 CHAPTER I The Keynote of this book is in the fact that free human beings are not brought up to their work on the same principles as a machine, a horse, or a slave. If they were, there would be very little difference between the distribution and the exchange side of value, for every agent of production would reap a return adequate to cover its own expenses of production with wear and tear, etc., at all events after allowance had been made for causal failures to adjust supply and demand. As it is, our growing power over nature makes her yield an ever larger surplus above necessaries, and this is not absorbed by an unlimited increase of the population. They remain therefore the questions, what are the general causes which govern the distribution of this surplus among the people? What part is played by conventional necessaries, i.e., the standard of comfort? What, by the influence which methods of consumption and of living generally exert on efficiency, by wants and activities, i.e., by the standard of life? What, by the many-sided action of the principle of substitution, and by the struggle for survival between hand-workers and brain-workers of different classes and grades? What by the power which the use of capital gives to those in whose hands it is? What share of the general flow is turned to remunerate those who work, including here the undertaking of ventures, and wait, as contrasted with those who work and consume at once the fruits of their endeavors? An attempt is made to give a broad answer to those and some similar questions. We shall begin a preliminary survey of the subject by noting how French and English writers a century ago represented value as governed almost wholly by cost of production, demand taking a subordinate place. Next we shall observe how near to the truth these results would be in a stationary state, and what corrections need to be introduced in order to bring these results into harmony with the actual conditions of life and work, and thus the remainder of Chapter I will be given mainly to the demand for labour. In Chapter II we shall first consider its supply under modern conditions, and thence we shall turn to a general view of the causes which fix the broad lines of distribution of the national income between labour and the owners of capital and land. In this rapid survey we shall pass by unnoticed many details. To fill in some of these is the task of the remainder of the book, but others must stand over for a later volume. The simplest account of the causes which determine the distribution of the national income is that given by the French economists who just preceded Adam Smith, and it is based upon the peculiar circumstances of France in the latter half of the last century. The taxes and other exactions levied from the French peasant were then limited only by his ability to pay, and a few of the labouring classes were far from starvation. So the economists or physiocrats, as they were called, assumed for the sake of simplicity that there was a natural law of population according to which the wages of labour were kept at a limit. They did not suppose that this was true of the whole working population, but the exceptions were few, so that they thought the general impression given by their assumption was true, somewhat in the same way as it is well to begin an account of the shape of the earth by saying that it is an oblate spheroid, although a few mountains do project as much as a thousand to part of its radius beyond the general level. Again, they knew that the rate of interest in Europe had fallen during the five preceding centuries, in consequence of the fact that economy had a generally prevailed over luxury. But they were impressed very much by the sensitiveness of capital and the quickness with which it evaded the oppressions of the tax-gatherer by retiring from his grasp, and they therefore concluded that there was no great violence in the supposition that if its profits were reduced below what they then were, capital would speedily be consumed or migrate. They assumed, again for the sake of simplicity, that there was something like a natural or necessary rate of profit, corresponding in some measure to the natural rate of wages, that if the current rate exceeded this necessary level, capital would grow rapidly till it forced down the rate of profit to that level, and that if the current rate went below that level capital would shrink quickly and the rate would be forced upwards again. They thought that wages and profits being thus fixed by natural laws, the natural value of everything was governed simply as the sum of wages and profits required to remunerate the producers. Adam Smith worked out this conclusion more fully than the physiocrats did, though it was led for Ricardo to make clear that the labor and capital needed for production must be estimated at the margin of cultivation, so as to avoid the element of rent. But Adam Smith saw also that labor and capital were not at the verge of starvation in England as they were in France. In England the wages of a great part of the working class were sufficient to allow much more than the mere necessaries of existence, and capital had too rich and too safe a field of employment there to be likely to go out of existence or to emigrate. So when he is carefully weighing his words, his use of the terms the natural rate of wages and the natural rate of profit has not that sharp definition and fixedness which it had in the mouths of the physiocrats, and he goes a good way towards explaining how they are determined by the ever fluctuating conditions of demand and supply. He even insists that the liberal reward of labor increases the industry of the common people, that a plentiful subsistence increases the bodily strength of the laborer, and the comfortable hope of bettering his condition, and of ending his days, perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workmen more active, diligent and expedious than where they are low, in England, for example, then in Scotland, in the neighborhood of great towns than in the remote country places. And yet he sometimes falls back into the old way of speaking, and thus makes careless readers suppose that he believes the mean level of the wages of labor to be fixed by an iron law at the bare necessaries of life. Malthus again, in his admirable survey of the course of wages in England from the thirteenth to the eighteenth centuries, shows how their mean level oscillated from century to century, falling sometimes down to about half a peck of corn a day, and rising sometimes up to a peck and a half, or even in the fifteenth century, to about two pecks. But although he observes that an inferior mode of living may be a cause as well as a consequence of poverty, he traces this effect almost exclusively to the consequent increase of numbers. He does not anticipate the stress which economists of our own generation lay on the influence, which habits of living exercise on the efficiency, and therefore on the earning power of the laborer. Ricardo's language is even more unguarded than that of Adam Smith and Malthus. It is true, indeed, that he says distinctly, it is not to be understood that the natural price of labor estimated in food and necessaries is absolutely fixed and constant. It essentially depends on the habits and customs of the people. But having said this once, he does not take the trouble to repeat it constantly, and most of his readers forget that he says it. In the course of his argument he frequently adopts a mode of speaking similar to that of Turgo and the physiocrats, and seems to imply that the tendency of population to increase rapidly as soon as wages rise above the bare necessaries of life causes wages to be fixed by a natural law to the level of these bare necessaries. This law has been called, especially in Germany, Ricardo's iron or brazen law. Many German socialists believe that this law is in operation now, even in the western world, and that it will continue to be so as long as the plan on which production is organized remains capitalistic or individualistic, and they claim Ricardo as an authority on their side. In fact, however, Ricardo was not only aware that the necessary or natural limit of wages was fixed by no iron law, but is determined by the local conditions and habits of each place and time. He was further keenly sensitive to the importance of a higher standard of living, and called on the friends of humanity to exert themselves to encourage the growth of a resolve among the working classes, not to allow their wages to fall anywhere near the bare necessaries of life. The persistency with which many writers continue to attribute to him a belief in the iron law can be accounted for only by his delight in imagining strong cases, and his habit of not repeating a hint which he had once given that he was omitting for the sake of simplicity the conditions and limitations that were needed to make his results applicable to real life. Mill did not make any great advance in the theory of wages beyond his predecessors in spite of the care with which he set himself to emphasize the distinctly human element in economics. He, however, followed Malthus in dwelling on those lessons of history which show that if a fall of wages caused the labouring classes to lower their standard of comfort, the injury done to them will be permanent, and their deteriorated condition will become a new minimum tending to perpetuate itself as the more ample minimum did before. But it was only in the last generation that a careful study was begun to be made of the effects that high wages have in increasing the efficiency not only of those who receive them, but also of their children and grandchildren. In this matter the lead has been taken by Walker and other American economists, and the application of the comparative method of study to the industrial problems of different countries of the old and new worlds is forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour, a fact which, though it is more full of hope for the future of the human race than any other that is known to us, will be found to exercise a very complicating influence on the theory of distribution. It has now become certain that the problem of distribution is more difficult than it was thought to be by earlier economists, and that no solution of it which claims to be simple can be true. Most of the old attempts to give an easy answer to it were really answers to imaginary questions that might have arisen in other worlds than ours, in which the conditions of life were not very simple. The work done in answering these questions was not wasted, for a very difficult problem can be best solved by being broken up into pieces, and each of these simple questions contained a part of the great and difficult problem which we have to solve. Let us profit by this experience and work our way by successive steps in the remainder of this chapter towards understanding the general causes which govern the demand for labour and capital in real life. Let us begin by studying the influence of demand on the earnings of labour drawn from an imaginary world in which everyone owns the capital that aids him in his labour, so that the problem of the relations of capital and labour do not arise in it. That is, let us suppose but little capital to be used, while everyone owns whatever capital he does use, and the gifts of nature are so abundant that they are free and unappropriated. Let us suppose further that everyone is not only of equal capacity but of equal willingness to work, and does in fact work equally hard, also that all work is unskilled or rather unspecialized in this sense, that if any two people were to change occupations, each would do as much and as good work as the other had done. Lastly, let us suppose that everyone produces things ready for sale without the aid of others, and that he himself disposes of them to their ultimate consumers, so that the demand for everything is direct. In this case the problem of value is very simple. Things exchange for one another in proportion to the labour spent in producing them. If the supply of any one thing runs short, it may for a little time sell for more than its normal price. It may exchange for things the production of which had required more labour than it had. But if so, the people will at once leave other work to produce it, and in a very short time its value will fall to the normal level. There may be slight temporary disturbances, but as a rule anyone's earnings will be equal to those of anyone else. In other words, each will have an equal share in the net sum total of things and services produced, or as we may say, the national income or dividend, which will constitute the demand for labour. If now a new invention doubles the efficiency of work in any trade, so the demand can make twice as many things of a certain