The Intellectual Foundations of Political Economy
The Austrian School
BOOK 3, The Natural Imputation of the Return from Production
by Friedrich Von Wieser
|Part I||Chapter VI||Chapter XII||Part III|
|Chapter I||Chapter VII||Chapter XIII||Chapter XVII|
|Chapter II||Chapter VIII||Chapter XIV||Chapter XVIII|
|Chapter III||Chapter IX||Part II||Chapter XIX|
|Chapter IV||Chapter X||Chapter XV|
|Chapter V||Chapter XI||Chapter XVI|
PART I: The General Principles of Imputation
Production goods, as well as consumption goods, afford utility. Land, capital, and labour afford utility inasmuch as they produce useful objects of consumption. As the latter serve directly, so do the former indirectly, toward the satisfaction of wants. The seed, the tree, the soil, the yarn, the coal, the machine: -- these are not indeed ripe or finished goods, like the fruit and the garment, but they are just as really goods. They contain prospective or potential utility.
And the production goods, land, labour, and capital, must receive value on account of their utility, so far as they are not available in superfluity. The atom of air, which floats above the field in company with the countless others that throng space, is useful but valueless, because its place is at any time taken and fined by another. On the other hand, in the judgment of economic men, all those elements of production must receive value on account of their useful effect, which, however numerous they be, are yet not numerous enough to prevent even a small loss in them being perceptible and bringing harm in its train. Production does not despise free goods; it does not disdain the fruitful land although it should stretch away in excess of all requirements, or the wood in the primeval forest, or free water power: on the contrary, it seeks them out and prefers to use them wherever it can, because their services are the most perfect possible, and present no break in the rendering. None the less it must be said that production pays little attention to free goods, -- indeed less than little. It does not consider them at all. It merely uses them; it ascribes to them no value. It does not even reckon to them the services they render. Utility alone gives no value; there must be limitation of supply as well, before value emerges from utility. Utility is and remains the source of value, but in order to set the source flowing there must be a peculiar motive power, which will direct the attention of man to the necessity of watching and attending to it.
It is, however, not usual to follow the value of production goods to its source in utility. To estimate the value of a field I do not consider what satisfactions of want can be had from its crop. I content myself with calculating what and how much crop it will probably yield; this crop then I estimate according to the value which attaches to it in virtue of its utility; and this value is to me the basis from which I ascertain the value of the field. The act of valuation of production goods, which ought to reach right back to wants, is, therefore, usually carried only to that point at which the relation of these goods to the value of their products is clearly established, for in the value of products the calculation of the wants is already represented. To this extent it is possible to say that the value of production goods is determined by the value of their products or by the value of the return. Productive value is return-value. The consideration that, from production goods, one can obtain a return in goods which possess not only utility but value, gives production goods their value.
According to the manner in which production is planned and carried out, it is possible to obtain from the same goods widely diverse kinds and amounts of return. Economic principles demand the obtaining of the greatest possible return; that is, the return possessing the greatest value which it is possible to obtain under the circumstances. It is this "greatest possible return" whose value should serve as basis for the valuation of production goods.(1*) Probably it never is possible to decide this beforehand with absolute accuracy, but some anticipatory estimate there must be. It is not therefore actually the value of the return which forms the ground of production value, -- but the expectation which is formed of it. It is the anticipated value of the anticipated return.
The greater the return reckoned on, the greater will be the productive value. The greater the dividend expected from a stock, the higher will be the value put upon the stock. This frustration of stocks and dividends is, on the whole, the best that could be given to explain productive value. Every means of production, every tool, every piece of land or raw material, every service of labour, represents, if one may say so, a share in an undertaking. This share contributes to the result of the undertaking, and consequently gets ascribed to it a quota of the result, and upon the amount of this result its value must depend.(2*)
1. The value of the productive unit again is decided according to the marginal law -- i.e. by the least among these returns. See below, Book III. chap. viii.
2. The classical political economy really examines only the value of products, or, more exactly, of produced consumption goods. So far as the factors of production are concerned, it looks upon them, on the one side, as sources of income (rent, interest, wage, and, perhaps, also undertaker's income); on the other side, as the elements which go to form the costs of production, and are considered to decide, principally, the value of the products.
But when one compares with this the endeavours which, explicitly or implicitly, guide the new writers on the theory of value, we find the circle of the phenomena to which the idea of value is applied extraordinarily widened. Factors of production -- better expressed by the later writers as "production goods" -- are conceived of all through as objects of value; costs are directly phenomena of value; and even income must be so conceived. Further than this, the relations between the value of utilities and the value of production goods is turned just the other way about -- the former being considered as determining, the latter as determined. On the present occasion we have first to do with the proposition which may serve as starting-point for the whole theory, -- that production goods receive their value from the value of the products which they serve to create. Gossen, Jevons, Menger, and Walras are all agreed on this point In my opinion it is again Menger who gives the most clear and comprehensive statement of the matter. He divides (as does also Gossen, though much less perfectly) the entire goods which stand in the productive nexus into Ranks, and value is conducted from rank to rank. The first and lowest rank is formed by those utilities which receive their value direct from wants. The value thus received passes over first to goods of the second rank, those, namely, which serve directly towards the producing of goods of the first rank; as e.g. the meal and the labour of the baker in the preparation of bread. From these value passes on to goods of the third rank (e.g. wheat and the labour of the miller); and so on, step by step, till it reaches the highest, or, as Bohm-Bawerk calls them, the most remote ranks.
The Problem of Imputation
No productive instrument, be it ever so efficient, yields a return by its unaided agency; it always requires the assistance of others. And the more the art of production is developed, the more numerous will be the productive instruments which co-operate. The very simplest products often require the most complicated methods of production, because they, more than any others, allow of the application of machinery and, therefore, of power in the mass. The proposition that production goods obtain their value from the value of their returns, suffices only for the valuation of the co-operating productive factors as a whole; not for their valuation individually. To obtain this also, we need a rule which will make it possible to divide up the whole return into single parts.
When land, capital, and labour work together, we must be able to separate out the quota of land, the quota of capital, and the quota of labour from the joint product. More than that, we must be able to measure the services of each separate piece of land, of each separate quantity of capital, and of each separate labourer. Of what use is it to know the return which falls to machinery, coal, and raw material together? It is necessary to distinguish what each has contributed to the total result, just as the contribution of the stone-cutter who hews the block must be distinguished from that of the artist who chisels it into the statue.
If we may form a judgment from economic practice, we should say there is such a rule of division. No one, practically, is limited to saying that return is due to all the producing factors together; every one understands and practises, more or less perfectly, the art of division of return. A good business man must know, and does know, what a day labourer and what a skilled worker would yield him; what profit a machine will bring in; how much has to be ascribed to the raw material; what return this and what return that piece of land will produce. If he did not know this; if he could only compare his outlay and his results as a whole and in the lump, he would not know what to do in case the return proved less than the outlay. Must he give up the production altogether? Must he alter the management? Must he be more saving with labour or capital, with machinery or raw material; or, on the contrary, must he employ more of these? Only if there is some adequate means of following out individually the working of each productive element, can he judge clearly upon these points That there is such a means is testified by the fact that economic decisions of the nature we have just mentioned are made, and made with as much confidence and as favourable results as are any other decisions in matters of value generally. The existence of this means of calculation is still more certainly proved by the fact that decisions of this nature are so often made in the same way by many people, -- in fact, by all persons who find themselves in the same circumstances. Why at a certain point of time does the entire body of undertakers, in some particular branch of manufacture, suddenly replace hand labour by machinery, when previously they had not found machinery profitable? Why is agriculture in one country so much more "intensive" than in another? Chance and caprice are here out of the question. It is calculations of production that effect these alterations. They give arithmetical proof that it is advantageous to eliminate the one element of production, with its accompanying share in the return, and substitute for it the other. The more perfect the production, the more exact will be its calculations, and the more highly will the art of distributing the return be developed. A "model economy" calculates everything. But the rudest peasant, and the wildest savage, make calculations, inexact and hasty though they be. They, too, make use of their experience, though very imperfectly of course, in regard to matters where the impulse and the confidence are given by nature. The peasant, dwelling in some cleft of the mountain, says to himself that this field is more valuable than that; and this he could not do unless he understood the art of separating the return of the field from the return of the co-operating labourers, tools, and materials. These are rules which arise naturally, from the very nature of man, when he finds himself confronted with the problems of economic life. In applying them, the attempt would undoubtedly be made even by a communistic state, to calculate the result of each individual productive element. And in a highly cultivated state these calculations would be made with great exactitude, in order to lay down that plan of production which, for the time being, was most effective.
It is singular how few of those writers who have attempted to grasp economic procedures into the unity of theory have tried to discover this rule, -- which is certainly one of the most important followed in practical economic dealings. Of the many difficulties which have to be overcome if we are to get, apart from actual transactions, a purely theoretical and scientific account of what people actually do when impelled by circumstances, probably the first and most difficult of all is to put before ourselves what are the problems really put in business transactions. Every theory begins with the least important of the things it has to do, and only in the end arrives at its true vocation.
The second difficulty is to state the problem correctly. The few writers who have managed to get over the first obstacle mentioned have almost all come to grief at the second. For the most part they pitch the question too high, and thus change, what to the simple man is a simple and natural thing, into a subtle and sophistical riddle, of which they then say, rightly enough, that no solution is possible. They try. to discover which portion of the joint product, physically considered, each factor has produced, or of which part of the result each factor is the physical cause. This, however, is not to be discovered. At the most it could be possible only in cases where the product is a complex of materials externally bound together; and even that only so far as regards the materials, and not as regards the power which makes them a complex -- a power whose effects inhere in all the constituent parts of the mass, without being incorporated in any one of them. Looked at in this way, we cannot get beyond the proposition that the result is the joint product of all its factors and causes; that those factors must work in combination or they cannot work at all, -- like the four brothers in the tale who saved the princess only by their united endeavours. If we wish to find the principle for division of return which is applied in practical life, the question must be put quite differently; it must be put as practical life puts it, and it must be put simply.
The causes of any phenomenon, whatever it may be, can be interpreted in very various ways. The philosopher looks at them in one light, the peasant in quite another; and yet both may judge rightly, and, so far as their judgment is correct, may apply rightly their conception. The difference in their opinions rests on the fact that they judge from different points of view. The former searches after the final causes that may be grasped by human reason; the latter limits his attention to the proximate and immediate causes, taking for granted the agency of all those which are further removed. Each would fail were he to make use of the other's knowledge; the peasant's maxim does not answer the purpose of philosophy, and the philosophic conception has no place in the economy of the peasant; yet each is serviceable enough in its own place. In whatever industrial situation men come to a judgment as to the causes of the phenomena which they encounter, the horizon of the judgment is always strictly limited by the point of view they take. Whatever lies beyond that cannot properly be taken into consideration, or the judgment would never come to anything. It would only end in needless critical reflection, which would be of no help as regards the objects aimed at. If we wish to obtain a practical judgment the object must be kept in view, and the matter looked at from the point of view of those concerned. A theory which proposes to explain the idea in business life, must, of all things, not be above its business; it must limit itself, so as not to give too deep a meaning to, and thereby really distort, the limited subject.
