 Chapter 8 of Principles of Economics Book 6 This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer, please visit LibriVox.org Recording by Ashwin Jain Principles of Economics Book 6 by Alfred Marshall Chapter 8 Profits of Capital and Business Power Continued The causes that govern earnings of management have not been studied with any great care till within the last 50 years. The earlier economists did not too much good work in this direction because they did not adequately distinguish the component elements of profits but served for a simple general law governing the average rate of profits a law which, from the nature of the case, cannot exist. In analyzing the causes that govern profits, the first difficulty which we meet is in some measure verbal. It arises from the fact that the head of a small business does himself much of the work which in a large business is done by salaried managers and foremen whose earnings are deducted from the net receipts of the large business before its profits are reckoned while the earnings of the whole of its labor are reckoned among its profits. This difficulty has long been recognized. Adam Smith himself pointed out that the whole drugs which the best employed apothecary in a large market town will sell in a year may not perhaps cost him above 30 or 40 pounds though he should sell them, therefore, for three or four hundred, but a thousand percent profit this may frequently be no more than the reasonable wages of his labor charged in the only way in which he can charge them upon the price of the drugs. The greater part of the apparent profit is the real wages disguised in the garb of profit. In a small seaport town, a little closer will make 40 or 50% upon a stock of a single hundred pounds while a considerable wholesale merchant in the same place will scarce make 8 or 10% upon a stock of 10,000. It is here important to distinguish between the annual rate of profits on the capital invested in a business and the rate of profits that are made every time the capital of the business is turned over that is every time sales are made equal to that capital or the rate of profits on the turnover. At present we are concerned with profits per annum. The greater part of the nominal inequality between the normal rates of profit per annum in small businesses and in large will disappear. In the scope of the term profits were narrowed in the former case or widened in the latter so that it included in both cases the remuneration of the same classes of services. There are indeed some trades in which the rate of profit rightly estimated on large capitals tend to be higher than on small though if reckoned in the ordinary way it would appear lower. For of two businesses competing in the same trade that with the larger capital can nearly always buy at the cheaper rate and can avail itself of many economies in the specialization of skill and machinery and in other ways which are out of the reach of the smaller business. While the only important special advantage with the latter is likely to have consists of greater facilities for getting near its customers and consulting their individual wants. In trades in which this last advantage is not important and especially in some manufacturing states in which the large firm can sell at a better price than the small one, the out goings of the former are proportionately less and the income is larger. And therefore, if profits are so reckoned as to include the same elements in both cases, the rate of profit in the former case must be higher than in the latter. But these are the very businesses in which it most frequently appears that large firms after crushing out small ones either combine with one another and thus secure for themselves the gains of a limited monopoly or by keen competition among themselves reduce the rate of profit very low. There are many branches of the textile, the metal and the transport trades in which no business can be started at all except with the last capital. While those that are bigger on a moderate scale struggle through great difficulties in the hope that after a time it will be possible to find employment for a large capital which will yield earnings of management high in aggregate though low in proportion to the capital. There are some trades which require a very high order of ability but in which it is nearly as easy to manage a very large business as well of moderate size. In rolling mills for instance, there is little detail which cannot be reduced to routine and a capital of 1000,000 pounds invested in them can be easily controlled by one able man. A rate of profit of 20% is not a very high average rate for some branches of the iron trade which demand insistent though and contrivance in the matters of detail but it will yield 150,000 pounds a year as earnings of management to the owner of such works and even stronger cases are offered by recent fusions of giant firms in successful branches of the heavy iron industry. Their profits fluctuate much with the state of trade but though enormous in the aggregate they are said to be on the average at a low rate. The rate of profits is low in nearly all those trades which require very little ability of the highest order in which a public or private firm with a good connection and a large capital can hold its own against newcomers so long as it is managed by men of industrious habits with sound common sense and a moderate share of enterprise. As men of this kind, a seldom wanting either to a well established public company or to a private firm which is ready to take the ablest of its servants into partnership. On the whole then we may conclude firstly that the true rate of profits in large businesses is higher than at first sight of use because much that is commonly counted as profits in the small business are to be clashed under another head before the rate of profits in it is compared with that in a large business and secondly that even when this correction has been made the rate of profit reckoned in the ordinary way declined generally as the rise of the business increases. Part 2 The normal earnings of management are of course high in proportion to the capital and therefore the rate of profits per annum on the capital is high and the work of management is heavy in proportion to the capital. The work of management may be heavy because it involves great mental strain in organizing