kind in a year without requiring additional appliances, then those things will fall to half their old exchange value. The effective demand for everyone's labour will be a little increased, and the share which each can draw from the common earnings stream will be a little larger than before. He may, if he chooses, take twice as many things of this particular kind, together with his old allowance of other things, or he may take somewhat more than before of everything. If there be an increase in the efficiency of production in many trades, the common earnings stream or dividend will be considerably larger. The commodities produced by those trades will constitute a considerably larger demand for those produced by others, and increase the purchasing power of everyone's earnings. Nor will the position be greatly changed if we suppose that some specialized skill is required in each trade, provided other things remain as before. That is, provided the workers are still supposed to be all of equal capacity in industry, and all trades to be equally agreeable and equally easy to be learnt. The normal rate of earnings will still be the same in all trades, for if a day's labour in one trade produces things that sell for more than a day's labour in others, and this inequality shows any signs of lasting, people will bring up their children by preference to the favorite trade. It is true that there may be some slight irregularities. The drifting from one trade to another must occupy time, and some trades may, for a while, get more than their normal share of the earnings stream, while others get less or even lack work. But in spite of these disturbances, the current value of everything will fluctuate about its normal value, which will in this case, as in the preceding, depend simply on the amount of labour spent on the thing, for the normal value of all kinds of labour will still be equal. The productive power of the community will have been increased by the division of labour. The common national dividend or earnings stream will be larger, and as all will, putting aside passing disturbances, share alike in it, each will be able to buy with the fruits of his own labour things more serviceable to him than he could have produced for himself. In this stage, as in those considered before, it is still true that the value of each thing corresponds closely to the amount of labour spent upon it, and that the earnings of everyone are governed simply by the bounty of nature and by the progress of the arts of production. Next, let us still neglect the influence which the liberty of the expenditure on rearing and training workers exerts on their efficiency, leaving that matter to be discussed with other aspects of the supply side of distribution in the next chapter, and let us look at the influences that changes in the numbers of population exert on the incomes which nature will yield. We suppose then that the growth of population proceeds at a rate which is either fixed or at all events not affected by the rate of wages. It may be influenced by changes in custom, in moral opinion, and in medical knowledge. And we still suppose all labour to be of the same grade, and the national dividend to be divided out equally to each family, save for some slight passing inequalities. In this case, every improvement in the arts of production or afterward, every new discovery, every new victory over nature will increase equally the comforts and luxuries at the command of each family. But this case differs from the last, because in this case the increase of population, if maintained long enough, must ultimately outgrow the improvements in the arts of production, and cause the law of diminishing return to assert itself in agriculture. That is to say, those who work on the land will get less sweet and other produce in return for their labour in capital, and ours label will represent a less quantity of wheat than before throughout the agricultural trades, and therefore throughout all other trades, since all labour is supposed to be of the same grade, and earnings are therefore as a rule equal in all trades. Further we must note that the surplus or rental value of land will tend to rise, for the value of any kind of produce must equal that of the labour aided on our supposition by a uniform quantity of capital throughout, which is required to produce it, whether on good land or bad, under barely remunerative or marginal conditions. More labour in capital than before will be needed to raise a quarter of wheat, etc., on the margin, and therefore the wheat, etc., which is returned by nature to the labour applied under advantageous circumstances, will have a higher value relatively to that labour in capital than before, or in other words it will yield a larger surplus value over that of the labour and capital used in raising it. Now let us drop the supposition that labour is so mobile as to ensure equal remuneration for equal efforts throughout the whole of society, and let us approach much nearer to the actual condition of life by supposing that labour is not all of one industrial grade, but of several. Let us suppose that parents always bring up their children to an occupation in their own grade, that they have free a choice within that grade, but not outside it. Lastly, let us suppose that the increase of numbers in each grade is governed by other than economic causes, as before it may be fixed, or it may be influenced by changes in custom, in moral opinion, etc. In this case also the aggregate national dividend will be governed by the abundance of nature's return to man's work in the existing state of the arts of production, but the distribution of that dividend between the different grades will be unequal. It will be governed by the demand of the people themselves. The share of those in any industrial compartment will be the higher, the more extensive and urgent the needs which they are able to satisfy on the part of those who are themselves drawing large shares of the national income. Suppose for instance artists to form a grade or case or industrial compartment by themselves, then their number being fixed, or at least controlled by causes independent of their earnings, their earnings will be governed by the resources and the eagerness of those classes of the population who care for such gratifications as artists can furnish. We may now leave the imaginary world in which everyone owns the capital that aids him in his work, and return to our own where the relation of labor and capital play a great part in the problem of distribution. But let us still confine our attention to the distribution of the national dividend among the various agents of production, in accordance with the quantity of each agent and the service which it renders, and leave the reflex influence which the remuneration of each agent exerts on the supply of that agent to be considered in the next chapter. We have seen how the alert businessman is ever seeking for the most profitable application of his resources, and endeavoring to make use of each several agent of production up to that margin or limit, at which he would gain by transferring a small part of his expenditure to some other agent. And how he is thus, so far as his influence goes, the medium through which the principle of substitution adjusts the employment of each agent, that, in its marginal application, its cost is proportionate to the additional net produce resulting from its use. We have to apply this general reasoning to the case of the hire of labor. A question constantly on the mind of the careful businessman is whether he has the right number of men for his work. In some cases that has settled for him by his plant. There must be one and only one engine driver on each express locomotive. But some express trains have only one guard, and when the traffic is heavy they may lose a few minutes which could be saved by a second guard. Therefore an alert manager is constantly weighing the net product in saving of time and of annoyance to passengers that will accrue from the aid of a second guard on an important train, and considering whether it will be worth its cost. This question is similar in kind, too, but simpler in form than the question whether it would pay to put an additional train on the timetable, which would call for more expenditure on plant as well as on labor. Again one sometimes hears it said that a certain farmer starves his land for labor. Perhaps he has enough horses and plant, but if he took on another man he would get his money back and a good deal more. That is, the net product of an additional man would more than cover his wages. Let us suppose that a farmer is raising such a question as to the number of his shepherds. For simplicity we may suppose that an additional man would not require any further expenditure on plant or stock. That he would save the farmer himself just as much trouble in some ways as he gives in others, so that nothing has to be allowed for earnings of management, even when these are interpreted broadly, so as to include insurance against risk, et cetera. And lastly, that the farmer reckons that he would do just as much in preventing the wastage of lambs, and in other ways it will increase by twenty his annual output of sheep in good condition. That is to say, he reckons that the net product of an additional man will be twenty sheep. If he can be got for much less than the equivalent of their price, the alert farmer will certainly hire him. But if only for about that price the farmer will be on the margin of doubt, and the man may then be called a marginal shepherd because his employment is marginal. It is best to assume throughout that the man is of normal efficiency. He would indeed be the marginal shepherd, even if he were of exceptional efficiency, provided only that his net produce were equal to his wages. The farmer might have reckoned that a shepherd of normal efficiency would have added only sixteen sheep to output, and therefore have been willing to hire this man at a quarter more than the ordinary wages. But to assume him to be thus exceptional would be most inexpedient. He should be representative, that is, of normal efficiency. If he is representative and his employer is representative, the twenty sheep will represent the net product, and therefore the earning power of a shepherd. But if the employer is a bad manager, if, for instance, he lets his men run short of necessaries for the sheep, the man may save only fifteen sheep instead of twenty. That product tends to represent normal wages only if the worker and his conditions of employment are both normal. The additional product to be got by this shepherd's labor is largely influenced by the number of shepherds whom the farmer already employs, and this, again, is governed by general conditions of demand and supply, and especially by the number of those from whom the ranks of shepherds could have been recruited during the current generation, by the demand for mutton and wool, and by the area from which supplies of them can be obtained, by the effectiveness of the shepherds on all other farms, and so on. And the amount of the marginal product is further largely influenced by the competition of other uses for land. The space available for sheep farming is curtailed by the demand for land for growing timber or oats, preserving deer, etc. This illustration has been chosen from a simple industry, but though the form may be different, the substance of the problem is the same in every industry. Product to conditions which are indicated in the footnote, but which are not important for our main purpose, the wages of every class of labor tend to be equal to the net product due to the additional labor of the marginal laborer of that class. This doctrine has sometimes been put forward as a theory of wages, but there is no valid ground for any such pretension. The doctrine that the earnings of a worker tend to be equal to the net product of his work has by itself no real meaning, since in order to estimate net product we have to take for granted all the expenses of production of the commodity on which he works, other than his own wages. But though this objection is valid against a claim that it contains a theory of wages, it is not valid against a claim that the doctrine throws into clear light the action of one of the causes that govern wages. In later chapters we shall need to take other illustrations for special purposes of the principle illustrated in the last section from the case of manual labor, and in particular to show how the value of some parts of the work of business management can be measured when it is found that the effective output of a business is increased as much by some additional superintendents as it would be by the hire of an additional ordinary worker. Again, the earnings of a machine can sometimes be estimated by the addition to the output