The Principles of Economics Part 21

[Sidenote: Productivity of labor and diminishing returns of natural agents]

2. _The marginal productivity of labor is affected by the relative abundance and efficiency of natural resources._ If land suddenly becomes more abundant through the opening up of new continents, the lower grades of agents are sooner or later abandoned. Labor having more of a choice as to the place where it is to be used, spreads itself over the better grades and takes on a greater marginal productivity. The marginal unit of labor working on better soil than before produces more, and wages expressed in produce are higher. Ground rent, on the other hand, is less under these conditions. If, however, the land is fixed in area, and population increases, no other change taking place, the principle of diminishing returns applies. The marginal laborers (the last arrivals or the growing generation) being compelled to work with less efficient resources on a poorer quality of land, produce less than was the rule before, and a smaller product therefore is attributed to all the laborers of that grade. They get lower wages and more goes as rent to the owners of the land. By shifting of occupations this reduction may be somewhat moderated and equalized among the workers in other industries.

In both these cases, wages vary more than does the physical amount of the total product. In the first case, wages are a larger proportion of a larger product; in the second case, the product is larger (there being more laborers) but wages are a smaller proportion of it.

[Sidenote: The iron law of wages]

3. _The unwarranted a.s.sumption that a disproportionate increase in population is sure to occur, gave rise to the subsistence theory, or iron law of wages._ This a.s.sumption is now seen not to correspond with what is occurring in the civilized world. A hundred years ago, however, when the poorer cla.s.ses of Europe appeared to be increasing with little restraint, it was not strange that thinkers should look upon this increase as inevitable. According to the subsistence theory, the question of population was simply a question of food; it was believed that men surely would multiply up to the point where they could not further increase their numbers, and starvation wages would be the rule.

It was this way of looking at things that gave to political economy the name of the dismal science. When population is limited in large measure by volitional means instead of by war, starvation, and other material means, the problem changes and the error in such a theory of wages becomes clear.

[Sidenote: The standard of living, and wages]

The "standard of living" theory of wages is a refined form of the subsistence theory. This theory is that wages must rise to meet the cost of any standard that the laborers may set, and below which they will refuse to multiply. This is probably a fragmentary truth, but is quite inadequate as a theory. A high standard of living and all the social inst.i.tutions and customs that aid in keeping the population from too rapid increase, are factors in determining ultimately the marginal productivity of labor and, hence, the height of wages. If these restraining influences suddenly were withdrawn, a reduction of wages would follow slowly because of the diminishing returns of material agents. But the standard of living is merely a partial and negative factor. No limitation of the number of workers can raise wages above their productive contribution and, in the present state of industry, a considerable falling off in population might be expected to result in a loss of enterprise, of cooperation, and of capital. The positive factor in wages is productivity.

[Sidenote: If labor increases faster than wealth, wages fall]

4. _An increase of population more rapid than that of the artificial industrial agents would reduce marginal productivity._ Labor makes use of many kinds of agents besides the so-called natural resources. If population is stationary while tools are allowed to wear out or if an increasing population, while opening up a proportionate supply of land for food, fails to acc.u.mulate a proportionate stock of other tools, the marginal productivity of labor must diminish. Labor would be more imperfectly equipped with spades, hoes, wagons, horses, cattle, machinery. These artificial agents help in getting not only manufactured products, but food products. The equipment of labor must keep pace with the number of workers or they will be forced to the lower, or less effective, uses in the tools. On the other hand, the growth of science and invention, and the growth of wealth faster than the population, equipping labor as it does with more efficient implements, cause the marginal productivity of labor to rise, and hence also the wages.

