VALUE AND DISTRIBUTION- AN HISTORICAL, CRITICAL, AND CONSTRUCTIVE STUDY IN ECONOMIC THEORY ADAPTED FOR ADVANCED AND POST-GRADUATE WORK BY CHARLES WILLIAM MACFARLANE, PH.D. SECOND EDITION PHILADELPHIA J. B. LIPP1NCOTT COMPANY 1911 ^x^ \^ ^O~ COPYRIGHT, 1898, BY J. B. LIPPINCOTT COMPANY. MAIN LIBRARY ELECTROTYPED AND PRINTED BY J. B. LIPPINCOTT COMPANY, PHILADELPHIA, U.S. A. THIS BOOK IS GRATEFULLY DEDICATED TO MY FRIEND AND FORMER PRECEPTOR DR. EUGEN VON PHILIPPOV1CH PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF VIENNA WHO, WHILE IN NO WAY RESPONSIBLE FOR THE OPINIONS HEREIN EXPRESSED, MAY YET FIND IN THEM SOME REFLEC- TION OF HIS OWN CATHOLIC VIEW OF ECONOMIC PHENOMENA 404156 PREFACE last quarter Q the nineteenth century has 1 witnessed more than one noteworthy advance in economic theory. Some of this work has been embodied in permanent form, as in the publications of the Austrian school of economists ; much of it, however, is scattered through various magazines and journals, and its importance is unrecognized because no effort has as yet been made to bring it together as a coherent whole. One of the purposes of the present volume is to give more permanent form to this scattered work and to bring it, as well as that of the Austrian economists, into some sort of co- relation with the work of the so-called orthodox school of economists. Again, it will be found that in the endeavor to give coherence to the work of previous writers certain concepts or theories are de- veloped that have not been clearly stated elsewhere, concepts which more or less seriously modify the hitherto accepted views of value and distribution. The fact from which all studies of distribution must start is the price of commodities, and what we have to determine is how this price is divided among the several parties to the transaction. From this it follows that any adequate study of distribution PREFACE. must be prefaced by an examination of the phe- nomena of value and price. In keeping with this I have devoted the first part of the present volume to an attempt to answer the vexed question, What do we mean by value and price ? In the discussion of the problem of distribution, the question of the equity of the distribution has been consciously arid purposely avoided. The im- portance of this phase of the subject cannot well be exaggerated ; but the laws according to which the social product is distributed should first be clearly defined before we attempt to determine whether or not this distribution is equitable. Nothing is gained either by confounding the two problems or by in- verting the order of the inquiry. In the present volume I shall strictly confine myself to the first of these problems, or to a purely theoretic study of the laws under which the several shares in distri- bution are determined. In the earlier days of the present investigation I regarded it strictly as a monograph, and addressed myself to those who are familiar with the whole range of economic theory. As the work progressed, however, it seemed that by some modifications and additions it might be made available for the ordinary advanced student or for those who had only been over the ground covered by the usual text-book. With this larger audience in mind, I was persuaded to adopt the topical form for the presentation of the subject. The shifting from one audience to PREFACE. yii another during the progress of the work has re- sulted in an unevenness which could only be elimi- nated by a careful rewriting of the entire book. The pressure of other interests renders this practi- cally impossible. In the desire to secure a clear and coherent view of a rather wide range of economic phenomena, I have been compelled to ignore many details whose discussion, though interesting and important, might confound the reader, or at least obscure his view of the main lines of the argument. Again, it may be that a greater wealth of illustrations would have helped rather than hindered the argument. If so, it is an omission which the intelligent teacher can readily supply. In conclusion, I have to thank Professor F. W. Speirs, of the Philadelphia Manual Training School ; Professor H. R. Seager, of the University of Penn- sylvania, and Professor John L. Stewart, of Lehigh University, for a careful reading of the manuscript and for valuable criticisms and suggestions. Again, I have especially to thank Professor H. C. Whitaker, of the Philadelphia Manual Training School, who spent several weeks with me in a revision of the original manuscript, thus enabling me to see all parts of the argument through the eyes of another. It was at his suggestion that the topical form was adopted. This has undoubtedly added much to the clearness of the entire argument. CONTENTS. INTRODUCTION. PAGE A necessary relation exists between the economic theories and the economic phenomena of a time and people xix Contrast between the economic phenomena in England during the first and last quarters of the nineteenth century xx The corresponding change in economic theory is not yet complete . xxii PART I. VAIAJE. CHAPTEE I. THE COST THEORY OP VALUE. I. THE EARLIER COST THEORY. 1. Paradoxes of value explained by the Cost Theory 20 2. Free goods eliminated from economic consideration 20 3. Scarcity goods eliminated because of their rare occurrence ... 21 4. The Law of Cost only applicable to freely reproducible goods . 21 II. THE MARGINAL COST THEORY. 5. The graphical representation of Marginal Cost Theory .... 22 6. Ricardo's statement of the Marginal Cost Theory . . . CHAPTER II. CONDITIONS UNDER WHICH THE COST THEORY FAILS. I. THE CONTENTION OF THE AUSTRIAN ECONOMISTS. 7. Exceptions admitted by Kicardo 25 8. Additional exceptions 26 II. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS FAILS. 9. Marginal Cost Theory holds for products of better land, etc. . . 27 10. Marginal Cost Theory holds for products of fixed capital ... 27 III. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS MAY BE SUSTAINED. 11. Fatents, Tariffs, etc 28 ix X CONTENTS. CHAPTEE III. THE UTILITY THEORY OF VALUE. I. THE EARLIER UTILITY THEORY. PAGE 1^ The failure of the Earlier Utility Theory to explain the para- doxes of value 30 II. THE MARGINAL UTILITY THEORY OF VALUE. 13. Gossen and his work 32 14. Jevons, Walras, and Menger 34 15. Bdhm-Bawerk's statement of the Theory of Marginal Utility . 35 16. Graphic illustration of the Marginal Utility Theory 37 (a) Value per Unit versus Total Value 38 (6) Total Value versus Total Utility 38 17. The Marginal Utility Theory and the paradoxes of value ... 39 (a) Why are air and water valueless, and why is iron of less value than gold ? 39 (b) Why did the Dutch East India Company destroy a por- tion of their crops ? 40 CHAPTER IV. CONDITIONS UNDER "WHICH THE UTILITY THEORY PAILS. 18. Bohm-Bawerk's admitted exceptions to the Law of Marginal Utility 43 19. How Bohm-Bawerk would escape from the consequences of these admissions 45 (a) The Elimination of the marginal pair of sellers ... 46 (6) The Elimination of one of the two marginal buyers . . 47 20. The defect in the analysis of the Austrian economists 48 (a) The Marginal Utility Theory rests upon the unwar- ranted assumption of free competition among con- sumers 48 (b) Marginal Utility Theory fails because the marginal consumer frequently secures a surplus 50 CHAPTER V. THE MONOPOLY THEORY OF PRICE. I. THE PRICE OF A SINGLE GOOD. 21. Normal Value and Price 66 22. Other conditions under which Marginal Utility determines Price 66 23. The diagram of the Austrian economists ' 68 24. Diagram of the Monopoly Theory of Price 58 II. THE PRICE OF COMPLEMENTARY GOODS. 25. The confusion in the Austrian treatment of complementary goods 60 26. Complementary goods an ordinary case of scarcity price ... 61 CONTENTS. xl CHAPTBE VI. VALUE AND PRICE. PAGE 27. Subjective Exchange Value is not a primary phenomenon of value ........................ 64 28. Use and Exchange Value versus Value and Price ...... 65 CHAPTEK VII. COST AND PRICE. I. THE LAW OF COST AND THE PRICE OF FREELY REPRO- DUCIBLE GOODS. 29. The Law of Cost is here an exact law ............ 68 30. Cost is here a direct cause of Value . v ............ 69 II. THE LAW OF COST AND THE PRICE OF SCARCITY GOODS. 31. A substitute always possible ............... 71 32. The substitute is in last resort a freely reproducible good ... 73 CHAPTEE VIII. DISTRIBUTION AND THE THEORIES OP UTILITY, VALUE, AND PRICE. 33. Society is interested in the increase of Total Utility ...... 74 34. The individual interested in the increase of Total Value .... 76 35. Disadvantages of the orthodox attitude ........... 77 36. Advantages and disadvantages of the Austrian attitude .... 78 II. DISTRIBUTION. BOOK L RENT. CHAPTER I. THE RENT OP LAND. I. FUNDAMENTAL PROPOSITIONS. 37. An Agrarian doctrine 83 38. Kent does not enter into the determination of price 84 39. Diagram of rent 85 40. Kent due to difference in fertility and distance from market . . 87 41. Law of Diminishing Returns 88 42. Effect of Improvements 88 CONTENTS. II. HISTORICAL DEVELOPMENT OF THE DOCTRINE OF RENT. PAGE 43. Adam Smith 89 44. Criticism of Smith 90 45. Anderson 9 91 46. Malthus * 95 47. West 96 48. Eicardo 97 49. Criticisms of Kicardo 99 CHAPTEE II. THE GENERAL DOCTRINE OF RENT. I. THE DOCTRINE IN ENGLISH ECONOMICS. 50. Whately on the General Doctrine of Eent 102 61. J. S. Mill on the General Doctrine of Kent 103 62. Walker on the Kent of entrepreneur 104 53. Marshall on the Kent of capital . . 105 54. Clark and Hobson on the General Doctrine of Rent 106 II. THE DOCTRINE IN GERMAN ECONOMICS. 65. Busch on the Kent of labor 107 66. Hufeland on the General Doctrine of Rent 108 (a) Rent of land 108 (b) Rent of capital 109 fe) Rent of labor 109 (d) Kent of unternehmer 109 67. Mangoldt on the General Doctrine of Rent Ill (a) Rent of land 112 (6) Rent of capital 112 (c) Rent of labor 113 (d) Rent of unternehmer 114 68. Schaffle on the General Doctrine of Rent 116 69. The Austrians on the General Doctrine of Rent .... ,117 BOOK H. PROFIT. CHAPTEE I. PROFIT A PRICE-DETERMINING SURPLUS. I. RENT AND PROFIT AND THEIR POINTS OF DIFFERENCE. 60. Rent an individual, Profit a group surplus 122 61. Rent a differential, Profit a marginal surplus 122 62. Rent a limited monopoly, Profit a monopoly surplus 123 63. Rent a price-determined, Profit a price-determining surplus . . 124 64. Competing differential concepts 126 II. INTEREST AND PROFIT AND THEIR POINTS OF DIFFERENCE. 65. Interest a normal, Profit a monopoly surplus 127 CONTENTS. CHAPTEE II. PROFIT AND THE CONCEPT OF A NO-BENT LAND. PAGE 66. Mill's admissions and their logical result .......... 129 67. Mill inadvertently includes a marginal surplus, or Profit under Rent . . . .* ..................... 131 68. Eent the differential surplus in a single industry ....... 132 69. Hobson's objections to this use of the term Rent ....... 133 70. Objections to Walker's use of the term Profit ........ 135 71. The suggested use of the terms Rent and Profit . . t , , . . 137 BOOK in. INTEREST. CHAPTER I. EARLIER IDEAS IN REGARD TO INTEREST. I. USURY IN LESS DEVELOPED SOCIETIES ; INTEREST IN HIGHLY DEVELOPED SOCIETIES. 72. Aristotle 139 73. Calvin 140 74. Locke 141 II. INTEREST A RETURN FOR THE USE OF WEALTH AND NOT FOR THE USE OF MONEY. 75 Hume 141 76. Adam Smith 143 CHAPTER II. THE EXPLOITATION THEORY OF INTEREST. 77. The contention that the value of all goods is measured by quan- tity of labor 146 (a) Ricardo and the case of scarcity goods 146 (6) What labor is the standard of value ? . 149 78. Contention that capital is notun original and independent source of value 152 (a) Natural goods are sometimes original powers 152 (b) Capital an independent power 153 79. The contention that the whole product belongs in equity to the laborer 154 CHAPTER III. THE USE THEORY OF INTEREST. 80. Menger's statement of the Theory 160 81. Criticism of Menger's statement 162 XIV CONTENTS. CHAPTEK IY. THE EARLIER PRODUCTIVITY THEORY OP INTEREST. I. CONTINENTAL WRITERS FAIL TO SEE THAT INCREASE IN PRODUCT DOES NOT NECESSARILY MEAN AN INCREASE IN VALUE. PAGE 82. Say 164 83. Kiedel 165 II. ENGLISH WRITERS SAW THAT INCREASE IN PRODUCT DOES NOT NECESSARILY MEAN AN INCREASE IN VALUE, BUT FAILED TO SUPPLY THE ELLIPSIS IN THE ARGUMENT. 84. Lauderdale 168 86. Malthus 170 86. Ellipsis in the argument of the advocates of productivity . . . 171 III. INCREASE IN PRODUCT IS NOT A NECESSARY CONDITION OP INTEREST. 87. Bohm-Bawerk fails to recognize the cause of the confusion . . 171 CHAPTEK Y. THE ABSTINENCE THEORY OP INTEREST. 88. Senior's statement of the Theory 173 89. Lasalle's philippic 176 90. Bohm-Bawerk's contention 176 91. Reply to Bohm-Bawerk 176 92. Another objection to the Abstinence Theory 177 93. Reply to this objection 179 94. Still another objection to the Abstinence Theory 180 CHAPTER VI. INTRODUCTION TO THE EXCHANGE THEORY OP INTEREST. 96. Capital is concerned with time utilities 183 96. The rationale of machine methods of production 186 97. Machine production not a necessary condition of interest . . . 186 98. The definition of capital 187 99. Difficulties encountered by this definition 188 CHAPTER VII. THE EXCHANGE THEORY OF INTEREST. I. PRESENT GOODS ARE WORTH MORE THAN FUTURE GOODS. 100. Differences in provision and underestimate of the future . . . 192 101. Roundabout methods of production 193 102. Technical superiority of present goods 193 CONTENTS. XV CHAPTEE VIII. CRITICISM OP THE EXCHANGE THEORY OP INTEREST. I. ARE PRESENT GOODS WORTH MORE THAN FUTURE GOODS? PAGE 103. Admitted exceptions to this contention 195 104. Additional exceptions 196 105. These exceptions are not fatal to the Exchange Theory of Interest 198 II. ABSTINENCE IN THE EXCHANGE THEORY OF INTEREST. 106. Interest measured by marginal abstinence 200 107. Abstinence recognized in the Exchange Theory 200 (a) Difference in provision 200 (b) Underestimate of the future 201 III. IS THE TECHNICAL, SUPERIORITY OF PRESENT GOODS A NECESSARY CONDITION OF INTEREST? 108. Technical superiority an increase in quantity of product . . . 202 109. Defects in Bohm-Bawerk's reasoning 203 (a) Technical superiority not an independent cause of value .... 204 (6) The technical superiority of present goods does not necessarily result in an increase in value 206 (c) Technical superiority of present goods is not an essen- tial condition of interest ... 210 CHAPTEE IX. THE MARGINAL, PRODUCTIVITY THEORY OP INTEREST. I. COMPETING CONCEPTS OF CAPITAL. 110. Capital as a sum of concrete commodities 214 111. Capital as a mobile, homogeneous fund 214 II. RATE OF INTEREST FIXED BY MARGINAL PRODUCTIVITY. 112. Clark on the mobility of capital 217 CHAPTEE X. THE NORMAL- VALUE THEORY OP INTEREST. I. INTEREST A PROBLEM IN NORMAL VALUE. 113. The source of Bohm-Bawerk's error 223 114. Bohm-Bawerk's confused recognition of the part played by abstinence 225 115. Statement of the Normal-Value Theory 228 XV i CONTENTS. BOOK IV. WAGES. CHAPTBE I. THE WAGES FUND DOCTRINE. I. THE EARLIER ADVOCATES OF THE THEORY. 116. Adam Smith ...................... 232 1}7. James Mill ....................... 233 118. Kicardo ......................... 233 II. THE LATER ADVOCATES AND CRITICS OF THE THEORY. 119. J. S. Mill's statement of the theory ............ 235 (a) Mill's contention that Trades Unions cannot increase wages ..................... 236 120; Longe's criticism of Mill ................. 237 121. Thornton's theory of price and wages ........... 238 122. The importance of Thornton's theory of price not generally recognized ..................... 241 123. One source of confusion in Thornton's discussion ...... 244 124. There is no fund set apart for the payment of wages ..... 247 125. Mill's reply to Thornton .......... ...... 250 126. Wages are affected by the productivity of labor ....... 252 127. Cairnes's attempt to rehabilitate the doctrine ........ 253 128. The element of truth in the Wages Fund Doctrine ..... 254 129. The source of the confusion ................ 255 CHAPTER II. THE RESIDUAL CLAIMANT THEORY OF WAGES. 130. Profits the residual share according to the earlier economists . 256 181. Cairnes's statement of the Kesidual Claimant Theory of Wages 257 132. Walker's Kesidual Claimant Theory of Wages ....... 258 133. Criticism of Walker's theory ............... 260 CHAPTER III. THE PRODUCTIVITY THEORY OP WAGES. I. THE GENERAL PRODUCTIVITY THEORY OF WAGES. 134. Walker's contention 265 II. MARGINAL PRODUCTIVITY THEORY OF WAGES. 135. Concrete and abstract concepts of labor 267 136. The abstract fund remains constant while concrete forms change 269 137. The rate of wages determined by the marginal productivity of labor . . , , , .270 CONTENTS. XV11 III. THE ELEMENT OF TRUTH IN THE WAGES FUND DOCTRINE. PAGE 138. Capital constant, population increasing 271 139. Population constant, capital increasing 272 140. A certain best ratio of capital and labor 272 141. Application to the Wages Fund Doctrine 273 IV. OBJECTIONS TO THE MARGINAL PRODUCTIVITY THEORY. 1 42. What determines the margin of production ? What limits the^" "* | supply of labor? I 274 CHAPTEE IV. THE MALTHUSIAN THEORY OF WAGES. I. THE EARLIER MALTHUSIAN THEORY OF WAGES. 143. The pressure of population upon subsistence 276 144. The function of misery and vice 277 145. The standard of life 277 146. The pressure not remote but immediate 278 147. The issue between Malthus and Godwin 279 II. THE LATER MALTHUSIAN THEORY OF WAGES AND THE CON- DITIONS OF PROGRESS. 148 Virtue and intelligence as checks to population 281 149. Increase of the food supply an essential condition of progress . 282 150. Manufactures and an advancing standard of life 283 151. Progress depends on the supply of capital as well as on the supply of land 284 152. Malthus 's changed view of society 287 153. The unfair treatment of Malthus . . 288 CHAPTEE Y. THE NORMAL VALUE THEORY OF WAGES. I. THE GAIN AND ABSTINENCE OF LABOR. 164. Clark's failure to recognize the abstinence of labor 291 165. Patten on the abstinence of labor 293 156. Clark's restatement of Patten's contention 294 II. A NORMAL VALUE OR AN EXCHANGE THEORY OF WAGES. 157 The time utilities of labor 297 158. The exchange by the laborer of present for future goods . . . 299 159. Confusion in Patten's use of the terms cost and surplus . . . 299 160. The modification of Patten's diagram 302 161. The Normal Value Theory only" applies to normal conditions in a progressing society 302 162. Failure to secure this gain due to loss of mobility ,,,... 304 xviii CONTENTS. KESUM& I. VALUE. PAGE 163. The Cost Theory and its failure 305 164. The Utility Theory and its failure 305 165. Price determined between limits 306 166. Cost and price 306 II. DISTRIBUTION. 167. Kent 307 168. Profit 308 169. Interest . . . 309 170. Wages 310 171. Factors of production versus different forms of surplus . . . . 312 172. An essentially different scheme of distribution from that pro- posed by Clark 316 INTRODUCTION. IT has frequently been remarked that there is a necessary correspondence between the economic theo- ries and the economic phenomena of a time and people. The economist, like every other purveyor of truth, is, to a greater or less extent, " cribbed, cabined, and confined" by the facts of his immediate environment. Strive as he may to forecast the fu- ture, his speculations seldom far outrun the progress of material phenomena. Indeed, there is always a grave danger that his theories will crystallize in such fixed and definite forms that they will fail to respond to the never-resting progress of the events they are supposed to explain. Nowhere does this find more apt illustration than in the utter lack of correspond- ence between theory and phenomena in the third quarter of the nineteenth century. Again, in the almost revolutionary change in the whole status of the theories of value and distribution which the last quarter of the century has witnessed, we have a belated attempt to bring our theories into some sort of harmony with the existing facts. The most cursory examination of the economic conditions of the first and last quarters of the nine- teenth century will reveal a sharp contrast in the xix XX INTRODUCTION. tendency of the phenomena of the two periods. For example, in England, in the first quarter, we find all restrictions of trade giving way before the industrial revolution that was then at its height. The intro- duction of steam and the substitution of the factory for the home system of industry had well-nigh com- pleted the destruction of the old craft and guild system. The growing power of the new middle class that had arisen with the development of the factory system was now asserting itself. It insisted upon the abolition of the corn laws and, secure in its estab- lished industries, was willing to accept a gradual re- duction of import duties. In a word, the English economists of the early part of the century were con- fronted by the phenomena of the rapid breaking down of all those trade restrictions which time and custom had rendered sacred. It is therefore not strange that they should have concluded that the day was not far distant when the ideal of free com- petition would be realized in the actual facts of in- dustrial life. Indeed, such progress had been made in this direction by the middle of the century that J. S. Mill writes, "scarcity values are rather con- ceivable than actually existing." The last quarter of the century has witnessed a rude awakening from this pleasant dream ; the ten- thousand-acre farms, the organization of labor in large and compact masses, the aggregation of great masses of capital into an even more complete soli- darity, all evidence the utter collapse of that ideal INTRODUCTION. XXI of free competition which Mill thought was about to be realized. As another has well said, " Just when the disappearance of the last vestige of a volitional restriction of competition was looked for, .and the universal application of the ' rule of the market' was confidently expected, we see a wide-spread revival of economic methods and agencies over which ' The Wealth of Nations' was read as a funeral service.-" * This rise of the modern system of labor organiza- tions, trusts, etc., has compelled a radical change in the attitude of economists towards the theories of value and distribution. They no longer hold that scarcity values are " rather conceivable than actually existing." Indeed, Mill's contention might well be reversed, since scarcity goods are the rule rather than the exception. It is the recognition of this fact that has constrained many economists to abandon the Cost Theory of Value and to substitute for it the Marginal Utility Theory of Value. It is, however, strange that the most strenuous advocates of the Marginal Utility Theory of Value have failed to see that this recognition of the general prevalence of scarcity values must compel the re- adjustment of our theory of distribution. The old scheme, which divided the social surplus into rent, wages, and interest, was based on the assumption of free competition. If this assumption does not cor- * See The Modern Distributive Process, by Clark and Gid- dingn, p. 20. INTRODUCTION. respond with the facts, if scarcity values do pre- vail, then the surplus due to such scarcity value must receive recognition and name in our scheme of distribution. And yet modern economists have, for the most part, either followed Bicardo and con- founded this surplus with interest, or have followed Mill in the passage just quoted and confounded it with rent. Again, economists, especially those of the Austrian school, have insisted so strongly upon the general prevalence of scarcity values among concrete com- modities that they have failed to see that in the problem of interest we are dealing entirely with nor- mal value, or with that phenomenon of value in which marginal utility and marginal disutility coin- cide. Failing to see this, Bohm-Bawerk, formally and in the most uncompromising way, repudiates ab- stinence as having any part in the determination of interest. Possibly the most important contribution of Ameri- can economists has been to the theory of wages ; and yet, though establishing almost every point neces- sary to the construction of an Exchange Theory of Wages corresponding in all respects to Bohm- Bawerk's " Exchange Theory of Interest," they have failed to recognize the possibility of such a theory of wages. There is one other change in the drift of economic thought which must also be examined with some care. This is the growing tendency to recognize the INTRODUCTION. fact that rent is not peculiar to land, but is a general function common to all the factors of production. In German economics this general character of the rent function was recognized as early as 1807, but in Eng- lish literature it was not until the last quarter of the century that the movement in this direction became at all general. The reason for this delayed recog- nition by English economists is found in the accent thrown upon the rent of land by the English corn law agitation. In sketching the history of economic theory, how- ever, one must not only keep in mind its correspond- ence with economic phenomena, but must be persist- ent in recognizing the continuity in its development. The Abstinence, Productivity, and Use Theories of Interest, for instance, cannot be dismissed as so many vain attempts to solve a difficult problem, but instead they must be seen as parts of a progressive movement in thought which resulted in the Exchange or Normal Value Theory of Interest. In other words, the rec- ognition of this continuity is as essential to the right understanding of the history of economic theory as to the right understanding of any other phase of human endeavor. If this continuity in thought is clearly developed in the historic part of the present study the writer will have attained at least some measure of success. PART !. VALUE. VALUE AND DISTRIBUTION. CHAPTER I. THE COST THEORY OF VALUE. A RECENT writer has well said, " There are certain unsettled questions in economic theory that have been handed down as a sort of legacy from one generation to another ;" questions that " return again and again, like troubled spirits doomed restlessly to wander until the hour of their deliverance shall appear." Among these is the question, " What is the ultimate standard of value ?" * Any attempt to answer this question is confronted by certain facts which are usually referred to as the paradoxes of value. These are as follows : 1. The most useful things, like air and water, are usually without value. 