
 
 contradiction or want of accord between 
 economic theory and practical experience. 
 This can in most instances be explained, 
 for it is due to either sentiment or custom. 
 As an instance of the former it is possible to 
 point to parts of the United Kingdom where 
 in some instances rents which are obviously 
 excessive are paid, and the converse of this 
 is also, but perhaps somewhat more rarely 
 found. For it would be possible to point to 
 farms where the rent paid is below the real 
 letting value. In both cases it is usually found 
 that sentiment is the root cause. Unduly 
 high rents are exactable where people are 
 deeply attached to their holdings, which may 
 have been farmed by their forebears for 
 several generations. In such cases an un- 
 scrupulous landowner can, and sometimes 
 does, take advantage of an honourable senti- 
 ment, and exact an excessive rent. The 
 law of rent is thus obscured, but whenever 
 in such a case the sentiment which gave the 
 landowner his opportunity ceases to operate, 
 the law comes into play again. Nor is the 
 law, as stated by Ricardo, really infringed, 
 for he stipulated that there must be perfect 
 competition in the letting of land (see p. 40). 
 As to the converse, that is where the rent 
 paid is less than the land is really worth, it
 
 LAND— A FACTOR IN PRODUCTION 51 
 
 is sentiment again that has intervened and 
 obscured the working of the law. This is 
 found where on old estates tenants have held 
 farms for several generations and the land- 
 owner influenced by sentiment does not 
 exact the full letting value, being proud of 
 the long connection between his family and 
 those of his tenants. The explanation is the 
 converse of that stated above, and whenever 
 the letting of the farms comes into a free 
 market the law asserts itself. 
 
 Custom, too, may obscure the law ; for 
 instance, in the case of metayer farming, 
 where an agreed share of the produce is 
 handed over to the landowner as rent. The 
 metayer system so far as Europe is concerned 
 is usually the mark of ineffective farming. 
 It is an out-of-date system that has been 
 replaced almost universally by tenant farming. 
 But there is an interesting revival of the 
 policy in a modernised form in the sheep and 
 cattle areas in South America. The land- 
 owner assigns to the metayer tenant a certain 
 area of land together with a certain number 
 of cattle or sheep for each acre. The tenant 
 provides the necessary labour for carrying 
 on the work, the tools, and a number of 
 cattle or sheep equal to that provided by the 
 landlord. Instead of paying an agreed rent,
 
 52 WEALTH 
 
 there is an agreed proportion of the increase 
 of stock handed over to the landlord annually. 
 
 Urban Rents and Rates 
 
 At first sight town rents seem to produce 
 a very different set of phenomena to those 
 just considered. It is true that house rent 
 includes interest on the capital sunk in build- 
 ing the house. There is, however, an element 
 in town rents — the pure economic rent — 
 which is due to causes closely allied to those 
 considered in connection with farm rents, 
 thus by careful analysis it will be seen that 
 the same law affects the tenancy of either 
 farm, house, or factory. 
 
 In an old country like England this is 
 perhaps not so easy to appreciate as in a 
 new country where towns have grown rapidly. 
 Our towns and cities have been for the most 
 part the growth of centuries, but in the new 
 world, towns have frequently developed into 
 great business centres in one or two genera- 
 tions, and thus cause and effect can be more 
 easily traced and explained. 
 
 Returning to the primitive village used 
 to illustrate the theory of agricultural rent, 
 it was seen that the early inhabitants who 
 were agriculturalists cultivated, in the first
 
 LAND— A FACTOR IN PRODUCTION 53 
 
 instance, the most fertile land close to their 
 cottages, and that as greater demands arose 
 for foodstuffs, rent emerged. Suppose that 
 as time goes on this village becomes a busy 
 centre of population, and that industry and 
 commerce have been added to agriculture 
 and have eventually become the primary 
 interests of the people, what are the interven- 
 ing steps between the time when small rents 
 were paid for the use of the site now occupied 
 by the large town as farm land, and the 
 present moment when, comparatively speak- 
 ing, enormous rents are paid for the use of 
 the few square yards required for houses or 
 factories ? 
 
 The essential fact to notice is that the 
 sparsely populated village has become a great 
 centre of population. It is this that accounts 
 mainly for the increased value of the land. 
 With increasing population the agricultural 
 village has become a great centre of exchange. 
 The fertility of the land has not changed, but 
 it has evolved a utility which possesses a 
 much greater power in the production of 
 wealth. " To labour expended in raising 
 wheat or potatoes such land will yield no 
 more of those things than at first, but to 
 labour expended in the subdivided branches 
 of production which require proximity to
 
 54 WEALTH 
 
 other producers, and especially to labour 
 expended in that final part of production, 
 which consists in distribution, it will yield 
 much larger returns. The wheat grower may 
 go further on, and find land on which his 
 labour will produce as much wheat and 
 nearly as much wealth ; but the artisan, the 
 manufacturer, storekeeper, and professional 
 man find that their labour expended here, 
 at the centre of exchanges, will yield them 
 much more than if expended even at a little 
 distance from it ; and this excess of productive- 
 ness for such purposes the landlord can claim, 
 just as he could an excess in its wheat pro- 
 ducing power. And so our settler is able to 
 sell in building lots a few of his acres for 
 prices which it would not bring for wheat 
 growing if its fertility had been multiplied 
 many times." 1 
 
 Thus, when the village has grown into a 
 Chicago, the original settler, or his descend- 
 ant, has become a very wealthy man not 
 from anything he has done except in origin- 
 ally making a happy selection of a site which 
 has become a busy commercial centre. The 
 increase and concentration of population is 
 the explanation of what has occurred. The 
 most valuable lands in the world, such as those 
 
 1 Cf. Henry George, Progress and Poverty, p. 169.
 
 LAND— AfF ACTOR IN PRODUCTION 55 
 
 of central London, Paris, and New York, 
 yielding the highest rents, are not necessarily 
 lands of surpassing fertility, but lands to 
 which a surpassing utility has accrued owing 
 to the increase of population. Another 
 phenomenon quickly strikes the investigator 
 into these problems. Even in cities there are 
 great differences in the values and rents of 
 land, for some sites have a greater utility 
 for a given purpose than others. Shops, 
 offices, and business premises in London, 
 near to a busy railway terminus, where 
 crowds of people are constantly passing are 
 conveniently situated for attracting business. 
 " To succeed, a shop must be in a main 
 thoroughfare " is a commonplace statement. 
 The extra business thus gained is not primarily 
 due to the cleverness or ability of the tenant 
 of the shop. He might be an exceptionally 
 able business man, but his best efforts would 
 be crippled were his shop in a side street. 
 He needs a good situation for his shop ; with 
 that and with business ability success is 
 assured. It is this extra value, due to position, 
 that the landlord exacts. The fertile land has 
 evolved a new quality. It has a utility of 
 position which gives it a monopoly value. 
 The high profits made in shops enjoying the 
 advantage of good position are to a great
 
 56 WEALTH 
 
 extent due to that position, and it pays the 
 tenant to agree to a high rent rather than take 
 a bigger shop in a less eligible part of the town. 
 The truth of this can readily be grasped by 
 watching the number of people entering shops 
 such as confectioners and drapers in various 
 parts of the same town, or even of the same 
 street. It will at once be seen that the shop 
 most convenient for shopping, that is the 
 shop at the point where people are constantly 
 passing in great numbers, is the shop best 
 calculated to succeed. Thus, so far as 
 economic rent is concerned, it must be realised 
 that as a community progresses, there emerges 
 in the case of land enjoying certain advantages 
 of either fertility or situation, or it may be 
 of both, an extra gain or profitableness in 
 connection with production. This extra 
 gain is not due to either the skill of the 
 cultivator or the shopkeeper or manu- 
 facturer ; nor is it due to any genius attaching 
 to the landowner. In some cases this extra 
 profitableness goes on increasing even to a 
 fabulous extent. It is due to progress and 
 the growing density of population. It has 
 been called an unearned increment. To 
 whom ought it to go ? Where the land is 
 privately owned it goes mainly to the owner. 
 Where the land is the property of the State,
 
 LAND— A FACTOR IN PRODUCTION 57 
 
 municipality, hospital, or university, the 
 community benefits. To exact all unearned 
 increments for the community might prove 
 to be a double-edged weapon, as there are 
 losses to face as well as gains to pocket. 
 It may be that an equitable arrangement 
 will be found in a judicious system of taxation. 
 The death duties seem to point in that 
 direction. This method of procuring for the 
 community, at any rate a share of this incre- 
 ment, is only in its infancy. It deserves 
 study and careful development. 
 
 At the present moment it is very necessary 
 that what economic rent is should be very 
 clearly known. It cannot be abolished. 
 Even though landlords were forbidden to 
 exact rent it would still exist. It is due to 
 progress and the general development of 
 the community and not to man's labour or 
 skill. Economic rent is inherent in the land, 
 it increases or diminishes automatically. 
 Like the sunrise it is a natural phenomenon 
 quite outside man's jurisdiction, and it 
 operates independent of any restrictions he 
 may attempt to impose. 
 
 Local Rates 
 
 In connection with conditions affecting 
 town property, it should be made clear
 
 58 WEALTH 
 
 that rates ought to be looked upon as a 
 deduction from the pure economic rent. In 
 practice it is found that in some instances the 
 landlord nominally pays the rates, whilst in 
 others it is the tenant. Broadly speaking, the 
 rule is that for small properties where the rent is 
 paid weekly the landlord pays the rates, but 
 that in the case of larger houses where the 
 rent is paid quarterly the tenant has also to 
 pay the rate collector. In both cases the 
 payment really comes from the same source, 
 and this can be seen by considering the cir- 
 cumstances of both classes of property. 
 Really rates are a part of rent ; they are the 
 share of rent exacted by the local authority 
 for local expenditure. If a man takes a house 
 at a rent of £100 a year he will find that it is 
 assessed for rating purposes at about £80, 
 and if the local rates stand at ten shillings in 
 the pound he will have to pay £40 to the rate 
 collector. A wise man, before definitely taking 
 a house, enquires as to the assessment, and 
 the amount of the rates, and if he finds that 
 the two amounts come to more than he can 
 afford for the use of the house he will look out 
 for another house which is obtainable at a 
 lower rent. He may attempt to bargain with 
 the landlord, and if the landlord finds that 
 he cannot obtain a tenant at £100 a year
 
 LAND— A FACTOR IN PRODUCTION 59 
 
 he will probably be willing to compromise, 
 but if the house be let at £100 and the rates 
 amount to £40 the tenant will have to find 
 the sum of £140 per annum. After he has been 
 in the house a few years, should the munici- 
 pality undertake some improvements which 
 entail a large expenditure of money and result 
 in a serious increase in the rates, which have 
 to be raised to fifteen shillings in the pound, 
 there will be a demand for another £20 a 
 year. During the continuance of the tenancy 
 agreement the tenant will be bound to pay 
 this sum, but when he has an opportunity of 
 reconsidering his tenancy he will endeavour to 
 shift part of it on to the landlord, especially 
 if he cannot afford £160 a year to live in that 
 house. What will the landlord do ? He will 
 endeavour to find another tenant, and if he 
 is successful he will let the original tenant go. 
 But if the full competitive value of the house 
 was £140 for rent and rates, which means that 
 he cannot find another tenant, he will com- 
 promise in order to retain the original tenant. 
 On the contrary, if rates were to decrease in 
 amount, and, to take an extreme case, if on 
 property belonging to the Corporation some 
 valuable mineral was discovered in quantities 
 sufficient to pay the whole of the local expen- 
 diture, then rates would go to zero. So long
 
 60 WEALTH 
 
 as the agreement between the landlord and 
 tenant lasts the tenant would get the advan- 
 tage of this, but the moment there was an 
 opportunity to reconsider the agreement, pro- 
 vided that other things remained constant, 
 that is to say it was worth the tenant's while 
 to pay £140 to live in that house or that was 
 the annual value of the house at competition, 
 the landlord would be able to exact £140 a 
 year from the tenant. 
 
 Where the landlord of weekly property 
 nominally pays the rates the same thing is 
 true. In the case of a street where the houses 
 were let at seven shillings and sixpence per 
 week each, that being the full competitive 
 letting value of the property, and the rates 
 were to increase five shillings in the pound, 
 the landlord would not necessarily be able to 
 raise the rents, other things remaining con- 
 stant. The value of the houses was seven 
 shillings and sixpence a week, and the land- 
 lord would not be able to exact more. If, 
 owing to some town-planning scheme or extra 
 facilities in the shape of tramways which 
 enabled people to live further from their work, 
 half of the houses of this street became empty, 
 the landlord would be seeking tenants and the 
 tendency would be for the rents to fall, but 
 rates are for the most part fixed charges, and
 
 LAND— A FACTOR IN PRODUCTION 61 
 
 the amount of rates demanded of the landlord 
 would remain practically the same, or would 
 tend to rise. Falling rents and rising rates 
 would be the result ; or, in the event of rates 
 disappearing, as imagined in the other illus- 
 tration, the seven shillings and sixpence a 
 week rent would not necessarily be modified, 
 because it was worth the while of the people 
 to live in these houses at seven shillings and 
 sixpence per week ; in other words, that was 
 the full competitive value, and so long as 
 other conditions remained constant the lessen- 
 ing or remission of rates would not result in 
 the lessening of rents. In a case where rising 
 rates impelled a landlord to try to raise 
 rents his success would merely show that he 
 had not previously been exacting the full 
 economic rent. 
 
 The point to note is that the pure economic 
 rent of a house, whether large or small, that 
 is to say its full letting value at competition, 
 includes both rent and rates. Thus the 
 amount paid to the local authority for local 
 expenditure is really a deduction from the 
 purely economic rent.
 