A science nearly related to our own as regards its subject, that of jurisprudence, may give us admirable instruction on this point. For an act of murder there must necessarily be a perpetrator, a victim, an instrument, and an opportunity. Besides these, the act is influenced by innumerable circumstances, which can often be shown to reach back to a far distant past in the previous history of the murderer, and even in the history of the community among which he came into existence and grew into manhood. The sociologist, the historian, the philanthropist, and the lawgiver will have much to consider that has but an indirect connection with the committing of the murder. But, however far back they may carry their consideration, some idle brain can always go still further, and follow ad infinitum the series of causes which led to the deed, -- as, for instance, the history of the tool with which it was done, as well as the history of the doer. The judge, on the other hand, who, in his narrowly-defined task, is only concerned about the legal imputation, confines himself to the discovery of the legally responsible factor, -- that person, in fact, who is threatened with the legal punishment. On him will rightly be laid the whole burden of the consequences, although he could never by himself alone -- without instruments and all the other conditions -- have committed the crime. The imputation takes for granted physical causality. It cannot fall upon any one who stands outside the series of causes which led to the result, and any proof that the accused does stand outside exempts him from condemnation. But if the causal nexus is once established, far more is laid to the account of the doer than was or could be physically done by him. Only a foolish interpretation of the judgment could take exception to this. The expression "this man has done it" does not mean "this man alone has done it," but "this man alone, among all the active causes and factors, is legally responsible for the deed."
In the division of the return from production, we have to deal similarly not with a complete causal explanation, but with an adequately limiting imputation, -- save that it is from the economic, not the judicial point of view. Observation of the fruits of the earth suggests to a religious mind the Creator of all things. A scientific investigator is directed by the same observation towards the pursuit of the cognisable causes of their creation. A Faust pines after knowledge regarding the hidden forces of their life. The farmer, as farmer, thinks differently from all of these. He ascribes his crops, soberly and unsentimentally, to a very limited and small circle of all the causes which have actually produced them. He asks -- "Towards what things must I direct my economic attention in order to receive this return?" -- and reckons the result accordingly. He therefore sets apart from the total active causes all those which lie behind in the past. From the present causes he then sets apart all those which can be of no use, or are not recognised as having any use. From the recognised and useful, again, he divides off all those which are not under economic command. From these last he, finally, separates out all those causes which need not be cared for, because they are present in superfluity. As we can readily understand, he does not in the least believe that the remainder is the sole originating cause of his return. At the same time he rightly attributes or imputes the return to it alone, taking the working of all the other elements as assured. His judgment, though limited, is neither false nor even inexact. It embraces all the causes which have to be considered by him if his labour is to be attended by good results.
If, in the economic working out, parts of the total result should be traced back to individual instruments of production, it is that we continue the reasoning with which we started: we trace back the total result not to its numerous wider causes, but simply to the economic instruments of its production. In regard to the part we limit ourselves still more than we did in regard to the whole; we seek out that one among the economic elements to which the part is practically to be imputed, although, certainly, it could have produced it only in combination with the other elements. Here, again, there is neither fallacy, nor even inaccuracy. On the contrary, so far as this method succeeds in founding, upon the imputation of the return, a valuation of goods and a plan of production which insures the most successful employment of each single element, it is the height of practical wisdom.
To show that imputation in this sense is both allowable and practicable take one single case. Suppose that two fields, the one fertile, the other poor, but both worked with similar amounts of capital and labour, give different returns. To which account is the surplus return of the better field to be attributed -- to that of the seed, or the manure, or the plough, or the labour? But these were the same in both fields. Is it not rather to be attributed to the land itself and its greater fertility? No one can be in doubt as to that, nor can one raise the objection that, without seed, manure, plough, and labour, there could have been no surplus return. Taking things as they are, more depends upon the possession of the better soil -- just as much more, in fact, as the surplus return amounts to.
It is of great importance that we should try to formulate theoretically the rules for the imputation of productive return, not only as regards land but as regards all productive instruments. If we do not succeed in doing so, the valuation of production goods will remain an enigma; and the existing order of things, under which the actual imputation of returns forms the basis for the distribution of national income among the citizens, will lie under the accusation of arbitrariness, if not the worse accusation of force and injustice. It would not even be possible to justify the difference in wages paid to some labourers as compared with others. If there is no rule by which to adjust the quarrel between owners and workers, neither is there any by which to measure the rank of the inventor against that of the day-labourer who carries out the invention. It would be purely arbitrary if one tried, even approximately and by way of valuation, to show respect to genius, devotion, art, power, skill -- in short all the virtues and excellences which, from time immemorial, have been held in respect in economic matters as well as in others, and which society has to thank for the most beneficent and useful services of its members.
The Socialist Reading of the Problem. The Claim of the Labourer to the Entire Return
The socialist theory so greatly limits the circle of those things which may be counted as means of production that the problem of imputation is also sensibly narrowed.
Socialists do not recognise three productive factors, land, capital, and labour: they acknowledge only a single productive power, Labour. Only human labour, they say, is creative; it alone can really produce. Of course, to be effective, it requires land and capital, but these hold a subordinate position to labour, and act merely as auxiliary means of production. But in the existing order of things, landowners and capitalists -- as having exclusive possession of the material auxiliary means of production -- are placed in a position to force the labourer to give up to them a great part of the product of labour, as it is only on this condition that they will lend their property and allow labour to use it. By reason of this, land and capital have become sources of personal income for the idle classes, but unjustly so; and it would be a great error to infer the fact of productive power from that of income. When the owners refuse to grant to labour the use of these auxiliaries, they place obstacles in the way of labour, as Rodbertus says; when they do grant this use, they do nothing more than merely remove the obstruction they have themselves created; they simply withdraw their own arbitrary fiat. It is always the labourer who must produce. Land and capital are only conditions, not causes of production. All return is exclusively labour-return.
As a matter of fact Rodbertus is perfectly right when he says that no conclusion can be drawn from personal income to material return. The problem of distribution of return must be entirely separated from that of distribution of income, if it is to be judged of correctly. But if the problem is to be entirely separated, it must also be so in its application. Let us then leave the personal quarrel entirely out of consideration. Let us completely disregard the question as to what persons should have the products; and, without regard to consequences, simply apply ourselves to find out which factors are to thank for their production, and to which factors they should be imputed. Let us imagine to ourselves the communistic state as seeking for the natural laws of imputation. Here the entire product falls to the enjoyment of the labouring commonwealth. The question then is: -- Does it therefore consider the whole product as a result of its labour, or does it also impute the product to its possession of land and capital?
Clearly this will depend on the standpoint from which the imputation is calculated. If it is the moral imputation that is in question, then certainly no one but the labourer could be named. Land and capital have no merit that they bring forth fruit; they are dead tools in the hand of man; and the man is responsible for the use he makes of them. Evidently all those who, in any sort of way, have assisted in bringing about the result, are counted among the labourers, -- those who direct as well as those who carry out. Indeed, there is no possible doubt that the greatest thanks are not due to mechanical exertions, if we are speaking of imputation in the highest sense of the word. Above these must stand the services of those who direct the executant labourer; who not only supply him with ideas, organisation, and energy, but also procure for him the materials for labour, contrive the machinery, and bring together the labourers who are to work with him. Compared with potencies such as these, the executant labourer himself takes the same position as the material means of production do as compared with himself. Morally considered, things are auxiliaries to him, but he himself is the auxiliary of his leader.
This moral imputation may be important for the personal disposition of income; for the material division of return, of which alone we are now speaking, it is of no consequence. The question here is: On what factors are we practically dependent if the return is to be obtained? Every one who knows economic life as it is, will answer quite plainly. Upon labour and productive wealth. Increase of possession raises the return just as surely as does additional industry. No one feels that the return is dependent upon those production goods of nature which are as abundant as the atom of air floating above the field, or the trees in a primeval forest. But every one feels that the return is dependent upon all goods which, however abundant they may be, are yet scarce; those goods which one economises and tries to multiply. Where would not such possessions have value? And if they have value why is it, if not on account of the return, and according to the amount of the return, which they secure? So long as men consider themselves rich in possessing land and capital, so long do they prove that they impute to them a portion of the fruits which they assist in bringing forth, and so long do they attribute to labour only the remainder of the total return. The socialist who wishes to see his state as rich in property as possible, confutes thereby as completely as possible his own theory, that labour alone makes rich.(1*)
All means of production in which value is recognised, are recognized thereby as practically influential causes of production. To these means of production land and capital will belong, so long as they are not available in ever-assured superfluity. No one can seriously doubt this. The only thing that can be doubted is whether it be just and advantageous for society to permit the existence of private and individual property in land and capital, whereby the return from land and capital is transferred exclusively to single individuals. On this question it is not so easy to come to a decision, and so far as we have gone we have not made any, nor even tried to do so. We have only explained the material relation between products and means of production, without in any way anticipating the ranking of personal claims.
1. We shall find further on (Book V. chap. x), in the socialist theory itself, a much clearer confession that labour is not the only factor in the formation of value. See also Book III, chap. xvii.
Previous Attempts at Solution
The only writer who has made any attempt at an exhaustive treatment of the problem now occupying our attention is Menger. In this Menger starts from the fundamental idea of his theory of value. Supposing that I possess a stock of consumption goods, the clearest way of finding the value of one single item of the stock is by assuming that I lose it. In this way I find what enjoyment depends upon this item -- the marginal enjoyment already described, -- and find at once the source and amount of its value. This method of determining value Menger now applies to the more complicated case in which one has to decide the value of a single item, among several co-operating production goods. Here also he asks what would be the consequence of losing a single item, or a definite portion of any such item, from among the entire group of available goods (land, seed, agricultural implements, labour, cattle, manure, and so on) -- e.g. a cart-horse or quantity of manure. The decrease in the total return which would take place, gives him the amount of return which the owner feels to be dependent upon the possession of the item in question, and gives him at the same time the foundation of its value.
