and illustrated by an example. The division The successive division of labor relatively unimportant. Difficulty of the problem with respect it is liable to misinterpretation. It would be better to say that most goods are produced by the joint efforts of several persons. The total reward which can go to all of them cannot in the long run exceed the total value of the finished product. This must be divided among all those who have participated in its production. The price of the loaf of bread must reward all those who have had any part in its production, including the baker, the miller, the various transportation agencies, and the farmer, as well as the manufacturers of the farmer's, the baker's, and miller's tools, and so on back to the lumbermen and the miners who extracted the raw material out of which the tools were made. . . . The division of labor [is] of two kinds: contemporaneous and successive. We have the successive division among the farmer, the miller, the railroad, and the baker, since, one after the other, they work on the same material. We have an example of the contemporaneous division of labor in the case of the mill owner and his employees of various kinds, the farmer and his hired men, the railroad company and its employees, and so on. The problem of distributing the price of the finished product among those who work upon the raw material in regular succession is simply a problem in the price of commodities. Thus, the reward of the farming comes to them in the form of the price of wheat. This price must then be distributed among the contemporaneous workers on the farm, that is, the farmer himself and his hired men. The difference between the price of wheat and the price of flour and its by-products must furnish the reward for the milling group, and the difference between the price of flour and the price of bread must furnish the total reward for the baking group. All this is fairly simple and leads to no serious social problem. . . The great social problem of to-day, so far as it related to the distribution of wealth, is the problem of distributing the price of the product among the contemporaneous workers. Of the total price of wheat, how much should go to the landowner (if he is a different man from the farmer), how much to the farmer, how much to the laborer, how much to the capitalist (if he is a different man from the farmer)? Or, again, of the total spread between the price of wheat and the price of flour, which furnishes the total reward to the milling group, how much should go to the capitalist, how much to the owner of the mill site, how much to the manager, and how much to the various types of laborers? And so on through the transportation groups and the baking groups, the difficult problem is always that of the distribution of the total earnings of the group among the contemporaneous workers within it. . . . It simplifies the problem somewhat to classify those who take part in the contemporaneous division of labor according to the functions which they are supposed to perform. It is customary to divide them into four main classes. The first class is made up of the laborers, who work either with their hands or with their heads, and receive their share in the form of wages or salaries (for the sake of simplicity, salaries are, in this chapter included under wages); the second class is made up of the land-owners who furnish the land and receive rent; the third class is made up of capitalists, who supply the capital and receive a reward in the form of interest; and the fourth class is made up of the independent business men, who undertake to assemble all the other factors, who take the chief risks of the enterprise, and receive whatever is left over after all the others have been paid, and call it profits. But economic theory has given rise to a great deal of The matter of rent has given rise to a great deal of discussion Rent as an among economists. Conflicting theories have been evolved with respect to the relation of rent to wages, interest and profits. though rent as an economic theory is involved in much dispute, at least students of the subject are agreed as to the chief factors discussion. which influence the rent of, say, agricultural land. These factors are briefly outlined by Professor Bullock in the following passage: Rent, in the economic use of the word, is the return that is secured by the owner of any natural agent. The most common case is the rent secured from land, but the rent of water privileges, dock facilities, etc., is an income of the same sort. Natural agents are reduced to private ownership when they become scarce relatively to the demand 1 From Charles J. Bullock, Introduction to the Study of Economics. Silver, Burdett & Co., 1900; pp. 399, 401. Rent de fined and illustrated. Origin of the rent of land. The influof ence fertility. Importance of location. The payment of interest is no longer considered unethical. for them. Land became private property only when nomadic peoples settled down to agricultural life, and arable land became scarce. The income received from natural agents may be explained by considering its most common form, the rent of land. Such rent arises out of differences in the desirability of various tracts of land, due to differences in location or in natural fertility. For agricultural purposes the natural fertility of land is important. Nature does much more to make some lands fertile than it does for others. Temperature and rainfall favor some lands. Some soils are far stronger than others, and can be used continually without deteriorating in the same degree. A plain has certain advantages over the slopes of a mountain, and land with a southern exposure is superior to land that slopes to the north. When land is once brought into cultivation, then the condition of the soil depends also upon the methods employed to preserve its fertility; but natural differences still remain very important. The location of a tract of land is important in determining its desirability for any purpose whatever. Agricultural land must be accessible to the market, and the rent secured from it will depend partly upon this consideration. Land used for residence purposes will be more or less desirable according to its accessibility, its healthfulness, and the beauty of its surroundings. Land used for the location of manufacturing or commercial enterprises must, above all, be accessible to the market, to means of transportation, and to the labor supply.. 