 LABOUR— A FACTOR IN PRODUCTION 
 
 LABOUR has been defined as a con- 
 scious moral act performed by man 
 ^as a result of his ability to reason 
 out the problems of life. Mankind is faced 
 with material conditions demanding the active 
 exercise of intelligence if there is to be pro- 
 gress and improvement in the conditions 
 of living. All life, indeed, is endowed with 
 the ability to do something, whilst intelli- 
 gence and reasoning powers differentiate 
 human life from all other kinds of life. 
 Vegetation has life but it acts unconsciously ; 
 the lower animals enjoy the gift of life in a 
 much higher form, but so far as we know 
 have not made a great amount of progress 
 from the time of the primitive type except 
 where aided by man. The work of the lower 
 animal in a state of nature is regulated 
 not by intelligence but by instinct. The 
 wild animal instinctively hunts for food, but 
 his hunting is carried on in the same way 
 
 62
 
 LABOUR— A FACTOR IN PRODUCTION G3 
 
 now as it was a thousand years ago. Man 
 alone in the animal world is endowed with 
 the intelligence which enables him to take 
 thought and give attention to making pro- 
 gress. He alone has studied the forces of 
 nature and made them his servants. Man's 
 labour then stands on a different footing from 
 all other kinds of labour. 
 
 It is sometimes said that all the wealth 
 produced is due to labour. This is, however, 
 a saying that requires a good deal of ampli- 
 fication, for we must carefully define the 
 word labour and understand exactly what is 
 included in the term. There are people who 
 accept the saying without apparently 
 troubling to determine exactly what it in- 
 cludes. Indeed, they are apt to make use of 
 this line of thought while taking it for granted 
 that labour means manual labour and nothing 
 else. 
 
 It may be taken for granted that land, 
 which we have already seen is an active 
 agent in the production of wealth, can only 
 produce to advantage when assisted by man. 
 As this assistance involves man's labour, an 
 analysis of that labour will give a very good 
 illustration of what is included in the general 
 term labour. 
 
 As soon as mankind began to cultivate
 
 64 WEALTH 
 
 land there was a response to his efforts. But 
 primitive methods of agriculture were not 
 very productive. 
 
 In order to get the best crops out of land 
 many varieties of labour must be put forth 
 by man. The chemist analyses the soil and 
 tells the cultivator what the soil needs in the 
 way of manures to give the best results. The 
 inventor is required to devise the best tools 
 and machinery for treating land and crops. 
 Modern farming practice makes demands on 
 the scientist, the inventor, the engineer, and 
 a number of other people, as well as on the 
 farmer and the labourers who do the actual 
 cultivation of the soil. A great part of this 
 work is done in the study, the laboratory, and 
 the workshop. Hand and brain co-operate, 
 and their full and harmonious co-operation is 
 necessary if the best results are to be ob- 
 tained. Manual labour, like land, as a factor 
 in production, requires the assistance and 
 co-operation of brain power and organising 
 ability or its efforts will be severely handi- 
 capped and the results of the labour expended 
 will be unsatisfactory. 
 
 The Physiocrats spent considerable effort in 
 denning productive and unproductive labour. 
 Succeeding generations of economists con- 
 tinued and developed the enquiry, until at
 
 LABOUR— A FACTOR IN PRODUCTION 65 
 
 the present day a very interesting pronounce- 
 ment on the subject is to be found in most 
 manuals of political economy. What is now 
 classed as productive labour by competent 
 economic thought gives the best definition of 
 the labour force of a given community. As 
 a corrective of incorrect teaching, this part 
 of the subject should be carefully studied. 
 Nor should the student proceed further with 
 his work until he has grasped what the labour 
 force of a country really comprises. 
 
 The Physiocrats held very definitely that 
 only that labour could be classed as produc- 
 tive which was actually employed in the 
 production of foodstuffs and raw materials. 
 The labour connected with farm, mine, and 
 fishery produced solid returns, but the labour 
 employed in a factory, it was asserted, merely 
 changed the form of the raw material, it pro- 
 duced nothing ; nor did the labour of the 
 carrier or the sailor, for by transport labour 
 goods were simply taken from one place to 
 another — they remained the same goods, there 
 was no outward change. Manufacturing 
 labour it was conceded might be necessary, 
 but it was in a different class from that of the 
 cultivator of the soil or the miner. 
 
 And when the efforts of doctors, lawyers, 
 teachers, shop-keepers, and commercial people 
 5
 
 66 WEALTH 
 
 came to be considered they were uncere- 
 moniously included in the unproductive class. 
 The early English economists reconsidered 
 the subject and had little difficulty in adding 
 the work of those engaged in manufacturing 
 industries to this class of productive labour. 
 But even then there were two great groups 
 of labour, one labelled productive and the 
 other unproductive. To people holding these 
 views it was not a little disconcerting when 
 the scientist pointed out that mankind pro- 
 duces nothing, that matter cannot be in- 
 creased, that the crop of corn merely repre- 
 sents elements taken from the soil, the air, 
 and the rain : there is merely a change of 
 form, comparable with that which changes 
 the ores of various metals into a locomotive 
 engine. 
 
 It was also pointed out that the miner only 
 displaces coal or ore. He does not make it. 
 His labour only differs in degree from that 
 of the transport worker who transports the 
 coal from the colliery to the domestic hearth 
 or to the factory. And yet the miner had 
 always been included in the class of produc- 
 tive labourers. Thus gradually the group of 
 recognised productive workers was enlarged 
 and made to include industrial and transport 
 workers.
 
 LABOUR— A FACTOR IN PRODUCTION 67 
 
 But what has to be said of commerce — the 
 wholesale and retail trader, and the profes- 
 sional man ? So far as the traders were 
 concerned, it became obvious that some 
 machinery was necessary to form a link be- 
 tween the producer and the consumer. The 
 textile mill produced cloth of various kinds 
 in wholesale quantities. The consumer re- 
 quired a few yards for some purpose, but the 
 manufacturer had no system of organisation 
 to supply the needs of the consumer. Some- 
 thing was necessary to complete the cycle of 
 production. Hence the need for the whole- 
 sale and retail markets ; the warehouseman 
 and the retail shop. If a woman wants a 
 small quantity of silk to make a blouse she 
 does not want a whole roll of silk as supplied 
 by the mill, and so she goes to the draper, 
 who cuts off from the roll the exact quantity 
 required. If I want a cup of tea, it is no good 
 to be told that a ton of tea is in the warehouse 
 and can be had at such a price. What I want 
 is the possibility of obtaining a small quantity 
 from which I can get a cup of tea without 
 causing waste to the world's supply of tea. 
 This I am able to get from the grocer, who 
 thus completes the cycle of production and is 
 a very useful and necessary member of 
 society, whether he be the proprietor of one
 
 68 WEALTH 
 
 shop, or the manager of a multiple shop com- 
 pany, or of a co-operative store. Some 
 machinery is necessary for supplying retail 
 quantities of the ordinary goods of everyday 
 life, and the shop or store provides just what 
 is necessar}/-. The labour connected with 
 these establishments is therefore necessary 
 and must be classed as productive. The corn 
 output of America and Canada is only useful 
 to Europe if transported thither ; the great 
 quantities of corn and flour in our elevators 
 and mills are only useful when handled by 
 baker and grocer. These retailers are neces- 
 sary workers, and are therefore now included 
 in the productive class. Conditions may 
 change, it may become necessary to modify 
 the system of retailing the necessaries of life, 
 but it is difficult to imagine a system under 
 which retailing will be unnecessary, and so 
 long as it be necessary, the labour con- 
 nected with it can only be classed as 
 productive. 
 
 Then we come to other types of workers — 
 the teacher, the doctor, the minister of re- 
 ligion, the actor and musician, the magis- 
 trate, judge, and policeman, member of Parlia- 
 ment, State officials from the lowest to the 
 chief of the State. What shall be said of all 
 these ? The teacher in school and university
 
 LABOUR— A FACTOR IN PRODUCTION 69 
 
 influences the material out of which various 
 types of future workers are being moulded. 
 Few professions probably give rise to so much 
 disappointment, but looking over a period of 
 years, it is evident that education has achieved 
 remarkable things for the community. The 
 work of production has been very considerably 
 assisted by the teaching of the school and 
 classroom, and by the investigations carried 
 on in the laboratory. The doctor and the 
 surgeon have kept the community in better 
 health and condition for work and effort than 
 would have been the case had there been no 
 one charged with this responsibility. The 
 minister of religion has preached an ideal — 
 he has inculcated morality and high thinking. 
 In proportion as his efforts have led men to 
 work more honestly and to take a saner view 
 of life and its responsibilities he has had an 
 effect on production. Modern society, too, 
 requires the institutions connected with the 
 maintenance of law and order. Without 
 security the work of production could not 
 proceed, hence the necessity for police, magis- 
 trates, and judges, Parliament and the gov< 
 ment departments with their staffs of men 
 skilled in administration. Were the efficiency 
 of government adversely affected, production 
 would suffer. A well ordered state is a nc<
 
 70 WEALTH 
 
 sity. Anarchism and material well-being 
 could not exist together. 
 
 The actor and the musician too may have 
 their sphere in helping on the productive 
 work of the world. The worker with hand 
 and brain gets wearied and needs recreation. 
 To the extent that healthy amusement helps 
 to recreate the jaded worker, the providers 
 of that amusement are assisting in the pro- 
 ductive work of the community. 
 
 Thus the modern teaching on this subject 
 is that all those workers who either directly or 
 indirectly assist the work of production should 
 be classed as productive workers. 
 
 Can an unproductive worker be men- 
 tioned ? Yes, unfortunately there are those 
 whose efforts tend to diminish the produc- 
 tivity of the community. The book, the pic- 
 ture, or the play that panders to the lower 
 instincts, and thereby weakens the will and 
 character of reader or auditor may result in 
 weakening the ability of the worker. The 
 agitator whose work is destructive, but who 
 cannot suggest what can beneficially take the 
 place of what he is trying to destroy. Such 
 work as these is unproductive because it 
 neither directly nor indirectly helps on the 
 well-being and productiveness of the com- 
 munity.
 
 LABOUR— A FACTOR IN PRODUCTION 71 
 
 Thus under modern conditions instead of 
 spending time in discussing what labour shall 
 be classed as either productive or unproduc- 
 tive, it is more essential to differentiate 
 between the degrees of productiveness of 
 available labour in order to prevent a waste 
 of labour which would result if an undue pro- 
 portion of available labour was employed in 
 any one group. For instance, at the present 
 moment, after five 3^ears of war, the world 
 demands large quantities of foodstuffs and 
 manufactured goods, but there must be a 
 sufficient labour force employed in the dis- 
 tributing industries to circulate what is pro- 
 duced. In neither class should there be such 
 an excess of labour that either there is an 
 amount of wealth produced that cannot be 
 transported to consuming centres, or there 
 are not sufficient goods to be transported to 
 keep transport labour fully employed. 
 
 As to the degrees of importance of various 
 types of work, it may be suggested that the 
 highest class of productive labour is that of 
 the efl i of production. The 
 
 intelligi ace required to organise and carry on 
 successfully a • business citi, ;i manu- 
 
 facturing busini 3S or a greal transport under- 
 taking is oi enormous value to the modern 
 ( ommunity, and must I" placed in the high
 
 72 WEALTH 
 
 class. There are many more failures than 
 successes in this class of work. The efficient 
 organiser is comparatively rare. He is not 
 the monopoly of any one section of society. 
 The most successful organisers have come from 
 various ranks, many have been self-made 
 men, especially in the United Kingdom. 
 There have been no water-tight compart- 
 ments in this country, binding men to remain 
 in the position into which they were born. 
 Here, as in no other country, brains and capa- 
 city like murder will " out." But the pos- 
 sessors of the qualities necessary to give 
 business success of the highest degree are 
 comparatively few in number. Theirs may 
 not be a very high type of brain power ; that 
 is an arguable point, but it is the rarest type. 1 
 Its value to the community is difficult to 
 assess, the fact that men endowed with these 
 qualities can command their own price, with- 
 out any adventitious aid, emphasises their 
 importance. Next comes the work of inven- 
 tion and discovery. Then the labour that is 
 capable of carrying into effect the schemes of 
 the first class and of utilising the inventions 
 and discoveries of the second class. In this 
 is included the skilled artisan of all trades. 
 
 1 Cf . p. 131 f . the qualities required by the organiser of in- 
 dustry.
 
 LABOUR— A FACTOR IN PRODUCTION 73 
 
 After these comes the class of labour employed 
 in transport and commerce, the necessary 
 official and professional classes, then those 
 whose work recreates and keeps fit the active 
 producers. In a well organised society there 
 should be a minimum of difficulty in deciding 
 as to which labour group a man's special 
 talents warrant him attaching himself. Where 
 mistakes are made it is evident that the com- 
 munity in question has not attained to the 
 higher development, and there is need pre- 
 sumably of modification and improvement in 
 the system of education. 
 
 The Share of Production Due 
 to Labour 
 
 Theoretically the amount of what is pro- 
 duced that can be claimed by the labour 
 force we have just considered, is the whole 
 body of wealth produced after the shares due 
 to land and capital have been deducted. 
 The amount due to land depends on the 
 fertility or utility of the land; 1 that due to 
 capital is the market rate of interest 2 together 
 with an addition proportionate to the risk 
 involved in the industry in which it is em- 
 
 1 Cf. Chap. iv. 2 p. 140.
 
 74 WEALTH 
 
 ployed. In some cases the risk may be small, 
 in others it may be considerable. This 
 insurance against risk requires careful con- 
 sideration. For instance, the risk increases 
 when producers do not co-operate harmoni- 
 ously, and production is thereby hampered. 
 This view of labour, including all those 
 engaged in the work of production from the 
 organiser to the humblest labourer, might 
 not at one time have been considered ad- 
 missible. In the days of smaller businesses 
 there was the capitalist employer, the man 
 who carried on his own comparatively small 
 business with his own capital, and whose 
 share of the wealth produced was called his 
 profits. That, however, has become, or is 
 rapidly becoming, a thing of the past. The 
 company or corporation now carries on most 
 of the world's work. The capital is supplied 
 by shareholders "and the organisers are paid 
 officials, subject nominally to the share- 
 holders. This has wrought a great change in 
 industrial conditions, but the change is a 
 healthy one and should be completely satis- 
 factory when it has been fully carried through. 
 At present, industry is passing through a 
 stage of transition ; as to whether the ultimate 
 outcome will be beneficial to all interests 
 depends on how those interests face this
 
 LABOUR— A FACTOR IN PRODUCTION 75 
 
 period. If a sane and well informed policy 
 be adopted, the issue may be thoroughly 
 satisfactory to every grade of the labour 
 involved. A mistaken idea as to the issues 
 at stake, or as to the relative importance of 
 the factors, may have the effect of arresting 
 or restricting industrial development. This 
 would adversely affect all sections of labour. 
 What is required is healthy evolution along 
 lines discernible to those who have knowledge 
 of history and the working of economic 
 laws. 
 