and devising new methods or because it involves great anxiety and risk and these two things frequently go together. Individual trades have indeed peculiarities of their own and all rules on the subject are liable to great exceptions but the following general propositions would be found to be valid other things being equal and to explain many inequalities in the normal rates of profit in different trades. First, the extent of the work of management needed in a business depends more on the amount of the circulating capital used than on that of the fixed. The rate of profit tends therefore to be low in trades in which there is a disproportionately large amount of durable plant and that requires but little trouble and attention when funds it has been laid down. As we have seen, these trades are likely to get into the hands of joint stock companies and the aggregate salaries of the directors and higher officials bear a very small proportion to the capital employed in the case of railway and water companies and even in a more marked degree of companies that own canals and docks and bridges. Further, given the proportion between the fixed and circulating capital of a business the work of management will generally be the heavier and the rate of profit the higher the more important the wages bill is relatively to the cost of material and the value of the stock in trade. In trades that handle costly materials, success depends very much upon good fortune and ability in buying and selling and the order of mind required for interpreting rightly and reducing to the proper proportions they cause it are likely to affect price is rare and can command high earnings. The allowance to be made for this is so important in certain trades as to have induced some American writers to regard their profits as a remuneration of risk supply and as consisting of what remains after deducting interest in earnings of management from gross profits but this use of the term seems on the whole not advantages because it tends to class the work of management with mere routine superintendents it is of course true that as a rule a person will not enter on a risky business unless other things being equal he expects to gain from it more than he would in other trades open to him after his probable losses have been deducted from his probable gains on a fair actuarial estimate if there were not a positive evil in such risk people would not pay premier to insurance companies which they know are calculated on a scale sufficiently above the true actuarial value of the risk to pay the company's great expenses of advertising and working and yet to yield a surplus of net profits and where the risks are not ensured for they must be compensated in the long run on a scale about as high as would be required for the premier of an insurance company if the practical difficulties of insurance against business risk could be overcome but further many of those who would be most competent to manage difficult businesses with wisdom and enterprise are repelled from great risks because their own capital is not large enough to bear great losses thus a risky trade is apt to get into the hands of rather reckless people or perhaps into the hands of a few powerful capitalists who work it ably but arrange among themselves that the market shall not be forced so as to prevent them from having a high rate of profit on the average in trades in which the speculative element is not very important so that the work of management consists chiefly of superintendents the earnings of management will follow pretty closely on the amount of work done in the business and a very rough but convenient measure of this is found in the ages bill and perhaps the least inaccurate of all broad statements that can be made with regard to a general tendency of profits to equality in different trades is that where equal capital are employed profits tend to be certain percentage per annum on the total capital together with a certain percentage on the wages bill a manufacturer of exceptional ability and energy will apply better methods and perhaps better machinery than his rivals he will organize better the manufacturing and marketing sites of his business and he will bring them into better relation to one another by these means he will extend his business and therefore he will be able to take greater advantage from the specialization both of labor and of plant thus he will obtain increasing return and also increasing profit for if he is only one among many producers his increased output will not materially lower the prices of his goods and nearly all the benefit of his economies will accrue to himself if he happens to have a partial monopoly of his branch of industry he will so regulate his increased output that his monopoly profits increase but when such improvements are not confined to one or two producers when they arise from a general increase in demand and output which corresponds to it or from improved methods of machinery that are accessible to the whole industry or from advances made by subsidiary industries and increased external economies then really then the prices of the products will keep close to a level which yields only a normal rate of profits to that class of industry and in the process the industry is likely to have passed over to a class in which the normal rate of profits is lower than its old class because there is in it more uniformity and monotony and less middle strain than before and though this is nearly the same thing in other words because it is more suited to joint stock management thus a general increase in the proportion with the quantity of product bears to the quantity of labor and capital in an industry is likely to be accompanied by a fall in the rate of profits which may from some points of view be regarded as a diminishing return measured in values Part 3 We may now pass from profit per annum and examine the causes that govern profit on the turnover It is obvious that while the normal rate of profit per annum varies within narrow limits the profit on the turnover may vary very widely from one branch of trade to another because it depends on the length of time and the amount of work required for the turnover Thus wholesale dealers who buy and sell large quantities of produce in single transactions and were able to turn over their capital very rapidly may make large fortunes