52. Some factors influencing interest1 In the Middle Ages some people thought that the payment of interest was unethical. One reason for so thinking was that since money is an inanimate object it cannot propagate itself in the manner that animals propagate themselves. For this reason, it was contended, a man who has loaned out $1000 has no right to demand back any more than this amount. However, this point of view no longer prevails, and to-day we say that the payment of interest for the use of capital is not only necessary but just, for the reason that with it the 1 From Henry Rogers Seager, Principles of Economics. Henry Holt & Co., 1917; pp. 269–272. borrower is enabled to produce more goods than he could otherwise have produced. In the following passage, Professor Seager discusses some of the reasons for variations in the interest rate: ... The effect of monop oly. raise the interest rate. The most familiar ground for differences in the return from different investments is the presence of monopoly. The monopolist deliberately restricts the output of the monopolized product so that the returns to the capital and labor he employs exceed those to be realized in competitive industries. . . . Another cause of differences in interest rates results from the Risk may danger of accidental destruction to which some capital goods are exposed. Whenever this danger may be provided against by the machinery of insurance, the difference figures simply in the larger replacement fund which must be earned in addition to current interest by the capital goods affected. In many cases the danger is too irregular and uncertain to be insured agains, and the increased interest needed to attract capital into the precarious investment depends upon the temperament of investors. Conservative people will be deterred by the fear of loss from investing at all in such enterprises. More reckless and optimistic capitalists may be tempted into taking large risks by the promise of only a slightly larger return than the current rate of interest. rates vary among sections In addition to the differences in rates of interest earned in differ- Interest ent investments and by different kinds of capital goods, there are differences among different sections. Although much more readily different transported to the best market than labor, capital also is timid about of the venturing too far from its source. Capitalists usually feel that they country, can better estimate the risks involved in investments near home than at a distance. In consequence of this feeling capital tends to be concentrated in the centers where men of wealth live, and new and backward communities are able to command less than their proportionate share of the available capital equipment. Instead of there being one rate of interest on free capital in a country like the United States there are a variety of rates, ranging from the low rates found in the large cities and the manufacturing sections of the North and East to the high rates prevailing in the agricultural and mining regions of the South and West. though such variations tend to decrease. A variation of from two to three per cent between the rates of interest regularly charged for equally good loans by banks in New York and Arizona roughly reflects the difference in the earning power of capital goods in the two localities. As the country's banking system is perfected and different districts are brought into more intimate business relations, the supply of capital will tend to distribute itself more equally over the entire industrial field and such differences will become less marked. . . . Social importance of the problem of wages. The effect of ease and cleanliness upon wages. 53. Some factors influencing wages 1 A proper appreciation of the principles influencing rent and interest is an important concern of the student of economics. At least equally important is the matter of the share of the joint income of industry which goes to laborers in the form of wages. Indeed, some observers believe wages to be of more social importance than any of the other shares in distribution, first, because the wage-earners outnumber those who are primarily land-owners, capitalists or entrepreneurs, respectively; and second, because most laborers are dependent entirely upon their wages for their livelihood, while those who are primarily land-owners, capitalists, or entrepreneurs are, in a financial sense, in a less precarious position. Be this as it may, the social importance of the problem of wages cannot be denied. In the following selection Adam Smith discusses some of the factors influencing wages: First, the wages of labor vary with the ease or hardship, the cleanliness or dirtiness . . . of the employment. Thus in most places, take the year round, a journeyman tailor earns less than a journeyman weaver. His work is much easier. A journeyman weaver earns less than a journeyman smith. His work is not always easier, but it is much cleanlier. A journeyman blacksmith, though an artificer, seldom earns so much in twelve hours as a collier, who is only a laborer, does in eight. His work is not quite so dirty, is less dangerous, and is carried on in daylight, and above ground. Secondly, the wages of labor vary with the easiness and cheapness, 1 From Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. London, 1776. Book 1, Chapter x, Part I. |