[Sidenote: The wage-fund theory explained]

5. _The "wage-fund theory" was an imperfect perception of this truth that wages are influenced by the efficiency of the industrial equipment._ As the subsistence theory took a partial view, looking at agricultural land alone as the determinant of wages, so the wage-fund theory looked alone at a portion of the capital in the hands of employers which was the fund from which wages were paid. The large part played in discussion by this doctrine and the strong hold it had on thought is somewhat puzzling now; for if one begins to doubt its entire truth it is difficult to be quite just to its merits or to state it in a form that is plausible. The theory was that wages depended on the amount of capital that, in some way not clearly seen, was set apart by employers for the payment of wages. The capital making up the fund out of which wages were supposed to be paid, was only a very small part of all capital, even in the narrow sense in which that term was then used.

It was a.s.sumed that this wage fund, once set aside, was necessarily paid out to laborers, wages being therefore determined by simple division: laborers were the divisor, the wage fund the dividend, and the average wage the result. When the theory is thus baldly expressed, it appears to begin and end on the surface of the facts; and the wage fund appears to be rather the arithmetic sum of variously determined payments than, in any sense, the cause of wages.

[Sidenote: The wage-fund theory a partial truth]

The abler wage-fund theorists did not fail at times to see, though too dimly, as the determining causes behind the employers' action, certain other things, such as the material facilities, the desires of consumers, the capabilities of the workers, and the resulting value of the labor.

The element of truth which still should be recognized in this theory is that the relation of labor to its equipment influences its efficiency, and determines the part of the product to be set aside for wages. In that sense, wages are related to the abstinence of capitalists and to the supply of "capital," but capital understood not as a special fund of the employers, but, in a broader sense, as labor's entire environment of indirect agents.

-- II. RELATION OF TIME-VALUE TO WAGES

[Sidenote: Labor may be near or far, in time, from gratifications]

1. _The services of labor, whether for one's self or others, have a more or less immediate relation in time to the gratifying of wants._ While all human efforts to which the term services is applied have a relation to wants, there is much diversity in their nearness to the gratification for which they are destined. The process may be technically roundabout, to use the language of recent economists. One may break a stick from a tree, pick up a stone and drill a hole in it, catch an animal, cut thongs, tie the handle to the stone, and use it as a weapon to kill other animals for food, the first step being taken with the last object in view. But a still more essential relation we have seen to be the relation in time. Some things, some goods, are used at once, some after a long interval; some are durable, others perishable. Labor produces a song or a gla.s.s of lemonade to be consumed on the instant; it is employed on bridges, monuments, railroads, or interoceanic ca.n.a.ls lasting for centuries. In all these cases the general object sought is the same though very different intervals of time must elapse before the gratification matures.

[Sidenote: All future products of labor are discounted to their present value]

2. _As different periods of time must elapse before services are enjoyed, the expected value of all products but those immediately available is discounted in advance._ The services that afford gratification immediately, and those that afford gratification at a later time, are judged and compared at one and the same moment. All economic life centers in the present. This difference in the time of services surely cannot be ignored. If Robinson Crusoe, at work on his island with his limited supply of energy, continues to provide for next year's enjoyment, neglecting the present, present goods become scarce and their utility rises as compared with the future goods the same labor secures. To escape inconvenience, and in the extremest case to escape starvation, Crusoe would be compelled to restore the equilibrium between the wants of the two periods by shifting his labor back to the present. So in each little economic group and in our complex society there is constant rivalry of present and future wants, competing for the limited present supply of labor. The present says, "Give me your labor and I will give you the fullest enjoyment." The future says, "I will give you a greater gratification, but you must wait for it." A given labor force thus making possible a wide range of choice among present and future services, labor is distributed according to the prevailing rate of time-value, which, as we have seen, is approximately expressed by the rate of interest. If the rate of interest is high, it means that the present is urgent and will not easily yield to the future. If the rate is low, it implies that the present is comparatively well provided for, and that future wants are given more consideration.

[Sidenote: The employer adjusts his labor force to the interest rate]

3. _The employer in hiring labor and producing goods takes account of these time differences._ In the preceding paragraph has been noted the influence of time differences in the simplest problem of economic wages.