2. Useful things, like iron and cop- per, are not valued as highly as less useful things, like gold or diamonds. 3. By decreasing the supply of a commodity, and consequently the total utility to be obtained from it, the total value may be increased. * Bohm-Bawerk, Annals of American Academy, September, 1894. 19 t ^ALTIE AND DISTRIBUTION. This was done by the Dutch East India Company when it destroyed a portion of the produce of its plan- tations in order to enhance the price of the balance. We have now to inquire what explanation the cost theory can offer for these paradoxes of value. I. THE EARLIER COST THEORY. It was not long before men perceived that in most instances there is a correspondence between the value of a commodity and its cost of production ; nor were they long in recognizing the further fact that this cost could be made to explain at least two of the above paradoxes of value. 1. Paradoxes of Value explained by the Cost Theory. With regard to the first parodox the solu- tion is evident. Such things as air and water have no value because they have no cost. The solution of the second paradox is almost as patent : Gold is more valuable than iron because on the whole it costs more than iron. In the case of the third paradox the solution is not so evident. But then it might be urged that a wilful destruction of commodities is of rare occurrence, that the limitation of supply which is here affected in an arbitrary way is usually determined by the cost of production. In other words, we here have the ex- ception that proves the rule. 2. Free Goods eliminated from Economic Con- sideration. Tested by the facility with which these complications were resolved, the advocates of the cost THE COST THEORY OF VALUE. 21 theory certainly had a strong case. Yet from the very first they hesitated to accept the logical results of their own reasoning. For if cost determines value, then things like air and water, which have no cost, can have no value. This, however, they were not pre- pared to admit, but declared that while such goods had " value in use" they had no " exchange value." But having thus established the distinction between these two forms of value they proceed to discuss " value in exchange," and do not trouble themselves any further about " value in use." It is necessary to bear in mind, however, that this did not involve the classical writers in any inconsistency. For the phe- nomenon of " value in use" was in their minds as- sociated with free goods, and so might fairly be dismissed from economic consideration. 3. Scarcity Goods eliminated because of their Rare Occurrence. The classical school did not get far in its attempts to apply the cost theory to the actual phenomena of economic life before it was con- fronted by goods whose value was far in excess of the cost either of production or of reproduction. This is the case with rare wines, pictures by the old mas- ters, etc. It was held, however, that such monopoly or scarcity goods are so small a part of the world's exchanges that they may safely be ignored in any discussion of the general phenomena of value. 4. The Law of Cost only applicable to Freely Re- producible Goods. Having eliminated both free and scarcity goods from the problem, the only phenomena 22 VALUE AND DISTRIBUTION. of value left for the older economists to explain were such as are associated with freely reproducible goods. In regard to such goods, it was held that if the pro- ducer does not at least obtain his cost he will cease to produce ; if he secures a surplus above his cost, others will enter that branch of industry and increase the supply of the commodity until the price is forced down to the level of cost. This led the older econ- omists to conclude that in cost we have a more or less exact measure of 'value. So satisfactory did this theory prove to be, so strong its hold upon economic thought, that it was not until the last quarter of the present century that another theory could find even a respectful hearing. II. THE MARGINAL COST THEORY. The earlier cost theory long found general accept- ance, but it is manifest that it fails to account for the products of better land and, in general, for all com- modities not produced at the margin. Yet it is not a difficult matter to state the theory so as to include all such commodities. This is done by substituting for the vague and indefinite concept of cost which the earlier economists had in mind the very definite concept of marginal cost. 5. The Graphical Representation of Marginal Cost. This concept of marginal cost may be shown graphically, as in Fig. 1. The amount of commodity is here laid off along the line OM. Other things remaining the same, the cost of production of sue- THE COST THEORY OF VALUE. 23 cessive increments of commodity increases, and is represented by lines at right angles to OM. Thus, if the amount of the commodity is represented by the length FIG. i. of the line OA, then the cost of production of the last in- crement added to the stock is represented by the length of the line AD. As in general the cost of production increases with each successive increment of commodity, the line of cost, ODN, is an ascending line. 6. Ricardo's Statement of the Marginal Cost Theory. Eicardo, in his discussion of the rent of land, shows that every increase in the supply of corn compels us to have recourse to less and less fertile lands or to an ever-increasing cost of production. He further contends that the value of corn is deter- mined by the cost of the last or most expensive incre- ment necessary to the maintenance of a given supply. Thus, if the supply of the commodity is OM (Fig. 1) and the cost of the final or most expensive increment is MN, then the value of each and every portion of the supply is determined by the cost MN of the final or marginal increment. Nor does Kicardo confine this proposition to the products of land, for he writes : " The exchangeable value of all commodities, whether they be manufactured, or the produce of the mines, or the produce of the land, is always regulated not by the least quantity of labor that will suffice for 24 VALUE AND DISTRIBUTION. their production under circumstances highly favor- able and exclusively enjoyed by those who have peculiar facilities of production, but by the greater quantity of labor necessarily bestowed on their pro- duction by those who have no such facilities ; by those who continue to produce them under the most un- favorable circumstances ; meaning, by the most un- favorable circumstances, the most unfavorable under which the quantity of produce required renders it necessary to carry on the production." (Bohn edi- tion, p. 50.) It is true that the orthodox writers sometimes lose sight of this marginal concept, or, at least, have failed to keep it consciously in mind, and yet a moment's consideration will show that the doc- trine of rent, upon which their whole theory of dis- tribution was based, rests in last resort upon the contention that price is determined by marginal cost. Under this contention the products of the better land, greater skill, or more efficient machines are eliminated as exceptions to the law of cost, since under this law it is the marginal cost that determines price. CHAPTER II. CONDITIONS UNDER WHICH THE COST THEORY FAILS. IT has already been shown that the cost theory of value rests upon the assumption that most com- modities are freely reproducible. It is against this assumption that the Austrian economists have di- rected their main attack, and have insisted that scarcity values are the rule rather than the ex- ception. It will be necessary, therefore, to examine with some care the argument by which these latter writers support this contention. One of the best statements of their case is found in that part of Bohm-Bawerk's "Capital and Interest^ which is de- voted to the refutation of the " Exploitation Theory of Interest." I. THE CONTENTION OF THE AUSTRIAN ECONOMISTS. 7. Exceptions admitted by Ricardo. On page 384 of " Capital and Interest" Ricardo is quoted as admitting that rare statues and pictures, scarce books and coins, and wines of a peculiar quality are ex- ceptions to the law of cost ; so, too, all products of the more fertile or more favorably situated land. Ricardo is also quoted as admitting that the law of labor cost fails where capital is employed. He writes : " The principle that the quantity of labor 25 26 VALUE AND DISTRIBUTION. employed in the production of goods regulates their relative value suffers a considerable modification by the employment of machinery and other fixed and durable capital." (Chap. L, Sees. 4 and 5, " Prin- ciples.") 8. Additional Exceptions. To this admitted list of exceptions Bohm-Bawerk adds all goods pro- duced under the protection of a patent, coypright, or tariff 4 , and then, as though this list of exceptions was not sufficient, Bohm-Bawerk calls attention to the fact that even those goods which are ordinarily re- garded as freely reproducible are only so for the brief interval during which their price is at the normal point. At all other times or during their fluctuations on either side of this normal point their price is determined under monopoly conditions.* * Much confusion has arisen in the use of the phrase free competition. Thus, it is held by many that free competition prevails wherever there is no legal or other external restric- tions on trade. It is manifest, however, that quite inde- pendent of such external restrictions there may be an inter- ference with the freedom of competition. It will hardly be claimed that a handicapped man is competing freely, or that the lame and the halt compete freely with those who are fleet of foot, or, again, that the ignorant and the weak compete freely with the cunning and the powerful. What, then, do we mean by free competition ? If we take the case of any pronounced monopoly good, we find that its price varies more or less widely from the normal price. From this we are led to conclude that any good whose price varies from the normal is a monopoly or scarcity good, whether the variation is CONDITIONS UNDER WHICH THE COST THEORY FAILS. 27 II. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS FAILS. 9. Marginal Cost Theory holds for Products of Better Land, etc. So far as the products of better land, greater skill, or more efficient machines are concerned, the case against the cost theory fails the moment that it is recognized that it is marginal cost that determines value. Ricardo in admitting that the products of the better land are exceptions to the law of cost lost sight of the fact that it is marginal cost that determines price. 10. Marginal Cost Theory holds for Products of Fixed Capital. While the employment of machinery or other fixed capital tells very seriously against a labor theory of value, it does not necessarily tell against a cost theory of value if it is admitted that abstinence is a disutility or cost. Ricardo's state- ment of the case is certainly open to this interpreta- tion. He writes : " Mr. Mai thus seems to think that large or small, or is maintained for a long or short interval. It follows from this that so-called freely reproducible goods are in reality scarcity goods, except during the interval that their price is at the normal point. Here, then, is the ultimate test of free competition, the existence of normal price, or the existence of those conditions in which marginal utility and marginal disutility are equal. Any departure from the normal or any failure in the equating of utility and disutility implies the existence of a marginal surplus; and the exist- ence of such a surplus indicates that there is some interference with the freedom of competition. 28 VALUE AND DISTRIBUTION. it is part of my doctrine that the cost and the value of a thing should be the same ; it is, if he means by cost, cost of production including profits/'* III. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS MAY BE SUSTAINED. 11. Patents, Tariffs, etc. In a more recent publi- cation f Bohm-Bawerk seems to have realized the weakness of his argument upon the two points just mentioned (goods produced by means of fixed capital or on the more fertile lands, etc.). In his restate- ment of the case against the cost theory he confines himself to those instances where the freedom of com- petition is interfered with by patents, tariff laws, etc. He writes : " There are at the present time very few products in which some patented machine or process or some import duty on raw or auxiliary material does not play a part." In other words, he contends, and rightly, that scarcity goods are the rule ; that competition at the margin is frequently interfered with by patent, im- port duty, etc. ; that non-competing groups among producers do exist ; that the marginal producer fre- quently secures a surplus above his cost, and, hence, that even marginal disutility must fail as the ulti- * Eicardo undoubtedly uses the term profits in a somewhat confused way ; but that it here includes interest there can be little doubt. f Annals of American Academy, September, 1894, p. 55. CONDITIONS UNDER WHICH THE COST THEORY FAILS. 29 mate standard of value. Bohm-Bawerk does not state the case in just this way, but the most cursory examination of his article on " The Ultimate Stand- ard of Value" will show that in this later contribu- tion he ignores all portions of the product that are produced under specially advantageous circumstances, and confines himself to showing the frequent occur- rence of those monopoly or scarcity goods in the pro- duction of which the marginal producer secures a surplus over and above all cost, either in labor or abstinence. It is important that this point in the argument should be clearly apprehended, for in another chapter I shall endeavor to show that the marginal utility theory fails for much the same reason, to wit, that in many instances the marginal consumer secures a surplus. CHAPTER III. THE UTILITY THEORY OF VALUE. I. THE EARLIER UTILITY THEORY. THE first attempt to formulate a theory of value of which we have any record resulted, as we have seen, in a Cost Theory of Value. It is, however, more than probable that the first explanation that suggested itself was that things are valuable because they are useful. The utility here in mind was not, however, the precise modern concept of marginal util- ity, but a more or less vague and indefinite concept of utility like the earlier concept of cost. 12. The Failure of the Earlier Utility Theory to explain the Paradoxes of Value. The moment an attempt is made to apply this Earlier Utility Theory to the several paradoxes of value its defects become manifest. It fails completely to explain why such useful things as air and water are valueless ; why gold is more valuable than the more useful commodity iron; or why the Dutch East India Company de- stroyed a portion of its crops when they were ex- ceptionally large. It was doubtless this failure of the earlier utility theory of value that compelled men to have recourse to the cost theory, in which they found a more or less satisfactory explanation of these paradoxes. THE UTILITY THEORY OF VALUE. 31 The modern advocates of the utility theory of value hold that this earlier abandonment of the util- ity theory was premature, and that under the recon- structed form of the Marginal Utility Theory of Value we have an entirely satisfactory explanation of the general phenomena of value and of the several paradoxes that proved so fatal to the earlier statement of the utility theory. II. THE MARGINAL UTILITY THEORY OF VALUE, That value and price depend upon demand and supply has long been recognized as a truism. Again, it was recognized that the value of a commodity cannot be determined unless we know the amount of the commodity offered for sale. But it was not until the promulgation of the marginal utility theory of value that this mutual interdependence of supply, demand, and value was apprehended in an entirely clear and definite way. The Theory of Marginal Utility is based upon the familiar experience that pleasures when repeated de- crease in intensity. Hence if there is but one loaf of bread between a man and starvation he will, of course, value it very highly. But if he has a hun- dred loaves he will not value bread so highly. In this case the value of the bread will be fixed by the pleasure, satisfaction, or utility dependent upon the possession of the hundredth loaf. If the man has but fifty loaves, the value of the bread will be de- pendent on the utility of the fiftieth loaf; and in 32 VALUE AND DISTRIBUTION. general the value of the bread will be dependent upon the utility of the last or marginal loaf. 13. Gossen and his Work. The first to formu- late the Marginal Utility Theory of Value was Her- man Heinrich Gossen in his " Entwickelung der Ge- setze des menschlichen Verkehrs, etc.," published in 1854. In his introduction, Gossen declared that he had made as important a discovery in the field of National Economy as Copernicus had made in the domain of Astronomy. As a matter of fact, he did give us a fairly complete statement of the modern theory of marginal utility. The book, however, was received with such scant courtesy that the author withdrew it from the trade and died a bitterly dis- appointed man. Gossen starts out with Bentham's thesis, that hap- piness or utility is the ultimate motive of all human action. Gossen clearly recognizes that in the con- sumption of a commodity there is a more or less regular decrease in the pleasure of consumption ; and that if the supply is large enough the point of satiety would ultimately be reached. Again, an early repetition of the act of consumption would in- volve a lower initial pleasure and a shortening of the period of enjoyment. Gossen sees, too, that it is the marginal pleasure or utility that fixes the value of the commodity, and holds that the condition of ex- change of two commodities is the equality of the pleasure derived from the last atoms (letzten Atoms) of the two commodities exchanged. Again, he holds THE UTILITY THEORY OF VALUE. 33 that the ideal condition for society as a whole is where commodities are so distributed among men that the last atom of every commodity yields the same amount of pleasure. Gossen's work differs from that of more recent writers in that he never loses sight of the moral or social aspect of the question. Marginal utility only interests him as it enables him to formulate the conditions of human happiness or the conditions of an ideal society. In the develop- ment of his argument he employs the same graphic illustrations that have since become so familiar. He, however, lays off units of time on the horizontal axis instead of units of commodity ; but as a unit of com- modity is consumed in a unit of time, the result is the same as if a unit of commodity were laid off on the horizontal axis.* * The following passages are italicized in Gossen : Der Mensch richte seine Handlungen so ein, dass die Summe seines Lebensgenusses ein Grosstes werde. (Page 3.) 1. Die Grosse eines und desselben Genusses nimmt, wenn wir mit Bereitung des Genusses ununterbrochen fortfahren, fortwahrend ab, bis zuletzt Sattigung eintritt. (Page 4.) 2. Eine ahnliche Abnahme der Grosse des Genusses tritt ein, wenn wir den friiher bereiteten Genuss wiederholen, und nicht bloss, dass bei wiederholter Bereitung die ahnliche Ab- nahme eintritt, auch die Grosse des Genusses bei seinem Be- ginnen ist eine geringere, und die Dauer, wahrend welcher etwas als Genuss empfunden wird, verkiirzt sich bei der Wiederholung, es tritt friiher Sattigung ein, und beides, an- fangliche Grosse sowohl, wie Daucr, vermindern sich um so mehr, je rascher die Wiederholung erfolgt. (Page 5.) 3 34 VALUE AND DISTRIBUTION. 14. Jevons, Walras, and Menger. The first recog- nition of the great importance of Gossen's work is found in the preface to the second edition of Jevons's " Theory of Political Economy," published in 1879. German economists seem to have remained ignorant even of its existence until their attention was thus called to its great importance. Jevons published his first edition in 1871, while at about the same time two other economists, Walras and Menger, promulgated the same doctrine. It is, therefore, most interest- ing to note that the message which in 1854 could not even secure a hearing is so much in the air in 1871 that three widely separated economists, Jevons, Wal- ras, and Menger, gain fame in proclaiming it. There seems to be but one explanation of this phenomenon. Gossen wrote in 1854 while economists were still in bondage to the fundamental premise of orthodox Dor Tausch blcibt fur A, wenn gleiche Quantitaten gegen einander vertauscht werden, so lange vortheilhaft, bis der Werth des letzten Atoms bei beiden Gegenstanden, welche in den Besitz des A gelangen, gleich gross geworden ist. Es muss jeder der beiden Gegenstande nach dem Tausche unter A und B der Art sich vertheilt finden, dass das letzte Atom, welches jeder von einem jeden erhalt, beiden gleich grossen Werth schafft. (Pages 84 and 85.) Damit durch den Tausch ein Grosstes von Werth entstehe, muss sich nach demselben jeder einzelne Gegenstand unter alle Menschen so vertheilt finden, dass das letzte Atom, welches jedem von einem jeden Gegenstande zufallt, bei ihm den gleich grossen Genuss schafft, wie das letzte Atom des- selben Gtgeustandes bei einem jeden andcrn. (Page 85.) THE UTILITY THEORY OF VALUE. 35 economics, that scarcity commodities are the excep- tion and freely reproducible goods the rule. But by 1871 economic conditions had so changed that econo- mists were constrained to recognize the utter falsity of this proposition, and so were compelled to seek for a theory of value that would include the case of scarcity goods. The cause of the failure of the earlier advocates of the utility theory is now manifest. They did not even see the real difficulty that confronted them ; did not recognize the fact that in the consumption of a given commodity a number of different utilities are developed. It therefore never occurred to them to ask the interesting question, Which of these utilities is it that determines the value of the com- modity ? As this is a crucial point in the develop- ment of the modern utility theory, it may be well to allow its advocates to state the case in their own language. 15. Bohm-Bawerk's Statement of the Theory of Marginal Utility. After a careful elaboration of -a number of concrete instances, Bohm-Bawerk sums up : " The case, then, stands as follows : Wants which are more important than this ' last' want will not be affected by the loss of the good, for their satisfaction is, as before, guaranteed in case of need by the re- placement of substitutes.