of a factory which it might effect in certain cases without involving any incidental extra expense. Generalizing from the work of a particular machine to that of machinery of a given aggregate value, we may suppose that in a certain factory an extra one hundred pounds worth of machinery can be applied so as not to involve any other extra expense and so as to add annually four pounds worth to the net output of the factory, after allowing for its own wear and tear. If the investors of capital push it into every occupation into which it seems likely to gain a high reward, and if after this has been done and equilibrium has been found, it still pays and only just pays to employ this machinery, we can infer from this fact that the yearly rate of interest is four percent. But illustrations of this kind merely indicate part of the action of the great causes which govern value. They cannot be made into a theory of interest any more than into a theory of wages without reasoning in a circle. It may, however, be well to carry a little further our illustration of the nature of the demand for capital for any use, and to observe the way in which the aggregate demand for it is made up of the demands for many different uses. To fix the ideas, let us take some particular trade, say that of hat making, and inquire what determines the amount of capital which it absorbs. Suppose that the rate of interest is four percent per animal on perfectly good security, and that the hat making trade absorbs a capital of one million pounds. This implies that the hat making trade can turn the whole million pounds worth of capital to so good a count that they would pay four percent per annum net for the use of it rather than to go without any of it. Some things are necessary to them. They must have not only some food, clothing, and house room, but also some circulating capital, such as raw material and some fixed capital, such as tools and perhaps a little machinery. And though competition prevents anything more than the ordinary trade profit being got by the use of this necessary capital, yet the loss of it would be so injurious that those in the trade would have been willing to pay fifty percent on it if they could not have got the use of it on easier terms. There may be other machinery which the trade would have refused to dispense with if the rate of interest had been twenty percent per annum, but not if it had been higher. If the rate had been ten percent, still more would have been used. If it had been six percent, still more. If five percent, still more. And finally the rate being four percent, they use more still. When they have this amount, the marginal utility of the machinery, i.e. the utility of that machinery, which it is only just worth their while to employ, is measured by four percent. A rise in the rate of interest would diminish their use of machinery, for they would avoid the use of all that did not give a net annual surplus of more than four percent on its value. And a fall in the rate of interest would lead them to demand the aid of more capital and to introduce machinery which gave a net annual surplus of something less than four percent on its value. Again, the lower the rate of interest, the more substantial will be the style of building used for the hat making factories and the homes of hat makers. And a fall in the rate of interest will lead to the employment of more capital in the hat making trade in the form of larger stocks of raw material and of the finished commodity in the hands of retail dealers. The methods in which capital will be applied may vary much, even within the same trade. Each undertaker, having regard to his own means, will push the investment of capital in his business in each several direction, until what appears in his judgment to be the margin of profitableness is reached. And that margin is, as we have said, a boundary line cutting one after another every possible line of investment and moving irregularly outwards in all directions whenever there is a fall in the rate of interest at which extra capital can be obtained. Thus the demand for the loan of capital is the aggregate of the demands of all individuals in all trades, and it obeys a law similar to that which holds for the sale of commodities, just as there is a certain amount of a commodity which can find purchasers at any given price. When this price rises, the amount that can be sold diminishes, and so it is with regard to the use of capital. And as with borrowings for productive purposes, so with those of spend-thrifts or governments who mortgage their future resources in order to obtain the means of immediate expenditure, it is true that their actions are often but little governed by cool circulation, and that they frequently decide how much they want to borrow with but little reference to the price they will have to pay for the loan, but still the rate of interest exercises a perceptible influence on borrowings even of this kind. To sum up the whole in a comprehensive, if difficult statement, every agent of production, land, machinery, skilled labor, unskilled labor, etc., tends to be applied in production as far as it profitably can be. If employers and other businessmen think that they can get a better result by using a little more of any one agent they will do so. They estimate the net product. That is, the net increase of the money value of the total output after allowing for incidental expenses, that will be got by a little more outlay in this direction, or a little more outlay in that, and if they can gain by shifting a little of their outlay from one direction to another, they will do so. Thus then, the uses of each agent of production are governed by the general conditions of demand in relation to supply. That is, on the one hand, by the urgency of all the uses to which the agent can be put, taken together with the means at the command of those who need it, and on the other hand by the available stocks of it. And equality is maintained between its values for each use by the constant tendency to shift it from uses in which its services are of less value to others in which they are of greater value in accordance with the principle of substitution. If less use is made of unskilled labor or any agent, the reason will be that at some point at which people were on the margin of doubt whether it was worthwhile to use that agent, they have decided that it is not worth their while. That is what is meant by saying that we must watch the marginal uses and the marginal efficiency of each agent. We must do so simply because it is only at the margin that any of those shiftings can occur by which changing relations of supply and demand manifest themselves. If we neglected differences between the grades of labor and regarded all laborers of one kind, or at least as all expressed in terms of a certain kind of labor of standard efficiency, we might look for the margin of indifference between the direct application of labor and that of material capital. And we might say shortly to quote Von Thunen's words that efficiency of capital must be the measure of its earnings, since if the labor of the capital were cheaper than that of the men, the undertaker would dismiss some of his workmen and in the opposite case he would increase their number. But of course the increased competition of capital in general for employment is of a different character from the competition of machinery for employment in any single trade. The latter may push a particular kind of labor out of employment altogether. The former cannot displace labor in general, for it must cause an increased employment of the makers of those things which are used as capital. And in fact the substitution of capital for labor is really the substitution of labor, combined with much waiting in the place of other forms of labor combined with little waiting. When we speak of the national dividend or distributable net income of the whole nation as divided into the shares of land, labor, and capital we must be clear as to what things we are including and what things we are excluding. It will seldom make very much difference to our argument whether we use all the terms broadly or all the terms narrowly. But it is essential that our usage should be consistent throughout any one argument and that whatever is included on one side of the account of the demand for and supply of land, labor, and capital should be included also on the other. The labor and capital of the country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds. The limiting word net is needed to provide for the using up of raw and half finished commodities and for the wearing out and depreciation of plant which is involved in production. All such waste must, of course, be deducted from the gross produce before the true or net income can be found. And net income due on account of foreign investments must be added in. See above Part 2, Chapter 4, Paragraph 6. This is the true net annual income or revenue of the country or the national dividend. We may, of course, estimate it for a year or for any other period. The terms national income and national dividend are convertible. Only the latter is the more significant when we are looking at the national income in the character of the sum of the new sources of enjoyments that are available for distribution. But it is best here to follow the common practice and not to count as part of the national income or dividend anything that is not commonly counted as part of the income of the individual. Thus, unless anything is said to the contrary, the services which a person renders to himself and those which he renders gratuitously to members of his family or friends, the benefits which he derives from using his own personal goods, or public property such as toll-free bridges, are not reckoned as parts of the national dividend but are left to be accounted for separately. Some part of production goes to increase the stock of raw material, machinery, etc., and does not merely replace material that has been used up or machinery that has been worn out, and this part of the national income or dividend does not pass direct into personal consumption. But it does pass into consumption in the broader sense of the term which is commonly used by, say, a manufacturer of printing machines when some of his stock is sold to printers. And in this broad sense it is true that all production is for consumption, that the national dividend is convertible with the aggregate of net production and also with the aggregate of consumption. Under ordinary conditions of industry, production and consumption move together. There is no consumption except that for which the way has been prepared by appropriate production, and all production is followed by the consumption for which it was designed. There may indeed be some miscalculation in particular branches of production, and a collapse of commercial credit may fill nearly all warehouses for a time with unsold goods. But such conditions are exceptional and are not within our present view. Chapter 2 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. Principles of Economics, Book 6 by Alfred Marshall. Chapter 2, Preliminary Survey of Distribution, Continued. As was indicated at the beginning of the last chapter, we are now to supplement the study of the influence of demand on distribution by a study of the reflex influence of remuneration on the supply of different agents of production. We have to combine the two in a preliminary general view of the parts played by cause to production and by utility or desirability in governing the distribution of the national dividend between different kinds of labor and the owners of capital and land. Ricardo and the able businessmen who followed in his wake took the operation of demand too much for granted as a thing which did not need to be explained. They did not emphasize it nor study it with sufficient care, and this neglect has caused much confusion and has obscured important truths. In the reaction too much insistence has been laid on the fact that the earnings of every agent of production come from and are for the time mainly governed by the value of the product which it takes part in producing. Its earnings being so far governed on the same principle as the rent of land, and some have even thought it possible to constitute a complete theory of distribution out of a multi-fold application of the law of rent. But they will not reach to that end. Ricardo and his followers seem to have been rightly guided by their intuitions when they silently determined that the forces of supply were those the study of which is the more urgent and involves the greater difficulty. When we inquire into what it is that governs the marginal efficiency of a factor of production, whether it be any kind of labor or material capital, we find that the immediate solution requires a knowledge