 The question of profits 1 will be dealt with 
 later on. At this point the problem to be 
 considered is that connected with wages. 
 
 The man who is paid daily or weekly for 
 work remunerated by the hour or the piece 
 is said to be a wage earner. The man who is 
 engaged for an annual amount paid monthly 
 or quarterly is said to be paid a salary. 
 Hitherto the salary earner has made his own 
 bargain for his services, and presumably 
 has been paid what was considered to be his 
 worth. Both theory and practice as to the 
 conditions affecting the wage earner arc full 
 of interest, for new forces have conic into play 
 and the results have been momentou 
 
 1 ( i. Chap. vi.
 
 76 WEALTH 
 
 The invention of the steam engine made 
 possible the industrial revolution which 
 accentuated as time went on the problems 
 connected with manual labour and its share 
 of production. But the wages question and its 
 problems was no new thing even one hundred 
 and fifty years ago, when Watt was success- 
 fully experimenting with steam. In France, 
 men like Turgot were speculating on the 
 causes of misery among the labouring classes, 
 and they came to some conclusions that 
 affected economic thought for many a decade : 
 indeed, their views, developed by Adam 
 Smith and Ricardo, were utilised by men of a 
 very different stamp and for a very different 
 purpose. 
 
 France in the middle of the 18th century 
 was suffering from the exhaustion following 
 a long period of conflict. The national debt 
 had mounted to unheard-of figures, and the 
 taxation was so heavy that the sole limit to the 
 amount levied on the peasantry was their 
 ability to pay. Labourers lived on the 
 borders of starvation. What was the cause 
 of this unhappy state of affairs ? Economic 
 speculators observed current facts and 
 tendencies ; they did not apparently give 
 attention to the possibility that the country 
 was passing through a stage of transition.
 
 LABOUR— A FACTOR IN PRODUCTION 77 
 
 They agreed as though what was, always had 
 been, and always would be. And so they 
 concluded that the labouring population 
 merely gain a bare subsistence. ' In every 
 industry it must happen that the wages of the 
 worker are limited to the amount necessan' 
 for subsistence — II ne gagne que sa vie." 
 Here we get the foundations of a theory 
 which earned for Political Economy the 
 title of the Dismal Science — and no wonder. 
 It is true theoretically, and probabl}- in 
 practical life too, that in the first instance 
 labour secured the whole fruits of its effort. 
 A man made his own simple tools or weapons, 
 and what he produced with them was his 
 own property. There were no deductions. 
 But as society progressed things changed. 
 Rent emerged, and had to be paid on certain 
 qualities of land. Then industry and trade 
 assumed greater proportions, and capital was 
 needed to provide improved tools, machinery, 
 buildings, stores of raw materials, vehicles 
 for distribution, and other necessary adjuncts 
 to a trading community. At this point, 
 the advanced socialist may say, here began 
 the exploitation of the worker. But a short 
 consideration of facts will convince one that 
 quite the contrary wa*s occurring. The rent 
 that was paid was no deduction cither from
 
 78 WEALTH 
 
 the earnings of the farmer or from the wages 
 he paid any labour he might have to employ. 
 It was paid for the use of fertile land, and was 
 due to the extra fertility of land for the pay- 
 ment of which the farmer and his labourers 
 got the benefit in having to put forth less 
 effort to produce crops. The same thing 
 occurred when, owing to thrift, capital was 
 available to assist manual and organ- 
 ising labour in manufacturing employments. 
 Machinery, buildings, and supplies of raw 
 material lightened the toil of labour and 
 made it more regular and more productive. 
 This meant the possibility of shorter hours 
 and better pay. The interest paid to the 
 thrifty man who saved capital was no 
 deduction from the worker or his employer. 
 Capital gave a double benefit — it blessed both 
 lender and borrower where it was rightfully 
 employed. The mistakes as to the exploita- 
 tion of labour by capital arose out of the 
 theory that capital not only provided 
 machinery, buildings, and raw materials, 
 but paid labour. That by so doing it was 
 able to grind the face of labour. English 
 economists took up the French theories and 
 came to the conclusion that the labourer's 
 share of the wealth he helped to produce was 
 fixed by the capital available for his employ-
 
 LABOUR— A FACTOR IN PRODUCTION 79 
 
 ment, and that if you divided the amount 
 of this capital by the number of workers you 
 knew the average wage. And this average 
 would remain at a point at which it was 
 sufficient to maintain the labouring classes, 
 who would only gain a bare living. Ricardo 
 introduced a new idea to the theory. He 
 held that a class forms a notion of a standard 
 of living, and that this standard regulates 
 the increase of population. From these 
 conceptions developed the Wages Fund 
 Theory or Iron Law of Wages. There were 
 three stages in the development of this 
 theory. 
 
 Malthus 1 declared that " it may at first 
 appear strange . . . that I cannot by means 
 of money raise the condition of a poor man 
 . . . without proportionately depriving others 
 in the same class. But if I only give him 
 money, supposing the produce of the country 
 to remain the same, I give him a title to a 
 larger share of the produce than formerly, 
 which shows that he cannot receive without 
 diminishing the share of others." 
 
 What Malthus assumed for the purpose 
 of his argument was that the food supply is 
 fixed in amount, so that an increase in the 
 
 1 Essays on Population, iii. 5.
 
 80 WEALTH 
 
 demand would raise price without increasing 
 supply ; and that a certain amount ol the 
 total supply is earmarked for manual labour. 
 Under modern conditions at any rate, those 
 assumptions do not hold good. 
 
 The elder Mill examined the theory and 
 confirmed it. But he made use of the word 
 capital instead of food supply. According 
 to him it is the amount of capital, i.e. the 
 wealth available for the work of production 
 which fixes the amount of wealth divisible 
 among the workers. 
 
 John Stuart Mill 1 laid it down that industry 
 is limited by capital, but does not always 
 come up to that limit, while the increase of 
 capital gives increased employment to labour. 
 He added that it is not all capital which 
 constitutes the wages fund of a country, 
 but only that part which is earmarked for the 
 direct purchase of labour. Thus wages 
 depend on the supply and demand of labour, 
 or on the proportion between population imd 
 capital. Moreover, wages cannot rise but by 
 an increase of the aggregate funds employed 
 in paying labour, or in a diminution in the 
 number of men desiring to be employed. 
 
 Such a theory was admirably adapted as 
 
 1 Political Economy, Bk. i, Chap, v., 1-3.
 
 LABOUR— A FACTOR IN PRODUCTION 81 
 
 the text from which to preach class warfare, 
 and it became, in fact, the foundation of the 
 teaching of that school of social reformers, 
 the fruition of which is having such disastrous 
 effects at the present moment. 
 
 It is true that Mill confessed that he had 
 gone too far, but others reiterated and 
 amplified his conclusions and his repudiation 
 has been to a great extent ignored — especially 
 by interested parties. Mill's recantation 
 did not give even the germ of the truth, for 
 he still maintained that wages are paid out 
 of an existing fund which cannot exceed the 
 means of the employing class. u } 
 
 Fortunately, new light was to be thrown on 
 the subject, and it came from the other side 
 of the Atlantic. In 1876, F. A. Walker 
 published a book on wages, showing that there 
 is no necessary relation between capital and 
 wages. Wages are paid out of what is pro- 
 duced, not out of any pre-existing fund. 
 For convenience sake wages may be advanced 
 out of existing wealth, but only because the 
 owners of that wealth know that the workers 
 are engaged on productive employment, and 
 that the advance will be repaid. He holds 
 that the workers are in effect the owners 
 of the whole of the product subject to the 
 payment of definite amounts due to land for 
 
 6
 
 82 WEALTH 
 
 rent, capital for interest, and the employer 
 for profits. Since Walker wrote commercial 
 and industrial organisation and methods 
 have progressed considerably. Half a century 
 ago profits might be an3^thing and were indefi- 
 nite in amount. To-day, however, the situation 
 is greatly changed. In place of the capitalist 
 employer there is the limited company or the 
 corporation. The accounts of these must be 
 published, and the possibility of hiding 
 earnings under a system of book-keeping or 
 as secret reserves has been restricted and is 
 likely to be still further restricted. The 
 fac'ut^an be known if interested parties 
 make up their minds to know them. The 
 whole labour force of a community is in a 
 position to get most of the required informa- 
 tion, and can, if it so decide, obtain all 
 relevant information. Unfortunately, in- 
 stead of labour insisting on obtaining facts 
 to which it is entitled and on which it could 
 base a sound economic claim, it has hitherto 
 been content to believe that capital exploits 
 labour. It has suspicions, but very little 
 concrete knowledge. It is those suspicions 
 that are at the root of labour unrest and 
 industrial friction. It is in the interest of the 
 whole community, and especially of the whole 
 labour force, that specious statements should
 
 LABOUR— A FACTOR IN PRODUCTION 83 
 
 be replaced by economic facts. This should 
 be the aim of all well wishers of industry and 
 commerce. From facts which could be 
 ascertained, the economic rights of each 
 member of the industrial force could be 
 demonstrated, and in place of wild state- 
 ments as to the exploitation of labour there 
 might be substituted a demand based on 
 sound economic knowledge. Limiting pro- 
 duction, either by a ca' canny policy or by 
 refusing to take advantage of the best 
 processes and the most modern machinery, 
 must result in decreasing the real wages of 
 labour. 1 The greater the production of all 
 necessary and useful commodities, the better 
 can be the position and the higher the standard 
 of living of every member of the community. 
 And with increasing production there goes 
 hand in hand an increasing cycle of prosperity; 
 for the greater the production the less is the 
 cost of producing, and so prices can fall. 
 Increased wages with decreased production 
 results in a more than proportionate increase 
 in price. We may now 2 be suffering to some 
 extent from profiteering. But the possibility 
 of profiteering is limited. We are suffering 
 because during five strenuous years we have 
 
 1 Cf. p. 90. ■ 1920.
 
 84 WEALTH 
 
 been forced to concentrate our efforts on 
 unproductive production, and we have been 
 consuming unproductively. The cost of the 
 war is the sum of our unproductive con- 
 sumption. The victory of the Allies has saved 
 the liberties of the world, but the effort put 
 forth to crush autocracy and militarism has 
 been costly and must be paid for. The war 
 has, however, given a spur to invention, it 
 has caused us to scrap uneconomic methods 
 of working, and to equip our factories with 
 the most productive machinery, and to make 
 use of the most productive processes. Peace 
 has dawned, and it behoves the world now to 
 apply to the arts of peace, the machinery and 
 processes found to be so necessary during the 
 strenuous time of war. If any one country 
 refuses to utilise these new methods it must 
 suffer, for other countries will not be so foolish. 
 In the United Kingdom we are in a new 
 position of advantage. That unscrupulous 
 men may attempt to grasp as much as possible 
 of the resulting wealth for self is doubtless 
 true, but whereas at one time this might 
 be done with impunity, because of the 
 difficulty of analysing the economic position, 
 we now have the necessary information 
 available, or the means for making it avail- 
 able. Hence, if the country will face peace
 
 LABOUR— A FACTOR IN PRODUCTION 85 
 
 problems as it faced war conditions, with a 
 united front and a determination to grasp 
 the facts and reconstruct in the light of those 
 facts, there will be no need for class warfare 
 or of the universal strike. 
 
 Those who believe that they are entitled 
 to a greater share of the wealth produced 
 should either by themselves or through their 
 leaders make plain their economic position, 
 and if their conclusions are sound they will 
 obtain redress. But to imagine that with a 
 modicum of knowledge, and that perhaps 
 poisoned at the source, they can hold the 
 community to ransom, is not only a mistake 
 but a crime. It cannot succeed, and its 
 failure will entail untold misery on the 
 masses of the nation. 
 
 It may be objected that it is only possible 
 in theory to get the full facts necessary for 
 determining the economic rights of each of 
 the factors in production. There is, however, 
 a concrete illustration of what can be done. 
 The government of the United States in- 
 vestigated the pottery industry 1 both in 
 America and Europe. The result of this 
 investigation has been published in full. 
 From the voluminous report, not only can a 
 
 1 The Pottery Industry, published by the Department of 
 Commerce, Washington, Miscellan eries, No. 21, 1915.
 
 86 WEALTH 
 
 great deal be learned as to the industrial and 
 commercial working of an important industry, 
 but employers have already realised that 
 it is to their advantage to supply further 
 information, and in this country the success- 
 ful working of the Standing Joint Committee 
 in the pottery industry is a monument of 
 what can be achieved in this way. It is 
 to be hoped that investigations and reports, 
 carried through on the same lines, may be 
 undertaken and published in connection with 
 all our main industries. Nothing could be 
 more helpful at the present moment, nor 
 could anything be calculated to serve our 
 industrial life better in the future. 
 