* Nor will those wants be * This is based upon the assumption that we have a number of equally efficient increments of commodity, say fifty loaves 36 VALUE AND DISTRIBUTION. affected which are less important than this ' marginal want/ for they go unsatisfied whether the good is there or not. The only want affected is the last of those that otherwise would be satisfied : it will be satisfied if the good is there ; it will not be satisfied if it is not there. It is thus the dependent want we were seeking. "Here, then, we have reached the goal of the present inquiry and may formulate it thus : the value of the good is measured by the importance of that concrete want, or partial want, which is least urgent among the wants that are met from the available stock of similar goods. What determines the value of a good, then, is not its greatest utility, not its average utility, but the least utility which it, or one like it, might be reasonably employed in providing under the concrete economical conditions. \ To save ourselves a repetition of this circumstantial descrip- tion, which, nevertheless, has to be somewhat cir- cumstantial to be quite correct, we shall follow Wieser in calling this least utility the utility that stands on the margin of the economically permissible the economic Marginal Utility of the good. The law which governs amount of value, then, may be put in the following very simple formula : The value of a good is determined by the amount of its mar- ginal utility. of bread. In this case the loss of one loaf would lead to the substitution of another equally efficient loaf. THE UTILITY THEORY OF VALUE. 37 " This proposition is the keystone of our theory of value. But it is more. In my opinion it is the mas- ter-key to the action of practical economic men with regard to goods. In the simplest cases, as in all the tangle and complication which our present varied economic life has created, we find men valuing the goods with which they have to deal by the marginal utility of these goods, and dealing with them accord- ing to the result of this valuation. And to this ex- tent the doctrine of marginal utility is not only the keystone of the theory of value, but, as affording the explanation of all economical transactions, it is the keystone of all economical theory." * 16. Graphic Illustration of the Marginal Utility Theory. This theory finds graphic illustration in Fig. 2. The amount of com- modity is here laid off along the line OM. The utility of successive increments of com- modity is represented by lines at right angles to OM. Thus, if the amount of the com- modity is represented by the length of the line OA, then the utility of the last incre- o ment of the supply of the commodity is represented by the length of the line AU. But if the amount of the commodity is repre- Fro. 2. * Positive Theory of Capital, pp. 148, 149. 38 VALUE AND DISTRIBUTION. sented by the length of OM, the utility of the last increment of the supply is represented by the length of MN. As the utility decreases with each succes- sive increment of the supply of the commodity, the line of utility, YUN, is a descending line. Again, according to the marginal utility theory, the value of the whole commodity is determined by the utility of the last increment of the supply of the commodity, Thus, if the amount of commodity is OA, the mar- ginal utility or value of the commodity is AU ; if, however, the amount of commodity is OM, then the marginal utility or value of the commodity is MN. (a) VALUE PER UNIT VERSUS TOTAL VALUE. It should be noticed that under the above assumptions AU and MN represent severally the marginal utility or value per unit of the commodity. There is, how- ever, another concept of value with which it is some- times necessary to deal, and which must be care- fully distinguished from the concept of value per unit. The concept here referred to is that of total value, which is represented by the areas of the rec- tangles OAUF and OMNE, or by quantity of com- modity multiplied by value per unit. (b) TOTAL VALUE VERSUS TOTAL UTILITY. There is still another concept that must be carefully dis- tinguished from total value. We here refer to the concept of total utility, which is represented by the area OAUY if the margin is at A and by the area OMNY if the margin is at M. It is here mani- fest that total utility and total value are essentially THE UTILITY THEORY OF VALUE. 39 different concepts, total utility exceeding and in- cluding total value. 17. The Marginal Utility Theory and the Para- doxes of Value. (a) WHY ARE AIR AND WATER VALUELESS, AND WHY is IRON OF LESS VALUE THAN GOLD ? To both of these questions the advocates of marginal utility find a ready answer. We cannot do better than to quote again from Bohm-Bawerk : " Here, then, we have an entirely natural explana- tion of the phenomenon which originally struck us as so surprising, that comparatively ' useless' things, such as pearls arid diamonds, have so high a value, while infinitely more ' useful' things, like bread and iron, have a far less value, and water and air no value at all. Pearls and diamonds are to be had in such small quantities that the relative want is only satisfied to a trifling extent, and the point of mar- ginal utility which the satisfaction reaches stands relatively high. Happily for us, on the other hand, bread and iron, water and light, are, as a rule, to be had in such quantities that the satisfaction of all the more important wants which depend on them is as- sured. Only very trifling concrete wants, or no wants at all, are dependent, for instance, on the com- mand over a piece of bread or a glass of water. It is, of course, true that in abnormal circumstances as, for instance, in besieged towns, or in desert journeys, where water and food is scarce, and small stores only suffice to meet the most urgent concrete wants of meat and drink the marginal utility flies 40 VALUE AND DISTRIBUTION. up. According to our principles the value of these goods, otherwise of so little account, must rise also, and the inference finds ample empirical confirmation in the enormous prices paid in such circumstances for the most wretched means of subsistence. Thus, those very facts which, at first sight, seemed to con- tradict our theory that the amount of value is de- pendent upon the amount of utility, on closer exam- ination afford a striking confirmation of it."* There is, however, another phase of this paradox that may need some further explanation. We have seen in what way and why gold may have a greater value than iron, but we have not explained just how and why we continue to think of iron as the more useful metal. That is, we have not brought this fact into accord with our utility theory of value. Put in a brief way, the explanation is found in the fact that a great reduction in our supply of so-called neces- saries might raise their marginal utility to almost any point or degree of importance, even to the impor- tance of maintaining life itself. On the other hand, no reduction in the supply of commodities that are not necessary for the maintenance of life could ever reach the same degree of importance or the same marginal utility. Bohm-Bawerk's more elaborate discussion of this question will be found on page 144 of " Positive Theory of Capital." (b) WHY DID THE DUTCH EAST INDIA COMPANY * Positive Theory of Capital, pp. 152, 153. THE UTILITY THEORY OF VALUE. 41 3. DESTROY A PORTION OF THEIR CROPS ? This paradox is readily explained in terms of the marginal utility theory of value. Let us assume (Fig. 3) that our utility curve takes a sud- den change in direction at the point U, or that an increase in the sup- ply of commodity be- yond OA occasions a much more rapid de- cline in marginal utility than was occasioned by i . / 6 A M an equal increase in commodity before that point was reached. The result manifestly would be that, despite the increase, AM, in the quantity of commodity, the total value has decreased from the area OAUF to the area OMNE. Under such circumstances a seller con- trolling a large part of the supply might profitably destroy a portion of his commodity, since he would thereby increase not only the marginal utility but the total value as well. From this, it is clear that the Marginal Utility Theory is even more efficient than the Cost Theory in resolving the several para- doxes of value. CHAPTEK IV. CONDITIONS UNDER WHICH THE UTILITY THEORY FAILS. IT has already been shown that the Earlier Utility Theory failed to explain the several paradoxes of value. On the other hand, it has been seen how complete and satisfactory are the explanations offered by the Marginal Utility Theory. It remains to be shown that even this theory does not afford an en- tirely satisfactory solution of the ever interesting problem of price. Towards the close of his earlier argument Bohm- Bawerk writes : " If what is practically inconceiva- ble production were carried on in ideal circum- stances, unfettered by limitations of space and time, with no friction, with the most perfect knowledge of the position of human wants requiring satisfaction and without any disturbing changes of wants, stocks, or technique, then the original productive powers would, with ideal and mathematical exactitude, be invested in the most remunerative employments, and the law of costs, so far as we can speak of such a law, would hold in ideal completeness." * In other words, it is here maintained that the law of cost is only true under the assumption of an ideal * Positive Theory of Capital, p. 233. 42 CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 43 condition of free competition among producers. It is the purpose of the present chapter to show that the law of marginal utility is likewise based upon the assumption of an ideal condition of free com- petition. It will be remembered, however, that the Austrian economists called attention to the fact that Bicardo admitted the failure of the Cost Theory in the case of rare wine, paintings by the old masters, etc. (See page 25.) It may, therefore, be well to note that they themselves have made even more serious admis- sions as against their own theory. 18. Bohm-Bawerk' s admitted Exceptions to the Law of Marginal Utility. On page 217 of "The Positive Theory of Capital," Bohm-Bawerk admits that marginal utility fails, at least in exactness, in the case of money and labor. May it not, then, fairly be urged that while " there are at the present time very few products in which some patented ma- chine or process or some import duty on raw or aux- iliary material does not play a part," yet it is equally true that there are few products in which varia- tions in the value of money and labor do not play a part ? Again, in his discussion of the three possible forms of exchange, Bohm-Bawerk writes, "In iso- lated exchange exchange between one buyer and one seller the price is determined somewhere be- tween the subjective valuation of the commodity by the buyer as upper limit and the subjective valuation 44 VALUE AND DISTRIBUTION. of the seller as lower limit."* Or he admits that in all such cases the marginal utility of the good to the buyer and seller only establishes limits within which the price may vary. In other words, mar- ginal utility fails in exactness in all cases of isolated exchange. Then, too, of the case of one-sided competition, he writes : " First. The competition of buyers has the effect of narrowing the sphere within which price is determined, and narrowing it in the upward direc- tion. Second. One-sided competition of sellers forms the exact converse of the foregoing. Entirely analo- gous tendencies lead to entirely analogous results only in an opposite direction. "f Here we again have an admission that there is quite a sphere within which the price may vary, or an admission that marginal utility fails in exactness in all cases of one- sided competition. Lastly, in his discussion of two-sided competition, he sums up as follows : " If, finally, we substitute the short and significant name of ' Marginal Pairs' for the detailed description of the four parties whose competition determines the price, we get this very simple formula : The market price is limited and determined by the subjective valuation of the two Marginal Pairs." J In other words, Bohm-Bawerk * Positive Theory of Capital, p. 199. f Ibid., p. 201. J Ibid., p. 209. CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 45 here admits that in all three forms of exchange the valuations of buyers and sellers merely establish limits within which the price may vary. Again, he writes : " According as in the conduct of the trans- action the buyer or seller shows the greater dex- terity, cunning, obstinacy, power of persuasion, or such like, will the price be forced either to its lower or to its upper limit." Clearly, then, the price in all three cases may be determined at a point which is less than the valuation of the marginal buyer. From this it follows that this last or marginal buyer secures a surplus, and hence that marginal utility fails as an exact determinant of price. 19. How Bohm-Bawerk would escape from the Consequences of these Admissions. It will now be interesting to inquire how Bohm-Bawerk would es- cape from a position so fatal to the Marginal Utility Theory. This he endeavors to do in his chapter on Price. The first two forms of exchange are ignored on the ground that the bulk of the world's exchanges comes under the head of two-sided competition. He then devotes his attention to this last form, and en- deavors, first, to eliminate the marginal pair of sell- ers, and, second, to reduce the difference in the valua- tions of the marginal pair of buyers to an amount so small that it may safely be ignored. Price is then determined by the valuation of the last buyer or by marginal utility. It will be well to follow his reason- * Positive Theory of Capital, p. 199. 46 VALUE AND DISTRIBUTION. ing upon this point with some care. (See " Positive Theory of Capital," pp. 220, 221.) (a) THE ELIMINATION OF THE MARGINAL PAIR OF SELLERS. Let us turn first to that part of his argu- ment in which he seeks to eliminate the marginal pair of sellers. It is undoubtedly true that under modern conditions many commodities are produced in anticipation of the market, and " when goods are once produced and the owner can do nothing with them for his own personal wants, they must, all the same, seek a market," and the seller must. accept whatever price the buyer is willing to pay. In other words, the marginal utility of the good to the seller is here so low that it does not enter into the problem, the determination of the price coming entirely from the side of the buyer. This, I take it, is the reason- ing by which Bohm-Bawerk eliminates the marginal pair of sellers. Nevertheless, it may fairly be urged that no inconsiderable part of many commodities is still made or produced to order, or while more clothes are now manufactured in anticipation of the market than a hundred years ago, yet some clothes still are and probably ever will be made to order. And a standard of price that fails to determine the price of goods made to order can hardly be accepted as a uni- versal standard of price. The orthodox school, undoubtedly, had in mind this latter class of goods, while the Austrians have called attention to the fact that in modern times the tendency is to produce in anticipation of the market. CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 47 So long as they urge tins fact to show the failure of the law of cost I am not here disposed to disagree with them, but when they rest their theory of value upon the assumption that goo t ds made to order now form so inconsiderable a part of the world's produc- tion that they may safely be ignored, I am constrained to part company with them. (b) THE ELIMINATION OF ONE OF THE Two MAR- GINAL BUYERS. Note again, that Bohin-Bawerk re- stricts the law of marginal utilky " to prices actually established within a large and organized market." He then concludes : " If the buyers are very numer- ous, the interval between the figures which two suc- cessive buyers put on their valuation is so small that the zone limited by the figure of the last buyer and that of the first unsuccessful competitor is narrowed almost to a point. And so far as this is the case it may be asserted, with sufficient exactness, of the economic exchange which goes on in large markets, that the market price is determined by the Valua- tion of the Last Buyer/' In other words, he practi- cally assumes that the bulk of the world's goods is sold in markets that are large and well organized ; a contention not easily maintained, especially in re- gard to retail markets or those that touch the con- sumer most nearly. In any event, there are many goods sold in markets that are neither large nor well organized, and under the above assumption these goods are clearly excluded from the operation of the law of marginal utility. 48 VALUE AND DISTRIBUTION. To sum up, then, we find, by the admissions of Bohm-Bawerk himself, that the law of marginal utility fails in exactness, not only for money and labor, but also for all cases of isolated exchange, for all cases of one-sided competition, for all goods made or produced to order, and for all goods sold in markets that are not large and well organized. In other words, we find a list of admitted exceptions to the Law of Marginal Utility that is at least as formidable as any that can be urged against the Law of Cost. 20. The Defect in the Analysis of the Austrian Economists. In Chapter II. the failure of the cost theory was shown not only by the many serious and admitted exceptions to this theory, but also by the fact that in last resort it rests upon the unwarranted assumption of ideal free competition among pro- ducers. In the present chapter I have thus far shown the failure of the Marginal Utility Theory by an equally serious list of admitted exceptions. It now remains for me to show that the Marginal Utility Theory rests upon a like unwarranted assumption of free competition. (a) THE MARGINAL UTILITY THEORY RESTS UPON THE UNWARRANTED ASSUMPTION OF FREE COMPE- TITION AMONG CONSUMERS. We have just seen that if the buyers are very numerous the difference be- tween the valuations of the "last buyer and the first unsuccessful competitor is narrowed almost to a point." We have now to inquire what happens when this difference in valuation is not narrowed to a point. CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 49 It is manifest that under such circumstances there might be quite an appreciable decline in the price be- fore the first unsuccessful buyer would really begin to compete for the commodity in question. In other words, the existence of an appreciable difference be- tween the valuation of the last buyer and the first unsuccessful competitor implies or is the result of some failure in the freedom of competition among buyers or consumers. Now, it may be urged by the advocates of marginal utility that under the assumption of a "large and organized market" the probability of such a failure in the freedom of competition is very remote ; that under this assumption price will vary continuously with the supply of the commodity and buyers will be able to range themselves in a differential series, etc. I will not combat this contention at this point in the argument, but would call attention to the un- warranted assumption upon which this contention rests. For if the existence of an appreciable difference between the valuations of the two marginal buyers im- plies the existence of some interference with the free- dom of competition among buyers or consumers, then the absence of such difference between their valuations implies the existence of ideal free competition among buyers or consumers. In other words, the Marginal Utility Theory rests in last resort upon the unwar- ranted assumption of ideal free competition among consumers just as the Marginal Cost Theory rests upon 50 VALUE AND DISTRIBUTION. the like unwarranted assumption of ideal free compe- tition among producers. (b) MARGINAL UTILITY THEORY FAILS BECAUSE THE MARGINAL CONSUMER FREQUENTLY SECURES A SURPLUS. Let us now return to the contention that where the buyers are numerous the difference be- tween the valuations of the marginal pair of buyers is narrowed almost to a point. This, as we have just seen, rests upon an altogether unwarranted assump- tion. Though there were a million buyers, how can it be said that the valuation of the million and first will necessarily vary by a differential from the millionth buyer? Why may there not be at any point a non-competing group or an interference with the freedom of competition among buyers as well as among sellers, among consumers as well as among producers ? If such an interference with the freedom of competition does arise, then the price may be fixed at a point " which is somewhat less than the valuation of the thousandth buyer and somewhat higher than the valuation of the thousand and first." Under these conditions the utility of the commodity to the actual marginal buyer would be greater than the price paid. He would therefore secure a marginal surplus and marginal utility would here fail as the standard of price, for the same reason that it fails in the case of isolated exchange, one-sided competition, and for all goods that are sold in markets that are not large and well organized. In other words, mar- ginal utility fails because the marginal consumer fre- CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 51 quently secures a surplus^ just as marginal cost fails because the marginal producer frequently secures a surplus. That the introduction of the concept of consump- tion as varying by differential increments has been of advantage to economic theory none will deny; and yet it is questionable whether this concept has not been as fruitful of errors as any yet introduced into the science. For its advocates fail to see, or at least to keep in mind, the assumption upon which it rests, namely, an ideal condition of free competition among consumers. So long as we do not lose sight of this, the concept of differential increments may be useful for certain theoretic purposes. But when we lose sight of the assumption that lies back of the Marginal Utility Theory, and hold that free compe- tition on the side of the consumer exists generally in the economic world, confusion must result. There is probably no commodity whose market satisfies the ideal conditions more closely than that of wheat, and yet it may very readily have hap- pened that in a recent decline in the price of wheat there may have been quite an appreciable break be- tween the point at which the price corresponded to the marginal utility of wheat for the feeding of human beings and the point where it became profit- able to feed it to hogs. Again, while at certain prices the sugar market may be very elastic, yet a point might readily be reached where all our present uses or desire for sugar would be satiated. In this 52 VALUE AND DISTRIBUTION. case quite an appreciable fall in price might fail to increase its consumption. This is practically the case with salt at present prices. So, too, with pep- per, matches, and a number of other commodities. It hardly need be again urged that this is generally true of all cases of isolated exchange of one-sided competition, and of all goods whose market is neither large nor well organized. As a matter of fact, the market for these, as for all other commodities, is only perfectly elastic or satisfies the conditions as- sumed by the Austrian economists so long as the price remains within more or less definite limits. It, however, loses this elasticity or fails to satisfy these conditions when the price passes either the upper or lower of these limits. That the orthodox school practically assumed the existence of an ideal condition of free competition among producers cannot be denied. But, as we have endeavored to show, the advocates of marginal utility have assumed a like ideal condition of free competition, or have assumed that there are no non- competing groups among consumers. That such an ideal condition of free competition, either on the side of production or of consumption, exists generally in the markets of the world, or is permanently estab- lished in the market of ariy one commodity, may well be questioned. It may be that an interference with the freedom of competition is much more fre- quent among producers than among consumers. And this because of the greater facility for combining CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 3 which the producers enjoy But be that as it may, it still remains true that a theory of price which rests upon the assumption of free competition among con- sumers is without sufficient warrant and can hardly be said to furnish us with an ultimate standard of price. CHAPTEE V. THE MONOPOLY THEORY OP PRICE. IT is the contention of the present writer that while value is determined by marginal utility price is never so determined save in the case of normal value and price. In the case of scarcity goods, or the great bulk of the world's commodities, the mar- ginal utility of the good to the consumer and its marginal utility to the producer only establish limits within which the price may vary. Its final loca- tion depends upon the relative monopoly strength of consumer and producer, and so is incapable of any exact determination. This in brief is the Monopoly Theory of Price which will here be pro- posed.