though their average profit on the turnover is less than 1% and in the extreme case of large stock exchange dealings even it is only a small fraction of 1% but a ship builder who has to put labor and material into the ship and to provide a birth for it a long while before it is ready for sale and who has to take care for every detail connected with it must add a very high percentage to his direct and indirect outlay in order to remunerate him from his labor and the locking up of his capital Again, in the textile industry some firms buy raw material and turn out finished goods while others can find themselves to spinning, to weaving or to finishing It is obvious the rate of profit on the turnover of one of the first class must be equal to the sum of the rates of profit of one of each of the three other classes Again, the retail dealer's profit on the turnover is often only 5% or 10% for commodities which are in general demand and which are not subject to changes of fashion so that while the sales are large the necessary stocks are small and the capital invested in them can be turned over very rapidly with very little trouble and no risk but a profit on the turnover of nearly 100% is required to remunerate the retailer of some kinds of fancy goods which can be sold but slowly of which various stocks must be kept which require a large place for the display and which a change of fashion may render unsellable except at a loss and even this high rate is often exceeded in the case of fish, fruit, flowers and vegetables part 4 we see then there is no general tendency of profits on the turnover to equality but there may be and as a matter of fact there is in each trade I need every branch of each trade a more or less definite rate of profits on the turnover which is required as a fair or normal rate of course these rates are always changing in consequence of changes in the method of trade which are frequently begun by individuals who desire to do a larger trade at a lower rate of profit on the turnover that has been customary but at a larger rate of profit per annum on the capital if however there happens to be no great change of this kind going on the traditions of the trade that are a certain rate of profit on the turnover should be charged for a particular class of work are of great practical service to those in the trade such traditions as outcome of much experience tending to sure that if that trade is charged a proper allowance will be made for all the costs supplementary as well as prime incurred for that particular purpose and in addition the normal rate of profit per annum in that class of business will be afforded if the change of price which gives much less than this rate of profit on the turnover they can hardly prosper if the charge of price which gives much less than this rate of profit on the turnover they can hardly prosper and if they charge much more they are in danger of losing their cluster since others can afford to undersell them this is the fair rate of profit on the turnover which an honest man is expected to charge for making goods to order when no price has been agreed on beforehand and it is the rate which a court of law will allow in case a dispute should arise between buyer and seller part 5 during all this enquiry we have had in view chiefly the ultimate or long period or true normal results of economic forces we have considered the way in which supply of business ability in command of capital tends in the long run to adjust itself to the demand we have seen how it seeks constantly every business and every method of conducting every business in which it can render services that are so highly valued by persons who are able to pay good prices for the satisfaction of their wants and those services will in the long run earn a high reward the motive force in the competition of undertakers each one tries every opening forecasting probable future events reducing them to their true relative proportions and considering what surplus is likely to be afforded by the receipts of any undertaking over the outlay required for it all his perspective gains enter into the profits which draw him towards the undertaking all the investments of his capital and energies in making the appliances for future production and in building up the immaterial capital of a business connection have to show themselves to him as likely to be profitable before he will enter on them all of the profits which he expects from them enter into the reward which expects in the long run for his venture and if he is a man of normal ability normal that is for that class of work and is on the margin of doubt whether to make the venture or not they may be taken as true representative of the marginal normal expenses of production of the services in question does the whole of the normal profits enter into true or long period supply price the motives which induce a man and his father to invest capital and labor in preparing him for his work as an artisan as a professional man or as a businessman are similar to those which lead to the investment of capital and labor in building up the material plant and the organization of a business in each case the investment so far as man's action is governed by deliberate motive at all is carried up to that margin at which any further investment appears to offer no balance of gain no excess or surplus of utility over disutility and the price that is expected as a reward for all this investment is therefore a part of the normal expenses of production of the services rendered by it long period of time is however needed in order to get the full operation of all these causes so that exceptional success may be balanced against exceptional failure on one hand are those who succeed evidently because it turned out to have rare ability or rare good fortune either in the particular incidents of their speculative enterprises or in meeting with a favorable opportunity for the general development of the business and on the other are those who are mentally or morally incapable of making good use of their training and their favorable start in life we have no special aptitude for their calling whose speculations are unfortunate and whose businesses are crammed by their encroachment of rivals or left stranded by the tide of demand receding from them and flowing in some other direction but those these disturbing causes may thus