In applying this Menger has arrived at some very remarkable and important results. No production good can work by itself: to accomplish anything every good requires the co-operation of others; and, in so far as production goods mutually demand and supplement each other, they are, to use Menger's expression, "complementary goods." At the same time the combinations which they enter into are less strict than might be expected. If a single good falls out of a productive group of goods, the efficiency of the remaining goods is not, as a rule, completely destroyed thereby. It happens frequently that the group may still remain a group, and still be effectively employed, although with somewhat diminished return, without the lost good being replaced at all. Land, e.g., yields some return even without manure, or without the whole amount of manure demanded by good farming. Or the loss may be made up, if not with quite the same effect, by the substitution of a good taken from some other group, in which latter group, naturally, the return must equally sink a little. Or it may happen that the goods left over become ineffective, or too little effective, when grouped as was originally intended, but allow of being annexed to other groups, whose return is thereby raised, although, perhaps, not by the entire amount of what was lost originally. Take, as example, agricultural capital and labour, which have lost their original employment through laying waste of the ground for which they were intended, and are turned to industrial purposes.
It will be seen that the complementary nature of goods does not reach so far as at first sight might be supposed. Every single good requires the co-operation of others in order to be really of use, but the connection of the goods is not a very strict one. Only a portion of the return from the combination ever depends upon any one single element of production; never (except in a few cases which scarcely require to be considered) the entire return.
What Menger has done is distinguished, as well by the logical sequence of his argument as by his skill in observation, and the lifelike interpretation of that observation. It brings light into the darkness of a subject which no other theorist could have faced, much less illumined. At the same time even Menger has not given the entire solution quite perfectly. An example will make this clear.
Suppose three productive elements, employed in the most rational plan of production possible, promise in combination a product whose value amounts to 10 units of value. If the three elements were to be employed otherwise, in combination with other groups, they would certainly raise the return of these groups, but it is against our hypothesis -- which is that of the most rational plan of production, -- that the return can be raised by 10 units; otherwise the first combination chosen would not after all have been the best. There is always an infinite number of ways in which the elements in question can be grouped, but there is always one plan, and that the best, which should be carried out: if this be given up in favour of another, the result must be smaller, even if only to a trifling extent.
Suppose, again, that the three elements are employed in some plan other than the best -- which, be it remembered, demanded their being combined with one another in a distinct group. Say that, by being each separately employed in some other group, the return of each of these three groups is raised by 3 units, and the three elements accordingly now produce a return amounting to 9 units of value.
How in this case will the value of each single item be reckoned according to Menger's principle? By the decrease in return which ensues in the case of loss. In this case the decrease amounts to 10 units -- the full return of the best combination now broken up -- of which, however, 6 can be recovered by the new employment of the two remaining elements. The loss, therefore, amounts finally to 4, and this is true indifferently of any of the three goods. 12, then, is the value of the three taken together. But this is impossible, since, when most profitably employed, they can give only a return of 10.
This mistake in the result proceeds from a mistake in the method. The normal and determining assumption on which one calculates the value of a good, is not that of its loss, but that of its undisturbed possession, and of the use it gives in fulfilling its end. The assumption of loss serves, in certain circumstances, to show more clearly the advantage of possession. I see more clearly what I have by possessing a thing when I imagine what would be the consequence if I ceased to have it. But this holds only under certain circumstances, namely, as regards a stock of goods of the same kind, where if, in imagination, I take away one good from the others, it is this one good alone and nothing else that is taken away. It does not hold in the case of a stock of heterogeneous and co-operating production goods, where if, in imagination, I remove one, I deprive the others also of a portion of their effect.
The full effect of all the elements in any productive combination can only be realised when these elements remain together undisturbed; it is therefore impossible to discover what value I receive and enjoy from this undisturbed possession, if I begin by assuming the dissolution of the combination, and then ask what still remains. The question must be put positively: What do I actually obtain from the goods as they stand at my disposal? Those productive employments which stand first, -- the employments which are most desirable and would be first chosen -- decide the value; not those which stand second, and would be taken up only in the exceptional case of some disturbance of the original combination. Two persons who are both in exactly the same circumstances, and whose judgment agrees as to the best arrangements for production, must obviously ascribe precisely the same value to their productive possessions, although one of them should have something better to fall back upon in case the first plan falls through. According to Menger, however, the values, in this latter case, would require to be assessed differently, and indeed the higher valuation would be that of the person who had the least to fall back upon, because to him it would be much more important that the first plan should not fall through.
The assumption of loss is sufficient if what is required is the dividing up of the return which the elements of one combination guarantee when put into other combinations; but it is of no use when what is wanted is to calculate as well the surplus by which the first-chosen combination excels all others. This surplus is left an undivided remainder of the return, and as regards it the problem of imputation is not solved, but comes up again for solution.(1*)
It needs only a very slight turn to correct the error in Menger's theory. Every well-thought-out train of reasoning teaches by its very faults, as these faults also possess the first requisite of scientific insight, that is, clearness; and Menger's theory contains in itself the indication as to how the error may be corrected. The deciding element is not that portion of the return which is lost through the loss of a good, but that which is secured by its possession.(2*)
1. Menger reckons this undivided residue to each separate factor instead of charging it to the entire amount, and thus the value comes out too high. In our example the surplus equals 1 (10-9). Menger calculates it three times instead of only once; thus calculating two units too many, and showing a value of 12 where there is only a return of 10.
2. The other attempts at solution of the problem do not go beyond suggestions. In Bohm-Bawerk alone (Werth, p. 56) is there a more detailed statement, -- and it professes only to point out the direction in which probably the solution of the problem might be sought -- "To measure the share which each one of several co-operating factors takes in producing the common product." Bohm-Bawerk, speaking first of some less important cases of "complementariness," establishes firmly the fundamental maxim that no element in a group which admits, firstly, of a separate employment outside the group, and which, secondly, may be replaced at the same time in the group by other goods of the same nature -- obtained from some outside source -- can receive a value higher than its "substitution value." By substitution value he means "that which is derived from the decrease of utility in those branches of production from which the substituted goods are procured." Of such a nature are, e.g., the bricks destined for housebuilding. If some cartloads of these are destroyed, it will not hinder the building, as they are simply replaced by others. This proposition Bohm-Bawerk applies to the cases of productive complementariness, dividing the total amount of complementary production goods into two categories. Of these, one -- which includes the overwhelming majority -- contains those goods which, as marketable wares, are "replaceable at will"; e.g., "the services of hired labourers, raw materials, fuel, tools, and so on." The other category -- which contains the minority -- includes those productive elements which "cannot be replaced, or are difficult to replace; e.g. the piece of land which the peasant cultivates, mines, railway plant, factories, the activity of the undertaker himself with his high personal qualities." The value of those goods which belong to the first group is decided, in every case, through the other employments possible to them; it is, so far, fixed. This value is first deducted from the total return, and the residue then falls "to the member or members which cannot be replaced"; thus the "peasant ascribes it to his land, the mine-owner to his mine, the manufacturer to his factory, the merchant to his capacity.
"Similar ideas may be found more or less clearly stated by various writers; in the Ursprung des Werthes I have myself pointed to a similar solution. Probably we should not be far wrong were we to assume that the reason why so many writers have neglected to take up this problem of distribution, is that they supposed distribution in this sense to be as easily solved in theory as it is in practice. How is it, however, when several "unreplaceable" goods come together? Do not the mine and the activity of its owner, as employer, go together? And are not many -- indeed very many-replaceable goods often combined? The value of these, which, practically, can always be ascertained by referring to their secondary employment and valuation, must, theoretically, be first separated from the combination, as again the secondary employment itself always requires combination with complementary goods, -- but how can this be done unless the rules of distribution are known?
If these observations of Bohm-Bawerk can give no solution of the problem of imputation, they none the less contain an important and notable contribution towards its theory, for that could never be complete without recognising the distinction to which he has drawn attention. On this point see, in Book III, chap. xii, the examination of "cost goods and monopoly goods."
The Principle of Solution. The Productive Contribution
Suppose that a hunter's life depends on his last cartridge killing the tiger about to spring on him. If he misses, all is lost. Rifle and cartridge together have here an exact calculable value. Taken together, the value equals that of the success of the shot, neither more nor less. Taken singly, on the other hand, there is no means of calculating the value of each. They are two unknown quantities for which there is only one equation. Let us call them x and y, and put the successful result at 100; all that can be said as to their value lies in the equation x + y = 100.
Again, suppose an artist were to fashion a pewter vessel which commanded great admiration on account of its perfect form. Suppose, further, that this were the only artist who could do really artistic work, and that his was the only artistic work known. And suppose that, besides the piece of pewter which he had employed, no other material of similar suitability were to be had, neither gold, silver, wood, clay, nor even another piece of pewter. It would be absolutely impossible to distinguish in the value of the vessel between the value of the labour and that of the material. The skill of the artist who conceived and executed, and the suitability of the material which yielded to his hand and retained the form he gave, would be regarded as equally irreplaceable conditions of success. If we, under existing economic conditions, do understand how to value the artist, and how to value the material, we have to thank the circumstance which distinguishes every act done under the influence of exchange from the adventure of the lonely hunter; -- the circumstance, namely, that these acts are not isolated, but take place along with many others of the same kind, and can be compared with them. This very pewter, out of which the artist creates a vessel of great artistic value, serves at the same time to furnish articles for ordinary use of very trifling value. We conclude from this that the pewter itself can have but a trifling value, and that only a small portion of the high value of the artistic product falls to it, while by far the greater share must be the property of the artist. We should be confirmed in this opinion were we to observe that every work of the artist was highly valued. But if, at the same time, we observe that he also works with such materials as gold and precious stones, and that these, on their side, equally lend a high value to all products of which they form part, we are forced to the conclusion that, in spite of his talent, the greater part of the value of his products does not always belong to the artist, and that, when he employs these materials, a highly important, if not very much the more important, part of the value must be ascribed to them. Certainly we can never succeed in considering either the artistic power or the material by itself alone, and thus we cannot succeed in measuring the effects of which they are independently capable. Every productive factor, if it is to be effective, must be combined with others and join its action with theirs; but the elements that are bound up with it may alter, and this fact makes it possible for us to distinguish the specific effect of each single element, just as though it alone were active.
It is possible not only to separate these effects approximately, but to put them into exact figures, so soon as we collect and measure all the important circumstances of the matter; such as the amount of the products, their value, and the amount of the means of production employed at the time. If we take these circumstances accurately into account, we obtain a number of equations and we are in a position to make a reliable calculation of what each single instrument of production does. To put in the shortest typical formula the full range of expressions which offer themselves, we have, for instance, instead of the one equation x + y = 100, the following: --
x + y = 100.
2x + 3z = 290.
4y + 5z = 590.
Here x= 40, y= 60, and z= 70.
According to the number of individual productive combinations carried out within the entire field of production, will be the individual equations. In these equations the combined factors of production on the one side, and the value of the jointly acquired (or anticipated) returns on the other, are set against each other as equivalent amounts. If we add together all the equations, the total amount of productive wealth will stand as equivalent against the total value of the return. This sum must be ascribed, entirely and without remainder, to the individual productive elements, according to the standard of the equation value. To every element there thus falls a definite share in the total performance, and this share could not be figured out either higher or lower, without overthrowing the equivalence between productive wealth and return.