 The theory as to wages has developed from 
 a hopeless stage which was the result of con- 
 sidering a passing phase as a permanent con- 
 dition. This gave rise to the Iron Law of 
 Wages, an initial attempt to account for a 
 new series of industrial phenomena. The 
 theorists did not make use of historical ex- 
 perience : they argued from the particular to 
 the general, and gave circulation to a doctrine 
 that could only lead to mischief. The one 
 great service rendered was that it arrested 
 attention and compelled investigation. It 
 took over half a century to get at the truth, 
 and meantime the error of the original theory
 
 LABOUR— A FACTOR IN PRODUCTION 87 
 
 had laid the foundations of a movement that 
 was to strain the industrial world to breaking 
 point. The workers in their efforts to save 
 themselves from a situation that went far to 
 confirm the theory, began to organise them- 
 selves into unions. This policy has had great 
 success in improving conditions arising out 
 of the revolution caused by the application of 
 steam and labour-saving machinery to manu- 
 factures. Now after long years of experience 
 Trade Unionism is on its trial. Its future 
 depends on how it grapples with the present 
 reconstruction period. Side by side with 
 labour's own endeavour to improve working 
 conditions has progressed the efforts of Par- 
 liament to make working conditions better by 
 means of Factory Acts and industrial legisla- 
 tion. Middle-class sympathisers, feeling that 
 labour might not be able to help itself, advo- 
 cated a policy of association from which has 
 resulted the Co-operative movement and 
 modern Socialism. Both these have de- 
 veloped on lines very different from those ex- 
 pected by their founders. 
 
 The industrial history of the nineteenth 
 century gives a series <>l attempts at practical 
 amelioration, nor has this been without suc- 
 cess. A very great advance has been accom- 
 plished as can be realised by comparing the
 
 88 WEALTH 
 
 position of manual labour a century ago with 
 that of to-day. The marked improvement is 
 due to all these forces, sometimes co-operating, 
 oftentimes apparently working almost in 
 opposition. The present situation is hopeful 
 to the extent that causes have been marked 
 and effects studied. A century ago the indi- 
 vidual workman might be a victim to a rich 
 employer. To-day organised labour knows 
 and shows its strength. If that strength can 
 realise the strength of other factors in indus- 
 try and use its power with knowledge and 
 moderation healthy evolution will result. The 
 time is ripe for a great advance, but the pos- 
 sible outcome is endangered by the extent to 
 which self-seeking on the one hand and an 
 ignorant application of force on the other 
 may bring about disastrous revolution in- 
 stead of natural evolution. It is the econo- 
 mist's duty to point to economic laws and 
 suggest an advance in accordance with 
 them. 
 
 Individual bargaining, with the individual 
 at a disadvantage, has been replaced by col- 
 lective bargaining, but that policy is only in 
 its infancy. Should the next step be towards 
 what is known as syndicalism, i.e. each indus- 
 try working for self against the community, 
 and this is an anti-social movement, the future
 
 LABOUR— A FACTOR IN PRODUCTION 89 
 
 will see an intensification of the friction which 
 has been working up for the past two decades. 
 If the next step be towards State Socialism 
 there will result a change in the direction of 
 industries, followed by a species of enslave- 
 ment weighing heavily on the whole com- 
 munity. Industrial freedom is the desired 
 goal, and that can best be obtained by all the 
 factors and all industries co-operating for the 
 common good, with the State acting as the 
 guardian of the consumer and the national 
 well-being. Amidst the clang of faction this 
 last seems destined to prevail. 
 
 In America the practical development of 
 industries has differed from that in this coun- 
 try. The conditions were widely different. 
 There was a new country, richly endowed with 
 natural resources, with almost unlimited 
 possibilities for growth. The labour force 
 was, as compared with that of the United 
 Kingdom, inadequate. Hence the invention 
 and application of labour-saving machinery 
 and devices of all sorts. Moreover, the 
 American employers adopted a policy full of 
 contrast to that ordinarily followed here. 
 Whilst many of our employers believed that 
 low cost and high profits depended on low 
 wages, America strove after a large output 
 and low labour cost, and to this end en-
 
 90 WEALTH 
 
 couraged the individual workman to put 
 forth his utmost effort. It was proved that 
 high wages and low cost of production are 
 compatible, and in many factories it became 
 a rule to dispense with the services of a man 
 who could not earn a high minimum wage. 
 This has been justified, and presents a great 
 contrast to our wage-cutting policy which in 
 too many instances has resulted in either 
 direct or indirect restriction of output. The 
 war demand was an object lesson for our 
 employers. A depleted labour force, assisted 
 by unskilled men and women, worked wonders 
 in producing a vastly increased output, en- 
 couraged by expanding wages and the deter- 
 mination to supply our own and our allies 
 forces with all that was necessary to win the 
 war. The lesson is obvious to those prepared 
 to see it. Employers must give up wage- 
 cutting, workers must cease to practice 
 restriction of output, if we are to win 
 through a very difficult condition of affairs 
 with success. 
 
 In America the policy of encouraging a 
 maximum output has led to what is known as 
 scientific management. In its essence this 
 means employing only the super-man in in- 
 dustry. Its results are most impressive super- 
 ficially, and whilst practised on a compara-
 
 LABOUR— A FACTOR IN PRODUCTION 91 
 
 tively small scale, it gives an impression of 
 soundness. If, however, this policy was to 
 be carried to its logical outcome, it would 
 stultify itself, because it would mean employ- 
 ing a comparatively small percentage of the 
 population — -the super-men — and they would 
 eventually find themselves burdened with the 
 responsibility of providing for all the other 
 members of the nation. To some extent it 
 may be advisable for this country to adopt 
 the sounder parts of scientific management, 
 but there is already in this country the germ 
 of a policy better calculated to meet our re- 
 quirements. This is a system of grading 1 
 which was worked out by Mr. W. J. Davis 
 and Mr. Evered for the brass workers of the 
 Midlands. Under this policy not only super- 
 men, but average men and men under the 
 average, can be profitably employed. The 
 ability of each worker is graded, and he is 
 paid a wage commensurate with his skill and 
 ability. This movement is well worth in- 
 vestigating. During the war period it has 
 received a set back, but its possible advan- 
 tages are such that it should receive the care- 
 ful consideration of all those responsible for 
 the reconstruction of our industries. It would 
 
 1 Cf. I. fe o) :: . /. D vi , bj Dalley.
 
 92 WEALTH 
 
 reduce the residue of unemployables to a 
 minimum, and at the same time overcome 
 the difficulties connected with the flat-rate — 
 the great disadvantage connected with trade 
 unionism. 
 
 It would be dangerous to entrust the duty 
 of grading to employers. This danger was 
 met in the brass workers' scheme by en- 
 trusting the grading to a joint board repre- 
 senting employers, the union, and technical 
 experts. A further development might be 
 suggested which, although perhaps some- 
 what Utopian for the moment, may become 
 practical politics. This would consist of 
 bringing about a revolution in the wages 
 system. 
 
 Now that the organisation of labour in well- 
 recognised unions is almost accomplished, 
 why should not the unions receive from em- 
 ployers the amount due for the labour of their 
 members ? Where this was found practicable 
 the employers would welcome it as relieving 
 them of much anxious and harassing work 
 connected with the rates and insurance of each 
 individual worker, whilst the officials of the 
 unions receiving the amounts due to their 
 members could work out a grading scheme 
 based on equity and acceptable by the indi- 
 vidual, because assessed not by any outside
 
 LABOUR— A FACTOR IN PRODUCTION 93 
 
 body but by officials responsible to the whole 
 membership of the union. 
 
 It might be suggested that this would revive 
 the detested gang system. But this is only 
 a superficial view, and is really untenable. 
 Under the gang system, a ganger agreed with 
 an employer to find the labour to carry out 
 some operation for an arranged price. This 
 man was working for himself and retained all 
 he possibly could of the agreed sum. He 
 became in many cases a sweater of the worst 
 description, and much hardship is said to have 
 resulted. In the suggested arrangement, how- 
 ever, quite the reverse would be the case. In 
 the first place the supply of labour would be 
 arranged by labour's own chosen officials. 
 These men would have no pecuniary interest 
 in the bargain. To ensure their position they 
 would have to satisfy the members of their 
 union not only as to the gross amount to be 
 received but as to its distribution. The ad- 
 vantages of the scheme would include the 
 possibility of framing statistics of the exact 
 labour cost of various operations, and there 
 would be clearer definition as to the share of 
 the wealth produced that went to labour. 
 Some occupations, at any rate at first, might 
 not appear to lend themselves to such a 
 scheme ; but in the larger industrii s its appli-
 
 94 WEALTH 
 
 cation should not prove difficult, and were it 
 successful, even those occupations which at 
 first sight seemed least capable of accepting it 
 might find it to their advantage to try the 
 experiment. 
 
 The union officials would under the scheme 
 enjoy an added dignity and responsbility. 
 They would have a more definite status when 
 conferring with employers, and they would 
 become great public servants of considerable 
 importance. 
 
 The Wages System — Some Definitions 
 and Explanations 
 
 The wage earner is paid either by the time 
 or by the piece. Each method has its advan- 
 tages, and although payment by the piece 
 has been severely criticised there are some 
 occupations for which it is so admirably 
 adapted that such disadvantages as may be 
 brought against it are more than neutralised 
 by advantages both to wage earner and wage 
 payer. 
 
 Time wages are where the worker is paid 
 at so much an hour, day or week ; piece wages 
 are payment at so much for each article or for
 
 LABOUR— A FACTOR IN PRODUCTION 95 
 
 each operation. For instance, a hat manu- 
 facturer may either pay the labour he employs 
 at the rate of so much for each hat or at so 
 much per hour engaged in making hats. 
 Human nature being what it is, a man usually 
 makes more hats when working under a piece 
 arrangement than if paid by the hour. It is 
 sometimes contended, however, that piece- 
 work leads either to the workman overstrain- 
 ing himself and thereby shortening his work- 
 ing life, or to the work being scamped o wing- 
 to the desire of the man to earn a maximum. 
 There is also a feeling, or perhaps rather more 
 than a feeling, among workmen that the extra 
 production resulting from piece wages keeps 
 other men out of work. Thus trade unions 
 as a rule view piece wages with a great amount 
 of suspicion and dislike. On the other hand, 
 it is contended that piece-work is more 
 economical and tends very materially to 
 lessen the cost of production. It saves ex- 
 penses of oversight, because a man under this 
 system works more steadily and the need for 
 foremen is lessened. It certainly meets to 
 some extent the objection to the flat time 
 rate, which puts all men doing the same work, 
 irrespective of what m;i\ be their ability, on 
 a level as to wage earning. It may not be a 
 very satisfactory method for overcoming this
 
 96 WEALTH 
 
 disadvantage, but until some better method 
 is introduced its benefit cannot be denied. It 
 may be all very well to fix a minimum wage, 
 but to tie down all workers to that minimum 
 is rather like fighting against nature. It must 
 tend to increase the class of unemployables, 
 as naturally the employer endeavours to dis- 
 pense with the slowest workers, who set the 
 pace where all receive the same rate, whatever 
 may be their output. This problem may be 
 looked at from another point of view. There 
 is in every occupation the average man who 
 possesses but a minimum of ambition. He 
 has his standard of living, and so soon as he 
 has earned sufficient to supply that standard 
 he is satisfied. But the man above the average 
 is more ambitious ; he not only wishes to im- 
 prove his own position but to give advantages 
 to his children. This natural desire requires 
 the means to carry it out. In other words, 
 men above the average not only can earn 
 higher wages if unrestricted, but require the 
 extra money to carry out their plans of ad- 
 vancement.- The man who wishes to prosper 
 must improve himself. He can do so by at- 
 tending classes, technical or otherwise. He 
 requires books, instruments, and tools ; all 
 these cost money. He is entitled to demand 
 for his work this extra amount, and it is to
 
 LABOUR— A FACTOR IN PRODUCTION 97 
 
 the interests of the communh^ that he have 
 it. If there were no unions there might be a 
 system of task wages or efficiency wages 
 whereby the extra strength or ability of a 
 worker would win its reward. These, how- 
 ever, under existing conditions arc not possible 
 Thus in certain occupations piece rates tend 
 to meet this difficulty. If labour could be 
 graded 1 and paid according to grade there 
 would be an efficiency wage, and this may 
 come in due course. It has already been 
 attempted in at least one industry. Until, 
 however, the suggested system be applied, 
 and whilst existing conditions continue, either 
 the flat time rate or the piece rate must hold 
 the field. With the time system, since all full 
 members of a union receive the same rate of 
 pay, the speed of production and the standard 
 of workmanship will tend to be that of the 
 least quick and the least skilled. An object 
 lesson as to the effects of this can be seen in 
 a case where men have been working at some 
 one occupation on time rates and then a piece 
 system is introduced. When the change is 
 made each man can work up to his capacity, 
 and the possibilities of the highly skilled, 
 energetic man are revealed. The average 
 ratejof production immediately changes. 
 
 1 Cf. p. 91.
 
 98 WEALTH 
 
 As to the contention that the extra produc- 
 tion of the more capable men tends to lessen 
 employment, nothing could be further re- 
 moved from the truth. Increased production 
 means decreased cost, decreased cost leads to 
 a lower selling price, lower selling price in- 
 creases consumption. Decreased cost in one 
 or two staple industries has a marked effect 
 on employment, first of all in these industries 
 themselves, but gradually it spreads to others 
 and leads to increasing employment and a 
 greater demand for labour. This can be well 
 illustrated from ascertained facts. Some em- 
 ployers, even where piece rates obtain, have 
 an idea that the lower the wage the cheaper 
 the goods. Thus they inspect their wages 
 books and attempt sometimes, perhaps too 
 frequently, to cut rates. This policy is known 
 as " speeding up." For a time it may be suc- 
 cessful, but not for long. The workers soon 
 realise what is coming, and their reply to the 
 cutting of rates is " ca' canny " or restriction 
 of output. Many of our industries in pre-war 
 days suffered considerably from this unwise 
 policy, initiated by the employers and causing 
 the natural reply from labour. 
 