* * By value is here meant the subjective importance of a good. This is measured in terms of marginal utility. By price is meant the quantity of money, or of the objective money commodity for which the good in question will ex- change. Value as thus defined corresponds to the subjective use value of the Austrian economists, and price to their objective exchange value. It is true that we might say that the objec- tive exchange value of a cow is the horse for which it is ex- changed, but in any developed society these direct exchanges are rare, almost all exchanges being made against money. And so we find that as a matter of fact the Austrians limit objective exchange value to the phenomenon of price. 54 THE MONOPOLY THEORY OF PRICE. 55 Fm - 4 ' I. THE PRICE OF A SINGLE GOOD. 21. Normal Value and Price. If with the older economists we hold that free competition is the rule and scarcity goods the exception, then our investiga- tion must be confined to the phenomena of normal value and price. In this case marginal utility, mar- ginal disutility, value, and price all coincide. This is brought out quite clearly in Fig. 4. In Fig. 1 we had the dia- gram of the line of cost or disutility. In Fig. 2 we had the diagram of the line of utility. In Fig. 4 these two dia- grams are combined. Here the line of utility, UiU 2 , and the line of disutility, DjDa, intersect at the point N. If the supply of the commodity is OA 1? the utility AiUi exceeds the disutility AjDi. This indicates that the production of the commodity is profitable, and therefore that others will be induced to enter this branch of industry. If this results in an in- crease of the amount of commodity to OA 2 , the dis- utility A 2 D 2 exceeds the utility A 2 U 2 . This indi- cates that the production of the commodity is no longer profitable; a restriction in the amount of commodity produced will therefore result. The tendency, of course, will be for the production of the amount of commodity to settle at OM, where the 56 VALUE AND DISTRIBUTION. utility and disutility are equal. This is the case of normal value and price, both of which are here represented by MN.* 22. Other Conditions under which Marginal Util- ity determines Price. It is true that if competi- tion is assumed to be absolutely free on the side of the consumers (that is, the producers have the entire monopoly advantage), the price of the good may be forced up to the limit of its marginal utility to the consumer. But, on the other hand, it is equally true that if competition is absolutely free on the side of the producers (the consumers having the entire monopoly advantage) the price may be forced down to the extreme limit of the marginal utility of the good to the producer. This finds graphic illustra- tion in Fig. 4. The case where the producer has the monopoly advantage is indicated by A^U,, while the consumer has the monopoly advantage in the case indicated by A a U a D a . It may at first be somewhat confusing to speak of this last case as a case of monopoly or scarcity price, since the supply of the good offered by the producer is in excess of the normal supply. The confusion, however, is largely due to our tendency to regard one-half of the transaction as the whole phe- nomenon, just as in physics there is a tendency to think of force and resistance as separate phenomena. * This diagram was, I believe, first employed by Marshall in a paper that only had a private circulation. THE MONOPOLY THEORY OF PRICE. 57 The physicist, however, sees very clearly that action and reaction are necessary complements of each other, and in the same way the commodities offered in exchange by the producer and the consumer are necessary complements of each other. While it may not be strictly correct to speak of the commodity offered by the producer as a scarcity good when its price is below its cost, yet it is true that its price is determined under monopoly conditions, only the monopoly is due to the relative scarcity of the com- modity offered in exchange by the consumer; the monopoly, therefore, inures to the benefit of the con- sumer by enhancing the purchasing power of his com- modity. In other words, we here have one of those unfortunate abstractions of the understanding, as Hegel styles them, in which half the phenomena is taken for the whole. In general, however, neither competition nor mo- nopoly is absolute on either side of the transaction. As a rule, the weaker party still retains some mo- nopoly strength, and the price is determined at some intermediate point by the relative monopoly strength of buyer and seller. In other words, the upper and lower limits of prices being determined by marginal utility and marginal disutility, the price approaches the former if, with the Austrian school, we assume that the producers have the monopoly advantage, and approaches the latter if, with the orthodox school, we assume that the consumers have the monopoly advan- tage. It would, of course, greatly simplify the mat- 58 VALUE AND DISTRIBUTION. FIG. 6. ter if we could solve all our problems in terms of one or the other of these variables, but, unfortunately, the phenomena are too complex for any such solution. The best that can be hoped for is a determination be- tween the limits of marginal utility and marginal disutility. At what intermediate point the price will actually be fixed is not given to us to say, for this de- pends upon the relative monopoly strength of the con- testants, and so upon an indeterminate element. 23. The Diagram of the Austrian Economists. In conclusion, it may be said that the entire discussion resolves itself into the question, May or do marginal consumers' surpluses arise? The advocates of marginal utility assume, for the most part unconsciously, that they do not arise in the bulk of the world's ex- change. This is brought out very clearly in Fig. 5, a diagram which S. N. Patten employs to such good purpose. In this the consumer's surplus is always represented as a tri- angle or as a differential surplus, the total rectangle or marginal surplus being given to the producers. (See " The Theory of Dynamic Economics," p. 91.) 24. Diagram of the Monopoly Theory of Price. My own contention is that this scheme of distribu- tion involves the assumption that there are no non- Coasumers Surplus Producers Marginal Surplus Producers Differential Surplus Differential Cost JLowest Cost THE MONOPOLY THEORY OF PRICE. 59 FIG. 6. Consumers Differential Surplus , competing groups among consumers, or that among them we have an ideal condition of free competition. The obligation cer- tainly rests upon the Austrian school to show that this is true. If it is not true, then the marginal surplus will be divided, as is shown in Fig. 6, between consumers and producers in accordance with their relative monopoly strength.* Consumers Marginal Surplus Producers Marginal Surplus Producers Differential Surplus^ Lowest Cost II, THE PRICE OF COMPLEMENTARY GOODS. Thus far in examining the various phenomena of value the discussion has been confined to the deter- * It is well known that the promulgation of the marginal utility theory of value gave a strong impulse to the mathe- matical treatment of problems in economic theory. Of course, protests against this have been made on the ground that the subjective utilities are not capable of exact measurement. What is really meant by this is, that the subjective phenomena of value are not capable of exact measurement in the terms of the objective phenomena of price. For, as has been shown, the subjective and objective phenomena are never in exact correspondence except in the case of normal value. From this it follows that economics cannot be treated as an exact science, though certain laws or tendencies may be more or less clearly determined. 60 VALUE AND DISTRIBUTION. mination of the price of a single good. It will now be necessary to consider the phenomena in which several productive goods enter into the creation of a resulting consumption good. We have here a case of the phenomenon that Menger has so happily characterized as " Comple- mentary Goods. " The pleasure that may be realized from the resulting consumption good is dependent upon our possession of each and all of the comple- mentary productive goods. Hence in parting with one of the latter we lose not only the pleasure that would result from the direct consumption of that single commodity, but also an additional pleasure due to the importance of this single good to the com- plementary group of which it forms an essential part. In other words, a single commodity when it becomes a part of such a group has, as it were, two marginal utilities or values. This raises the question, Which of these, or what combination of these, determines the price of this productive good ? 25. The Confusion in the Austrian Treatment of Complementary Goods. Bohm-Bawerk insists most strenuously that even in this connection marginal utility is the all-sufficient determinant of value and price. He writes, " It is easy to see that the intimate corelation of complementary goods the corelation in which they afford this utility will be reflected in the formation of their value. This leads to a number of peculiarities, all, however, occurring within the limits of the universal law of marginal utility." (" Positive THE MONOPOLY THEORY OF PRICE. 61 Theory of Capital," p. 170.) But, since such goods have two marginal utilities, the question naturally arises, Which of these determines their price ? Menger holds that the price of such good is deter- mined by the sum of the two utilities. Menger's de- fence of this contention might prove very interesting. Wieser tells us that " The imputation of the pro- ductive contribution assigns in this way to every productive good a medium share. To calculate the productive contribution, and therefore also the value at this medium amount, is sound common sense." (" Natural Value," p. 93.) 26. Complementary Goods an Ordinary Case of Scarcity Price. Here, as elsewhere, appeals to " common sense" are to be viewed with suspicion. The difficulty which the Austrian economists find in the case of complementary goods is due to the fact that in their general discussion of value and price they have labored to eliminate the determina- tion between limits, and to show that both value and price depend in last resort upon the marginal utility of the good to the consumer or buyer. Hence, when they came to the question of complementary goods, they thought they had found an exceptional compli- cation, for it was clear that in this case the marginal utility to buyer and seller only set limits within which the price may vary. And so, without further analysis, we are told that the price is fixed at the middle point between these limits, or that it is "a medium amount." 62 VALUE AND DISTRIBUTION. As a matter of fact we here have a case of every day scarcity price. The owner of the other pro- duction goods necessary to the complementary group and the owner of the single good that is likewise necessary to the completion of this group stand over against each other as the prospective buyer and seller of the single good. Here, as in every instance of scarcity price, the marginal utility of the good to the buyer and its marginal utility to the seller fix the upper and lower limits of the price. At what point the price will actually be fixed depends upon the relative monopoly strength of the parties to the transaction. The price, therefore, is incapable of re- duction under any definite law save when the single good is freely reproducible. In every other instance the price depends on the relative monopoly strength of buyer and seller. It is in this way, and in this way alone, that every good that enters into a com- plementary group has its share in the joint product determined. From this it is manifest that comple- mentary goods are not a complication that demands a special analysis. Instead they are included under the ordinary and prevailing case of scarcity price. CHAPTER VI. VALUE AND PRICE. NOTHING has interfered more seriously with the popular acceptance of the Marginal Utility Theory than the formidable appearance of the terms employed by its advocates, to wit, subjective use value, subjec- tive exchange value, and objective exchange value. Indeed, no one can deplore more earnestly than the Austrians themselves the cumbersome terminology which seems to be necessitated by their analysis of value and price. Bohm-Bawerk writes : " I frankly confess that I would gladly exchange these pedantic and clumsy expressions for terms more euphonious and popular, if they could be got to indicate the opposition referred to with even approximate cor- rectness. But I have not been able to find such expressions. The words Use Value and Exchange Value are not suitable at all, because, as we shall see, there is a Subjective Exchange Value.* The source of the difficulty is here clearly indi- cated. It is the existence of certain phenomena to which Bohm-Bawerk has given the name " Subjec- tive Exchange Value." I would, however, urge that the elevation of this phenomenon into the same rank * Positive Theory of Capital, p. 130. 63 64 VALUE AND DISTRIBUTION. with Subjective Use and Objective Exchange Value is unnecessary, and tends to obscure the important distinction between the subjective and objective phe- nomena which the Austrians have labored so zealously to establish. 27. Subjective Exchange Value is not a Primary Phenomenon of Value. First let us be entirely clear as to what is here meant by Subjective Exchange Value. Let us assume that tobacco, when I smoke it myself, has a marginal utility of 4. It may, how- ever, happen that I can exchange the tobacco for wheat with a marginal utility of 8. Under such cir- cumstances the actual value of the tobacco will be 8. Here 4, or the marginal utility of the tobacco when directly consumed by myself, is its subjective use value; while the marginal utility which I secure by exchanging the tobacco for wheat is the subjective exchange value of the tobacco, which in this instance is 8. Or as Bohm-Bawerk puts it, the value of the tobacco is here determined by the marginal utility of a foreign class of goods. There are several serious defects in the reasoning employed in the discussion of this part of the sub- ject. One noticed by Bohm-Bawerk himself is the speaking of two marginal utilities for the same com- modity. This at one and the same time and to one and the same person is manifestly impossible. Again, it may well be questioned whether it is true that the value of any consumption good is in last resort determined by the marginal utility of a " for- VALUE AND PRICE. 65 eigii class of goods." What we really do is to ex- change tobacco at 4 for wheat at 8 until the supply of tobacco is so reduced that its marginal utility has been raised to 8. But all this aside, we fail to see that Bohm-Ba- werk has anywhere justified his elevation of " Sub- jective Exchange Value" to the rank of a primary phenomenon of value. In the chapter in which he seeks to establish this rank for subjective exchange value the burden of the argument is devoted to an effort to show that this phenomenon is essentially dif- ferent from that of objective exchange value. This we freely grant, and for the reason urged, that one is a subjective and the other an objective phenomenon. But we fail to see that he has anywhere shown that any such fundamental difference exists between sub- jective use value and this so-called subjective ex- change value. The difference between the direct and indirect use of a commodity may or may not be of sufficient im- portance to justify their recognition as subdivisions of use value, just as we recognize normal and mar- ket price as subdivisions of objective exchange value. But I fail to find any sufficient reason for elevating the indirect use or subjective exchange value to the rank of a primary phenomenon of value. 28. Use and Exchange Value versus Value and Price. Subjective exchange value being thus elimi- nated as a primary phenomenon, we are, by Bohm- Bawerk's own statement, brought back to the older 66 VALUE AND DISTRIBUTION. and less cumbersome terms, use value and exchange value. We have now to inquire as to the expediency of including such essentially different phenomena under the common term value. Wieser writes : " It must be emphasized that the word value alters its original meaning somewhat when transferred from the subjective relations to wants to the objec- tive relations to price." (" Natural Value," p. 51.) Why, then, I would ask, must we continue to in- clude both phenomena under the common term value ? Would not the antithesis between these two concepts be more clearly apprehended if they were always known by essentially different names, one as value, the other as price ? Even though a generic term that would include both phenomena is desira- ble, yet why should we confound the discussion by compelling the term value to perform this function ? As a matter of fact, it is much to be doubted whether anything is gained by the introduction of such a generic term. The only attempt in the writings of the Austrian economists to justify the continuance of " value" as a generic term is found in the following passage from Bohm-Bawerk : "The two groups of phenomena to both of which popular usage has given the ambigu- ous name 'Value' we shall distinguish as value in the Subjective and value in the Objective sense." (" Positive Theory of Capital," p. 130.) Now, while I would be among the last to break unnecessarily with the traditions of the past, yet it may fairly be VALUE AND PRICE. 67 asked, Why continue a "popular usage" that in- volves us in a confessed ambiguity ? This substitution of the terms value and price for the more cumbersome terms subjective use value and objective exchange value is open to but one objection. That is, the fear that we may lose sight of the distinc- tion between value as a subjective and price as an objective phenomenon. The importance of this dis- tinction between the subjective and objective phe- nomena cannot be too strongly insisted upon, but it may well be questioned whether their inclusion under the common term value does not tend to ob- scure this distinction. I would therefore suggest that the term value be strictly confined to the subjective phenomena, and that the term price be similarly restricted to the objective phenomena. One is the im- portance of the good to the individual measured in terms of marginal utility. The other involves a compromise between two such subjective estimates, and is measured in the objective terms of the quan- tity of money or money commodity for which the good in question will exchange. The price, of course, always has some relation to the marginal utility or value of the good ; but the correspondence between value and price, as was shown in the previous chapter, is never exact save in the case of normal value and price. In general the marginal utility of the good to consumer and producer only establishes limits within which the price may vary. CHAPTER VII. COST AND PRICE. THE Austrian economists hold that even in the case of freely reproducible goods " The law of costs is only an approximate law." And again, that "Costs are not the final but only the intermediate cause of value. In last resort they do not give it to their products, but receive it from them." (" Positive Theory of Capital," pp. 188, 189.) It will be neces- sary to examine these contentions with some care. I. THE LAW OF COST AND THE PRICE OF FREELY REPRO- DUCIBLE GOODS. The contention that even in the case of freely re- producible goods the law of cost is only an approxi- mate law will require some explanation. We have seen that one of the arguments urged against the cost theory of value was that even so-called freely repro- ducible goods are in reality scarcity goods during all the fluctuations of their price on either side of the normal. From this Bohm-Bawerk has elsewhere argued that freely reproducible commodities are ex- ceedingly rare, and hence the failure of the cost theory as a general theory of price. 29. The Law of Cost is here an Exact Law. It may be asked, however, if it is entirely fair to first show that these so-called freely reproducible goods are for a large part of the time scarcity goods, and then 68 COST AND PRICE. (39 to employ the same argument to show that cost does not exactly determine the price of these so-called freely reproducible goods during the time that they are in reality scarcity goods. The goods are, at any given instant, either scarcity goods or freely repro- ducible goods. Under the former assumption we are constrained to admit that the law of cost does not give an exact determination of their price. It is, however, just as clear that during the interval that the price is at the normal point, or while these goods are freely reproducible, in any strict sense of this phrase the law of cost is not an " approximate law," but determines the price with absolute exactness. 30. Cost is here a Direct Cause of Value. The second of the above contentions, that " Even where the law of cost holds, costs are not the final but only the intermediate cause of value," is open to equally serious criticism. The argument upon which this contention is based is in brief as follows: Under modern conditions most goods are produced in an- ticipation of the market, hence the determination of the utility of the goods precedes in time the deter- mination of the disutility which men will endure in the production of the good. From this it is inferred that the causal relation is from marginal utility to cost. Some special complications are discussed in Bohrn-Bawerk's chapter on " The Value of Produc- tive Goods," but the whole argument may fairly be resolved into an attempt to establish the above causal relation. 70 VALUE AND DISTRIBUTION. So far as the present writer can see, this entire dis- cussion as to the precedence of utility or disutility in the determination of price is not only without any real profit, but is actually misleading. For no matter what the seeming order of precedence may be, the fact remains that in the case of freely reproducible goods (normal price) , the determination is contingent not upon one but upon two factors. It is true that the price of such good may be measured either in terms of marginal utility or of marginal disutility, but its determination depends upon the coincidence, of these two factors. (See Fig. 4, page 55.) When, therefore, the Austrian economists tell us that in last resort the value even of freely repro- ducible goods is determined by marginal utility and not by cost, the question certainly seems a pertinent one : What determines the point at which this mar- gin is fixed? The immediate answer is, of course, that it is fixed by the limitation of the supply of the commodity ; increase this supply, and, other things being equal, marginal utility declines. This, how- ever, only raises the further question, How or by what is the supply limited ? In the case of scarcity goods this limitation is clearly effected by indeter- minate monopoly influences ; but in the case under discussion, that of freely reproducible goods, the only limitation to the supply is found in the cost of the goods, or in the marginal disutility endured in their production. The error of the Austrian economists lies in the COST AND PRICE. 