be neglected in problems relating to normal earnings and normal value they assume the first rank and exert a predominating influence with regard to the incomes earned by particular individuals at particular times and since these disturbing causes affect profits and the earnings of management in very different ways from those in which they affect ordinary earnings there is a scientific necessity for treating differently profits and ordinary earnings when we are discussing temporary fluctuations and individual incidents questions relating to market fluctuations cannot indeed be properly handled till the theories of money, credit and foreign trade have been discussed but even at this stage we may note the following contrast between the ways in which these disturbing causes such as we have just described affect profits and ordinary earnings Part 6 in our first place the undertakers profit bear the first brunt of any change in the price of those things which are the product of his capital including his business organization office labor and of the labor of his employees and as a result fluctuations of his profits didn't really precede fluctuations of their wages and are much more extensive for other things being equal a comparatively small rise in the price for which he can sell his product is not unlikely to increase his profit manifold perhaps to substitute a profit for a loss that rise will make him eager to reap the harvest of good prices while he can and he will be in fear that his employees will leave him or refuse to work he will therefore be more able and more willing to pay the high wages and wages will tend upwards but experience shows that whether they are governed by sliding scales or not their seldom rise as much in proportion as prices and therefore they do not rise nearly as much as in proportion as profits another aspect of the same fact is that when trade is bad the employer at worst is earning nothing towards the support of himself and his family but the employer is outgoing so likely to exceed his income particularly if he is using much borrowed capital in that case even his gross earnings of management are a negative quantity that is he is losing his capital in very bad times this happens to a great number perhaps the majority of undertakers and it happens almost constantly to those who are less fortunate or less able or less well fitted to their special trade than others Part 7 to pass to another point the number of those who succeed in business is but a small percentage of the whole and in their hands are concentrated the fortunes of others several times as numerous as themselves who have made savings of their own or who have inherited the savings of others and lost them all together with their fruits of their own efforts in unsuccessful business in order therefore to find the average profits of a trade we must not divide the aggregate profits made in it by the number of those who are reaping them not even by that number added to the number which have failed but from the aggregate profits of the successful we must attract the aggregate losses of those who have failed and perhaps disappear from the trade and we must then divide the remainder by the sum of the numbers of those who have succeeded and those who have failed it is probable that the true gross earnings of management that is the excess of profits of interest is not on the average more than a half and in some risky trades not more than a tenth part of which it appears to be two persons to whom they estimate of the profitableness of a trade by observation only of those who have secured its prices there are however as we shall presently see reasons for thinking that the risk of trade are on the whole diminishing rather than increasing part 8 we have passed to another difference between the fluctuations of profits and ordinary earnings we have seen that before free capital and labour have been invested in securing the skill required for the work of the artisan or professional man the income expected to be derived from them is of the nature of profits though the rate of such profits which is required is often high for two reasons the people who make the outlay do not themselves reap the greater part of the reward arising from it and they are frequently in straightened circumstances and are not able to invest for a distant return without great self-denial and we have seen that when the artisan or professional man has once obtained the skill required for his work a part of his earnings are for the future really a quadrant of the capital and labour invested in fitting him for his work in obtaining his start in life his business connections and generally his opportunity for turning his fast qualities to good account and only the remainder of his income is through earnings of effort but this remainder is generally a large part of the whole and here lies the contrast for when a similar analysis is made of the profits of the businessman the proportions are found to be different in his case the greater part is quasi-rent the income with the undertaker of business on a large scale gets from the capital material and immaterial invested in his business is so great and liable to such violent fluctuations from a considerable negative to a large quantity that he often thinks very little of his own labour in the matter if profitable business opens out to him he regards the harvest accruing from it as almost pure gain there is so little difference between the trouble of having his business on his hands only partially active and that of working it to its full capacity that as a rule it scarcely occurs to him to set off his own extra labour as a deduction from those gains they do not present themselves to his mind for any considerable extent earnings purchased by extra fatigue in the same way as the extra earnings got by working overtime due to the artisan this fact is the chief cause and to some extent the justification of the imperfect recognition by the general public and even by some economists as a fundamental unity underlying the causes to determine normal profits and normal wages closely allied to the preceding difference when an artisan or a professional man has exceptional natural abilities which are not made by human effort and are not the result of sacrifices undergone for a future gain they enable him to obtain a surplus income over what ordinary