It is the share in the return, thus credited to the individual productive factor, which is usually called shortly the "return" of the factor in question; -- the return of labour, return of land, return of capital. I shall describe it as the "Productive Contribution" (see Ursprung des Werthes, p. 177), in order that it may always be clear whether we are speaking of the return as a whole, or of the share of the single factor in the return. The productive contribution, then, is that portion of return in which is confined the work of the individual productive element in the total return of production. The sum of all the productive contributions exactly exhausts the value of the total return.
It need scarcely be said that, as a matter of fact, calculation can rarely be made so exactly, and never so comprehensively. The equations indeed are all set down, and in every case the productive outlay is estimated according to the standard of the greatest attainable return. But the stating of the equations is frequently made with only a trifling degree of exactitude; and the sum of all the equations is never fully taken, and thus cannot be divided out among the individual elements. None the less we are constantly trying to ascertain the result of the addition and division; only that, instead of calculating directly, we try to attain our end, in a somewhat circumstantial way, by a method of testing. The values obtained in the individual case are applied, so far as they appear suitable, to other cases, and corrected, the one by the other, till in the end the right division is attained. And this is rendered immeasurably easier by the fact that we already possess, in the familiar and authenticated productive values, a key to the division which only requires to be adapted to the changes which emerge from time to time, At no time has the whole mass of production goods to be calculated all at once; it is only the contributions of individual members among these which require to be calculated anew, and even for them a good basis is found in the old values. New calculations require to be made only in those branches of production where the attainable returns and their values either rise or fall. This gives rise to new equations for the factors in question, either with more favourable or less favourable total values. According as it is one or the other, will production be extended or limited, and productive elements attracted from other branches of production, or attracted to them, until the most favourable plan of production is again discovered. The experience obtained while transferring now one, now another productive element, and watching the effect of each combination upon the value of the return, gives us sufficient information as to the amount with which the individual elements are bound up in the total return.(1*)
1. If we are to succeed in our calculation of the productive contributions there must be a sufficiently large number of equations. There must be at least as many equations as there are unknown quantities. Now this condition is certainly fulfilled. How many unknown quantities are there? Just as many as there are classes of production goods distinguishable in exchange. Without doubt these are very numerous. When theorists speak simply of land, capital, and labour, they include within each of these groups an enormous number of classes of goods which in exchange are as far as possible from being homogeneous. The value of labour is not to be calculated as one thing; there must be separate calculations for every kind and quality of labour between which one can distinguish. In calculating the value of agricultural land there will be, in one and the same district, as many different and distinguishable types of land, as would be distinguished in the register of a perfectly exact land tax imposed both on the cultivating and propertied agricultural classes. As to capital and its incalculable variety of forms we need not speak. But however far exchange may be specialised, the classes of productive combinations are undoubtedly even more numerous than the classes of production goods. The classes of combinations into which a good like iron or coal (even of one distinct origin or quality) may be introduced, are incalculable, and the same may be said of unskilled or day's labour. One and the same field is planted in rotation with the most various crops. And thus it comes that a mere change in the quantity of the same kind of goods in a group is sufficient to produce a new equation. Among all the many kinds of goods employed in production, it would be difficult to find one which, either as regards quantity or kind, would always be combined with others according to the same unalterably fixed formula. Different degrees of wealth, of knowledge, of skill, of local conditions, involve that even those kinds of goods which only admit of one single kind of employment, -- that is to say, which are only suited to produce one single kind of product -- must, at the same time and for the same purpose, go into a manifold variety of combinations. If there are exceptions to this rule they are only isolated ones. The contribution of such goods can, however, still be calculated -- always supposing that there are not two such elements in one and the same group. In this case, indeed, the principle we have established would not work, because we should have two unknown quantities and only one equation.
The Principle of Solution (continued). Contribution and Co-operation
The difference between our solution and that of Menger is as follows.
Menger assumes an economic course of events different from that which actually regulates economic life. To discover what return is obtained from the production goods which we possess, he tries to show what would happen should we cease to possess them. According to Menger, for example, the value to a farmer of a cart-horse is calculated by the diminution of return which would ensue were the farmer to lose the horse, and be forced to go on without it. That portion of return calculated by Menger to the single production good we may designate "the share dependent upon its co-operation." We, on the other hand, start by assuming an economic course of events such as owners of production goods would expect. We trace the effects that will ensue if all the production goods which we possess are actually employed as we wish and plan. In this way we calculate what we have called the "productive contribution" of each factor.
The sum of all the "productive contributions" is exactly the same as the sum of value of all the products; the sum of all the "shares dependent upon co-operation" is, on the other hand, as we have already shown, greater. In other words, the "productive contribution" is essentially smaller than the "share dependent upon co-operation," We reckon for instance the return which the cart-horse gives to the farm lower than Menger does, as we only estimate it at a portion of the decrease that would ensue were the owner obliged to farm without it. According to Menger, consequently, the farmer who loses his cart-horse loses only the value of the animal, whereas, according to our conception -- which calculates differently the same numerical loss -- not only does he lose the value of the animal, but he suffers, beyond this, some disturbance in the value of his remaining productive wealth.
Menger's is undoubtedly the simpler and clearer method. The distinction which we find it necessary to make between the "contribution" and the "co-operation" of a factor, appears contradictory and artificial. As a matter of fact, we introduce into the question no more difficulties than are actually contained in it. "Contribution" and "Co-operation," under whatever names they may be known, are everywhere distinguished, and must be distinguished, from each other in practical economic life. It is a generally-accepted fact that every productive factor furnishes the basis, not only for its own value, but also for that of all the other factors in the production. If any essential element is removed from any undertaking whatever, the whole undertaking must sensibly suffer. If there be a scarcity of raw material, human labour and machinery will lose some of their capacity of service, and vice versa; experience can show thousands of such cases. In innumerable ways experience shows that means of production mutually demand and mutually hamper each other. Increased activity on the part of labour raises the return to productive wealth, and extended exploitation of productive wealth raises the return to labour. What does this prove but that the share of return which furnishes the basis of value for its factor -- the "return" imputed to it which we have called its "contribution" -- does not exhaust the entire share contributed by it to the success of the production? Thus we find that the distinctions mentioned really exist, and are not introduced by us into economic life for the purpose of aiding our solution; we find that, by means of this solution, we explain an otherwise inexplicable economic contradiction, and our theory receives thereby no small degree of support and credibility. Or does it appear no contradiction to say that labour, besides affecting "its own" return, makes the "return to capital" rise or fall, or that capital, besides "its own," also affects the "return to labour"? Back to Top
The Principle of Solution (continued), The Economic Service of Imputation
Thanks to the imputation of the "productive contribution," every production good, without exception, has ascribed to it a greater effect than it could obtain through its own powers, No production good, not even the most powerful of all, labour, could by itself produce anything; every such good requires the co-operation of others, and is nothing by itself. On the other hand, again, every production good without exception, has, thanks to this imputation, a lesser effect ascribed to it than might be expected from the degree of dependence in which the complementary goods stand to it. If we take from a group any element, however unimportant, so long as it is a necessary and economic element, not only is its own return lost, but the other elements also are robbed of a portion of their effect. This holds of labour in its relation to capital, as well as of capital in its relation to labour. The well-worn argument, then, that without labour nothing would bring forth fruit, and that to labour consequently must be imputed the entire return, is false. Only those who misunderstand the rules of imputation in everyday use, could employ it. Nothing is easier than to reduce it to an absurdity by supposing labour obliged to work without land or capital.
The imputation of the productive contribution assigns in this way to every production good a medium share.(1*) To calculate the productive contribution, and therefore also the value, at this medium amount, is sound common sense. It is the only practical and useful kind of calculation; it justifies its logic by its utility, The value of production goods should be the controlling power of production. Now it will be so, most perfectly, if it is based, according to our standard, on the productive contribution of these goods. On the other hand, it will be so only imperfectly or not at all, if we depart from the principle. The sum of all the contributions is, as we have seen, equal to the value of the greatest possible total return, and this return will be actually reached if we demand from each factor a service equal to the contribution imputed to it. If we do not impute anything to the means of production, we deprive ourselves of all possibility of controlling their employment by reference to their value. If we impute to them either more or less than their actual "contribution," our control will be at fault, as it will induce us either to a too limited or a too extensive employment.
Perhaps I may be allowed to pursue these ideas still further into detail.
If we did not ascribe any share in the return to labour, nor yet to land and capital, we should have to use all these without being in any way guided by their value. If again the whole return were imputed to labour and none of it to the material instruments, production would be misled by productive value. Land and capital would be declared valueless; there would be no need to consider them at all; whereas labour would be overestimated, and would, consequently, be far too greatly withheld. The most overestimated would be that labour which got the most intensive material assistance, and so gave the absolutely largest returns. Labour which, in cooperation with a large amount of capital, gave a total return of 100, would be estimated more highly than labour of equal amount, but different quality, which, with a tenth part of the capital, gave a return of 99. Artistic labour, working without much outside assistance, would have a low valuation, while plentifully assisted labour, even although unskilled and mechanical, would have a high valuation. With the former extravagance might be allowable, while with the latter we should have to economise. The whole sphere of production would be dominated at every point by confusion and perversity.
The imputation of return to land, capital, and labour, according to the measure of their respective productive contributions, is a natural economic dictate; it holds in all forms of economic life in the communistic state as well as in the present one. It may -- possibly -- be a just demand that the whole product be given over to the labourers as personal income; but in any case, and even should this come to pass, it is an economic demand that the products be credited to the sources of the return, according to the contributions which they afford, in order that we may have a standard for the further employment of the means of production.
It need scarcely be said that there is a limit to the application of this law. When too large a number of production goods are grouped together as one unit -- as when theorists talk of all kinds of labour as "labour," all kinds of capital as "capital," and all varieties of ground as "land" -- there is no longer the number of equations necessary for any solution. Of "land, capital, and labour" there is nothing to be said except that, together, they bring forth everything; alone, nothing. In practical life, we have often occasion to look at things in this wholesale way. But, even if these occasions were more frequent than they actually are, the individual imputation would not be any the less necessary. Although production is carried on under these wholesale modes and conditions required for preparation, introduction, and security, still, in the conduct of production it necessarily comes, in the long run, to detailed calculation. The man who calculates the result most exactly, who measures and makes a difference as regards even the smallest amounts, will, so far as it depends on the working out, get the largest total result; while the poorest will fall to him who estimates things only in the gross, and in an outward and superficial way. If it be everywhere a sign and a principle of human advance that we make more and more minute division and classification of causes, it must also be so in the great sphere of economic life. If socialism means to do away with the productive imputation, it will induce a condition of things worse than that experienced in the deepest barbarism. The savage knows what he owes to his net, and what to his bow and arrow, and would be badly off if he did not know. Happily the same instinct which directs him is possessed by all men, and no amount of theories will ever make people neglect to measure the effects of the productive powers in the way that practical self-interest demands.