71 assumption that in marginal utility we have a phe- nomenon that is incapable of further analysis, an assumption that is largely true so long as we confine ourselves to scarcity goods. But when we turn to freely reproducible goods it is clearly in order for us to inquire what determines this margin. If, for in- stance, in the equation v = xy we assume x to be fixed, then v will vary with y. It still remains, however, for us to inquire what determines x. This limiting element in the case of freely reproducible goods is clearly the marginal disutility incident to the pro- duction of the goods. II. THE LAW OF COST AND THE PRICE OF SCARCITY GOODS. Under this heading I will endeavor to show that, contrary to the teachings of the Austrians, cost plays an important part even in the determination of the price of scarcity goods. 31. A Substitute always Possible. I may em- ploy my resources either in the purchase of rare wine or in the purchase of a diamond, which shall it be ? Manifestly that which for a given expendi- ture will yield the greatest utility. Let us assume that it is the rare wine. This raises the question, How under such circumstances do I determine the maximum amount which I will give for the wine? Clearly this is very seriously affected by the price at which I can secure the diamond. In other words, there is no good so unique or rare but that some substitute for it can be found. The 72 VALUE AND DISTRIBUTION. difference between the freely reproducible and the rare good is not that a substitute can be found for one and not for the other, but that in the case of a freely reproducible good an entirely equivalent sub- stitute can be found, while in the rare good the sub- stitute is not entirely equivalent. It is nevertheless true that in determining the price of either kind of good we necessarily have in mind the cost of the next best substitute. In the case of freely repro- ducible goods, this cost of the substitute fixes the price of the desired goods with absolute exactness. In the case of scarcity goods, no such exact deter- mination is possible, for we are manifestly willing to give for the desired good not only the cost of the next best substitute, but, in addition to this, an allowance for the greater utility of the desired good.* That this is the mental process through or by which we determine what, if need be, we are willing to give for any rare good the most cursory intro- spection will reveal. The reason for adopting this method is likewise manifest. It lies in the indefinite and unsatisfactory character of all subjective esti- mates. This compels us to adopt some more tangible and objective method, even though, as in the case in hand, we seem to further complicate the problem by introducing a second subjective estimate, the mar- ginal utility of the proposed substitute. * See Clark's Philosophy of Wealth, p. 104. COST AND PRICE. 73 32. The Substitute is in Last Resort a Freely Re- producible Good. As this substitute is in last resort a freely reproducible commodity, its marginal utility may be measured in the terms of price. Hence to this extent the value or subjective estimate of a scarcity good finds exact objective expression. This, however, does not represent the total price of such scarcity goods, for as was seen, we are willing to pay something in addition for its superior advantages. In our endeavor to measure the difference between the marginal utility of the scarcity good and the marginal utility of its substitute, we are limited to the methods that are applicable to subjective phe- nomena. Hence inexact and tentative results alone are possible. The point at which the price is ac- tually fixed depending in this case upon the relative monopoly strength of buyer and seller. CHAPTER VIII. DISTRIBUTION AND THE THEORIES OP UTILITY, VALUE, AND PRICE. NOT the least of the many valuable contributions of the Austrian economists is their clear exposition of the intimate relation that exists between the phe- nomena of value and price on the one hand and the phenomena of distribution on the other. All know that primarily the problem of distribution is to de- termine how the price of commodities is divided among the several parties to the transaction. Yet, despite this, we are prone to lose sight of the very intimate relation that exists between the phenomena of distribution, value, and price. 33. Society is interested in the Increase of Total Utility. One of the first points that must be clearly recognized in this connection is the fact that society as a whole is not primarily interested either in the increase of total value, value per unit, or price, but is interested in the increase of total utility. (See page 38.) For if this is not true, then all that is necessary to increase the happiness of mankind is to decrease the supply of pleasurable commodities and so raise their marginal utility. (See Fig. 2, page 37.) As a matter of fact, however, total value and total utility frequently increase together, and in such in- 74 DISTRIBUTION AND UTILITY, VALUE, AND PRICE. 75 stances society can find guidance in its economic conduct in the terms of total value. This, of course, has the great practical advantage that total value is more readily computed than total utility. For while total utility can only be determined by the summa- tion of a long series of marginal utilities, total value is simply the product of the quantity of commodity by its final marginal utility. 34. The Individual is interested in the Increase of Total Value. As a matter of fact, however, this increase of total value parri passu with the increase of total utility is not realized except under the as- sumption of free competition : hence it is not a uni- versal or even a general experience. It might, for instance, very readily happen that an increase in the supply of a commodity beyond a certain point would cause a very rapid decline not only in the marginal utility or value per unit but also in the total value. This is shown graphically in Fig. 7, where with a supply represented by OA the total value is the area OAUF, while increase, AM, to Pio. 7. an the supply results in - the total value repre- sented by the much smaller rectangle, OMNE; on the other hand, the total utility increases from the 76 VALUE AND DISTRIBUTION. area OAUY to OMNUY, or increases by the area AMNU. If, therefore, the primary interest of so- ciety is in the increase of total utility, it becomes manifest that total value is not a safe guide. By reference to page 41 it will be seen that the above graphic illustration is the same figure that was employed in the discussion of the practice of the Dutch East India Company in destroying a portion of their crops in order to enhance the marginal utility and so the price of the balance. In other words, the interests of society and the interest of the individual may be at serious variance. The interests of society are best subserved by increasing the total utility or the supply of all useful commodities ; or, rather, in approximating the condition of free com- petition. The interest of the individual controlling the supply of any one commodity is in the direction of increasing its value and price, and so diverting a larger share of the general social product to his own peculiar advantage. Or, stated in a more familiar way, society desires free competition in all commodi- ties, the individual desires free competition in all commodities save the one that he supplies. This, indeed, is the scientific basis of Proudhon's attack upon existing conditions and of his claim that only by a socialization of all industrial operations could this source of evil be eliminated. Our present interest, however, is not in the equity of the case, but to show the very intimate relation that exists between the phenomena of utility, value, and price on the DISTRIBUTION AND UTILITY, VALUE, AND PBICE. 77 one hand and the phenomena of distribution on the other. 35. Disadvantages of the Orthodox Attitude. The Austrians were singularly happy in their ex- position of this part of the subject, and rightly in- sisted that the orthodox economists were at serious fault. Wieser writes : " The classical political econ- omy really examines only the value of products, or, more exactly, of produced consumption goods. So far as factors of production are concerned, it looks upon them, on the one side, as sources of income (rent, interest, wages, and perhaps also under- taker's income) ; on the other side, as the elements which go to form the cost of production, and are considered to decide principally the value of the products." * The objection here implied to the older treatment of distribution is largely based upon the antagonism of the Austrian economists to the classical theory of value. This is shown in the concluding lines of the paragraph just quoted. The Austrian economists have, therefore, endeavored to treat the problem of distribution in a way that is more in touch with their own theory of value. The fundamental ques- tion with them is not to determine the share of the social product that accrues to the 'several factors of production, but instead to determine the share that accrues to the several productive goods which enter * Natural Yalue, p. 71. 78 VALUE AND DISTRIBUTION 1 . into the complementary group that is necessary to the creation of the consumption good. 36. Advantages and Disadvantages of the Aus- trian Attitude. The difference in method may not at first sight seem important, and it may well be that in last resort they might be made to yield the same result. It is nevertheless true that the latter method establishes a much more intimate connec- tion between the theory of value and the theory of distribution. This has the great advantage that it gives a unity or coherence to economic theory as a whole, which seemed sadly lacking under the older method of treating the problem of distribution. But while the newer method undoubtedly enjoys this great advantage, yet its employment is attended with a corresponding disadvantage. The Austrians have labored to show that freely reproducible goods are rather the exception than the rule ; and so long as we confine ourselves to the consideration of concrete commodities much may be said in favor of this con- tention. Once persuaded of this, we are apt to dis- miss the phenomena of normal value as of little moment in any discussion of distribution, when as a matter of fact normal surpluses are of primary importance in that discussion. We have already referred to this in the Introduction, but must defer its full explication to a much later chapter. (See Sections 113 to 115.) In the present volume we will endeavor not to lose sight either of the intimate relation that subsists be- DISTRIBUTION AND UTILITY, VALUE, AND PRICE. 79 tween the phenomena of value and distribution or of the important part played by the several factors of production, land, entrepreneur, capital, and labor. In other words, starting from the phenomenon of price as the concrete fact presented for analysis, we shall endeavor to formulate the laws by which the several forms of surplus, rent, profit, interest on capi- tal, and gain of labor are determined. PART II. DISTRIBUTION. BOOK I.-RENT. CHAPTER I. THE RENT OP LAND. THE earliest writers upon economic questions in- cluded all payments to a landlord under the term rent. In this, of course, they simply followed the practice of every-day life. That rent so defined is a complex return they probably realized, for the most cursory examination of this return reveals not only a payment for the use of the land itself but also an amount that is in reality interest on the money in- vested in permanent improvements. Despite this, however, the pre-Smithian economists continued to employ the term rent in the above described way to the confusion of their own minds as well as to the confusion of their readers. I. FUNDAMENTAL PROPOSITIONS, 37. An Agrarian Doctrine. With the rapid de- velopment of England's manufacturing interests in the last half of the eighteenth century conditions were developed that compelled an analysis of the complex return to which laymen had given the name 84 YALTJE AND DISTRIBUTION. rent. Those who held that the future greatness of England depended upon the development of her manufacturing interests saw that these interests were very seriously affected by the rate of wages, and that this again, under the prevailing standard of life, de- pended very largely upon the price of food. From this it was an easy step to the conclusion that the high rents secured by the landlords were a serious impediment to the growth of the manufacturing in- terests, and so to the future greatness of England. This, of course, put the agrarians upon the defensive, and the defence which they set up was that high rents do not in any way affect the price of corn, and so do not affect the rate of wages. 38. Rent does not enter into the Determination of Price. In support of this contention it was urged that the price of wheat must always be high enough to pay the cost of production on the poorest farm that is maintained in cultivation. Bent, it was said, is the surplus secured by those who have more efficient farms (farms that are more fertile or that are nearer the market) : hence rent does not de- termine price, but is determined by price. Rent so defined is, of course, an entirely different concept from the rent of every-day language. It clearly ex- cluded all interests on the cost of improvements, and was supposed to include only payments for "the original and indestructible powers of the land." The following graphic illustration may serve to make the thought a little clearer. THE RENT OF LAND. 85 39. Diagram of Rent. As the number of farms growing wheat is very large, and as it is possible that no two are of J IG. o. exactly equal effi- E ciency in the pro- duction of wheat, n, H we can conceive 01 them as arranged in a series of increasing difficulty or non-efficiency in production. In Fig. 8 OH represents the cost or disutility of production on the most efficient farm, while MN represents the cost or disutility on the least efficient farm, that must be maintained in cul- tivation in order to insure a given supply of corn. Now, it was the contention of those who sought to defend the agrarian interests that the price of wheat must equal the cost, MN, or the supply of corn would decrease ; for the marginal producer, or he who produces at the greatest cost, will not continue to produce if he does not at least secure an amount that will cover his cost. In other words, the price of wheat is determined quite independently of the rent of the more efficient farms here represented by HE and DG. Not only so, but the price must first be fixed by the cost on the poorest farm before we can determine the rent of the better farms. Hence, rent is determined by price and not price by rent. At MN cost and price are equal. This is the case of a no-rent farni. The diagram usually employed to illustrate the 86 VALUE AND DISTRIBUTION. doctrine of rent is given in Fig. 9. It brings out with great clearness the fact that the rent of a given piece of land is the difference in its productivity and the productivity of the poorest land in the cul- tivation for the production of the same commodity. If the productivity of the various farms are repre- sented by ordinates, a line drawn through their upper extremities would descend from the productivity of the best land, represented by OF, to the productivity of the poorest land, represented by MN. The total rent arising from the production of this commodity is the area FNE, which corresponds with the area HNE in Fig. 8. In the case of intensive culti- vation the area FNE or FIG. 9. TT ._,._ r _ , HNE represents the rent of a particular farm. Fig. 8 has the advantage of , bringing out in a clear and distinct way the fun- damental concept that underlies the doctrine of rent, to wit, Price is determined by the greatest or mar- ginal cost. From this it is clear that the advocates of this doc- trine of .rent were right when they claimed that the causal relation was not from rent to price but from price to rent. In other words as here defined, rent does not enter into the determination of the price of wheat, and so does not interfere with the manufactur- ing interests by raising the cost of living and so the rate of wages. In conclusion, I would say that there THE RENT OF LAND. 87 is absolutely no hope for any firm grasp of the most elementary problems of economic theory until this fundamental concept, that rent is a surplus which does not enter into the determination of price, has been made part of our intellectual furnishing. Again, it must ever be borne in mind that this proposition rests upon the further contention that in the case of freely reproducible goods price is determined by the greatest or marginal cost of production. It may be well to preface our review of the writers who have contributed to this part of economic literature by a brief enumeration of the several propositions that are usually regarded as essential parts of the doc- trine of rent. 40. Rent due to Difference in Fertility and Dis- tance from Market. Rent is due to differences in the efficiency of the various farms, or, as it is usually stated, to differences in fertility and distance from market. Lying back of this proposition we find the assumption that with the increase in population men are forced to employ less and less fertile land. It has been objected to this that it does not correspond to the actual order in which land is brought into culti- vation. In new countries the best land frequently remains uncultivated for lack of sufficient capital to drain it, etc. A slight change in the ordinary state- ment of the doctrine of rent will meet this difficulty. For, capital and technical skill remaining the same, men will always cultivate the more efficient land first. 88 VALUE AND DISTRIBUTION. 41. Law of Diminishing Returns. It was not long before it was seen that in the extension of culti- vation men might either have recourse to new and less efficient land or they might expend more capital and labor upon the land already in cultivation. At bottom these amount to one and the same thing. This method of intensive cultivation, however, sug- gests the possibility of an increase in cultivation by differential increments, a concept that has some im- portant theoretical advantages, and is regarded by some modern economists as the typical case of rent. In either case an addition of capital and labor may, up to a certain point, yield an increasing return, but after reaching that point a given expenditure of capi- tal and labor yields a diminishing return. 42. Effect of Improvements. It was also seen that this tendency to a diminished return and the rent consequent therefrom might be offset by all causes, such as improvements in transportation, etc., that tend to reduce the difference in cost between the more efficient and the least efficient or marginal land. It was further seen that the influences that tend to re- duce this difference in cost are more generally real- ized in manufactures than in agriculture. It appears, then, that in our review of those writers who have been active in the promulgation of the doc- trine of rent we should look for some recognition of the following concepts : Differences in fertility and access to market, or, better, differences in efficiency of land. THE RENT OF LAND. 89 The law of diminishing return and the effect of improvements. Greatest cost determines price and price deter- mines rent. This last contention, that price deter- mines rent, is, in brief, the doctrine of rent. II. HISTORICAL DEVELOPMENT OF THE DOCTRINE OF RENT, 43. Adam Smith. It is not difficult to find iso- lated passages in "The Wealth of Nations" that seem to justify the claim that the doctrine of rent, as applied to land, found clear and explicit state- ment at the hands of Adam Smith. In the first place, he clearly recognizes not only that difference in fertility and distance from the market are sources of rent, but that these are offset by increased facilities in transportation. (See Book I. Chap. XI. Part I.) Again, he writes : " Rent, it is to be observed, therefore, enters into the composition of the price of commodities in a different way from wages and profit. High or low wages and profit are the cause of high or low price ; high or low rent is the effect of it. It is because high or low wages and profit must be paid, in order to bring a particular commodity to market, that its price is high or low ; but it is because its price is high or low, a great deal more, or very little more, or no more, than what is sufficient to pay those wages and profit, that it affords a high rent, a low rent, or no rent at all." (" The Wealth of Nations," Book I. Chap. XI.) But while Smith seems to see quite clearly that 90 VALUE AND DISTRIBUTION. rent does not enter into the determination of price, he is not so clear on the proposition upon which in last resort the law of rent is based, namely, that price is determined by the greatest or marginal cost of production. This is shown in the following passage : " As the price both of the precious metals and of the precious stones is regulated all over the world by their price at the most fertile mine in it, the rent which a mine of either can afford to its proprietor is in proportion not to its absolute, but to what may be called its relative fertility, or to its superiority over other mines of the same kind." (" The Wealth of Nations," Book I. Chap. XL Part II.) While he here recognizes that the rent of such mines is due to " their superiority over other mines of the same kind," he confounds the argument by saying that " the price of these commodities is regu- lated all over the world by their price at the most fertile mines in it." 44. Criticism of Smith. Passages like the above led those who immediately followed Smith to con- clude that he did not have a firm grasp upon the doctrine of rent. Ricardo writes : " Adam Smith sometimes speaks of rent in the strict sense to which I am desirous of confining it, but more often in the popular sense in which the term is usually employed. . . . He also speaks of the rent of coal-mines and of stone-quar- ries, to which the same observation applies, that the THE RENT OF LAND. 91 compensation given for the mine or quarry is paid for the value of the coal or stone which can be re- moved from them, and has no connection with the original and indestructible powers of the land/' * Malthus writes : " Adam Smith, though in some parts of the eleventh chapter of his first book he contemplates rent quite in its true light, and has interspersed through his work more just observations on the subject than any other writer, he has not ex- plained the most essential cause of the high price of raw produce with sufficient distinctness, though he often touches upon it ; and by applying occasionally the term monopoly to the rent of land, without stop- ping to mark its more radical peculiarities, he leaves the reader without a definite impression of the real difference between the cause of the high price of the necessaries of life and of monopolized commodities."-]* 45. Anderson. The first to give us a full and fairly complete statement of the doctrine of rent as applied to land was Dr. James Anderson, who in 1777 published a tract entitled "An Inquiry into the Nature of the Corn Laws." In this he writes : J "I foresee here a popular objection. It will be said that the price to the farmer is so high only on ac- count of the high rents and avaricious extortions of * Ricardo's Principles of Political Economy, Bohn edition, p. 45. ( An Inquiry into the Nature and Progress of Rent, p. 3. J This is taken from the abstract in Overtone's reprint of rare tracts. 