persons could expect from similar exertions following on similar investments of capital in labour in their education and start in life a surplus which is of the nature of rent but to revert to a point mentioned at the end of last chapter the class of business undertakers contains a disproportionately large number of persons with high natural ability since in addition to the able men born within its ranks it includes also a large share of the best natural abilities born in the lower ranks of industry and thus while profits on capital invested in education is a specially important element in the incomes of professional men taken as a class the rent of rare natural abilities may be regarded as a specially important element in the incomes of businessmen so long as we consider them as individuals in relation to normal value the earnings even of rare abilities are as we have seen to be regarded rather as a quasi-rent than as a rent proper but there are exceptions to this rule the humdrum businessmen who has inherited a good business and has just sufficient force to keep it together may reap an income of many thousands a year which contains very little rent of rare natural qualities and on the other hand the greater part of incomes earned by exceptionally successful baristas and writers and painters and singers and jockeys may be classed as the rent of rare natural abilities so long at least we regard them as individuals and are not considering the dependence of the normal supply of labour in the several occupations on the prospects of brilliant success with the hold out to aspiring youth the income of a particular business is often very much affected by exchanges in its industrial environment and opportunity or conjecture but similar influences affect the special income derived from the skill of many classes of workers the discovery of rich copper mines in America and Australia lowered the earning power of scale of Cornish miners so long as they stayed at home and every new discovery of rich mines in the new districts raised the earning power of the scale of those miners who had already gone there and again the growth of a taste for theatrical amusements while raising the normal earnings of actors and inducing an increased supply of the scale raises the earning power of the scale of those already in profession a great part of which is from the point of view of the individual produces surplus due to rare natural qualities part 9 next let us consider in relation to one another the interests of different industrial classes engaged in the same trade this solidarity is a special case of the general fact the demand for the several factors of production of any commodity is a joint demand and we will refer back to the illustration of the general fact which is given in book 5 chapter 6 where they saw how a change in the supply of say pastoral's labor would affect the interests of all other branches of the building trades in the same way but much more intensely than it would the general public the fact is that the income derived from the specialized capital and the specialized scale belonging to all the various industrial classes engaged in producing houses or calico or anything else depend very much on the general prosperity of the trade and so far as this is the case they may be regarded for short periods as shares of a composite or joint income of the whole trade the share of each class tends to rise when this aggregate income is increased by an increase in their own efficiency or by any external cause but when the aggregate income is stationary and any one class gets a better share than before it must be at the expense of the others this is true of the whole body of those engaged in any trade it is true in a special sense of those who have spent a great part of their lives in working together in the same business establishment part 10 the earnings of a successful business looked at from the point of view of the businessman himself at the aggregate of the earnings firstly of his own ability secondly of his plant and other material capital and thirdly of his good will of business organization and connection but really it is more than the sum of these for his efficiency depends partly on his being in that particular business and if he were to sell it at a fair price and then engage himself in another business his income would probably be diminished the whole value of his business connection to him when working it is a notable instance of conjuncture of opportunity value it is mainly a product of ability and labor though good fortune may have contributed to it that part which is transferable and may be bought by a private individual or by a large amalgamation of firms must be entered among their costs and in a sense a conjuncture or opportunity cost the point of view of the employer however does not include the whole gains of the business for there is another part which attaches to his employees indeed in some cases and for some purposes nearly the whole income of a business may be regarded as a quasi-rent that is an income determined for the time by the state of the market for its ways with but little reference to the cost of preparing for their work the various things and persons engaged in it in other words it is a composite quasi-rent divisible among the different persons in the business by bargaining supplemented by custom and by notions of fairness results which are brought about by causes that bear some analogy to those that in early forms of civilization have put the producer surplus from the land almost permanently into the hands of a lot of single individuals but of cultivating firms thus the head clerk in our business has an acquaintance with men and things the use of which he would in some cases sell at a high price to rival firms but in other cases it is of a kind to be of no value saved to the business in which he already is and then his departure would perhaps injure it by several times the value of his salary while probably he would not get half that salary elsewhere it is important to see how the position of such employees differs from that of others whose services would be of almost equal value to any business in a life trade the income of one of these in any week consists as we have seen partly of a recompense for the fatigue incurred by the work of that week and partly of a cause rent of his specialized skill