 This brings us to a consideration of the dif- 
 ference of the point of view of the employer 
 and the seller of labour. What the employer
 
 LABOUR— A FACTOR IN PRODUCTION 99 
 
 wants in order to compete successfully in the 
 selling markets is low labour cost. He should 
 therefore give his chief attention to his cost 
 book and not to his wages book. So long as 
 the cost of labour for a given piece of work is 
 low it is no concern of the employer what rate 
 the individual worker gains. And experience 
 warrants this assertion, that as a general rule 
 high rates of wages lead to low labour cost. 
 This is the secret of the policy pursued in 
 certain American factories, 1 where men must 
 earn a given minimum or their services are 
 not required. On the other hand the work- 
 man's point of view is the rate of pay. This, 
 though seemingly so simple, is a position 
 that is far too little realised among our em- 
 ployers. 
 
 Connected with the rate of pay is the neces- 
 sity to understand the difference between real 
 and nominal wages. For instance, it is diffi- 
 cult to compare the position of labour in the 
 United Kingdom and in Japan by merely 
 quoting earnings, because the purchasing 
 power of money is so different in the two 
 countries. Nominal wages are the amount 
 received. Thus an engineer may receive £4 
 a week, that is his nominal wage. His real 
 
 1 Cf. p. 89.
 
 100 WEALTH 
 
 wage depends on the purchasing power of his 
 £4. If living on the average costs 25 per cent 
 more in London than in the Black Country, 
 an engineer in London and one in Dudley 
 receiving £4 a week, although nominally 
 receiving the same rate, are really in a very 
 different position. The man in Dudley is 
 considerably better off. Thus in estimating 
 the position of labour in different countries, 
 or in different parts of the same country, you 
 must take into consideration rent and the 
 cost of food, clothing, and other necessaries. 
 The family also affect the question of real and 
 nominal wages. Two men living in the same 
 town and earning the same wages are nomin- 
 ally equally well off, but if one be a bachelor 
 and the other a married man with four or five 
 young children the real position of the two 
 men is very different. 
 
 In some industries attempts have been 
 made to identify the interests of the work- 
 people with the business in which they are 
 engaged. This takes two main forms. There 
 may be co-partnership or a bonus system — 
 either of these involve profit sharing. 
 
 Co-partnership has been practised with 
 considerable success by the London gas com- 
 panies, and is found in various trades, such as 
 printing, boot making, lock making, and even
 
 LABOUR— A FACTOR IN PRODUCTION 101 
 
 building. The late Sir George Livesay, of the 
 South Metropolitan Gas Company, gave a 
 great impulse to the movement, and a co- 
 partnership association has been organised to 
 do propaganda work. The late Lord Furness 
 attempted to apply the policy to shipbuilding, 
 but either because the scheme was ill-organised 
 or because of union opposition it failed. Under 
 co-partnership the usual method is for the 
 men to receive the normal rates of wages, and 
 at the end of each year or half year a share of 
 the profits realised go to the co-partners either 
 in cash, or in shares, or in both. In some cases 
 workmen co-partners are entitled to repre- 
 sentation on the board of directors. 
 
 Where men are thrifty and decide to save 
 the additional earnings, these methods have 
 much to recommend them. The interests of 
 the workpeople are identified with the busi- 
 ness, and thus there is a minimum of lost time 
 and waste. Each man has a definite incentive 
 to see that his part of the work is performed 
 as economically as possible. There are, how- 
 i'\ er, two great obstacles to the permanent 
 success of such schemes. Where employment 
 is of a fluctuating nature it is difficult to apply 
 in a satisfactory manner cither co-partnership 
 or profit sharing. Whilst thrift not being a 
 too widely practised virtue, a possible but
 
 102 WEALTH 
 
 unknown bonus, to be received at some 
 future date, may be a snare causing much in- 
 convenience to the individual recipient. As 
 an illustration may be given a case where a 
 man receives, under a profit-sharing scheme, 
 a substantial amount during the first year. 
 Not being thrifty, he looks on this amount as 
 a permanent addition to his wage and 
 arranges to live up to it. For a time all goes 
 well, but there comes a time when the bonus 
 is less than usual, or it is found that owing to 
 bad times it is impossible to pay a bonus at 
 all ; then the unthrifty man feels the pinch 
 and may find himself considerably embar- 
 rassed. The moral is that so long as men 
 work for weekly wages the safest course 
 is that the individual shall know what his 
 regular wages are. A bonus may be an in- 
 centive, but its precarious nature creates 
 difficulty. 
 
 With co-partnership there is the necessity 
 to share losses as well as gains. Here, again, 
 the workman is at a disadvantage, for in the 
 majority of cases he cannot share a loss, and 
 if his capital in the business be reduced in 
 consequence of a lean year's working it is 
 difficult to persuade him that he is not being 
 exploited. Under certain circumstances either 
 co-partnership or profit sharing may work
 
 LABOUR— A FACTOR IN PRODUCTION 103 
 
 beneficially, but up to the present there is not 
 sufficient proof that either policy can be widely 
 applied to the permanent advantage of the 
 worker. Co-partnership may be a useful step 
 towards full co-operative working, but except 
 in special cases it is not possible to say that 
 it can be permanently successful as a remedy 
 to industrial friction. 
 
 The efficiency of the labour force in any 
 community will depend on sets of conditions 
 which affect both the individual worker and 
 labour in the mass. The individual is affected 
 by the conditions of his birth and upbringing. 
 It cannot be expected that a satisfactory 
 labour force can be reared under slum con- 
 ditions. The physical, mental, and moral 
 surroundings of the child must affect its after 
 career. The housing, water supply, sanitary 
 conditions, food and clothing, if below a 
 definite minimum, must adversely affect the 
 individual. The information derived during 
 compulsory recruiting in this countiy has 
 been of the greatest value in attracting public 
 attention to the evils attendant on improper 
 conditions of living. Young men who could 
 barely pass the standards developed remark- 
 ably during a few months of good feeding, 
 good clothing, and adequate housing, to- 
 gether with physical exercises and an open
 
 104 WEALTH 
 
 air life. These lessons will not be thrown 
 away. 
 
 Education, too, affects the whole subsequent 
 life of the youth. Under a good system of 
 elementary education a boy begins to show 
 his bent, and the educational ladder to the 
 secondary school, the technical school, and 
 the university enables the boy of brains to 
 take his rightful place in the community as a 
 hand or a brain worker. Then there are the 
 moral influences affecting the youth of the 
 community, inducing thrift, industry, tem- 
 perance, integrity, and a real patriotism, i.e. 
 the submission of self. 
 
 Labour in the mass is affected by the laws 
 and customs of the country as to combination. 
 Labour may be free to combine ; will it have 
 the wisdom to combine so that combined 
 action shall assist and not retard the common- 
 wealth P 1 
 
 From the point of view of productiveness, 
 labour in the mass is vitally affected by what 
 is called division of labour. 
 
 In very early days it was realised that a 
 division of employments was beneficial to 
 production. Instead of each man hunting, 
 cooking, tailoring, building, or boot making 
 
 1 This part of the subject is dealt with in another volume 
 in this series.
 
 LABOUR— A FACTOR IN PRODUCTION 105 
 
 for himself, those individuals having special 
 aptitude or training in these separate occu- 
 pations gave their entire time to that one 
 calling. Each village community thus evolved 
 its own miller, blacksmith, carpenter, and 
 baker. With primitive methods and tools 
 separation of employment was possible. As 
 methods and tools improved, a still further 
 sub-division took place, and when steam 
 and machinery revolutionised industry it 
 was found that the limits to division of 
 labour were only fixed by the extent of the 
 market. 
 
 Adam Smith saw the great importance of 
 this stage in industrial development, and 
 he gave much thought and care to making the 
 subject plain. 
 
 At the outset care must be taken to dif- 
 ferentiate between division of labour, i.e. the 
 dividing up of the making of any one com- 
 modity into a number of processes — each 
 workman becoming very expert in one simple 
 process, and the employing of a number of 
 workers to produce a great result. Adam 
 Smith's illustration of division of labour has 
 become classical. He was not content to 
 theorise, he wished to have concrete practical 
 proof of his theory. Thus he visited a pin 
 factory and was informed that whereas one
 
 10 G WEALTH 
 
 untrained man would find it difficult to make 
 twenty pins in a day's work, if the making of 
 a pin was divided up into ten simple processes 
 ten men could turn out 48,000 pins in the 
 course of a day. Since Smith's time, division 
 of labour has been carried considerably 
 further. At present there are machines 
 turning out several million pins in an hour ; 
 this shows the policy carried to its fullest 
 extent. 
 
 Adam Smith summed up the advantages 
 attaching to this policy. It gave the workers 
 increased dexterity, it resulted in a great 
 saving of time, and it led to the invention of 
 better processes, tools, and machinery. Since 
 Smith's day other economists have investi- 
 gated the subject. John Stuart Mill saw two 
 other advantages . There was a saving in the 
 use of tools and there was organisation of 
 capacity. Professor Alfred Marshall observed 
 yet another beneficial effect, and this he 
 termed the inter convertibility of industries. 
 This last is of considerable importance at the 
 present moment. Marshall's attention was 
 drawn to what happened in America at the 
 conclusion of the Civil War. The great de- 
 mand for military equipment had led to the 
 building of large factories for making special 
 weapons and munitions. Rifles had been
 
 LABOUR— A FACTOR IN PRODUCTION 107 
 
 required in large numbers, but when the war 
 ended the demand suddenly ceased. At one 
 large factory, owing to the making of a rifle 
 having been divided up into a great number 
 of simple processes, it was found possible to 
 convert the establishment into a sewing- 
 machine factory without discharging a single 
 employee. There are few things superficially 
 less alike than a rifle and a sewing machine. 
 Yet on investigation it will be seen that in 
 each there is a certain amount of woodwork — 
 in the rifle a stock, for the sewing machine a 
 base. Then the small parts, entailing fitting 
 with screws and small adjustments demand 
 a similar type of workmanship. Had one 
 man been trained to make a complete rifle it 
 might have been difficult to turn him into a 
 constructor of sewing machines, but since 
 each man merely did one process — one man 
 drilling a hole, another tapping it, a third 
 screwing in a screw made by perhaps a dozen 
 other men, there was but little difficulty in 
 bringing about the change of output. It was 
 a matter of organisation and not of technical 
 skill. 
 
 The same process is going on in this country 
 in many factories at the present moment. 
 These factories were built and equipped to 
 produce various munitions of war in great
 
 108 WEALTH 
 
 quantities. For this purpose the latest labour- 
 saving machinery was installed, and every- 
 thing was done to enable a depleted and less 
 skilled labour force to effect an increased pro- 
 duction. The war being over, it is necessary 
 to convert these works to the making of com- 
 modities required for peace purposes. The 
 process of reconstruction is going on and is 
 not yet complete, but in one large works 
 visited it was most interesting to see what 
 was being accomplished. Before the war 
 these works were engaged in manufacturing 
 small metal goods. Many of these were cast 
 and then trued up by hand. Now bar metal 
 fed automatically into a foolproof machine 
 turns out these metal fittings more accurately 
 and considerably more economically than was 
 done in pre-war days. The new machine 
 equipment of this country should be a big 
 asset in re-establishing the nation. 
 
 It has already been stated that division 
 of labour should not be confused with 
 massing of labour. Both produce great 
 results, but whereas the success of the former 
 depends on skilfully dividing up a manufac- 
 ture into many separate processes, and 
 specially training one man for one special 
 process so that he becomes very expert in it, 
 the latter consists in employing a great
 
 LABOUR— A FACTOR IN PRODUCTION 109 
 
 number of workers to produce a great effect. 
 It is said that when the great Napoleon went 
 to the chateau at Compiegne to spend his 
 honeymoon he wished to give his bride a 
 surprise. At some distance from the chateau 
 rise the Beaux Monts, and between the 
 grounds of the chateau and the Beaux Monts 
 rolls the forest of Compiegne. By massing a 
 great number of men during the first night of 
 his stay at the chateau, Napoleon caused a 
 broad roadway to be cut through the forest 
 right up to the Beaux Monts, and when morn- 
 ing broke he and his bride saw a broad turfed 
 way running from the chateau grounds giving 
 a very pleasing but quite different outlook 
 from what had existed previously. This great 
 work was carried out in a few hours by a 
 massing of labour. Massing of labour can be 
 made to produce great results in road making 
 and similar operations, but it is very different 
 from division of labour. 
 
 A number of disadvantages have been 
 alleged against division of labour. These 
 should be carefully considered together with 
 the alleged advantages, in order that a true 
 view may be gained of the present industrial 
 situation, many of the conditions of which 
 are due to this policy. It has been contended 
 that division of labour has had an adverse
 
 110 WEALTH 
 
 effect upon the apprenticeship system. An 
 apprenticeship of seven years to a trade 
 where the conditions were faithfully fulfilled 
 on both sides turned out a craftsman of a 
 high order. British workmen trained under 
 this system were famed the world over. But 
 with large scale production it became un- 
 necessary that every worker should be so 
 highly skilled. We cling somewhat obsti- 
 nately in this country to our old methods and 
 simple machinery, and with these a highly 
 skilled labour force was necessary. The war 
 opened our eyes to what could be done with 
 labour-saving machinery and a developed 
 system of division of labour. Unskilled 
 women after a few weeks' training were, with 
 the aid of new machinery, able to produce a 
 greater output than could highly skilled men 
 working with less capable tools. It was 
 realised that for many occupations a long 
 apprenticeship was a waste of time, that a 
 shorter working day could result in greater 
 output, and that the worker might have better 
 conditions of work and greater leisure wherein 
 to get recreation and cultivate the higher side 
 of his character. Under the old conditions 
 there must be long working hours for the in- 
 dividual worker in order to obtain an economic 
 output capable of paying a living wage.
 