Interest is likewise taken account of in the bargains between workman and employer, by which contract wages are fixed. The employer of labor works subject to a prevailing rate of interest. If he ignores it he must lose. He should direct a given amount of labor to products that mature next year only when their expected selling price is greater than that of products that can be marketed this year. This difference due to time can no more be ignored than can any other difference in the cost of products. If the employer keeps the future goods to sell later, they will normally increase in value as they approach maturity; if he markets the goods at once, he normally must pa.s.s on to the purchaser the benefit of the discount he has made on their future value. That is to say, it is not the employer of labor, the purchaser of labor as such, who gains by discounting the future value of labor; it is the investor of capital (whether employer or later purchaser) who secures the rent as it matures.

[Sidenote: The discount of the future value of services is inevitable]

4. _Hence all wages paid for help on products that are remote are based on the present worth, or discounted value, of the future gratification to which the labor contributes._ The idea is held in one form or another by all radical socialistic writers, that the laborer does not get the full value of his products. In the sense that is here discussed, he does not. He does not get what the product will sell for in the future. He gets the probable future value at its present worth, discounted at the prevailing rate. That part of the employer's gains corresponding to this discount on labor is economic time-value.

Nor is this discount of future services dependent on a political system or on private property or on the wage system, as some have a.s.sumed. It is a universal truth. It is in the nature of wants that present and future should differ. A communistic or socialistic state would have to take account of this difference, else the whole social economy would be irrational and there would be no principle by which to apportion in time the productive forces of the community. Contracts to pay interest and contracts to pay wages might be forbidden and made criminal by formal law, but time-value would persist.

[Sidenote: Relations of wages, rent, and time-value]

5. _Wages and rent are coordinate species of the value problem; time-value is a different kind of problem, bearing to both the other problems a similar relation._ A close examination of the problems of rent and wages serves to bring out the close parallelism of these two forms of income as here defined. Rent is the value of the usufruct of wealth, wages are the value of the usufruct of labor. The bearer of the use in one case is material goods, in the other is human agents.

Different in the source of use, they are in large measure alike in the form of contract, or nature of the calculation. Together rent and wages comprise the value of all currently arising uses; they are the two coordinate species of the genus "value of uses." The two groups of uses are closely interrelated in practice, each acting and reacting on the value of the other.

Time-value is a different genus of the value problem. Having to do with time differences, it must be found in connection with every use that is not immediate, whatever be the bearer of that use. Its application to rent is more frequent and obvious, as only the uses of material agents are capitalized, that is, sold in perpetuity. Moreover any service of labor that is not at once consumed is fixed in material form and appears thenceforward as wealth whose uses are yielded as rent or as consumption goods.

-- III. THE RELATION OF LABOR TO VALUE

[Sidenote: Several conditions of value]

1. _Labor is a cause, but only one of the causes of value._ A cause is some one condition which is seen to be necessary to the existence of a thing, and usually that condition which brings the thing about, other things being a.s.sumed. In what sense ought a cause of value be spoken of?

In one sense it is in the minds of men--it is their wants; again, looked at objectively it is in the nature of the good--it is the quality that fits it to gratify the want. But if both these causes are operative, and labor is applied to fit goods better to gratify wants, labor appears as the cause of value. Personal causes are so much more evident, an explanation through personal causation is so much more satisfying in the earlier stages of scientific inquiry, that labor long continued to be looked upon as the one source of value. This erroneous view has never quite ceased to influence economic thought, and a great deal of effort has been directed to formulating theories of value based upon it. The cruder form of the error has now almost disappeared, but in various little recognized ways it still persists.

[Sidenote: Two phases of economic production]

2. _Economic production is the origin, or genesis, of value finding its source either in objective things or in services._ The writers of fifty years ago defined economic production as the application of labor to the creation of wealth. But as there are two factors in production, man and material things, so there are two productive sources of value. In some cases the origin of value is attributable to man's action; in other cases scarce uses arise in objective things without man's action. Broad as is this definition of production, it does not include the enjoyment of free goods, as in the case of the care-free darky basking in the sun.