and ability and assuming competition to be perfectly efficient this cause rent is determined by the price which either his present employers or any other would be willing to pay for his services in the state in which the market for their wares is during that week the prices that have to be paid for a given work of a given kind being thus determined by the general conditions of the trade these prices enter into the direct out goings which have to be deducted from its gross earnings in order to ascertain the cause rent of this particular firm at the time but in the rise or fall of that cause rent the employees would have no share in fact however competition is not thus perfectly efficient in where the same price is paid all over the market for the same work the same machinery the prosperity of a firm increases the chance of advancement for each of its employees and also his chance of continuous employment when trade is slack and much coveted over time when trade is good thus there is de facto some sort of profit and loss sharing between almost every business and its employees and perhaps this is in its very highest form when without being embodied in a definite contract the solidarity of interest between those who work together in the same business is recognized with cordial generosity as the result of true brotherly feeling but such cases are not very common and as a rule the relations between employers and employed are raised to a higher plane both economically and morally by the adoption of the system of profit sharing especially when it is regarded as but a step towards the still higher but much more difficult level of true cooperation if the employers in any trade act together and so do the employed the solution of the problem of wages becomes indeterminate there is nothing but bargaining to decide the exact shares in which the excess of its incomeings over its outgoings for the time should be divided between employers and employed leaving out of account industries which have been superseded no lowering of wages will be permanently in the interest of employers which drives many skilled workers to other markets or even to other industries in which they abandon the special earnings of skill and wages must be high enough in an average year to attract young people to the trade this sets lower limits to wages and upper limits are set by corresponding necessities as to supply of capital and business power but what point between these limits should be taken at any time can be decided only by higgling and bargaining which are however likely to be tempered somewhat by ethical prudential considerations especially if there be a good coat of conciliation in the trade the problem is in practice even more complex for each group of employees is likely to have its own union and to fight for its own hand the employers act as buffers but a strike for hire which is on the part of one group may in effect deplete the wages of some other group almost as much as the employers profits this is not a fitting place for a study of the causes and effects of trade combinations of alliances and counter alliances among employers and employed as well as among traders and manufacturers they present a succession of pictures, incidents and romantic transformations which arrest public attention and seem to indicate a coming change of our social arrangements now in one direction and now in another and their importance is certainly great and grows rapidly but it is apt to be exaggerated for indeed many of them are little more than eddies such as have always fluttered over the surface of progress and though they are on a larger and more imposing scale in this modern age than before yet now as ever the main body of movement depends on the deep silent strong stream of the tendencies of normal distribution in exchange which are not seen but which control the course of those episodes which are seen for even in conciliation and arbitration the central difficulty is to discover what is at normal level from which the decisions of the court must not depart far under penalty of destroying their own authority end of chapter 8 Recording by Ashwin Yes Chapter 9 of Principles of Economics Book 6 This is a LibriVox recording All LibriVox recordings are in the public domain For more information or to volunteer please visit LibriVox.org Recording by Stephanie Nance Principles of Economics Book 6 by Alfred Marshall Chapter 9, Rent of Land Section 1 It has been argued in Book 5 that the rent of land is no unique fact but simply the chief species of a large genus of economic phenomena and that the theory of the rent of land is no isolated economic doctrine but merely one of the chief applications of a particular corollary from the general theory of demand and supply that there is a continuous gradation from the true rent of those free gifts which have been appropriated by man through the income derived from permanent improvements of the soil to those yielded by farm and factory buildings steam engines and less durable goods In this and the following chapter we are to make a special study of the net income of land that study has two parts one part relates to the total quantity of the net income or producer surplus from land the other to the way in which this income is distributed between those who have an interest in the land the first is general whatever be the form of land tenure we will begin with it and suppose that the cultivation of the land is undertaken by its owner we may call to mind that the land has an inherent income of heat and light and air and rain which man cannot greatly affect and advantages of situation many of which are wholly beyond his control while but few of the remainder are the direct result of the investment of capital and effort in the land by its individual owners these are the chief of its properties the supply of which is not dependent on human effort and which would therefore not be increased by extra rewards to that effort and attacks on which would always fall exclusively on the owners on the other hand those chemical or mechanical properties of the soil on which its fertility largely depends can be modified and in extreme cases entirely changed by man's action but attacks on the income derived from improvements which though capable of general application are yet slowly made and slowly exhausted would not appreciably affect the supply