On the other hand, again, the individual imputation does not do away with the necessity of considering production as a whole. The preparation for and introduction of productive labour often requires, as has been said, very large and wholesale standards, where it is not sufficient merely to reckon up the productive contributions. These contributions correspond to the individual results which emerge where production succeeds. But how if it does not succeed? How if certain goods are wanting, and the want retards production, limits it, or even makes it quite impossible? Then, indeed, we get results from the single good which go far beyond the amount of its contribution. Then it becomes evident that the individual good not merely creates "its own return," but, besides this, conditions the returns of other goods. The disturbing power of a want or loss of goods -- the difference between "contribution" and "co-operation" -- is larger, the larger the quantity of goods lost. Where, then, there is any danger of a loss, and especially a loss of wide extent, individual imputation is not sufficient; it reckons the damage too low; its only standards have too small a range. In this case it is necessary to be fully informed concerning the whole circle of conditions upon which the production depends, and the whole importance of the co-operation of all the factors.
Individual imputation and observation of production as a whole, although they may lead to different valuations of the same goods, do not on that account contradict each other, nor cancel each other. Each valuation can be employed only for its own purposes. Individual imputation serves, in the carrying out of production, to measure the economic employment of each portion of a nation's resources; consideration of production as a whole serves to guarantee that the production is carried through. The labour powers of a nation, for instance, must be individually valued and employed according to the exact amount of their contributions, while, at the same time, particular care must be taken to meet the perils which so often all at once threaten the labour power of individual groups, and indeed of great classes. Again, the various forms of a nation's capital must be individually valued and employed according to the measure of their contributions. At the same time care must be taken that capital as a whole, and capital in the chief branches of production, remains and increases in the face of possible danger and attack. The consideration of production as a whole must thus aim at securing against all disturbance the essential foundations of production, and the harmonious relation of its elements.
In the economic life of to-day individual imputation devolves chiefly upon the individual citizen, while consideration of production as a whole is mainly undertaken by the government. The former belongs peculiarly to the sphere of private economic valuation, the latter peculiarly to that of public economic valuation. Here we only indicate the distinction, leaving more exact consideration to the last book.
1. Medium, that is, between the greater and the lesser shares just mentioned. The share of labour, for instance, is not determined by the (socialist) consideration that capital without labour is dead, nor by the (opposite) consideration that labour without capital is crippled. In becoming organic every element gains in importance by becoming arbiter of others, but loses as it puts itself into the same position of dependence upon others. -- W.S.
The Principle of Solution (continued). Imputation and the Marginal Law
In the case of production goods which are available, not individually but in stocks, imputation of the productive contribution follows the marginal law. To each single item or quantity is imputed the smallest contribution which, under the circumstances, can be economically aimed at by the employment of this particular item or quantity -- the "Marginal Contribution" as I have already called it (Ursprung des Werthes, p. 177), or, looking at it from a different point of view, the "Marginal Product." Bohm-Bawerk has drawn attention (Werth, p. 502) to the fact that this law of exchange value has long been recognised in the case of certain production goods: -- "Thunen, and all the body of economic doctrine after him, have taught that the rate of interest is decided by the productiveness of the last applied dose of capital, and the rate of wages by the return of the last labourer employed in the undertaking." Now what is here conceded to a limited extent holds generally of all production goods, and for every form of value, as a law of natural valuation.
It is self-evident that the marginal law which holds as regards produced consumption goods, holds also as regards the goods which produce them. We know that, in every stock of consumption goods, every unit receives its value from the marginal utility; thus the value which the products are expected to have is already adjusted to the marginal level, and the value of the production goods, as derived from this, is consequently placed, from the beginning, on the basis of the marginal value. if the communistic state wish to produce a million new rifles to one pattern, it will, in the calculations previous to production, reckon every individual rifle as equal in value; and thus it is, from the first, impossible that one quantity of metal destined to make these rifles should obtain a value different from any other quantity of like amount and quality. If from 1000 productive units 10,000 units of product are produced, each with a marginal value of 5 (the total value being exposed by the formula 10,000 x 5 = 50,000), the entire productive stock receives a value of 50,000, and each individual unit will be valued equally at 50.
While this application of the marginal law to production goods results indirectly, through the medium of products, we have to consider a second and direct application. Production goods which are capable of being employed in many different ways, are used to create products of various kinds. In each kind, taken by itself, the value of the product is adjusted to the level of its particular marginal utility, but we need not expect -- and, in fact, it would be essentially a mere chance -- that the marginal amounts of all the different kinds should, when compared with each other, entirely agree. We have already shown (in Book I. chap, iv) that only in a limited sense can one speak of a common level of household economy; and it is only in the same limited sense that we can speak of a common level of production. Production stocks must always be employed in such a way as to bring forward those products which will secure the greatest possible satisfaction of want. In particular, the destination of production goods to individual branches of production, -- or, what is the same thing, the choice of the kind and amount of goods to be produced, and the investment of labour and capital in the individual classes and branches of production, -- must always be weighed and decided with a view to prodding the greatest possible satisfaction of wants. This does not, however, in the least imply that products must everywhere have the same marginal utility. Many products satisfy wants of trifling extent, where the satiation point is reached very speedily: others again satisfy wants whose receptive capacity is very great, and where the scale of satisfaction shows the finest shades of transition from the stronger intensities of desire downwards. To take as drastic an example as possible, compare the employment of gold in the filling of teeth with its employment for purposes of luxury. The two scales of satisfaction do not in the least correspond with each other, and it is quite impossible in the two kinds of employments to keep always exactly to the same marginal amount. All economic demands are fulfilled when care is taken that goods of less marginal utility are never produced from production goods which, if employed in producing other things, might have brought a higher marginal utility. It may, therefore, very well happen, and, in the case of all means of production which are capable of numerous and varied employments, it will always happen, that the marginal amounts in the different classes of production will differ from each other.
Suppose, for example, that from one stock of iron are produced three kinds of products, which we may designate as A, B, and C; that, in kind A, the unit of iron receives a value of 10 -- corresponding with the economically-attainable marginal utility of 10; -- that in kind B the unit receives a value of 9 -- corresponding with the marginal utility 9; in kind C, a value of 8 -- corresponding with the marginal utility 8. Here we have a case where utility, at the stage of the products, is not yet completely adjusted to the marginal level, and where the equalisation must first take place directly and at the stage of the production goods. That the equalisation must ultimately take place cannot be doubted. It is quite impossible to estimate one-third of the iron higher than another third; indeed, assuming it to be all of one quality, there would be no possible way of deciding which concrete portion of the stock should have the preference over the rest. So long as any appreciable quantity of the iron is destined to turn out products with a marginal utility of 8, no unit of the entire stock can be valued at a higher return. To every unit in such a case must be imputed the marginal return of 8, and the value of the entire stock is found by multiplying the number of units which it contains by the marginal value 8.(1*)
The fact that the marginal law applies, partly directly partly indirectly, to production goods also, first renders it possible for value actively to fulfil its peculiar economic service, as the form in which we calculate utility and the means by which we control it. Compared with stocks of consumption goods, stocks of production goods are larger, more concentrated, and more homogeneous. In the household of an individual there are not many stocks of anything, but the elements which produce almost all he possesses are accumulated in stocks -- in the hands of producers sometimes in enormous stocks, -- and thus become subject to the simplified calculation of value, where the economic amount of each stock is expressed by a multiple of its amount and marginal value. And thus, through the law of costs (see note below), products also are subjected, in great numbers, to this simplified form of calculation.
We constantly see producers making calculations as to their warehouses, materials, plants, and stocks in this simple way; namely, by taking the amount and the price of the unit, and putting down as the total value the amount obtained by multiplying the one into the other. This observation by itself is sufficient proof of the wide extent to which the marginal law obtains in the economy of to-day. Not only are prices decided by a marginal law, but, by means of prices, the whole sphere of production, which makes its calculations throughout in terns of price, is based all through on a marginal valuation. Is it not worth while to discover what is meant by the application of a marginal valuation such as this? And is it not satisfactory to know that the naive form of estimating goods, pursued from time immemorial in virtue of the original prompting of man's nature, is a wonder of simplicity and appropriateness?
1. This is one of the most pregnant applications of the marginal law; we shall return to it again and again later on, particularly in the fifth book, where we consider the subject of costs. To assist our comprehension of the law of costs, we may here anticipate so much as to say, that the productive marginal value on its part has a levelling effect upon the value of products. In the above example the value of the marginal utilities 10 and 9, in kinds A and B respectively, will be alike pressed down to the productive marginal amount of 8.
The Individual Factors of Imputation. I. -- Supply
Those things which are always adduced as causing the changes in the value of production goods, effect this change, in the first instance, by altering the amount of contribution imputed to the production goods. We shall now discuss these in turn, and this may possibly prove the most wearisome part of our task.
In the first place we have to notice the available supply. The larger the available supply of any definite kind of productive instruments, the less important may and must be the goods produced -- always supposing that in other respects no disturbing change of circumstance takes place. If more iron be raised, iron products of smaller marginal utility may and must be made. It is inevitable that this result should be attributed to the material, the iron, and expressed in a lower valuation of its marginal productive service. It cannot be imputed to any other factor, such as the labour that cooperates in the production, as no change has taken place in the circumstances of any other factor. Of all the equations of return, only those in which iron occurs have been reduced, those in which labour occurs, expended on other materials, remaining unaltered; consequently the calculation is lower for the former, not for the latter. To iron, therefore, and not to labour, is imputed a smaller share of the return. If one were to calculate everything as before, or were to impute to labour the diminished return, the calculation would defeat its own purpose; one would be calculating as if everything could be spent as before, or as if labour could be employed with greater freedom. Neither of these could be allowed.
Of all production goods, the smallest contributions must be imputed to those the supplies of which are most abundant in comparison with the demand for them. These may be spent most freely, down to their most insignificant uses. So far as productive exploitation is concerned, it is desirable that those goods which are most needed should also be the most abundant, and should have the smallest contributions imputed to them.(1*)
1. It may be of use to the English reader to note how our representative English economist expresses similar ideas: -- "Other things being equal, the larger the supply of any agent of production, the farther will it have to push its way into uses for which it is not specially fitted, and 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, in so far as competition equalises 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 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." -- Marshall, Principles of Economics, 2nd edit., p. 565. -- W.S.