 LABOUR— A FACTOR IN PRODUCTION 111 
 
 Under the new conditions costly machinery 
 must be kept as fully employed as possible, 
 but this could be effected by shifts of labour. 
 A short working day for the individual 
 worker might result in a maximum produc- 
 tion, thereby lowering the working expenses 
 of industry and making high wages, yet low 
 labour cost, and so low selling prices a possi- 
 bility. It is these facts that need to be 
 realised by both employers and employed at 
 the present moment. Low labour cost re- 
 sulting in low cost of production should be 
 the employers' concern. For the worker, 
 shorter hours, less toilsome work, and higher 
 wages are the great aim. The old dictum 
 that the only way to keep profits up is by 
 keeping wages down has ceased to hold 
 good under modern industrial conditions, 
 though unfortunately there are some em- 
 ployers who are still obsessed by this obsolete 
 idea. 
 
 It has also been affirmed that the constant 
 application of the attention to one minor 
 operation tends to deaden the mental facul- 
 ties. Undoubtedly, in going round the muni- 
 tion factories where long hours were worked 
 under war pressure, there were few days 
 off ; the men in many cases looked as though 
 the monotony of the work palled on them.
 
 112 WEALTH 
 
 Women were not similarly affected, prob- 
 ably because women's home duties tend to 
 monotony. But the conditions were ab- 
 normal. Everyone was being urged to do 
 his utmost to increase output. Under peace 
 conditions shorter hours, for one thing, will 
 make a great difference, and although there 
 is still need for a great output, there will not 
 be the same impelling force. The necessary 
 output can be obtained without overworking 
 or overstraining the worker. Indeed, under 
 normal conditions it may be anticipated that 
 work done mechanically will free the worker's 
 mind, and he will, if of an inventive turn, 
 think out new methods and processes for still 
 further lightening labour and increasing pro- 
 duction. This is said to have been the ex- 
 perience in America. 
 
 The most serious disadvantage alleged 
 against the policy is that it results in the 
 manufacturing town with all its social prob- 
 lems. But it must be realised that these evils 
 are being mitigated. The industrial town, 
 like Topsy, grew. The community suddenly 
 awakened to the fact of its existence and of 
 the attendant problems. For several decades 
 attempts have been made to solve these 
 problems, and with improved methods of 
 transport much has already been done.
 
 LABOUR— A FACTOR IN PRODUCTION 113 
 
 Under previous conditions labour had to live 
 near its work. With a ten or twelve hours 
 working day, and no electric trams or cheap 
 train services, congestion in housing appeared 
 to be a necessary corollary to the large 
 factory. But with a working day of six, 
 seven, or eight hours there is going to be a 
 great change. Indeed, that change has more 
 than commenced. We have model villages 
 and garden cities. The workman may now 
 live some miles away from his work and yet 
 be a good time-keeper. There is less and less 
 necessity for congested housing, and the slum 
 tends to become the habitat of the un- 
 employable or undesirable, and he, it is to 
 be hoped, will be legislated out of existence 
 eventually. 
 
 Many errors have been made by people 
 who imagine that because some evil has 
 existed for a few decades therefore it is 
 permanent and unchangeable. This was the 
 cause of the teaching of the French Phy- 
 siocrats and Malthus on the wages question. 
 They did not take a broad enough outlook ; 
 their survey of social conditions was limited 
 to the experience of the age in which they 
 lived. 
 
 Division of labour assists large scale pro- 
 duction, but does it lead to the elimination 
 
 8
 
 114 WEALTH 
 
 of the comparatively small factories and 
 works ? Theoretically it does, but in prac- 
 tical life there is a very interesting position. 
 With standardisation of process and manu- 
 facture in a large factory, there goes a certain 
 inelasticity which is not so common in a 
 smaller business. In pre-war days America 
 and Germany supplied many world require- 
 ments with standardised goods. Special 
 orders came to England. The work was 
 profitable and enabled the comparatively 
 small factory staffs with highly skilled labour 
 to prosper. One of the features of reconstruc- 
 tion, now the war is over, is that we have for 
 war purposes adopted modern methods of 
 production and scrapped many of our old 
 methods. It may be predicted that the small 
 business will continue to flourish in this coun- 
 try, and it is to our advantage that it should. 
 Its greater elasticity enables us to take full 
 advantage of unexpected demands. 
 
 Moreover, our smaller works train the men 
 of resource and initiative required in the 
 larger works. There is scope for both, and it 
 may be expected that whilst there will be an 
 increase in large scale production in this 
 country, yet the smaller business will, at any 
 rate for some time yet, hold its own. There 
 are occupations that hardly lend themselves
 
 LABOUR— A FACTOR IN PRODUCTION 115 
 
 to large scale production, and many classes 
 of repair work are more suitable to the small 
 shop with its more primitive machinery and 
 tools, which require greater skill and initiative 
 to manipulate.
 
 VI 
 CAPITAL— A FACTOR IN PRODUCTION 
 
 OF the three factors necessary for pro- 
 duction, land and labour are agents, 
 but capital is an instrument. It has 
 to be set to work in order that it may be 
 effective. Probably there is no term in use 
 in everyday life as to which there is so much 
 misconception, nor would it be easy to find 
 a word more loosely used in ordinary conver- 
 sation and in the newspapers. Thus, at the 
 very outset of the consideration of this instru- 
 ment in production, it is very necessary to 
 get a clearly defined idea of what capital 
 really is. 
 
 The usually accepted definition of capital 
 is so simple that one would imagine there 
 should be no possibility of confusion of 
 thought or looseness of statement when using 
 the word. Capital is wealth used in produc- 
 tion, that is to say, it is that portion of wealth 
 which is definitely set aside for the produc- 
 tion of more wealth. Thus, whilst all capital 
 
 116
 
 CAPITAL— A FACTOR IN PRODUCTION 117 
 
 is wealth, only one very definite portion of 
 wealth should be talked about as capital. A 
 simple illustration may help to clear up any 
 ambiguity on the point. 
 
 Take for example the wealth of an ordinary 
 well-to-do manufacturer. His wealth may 
 amount to quite a considerable value, but it 
 will not all be capital. 
 
 He will own a house, which will contain 
 valuable furniture, possibly valuable pictures 
 and collections of china or silver, which in 
 terms of money would represent a large 
 amount. But this house and its contents are 
 not being used by the owner for the purpose 
 of production. Hence the value represented 
 by the house with its furniture and collections 
 is wealth pure and simple. If, however, we 
 were to accompany the individual in question 
 to his factory we should there find buildings, 
 machinery, and stock, which again would 
 represent a considerable amount of wealth. 
 But this part of the individual's wealth is 
 definitely set aside for productive purposes, 
 and is capital in the economic sense of the 
 word. Or again, take public wealth. A 
 municipality usually owns a more or less 
 considerable amount of wealth. In many 
 instances there is an art gallery and museum, 
 the buildings and contents of which might
 
 118 WEALTH 
 
 be worth many thousands of pounds. That 
 wealth belongs to the community, but it is 
 not being utilised in producing commodities. 
 It is, therefore, wealth, but not capital. In 
 these days, however, of municipal trading it 
 is possible to visit the gas, water, or electric 
 light undertakings of the same municipality, 
 and there you find considerable amounts of 
 wealth which is being definitely utilised for 
 the production of wealth. It thus fulfils the 
 conditions of the definition and is in the 
 economic sense capital. One cannot be too 
 careful at the very outset of the study of this 
 subject to make perfectly sure that the dis- 
 tinction between wealth and capital is 
 thoroughly understood. 
 
 A superficial observer might think that by 
 organising human labour on the land, wealth 
 could be produced without further assistance, 
 but the moment one begins seriously to con- 
 sider the conditions of production it is 
 realised that under modern conditions land 
 and labour, if unassisted, would be sterile 
 and unproductive. It might be argued by 
 making use of the imagination that there was 
 a time when man was not assisted by capital, 
 but such a period could only have existed 
 the moment man made his appearance on 
 this planet, and could have lasted but a very
 
 CAPITAL— A FACTOR IN PRODUCTION 119 
 
 short time. Primitive man, face to face with 
 the necessity of providing even primitive 
 forms of food and clothing, must have lived 
 an extremely hard life. If he lived on the 
 wild fruits of the earth he had to find them, 
 and he had to experiment as to the whole- 
 someness of various fruits and roots ; to 
 procure any kind of meat food he would have 
 to catch and kill some animal, bird, or fish, 
 and man with merely his own hands would 
 find it extremely difficult to catch the living 
 creatures usually available for food. He 
 would quickly become aware of the fact that 
 with the aid of a stick or a stone the work of 
 procuring meat food was greatly facilitated, 
 but the moment man realised and acted upon 
 this he was making use of capital. This 
 simple illustration helps us to understand one 
 of the great functions of capital, which is to 
 ease the burden of labour, to make it easier 
 for man to live, to enable him to produce to 
 a greater advantage, to produce under better 
 conditions and on a greater scale with less 
 physical effort. 
 
 Thus it is practically certain that capital 
 has been assisting man from the very earliest 
 times. As mankind developed socially, the 
 need for capital to assist him in the material 
 side of life would become more and mure
 
 120 WEALTH 
 
 impressed upon him. He would find that by 
 retaining a part of the produce of the chase 
 or by husbanding a supply of fruits he would 
 obtain a certain amount of leisure which would 
 enable him to consider and to plan and to 
 invent new ways of doing things. He would 
 find that sticks or stones of a certain shape 
 were more suitable for certain operations, 
 and he would also see that by improving the 
 shape of these rude implements he was still 
 further assisted. Improvements in weapons 
 and tools tended still further to minimise the 
 hardness of man's original conditions. Then, 
 doubtless, appeared the long-headed or thrifty 
 man who found that by the constant practice 
 of thrift he was able to obtain accumulations 
 of various kinds, which gave him an advan- 
 tage over the less thrifty contemporary. 
 From this there would actually evolve the 
 separation of employment. One man was 
 found to be cleverer in adapting wood for 
 tools or weapons ; another man had a knack 
 for working stones, notably flints. Eventually 
 the man appeared who realised the possibility 
 of utilising metals. When once a man gave 
 his attention to the making of one group of 
 things, or one special thing, he would quickly 
 find that he could in a comparatively short 
 working day make far more of this com-
 
 CAPITAL— A FACTOR IN PRODUCTION 121 
 
 modity than was necessary for his own 
 use, and the advantages of the exchange 
 of surplus products would burst upon the 
 community. 
 
 It is difficult for us to realise the very con- 
 siderable advantages connected with the de- 
 velopment which came about with the intro- 
 duction of the system of the separation of 
 employment, the forerunner of the policy 
 which we call division of labour. 
 
 Thus the creation of capital depends on 
 thrift. A man produces more than he con- 
 sumes and is able to enjoy and utilise the 
 balance. In order that the thrift and absti- 
 nence of such an individual may be encouraged 
 and rewarded two things are necessary. First 
 of all there must be security in the possession 
 of what has been saved, and thus arise the 
 rights of private property on which progres- 
 sive communities are founded. Then, when 
 once a man finds himself secure in the pos- 
 session of what has been saved, and discovers 
 that he is able to save more than he is able 
 himself to utilise in his own activities, he may 
 receive a further reward for his thrift. For 
 he is conferring a benefit not only on himself 
 but on the whole community. And the society 
 in which his life is cast realises this and per- 
 mits him to lend at interest that part of his
 
 122 WEALTH 
 
 accumulated wealth which he cannot utilise 
 himself. Other members of the community 
 who have not sufficient capital of their own 
 to enable them to produce to the best advan- 
 tage are willing, in order to extend their 
 operations, to give the lender of capital a 
 certain proportion of the increased gain as 
 a reward for the use of his capital. 
 
 A smile has sometimes been caused by a 
 recital of what is called the cabbage-patch 
 illustration of the advantages and reward of 
 thrift in a fairly primitive country ; but under 
 very modern conditions it is quite possible 
 to see the essentials of the cabbage-patch 
 illustration in active operation. 
 
 In these days when allotments and small 
 holdings are to be found in most parts of the 
 country, an observer who takes the trouble 
 can trace out for himself with very little 
 difficulty how capital is accumulated, what 
 it does for the individual in the first place and 
 then for the community, and why payment 
 for the use of capital is justifiable. If when a 
 local authority takes over some land and 
 divides it up for allotment purposes, obser- 
 vation is kept on the development of the 
 scheme, the following course of events can 
 very frequently be noted. 
 
 There will be two holders on the same patch
 
 CAPITAL— A FACTOR IN PRODUCTION 123 
 
 of allotment, who have just managed to ob- 
 tain sufficient capital for each of them to 
 obtain the holding and to supply themselves 
 with simple tools and seeds. They both work 
 hard, and during the first season they produce 
 a crop under quite considerable difficulty. 
 Both are hard-working men, but one happens 
 to be rather more careful than the other. The 
 one man uses the whole of his crop for his 
 family. At the end of the season he has been 
 able to live better, he has been doing healthy 
 work ; he has produced a crop which has im- 
 proved the food supply of his family ; they 
 have enjoyed a more generous diet, but they 
 have consumed all that was produced. Thus 
 when the next season begins this man is in 
 the same position as when he commenced, 
 and his next season's crop, provided condi- 
 tions remain fairly constant, will be practi- 
 cally the same as the last season's. The more 
 thrifty man, however, has only consumed a 
 part of what his land has produced. He has 
 saved as much as possible and has sold it, and 
 he utilises the money obtained to provide 
 better tools, better seeds, and more efficient 
 manures. As a consequence of this he faces 
 the second season under very different cir- 
 cumstances. The work of cultivating the 
 land is not nearly so heavy, thanks to better
 
 124 WEALTH 
 
 tools ; he neither works so hard nor so long, 
 and at the end of the season, provided that 
 other conditions remain fairly constant, he 
 has a greatly increased production, and if he 
 exercised the same amount of thrift he has 
 an even larger amount of products that he 
 can sell. Thus, season after season this man 
 steadily improves his position, thrift giving 
 him capital which enables him to work his 
 land more efficiently with less labour and with 
 greater results. This shows in a simple way 
 the great functions of capital, which is to 
 assist man in his work, to make life easier, 
 and to improve conditions generally. The 
 thrifty man is getting part of the reward of 
 his thrift. By continuing the story it is pos- 
 sible to see how the full reward for his thrift 
 can be obtained. 
 