92 VALUE AND DISTRIBUTION. proprietors. ' Lower (say they) your rents, and the farmer will be able to afford his grain cheaper to the consumers.' But if the avarice alone of the pro- prietors was the cause of the dearth of corn, whence comes it, I may ask, that the price of grain is always higher on the west than on the east coast of Scot- land? Are the proprietors in the Lothians more tender-hearted and less avaricious than those of Clyddesdale? The truth is, nothing can be more groundless than these clamours against men of landed property. There is no doubt but that they, as well as every other class of men, will be willing to augment their revenue as much as they can, and therefore will always accept of as high a rent for their land as is offered to them. Would merchants or manufacturers do likewise? AVould either the one or the other of these refuse, for the goods he offers for sale in a fair open way, as high a price as the purchaser is inclined to give ? If they would not, it is surely with a bad grace that they blame gentlemen for accepting such a rent for their land as farmers, who are supposed always to understand the value of it, shall choose to offer them. . . . " // is not, however, the rent of the land that deter- mines the price of its produce, but it is the price of thai produce which determines the rent of the land. " In every country there is a variety of soils, dif- fering considerably from one another in point of fertility. These we shall at present suppose ar- ranged into different classes, which we shall denote THE RENT OF LAND. 93 by the letters A, B, C, D, E, F, etc. ; the class A comprehending the soils of the greatest fertility, and the other letters expressing different classes of soils, gradually decreasing in fertility as you recede from the first. Now, as the expense of cultivating the least fertile soil is as great as or greater than that of the most fertile field, it necessarily follows that if an equal quantity of corn, the produce of each field, can be sold at the same price, the profit on culti- vating the most fertile soil must be much greater than that of cultivating the others, and as this con- tinues to decrease as the sterility increases, it must happen that the expense of cultivating some of the inferior classes will equal the value of the whole produce" This Anderson assumes to be the case in class F, and concludes that " the utmost avarice of the proprietor cannot in this case extort a rent from this class." Farmers in the other class could of course afford to pay a rent. " Nor would the proprietors of these fields find any difficulty in obtaining these rents ; because farmers, finding they could live equally well upon such soils, though paying these rents, as they could upon the fields without any rent at all, would be equally willing to take the one as the other." " Let us now suppose that the gentlemen of Clyd- desdale, from an extraordinary exertion of patriot- ism and an inordinate desire to encourage manufac- tures, should resolve to lower their rents, so as to demand nothing from those who possessed the fields 94 VALUE AND DISTRIBUTION. E, as well as those of the class F, and should allow the rents of all the others to sink in proportion ; would the prices of grain fall in consequence of this ? By no means. The inhabitants are still in need of the whole produce of the field F as before, and are under the necessity of paying the farmer of these fields such a price as to enable him to cultivate them. He must, therefore, still receive fourteen shillings per boll as formerly. And as the grain from the fields E D C B and A are at least equally good, the occu- piers of such of these fields would receive the same price for their produce. The only consequence, then, that would result from this quixotic scheme would be the enriching one class of farmers at the expense of their proprietors, without producing the smallest benefit to the consumers of grain, perhaps the re- verse, as the industry of these farmers might be slackened by this measure. " If, on the other hand, by any political arrange- ment, the price of oatmeal should be then reduced from fourteen to thirteen shillings per boll, it would necessarily follow that all the fields of the class F would be abandoned by the plough, and the rents of the others would fall, of course ; but with that fall of rent the quantity of grain produced would be dimin- ished, and the inhabitants would be reduced to the necessity of depending on others for their daily bread. Thus it appears that rents are not at all arbitrary, but depend on the market price of grain ; which, in its turn, depends upon the effective de- THE RENT OF LAND. 95 mand that is for it, and the fertility of the soil in the district where it is raised : so thai the lowering of rents alone could never have the effect of render- ing the grain cheaper" We here have a clear rec- ognition of the two essential propositions that price is determined by the greatest or marginal cost, and that price determines rent instead of being deter- mined by rent. So, too, in this first elaboration of the doctrine of rent, we find it set up as the defence of the agrarian interest against the growing demands of the manufacturing interest. Despite the clear enunciation in Anderson's tract of fundamental concepts involved in the doctrine of rent, nearly half a century elapsed before this doc- trine became an essential part of economic theory. It was not, indeed, until 1815 that Malthus, in " An Inquiry into the Nature and Progress of Rent," and Sir Edward West, in his essay on " The Application of Capital to Land,'' developed quite independently of each other and of Anderson the modern doctrine of the rent of land. 46. Malthus. This writer held that " The reason why the real price of corn is higher and continually rising in countries which are already rich, and still advancing in prosperity and population, is to be found in the necessity of resorting constantly to poorer land." (Page 44.) " The price of produce in every progressive country must be just about equal to the cost of production on land of the poorest quality in use ; or to the cost of raising additional produce 96 VALUE AND DISTRIBUTION. on old land, which yields only the usual return of agriculture stock, with little or no rent." (Page 35.) " There is no just reason to believe that if landlords were to give the whole of their rents to their tenants corn would be more plentiful and cheaper." (Page 57.)* Differences in fertility and distance from market are here clearly recognized as sources of rent. So, too, the propositions that greatest cost determines price and price determines rent. Again, the laws of Increasing and Diminishing Return are clearly ap- prehended by Mai thus. For he writes : " Many of the questions, both in Morals and Politics, seem to be of the nature of the problem de maximis and minimis in Fluxions ; in which there is always a point where a certain effect is the greatest, while on either side of this point it gradually diminishes." (" Tract on the Effects of the Corn Laws," p. 32.) 47. West. Sir Edward West's formulation of the doctrine of rent differs but little from that just ex- amined. West writes : " When in the progress of improve- ment new land is brought into cultivation recourse is necessarily had to poor land, or to that at least which is second in quality to what is already culti- vated." (Page 9.) Again, " The additional work bestowed on land must be expended either in bringing fresh land into *An Inquiry into the Nature and Progress of Rent. THE RENT OF LAND. 97 cultivation or in cultivating more highly that already in tillage. In every country the gradations between the richest land and the poorest must be innumer- able. The richest land, or that most conveniently situated for a market, will, of course, be cultivated first." (Page 9.) " It is the diminishing rate of return upon ad- ditional portions of capital bestowed on land that regulates, and almost solely causes rent." (Page 49.) " The corn that is raised at the least expense will, of course, sell for the same price as that raised at the greatest, and consequently the price of all corn is raised by the increased demand. But the farmer gets only the common profits of stock in its growth, which is afforded in that corn which is raised at the greatest expense ; all the additional profit, therefore, on that part of the produce which is raised at a less expense goes to the landlord in the shape of rent." (Page 50.) It is manifest that West, like Malthus, recognizes all of the fundamental conceptions involved in the modern doctrine of rent as applied to land. Differ- ence in fertility and distance from market, the law of Diminishing Returns, and the effect of improve- ments are clearly set forth, while the propositions that price is determined by the greatest cost and that rent is determined by price are clearly enunciated. 48. Ricardo. Ricardo, whose " Principles" ap- peared shortly after the above papers by Malthus and West, recognized the importance of their con- 98 VALUE AND DISTRIBUTION. elusions, and hastened to embody them in his system of distribution. In determining the cause of rent he follows the above writers very closely : " The most fertile and most favorably situated land will be first cultivated." (Page 49.) "If, then, good land existed in a quantity much more abundant than the production of food for an increasing population required, or if capital could be indefinitely employed without a diminished return on the old land, there could be no rise of rent." (Page 49.) Again, he writes : " Raw material enters into the composition of most commodities, but the value of that raw material, as well as corn, is regulated by the productiveness of the portion of capital last em- ployed on the land and paying no rent ; and there- fore rent is not a component part of the price of commodities." (Page 55.) He also gives us the following statement, in which the conditions under which rent arises are couched in the most general terms : " Rent is always the dif- ference between the produce obtained by the em- ployment of two equal quantities of capital and labor." Ricardo added but little to the doctrine of rent as formulated by Malthus and West ; he, however, em- bodied it in a scheme of distribution that was ac- cepted by English economists for many years after the publication of his " Principles," and so from this time on we hear only of Ricardo's law of rent, while the belief that in the cost of production we have the THE RENT OF LAND. 99 true and only measure of value became even more firmly riveted upon the body of economic theory. 49. Criticisms of Ricardo. For more than half a century after the publication of Ricardo's " Prin- ciples" English literature was well-nigh barren of any valuable contribution to the doctrine of rent. Specific statements of Ricardo were objected to, and the objections sometimes sustained. For instance, his contention that the most fertile and most favorably situated land will be first cultivated does not agree with the facts as we find them in the settling of a new country, for men are frequently forced to culti- vate the less fertile land of the hill-side until capital has accumulated to allow them to drain the more fertile bottom lands. Again, he writes : " Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil." (Page 44.) This contention has been attacked on the ground that the only original and indestructible powers of the soil are the area on which to expose soil and plants to air, water, and sunshine, and it is agreed that in this sense land is so abundant that it could have no value. (See Clark, Quarterly Journal of Economics, 1891.) Ricardo's phrase, " the original and indestructible powers of the soil," is certainly far from happy ; it is, however, capable of a more liberal interpretation than that given in this criticism. What Ricardo intended to say was that before rent can arise not 100 VALUE AND DISTRIBUTION. only the cost of production must be met, but also the cost of maintaining the land unimpaired in its fer- tility. Where this last deduction is not made the payment, as in the case of mines, is a royalty and not a rent. It is, indeed, in this very connection that Bicardo employed the terms to which Clark objects. He writes : " Compensation given for the mine or quarry is paid for the value of the coal or stone which can be removed from them, and has no con- nection with the original and indestructible powers of the land." Even the fundamental condition of a rent, that it does not enter into the determination of price. but is determined by price, has not escaped attack. In- deed, so able a defender of the Eicardian faith as J. S. Mill has yielded to the attack at this point. He writes : " Rent is not an element in the cost of pro- duction of the commodity which yields it ; except in the case (rather conceivable than actually existing) in which it results from and represents a scarcity value. But when land capable of yielding rent in agriculture is applied to some other purpose, the rent which it would have yielded is an element in the cost of production of the commodity which it is employed to produce." (Book III. Chap. VI.) This is a practical admission of the claim of Bi- cardo's critics that there is no such thing as a no-rent land. If this is true, it follows that rent does enter into the determination of price. In other words, the law of rent is completely nullified. In Book II., THE RENT OF LAND. 101 Chapter II., this statement of Mill, and likewise the contention that there is no no-rent land, will be ex- amined at some length. For the present I would urge that we must either dismiss the doctrine of rent as part of the antiquated lumber of our intellectual furnishing or hold fast to the proposition that rent is that surplus which does not enter into the determination of price, but is de- termined by price. CHAPTEE II. THE GENERAL, DOCTRINE OF RENT. I. THE DOCTRINE IN ENGLISH ECONOMICS. THE earlier English economists restricted them- selves almost entirely to a discussion of the doctrine of rent as applied to land. And yet from the very inception of the doctrine men recognized that its pri- mary and essential condition is that it does not enter into the determination of price but is determined by price. From this it is not far to the further conclu- sion that wherever such a surplus arises, whether in connection with land, labor, capital, or entrepreneur, we have a rent of the corresponding factor of produc- tion. And yet, despite the ease with which this further step in the argument may be taken, it was long delayed among English economists. Here and there we find an occasional reference to this general doctrine, but it was not until the last quarter of the present century that it found any general accept- ance. 50. Whately on the General Doctrine of Rent. This writer took occasion to declare that the rent of land is only one species of an extensive genus, and complained that English economists have regarded it as a genus by itself, and have either omitted its cog- 102 THE GENERAL DOCTRINE OF RENT. 103 nate species from all consideration or have included them under genera to which they do not properly belong. But beyond entering this general complaint the Archbishop makes no further contribution to the literature of the subject. 51. J. S. Mill on the General Doctrine of Rent. Mill writes : " Cases of extra profit analogous to rent are more frequent in the transactions of industry than is sometimes supposed. Take the case, for example, of a patent or exclusive privilege for the use of a process by which cost of production is lessened. If the value of the product continues to be regulated by what it costs to those who are obliged to persist in the old process, the patentee will make an extra profit equal to the advantage which his process .pos- sesses over theirs. This extra profit is essentially similar to rent, and sometimes even assumes the form of it; the patentee allowing to other producers the use of his privilege in consideration of an annual payment. . . . " The extra gains which any producer or dealer obtains through superior talents for business, or su- perior business arrangements, are very much of a similar kind. If all his competitors had the same ad- vantages, arid used them, the benefit would be trans- ferred to their customers, through the diminished value of the article : he only retains it for himself because he is able to bring his commodity to market at a lower cost, while its value is determined by a higher. All advantages, in fact, which one competi- 104 VALUE AND DISTRIBUTION. tor has over another, whether natural or acquired, whether personal or the result of social arrange- ments, bring the commodity, so far, into the Third Class, and assimilate the possessor of the advantage to a receiver of rent." (Appleton edition, pp. 585, 586.) While this is far from a happy statement of the case, yet it clearly recognizes the general character of the rent function. 52. Walker on the Rent of Entrepreneur. That Walker has shown that the entrepreneur performs as distinct and important a service as capital or labor will hardly be questioned ; but what interests us most in this connection is his claim that the return secured by the entrepreneur follows the law of rent. He writes: "I shall now undertake to show that profits, the remuneration of the entrepreneur or employer, partake largely of the nature of rent, being a species of the same genus. So far as this is the case, profits do not form a part of the price of the products of industry." (" Political Economy," 1888, p. 236.) As we shall have occasion to review this writer's contribution to this part of economic theory at some length in another chapter (see page 135), a very brief notice at this point will be suffi- cient. In conclusion, we can only express regret that he did not follow his argument to its legitimate conclusion, and call the return which confessedly follows the law of rent the rent of the entre- preneur. THE GENERAL DOCTRINE OF RENT. 105 53. Marshall on the Rent of Capital. This rent, though now and again incidentally noticed in Eng- lish literature, receives its first full enunciation at the hands of Professor Marshall. He writes : " Let us suppose, then, that an exceptional demand for a certain kind of textile fabric is caused by, say, a sudden movement of the fashions. The special ma- chinery required for making that fabric will yield for the time an income which bears no direct rela- tion to the expenses of making the machinery ; but is rather a high Quasi-rent governed by the price that can be got for the produce, and consisting of the excess of the aggregate price of that produce over the direct outlay (including wear and tear) incurred in its production. . . . " Meanwhile such of the old machinery as is in good repair may perhaps be kept at work ; but the income which it earns will bear no direct relation to its own expenses of production ; it will be the small excess of the selling value of the produce made by it over the wear and tear and other direct outlay involved ; this income will be a Quasi-rent,* the value of which will be determined by the price of * Marshall accents the greater permanence of land rent, and so calls the differential earnings of capital " Quasi-rent." Many German economists, on the other hand, regard every differential gain as an unqualified rent without regard to its duration. As a matter of fact, the rent of land is only a little more permanent, as the recent reduction in rents, because of improvements in transportation, abundantly testify. VALUE AND DISTRIBUTION. the produce, and play no direct part in determining that price. . . . " Similar illustrations might be taken from any other branch of business. Each branch has special features of its own ; but with proper modifications in detail the same general principle applies to all. In every case the net-income derived from the invest- ment of capital, when once that investment has been made, is a Quasi-rent." (Marshall's " Principles of Economics," pp. 469-471.) 54. Clark and Hobson on the General Doctrine of Rent. In the magazine literature of more recent years there is a growing tendency to regard rent as a general function, or as a surplus that may be realized by any and all factors of production. Indeed, there is some danger that its application will be extended beyond its legitimate limits. This is notably the case with an article by J. B. Clark in the Quarterly Jour- nal of Economics, 1891, under the caption of " Dis- tribution determined by a Law of Rent." In this Clark seeks to show that even the interest on capital and the wages of labor follow the law of rent. That both capital and labor may secure a differential return or a rent is, of course, admitted. Clark, however, seems to hold that the minimum rate of interest or the earnings of capital as an abstract fund- to use his own phrase is a differential gain or a rent. As his completed work will shortly ap- pear, criticism at this time would hardly be in order. In the same volume of the Quarterly Journal of THE GENERAL DOCTRINE OF RENT. 107 Economics there is an article by J. H. Hobson on " The Law of the Three Rents/' which seems like- wise to give a very wide range to the doctrine of rent. This will be examined in a later chapter. II. THE DOCTRINE IN GERMAN ECONOMICS. 55. Busch on the Rent of Labor. This writer in- forms us that " not only special talent and ability have this distinction, but even the laborer who is presumed to have mere bodily strength attains to a skill which gives him a gain in the same way as talent. Nor can this be regarded as a return for the time during which he was acquiring this skill, be- cause during that time he received all his skill could command or was paid for his total effect. So the old experienced seaman does not work harder than the new beginner, and yet he gets higher wages, because he knows the parts of the ship better, and so can more quickly, surely, and properly obey the commands of the officers. So in agriculture the ex- perienced ploughman is better paid than the inex- perienced. So, too, in stores the more skilful packer is paid better than the unskilled, though both use equal strength, and also in some positions greater honesty will command higher pay. If it was worth the trouble to be very exact in the matter, one could even contest whether wages-gain (Arbeiterslohn-Ge- winn) is rightly so characterized, for it can, at least in part, be regarded as a rent of the mere skill of labor, for though the rent is so insignificant, yet the 108 VALUE AND DISTRIBUTION. incapable laborers cannot draw it." We here have a clear recognition of a rent of labor, and that as early as 1800.* 56. Hufeland on the General Doctrine of Rent.f Writing some seven years later, Hufeland quotes with approval Busch's remarks about the rent of labor. He, however, goes much farther than Busch, and attempts to show that the doctrine of rent is ap- plicable to all the factors of production. (a) RENT OF LAND. In his discussion of this rent Hufeland clearly recognizes that it depends upon differences in fertility and distance from the mar- ket. He also sees that "the ground-rent depends, much more than hitherto considered gains, upon the market price of the product. It does not contain, like wages and capital, some principle for the deter- mination of the price, whereby these latter can be the cause of the price, for out of these, as is well known, the price of corn is formed, since they in their repair must receive a definite amount, and may even, upon this amount, obtain a proportional gain before the rent is paid. The ground-rent is entirely want- ing in this fundamental determining quantity ; it can only wait for what remains for it. The laborer and capitalist can first obtain not only their cost, but also their share of the gain, because when the gain is not * John George Busch, " Abhandlung von dem Gelduralauf," second edition, 1800. f "Neue Grundlegung der Staatswirthakunst," 1807. THE GENERAL DOCTRINE OF RENT. 1Q9 high enough they can go elsewhere to find employ- ment, but the landlord must wait for his rent, be- cause at best he can only allow his land to lie idle. Therefore, out of the market price comes first the wages and then the capital gain with some certainty, and the ground-rent is the least assured. If the market price sinks, the landlord must be the first to lose." (b) RENT OF CAPITAL. In his discussion of this rent Hufeland is not very happy. He nowhere suc- ceeds in showing a gain due to a differential advan- tage in production. In other words, he only gives us a formal and not an actual recognition of this rent. (c) KENT OF LABOK. Hufeland quotes the pre- ceding paragraph from Busch, but does not make any substantial addition to this part of the discussion. (d) RENT OF UNTERNEHMER. In his treatment of this rent he writes (paragraph 72) : " He who ap- plies or employs capital may be the owner of the capital, or he may employ the capital of others. " He who employs the capital is the Unternehmer, the owner of the capital is the capitalist, and the re- turn which the Unternehmer receives is called the ' Unternehmungsgewinn/ " The ' Unternehmungsgewinn' is the surplus after abstracting " 1. Wages with gain. " 2. Repair of capital. " 3. Repair for risk of capital. " 4. ' Capitalgewinn' or interest. HO VALUE AND DISTRIBUTION. " The balauce comes to the Unternehmer, and is partly a gain which he draws because of the greater risk which he incurs, and partly a rent for his talent or other mental qualities. And so it is in the class of successful Unternehmers that the greatest wealth is gained. The rent for the talent and other qualities has no limit, because men of this sort are scarce." Again, paragraph 76, " There are certain natural conditions without which production is impossible. These are derived from nature alone, and are more or less rare. The possessor of them can deny their use to others unless they pay him for it. But what he receives is no repair or indemnification for any ser- vice he has rendered, because he has rendered none ; it is pure gain, pure rent. " To these natural sources of wealth belong two classes : " 1. Human talent, capability, qualities of mind, heart, and character. " 2. The land or soil." He then goes on to remark " that hitherto only the last sort has been so regarded, and that now for the first time, through the addition of the first sort, the conception of the matter has been made more gen- eral." He then refers to Say as having some foreshadow- ing of this, and marvels that he did not recognize the general concept. It is true, Hufeland does not enter into that de- tailed discussion of the function and qualifications of THE GENERAL DOCTRINE OF RENT. the Unternelimer which we find in later writers, but that the Unternehmer receives a return because of his differential advantage, or that with equal pain, in the effort of production, there was an unequal re- turn, and so a rent, an unearned increment, he most clearly and explicitly recognized. It is also interesting to note that in his discus- sion of the subject he proceeds in the following order : 1. Rent of Fixed Capital. 