The Individual Factors of Imputation (continued). II. -- Demand and Complementary Goods
In the case of goods for immediate consumption, demand and want coincide: the amount of agricultural produce required for the full satisfaction of personal want forms the demand for agricultural produce. It is otherwise with production goods; here personal want does not always create a demand. If land, of its own accord and without cultivation, were to bring forth fruits in superfluity, there would be no demand for agricultural implements. And likewise, on the other hand, if land refused to make any return, if all land were waste and barren, there would be no demand for agricultural implements, there could be no use for them. A demand for means of production arises only when, on the one hand, we are obliged to employ them or else go without what they produce; and when, on the other hand, we can employ them, inasmuch as we have at our disposal the necessary complementary goods. So long as the complementary goods are wanting, we can, at best, speak of a latent demand; the demand is effective only when we have also acquired the complementary goods.(1*)
It follows from this that the effective demand for means of production must vary, not only when there is a variation in personal want, but also when there is a variation in the quantity of complementary goods.(2*) In both directions we must examine the effect upon the imputation, and thus, in looking at demand in the case of production goods, we have a far more complicated causal connection than in the case of consumption goods. We shall find, however, that the law remains the same for both. The contribution imputable to production goods always varies with the demand, just as does the value of consumption goods. If demand increases, from whatever cause, so does the contribution, and, as demand sinks, the contribution sinks with it. To prove this in the shortest manner possible.
First: it may be granted that the effective demand rises when the abundance of complementary goods increases, personal want remaining the same. Suppose e.g. that the amount of agricultural capital and available agricultural labour power increase, and that the effective demand for land also increases thereby, inasmuch as latent demand becomes active; suppose, that is to say, that it is now and henceforth possible, -- so far as depends on complementary goods, -- to cultivate more land and more completely satisfy want. How will this affect the calculation of agricultural return? Evidently there are again several cases which must be distinguished from each other. It may be that the ground will not permit of any further cultivation, so that, in spite of increased facilities in capital and labour, production cannot be extended, -- as might readily happen with vine-growing land in a specially favourable situation. Or the return may increase in perfect proportion with the increase of capital and labour, as we may assume to be possible on the slightly cultivated land of a new colony. Or, finally -- and this is the general rule in old countries -- the return may indeed be increased, but not entirely in proportion to the increase of complementary goods; here indeed all the new capital and labour find employment, but with diminished results.
Different as these cases are, the final result is the same in all, although it comes about in a variety of ways. In every case a larger share of the return will be imputed to the land.
(a) If production cannot be extended, the value of the products remains the same as before, as no reason for change has emerged. What does change is the distribution of the imputation. The equation on which, in the above example, is to be calculated the return of the vine land, of the capital employed upon it, and of the labour employed upon it, all taken together, remains as it was. But the added capital and labour must now find employment elsewhere; must enter into new combinations, either on other land, or in some trade or industry where they give a smaller return. Their equations are, therefore, on the whole less favourable, and the consequence is that the equation, which the wine production presents, is now solved in a way less favourable for them. Their marginal productive contribution sinks, and, less being deducted for capital and labour, the value of the wine leaves a greater share to the credit of land. Land obtains a greater share, as it were, by absorption of the effects which can now no longer be attributed to the complementary goods, inasmuch as the marginal law requires that these should everywhere be estimated at the same value, and inasmuch as the common margin of their possibility of employment has fallen.
(b) Where production admits of being extended indefinitely the total value of the products rises (in the "up grade" of the movement of value), although the single product may lose in value. The equations of return are more favourable equally for all factors concerned, and the greater total return gives, equally to land, capital and labour, an absolutely greater share.
(c) Where production can be only partially extended we have a combination of both results. The contribution credited to land experiences a double augmentation, one due to increased utilisation, and the other to the reduced valuation of the auxiliary means employed.
Second: the effective demand rises when personal want increases, complementary wealth remaining the same. Here the matter is very simple. The figures of the ratio which decide the distribution of return remain unaltered, but the value of the return has risen. The consequence is that the same quota has an absolutely greater value.
Every-day experience makes the changes of relation, which we have just pointed out between the co-operating factors of production, sufficiently familiar to every one who knows about exchange value. Every undertaker knows that it is to his advantage when the auxiliary means he employs come upon the market in larger quantities, whether it be because they are being more largely produced, or because there is less use for them in other directions. He can now extend his business, or make more out of it, by spending less upon the auxiliary means of production he requires, while the return remains unaltered. Every undertaker, on the other hand, knows that it is to his disadvantage when the auxiliary means he employs become scarcer in the market, or, what amounts to the same thing, are drawn off in larger quantities by other branches of production. In the communistic state entirely similar calculations will require to be made, in order to estimate correctly the mutual effects of the complementary goods on each other. Assuming the circumstances just mentioned, a vineyard, even in the communistic state, would inevitably be more highly valued wherever the auxiliaries towards its cultivation came forward in greater quantity, or were less freely employed in other directions: and it would certainly be estimated at a lower figure wherever the auxiliaries towards its cultivation were more highly valued, either on account of a diminished amount of them coming forward, or of their increased employment in other directions. Further, its share in the return would sink to zero whenever the auxiliary means of its cultivation were so highly valued that their contributions equalled the whole return of wine; and its cultivation would have to be given up entirely whenever it became impossible to meet these contributions out of the return of wine.
Should any one factor of production, be it land, capital, or labour, come more freely into our disposal, the natural rules of imputation require that all the others obtain a higher valuation; as they also require that all the factors be more highly valued if there should be an all-round increase of personal want.
1. See on this point Menger, p. 39.
2. Compare with this Marshall's Principles, p. 563: -- "In the account given of the demand for the several agents of production, it was indicated that the ultimate demand for each depended on the co-operation of the others in raising the joint product of their labour; or, to state the case even more broadly, that the demand for each is in a great measure governed by the supply of the others." -- W.S.
The Individual Factors of Imputation (continued). III. -- Technique
Technique is the art of making the best use of productive instruments. Every advance in technique improves either the quantity or the quality of products. Even a so-called "labour-saving" machine acts in the long run like an intensified utilisation. By dispensing with another productive instrument at a certain point or for the present, it preserves it for other or later employments.
Improvement in the quality of products raises their value. Multiplication of their quantity certainly diminishes the value of the individual product, but at the same time (in the "up grade" of value, which, for the sake of brevity, we shall alone consider at present) increases the sum of value of all the products taken together. Technical improvements have, therefore, this result, that the known quantities, in the equations of return by which the contributions of the production goods are to be calculated, are put higher, while the unknown quantities remain the same. Thus, according to circumstances, the contributions of all the factors, or simply of individual factors in the production in question, will be raised; it frequently happens, however, that the circumstances are such that the contributions of certain factors must be calculated at less.
What happens, for example, when some expedient to reduce cost is introduced into a kind of production incapable of further extension -- say, the production of wine in a limited area already cultivated to the utmost extent? The return of wine remains the same, and its value remains the same, but to the vineyard must be imputed a larger share of the return than formerly, because it has to share it with a smaller number of productive factors. The elements of production thus saved can and will find another employment; they increase the supply available for other purposes while the demand for such purposes remains the same. The final result is consequently a reduction of their productive contribution. The same is true of all means of production which have been driven from their former employments by reason of technical improvements. The familiar effect of labour-saving machinery is that it makes wages fall; and this arises from the fact that, in the first instance, it reduces the contribution of labour. Even in the communistic state this part of the effect would emerge. The more labour could be replaced by machinery, the more labour power would there be left to dispose of; and the less remunerative the employments to which it would be devoted. If formerly it had been a mistake to devote it to such employments, it would now be a mistake not to do so. The role of labour in production would have altered; it would take another position; and other effects would have to be imputed to it, if the imputation is to be based on natural principles, -- that is, principles which promote the most advantageous employment possible.
In all cases where production is limited by certain specific elements, the chief advantage obtained by improvement of technique is ascribed to these elements. Means of production which have a more extensive employment are but little affected by changes in individual branches of production; only those technical improvements which affect all, or a greater part of their employments, are of much importance to them, since it is only in these cases that the equations of return are noticeably altered in their favour. The improvement in means of transport, which brought with it the increased utilisation of an enormous number of industries, is an example of a comprehensive technical improvement which actually had the power to raise the returns of almost all means of production.
Every change in technical art naturally calls for a certain change in the plan of production, a certain rearrangement in the disposal and destination of our productive resources. Other results seem now the more attractive; other products are now the marginal products. The rapid development of industry in the course of the present century has attracted many labourers from agricultural to industrial pursuits. This transference, which was a very serious matter to the landowners since, among other things, it compelled them to pay the labourers they had left at the higher rate given by the manufacturers, was entirely beneficial for production generally. It removed the labourers from occupations which brought them little, but were, however, in the absence of anything more remunerative, permissible up till that time, into others in which they could assess their powers at a higher contribution. If in the communistic state a similar phenomenon should ever come in the train of technical development, it also would require to be met by a similar transference of capital and labour, the measure for which would be obtained by observation of the marginal productive contributions.
The Individual Factors of Imputation (continued). IV. -- The Imputation to Cost Goods and to Monopoly Goods
What has been said as to the influence of supply, of demand, and of technique, gives sufficient evidence that, in the imputation of return, there is a certain category of production goods particularly favoured, and another peculiarly prejudiced. The line of division, however, which separates these two categories cannot be drawn with any great strictness; the transferences from one group to the other are imperceptible; the grouping changes with the change of circumstances; and, even within the separate groups, there is the same division. Goods which are favoured above many others may nevertheless be quite the reverse in comparison with just as many more.
The first group is composed of those goods to which attaches a natural monopoly (as opposed to a legal monopoly). Characteristic of this group is the comparative rarity of such goods as compared with the demand for them, or, it may be, the comparatively small quantity that can be produced. As examples of goods which have pronouncedly the character of monopoly may be mentioned the following; -- scarce raw materials, land exceptionally situated, the work of one peculiarly gifted, -- particularly an artist or scientific worker of the highest rank, -- a secret and at the same time successful process (or, more exactly, the exclusive knowledge of such a process, whereby the persons who have it obtain a preference over others), and, finally, works of human hands, which, on account of their size, or on account of technical difficulties, cannot be repeated.
Goods which belong to the second group may be called "Cost Goods," inasmuch as they are the elements in the calculations of cost.(1*) They are goods easily accessible and abundant, or goods whose production can be indefinitely increased. The following goods have markedly this character; -- unskilled labour, coal, wood, the common metals, and also land devoted to industrial undertakings where there is no question of any particular advantage in situation. Things which are to be had in superfluity are not counted among cost goods; indeed they are not reckoned among economic goods at all. While monopoly goods are specific elements of individual industries, cost goods are the common cosmopolitan and indispensable powers and materials of production.