 The first man, who has not been able to 
 save, notices that the thrifty man's tools are 
 not always in use. He realises that if he can 
 have the use of them he will be able to lighten 
 his own work. He asks the thrifty man if he 
 is willing to lend him the tools when they are 
 not in use. The thrifty man may say, " I am 
 willing to lend you the tools, but since they 
 will enable you to cultivate your land better 
 with less exertion, part at any rate of the extra 
 crop produced as a result of the use of my
 
 CAPITAL— A FACTOR IN PRODUCTION 125 
 
 tools ought to be given to me for their use." 
 Thus a bargain is struck. When the thrifty 
 man is able not only to improve his own 
 methods of cultivation by means of thrift but 
 to assist another man who has not been so 
 thrifty and the other is willing to share the 
 extra production with his benefactor, then the 
 thrifty man is obtaining a full reward for his 
 thrift. 
 
 It has now been shown how capital origi- 
 nates and how it increases. The secret of the 
 creation of capital is carefulness, thrift and 
 abstinence. An individual abstains from the 
 present enjo3^ment because he is sufficiently 
 long-sighted to realise that by denying him- 
 self an immediate enjoyment he may provide 
 for the future. When once the example had 
 been set, and when under an ordered govern- 
 ment security of private possessions had been 
 guaranteed, the growth of wealth would pro- 
 ceed rapidly. The accumulations that we 
 are accustomed to at the present day are the 
 result of centuries of thrift. At first growth 
 was slow, but as industry and commerce 
 flourished and the advantages connected with 
 the employment of a large amount of capital 
 were realised, thrift was more generally prac- 
 tised, and the benefits to the community 
 became correspondingly great.
 
 126 WEALTH 
 
 At a very early period in the world's history 
 the advantages of owning wealth became 
 apparent, and the money-lender began to 
 exercise his trade. Law-givers, both religious 
 and secular, were confronted with a new 
 problem and were not slow in attempting to 
 regulate this new phenomenon. Nearly every 
 code of law contains some enactment on the 
 subject, and it is of considerable moment that 
 the teaching on the subject of the exaction of 
 interest on money loans should be understood. 
 
 In the Mosaic economy there was very 
 definite teaching on the subject. Indeed it 
 is not the least of the claims of Moses to be 
 ranked among the greatest prophets and most 
 far-seeing of law-givers that his teaching 
 differed rather considerably from that of the 
 Greeks, and contained an exception which 
 during both medieval and modern times has 
 had a very considerable and unlooked for 
 consequence. Moses enacted " Thou shalt 
 not lend upon usury to thy brother ; usury 
 of money, usury of victuals, usury of anything 
 that is lent upon usury : unto the stranger 
 thou mayest lend upon usury ; but unto thy 
 brother thou shalt not lend upon usury." 
 (Deut. xxiii. 19, 20.) 
 
 Thus a Jew could not lend at interest to a 
 brother Jew, but he could to a Gentile.
 
 CAPITAL— A FACTOR IN PRODUCTION 127 
 
 In India under the Brahmanical law lend- 
 ing by the higher castes was restricted to this 
 extent, that members of these castes could 
 not lend at interest except to wicked people 
 who were neglectful of their religious duties. 
 
 Among the Greeks, Aristotle took a stronger 
 line, and his argument is worthy of note. In 
 treating of loans of money Aristotle took up 
 the position that since metal is a sterile sub- 
 stance and is not capable of natural increase, 
 therefore, whilst if a man borrowed an orchard 
 or a flock of sheep for a certain period and 
 during that period there was a natural in- 
 crease, part of it belonged to the owner and 
 part to the borrower, with a loan of metal, 
 there being no natural increase, there was 
 nothing to divide, and thus it was unnatural 
 to exact interest on money loans. 
 
 There was also this consideration in more 
 primitive times. A man usually needed a 
 loan of money not for commercial purposes 
 but to tide him over a difficulty. If a wealthy 
 person took advantage of another man's need 
 to exact usury on a loan for such a purpose he 
 was guilty of somewhat heartless conduct. 
 The circumstances of course were greatly 
 modified when with the advent of trade and 
 commerce a loan of money might enable 
 the trader to extend his operations and make
 
 128 WEALTH 
 
 greater profits. It is curious to note that 
 when Europe became Christianised and the 
 Canonists began developing the Canon law to 
 regulate the life and conduct of Christians, 
 they too had to consider this problem. 
 Whether they knew their Aristotle better 
 than their Old Testament, or whether they 
 merely took a superficial view of the subject, 
 their decision coincided practically with that 
 of Aristotle, for they taught that the exaction 
 of interest on money loans was wrong. Thus, 
 when Europe began to settle down and in- 
 dustry and commerce developed, the Christian 
 community was harassed by the Canon Law 
 on the subject of interest. Then appeared the 
 value of the foresight of Moses in making the 
 exception which neither Aristotle nor the 
 Canonists countenanced. The Jew could lend 
 to the Gentile at interest without breaking 
 his law. There was nothing to prevent the 
 Christian from paying interest, and there was 
 nothing to prevent the Jew from lending and 
 exacting interest. Thus the Jews became the 
 money-lenders of Europe, and developed the 
 only profession that was open to them. 
 The state of affairs thus inaugurated has 
 resulted in the unique position enjoyed by 
 the Jews in the financial world. But the 
 Christians were not altogether happy on the
 
 CAPITAL— A FACTOR IN PRODUCTION 129 
 
 subject, and they made use of various fictions 
 to enable them to get round the strict letter 
 of the law. For instance, in connection with 
 the use of bills of exchange there arose the 
 question of discount. There was in such 
 transactions payment for the use of money, 
 but ultimately this was allowed, the fiction 
 being that the discount in question was a 
 payment for services rendered, namely the 
 transport of money from one place to another. 
 Or, in the case of a business where one man 
 organised, and another supplied the capital 
 but did no active work, he was allowed to 
 share in the profits, the fiction being that 
 whilst money itself was sterile, money joined 
 to human effort might be productive, and 
 therefore the man who supplied the capital 
 might take a share of the profits. As time 
 went on Christians even took part in banking, 
 and this was eventually allowed, although to 
 all appearances both the spirit and letter of 
 the law were broken. It was always recog- 
 nised that to assist the poor was a Christian 
 act, and therefore people blessed with this 
 world's goods were encouraged to help the 
 poor with money. This philanthropic work 
 was systematised by the establishment of 
 montes pietatis, religious banks. At first the 
 well-to-do lent money to these montes to 
 
 9
 
 130 - WEALTH 
 
 assist the poor and needy. The poor received 
 loans, but had to repay them, together with 
 an extra payment covering the cost of run- 
 ning the banks. When there was not suffi- 
 cient money available to supply the demand 
 of the poor, philanthropists were encouraged 
 to lend, and were paid for the use of the money 
 lent, the fiction being that such money was 
 taken from lucrative employment, and there- 
 fore the lenders were entitled to an equivalent. 
 When once this had been conceded it was 
 obvious that the flood-gates had been opened, 
 and ultimately it was impossible to prevent 
 the establishment of monies profani, secular 
 banks, run on parallel lines. At the time of 
 the Reformation the Canon Law on the sub- 
 ject still held that payment of interest on 
 money loans was wrong, and when Luther 
 was applied to on the subject he adopted the 
 somewhat equivocal attitude that though 
 theoretically the exaction of interest was 
 wrong, yet owing to man's fall, a useful ecclesi- 
 astical fiction, it should be allowed. Calvin 
 took up a much stronger and saner attitude 
 on the subject. He argued that no one denied 
 the right of the owner of a house to exact rent 
 for the use of the house, and that if that was 
 right it could not be wrong to pay for the use 
 of the money that built the house. It may
 
 CAPITAL— A FACTOR IN PRODUCTION 131 
 
 be that this common-sense teaching of Calvin 
 had something to do with commending his 
 views to the progressive commercial com- 
 munities. 
 
 As far as this country is concerned, laws 
 against usury existed from as early as the 
 ninth century, but as business and commerce 
 increased they were more honoured in the 
 breach than in the observance. Finally, 
 Jeremy Bentham's letters in defence of usury 
 made plain the inconsistency of the situation, 
 and in 1854 the remnants of this legislation 
 disappeared. 
 
 The payment of interest on money loans 
 is still denounced by some people, but in 
 practice in every civilised country it is now 
 considered lawful, and the use of capital can 
 only be obtained on two conditions. The 
 individual who wants to borrow capital must 
 be trustworthy and he must pay interest'- for 
 its use. 
 
 It has been already stated that capital as 
 a factor in production is an instrument, and 
 like all instruments it requires someone to set 
 it to work. The person who does this is the 
 organiser of industry. On him lies the re- 
 sponsibility for operating an instrument, the 
 use of which involves more than usual risks. 
 The instruments with which we are usually
 
 132 WEALTH 
 
 familiar may be used by even unskilful per- 
 sons without any great risk of damaging them. 
 For instance, a beginner at golf may obtain 
 a first-class set of clubs, and he may have a 
 very trying experience when he first essays to 
 use them, but these same clubs in the hands 
 of a competent player will perform their 
 functions unimpeded by the want of skill 
 of the previous player ; or a piano may 
 cause extreme annoyance to those who hear 
 it strummed on by a beginner, but if a 
 musician seats himself at the same piano he 
 may produce considerable pleasure. In other 
 words, the ordinary instruments of everyday 
 life are not necessarily damaged or de- 
 teriorated in any way by an inefficient user. 
 But this instrument, capital, has this extra- 
 ordinary characteristic that it is destroyed in 
 the using, and thus if any organiser makes 
 use of capital unsuccessfully the instrument 
 has disappeared in the using and the com- 
 munity suffers. It is the responsibility of the 
 organiser to so utilise capital that he not only 
 keeps in existence a body of capital equal to 
 the amount he is utilising in his business, but 
 he must make additional amounts to pay the 
 interest for the use of the capital, to repay 
 himself for the work of organisation, and he 
 should make a further sum in order to in-
 
 CAPITAL— A FACTOR IN PRODUCTION 133 
 
 crease the stock of capital in existence. Pro- 
 gress, both commercial and social, depends 
 on the increase of the capital available in the 
 community. 
 
 Thus the organiser of industry is a very 
 special and a very highly skilled worker, and 
 as such he has to be paid. The exact nature 
 of his reward has varied with the circum- 
 stances and conditions of industrial organi- 
 sation. When industry is carried on under 
 the system of capitalist employers, the reward 
 of the organiser will be his profits, but during 
 the past half century there have been develop- 
 ments in industrial organisation which have 
 very materially affected the position of the 
 organiser. Fifty years ago the reward of the 
 organiser might quite rightly have been de- 
 fined as his profits. To-day it would be more 
 true to say that he receives wages of superin- 
 tendence. Attention may be drawn to a very 
 important Act of Parliament which was 
 passed in the middle of last century — the In- 
 dustrial and Provident Partnership Act. Prior 
 to the passing of that Act, co-operation of 
 either capital or labour in production or dis- 
 tribution was not protected by the law except 
 in the case of certain favoured chartered 
 corporations. By the Act just mentioned the 
 Co-operative Societies, which had been exist-
 
 134 WEALTH 
 
 ing under considerable difficulty for the past 
 half century, had their position legalised, and 
 this led to another development which can 
 hardly have been anticipated by the advo- 
 cates of the co-operative movement. About 
 three years after the passing of the Industrial 
 and Provident Partnership Act the first 
 Limited Liability Act was passed, and by 
 1862 this new policy in industrial and com- 
 mercial organisation had taken on its final 
 form. Under limited liability a man's finan- 
 cial responsibility is limited (so far as the 
 business in which he is interested may be 
 concerned) to the nominal value of the shares 
 he holds. This has to a great extent revolu- 
 tionised the position of the organiser. The 
 board of directors takes the place of the 
 capitalist employer, and the advantages con- 
 nected with the system have to a great extent 
 resulted in eliminating the capitalist employer. 
 The change should also have another marked 
 effect ; the salaried manager of a company 
 should be regarded as a member of the indus- 
 trial army, as the highest type of skilled labour, 
 a man capable by training and experience of 
 operating the most delicate machinery. It 
 cannot be too clearly understood that the 
 labour force of the community is one and in- 
 divisible, and any suggestion that there is no
 
 CAPITAL— A FACTOR IN PRODUCTION 135 
 
 identity of interest between the various 
 grades of the industrial force should be 
 viewed with the strongest suspicion. Indeed, 
 it is usually the mark of an attempt to create 
 industrial friction and cause inharmonious 
 working amongst the factors of production. 
 It is not usually realised that the experience 
 required successfully to plan and equip a 
 factory and organise it in all its departments, 
 exercising the law of substitution whereby 
 the right proportion of the three factors are 
 set to work for a given object, and then the 
 knowledge of the raw material markets, and, 
 finally, the ability to place the finished pro- 
 duct in either the home or the foreign markets 
 requires a skill and an ability far in excess of 
 that required for the working of even the most 
 complicated piece of machinery used in the 
 actual process of manufacture. The brain 
 power required for this work may not be of a 
 very high order. That is a point which is 
 arguable. But it is of a very rare order, and 
 as a consequence the exceptional man who 
 can utilise capital successfully in the work of 
 production is a man who can command ex- 
 ceptional terms for his services. Indeed, in 
 these days of mass production, which involve 
 the use of very large amounts of capital and 
 a wide knowledge of world conditions, this
 
 136 WEALTH 
 
 type of labour is the most highly paid in the 
 world. 
 