2. Rent of Skill and Talent. 3. Rent of Land. Or so clearly did he recognize the breadth and generality of the doctrine of rent that he discusses all other applications of the doctrine before proceed- ing to the consideration of land-rent. 57. Mangoldt on the General Doctrine of Rent. From 1807 to 1855 the general doctrine of rent had, in German economics, a somewhat varied career. Some writers, like Rau, who were strongly impressed by Ricardian economics, failed entirely to see any general doctrine of rent. Others, like Herman and Nebenius, had more or less of a grasp of the idea that rent is a general function common to all factors of production. It was not, however, until Mangoldt * published in 1855 that we find a full and complete exposition of the doctrine as applied to all factors of production. * " Die Lehre von UnternchmtingHgewinn," 1855. 112 VALUE AND DISTRIBUTION. (a) RENT OF LAND. While Mangoldt recognizes the part played by difference in fertility and dis- tance from market, etc., he does not elaborate this part of the discussion or add anything to that which has already been well said by others. He seems to think that, so far as this rent is concerned, the evi- dence is all in and the case closed. (b) RENT OF CAPITAL. In his discussion of the rent of capital we have a distinct advance upon all previous contributions. For while the formal recog- nition of this rent which we found in Hufeland re- curs again and again in German economics, it is always equated to some disadvantage in production, to risk, etc. Here for the first time it is equated to a differential advantage in production, or to the superi- ority of certain forms of capital in the production of a given commodity. In this connection Mangoldt writes : " This interest-rent is not drawn by all forms of capital equally, any more than wages-rent is drawn by all who are capable of working. It is only the surplus which a certain form of capital draws in excess of the general rate of interest. . . . The reason why a certain form of capital yields this extra return is either the scarcity of its kind or the scarcity of its extent or amount. "If capital of a certain kind is either uncondi- tionally necessary to the production of a commodity, or can only be replaced by a less satisfactory substi- tute, it begins to give an interest-rent as soon as the demand for the commodity for whose production it THE GENERAL DOCTRINE OF RENT. serves is so strong that the supply at existing prices is not sufficient to satisfy it." ( be in harmony with the changed environment. All is here left to the chapter of accidents, the volition of the individual counting for naught. So long as we confine our- selves to a study of the lower forms of life there is much to sup- port this contention, for it is undoubtedly true that the envi- ronment here dominates the situation, but as we pass to the higher organic and super-organic phenomena the self-deter- mining power of the individual asserts itself with ever-in- creasing power. Indeed, it might be said that the evolution of all organic forms is but an escape from the domination of the environment or a growth in self-determining power. This is clearly recognized by men of Darwin's school when they study these higher phenomena. Mr. Spencer, for instance, writes in regard to the evolution of conduct as follows : " We saw that conduct is distinguished from the totality of actions by ex- cluding purposeless actions, but during evolution this distinc- tion arises by degrees. In^the very lowest creatures most of the movements from moment to moment made have not more recognizable aims than the struggles of an epileptic. . . . Their conduct is constituted of actions so little adjusted to ends that life continues only so long as the accidents of the environment are favorable. A higher form, as a rotifer, by better adjusting its own actions becomes less dependent upon the actions going on around it, and so preserves itself for a longer period." ("Data of Ethics," p. 11.) In other words, though it be true that in the evolution of lower forms " nature is red in tooth and claw," yet this gives us no warrant for assuming that the same conditions must prevail in the evolution of the higher forms. Or, to again return to economic terms, it may be said that in the future social progress will depend less upon the direct pains of labor and more upon the disutility of abstinence. 288 TALTJE AND DISTRIBUTION. provement in the condition of the masses in France subsequent to the Revolution it is, of course, impos- sible to say. But we do know that m his later editions he refers to this improvement upon more than one occasion. (See pages 189 and 320 of the seventh edition.) In any event, there can be no question about his complete change of attitude towards the whole social problem. He no longer has in mind that stationary condition of society in which the laborer cannot hope to secure more than a bare existence. Instead, he contemplates a hopeful progressing society in which the laborer secures a surplus not only above a bare existence but above an ever-advancing standard of life. It must be borne in mind, however, that it is still a cost theory of wages that Malthus has in mind. In his first edition we have a theory of normal wages in a stationary society, while in his later editions he seeks to establish a theory of normal wages in a progressing society. This is a point on which we shall have more to say in the next chapter. 153. The Unfair Treatment of Malthus. In con- clusion, it may be noted that some economists con- tinue to this day to direct their criticism against the teachings of the first edition of the " Essay on Popu- lation." For them the "Essay" has never gotten beyond the first, or at most the second, edition. Mal- thusianism continues to be defined as that pressure of population upon subsistence which is only relieved by the direful remedies of misery or vice. Even THE MALTHUSIAN THEORY OF WAGES. 289 when notice is taken of the fact that in his second edition Mai thus recognized that moral restraint played an important part, this fact is only employed to refute the argument of the first edition. It is certainly time that some protest was entered against this essentially unfair treatment of one of the ablest of English-speaking economists. In common fair- ness it should be remembered that Malthus entirely abandoned this contention as -well as the concept of society lying back of it. In other words, he no longer has in mind that concept of society in which the best that can be hoped for is that the conditions of life will not become worse. Instead, he sees a hopeful progressing society in which the passing years will bring an improvement in the condition of even the lowest classes. CHAPTER V. THE NORMAL VALUE THEORY OF WAG-ES. I. THE GAIN AND ABSTINENCE OF LABOR. HAVING followed Malthus in his escape from the pessimistic view of society which characterized the first edition of his " Essay," we are now in a position to recognize the fact that normal wages may contain a surplus above the mere cost of subsistence. This nowhere finds clearer statement than from the pen of F. H. Giddings in " The Modern Distributive Process." On page 54 he writes : " Nature makes generous advances to her children, but inexorably enforces payment. A given amount of food con- tains more energy, usually to be set free through its consumption, than was expended in obtaining it. Consequently, the value of work is usually a little more than the value of the antecedent work from which it was evolved. To these advances, persistently utilized, advances converted into abilities, abilities, in turn, put forth in works, the progress of man- kind from savagery to civilization has been due." In other words, social progress is dependent upon the existence of a surplus in normal wages in excess of the amount necessary to maintain the existing standard of life. It is to this surplus that I would restrict the term gain of labor, and the contention of the present chapter will be that this gain of labor is 290 THE NORMAL VALUE THEORY OF WAGES. 291 in all respects similar to that surplus return from capital to which the name interest has been given. It will be further urged that in the case of both of these surpluses we are dealing with a mobile, homo- geneous fund, and so with normal value ; that both are equated to some disutility, abstinence, or inter- ference with consumption, and that in both of them there is an exchange of present for future goods. From this it follows that a theory of wages may be constructed which is practically identical with the " Normal Value Theory of Interest." Much of the work necessary for the construction of such a theory has already been done by other economists. A review of their work will therefore be in order. In the review of the productivity theory of wages it was seen that labor like capital may be conceived either in its concrete forms of weaver and spinner or as a mobile, homogeneous fund, and that just as the interest on capital is the earning of the mobile fund of capital, so, too, the gain of labor is the earning of a similar mobile fund of labor. 154. Clark's Failure to recognize the Abstinence of Labor. We have seen that the first to set forth in any complete way the important distinction be- tween the concrete forms and the abstract mobile funds of capital and labor was J. B. Clark. Unfor- tunately, however, Clark did not follow the similarity between capital and labor to its legitimate conclusion, for he failed to see that there is a sacrifice of absti- 292 VALUE AND DISTRIBUTION. nence on the part of the laborer as well as on the part of the capitalist. In this connection Clark writes : " Labor is not the only sacrifice incurred in the cre- ating of wealth. Abstinence entails a sacrifice and it increases the fruits of industry." * It is here manifest that to this writer's mind the sacrifice of labor and the sacrifice of abstinence are two essentially different forms of sacrifice. In other words, he is here still in bondage to the older Mal- thusian notion that wages yield a bare subsistence. Yet, as has been shown in the preceding chapter, the moment we pass to the concept of a progressing society we see that normal wages must include a surplus. If the similarity which Clark has sought to establish between labor and capital has any sub- stantial basis in fact, it should lead us to suspect the existence of some sort of abstinence on the part of the laborer, to be equated to this surplus in his wages ; just as the abstinence on the part of the capitalist is equated to his surplus or interest. The failure of economists to recognize the existence of an interference with consumption in the experience of the laborer is readily explained. The earlier economists were interested in the problem of increas- ing the total wealth of a people or nation rather than in the problem of distribution. Modern econo- mists, it is true, have taken more interest in the * " Distribution as determined by a Law of Kent," Quar- terly Journal of Economics, 1891. THE NORMAL VALUE THEORY OF WAGES. 293 latter problem, but they have largely confined them- selves to an attempt to determine the shares secured by men as producers, ignoring for the most part their interest as consumers. 155. Patten on the Abstinence of Labor. The first to abandon this traditional attitude and seriously to inquire as to the effect of consumption upon the distribution of wealth was S. N. Patten, who, in his " Theory of Dynamic Economics," writes as follows : " Every increase of productive power lengthens the time during which a man can work and have a sur- plus ; but with every increase in the quantity pro- duced more time is needed to consume it. The time needed to consume goods cuts in on the time which might be used to produce them, preventing the day's work from being prolonged until the effort of pro- duction equals the pleasure of consumption. " Let us assume that a man occupies eight hours in sleep. Sixteen hours are thus left for work and leisure, or for production and consumption. If the man works after supplying the necessities of life, the return must be high enough to pay for the pain of production and the pleasure in consumption which he loses by spending his time in work." (Page 57.) " When the productive power of society has in- creased beyond a certain point, the efficiency of the workman becomes so great that the time needed to con- sume what he has produced cuts into the time needed for production ; he ceases to work before the pain of the last increment of production equals the utility of 294 VALUE AND DISTRIBUTION. the last increment of consumption. There is for the efficient workman a surplus at the margin of pro- duction equal to the pleasure that could be obtained in using their time in unproductive consumption." (Page 71.) " The sacrifice of the capitalist, therefore, is of the same nature as the sacrifice of the laborer when the latter gets a surplus above the cost of his labor." (Page 60.) In this recognition of an abstinence on the part of the laborer identical in all respects with the ab- stinence on the part of the capitalist we have one of the most important contributions that has yet been made to the theory of normal wages. 156. Clark's Restatement of Patten's Conten- tion. Clark, in a review of "The Theory of Dy- namic Economics," generously recognizes the great importance of Patten's contribution, and holds that it is an epoch-making book. He then restates the case in regard to the abstinence of labor in his own happy way. " It may well be that the last hour of labor in a day secures to the worker something that, in itself alone, is worth to him more than it costs in the way of mere fatigue ; but if the gaining of it entails the imperfect utilization of other things already in pos- session, then the acquisition of it may be unprofitable. It will afford no surplus.* " This fact, stated in another way, reveals a prin- ciple to which increasing interest and importance * Annals of American Academy, July, 1892, p. 40. THE NORMAL VALUE THEORY OF WAGES. 295 attaches as the industrial process perfects itself. The sacrifice involved in labor itself is coming to be largely abstinence. Confinement rather than fatigue is the cause of it, and this confinement burdens the man by that withdrawing of utility from things al- ready in his possession, to which attention has just been called. To the man who is confined for most of his waking time nothing is really worth what it should be, and some things are worth very little. He cannot utilize them. Though he may have them in his house he is kept from enjoying them. The man who works twelve hours a day is the typical ab- stainer of our modern economy. The saddest feature of his abstinence is that it is practised on things that he actually possesses. He abstains from the full use of his house, his garden, and his furnishings and decorations. He foregoes much of the enjoyment of his books and papers, and even of the comelier part of his wardrobe. He has little time for wearing good clothes, for sitting on porches in summer, or before fireplaces in winter. He lacks leisure for reading, etc. " What is worse, this lack of time takes the essen- tial utility out of the free gifts of nature. It puts a blight on air and sunlight. It spoils, for this par- ticular man, the trees, the streams, the hills, etc. ' We want to see the sunshine/ the worker is made to say in a somewhat familiar rhyme that expresses the eight-hour movement. It is the increase of utility that, for the men engaged in this struggle, two 296 VALUE AND DISTRIBUTION. extra hours of leisure would infuse into their entire environment that is the real object to be secured. This man wants to make the sun worth something." * II. A NORMAL VALUE OR AN EXCHANGE THEORY OF WAGES. With the data in hand we might readily construct an abstinence theory of wages that would be identical in all respects with the abstinence theory of interest. This, however, would give us, in the one case as in the other, but a partial solution for the problem. We are here dealing with a mobile, homogeneous fund, or with normal value ; hence disutility and utility, or abstinence and productivity, must be equated. The marginal saver will not endure the disutility of ab- stinence unless he receives a corresponding surplus in his future product. It follows from this that any satisfactory solution of the wages problem must take account of productivity as well as of abstinence. While special laborers may receive more or less than normal wages, all labor that is free to move must re- ceive at least normal wages. How much this will be is determined by the product of such free labor in the least productive branch of the whole field of indus- try ; in other words, by the marginal productivity of labor. This raises the question, How is this margin or the supply of labor determined ? The answer is as follows : The increase in the amount or efficiency of labor depends, in the first instance, on the realization * Annals of American Academy, July, 1892, p. 41. THE NORMAL VALUE THEORY OF WAGES. 297 of a surplus in the product of labor above the cost of maintaining the present supply of labor at the existing standard of life. But in order to secure this surplus the hours of labor are prolonged beyond the point which would be sufficient to maintain existing conditions. This extension of the hours of labor in- volves a postponement of present enjoyment or an increasing abstinence on the part of the marginal laborer. It is this abstinence, therefore, which ope- rates in restraint of the extension of the hours of labor, and so of the realization of that surplus in wages which is the necessary condition of an in- crease in the amount or efficiency of labor. In brief, then, the supply of labor, and so the margin of production, is determined by the disutility or absti- nence endured by the marginal man who postpones his consumption in order that he may continue his labor. It might further be urged, in support of the Normal Value Theory of Wages, that it is capable of state- ment in much the same terms as Bohm-Bawerk's Exchange Theory of Interest. We have already seen that we are here dealing with normal value, or with those conditions in which marginal utility and marginal disutility coincide. It only remains for us to show that in the gain of labor, as in the interest on capital, the increase in value is a function of time, and that somewhere along the line the laborer ex- changes present for future goods. 157. The Time Utilities of Labor. In an earlier 298 VALUE AND DISTRIBUTION. chapter we learned that capital has to do with utili- ties of time. That is to say, interest arises wherever time is necessary to mature the value of any com- modity. It matters not whether this time is necessi- tated by the course of the season, as in agriculture ; by that gain of power with a sacrifice of time which is incident to all machine production ; by the season- ing of lumber, the curing of skins, the aging of wine, or the returning heat of summer which arouses the demand for and so increases the value of the ice cut months before, all involve an increase of value as a function of time. And so we are led to conclude that wherever time necessarily intervenes between the first investment and the realization of the product in its fully matured value interest will arise. Eliminate time as a condition of the increase in value, or as- sume that the increase is an instantaneous process, and the surplus which we know as interest fails to appear. But while it has been generally recognized that natural forces other than labor need time in which to realize or manifest themselves, we have unconsciously continued to think of labor force as though it was exerted instantaneously or as not requiring an appre- ciable interval of time in which to manifest itself. We say that this has been a more or less unconscious assumption, for the moment we give the matter any consideration we recognize that labor force, like all other natural forces, is subject to time limitations. From this it follows that the time necessary for the THE NORMAL VALUE THEORY OF WAGES. 299 exercise of the laborer's power may cut in on the time necessary for consumption, and so result in an abstinence on the part of the laborer. 158. The Exchange by the Laborer of Present for Future Goods. If there is any abstinence or postponement of enjoyment on the part of the laborer there must in some way be an exchange of present for future goods. We are here met by the difficulty that in the payment of wages it is the capitalist and not the laborer who surrenders his claim on present or consumption goods, receiving in exchange unfinished products or future goods. This, of course, would serve as an explanation of interest, but if we are to account for the gain of wages, we must show that in some way the laborer surrenders his claim on present goods, receiving in exchange some form of unfinished or future goods. This, however, is not so difficult a matter as at first might appear. For the payment of wages by the capital- ist is, after all, the second step in the transaction. The first step is that in which the laborer post- pones the enjoyment of the free and other present goods under his control that he may continue his hours of labor. For this he receives in exchange the unfinished products of his labor or future goods. Later on he exchanges these unfinished products for present goods in the form of wages. 159. Confusion in Patten's Use of the Terms Cost and Surplus. This brings us to a source of confusion which was developed in Patten's discussion of the 300 VALUE AND DISTRIBUTION. subject, and which it may be well to dispose of at this point. Patten writes : " The sacrifice of the capitalist, therefore, is of the same nature as the sacrifice of the laborer, when the latter gets a surplus above the cost of his labor. The laborer gets this surplus because he abstains from some action which would have given him the same surplus. Like the capitalist, he is paid in this case for a negative act and not for a positive cost. Viewed from the position of society, neither of these acts is a cost, as they do not increase the positive pain which the members of the society must undergo. Viewed from the position of the buyer of goods, both are costs, because he must give a larger quantity of goods to get the articles they produce. Absti- nence of either kind is a negative cost which affects the value of goods in distribution, but neither is a positive cost increasing the pains of production. To delay a pleasure or to change from one occupation to another is not the same thing as to undergo a pain, though they have the same effect on the value of the goods to consumers. Aggregate costs, therefore, are composed of two elements, the positive cost of pro- duction and the negative cost of abstaining from the surplus which might be obtained by actions in less complete conformity to the interests of society. When it is said that marginal values equal the cost of production, a surplus in the form of interest and wages is added to the real cost/* (Page 60.) Now, not only are the terms positive cost and THE NORMAL VALUE THEORY OF WAGES. 