of the available supply of that factor. For if the supply is increased, the thing will be applied to uses for which it is less needed and in which it is less efficient. And the ultimate solution requires a knowledge also of the causes that determine that supply. The nominal value of everything, whether it be a particular kind of labor or capital or anything else, rests like the keystone of an arch balanced in equilibrium between the contending pressures of its two opposing sides, the forces of demand press on the one side and those of supply on the other. The production of everything, whether an agent of production or a commodity ready for immediate consumption, is carried forward up to that limit or margin at which there is equilibrium between the forces of demand and supply. The amount of the thing and its price, the amounts of the several factors or agents of production used in making it and their prices, all these elements mutually govern one another. And if an external cause should alter any one of them, the effect of the disturbance extends to all the others. In the same way when several balls are lying in a bowl, they mutually govern one another's positions. And again when a heavy weight is suspended by several elastic strings of different strengths and lengths, all of them being stretched, attached to different points on the ceiling, the equilibrium positions of all the strings and of the weight mutually govern one another. If any one of the strings is shortened, everything else will change its position, and the length and the tension of every other string will be altered also. We have seen that the effective supply of any agent of production at any time depends, firstly, on the stock of it in existence, and secondly, on the willingness of those in whose charge it is to apply it in production. This willingness is not decided simply by the immediate return which is expected, though there may be a lower limit, which in some cases may be described as a prime cost, below which no work will be done at all. A manufacturer, for instance, has no hesitation in declining to put his machinery in motion for an order that will not cover the extra direct money outlay caused by the work, together with the actual wear and tear of the machinery, while there are somewhat similar considerations with regard to the wear and tear of the worker's own strength and to the fatigue and other discomodities of his work. And though for the present we are concerned with cost and remuneration under normal conditions, rather than with the direct cost to the individual of any particular piece of work that he does, yet it may be well to make a short statement on the subject here in order to avoid misconceptions. It has already been noticed that when a man is fresh and eager and doing work of his own choice it really costs him nothing. For, as some socialists have urged with pardonable exaggeration, few people know how much they enjoy moderate work, till something occurs to prevent them from working altogether. But rightly or wrongly most persons believe that the greater part of the work which they do when earning their living yields them no surplus of pleasure, but on the contrary cost them something. They are glad when the hour for stopping arrives. Perhaps they forget that the earlier hours of their work have not cost them as much as the last. They are rather apt to think of nine hours' work as costing them nine times as much as the last hour, and it seldom occurs to them to think of themselves as reaping a producer's surplus or rent, through being paid for every hour at a rate sufficient to compensate them for the last, and most distressing hour. The longer a man works, or even is on duty, the greater is his desire for a respite, unless indeed he has become numbed by his work, while every hour's additional work gives him more pay, and brings him nearer to the stage at which his most urgent wants are satisfied, and the higher the pay the sooner this stage is reached. It depends then on the individual, whether with growing pay new wants arise, and new desires to provide comforts for others or for himself in after-years, or he is soon satiated with these enjoyments that can be gained only by work, and then craves more rest and more opportunities for activities that are themselves pleasurable. No universal rule can be laid down, but experience seems to show that the more ignorant and phlegmatic of racism of individuals, especially if they live in a southern climb, will stay at their work a shorter time, and will exert themselves less while at it, if the rate of pay rises so as to give them their accustomed enjoyments in return for less work than before. But those whose mental horizon is wider, and who have more firmness and elasticity of character, will work the harder and the longer, the higher the rate of pay which is open to them, unless indeed they prefer to divert their activities to higher aims than work for material gain. But this point will need to be discussed more fully under the head of the influence of progress on value. Meanwhile, we may conclude that increased remuneration causes an immediate increase in the supply of efficient work as a rule, and that the exceptions to this rule just noticed are seldom on a large scale, though they are not devoid of significance. Then however we turn from the immediate influence exerted by a rise in wages on the work done by an individual to its ultimate effect after a generation or two, the result is less uncertain. It is indeed true that, though a temporary improvement will give a good many young people the opportunity to marry and set up house, for which they have been waiting, yet a permanent increase of prosperity is quite as likely to lower as to raise the birth rate. But on the other hand, an increase of wages is almost certain to diminish the death rate, unless it has been obtained at the price of the neglect by mothers of their duties to their children. And the case is much stronger when we look at the influence of high wages on the physical and mental vigor of the coming generation. For there is a certain consumption which is strictly necessary for each grade of work in this sense, that if any of it is curtailed the work cannot be done efficiently. The adults might indeed take good care of themselves at the expense of their children, but that would only defer the decay of efficiency for one generation. Further, there are conventional necessaries which are so strictly demanded by custom and habit, that in fact people generally would give up much of their necessaries, strictly so called, rather than go without the greater part of these. Thirdly, there are habitual comforts, which some, though not all, would not entirely relinquish even when hardly pressed. Many of these conventional necessaries and customary comforts are the embodiment of material and moral progress, and their extent varies from age to age and from place to place. The greater they are, the less economical is man as an agent of production, but if they are wisely chosen they attain in the highest degree the end of all production, for they then raise the tone of human life. Any increase in consumption that is strictly necessary to efficiency pays its own way and adds to, as much as it draws from, the national dividend. But an increase of consumption, that is not thus necessary, can be afforded only through an increase in man's command over nature, and that can come about through an advance in knowledge and the arts of production, through improved organization and access to larger and richer sources of raw material, and lastly through the growth of capital and the material means of attaining desired ends in any form. Thus the question, how closely the supply of labor responds to the demand for it, is in a great measure resolved into the question, how great a part of the present consumption of the people, at large, consists of necessaries, strictly so called, for the life and efficiency of young and old. How much consists of conventional necessaries which theoretically could be dispensed with, but practically would be preferred by the majority of people to some of those things that were really necessary for efficiency, and how much is really superfluous regarded as a means toward production. Though of course part of it may be of supreme importance regarded as an end in itself. The earlier French and English economists, as we noted at the beginning of the preceding chapter, classed nearly all the consumption of the working classes under the first head. They did so partly for simplicity and partly because those classes were then poor in England and very poor in France, and they inferred that the supply of labor would correspond to changes in the effective demand for it in the same way, though of course not quite as fast as that of machinery would. And an answer not very different from theirs must be given to the question with regard to the less advanced countries even now. For throughout the greater part of the world the working classes can afford but few luxuries and not even many conventional necessaries, and any increase in their earnings would result in so great an increase of their numbers as to bring down their earnings quickly to nearly the old level at their mere expensive rearing. Over a greater part of the world wages are governed nearly after the so-called iron or brazen law which ties them close to the cost of rearing and sustaining a rather inefficient class of laborers. As regards the modern Western world the answer is materially different. So great has been the recent advance in knowledge and freedom, in vigor, in wealth, and in the easy access to rich, distant fields for the supply of food and raw material. But it is still true, even in England today, that much the greater part of the consumption of the main body of the population conduces to sustain life and vigor, not perhaps in the most economical manner, but yet without any great waste. Doubtless some indulgences are positively harmful, but these are diminishing relatively to the rest, the chief exception perhaps being that of gambling. Most of that expenditure which is not strictly economical as a means toward efficiency yet helps to form habits of ready resourceful enterprise and gives that variety to life without which men become dull and stagnant and achieve little, though they may plod much, and it is well recognized that even in Western countries skilled labor is generally the cheapest where wages are the highest. It may be admitted that the industrial development of Japan is tending to show that some of the more expensive conventional necessaries might conceivably be given up without a corresponding diminution of efficiency, but though this expenditure may be fruitful of far reaching results in the future, yet it has little bearing on the past and the present. It remains true that, taking man as he is and has been hitherto, in the Western world the earnings that are got by efficient labor are not much above the lowest that are needed to cover the expenses of rearing and training efficient workers and of sustaining and bringing into activity their full energies. We conclude then that an increase of wages unless earned under unwholesome conditions almost always increases the strength, physical, mental, and even moral of the coming generation, and that other things being equal and increase in the earnings that are to be got by labor increases its rate of growth, or in other words, a rise in its demand price increases the supply of it. If the state of knowledge and of social and domestic habits be given, then the vigor of the people as a whole, if not their numbers, and both the numbers of vigor of any trade in particular, may be said to have a supply price in this sense, that there is a certain level of the demand price which will keep them stationary, that a higher price would cause them to increase, and that a lower price would cause them to decrease. Thus again we see that demand and supply exert coordinate influences on wages, neither has a claim to predominance any more than either has a blade of a pair of scissors, or either pier of an arch. Wages tend to equal the net product of labor. Its marginal productivity rules the demand price for it, and on the other side wages tend to retain a close, though indirect and intricate, relation with the cost of rearing, training, and sustaining the energy of efficient labor. The various elements of the problem mutually determine, in the sense of governing one another, and incidentally this secures that supply price and demand price tend to equality. Wages are not governed by demand price nor by supply price, but the whole set of causes which govern demand and supply. A word should be said as to the common phrase, the general rate of wages, or the wages of labor in general. Such phrases are convenient in a broad view of