 The modern industrial company has to pay 
 the factors in production. For the use of land 
 there is rent, for the use of labour there is 
 wages or salaries, and for the use of capital 
 there is interest. 
 
 There is, however, another phenomenon 
 that requires consideration. At stated periods 
 the modern company declares dividends, and 
 these dividends vary very greatly in amount. 
 There are some businesses which are engaged 
 in working new processes, or new patents 
 which may have been developed at consider- 
 able cost, and sometimes at a very great risk 
 of failure. If successful, these companies 
 sometimes divide what appear to be excessive 
 profits, but before deciding that any profit is 
 excessive the whole of the conditions under 
 which that profit has been earned ought to 
 receive full and fair consideration. There are 
 other firms which have earned a reputation, 
 and by means of their trade marks or special 
 brands are able to make an additional profit 
 as a result of this well-earned reputation. 
 Such businesses as have just been mentioned 
 require special treatment from the economist. 
 In this short essay attention will be limited 
 to the dividend and profits of ordinary com-
 
 CAPITAL— A FACTOR IN PRODUCTION 137 
 
 petitive businesses connected with staple 
 commodities. In these the average profit 
 made is as a rule not excessive, but as in the 
 case of land, some of which is on the margin 
 of cultivation and some of which, owing to its 
 extra fertility or advantageous position, com- 
 mands a greater rent, so there are manufac- 
 turers who are on the margin of production 
 and merely make a bare living, whilst there 
 are others who through successful organisa- 
 tion make comparatively great profits. The 
 published results of limited liability companies 
 show that some make hardly any profit, whilst 
 others pay handsome dividends. In any one 
 industry, indeed, there will be found a gradu- 
 ated scale of profits between these extremes. 
 In an industry where labour is well organised 
 all the firms may be making similar commodi- 
 ties and working with union labour, which 
 means that the nominal wages paid are the 
 same. It is sometimes thought that the com- 
 paratively big profits made by some com- 
 panies are made either at the expense of the 
 wage earner employed or at the expense of 
 the consumer, but a consideration of the con- 
 ditions of these industries shows that such is 
 not the case. The large profits made in the 
 production of ordinary staple commodities 
 under competing conditions are the result of
 
 138 WEALTH 
 
 successful organisation and are not due to the 
 manual labour employed, nor does the con- 
 sumer pay for them in the price of the com- 
 modity. The demand of the market is such 
 that the producers on the margin, although 
 making but a bare living, are tempted to con- 
 tinue supplying it. With increasing demand 
 the margin tends to fall. The price of the 
 commodity on the market depends on the 
 cost of production by the marginal producer, 
 and it is owing to the demand for his services 
 that the thoroughly efficient organiser is able 
 to make a greater profit. When demand 
 decreases and the margin shrinks the profits 
 of the more efficient producer tend to fall. 
 So far as the wage-earner is concerned, 
 though the efficient and the less efficient 
 organiser may be paying the same nominal 
 rates, in reality the employees of the efficient 
 employer are usually better off than those of 
 the less efficient, because conditions of work 
 are better, and there is greater regularity in 
 the employment, with the result that the real 
 wages of the labour employed are greater. 
 This result leads to the conclusion that in the 
 interest of both worker and consumer the 
 object of the community should be to dis- 
 courage less efficient producers, and yet there 
 are some people who advocate limitation of
 
 CAPITAL— A FACTOR IN PRODUCTION 139 
 
 profits which, if the above argument be 
 tenable, would only result in penalising the 
 skilled organiser and in putting a premium 
 on inefficiency. There has already been con- 
 siderable experience of what results from the 
 policy of limitation of profits in causing ex- 
 travagance and inefficiency in management. 
 The history of such undertakings as the Dock 
 Companies of London, only to mention one 
 instance, is evidence of this. The whole argu- 
 ment shows the necessity for entrusting the 
 wealth of the community, which is to be dedi- 
 cated to the work of production, to the most 
 capable organiser. Capital should be in the 
 right hands in the interests of all concerned, 
 including both workers and consumers. 
 
 Just one word more as to profits. It is 
 sometimes thought that the amount of divi- 
 dend paid on capital invested in industry 
 should be but little in excess of the normal 
 market rate for money, and that any addi- 
 tional sum available for distribution should 
 be devoted either to the worker or to the 
 consumer. From the argument that has just 
 been elaborated it will be realised that in the 
 first place if there were no inducement to 
 make this additional sum there might be 
 nothing to divide between the two classes 
 mentioned, or, indeed, that a very different
 
 140 WEALTH 
 
 result might be experienced, namely, that the 
 discouragement of skilled management would 
 lead to higher prices and possibly lower wages, 
 or to inferior conditions of employment. The 
 gross profits of a successful business should 
 be regarded as consisting of first, the normal 
 rate of interest on money in an absolutely 
 safe investment, then an extra amount which 
 would represent an insurance against risk 
 commensurate to the risk involved in invest- 
 ing capital in a given business ; there should 
 also be a further amount that would be pure 
 economic profit, which the skilled organiser 
 is willing to divide with those who share the 
 responsibilities of the business with him by 
 embarking their capital in it and as a reward for 
 taking their part in the financial risk. If this 
 economic profit in ordinary competing busi- 
 ness be injudiciously interfered with the ill- 
 effects on industry can hardly avoid being 
 serious. 
 
 At the beginning of this section there was 
 traced out the origin of capital, and it was 
 shown to be due to thrift and abstinence on 
 the part of the individual or community. 
 The illustration made use of was that of a poor 
 man working on an allotment. Such thrift is 
 of the greatest value to the community, but 
 some of the great accumulations of capita
 
 CAPITAL— A FACTOR IN PRODUCTION 141 
 
 are in the hands of wealthy individuals, and 
 it may be asked is it correct to talk about 
 the abstinence of the wealthy man ? Indeed, 
 it has sometimes been asserted that the 
 wealthy man exploits the poorer members 
 of the community and lives on their labour. 
 This position should be considered, and an 
 attempt should be made to estimate to what 
 extent the community is indebted to wealthy 
 people who invest their wealth either in State 
 or municipal loans, or in industrial and com- 
 mercial enterprises. Take as an illustration 
 an individual who receives intimation that a 
 wealthy relative has died and has left him a 
 fortune — say £100,000. Under present con- 
 ditions, that money becomes the property of 
 the legatee, and it is his to do with as he likes. 
 He may consume it entirely on his own plea- 
 sures. He can have a comfortable house, and 
 can give himself up to a round of gaiety, with 
 the result that his legacy may be consumed 
 in a few years, but during that time he may 
 have what is sometimes looked upon as a 
 thoroughly enjoyable life. He may give him- 
 self up entirely to the selfish enjoyment of 
 his good fortune. On the other hand, if he 
 be a thrifty soul, he may decide to forgo the 
 pleasure of thoroughly enjoying the whole of 
 the legacy in a short time, and he may decide
 
 142 WEALTH 
 
 that he will invest the money and live on a 
 comparatively small annual sum. On the 
 advice of his stockbroker he may invest his 
 money in a carefully selected number of in- 
 dustrial companies. He may get on an aver- 
 age eight or ten per cent for his money, and 
 he has an annual income which, so long as 
 these companies remain successful, is avail- 
 able for himself and for those who come after 
 him. What is the result of his decision to 
 postpone the immediate enjoyment of his 
 legacy ? The result is that the community 
 get the advantages of this capital, and the 
 fund available for employment is increased 
 to that extent. He takes his risk of these 
 companies being successful or otherwise. The 
 successful companies do not divide up the 
 whole of their gross profits, but they set aside 
 annually a certain amount for keeping their 
 plant and equipment generally efficient and 
 up-to-date. Thus again there is abstinence. 
 Another extra sum which might be enjoyed 
 is deliberately set aside with the object of 
 making the business permanent. In the first 
 instance the individual forgoes the immediate 
 enjoyment of a large sum, the use of this he 
 hands over to the community, and in return 
 he gets an annual income. Secondly, that 
 annual income is decreased to the extent that
 
 CAPITAL— A FACTOR IN PRODUCTION 143 
 
 arrangements are made for keeping the capital 
 in the business effective. This is a justifica- 
 tion for continuous profits or permanent in- 
 terest. An individual frequently acts in this 
 way. If the community were to take over 
 the wealth in question, would it act with 
 equal foresight ? Would the socialisation of 
 capital result in the same efficiency as is the 
 general characteristic of the present system ? 
 Thus, the gibe that is sometimes made at 
 what is derisively called the abstinence of the 
 millionaire is seen to have but little founda- 
 tion. The wealthy man who invests his 
 money rightly benefits the whole community, 
 and he has a right to expect a return for the 
 benefits conferred.
 
 INDEX 
 
 Adam Smith, I, n 
 
 on division of labour, 
 
 105 
 
 America, practical develop- 
 ment of industries of, 89 
 
 Banks, religious, 129 
 
 — secular, 130 
 Barter, 6 
 
 Bills of exchange, 129 
 
 Capital, 22, 25 
 
 — creation of, 121 
 
 — destroyed in using, 132 
 
 — an instrument, 116 
 
 — in relation to labour, 78 
 
 — in relation to law of 
 substitution, 27 
 
 Capital, in relation to wages, 
 
 81 
 City state, 8 
 Commerce, 8 
 
 — in connection with labour, 
 67 
 
 Co-partnership, 100-102 
 Credit, 7 
 
 Diminishing returns, law of, 
 
 32 
 Discount, 129 
 Dividends, 136 
 
 Economist, 7, 16, 21 
 
 — American, on law of di- 
 minishing returns, 33 
 
 Economists, early English 
 definition of productive 
 labour, 66 
 
 Economic laws, 26, 29 
 
 — Rent, definition of, 48 
 
 nature of, 45-47 
 
 Economy, Mosaic, 126 
 Employer, 19 
 
 — in considering wages, 99 
 
 — American, 90 
 Exchange, bills of, 129 
 
 — 5. 0, 17 
 
 — 18 
 
 Gang system, 93 
 Grading system, 91 
 
 Hunting stage, 3, 6 
 
 Industrial and Provident 
 
 Partnership Act, 133 
 Industrial tours, problems 
 
 connected with growth of, 
 
 112 
 Industries, interconverti- 
 
 bility of, 106 
 Industry, limitations of, 80 
 
 — payment of organiser of, 
 
 133 
 
 Interest, payment of, on 
 
 money loans, 131 
 
 John Stuart Mill, 15 
 J. S. Mill on limitations of 
 industry, 80 
 
 H5
 
 146 
 
 WEALTH 
 
 John Stuart Mill on law of ' 
 diminishing returns, 32 
 
 Labour, 19, 21, 25 
 
 — definition of, 62 
 
 — division of, 105 
 
 — division of, in relation to 
 massing of, 108 
 
 Labour, division of, in 
 relation to small factories, 
 
 Labour as affected by law 
 
 and custom, 104 
 Labour in relation to law of 
 
 substitution, 27, 29 
 Labour, share of production 
 
 due to, 73 
 Labour unrest, 82 
 
 — unskilled, in connection 
 with machinery, no 
 
 Land, 31 
 
 Limited Liability Act, 134 
 
 Malthus on iron law of 
 
 wages, 79 
 Management, American 
 
 scientific, 90 
 Manufactured goods, 9 
 Marshall on industry, 106 
 Mercantile system, 9 
 Metayer system, 51 
 Money, 6 
 
 — lender, the, 126 
 
 — lending, Brahmanical law 
 of, 127 
 
 Money in relation to price, 
 
 43 
 
 Money loans, 7 
 
 Navigation laws, 10 
 
 Pastoral period, 3 
 Physiocrats, 11 
 
 Physiocrats' definition of 
 
 labour, 64, 65 
 Physiocrats and Malthus on 
 
 wages question, 113 
 Political economy as the 
 
 dismal science, 77 
 Pottery industry, standing 
 
 joint committee of, 86 
 Production as affecting the 
 
 law of diminishing returns, 
 
 Production, natural laws of, 
 
 23 
 
 Profits, 26 
 
 — average, in connection 
 with dividends, 137 
 
 Profits, tendency to fall, 138 
 
 Rates, local, 57 
 
 — in relation to rent, 58 
 Rent, agricultural, 39, 41, 52 
 
 — causes of payment, 49 
 
 — economic problems of, 44 
 of a house, 61 
 
 - — house, 52 
 
 — law of, 50 
 
 — theory and practice not 
 in accord, 50 
 
 Rents and rates (urban), 52 
 Ricardo, 40 
 
 — on law of rent, 50 
 
 Scientific management, 
 
 American, 90 
 Slavery, 8 
 Smith, Adam, 1, n 
 Speeding-up policy, 98 
 Standardisation of process, 
 
 114 
 State Socialism, 89 
 Substitution, law of, 27, 
 
 28-30 
 Syndicalism, 88
 
 INDEX 
 
 147 
 
 Trade, 8 
 
 Trade Unions, 19 
 Trade Unionism on its trial, 
 87 
 
 Unearned increment, 46 
 Unproductive consumption 
 
 due to war, 84 
 Usury, 7 
 
 — laws against, 131 
 
 — Mosaic, 126 
 
 Value, 16, 18 
 Village, 41 
 
 Wages, 26 
 
 — as affected by industry, 
 80 
 
 Wages, iron law of, 79, 86 
 
 — no necessary relation to 
 capital, 81 
 
 Wages, nominal, 100 
 
 — piece, 94 
 
 — problem of, 75 
 
 — system, definition of, 94 
 
 — theory, J. S. Mill, 80 
 
 — time, 94 
 
 — Walker's theory, 81 
 Walker theory of wages, 81 
 Wealth, 1, 2, 11, 12, 14, 15, 
 
 20, 24, 25 
 Wealth in relation to capital, 
 
 117 
 Wealth, public, 117 
 Wealthy man, position of, 
 
 141
 
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