3Q1 negative cost far from happy, but the contention that one is a real cost and the other a surplus is distinctly misleading. And so we find that Clark, in his review of " The Theory of Dynamic Economics," takes exception to Patten's use of the terms cost and surplus. This discussion was continued through sev- eral numbers of the Annals of the American Academy without reaching any very definite result. To the present writer it has seemed that the source of the confusion lies in the tendency to confound the two essentially different concepts of society. In a sta- tionary society cost is the actual wear and tear of the tissue of capital and labor involved in production. In a progressing society cost equals the above wear and tear of tissue plus the disutility or abstinence in- curred in securing that surplus which increases the supply of capital and labor. Both are social costs, for both are equated to normal value. In one in- stance, however, we are dealing with cost and normal value in a stationary society, and in the other with cost and normal value in a progressing society. In other words our concept of cost must vary with the supply of capital and labor that is assumed. If we desire to maintain the existing conditions, cost would include only the wear and tear of the existing supply of capital and labor. If, however, we have a progressing society in mind and so imply an ever-in- creasing supply of capital and labor, then the absti- nence incident to the maintaining of this increasing supply is as essential a part of our cost as the wear 302 VALUE AND DISTRIBUTION. and tear of the original supply. From this it fol- lows that the interest on capital and the gain of labor are surpluses if we have in mind the maintaining of existing conditions. On the other hand, they are part of our costs if we have in mind an increasing supply of capital and labor or a progressing society. 160. The Modification of Patten's Diagram. The diagram referred to is Fig. 5, page 58 of the present volume. The suggested change is shown in Fig. 11, in which the interest on capital and the FIG. 11. Differential Consumers Surplus Cost in a Pro- gressing So- ciety Marginal Consumers Surplus Marginal Producers Surplus Differential Producers Surplus Differential Cost Interest on Capital Gain of Labor "Wear and Tear of Capital and Labor Normal Surpluseg { Cost in a Stationary f Society gain of labor are shown as a part of the cost in a pro- gressing society and as surpluses in a non-progressing society. In the latter case they are included, as is here shown under normal surpluses. 161. The Normal Value Theory only applies to Normal Conditions in a Progressing Society. The preceding diagram will serve to bring out very clearly the scope and limitations of the theory of THE NORMAL VALUE THEORY OF WAGES. 3Q3 wages here proposed. In the first place, and as its name implies, it is a theory of normal wages. Again, it is only applicable to normal wages in a progressing society, for in a stationary society the normal sur- pluses, interest on capital and gain of labor, would disappear. If it is urged that the theory gives but a partial solution of the wages problem ; that it in no way accounts for market wages, we must admit its deficiency. On the other hand, it might be urged that market wages like all scarcity prices are incapable of exact determination or of reduction under anything like an exact law. (See Sections 121, to 123.) Nor- mal wages are, however, capable of exact determina- tion, and in a progressing society they include a gain which is equated to an abstinence on the part of the laborer. A theory which seeks to account for a surplus in wages above the cost of maintaining the laborer is likely to meet with serious opposition. Many of us still hold to that conception of society which ob- tained in the beginning of the century. We fail fully to realize that in a progressing society both capital and labor must secure a surplus above the cost of maintenance. We see this surplus quite clearly in the case of capital, because it is frequently the object of a separate payment. In the case of wages the surplus is not thus rendered manifest, the payment being in the form of the total amount and not of the surplus alone. And yet, if there is any- thing in the contention that there is a necessary re- 304 VALUE AND DISTRIBUTION. lation between capital and labor as mobile, homoge- neous funds, it follows -that if interest is a necessary condition of progress, then the gain of labor is like- wise a necessary condition of such progress. 162. Failure to secure this Gain due to Loss of Mobility. Finally, it may be urged that even in a progressing society there are many who do not secure any such surplus or gain of labor. We are here dealing with a question of fact, and must perforce admit that it is too often true. This, however, does not tell against the contention that in every progress- ing society normal wages must contain a surplus. For the surplus that we here have in mind is in- cluded in the earnings of labor as a mobile fund. If you interfere in any way with the mobility of this fund, you manifestly change the conditions of the problem, whether it is capital or labor that you have in mind. For instance, when power-looms superseded the old hand-loom much distress was undoubtedly oc- casioned. Certain portions of the mobile fund of labor had become fixed in the concrete form of hand-loom weavers, and the distress was in large measure due to the fact that these men had lost their mobility and could not readily adapt themselves to the new conditions. This, however, was just as true of the capital invested in the old hand-loom as it was of the weaver. Yet no one would argue from this that capital does not yield a surplus. RESUME. I. VALUE. 163. The Cost Theory and its Failure. The present volume has been written to little purpose if it has not made clear how intimate is the relation between the problem of value and the problem of distribution. It was this, indeed, that compelled me to preface the discussion of distribution with a review of the literature on the theory of value. In Chapter II. it was seen that the marginal cost theory of value failed because scarcity values are not the exception, but the rule. The prevalence of these scarcity goods means that among general commodities the price fre- quently contains a surplus, even for the marginal producer. From this it follows that even marginal cost must fail as the ultimate standard of price. 164. The Utility Theory and its Failure. In Chapter IV. it was shown that the marginal utility theory fails for a like reason, to wit, that the price frequently contains a surplus for the marginal con- sumer. Qi,just as the Marginal Cost Theory rests in last resort upon the assumption of ideal free competition among producers, so too the Marginal Utility TJieory rests upon a like unwarranted assumption of ideal 20 305 306 VALUE AND DISTRIBUTION. free competition among consumers. Any failure in this ideal condition will result in a marginal con- sumers' surplus, and in all such cases the Margi- nal Utility Theory fails as the ultimate standard of price. 165. Price determined between Limits. In Chap- ter V. the monopoly theory of price was discussed. It was there urged that the marginal utility of the good to the consumer and its marginal utility to the producer only set the upper and lower limits within which the price may vary. It was also maintained that the point between these limits at which the price is actually fixed is more or less indeterminate, since it depends upon the relative monopoly strength of buyer and seller. From this it was concluded that the phenomena of price cannot be reduced under any exact law. 166. Cost and Price. In Chapter VI. it was shown that in the case of freely reproducible goods price is directly and exactly measured by the mar- ginal cost of production. Again, it was shown that while scarcity prices are not directly and exactly measured by cost, yet some concept of cost does enter into our determination of the price of such goods. Of course, it is not the cost of the scarcity good, but it is the cost of the next best substitute that enters into this determination ; for there is no good so rare or so valuable that some less efficient substitute cannot be found to replace it. RESUME. 307 II. DISTRIBUTION. In the development of the theory of distribution, herein proposed, three forms of surplus have been recognized : KENT, OR THE DIFFERENTIAL SURPLUS that does not enter into the determination of price. PROFIT, OR THE MARGINAL SURPLUS that does enter into the determination of price. INTEREST ON CAPITAL AND GAIN OF LABOR, OR THE NORMAL SURPLUSES which enter into the deter- mination of price and into the social cost of pro- duction in a progressing society. It may be well to review in a rapid way the argument by which this scheme of distribution was developed. 167. Rent. In the review of the history of the doctrine of rent, it* was seen that it was first de- veloped in connection with the old Corn Law agita- tion. It was practically the defence set up by the agrarian interest against the charge that high rents compelled the payment of high wages, and so inter- fered with the manufacturing interest of England. As a result of this, the doctrine of rent was, in Eng- lish economics, largely confined to the earnings of land. In Germany, however, where the manufac- turing interests were much slower in their develop- ment, this phase of the agrarian problem had not yet arisen ; hence we find that German economists did not so persistently restrict the doctrine of rent 308 VALUE AND DISTRIBUTION. to the earnings of land. As early as 1807, Hufeland recognized that rent is a differential or price-deter- mined surplus, and that it is common to all the fac- tors of production. It has seemed wise, therefore, to follow the German economists, and to say that every price-determined surplus is the rent of the correspond- ing factor of production* 168. Profit. In this part of the discussion atten- tion was called to the fact that in many instances the marginal producer secures a surplus; that this sur- plus enters into the determination of price, and so is in direct antithesis to rent or the price-determined surplus. To this marginal or price-determining sur- plus, whether secured by merchant, manufacturer, farmer, or landlord, the name profit has been given. It is distinguished from rent, as above set forth, and from interest, by the fact that it is a marginal or mo- nopoly surplus, while interest is a normal surplus. In reviewing this part of the literature, it was seen that there has been much confusion in the use of the term profit. Sometimes it is applied to the interest on capital ; at other times to the wages of the entrepreneur ; while, not unfrequently, the terms profit and interest are employed interchangeably. This confused use of the term profit is partly due to the fact that the earlier economists assumed that the prevailing economic conditions are those of free competition. Under such circumstances the marginal or monopoly surplus, to which I have restricted the term profit, would not appear. BESUME. 309 The first to break with this earlier practice in regard to the term profit was Walker, who restricted it to that part of the entrepreneur's return which is a differential surplus and so follows the law of rent. It might, however, be urged that if this surplus follows the law of rent it would be much better to follow the German practice and call it the rent of the entrepreneur. We are thus enabled to restrict the term profit to the marginal or price-determining surplus. This, as was shown, is in entire agreement with the use of the term profit by the earlier econo- mists ; for, no matter how confused they may have been on other points, they were clear that profit is a surplus that enters into the determination of price. From this it follows that the term should not be applied to a surplus which confessedly does not enter into this determination. 169. Interest. In the discussion of this share of the social product we first reviewed the various theo- ries of interest, including the Exploitation, the Use, the Productivity, the Abstinence, the Marginal Prod- uctivity, and the Exchange Theory. The element of truth, as well as the defects of the several theories, was pointed out. The Exchange Theory was exam- ined with considerable care, and it was found that, while its author expressly repudiated abstinence as a factor in the problem, yet as a matter of fact he includes in his theory of interest all three of the essential elements, time, productivity, and absti- nence. His formal ignoring of the part played by 310 VALUE AND DISTRIBUTION. abstinence was seen to be due to his failure to recog- nize the fact that interest is a problem in normal value. In the development of this part of the argu- ment we drew very freely upon Clark's discussion of the two concepts of capital, one as a sum of con- crete intermediate products ; the other as an abstract, mobile, homogeneous fund. It was also seen that interest per se is the earning of this mobile fund, and that it is determined by the marginal produc- tivity of this fund or by its product in the least productive industry in which its employment is economically permissible. Again, as interest is the earning of a mobile homogeneous fund, its determina- tion is clearly a problem of normal value. If this is true, then we can no longer content ourselves with the statement that the rate of interest is determined by the marginal productivity of capital. The question necessarily arises, What determines this margin or the supply of capital ? To this there is the manifest answer that it depends upon the abstinence or dis- utility endured by the marginal saver, for it is this abstinence that determines the increase of the supply of capital. This, however, conflicts in no way with Bohm-Bawerk's contention that interest is the differ- ence in value between present and future goods. Instead, it confirms that contention in the strongest possible way. To the exchange theory as thus amended we gave the name The Normal Value Theory of Interest. 170. Wages. In the review of the literature of RESUME 311 this part of our subject the various theories of wages were examined. This included the Wages Fund Doctrine, the Residual Claimant Theory, the Prod- uctivity Theory, the Marginal Productivity Theory, and the Malthusian Theory. In the discussion of the Marginal Productivity Theory, it was learned that Clark had followed Marx and developed con- cepts of labor that are identical with Clark's two con- cepts of capital. In other words, we can think of labor either in the concrete form of weavers and spinners, or as a mobile, homogeneous fund capable of taking any shape the entrepreneur may desire. It was also shown that the rate of wages, like the rate of interest, is determined by the marginal produc- tivity of this abstract, mobile, homogeneous fund, or by its product in the least productive industry in which it will find employment if it retains its free- dom of motion. Again, it was urged that in dealing with labor as a mobile, homogeneous fund we are dealing with normal value. If this is true, it follows that we cannot content ourselves with the statement that the rate of wages is set by the marginal productivity of the mobile fund of labor. For the questions arise, What fixes this margin? What determines the supply of labor? Here, again, the answer was found to be that in a progressing society the supply of labor is limited by the disutility, or abstinence, endured by the marginal laborer who abstains from the enjoyment of free and other goods that he may continue the hours of his 312 VALUE AND DISTRIBUTION. labor. As interest is a surplus above the cost of maintaining the existing supply of capital, so, too, there is a like surplus in wages, or a gain of labor, which is in excess of the cost of maintaining the existing supply of labor. In the discussion of the Malthusian theory we found a recognition of such a surplus in wages as early as the fifth edition of the " Essay on Popula- tion." It is there clearly recognized that the exist- ence of such a surplus is a primary condition of social progress. All this led the present writer to propose what he has styled the Normal Value Theory of Wages, a theory that corresponds in all essential details to the Normal Value Theory of Interest. It was also shown that as the latter theory involved an exchange of present for future goods, so, too, the Normal Value Theory of Wages in- volved a like exchange of present for future goods. In other words, they might both be called either exchange theories or normal value theories of in- terest and wages. 171. Factors of Production versus Different Forms of Surplus. It has been seen that the ortho- dox economists, so far as they gave any thought to the problem of distribution, threw the accent upon the several factors of production, land, labor, capi- tal, and entrepreneur. For certain purposes it will still be well to retain this subdivision. It must, however, be remembered that there is another and much more important subdivision, rent, profit, in- KESUM& 313 terest on capital, and gain of labor. The first sub- division is more objective, and so was the first to be recognized. The second, though more important, does not lie so much on the surface of the phe- nomena of distribution. The relation between these subdivisions is best shown in the following tabula- tion : FACTORS OP PRODUCTION. THE THREE FORMS OF SURPLUS. DIFFERENTIAL. MARGINAL. NORMAL. Land* Bent. Rent. Bent. Bent. Profit. Profit. Profit. Profit. Interest. Gain. Entrepreneur . . . Capital Labor It is here seen that rent and profit are surpluses that may be secured by all four factors of produc- tion, while interest and gain of labor can only be secured by those factors that are freely reproducible. Again, it should be noted that interest and gain are surpluses if we have in mind the maintenance of existing conditions. They, however, become a part of costs if we have in mind a progressing society. It is therefore conceivable that profits might disappear and rents be confiscated and yet society continue to progress. But it is seriously to be ques- tioned whether society can long continue to progress Land here includes all natural forces except labor. 314 VALUE AND DISTRIBUTION. if either interest or gain is eliminated. Here, then, we have that ideal of society which socialist writers have endeavored to define. The defective analysis of the orthodox economists has, however, led them astray. In common with these economists, the social- ists failed to see that one portion of the earnings of capital, like the earnings of labor, is determined under conditions of free competition. It must be ad- mitted, however, that while progress depends in last resort upon the realization of the interest on capital and the gain of labor, yet, as a matter of fact, progress has in the past been largely dependent upon the stimulus of rents and profits. On the other hand, it may well be true that society has not only paid more in rents and profits than was necessary to se- cure the desired progress, but that these overdrafts have materially retarded that progress. For after all, /the only social justification that can be urged for rents J and profits is that they tend to resolve themselves ) into interest and gain through an advancing standard ( of life. It may be objected that we here employ the terms rent, profit, interest, and gain in an entirely different sense from that sanctioned by common usage, and that it would have been better to make use of entirely new terms. In reply, I would plead the precedent established by the earlier economists in their de- velopment of the doctrine of rent. They saw, of course, that the total payment to the landlord is a complex return which includes not only a payment RESUME. 315 for the land, but as well a payment for the money in- vested in permanent improvements. Having shown that the first was determined by a more or less definite law, they restricted the term rent to this share of the total payment. It is this method of procedure that has been followed in the present study. Having clearly distinguished three, or, if you like, four, forms of surplus, we have availed ourselves of the familiar terms rent, profit, interest, and gain by giving them a more restricted meaning than that which prevails in common practice. But if the employment of these or any equally short terms tends to obscure the im- portant differences that exist between these several surpluses, then let us abandon them and return to the more cumbersome terms, the price-determined sur- plus, the monopoly price-determining surplus, and the normal price-determining surpluses of capital and labor. After all, it is far less important what terms are employed than that we should clearly dis- tinguish these several surpluses in our study of dis- tribution. When, for instance, J. S. Mill tells us that rent does not enter into the determination of price except in the case of scarcity goods, we must have our several surpluses so well in hand that we clearly recognize that there is here a confusion in thought, due to the including of two forms of sur- plus, the price-determined and the price-determining, or rent and profit under a common term, rent. Again, when Wieser urges that interest is not a condition of progress because interest is high in non- 316 VALUE AND DISTRIBUTION. progressing countries like China, it is manifest that he has confounded a monopoly surplus with a nor- mal surplus or profit with interest by including both under a common term, interest. It is, as I have already said, far less important that we should re- tain the familiar terms rent, profit, interest, and gain than that we should avoid the confusion which results from the confounding of these essentially different forms of surplus. 172. An Essentially Different Scheme of Distri- bution from that proposed by Clark. In conclu- sion, it may be well to note that the scheme of distri- bution which is here proposed differs fundamentally from that proposed by J. B. Clark. He writes : " The true method of obtaining a law of distribu- tion is not, therefore, to eliminate from the earnings of society the element of ground-rent arid then try to find a principle that will account for the remaining elements ; it is to eliminate what is not rent namely, pure profit by reducing society to a static condition and then by the use of the rent-law to account for all that remains." * In keeping with this he writes : " Interest is the rent of the social fund of pure capital. It is a differential gain in the fullest sense of the term. It is measured by the Ricardian formula, and will bear all the tests to which a rent producer can be subjected." f * Quarterly Journal of Economics, 1891, page 291. f Ibid., page 303. RESUME. 317 As the latest statement of Clark's views upon this point are nearly a decade old, and as the first volume of his completed book will shortly appear, it is hardly in order to attempt any review of this part of his work at the present time. It is manifest, how- ever, that he here divides the entire social surplus into rent and profit. I, on the other hand, have recognized three forms of surplus, the differential, the marginal, and the normal ; or rent, profit, and, under the normal surplus, interest on capital and gain of labor. The source of our disagreement is found, I think, in the two competing differential concepts, one confined to the single industry and the other including the whole range of industry. For reasons given in sections 62, 66, and 67, I have fixed upon the first, while Clark has taken the second as the concept having the greatest economic importance. If Clark has not modified his views upon this point, it will be in order for the reader to pass upon the two schemes of distribution when his work appears. THE END. 14 DAY USE RETURN TO DESK FROM WHICH BORROWED LOAN DEPT. This book is due on the last date stamped below, or on the date to which renewed. Renewed books are subject to immediate recall. LD 21A-50m-4,'59 (A1724slO)476B General Library University of California Berkeley O f O* THE UNIVERSITY OF CALIFORNIA LIBRARY