of them during a short period nor therefore the supply of produce due to them it would consequently fall in the main on the owner a lease holder being regarded for the time as the owner subject to a mortgage in a long period however it would diminish the supply of them would raise the normal supply price of produce and fall on the consumer section two now let us revert to our study of the tendency to diminishing return in agriculture in the fourth book still supposing that the owner of the land undertakes its cultivation so that our reasoning may be general dependent of the incidence of particular forms of land tenure we saw how the return to successive doses of capital and labor though it may increase for the first few doses will begin to diminish when the land is already well cultivated the cultivator continues to apply additional capital and labor till he reaches a point at which the return is only just sufficient to repay his outlay and reward him for his own work that will be the dose on the margin of cultivation whether it happens to be applied to rich or to poor land an amount equal to the return to it will be required and will be sufficient to repay him for each of his previous doses the excess of the gross produce over this amount is his producer's surplus he looks forward as far as he can but it is seldom possible to look forward very far and at any given time he takes for granted all that richness of the soil which results from permanent improvements and the income or quasi-rent derived from these improvements together with that due to the original qualities of the soil constitutes his producer's surplus or rent henceforth it is only the income derived from new investments that appears as earnings and profits he carries these new investments up to the margin of profitableness and his producer's surplus or rent is the excess of the gross income from the improved land over what is required to remunerate him for the fresh doses of capital and labor he annually supplies this surplus depends on firstly the richness of the land and secondly the relative values of those things which he has to sell and of those things which he needs to buy the richness or fertility of the land we have seen cannot be measured absolutely for it varies with the nature of the crops raised and with the methods and intensity of cultivation two pieces of land cultivated even by the same man with equal expenditures of capital and labor are likely, if they yield equal crops of barley to give unequal crops of wheat if they return equal crops of wheat when cultivated slightly or in a primitive fashion they are likely to yield unequal crops when cultivated intensively or on modern methods further the prices at which the various requisites of the farm can be bought and its various products sold depend on the industrial environment and changes in that are continually changing the relative values of different crops and therefore the relative values of land in different situations lastly, we suppose the cultivator to be of normal ability relatively to the task he is undertaken and the circumstances of time and place if he is of less ability his actual gross produce will be less than that which normally should come from the land it will be yielding to him less than its true producer surplus if on the contrary he is of more than normal ability he will be getting in addition to the producer surplus due to the land some producer surplus due to rare ability section three we have already traced in some detail the way in which a rise in the value of agricultural produce increases the producer surplus measured in terms of produce from all lands but especially from those where the tendency to dimension returns acts but feebly we have seen that generally speaking it raises the value of poor lands relatively too rich or in other words that if a person anticipates a rise in the value of produce he may expect a larger future income from investing a given sum of money in rich land at present prices then from investing it in rich land next the real value of the producer surplus i.e. its value measured in terms of general purchasing power will rise relatively to its produce value in the same ratio as the value of produce measured in the same way has risen that is to say a rise in the value of produce causes a double rise in the value of producer surplus the term the real value of produce is indeed ambiguous historically it has most often been used to mean the real value from the point of view of the consumer this use is rather dangerous for there are some purposes for which it is better to consider real value from the point of view of the producer but with this caution we may use the term labor value to express the amount of labor of a given kind that the produce will purchase and real value to mean the amount of necessaries comforts and luxuries of life that a given amount of produce will purchase a rise in the labor value of raw produce may imply an increasing pressure of population on the means of subsistence and a rise of the producer surplus from land due to that cause goes together with and is a sort of measure of the degradation of the people but if on the other hand the rise in the real value of raw produce has been caused by an improvement of the arts production other than agricultural it will probably be accompanied by a rise in the purchasing power of wages section four in all this it has been clear that the producer surplus from land is not evidence of the greatness of the bounty of nature as was held by the physiocrats and in a more modified form by Adam Smith it is evidence of the limitations of that bounty but it must be remembered that inequalities of situation relatively to the best markets are just as powerful causes of inequalities of producer surplus as are inequalities of absolute productiveness this truth and its chief consequences many of which seem now so obvious were first made manifest by Ricardo he delighted to argue that no surplus can be reaped from the ownership of those of nature's gifts the supply of which is everywhere practically unlimited and in particular that there would be no surplus from land if there were an unlimited supply of it all equally fertile and all equally accessible he carried this argument further and showed that an improvement in the arts of cultivation equally applicable to all soils which is equivalent