distribution, and especially when we are considering the general relations of capital and labor. But in fact there is no such thing in modern civilization as a general rate of wages. Each of a hundred or more groups of workers has its own wage problem, its own set of special causes, natural and artificial, controlling the supply price, and limiting the number of its members. Each has its own demand price governed by the need that other agents of production have of its services. Somewhat similar difficulties arise with regard to the phrase the general rate of interest, but here the chief trouble comes from the fact that the income derived from capital already invested in particular things, such as factories or ships, is properly a quasi-rent and can be regarded as interest only on the assumption that the capital value of the investment has remained unaltered. Leaving this difficulty on one side for the present, and recollecting that the phrase the general rate of interest applies in strictness only to the anticipated net earnings from new investments of free capital, we may resume briefly the results of our earlier studies of the growth of capital. We have seen that the accumulation of wealth is governed by a great variety of causes, by custom, by habits of self-control and of realizing the future, and above all by the power of family affection, security is a necessary condition for it, and the progress of knowledge and intelligence furthers it in many ways. But though saving in general is affected by many causes other than the rate of interest, and though the saving of many people is but little affected by the rate of interest, while a few who have determined to secure an income of a certain fixed amount for themselves or their family will save less with a high rate than with a low rate of interest, yet a strong balance of evidence seems to rest with the opinion that a rise in the rate of interest or demand price for saving tends to increase the volume of saving. Thus then interest, being the price paid for the use of capital in any market, tends towards an equilibrium level such that the aggregate demand for capital in that market at that rate of interest is equal to the aggregate stock forthcoming there at that rate. If the market, which we are considering, is a small one, say a single town or a single trade in a progressive country, an increased demand for capital in it will be promptly met by an increased supply drawn from surrounding districts or trades. But if we are considering the whole world or even the whole of a large country as one market for capital, we cannot regard the aggregate supply of it as altered quickly and to a considerable extent by a change in the rate of interest. For the general fund of capital is the product of labor and waiting, and the extra work and the extra waiting to which a rise in the rate of interest would act as an incentive would not quickly amount to much as compared with the work unwaiting of which the total existing stock of capital is the result. An extensive increase in the demand for capital in general will therefore be met for a time not so much by an increase of supply as by a rise in the rate of interest, which will cause capital to withdraw itself partially from those uses in which its marginal utility is lowest. It is only slowly and gradually that the rise in the rate of interest will increase the total stock of capital. Land is on a different footing from man himself and those agents of production which are made by man, among which are included improvements made by him on the land itself. For while the supplies of all other agents of production respond in various degrees and various ways to the demand for their services, land makes no such response. Thus an exceptional rise in the earnings of any class of labor tends to increase its numbers or efficiency or both, and the increase in the supply of efficient work of that class tends to cheapen the services which it renders to the community. If the increase is in their numbers then the rate of earnings of each will tend downwards towards the old level. But if the increase is in their efficiency, then, though they will probably earn more per head than before, the gain to them will come from an increased national dividend and will not be at the expense of other agents of production. And the same is true as regards capital, but not true as regards land. While therefore the value of land, in common with the values of other agents of production, is subject to those influences which were discussed towards the end of the preceding chapter, it is not subject to those which have been brought into the reckoning in the present discussion. It is true that land is but a particular form of capital from the point of view of the individual manufacturer or cultivator, and land shares the influences of the laws of demand and of substitution which were discussed in the last chapter, because the existing stock of it, like the existing stock of capital or of labor of any kind, tends to be shifted from one use to another till nothing could be gained for production by any further shifting. And so far as the discussions of the last chapter are concerned, the income that is derived from a factory, a warehouse or a plow, allowance being made for wear and tear, etc., is governed in the same way as is the income from land. In each case the income tends to equal the value of the marginal net product of the agent. In each case this is governed for the time by the total stock of the agent and the need that other agents have of its aid. That is one side of the question. The other is that land in an old country does not share the reflex influences discussed in this chapter which a high rate of earnings exerts on the supply of other agents of production and consequently on their contributions to the national dividend and consequently on the real cost at which their services are purchased by other agents of production. The building and additional floor on one factory or putting an extra plow on one farm does not generally take a floor from another factory or a plow from another farm. The nation adds a factory floor or a plow to its business as the individual does to his. There is thus a larger national dividend which is to be shared out and in the long run the increased earnings of the manufacturer or farmer are not as a rule at the cost of other producers. In contrast to this the stock of land in an old country at any time is the stock for all time and when a manufacturer or cultivator decides to take in a little more land to his business he decides in effect to take it away from someone else's business. He adds a little more land to his business but the nation adds no land to its business. The change does not in itself increase the national income. To conclude this stage of our argument the net aggregate of all the commodities produced is itself the true source from which flow the demand prices for all these commodities and therefore for the agents of production used in making them. Or to put the same thing in another way this national dividend is at once the aggregate net product of and the sole source of payment for all the agents of production within the country. It is divided up into earnings of labor, interest of capital and lastly the producer's surplus or rent of land and of other differential advantages for production. It constitutes the whole of them and the whole of it is distributed among them and the larger it is the larger other things being equal will be the share of each of them. It is distributed among them speaking generally in proportion to the need which people have for their several services i.e. not the total need but the marginal need. By this is meant the need at that point at which people are indifferent whether they purchase a little more of the services or the fruits of the services of one agent or devote their further resources to purchasing the services or the fruits of the services of other agents. Other things being equal each agent is likely to increase the faster the larger the share which it gets unless indeed it is not capable of being increased at all. But every such increase will do something towards filling up the more urgent needs for that agent and will thus lessen the marginal need for it and lower the price at which it can find a market. That is to say an increase in the proportionate share or rate of remuneration of any agent is likely to bring into play forces that will reduce that share and leave a larger proportionate share of the dividend to be shared among others. This reflex action may be slow but if there is no violent change in the arts of production or in the general economic condition of society the supply of each agent will be closely governed by its cost to production account being taken of those conventional necessaries which constantly expand as the growing richness of the national income yields to one class after another and increasing surplus above the mere necessaries for efficiency. In studying the influence which increased efficiency and increased earnings in one trade exert on the condition of others we may start from the general fact that other things being equal the larger the supply of any agent of production the further it will have to push its way into uses for which does not specially fit it the lower will be the demand price with which it will have to be contented in those uses in which its employment is on the verge or margin of not being found profitable and insofar as competition equalizes the price which it gets in all uses this price will be its price for all uses. The extra production resulting from the increase in that agent of production will go on to swell the national dividend and other agents of production will benefit thereby but that agent itself will have to submit to a lower rate of pay. For instance, if without any other change capital increases fast the rate of interest must fall. If without any other change the number of those ready to do any particular kind of labor increases their wages must fall. In either case there will result an increased production and an increased national dividend. In either case the laws of one agent of production must result in a gain to others but not necessarily to all others. Thus the opening up of rich quarries of slate or the increase in numbers or efficiency of quarrymen would tend to improve the houses of all classes and it would tend to increase the demand for brick layers and carpenters labor and raise their wages but it would injure the makers of roofing tiles as producers of building materials more than it benefited them as consumers. The increase in the supply of this one agent increases the demand for many others by a little and for some others by much but for some it lessens the demand. We know that the wages of any worker, say an operative in a boot and shoe factory, tend to equal the net product of his labor. They are not governed by that net product. For net products, like all other incidents of marginal usages, are governed together with value by the general relations of demand and supply. But when, one, the aggregate application of capital and labor to the boot and shoe industry up to that limit at which the additional products resulting from any further application could barely be made at profitable rates. Two, the distribution of resources between plant, labor and other agents of production has been appropriately made. Three, we have in view of factory working with normally good fortune, conducted with normal ability and where the conditions are such that there is a doubt whether to take on an additional operative of normal ability and energy who offers himself at the normal wage. When all these things are done then we may fairly conclude that the loss of that man's work would be likely to cause a diminution in the net output of that factory, the value of which was about equal to his wages. The inversion of this statement runs that his wages are about equal to that net product. Of course the net product of an individual cannot be separated mechanically from that of others who are working together with him. The work done by the various classes of operatives in a boot and shoe factory is not all of the same difficulty but we may ignore differences in industrial rank between the classes and suppose them to be of all the same rank. This supposition greatly simplifies the wording of the argument without affecting its general character. Now under the rapidly changing conditions of modern work one industry or another is apt to be from time to time rather oversupplied or rather undersupplied with labor and these inevitable inequalities are apt to be increased by restrictive combinations and other influences. But yet the fluidity of labor is sufficient to make it true that the wages of labor of the same industrial grade or rank tend to equality in different