Articles whose making requires no monopoly goods may be produced, comparatively to others, in the largest quantities; on the other hand, those will be produced in the smallest quantities which demand productive factors of a peculiarly marked monopoly character, even although cost goods, subject to very little limitation, should be employed along with them. Assuming equal wants, then, the value of goods produced under monopoly must, by reason of their small available quantity, stand comparatively high; and consequently, to monopoly goods, as compared with cost goods, must generally be imputed a contribution of higher value. This is the first advantage which monopoly goods enjoy. In the course of economic development, however, many other advantages accrue to them, as the development itself accentuates the gulf which naturally exists between them.
In the ordinary course of economic history the available supply of many monopoly goods increases but slowly, or not at all, -- in many cases, indeed, it becomes smaller; whereas the available supply of many cost goods increases rapidly and uninterruptedly. We have here two causes which widen the difference between the two imputations, inasmuch as the contribution imputed varies for every good in inverse ratio to the change in its supply, and in direct ratio to the change in complementary wealth. Now in the ordinary course of economic history, wants are continually increasing, and the numbers of those who want are continually increasing, while, at the same time, technique is always becoming more perfect. Both of these facts create a tendency towards raising the value of production goods. This tendency affects monopoly goods unreservedly, but, in the case of cost goods, on the other hand, it is frequently outweighed, -- either immediately or after a certain lapse of time, -- by the opposing tendency which comes from their increase. Generally speaking, cost goods gain only by such rises in the value of return as are wide-reaching enough to extend beyond the sphere of one single industry. Rises in value which are confined to individual branches of production are completely absorbed, as we have shown (Book III. chapters x, and xi) by the specific elements in that branch, by the monopoly goods. And even should there be no such elements -- as sometimes happens -- an increase of value in one particular industry has comparatively little effect upon elements which are simultaneously employed in a great many.
Although cost goods are thus prejudiced in the calculation of the return, they have nevertheless the strongest influence on the result of production and its regulation, and, consequently also, on the basis of imputation. They are the goods of universal diffusion -- the goods which are to be found in every market; they form the majority of goods, and build up generally the body economic. Monopoly goods must conform more to circumstances made for them; the using of them changes constantly with the change in the general economic conditions, for it rises and falls with them, just as the level of a stream when it runs below ground rises and falls with the level above. Thus, practically, it would seem to come to this; that the imputation of the share due to the monopoly goods is made only after that due to the cost goods is finished. The shares due to cost goods are always first deducted from the total return of production, and the residue then falls to the monopoly goods. But closer consideration shows the matter to be somewhat different. It is only in the individual case that such a calculation can be made. In the totality of cases it is impossible to overlook the influence of monopoly goods upon the ordinary formation and imputation of return. This influence is in part an indirect one, inasmuch as great quantities of cost goods are employed in monopoly productions, whereby the marginal productive return of the monopoly goods must be indirectly affected; and it is in part direct, inasmuch as through the results of monopoly productions, value equations are furnished, which are indispensable to the total valuation.
Monopoly goods have often received a quite peculiar position in theory. Ricardo, for example, teaches that they owe their value altogether to their scarcity, while all other goods receive their value from the labour of producing them. A sufficiently wide consideration, however, shows that monopoly goods come altogether under the ordinary conditions of valuation, and differ from other economic goods only in that they display much more strikingly the character common to all.(2*)
1. See below, Book V.
2. In the second note to Book III. chap. iv. reference was made to the present chapter, stating that it would there be shown that, without taking into account the distinction to which Bohm-Bawerk has drawn special attention, and which deals with the opposition between monopoly goods and cost goods, the subject could not be finally settled. The importance of the distinction ought by this time to have become clear. The reader will remember that, in distribution as Menger would have it, there is an "undivided residue." Now, in every combination, this "undivided residue" falls, for the greater part, to that good which possesses most strongly the character of a monopoly. Consequently, where a pronounced monopoly good is combined with pronounced cost goods, the "undivided residue" is imputed to the monopoly good; where cost goods alone are combined it is imputed to that good which most nearly resembles the monopoly goods; and, lastly, where several monopoly goods are combined it is imputed to that one which most distinctly bears the monopoly character.
It must be noted, however, that only the greater part, not the whole, of the "undivided residue" is to be imputed to the good in question. Some part of it -- although often a most trifling and indeed practically indistinguishable part -- must always be ascribed to the other co-operating goods, as all of these experience a certain increased utility from the maintenance of the combination, while the dispersing of it would destroy that plan of production which is regarded as best. The share to be ascribed to the other co-operating goods will be the greater, the more the maintenance of the above-mentioned combination is dependent upon them -- i.e. the more they themselves possess the character of monopoly goods, and the less they possess that of cost goods. A scarce good will, as a rule, be more seriously affected by a trifling change of productive destination than one that is less scarce; as was explained in the text, there must be considerable alterations in demand and supply before the value of goods which are most distinctively cost goods, shows a corresponding change.
The difference, therefore, between "contribution" and "co-operation" remains fundamentally clear for all cases, although practically it does not come to much, and, so long as only units of goods are concerned, need for the most part scarcely be taken into account. So much the more important is it when we are examining the influence that larger quantities of production goods have upon the amount of productive return.
In this sense I had, in the Ursprung des Werthes, although only by way of suggestion, already disposed of the problem of "complementarity." There I stated that to production goods must be imputed their "marginal productive contribution," while, to the "specific productive factors belonging to individual productions" falls the residue of return, after deducting the quotas of all supplementary goods. The only matters omitted were: what would happen were several monopoly goods combined together, and an exact formulation of the law for calculating the contributions.
The Individual Factors of Imputations (continued). V -- The Imputation to Productive Factors of Preferable Quality
Of two production goods of the same kind, that one possesses the better quality which shows the greater "rentability" -- to use a clumsy but convenient German expression. In other words, it is that good which, when co-operating with the same amount of complementary goods, gives a return of higher value; -- whether it be that the higher value of the return arises from more being produced, or from what is produced being of a better or preferable quality. In what follows, for brevity's sake, we shall consider only the former case.
If we possessed several production goods which, in this specially limited sense, were of different qualities, we should undoubtedly, in the production, employ the goods of poorer quality only when the supply of better ones was not sufficient for the demand; and the share of return which fell to the better goods would, of course, be higher than that which fell to the poorer ones, by an exactly ascertainable quota. According as the better means of production, when working along with an equal addition of complementary goods, produce a greater total return, the value equation becomes more favourable to them by the whole amount of the surplus return. Their productive contribution is equal to that of the poorer quality plus this surplus return. Should the poorer goods be present in superfluous amount and so have no contribution imputed to them, the contribution of the better goods alone will be credited with the surplus return. Experience confirms these propositions in thousands of ways; they answer to the economic observation of everybody.
Some economists who have paid very little attention to the laws of complementarity in general, have shown extraordinary earnestness in discussing this particular case. Ricardo, in his theory of land rent, deals with the advantage obtained from greater natural fertility in the case of agricultural lands, or the greater productiveness of mines. Then he goes on to the advantage, as regards return, which industrial capital first expended has, as against the increments of capital which follow. His theory of land rent was amplified by pointing out that rent of land is influenced also by its situation, i.e. by its distance from the market for its product. Finally it has been shown that the "rentability" of land in towns, and also that of capital and labour, is graduated in the same way as that of agricultural land, and that the opportunity of obtaining for the better quality a greater rent -- a surplus return and a surplus value -- occurs as often in the one case as in the other.
These theoretic statements all relate to price, but they hold equally as regards the theory of value. The more fertile land, the land which lies nearer to the sphere of demand, the more skilled labourer, the more capable machine, are not only more highly paid, but have imputed to them as well, on account of their better quality, a comparatively greater share in the return, -- which, indeed, is the cause of their being more highly paid. In the communistic state, too, calculation will be made in the same way. The more fertile or more conveniently situated land will be cultivated before any other land, and, should other and poorer land require to be cultivated, the better qualities will be more highly valued in exact proportion to their surplus return.
PART II: NATURAL LAND RENT
Ricardo's Differential Rent: The First Part
Ricardo, in his famous Principles, takes up what we may call Contract rent, the rent which emerges when an owner lets his land. It is generally granted that the law of this kind of rent is true also, in all essential respects, of that income which the owner of the land could obtain without letting it, by selling its products. What has been said as to imputation has probably shown that the analogy must be carried still further. The personal income which land yields is, in the last resort, dependent upon the fact that the land in question yields a return such that, after the shares of capital and labour are deducted, there remains a share which must, on natural laws, be imputed to the land. The problem of land rent, conceived of primarily as a problem of division of income, in the last resort contains also a problem of distribution of return. As a problem of distribution of return it will emerge in the communistic state just as it does under existing social conditions, and in both cases the solution is fundamentally the same.
Ricardo begins his statement with a disquisition upon primitive historical conditions. So long as population is thin, and it is unnecessary to cultivate even all its rich and fertile land in order to provide food, no single piece of land can obtain a rent. Who "would pay for the use of land when there was an abundant quantity not yet appropriated, and, therefore, at the disposal of whosoever might choose to cultivate. it"? Should, however, population increase to a degree which necessitates the cultivation of land of the second quality, rent immediately commences on that of the first quality. Land of the second quality would require a greater expenditure of costs, in order to produce the same return as that of the first quality; it can therefore be cultivated only when the increased demand has raised the price of agricultural produce enough to cover the necessary costs. But this price leaves a surplus to land of the first quality, according to the saving of costs which it allows. If, further, land of the third quality requires to be cultivated, a rent emerges for that of the second quality, while the rent for land of the first quality is increased; and thus every new and poorer quality which is pressed into use creates a rent for those above it, measured by the difference in quality.
To put it into exact figures. Suppose the value of wheat is 40s. per quarter, and that, with an expenditure of £200, the cultivation of a piece of land
of the 1st quality produce a return of 120 qrs with a value of £240 of the 2nd quality produce a return of 100 qrs with a value of £200 of the 3rd quality produce a return of 80 qrs with a value of £160
a private owner will confine himself to the cultivation of the two better classes of land, and will calculate to himself from the first class a rent of £40.