to a general increase in the natural fertility of land will be nearly sure to lower the aggregate corn surplus and quite sure to lower the aggregate real surplus derived from the land that supplies a given population with raw produce he also pointed out that if the improvements affected chiefly those lands that were already the richest it might raise the aggregate surplus but that if it affected chiefly the poorer class of land it would lower that aggregate very much it is quite consistent with this proposition to admit that an improvement in the arts of cultivation of the land of England now would raise the aggregate surplus from her land because it would increase the produce without materially lowering its price unless it were accompanied by a similar improvement in those countries from what she imports raw produce or which comes to the same thing for this purpose by an improvement in the means of communication with them and as Ricardo himself says improvements that apply equally to all the lands supplying the same market as they give a great stimulus to population and at the same time enable us to cultivate poorer lands with less labor are ultimately of immense advantage to the landlords there is some interest in the attempt to distinguish that part of the value of land which is the result of man's labor from that which is due to the original bounty of nature part of its value is caused by highways and other improvements that were made for the general purposes of the country and are not a special charge on its agriculture counting these in List, Kerry, Bastia and others contend that the expense of bringing land from its original to its present condition would exceed the whole value it has now and hence they argue that all of its value is due to man's labor their facts may be disputed but they are really not relevant to their conclusions what is wanted for their argument is that the present value of land should not exceed the expense insofar as it can properly be charged to agricultural account of bringing the land from its original condition to one in which it would be as fertile and generally useful for agricultural purposes as it now is many of the changes wrought in it were made to suit agricultural methods that are long since obsolete and some of them even deduct from rather than add to the value of the land and further the expenses of making the change must be the net expenses after adding indeed interest on the gradual outlay but also after deducting the aggregate value of extra produce which has from first to last been attributable to the improvement the value of land in a well people district is generally much greater than these expenses and often many times is great section five the argument of this chapter so far is applicable to all systems of land tenure which recognize private ownership of land in any form for it is concerned with that producer surplus which accrues to the owner if he cultivates his land himself or if he does not then accrues to him and his tenants regarded as a firm engaged in the business of cultivation thus it holds true whatever be the division which custom or law or contract may have arranged between them with regard to their several shares of the cost of cultivation on the one hand and the fruits of the cultivation on the other the greater part of it is also independent of the stage of economic development which has been reached and it is valid even if little or no produce is sent to market and dues are levied in kind and so on at the present day in those parts of England where custom and sentiment count for least and free competition and enterprise for most in the bargaining free the use of land it is commonly understood that the landlord supplies and in some measure maintains those improvements which are slowly made and slowly worn out that being done he requires of his tenant the whole producer surplus which the land thus equipped is estimated to afford in a year of normal harvest and normal prices after deducting enough to replace the farmers capital with normal profits the farmer standing to lose in bad years and gain in good years in this estimate it is implicitly assumed that the farmer is a man of normal ability and enterprise for that class of holding and therefore if he rises above that standard he will himself reap the benefit and if he falls below it will himself bear the loss and perhaps ultimately leave the farm in other words that part of the income derived from the land which the landlord obtains is governed for all periods of moderate length mainly by the market for the produce there is little reference to the cost of providing the various agents employed in raising it and it therefore is of the nature of a rent and that part which the tenant retains is to be regarded even for short periods as profits entering directly into the normal price of the produce because the produce would not be raised unless it were expected to yield those profits the more fully therefore the distinctively forms of land tenure are developed the more nearly it is true that the line of division between the tenants and the landlords share coincides with the deepest and most important line of cleavage in economic theory this fact perhaps more than any other was the cause of the ascendancy of English economic theory early in the century it helped English economists to pioneer the way so far ahead that even in our own generation when as much intellectual activity has been devoted to economic studies in other countries as in England nearly all the new constructive ideas are found to be but developments of others which were latent in the older English work the fact itself appears accidental but perhaps it was not for this particular line of cleavage involves less friction less waste of time and trouble in checks and counterchecks than any other it may be doubted whether the so-called English system will endure it has great disadvantages and it may not be found the best in a future stage of civilization but when we come to compare it with other systems we shall see that it afforded great advantages to a country which pioneered the way for the world in the development of free enterprise and which therefore was impelled early to adopt all such changes as give freedom vigor, elasticity, and strength End of Chapter 9 Recording by Stephanie Nance Principles of Economics Book 6 by Alfred Marshall