occupations throughout the same western country. Accordingly no considerable inaccuracy is involved in the statement that in general every worker of the same industrial rank with a normal boot operative will be able to buy a pair of boots of any kind after providing the cost of their material with the wages earned by him in about the same time as is required by such an operative to contribute a pair of boots of that kind to the net product of his factory. Putting this statement into a more general form we may say that every worker will in general be able with the earnings of a hundred days labor to buy the net products of a hundred days labor of other workers in the same grade with himself. He may select them in whatever way he chooses so as to make up that aggregate sum. If the normal earnings of workers in another grade are half as high again as his own the boot operative must spend three days wages in order to get the net product of two days labor of a worker in that grade and so in proportion. Thus other things being equal every increase in the net efficiency of labor in any trade including his own will raise in the same proportion the real value of that part of his wages which the boot operative spends on the products of that trade and other things being equal the equilibrium level of the real wages of the boot operative depends directly on and varies directly with the average efficiency of the trades including his own which produce those things on which he spends his wages. Conversely the rejection by the workers in any industry of an improvement by which his efficiency could be increased ten percent inflicts on the boot operative and injury measured by ten percent of that part of his wages which he spends on the products of that industry but an increased efficiency on the part of workers whose products compete with his own may injure him temporarily at least especially if he is not himself a consumer of those products. Again the boot operative will gain by anything that changes the relative positions of different grades in such a way as to raise his grade relatively to others. He will gain by an increase of medical men whose aid he occasionally needs and he will gain more if those grades which are occupied chiefly with the tasks of managing business whether manufacturing trading or any other receive a great influx from other grades for then the earnings of management will be lowered permanently relative to the earnings of manual work. There will be a rise in the net product of every kind of manual labor and other things being equal the boot operative will get more of every commodity on which he spends those wages that represent his own net product. The process of substitution of which we have been discussing the tendencies is one form of competition and it may be well to insist again that we do not assume that competition is perfect. Perfect competition requires a perfect knowledge of the state of the market and though no great departure from the actual facts of life is involved in assuming this knowledge on the part of dealers when we are considering the course of business in Lombard Street the stock exchange or in a wholesale produce market it would be an all together unreasonable assumption to make when we are examining the causes that govern the supply of labor in any of the lower grades of industry for if a man had sufficient ability to know everything about the market for his labor he would have too much to remain long in a low grade. The older economists in constant contact as they were with the actual facts of business life must have known this well enough but partly for brevity and simplicity partly because the term free competition had become almost a catchword partly because they had not sufficiently classified and conditioned their doctrines they often seem to imply that they did assume this perfect knowledge it is therefore especially important to insist that we do not assume the members of any industrial group to be endowed with more ability and forethought or to be governed by motives other than those which are in fact normal to and would be attributed by every well informed person to the members of that group account being taken of the general conditions of time and place there may be a good deal of wayward and impulsive action sorted and noble motives may mingle their threads together but there is a constant tendency for each man to select such occupations for himself and his children as seen to him on the whole the most advantageous of those which are within the range of his resources and of the efforts which he is able and willing to make in order to reach them the last group of questions which still remain to be discussed is concerned with the relation of capital in general to wages in general it is obvious that the capital in general is constantly competing with labor for the field of employment in particular trades yet since capital itself is the embodiment of labor as well as of waiting the competition is really between some kinds of labor aided by a good deal of waiting and other kinds of labor aided by less waiting when for instance it is said that capitalist machinery has displaced much labor that was employed in making boots what is meant is that formally there were many who made boots by hand and a very few who made alls and other simple implements aided by a little waiting while now there are rather fewer persons occupied in boot making and they make a much larger number of boots than before by aid of powerful machines made by engineers aided by a good deal of waiting there is a real and effective competition between labor in general and waiting in general but it covers a small part of the whole field and is of small importance relatively to the benefits which labor derives from obtaining cheaply the aid of capital and therefore of efficient methods in the production of things that it needs for speaking generally and increase in the power and the willingness to save will cause the services of waiting to be pushed constantly further and will prevent it from obtaining employment at as higher rate of interest as before that is the rate of interest will constantly fall unless indeed invention opens new advantageous uses of roundabout methods of production but this growth of capital will increase the national dividend open out new and rich fields for the employment of labor in other directions and will thus more than compensate for the partial displacement of the services of labor by those of waiting the increase of the national dividend owing to the growth of capital and invention is certain to affect all classes of commodities and to enable the shoemaker for instance to purchase with his earnings more food and clothes more and better supplies of water artificial light and heat travel and so on it may be admitted that a few improvements affect only commodities consumed by the rich in the first instance at least that no part of the corresponding increase of the national dividend goes directly to the laboring classes and that they do not at once gain anything to compensate for the probable disturbance of some of their members in particular trades but such cases are rare and generally on a small scale and even in them there is nearly always some indirect compensation for improvements designed for the luxuries of the rich soon spread themselves to the comforts of other classes and though it is not a necessary consequence yet in fact a cheapening of luxuries does generally lead in various ways to increase desires on the part of the rich for things made by hand and for personal services and increases also the means at their disposal for gratifying those desires this points to another aspect of the relation between capital in general and wages in general it is to be understood that the share of the national dividend which any particular industrial class receives during the year consists either of those things that were made during the year or the equivalence of those things for many of the things made or partly made during the year are likely to remain in the possession of capitalists and undertakers of industry and to be added to the stock of capital while in return they directly or indirectly hand over to the working classes some things that had been made in previous years the ordinary bargain between labor and capital is that the wage receiver gets command over commodities in a form ready for immediate consumption and in exchange carries his employers goods a stage further towards being ready for immediate consumption but while this is true of most employees it is not true of those who finish the process of production for instance those who put together and finished watches give to their employers far more commodities in a form ready for immediate consumption then they obtain his wages and if we take one season of the year with another so as to allow for seed and harvest time we find that workmen as a whole hand over to their employers more finished commodities then they receive his wages there is however a rather forced sense in which we may perhaps be justified in saying that the earnings of labor depend upon advances made to labor by capital for not to take account of machinery and factories of ships and railroads the houses learn to workmen and even the raw materials in various stages which will be worked up into commodities consumed by them represent a far greater provision of capital for their use than the equivalent of the advances which they make to the capitalist even when they work for a month for him before getting any wages in all this then there is nothing to make the relations between capital in general and labor in general differ widely from those between any other two agents of production in the general scheme of distribution already explained the modern doctrine of the relations between labor and capital is the outcome to which all the earlier doctrines on the subject we're working their way and differs only in its greater exactness completeness and homogeneity from that given by mill in the third chapter of his fourth book the only place in which he collects together all the various elements of the problem to conclude another stage of the argument capital in general and labor in general cooperate in the production of the national dividend and draw from it their earnings in the measure of their respective marginal efficiencies their mutual dependence is the closest capital without labor is dead the laborer without the aid of his own or someone else's capital would not long be alive where labor is energetic capital reaps a high reward and grows apace and thanks to capital and knowledge the ordinary laborer in the western world is in many respects better fed clothed and even housed than were princes in earlier times the cooperation of capital and labor is as essential as that of the spinner of yarn and the weaver of cloth there is a little priority on the part of the spinner but that gives him no preeminence the prosperity of each is bound up with the strength and activity of the other though each may gain temporarily if not permanently a somewhat larger share of the national dividend at the expense of the other in the modern world private employers and officials of joint stock companies many of whom have but little capital of their own act as the center of a great industrial wheel the interests of owners of capital and of workers radiate towards them and from them and they hold the whole together in a firm grip they will therefore take a predominant place in those discussions of fluctuations of employment and of wages which are deferred to the second volume of this treatise and a prominent though not predominant place in those discussions of the secondary features in the mode of action of demand and supply peculiar to labor capital and land respectively which will occupy the next eight chapters in appendix J some account will be given of the wages fund doctrine reason will be shown for thinking that it laid excessive stress on the side of demand for labor to the neglect of the causes which govern its supply and that it suggested a correlation between the stock of capital and the flow of wages instead of the true correlation between the flow of the products of labor aided by capital and the flow of wages but reason will also be given for the opinion that the classical economists themselves though perhaps not nearly all their followers if cross-examined would have explained away the misleading suggestions of the doctrine and thus have brought it into close accord so far as it went with modern doctrines in appendix K some study will be made of the various kinds of producers and consumers surpluses raising questions of some abstract interest but of little practical importance as has already been intimated the efficiencies total and marginal of the several factors of production their contributions