Anything that, causing a feeling of greater importance to attach to a thing, changes it from a free good to a scarce good or makes it more scarce, is a cause of its value. A large rainfall causing a greater crop of grain may be thought of as producing utility. The regular surplus of value attributable to the waterfall or to the railroad, is the product of the material services of wealth. Production through human action is the more obvious and is the more usually thought of; the part of material agents must be recognized if the fallacies of the labor theory of value are to be avoided.

[Sidenote: Labor applied to creating utility]

3. _Human activity is directed to shaping and arranging things so as to increase their want-gratifying power._ Human and non-human agents are combined in different proportions in various products. In one thing more land and machinery are used, in another more labor is used. But either of these two great cla.s.ses of agents may touch the vanishing point in the production of value. While it is true that man's part is the most striking aspect of production, yet there may be value without labor. The study of rent puts this abstractly, but in a clear light. In actual life, however, a part of the value is usually attributable to rent, a part to labor.

[Sidenote: Value of labor derived from its products]

But in what sense is even this part attributable? Not in the sense that the labor is the original source of value which imparts that value to its products. The usufruct of wealth is the basis of rent; the need to pay rent is not the cause of value in the product. Likewise, product is the basis of wages, labor is not the origin of value. Labor, like the forces and qualities of wealth, is the cause of technical changes. These changes, if favorable, cause the goods to take on a higher value which is reflected back to the labor. The labor itself has not a predetermined, ascertainable value, but only a resultant, derived value.

An exception to this statement appears on a superficial view of the value of labor hired under the wage contract to make a particular product. The labor having a market value because of a large number of well-known alternate uses, can be diverted to a particular use only on condition of a definite payment. Labor here, as viewed by the employer, appears to have an original value; products, a derived value. But in the logical view, labor is seen to impart technical qualities to the goods; in turn, the goods to impart value to the labor. Man hunts throughout industry for those things to which his labor can be applied usefully. He foresees in them the changes that will increase the value. It is only as he has judged rightly that the value taken on by the things is reflected back to the labor attributed to it.

[Sidenote: No unit of labor to serve as a standard of value]

4. _Labor being of many qualities and receiving many rates of pay, there is no unit of labor that can be used as a measure of value._ The idea of finding in a "unit of labor" an objective standard of value to which the value of all other things could be reduced has been a very attractive one. This fallacious hope animates every one beginning to think of the value problem. The thought was so plausibly formulated by Ricardo that it continued for a long time to be the generally accepted doctrine of value. Although most writers reject the formal statement of the labor theory of value, use is frequently made, even now, of the phrase "unit of labor," suggesting the thought that labor is the standard by which the value of all goods may be measured. This unit of labor of the text-books may be seen to be either labor arbitrarily a.s.sumed to be of uniform quality and quant.i.ty, as a day of unskilled labor (in that form quite incomparable as to amount with other qualities), or a given amount of money invested in labor of different grades at its market value. It is only by expressing labor in terms of its value that the various grades of skilled and unskilled labor can be reduced to a h.o.m.ogeneous unit, which is but a unit of money wages. This should not deceive us into the belief that in any peculiar sense labor can be used as a unit of value. It is equally valid and convenient to speak of units of machinery and of units of land. In terms of capital a factory site can be expressed as a multiple of a potato patch not less perfectly than can a sculptor's labor as a multiple of a ditch-digger's.

[Sidenote: Scarcity and utility of labor]

Scarcity of things desired is the one objective condition of value. The things that labor can produce and the labor to produce them being scarce, labor takes on a value. All things at last become comparable in terms of psychic income in each individual's judgment, but as yet neither in this comparison nor in the market values that are fixed in exchange, has any absolute standard been found by which the utility of all goods or the welfare of all men can be measured.

CHAPTER 25

THE WAGE SYSTEM AND ITS RESULTS

-- I. SYSTEMS OF LABOR

[Sidenote: The wage system defined]