direct and indirect to the aggregate net product or national dividend and the shares of that dividend which accrue to them severly are correlated by a number of mutual interactions so complicated that it is impossible to comprehend the whole in a single statement but yet by the aid of the terse compact precise language of mathematics it is possible to lead up to a fairly unified general view though of course it can take no account of differences of quality except in so far as they can be interpreted more or less crudely into differences of quantity end of chapter two chapter three of principles of economics book six this is a liber box recording all liber box recordings are in the public domain for more information or to volunteer please visit liberbox dot org principles of economics book six by alfred marshal chapter three earnings of labor when discussing the general theory of equilibrium of demand and supply in the last book and the main outlines of the central problem of distribution and exchange in the first two chapters of this book we left on one side as far as might be all considerations turning on the splendid qualities and incidents of the agents of production we did not inquire in detail how far the general theories of the relations between the value of an appliance for production and that of the product which it helps to make are applicable to the incomes earned by natural abilities or by skill and knowledge acquired long ago whether in the ranks of the employers the employed or the professional classes we avoided difficulties connected with the analysis of profits paying no attention to the many different scopes which the usage of the marketplace assigns to this term and even the more elementary term interest and we took no account of the influence of varieties of tenure on the farm of demand for land these and some other deficiencies will be made good by more detailed analysis in the following three groups of chapters on demand and supply in relation to labor to capital and business power and to land respectively problems relating to methods of estimating and reckoning earnings to which the present chapter is devoted belong mainly to the province of arithmetic or bookkeeping but much error has arisen from treating them carelessly when watching the action of demand and supply with regard to a material commodity we are constantly met by the same difficulty that two things which are being sold under the same name in the same market are really not of the same quality and not of the same value to the purchasers or if the things are really alike they may be sold even in the face of the keenest competition at prices which are nominally different because the conditions of sale are not the same for instance a part of the expense or risk of delivery which is born in the one case by the seller may in the other be transferred to the buyer but difficulties of this kind are much greater in the case of labor than of material commodities the true price that is paid for labor often differs widely and in ways that are not easily traced from that which is nominally paid there is a preliminary difficulty as to the term efficiency when it is said that about equal earnings or rather equal net advantages see above two four two are obtained in the long run in different occupations by persons of about equal efficiency the term efficiency must be interpreted broadly it must refer to general industrial efficiency as defined above but when references made to differences of earning power of different people in the same occupation then efficiency is to be estimated with special reference to those particular elements of efficiency which are needed for that occupation it is commonly said that the tendency of competition is to equalize the earnings of people engaged in the same trade or in trades of equal difficulty but this statement requires to be interpreted carefully for competition tends to make the earnings got by two individuals of unequal efficiency in any given time say a day or a year not equal but unequal and in like manner it tends not to equalize but to render unequal the average weekly wages in two districts in which the average standards of efficiency are unequal given that the average strength and energy of the working classes are higher in the north of England than in the south it then follows that the more completely competition makes things find their own level the more certain it is that the average weekly wages will be higher in the north than in the south Cliff Leslie and some other writers have naively laid stress on local variations of wages as tending to prove that there is very little mobility among the working classes and that the competition among them for employment is ineffective but most of the facts which they quote relate only to wages reckoned by the day or week they are only half facts and when the missing halves are supplied they generally support the opposite inference to that on behalf of which they are quoted for it is found that local variations of weekly wages and of efficiency generally correspond and thus the facts tend to prove the effectiveness of competition so far as they bear on the question at all we shall however presently find that the full interpretation of such facts as these is a task of great difficulty and complexity the earnings or wages which a person gets in any given time such as a day a week or a year may be called his time earnings or time wages and we may say then that Cliff Leslie's instances of unequal time wages tend on the whole to support and not to weaken the presumption that competition adjusts earnings and occupations of equal difficulty and in neighboring places to the efficiency of the workers but the ambiguity of the phrase the efficiency of the workers has not yet been completely cleared away when the payment for work of any kind is apportion to the quantity and quality of the work turned out it is said that uniform rates of piecework wages are being paid and if two persons work under the same conditions and with equally good appliances they are paid in proportion to their efficiencies when they receive piecework wages calculated by the same list of prices for each several kind of work if however the appliances are not equally good a uniform rate of piecework wages gives results disproportionate to the efficiency of the workers if for instance the same list of piecework wages were used in cotton mills supplied with old fashioned machinery as in those which have the latest improvements the apparent equality would represent a real inequality the more effective competition is and the more perfectly economic freedom and enterprise are developed the more surely will lists be higher in the mills that have old fashioned machinery than in the others in order therefore to give its right meaning to the statement that economic freedom and enterprise tend to equalize wages in occupations of the same difficulty and in the same neighborhood we require the use of a new term we may find it in efficiency wages or more broadly efficiency earnings that is earnings measured not as time earnings are with reference to the time spent in earning them and not as piecework earnings are with reference to the amount of output resulting from the work by which they are earned but with reference to the exertion of ability and efficiency required of the worker the tendency then of economic freedom and enterprise or in more common phrase of competition to cause everyone's earnings to find their own level is a tendency to equality of efficiency earnings in the same district this tendency will be the stronger the greater is the mobility of labor the less strictly specialized it is the more keenly parents are on the lookout for the most advantageous occupations for their children the more rapidly they are able to adapt themselves to changes in economic conditions and lastly the slower and less violent these changes are this statement of tendency is however still subject to a slight correction for we have hitherto suppose that it is a matter of indifference to the employer whether he employs few or many people to do a piece of work provided his total wages bill for the work is the same but that is not the case those workers who earn most in a week when paid at a given rate for their work are those who are cheapest to their employers and they are the cheapest also to the community unless indeed they overstrain themselves and work themselves out prematurely for they use only the same amount of fixed capital as their slower fellow workers and since they turn out more work each part of it has to bear a less charge on this account the prime costs are equal in the two cases but the total cost of that done by those who are more efficient and get the higher time wages is lower than the total cost of that work done by those who get the lower time wages at the same rate of piece work payment this point is seldom of much importance in out-of-door work where there is abundance of room and comparatively little use of expensive machinery for then except in the matter of superintendents it makes very little difference to the employer whose wages bill for a certain piece of work is one hundred pounds whether that some is divided between twenty efficient or thirty inefficient workers but when expensive machinery is used which has to be proportion to the number of workers the employer would often find the total cost of his goods lowered if he could get twenty men to turn out for a wages bill of fifty pounds as much work as he had previously got done by thirty men for a wages bill of forty pounds in all matters of this kind the leadership of the world lies with america and it is not an uncommon saying there that he is the best business man who contrives to pay the highest wages the corrected law then stands that the tendency of economic freedom and enterprise is generally to equalize efficiency earnings in the same district but where much expensive fixed capital is used it would be to the advantage of the employer to raise the time earnings of the more efficient workers more than in proportion to their efficiency of course this tendency is liable to be opposed by special customs and institutions and in some cases by trades unions regulations thus much with regard to estimates of the work for which the earnings are given but next we have to consider most carefully the facts that in estimating the real earnings of an occupation account must be taken of many things besides its money receipts and that on the other side of the account we must reckon for many incidental disadvantages besides those directly involved in the strain and stress of the work as adam smith says the real wages of labor may be said to consist in the quantity of the necessaries and conveniences of life that are given for it it's nominal wages in the quantity of money the laborer is richer poor is well or ill rewarded in proportion to the real not to the nominal price of his labor but the words that are given for it must not be taken to apply only to the necessaries and conveniences that are directly provided by the purchaser of the labor or its products for account must be taken also of the advantages which are attached to the occupation and require no special outlay on his part in endeavoring to ascertain the real wages of an occupation at any place or time the first step is to allow for variations in the purchasing power of the money in which nominal wages are returned this point cannot be thoroughly dealt with till we come to treat of the theory of money as a whole but it may be remarked in passing that this allowance would not be a simple arithmetical reckoning even if we had a perfectly accurate statistics of the history of the price of all commodities for if we compare distant places or distant times we find people with different ones and different means of supplying those ones and even when we can find our attention to the same time and place we find people of different classes spending their incomes in very different ways for instance the prices of velvet of operatic entertainments and scientific books are not very important to the lower ranks of industry but a fall in the price of bread or of shoe leather affects them much more than it does the higher ranks differences of this kind must always be born in mind and it is generally possible to make some sort of rough allowance for them we have already noticed that a person's total real income is found by deducting from his gross income the outgoings that belong to its production and that this gross income includes many things which do not appear in the form of money payments and are in danger of being overlooked firstly then with regard to the outgoings we do not hear reckon the expense of education general and special involved in the preparation for any trade nor do we take any account of the exhaustion of a person's health and strengthen his work allowance for them may best be made in other ways but we must deduct all trade expenses whether they are incurred by professional men or artisans thus from the bearers gross income we must deduct the rent of his office and the salary of his clerk from the carpenter's gross income we must deduct the expenses which he incurs for tools and when estimating the earnings of quarry men in any district we must find out whether local custom assigns the expenses of tools and blasting powder to them or to their employers such cases are comparatively simple but it is more difficult to decide how large a part of the expenses which a medical man incurs for house and carriage and social entertainments should be regarded as trade expenses again when servants or shop assistants have to supply themselves at their own cost with expensive clothes which they would not buy free to do as they like the value of their wages to them is somewhat lower by this compulsion and when the employer provides expensive liveries house room and food for his servants these are generally worth less to them than they cost to him it is therefore an error to reckon the real wages of domestic servants as some statisticians have done by adding to their money wages the equivalent of that cost to their employer of everything that he provides for them on the other hand when a farmer hauls coal free for his men he chooses of course times when his horses have little to do and the real addition to their earnings is much greater than the cost to him the same applies to many perquisites and allowances as for instance when the employer allows his men to have without payment commodities which though useful to them are almost valueless to him on account of the great expenses involved in marketing them or again when he allows them to buy for their own use at the wholesale price commodities which they have helped to produce when however this permission to purchase is changed into an obligation to purchase the door is open to grave abuses the farmer who in old times used to compel his men to take from him spoiled grain at the wholesale price of good grain was really paying them lower wages than he appeared to be and on the whole when this so-called truck system prevails in any trade in an old country we may fairly assume that the real rate of wages is lower than the nominal next we have to take account of the influences exerted on the real rate of earnings in an occupation by the uncertainty of success and the inconstancy of employment in it we should obviously start by taking the earnings of an occupation as the average between those of the successful and unsuccessful members of it but care is required to get the true average for if the average earnings of those who are successful are two thousand pounds a year and of those who are unsuccessful are four hundred pounds a year the average of the whole will be twelve hundred pounds a year if the former group is as large as the latter but if as is perhaps the case with barristers the unsuccessful are ten times as numerous as the successful the true average is but five hundred and fifty pounds and further many of those who have failed most completely are likely to have left the occupation altogether and thus to escape being counted and again though by taking this average we obviate the necessity of making any separate allowance for insurance against risk account generally remains to be taken of the evil of uncertainty for there are many people of a sober steady going temper who like to know what is before them and who would far rather have an appointment which offered a certain income of say four hundred pounds a year then one which was not unlikely to yield six hundred pounds but had an equal chance of affording only two hundred pounds uncertainty therefore which does not appeal to great ambitions and lofty aspirations has special attractions for a very few while it acts as a deterrent to many of those who are making their choice of a career and as a rule the certainty of moderate success attracts more than an expectation of an uncertain success that has an equal actuarial value but on the other hand if an occupation offers a few extremely high prizes it's attractiveness is increased out of all proportion to their aggregate value for this there are two reasons the first is that young men of an adventurous disposition are more attracted by the prospects of a great success then they are deterred by the fear of failure and the second is that the social rank of an occupation depends more on the highest dignity and the best position which can be obtained through it then on the average good fortune of those engaged in it it is an old maximum statecraft that a government should offer a few good prizes in every department of its service and in aristocratic countries the chief officials received very high salaries while those of the lower grades are comforted in the receipt of salaries below the market level for similar services by their hopes of ultimately rising to a coveted post and by the social consideration which in such countries always attends on public officers this arrangement has the incidental effect of favoring those who are already rich and powerful and partly for that reason it is not adopted in democratic countries they often go to the opposite extreme and pay more than the market rates for their services to the lower ranks and less to the upper ranks but that plan whatever be its merits on other grounds is certainly an expensive one we may next consider the influence which in constancy of employment exerts on wages it is obvious that in those occupations in which employment is irregular the pay must be high in proportion to the work done the medical man and the shoe black much each receive when at work a pay which covers a sort of retaining fee for the time when he has nothing to do if the advantages of their occupations are in other aspects equal and their work equally difficult the bricklayer when at work must be paid a higher rate than the joiner and the joiner than the railway guard for work on the railways is nearly constant all the year round while the joiner and the bricklayer are always in danger of being made idle by slackness of trade and the bricklayer's work is further interrupted by frost and rain the ordinary method of allowing for such interruptions is to add up the earnings for a long period of time and to take the average of them but this is not quite satisfactory unless we assume that the rest and leisure which a man gets when out of employment are of no service to him directly or indirectly this assumption may be fairly made in some cases for waiting for work often involves so much anxiety and worry that it causes more strain than the work itself would do but that is not always so interruptions of work that occur in the regular course of business and therefore raise no fears about the future give opportunity for the system to recruit itself and lay in stores of energy for future exertions the successful barrister for instance is subject to a severe strain during some parts of the year and that is itself an evil but when allowance has been made for it he may be regarded as losing very little by being prevented from earning any fees during the legal vacations next we must take account of the opportunities which a man's surroundings may afford of supplementing the earnings which he gets in his chief occupation by doing work of other kinds and account may need to be taken also of the opportunities which these surroundings offer for the work of other members of his family many economists have even proposed to take as their unit the earnings of a family and there is much to be said for this plan with reference to agriculture and those old-fashioned domestic trades in which the whole family works together provided that allowance is made for the loss resulting from any consequent neglect by the wife of her household duties but in modern england trades of this kind are exceptional the occupation of the head of the family seldom exerts much direct influence on those of its other members except those of his sons whom he introduces into his own trade though of course when the place in which he works is fixed the employments to which his family can get easy access are limited by the resources of the neighborhood thus then the attractiveness of a trade depends on many other causes besides the difficulty and strain of the work to be done in it on the one hand and the money earnings to be got in it on the other and when the earnings in any occupation are regarded as acting on the supply of labor in it or when they are spoken of as being its supply price we must always understand that the term earnings is only used as a short expression for its net advantages we must take account of the facts that one trade is healthier or cleaner than another that it is carried on in a more wholesome or pleasant locality or that it involves a better social position as is instanced by adam smith's well-known remark that the aversion which many people have for the work of a butcher and to some extent for the butcher himself raises earnings in the butchers trade above those in other trades of equal difficulty of course individual character will always assert itself in estimating particular advantages at a high or low rate some persons for instance are so fond of having a cottage to themselves that they prefer living on low wages in the country to getting much higher wages in the town while others are indifferent as to the amount of house room they get and are willing to go without the comforts of life provided they can procure what they regard as its luxuries this was the case for example with a family of whom the royal commission on the housing of the working classes in eighteen eighty four were told their joint earnings were seven pounds a week but they chose to live in one room so as to be able to spend money freely on excursions and amusements personal peculiarities such as these prevent us from predicting with certainty the conduct of particular individuals but if each advantage and disadvantage is reckoned at the average of the money values it has for the class of people who would be likely to enter an occupation or to bring up their children to it we shall have the means of estimating roughly the relative strengths of the forces that tend to increase or diminish the supply of labor in that occupation at the time and place which we are considering for it cannot be too often repeated that grave errors are likely to result from taking over an estimate of this kind based on the circumstances of one time in place and applying it without proper precaution to those of another time or another place in this connection it is interesting to observe the influence of differences of national temperament in our own time thus in america we see swedes and norwegians drift to agriculture in the northwest while the irish if they go on the land at all choose farms in the older eastern states the preponderance of germans in the furniture in the brewing industries of italians in railway building of slobs and meat packing and in some groups of minds and of irish and french canadians in some of the textile industries of the united states and the preference of the jewish immigrants in london for the clothing industries and for retail trade all of these are due partly to differences in national aptitudes but partly also to differences in the estimates that people of different races form of the incidental advantage and disadvantage of different trades lastly the disagreeableness of work seems to have very little effect in raising wages if it is of such a kind that can be done by those whose industrial abilities are of a very low order for the progress of sciences kept alive many people who are unfit for any but the lowest grade of work they compete eagerly for the comparatively small quantity of work for which they are fitted and in their urgent need they can think almost exclusively of the wages they can earn they cannot afford to pay much attention to incidental discomforts and indeed the influence of their surroundings has prepared many of them to regard the dirtiness of an occupation as an evil of but minor importance hence arises the paradoxical result that the dirtiness of some occupations is a cause of the lowness of the wages earned in them for employers find that this dirtiness adds much to the wages they would have to pay to get the work done by skilled men of high character working with improved appliances and so they often adhere to old methods which require only unskilled workers of but indifferent character and who can be tired for low time wages because they are not worth much to any employer there is no more urgent social need than that labor of this kind should be made scarce and therefore dear end of chapter three