In the communistic state the result will be the same, granting the same assumptions. So long as land of the first class is to be had in superfluity, or is "free," no share in the return which it helps to produce will be imputed to it. And why? Because people have still the choice as to which of the many lands of equal quality they will cultivate, and because they are dependent upon no single one of these. Land of the second quality is cultivated only when that of the first is all under cultivation, and when, at the same time, the demand for land produce has risen sufficiently to meet the increased cost. When, by the higher value of the return, however, the increased cost on the second class of land has been thus covered, there remains to the first class a surplus which must be attributed to the land as rent. The land and its better quality are indeed the "cause" of the surplus return. It is impossible to derive the surplus from the cost goods, seeing that similar amounts and qualities of costs have been spent on both classes of land. A very simple negative proof will confirm the propriety of this method of imputation. Suppose a piece of first-class land be left uncultivated, the surplus return will immediately, disappear. the cost goods will be incapable of reproducing it elsewhere, because there is no other piece of land of the same quality to take its place. There is no lack of practical opportunity to establish this conclusion. In every question as to the utilising of such lands we have to be fully apprised that they guarantee such and such rent if properly cultivated, and that this rent will have to be given up if they are left entirely uncultivated or used in some other way. If e.g, we have to make a road, we shall soon know that it leads through lands of the first quality by its costing extra the whole amount of the rent. But why multiply examples? If we are to calculate at all in production, it must be in this way. Were we to refrain from reckoning the differential rent, it would mean that we disregarded the circumstance that land, as a matter of fact, is of different degrees of fertility; it would mean that we were quite indifferent whether we got much return or little.
In the inventory of the communistic state the lands of better quality will be entered at an amount corresponding to the capitalisation of their rents. The agricultural officials will require to be made responsible for the return of a rent from these better lands corresponding to their quality. In fact, in all those connections it will be impossible for the communistic state to act differently from any large landowner of the present day, who tries to manage his property economically, and to have an effectual control over his servants.
Ricardo's Differential Rent: The Second Part
There is a second Part to Ricardo's theory which is frequently overlooked, although it is really the more important. From the very nature of land every piece of it has powers of different quality. Just as only the best lands are at first taken up, so are only the best powers in each piece of land. Of these powers the poorest class -- so long as this class is in excess of the demand -- gives no rent, and the better classes give a net differential rent.
In this second part of Ricardo's theory also, the natural principles of imputation are found to be in perfect agreement with the rules he has laid down for the formation of contract rent. This may be best shown by an example. Say, as before, that the quarter of wheat brings 40s. Then a certain piece of land, according as it is cultivated at a greater or smaller outlay in capital and labour, will produce the following returns: --
to a first £200 of expenses the return is 120 qrs. and the value £240 to a second £200 of expenses the return is 100 qrs. and the value £200 therefore to £400 of expenses the return is 220 qrs. and the value £440 to a third £200 of expenses the return is 80 qrs. and the value £160 therefore to £600 of expenses the return is 300 qrs. and the value £600
Under these circumstances a private owner will find it advantageous to expend only £400. He gains thereby a return of £40; and, instead of sinking the third £200 in his land and gaining a return of only £160, he will do better to employ it in some other direction, where it may give its full possible return of £200. From the £440 return thus obtained, he reckons £400 as the costs; the remaining £40 he can claim, and the tenant can pay, as rent. Just so must the communistic state make its calculations according to these natural principles of valuation. There, too, natural principles will demand that only £400 be sunk in the land, and that the surplus of £40 thus earned be imputed to the land as rent.(1*)
The differential rent received from preferable powers of the soil may be called the "Intensity Rent," because it emerges and rises according as the land is cultivated intensively. This "intensity rent," according as Ricardo conceives of it, might quite well be a universal rent for all the lands of a country, or of the whole world, supposing them to be all cultivated with sufficient intensity. Ricardo's differential theory in no way requires -- as is often said -- the existence of no rent land. It is sufficient if there are no rent powers in the soil.
It need scarcely be said that "intensity rents" must receive as exact consideration from the economist as the rent of better lands. It is perhaps unnecessary to say anything further on this point.
1. If £600 were sunk a total of £600 would indeed be received in return, but none the less would there be a loss of £40 on the third two hundred. If only £400 were sunk, and the surplus of £40 were imputed not to the land, but to the capital or to the labour, we should make two mistakes, each contradicting the other. Firstly, the land, as such, would be declared to yield no return. The practical conclusion would be that it ought not to be cultivated, and that the capital and labour should be otherwise employed, in which case the whole £40 would be lost. Secondly, this application of capital and labour would be shown to be peculiarly profitable -- the practical conclusion of which would be that it would appear permissible to sink even more capital in the land. But this ought not to be done, as £400 is the highest expenditure economically permissable. The land rent of £40 is, therefore, the rational expression of the most advantageous disposition of production.
Criticism of Ricardo's Theory
According to what is certainly the most usual opinion, the differential rent of better lands, or of better powers of land, is to be explained simply by the fact that there are not sufficient of such to meet the demand; that, in fact, as is frequently said, they "have a monopoly." But it may easily be seen that this is not sufficient for an explanation. We must add two other assumptions.
First, the lands or powers of land last taken into cultivation must be available in superfluous amount. In order e.g, that first quality lands may bear a differential rent, not only must these lands be insufficient to meet the demand, but there must be besides them "free" lands of the second quality. The limitation or "monopoly" of first-class lands is the proximate occasion of rent, and rent would emerge in any case, even if there should be no other qualities of land. Then the interposition of second-class lands, which are more than enough to meet the demand, and are consequently rentless, has the effect of keeping down the rent of first-class lands -- which night otherwise rise indefinitely -- to the amount of difference existing between the qualities of the two. If second-class lands were not "free," they also would bear rent; and this rent, again, could only be kept down to the differential rent through the intervention of a third class. In short, if there is to be a net differential rent, there must be a last, rentless, and therefore "free" category of lands (or powers of land) alongside the better and limited ones. There must be both limitation and superfluity of land.
Second, there must also be "monopoly" of capital and labour. Why does any one prefer the better classes of land? Because on them capital and labour prove more productive. But why should it be of consequence that capital and labour prove more productive? Because, as a general rule, we do not have enough of either. If it were quite a matter of indifference what return was obtained from definite amounts of capital and labour, because it was always possible to make up any deficiency by employing other quantities of the same, it would also be a matter of indifference from which class of land they got their return -- assuming, of course, that there was never any scarcity of at any rate the poorest quality of land. And if, in face of such superfluity of the poorest class of land, the better and best classes are marked out and preferred, it is because man has to economise his labour and capital. The differential rent measures exactly the advantage which the better and best classes of land secure in the accomplishment of that task.
Thus we see that, wherever a net differential rent exists, land is partially limited (in the better and best classes), partially over-abundant (in the poorer classes), while capital and labour are always limited.(1*) To have overlooked this circumstance is the first defect in Ricardo's theory. He states positively that the amount of labour (and under this he includes capital), which may be expended in production can be had, as a rule, for the asking -- may be increased at will; while the rent-bearing classes of land are to be had only in limited amounts. This defect is connected with another and still greater one and one that applies not to Ricardo alone; he has no general theory of economy, of value, and of imputation. All his ingenuity is expended upon details, such, for example, as the explanation of land rent, and this in itself shows that these details can only have been looked at and conceived of in a one-sided fashion.
A further defect of the differential theory is that it does not suffice for all cases. It sometimes happens that even the last cultivated lands, or powers of land, return a rent, and for this Ricardo has no explanation, or, to speak more exactly, no law. Whenever the demand for land products has increased to such an extent that the class of land last taken into cultivation is not sufficient to meet it, while, at the same time, the value of the land products has not risen sufficiently to permit of a new and still lower class being put under the plough, the last cultivated land returns a rent, although it becomes differential only when the next class of land has actually been put under cultivation. And when all the classes of land have been exhausted, and cultivation in general cannot be further extended, there emerges a universal land rent, -- universal not only for all lands (for in this sense the "intensity rent" might be a universal one), but even for all powers of land. This case -- of the impossibility of extending cultivation -- occurs more frequently than one would think. It is not, as would seem at first sight, a thing to be expected at the very end of the historical development of economic life, when the whole earth is over-populated. It belongs rather to the normal phenomena which occur in the course of this development. Indeed it is just as regards the past that it can be established with perfect certainty; while prophecies of what is to come must always be uncertain, and can never be made with scientific exactitude. A slight consideration will suffice to make this clear.
Land and capital, so far as regards the conditions under which they are acquired, appear to stand in complete opposition to each other. All capital, with trifling exceptions, has been worked for by human hands, and the sum of capital is always increasing and is capable of indefinite increase. All land, on the other hand (with exceptions which are quite insignificant as compared with the whole) has been in existence from the beginning, and it is practically impossible for human power to extend its compass -- so at least a geographer or physicist would have to say. But can we say so economically? Certainly not. Economically speaking, man has not from the first had command over the whole solid surface of the earth and its treasures. Starting with a very insignificant portion of it, the sphere of his control has extended at a rate which scarcely comes behind the increase of his capital. The limits of his power are not yet reached, and he would be a bold man who would say when they must be reached, and where their limits lie. Looked at economically, there is always available to him only so much superficies and so much fruitful soil as he has the means and the knowledge to utilise. The development of agricultural skill and technique generally, the employment of manures, growth of population, emigration, scientific discovery, the spread of commerce, the perfecting of the means of transport, increase of wealth in capital and labour -- all these have gradually increased landed property to an enormous extent. To the hunter belongs only the surface of the ground; to the peasant who forces his plough down into it belongs also its interior, and the deeper the plough goes, so much more of the land comes into the service of man. In our own time, indeed, the amount of land in far-away countries which is at the disposal of European consumption, has increased in a degree that is alarming to European agriculturists. If we look back on the past, we might almost believe that it has been quite the same with land as with capital; -- that at first the provision of it was very scanty, and that later it has gone on richly and steadily increasing. Certainly the error which this opinion betrays would be no greater than that betrayed by the commonly held opinion that land is quite incapable of being increased. In any case, there can be no doubt of one thing. It is conceivable that a time may arrive when all land available for economic purposes has been taken up, and that, notwithstanding, at some later period, so much new land, economically speaking, may come into the world's possession, that a much greater population may be maintained upon it, without even touching the limits of subsistence. And has this conceivable case never been an actual fact? Have we not accounts, handed down to us from primeval times, of overpopulation and emigration caused by urgent want? Has not the spectre of hunger haunted every land and every people on the face of the earth, and is it not the case that only the most highly cultured of nations, at the height of their development, have been able to escape from its terror?
Still, however that may be, even supposing it has never actually happened that the limits of cultivation have been reached, -- a theory which cannot bring the case of a "universal" land rent under a law remains an inadequate theory. If we have no law for the assumed case that all lands and powers of land bear rent, we have no law for the undeniable fact that all economically employed labour and capital yield a return; we can say absolutely nothing more than that the better qualities of goods have more imputed to them by the amount of their surplus return. We are incapable of learning what shares are to be imputed to the common qualities, which constitute the majority of production goods. The law of a universal land rent, and the universal law of imputation, are identical, and a theory which has no formula for the former confesses its utter inability to solve the problem of the valuation of production goods generally.(2*)
1. Among the trees of a primeval forest which have, as a rule, no value, because they are available in superfluity, there are nevertheless some which may receive value; all those, namely, which have peculiar advantages as regards felling and carrying to market -- say, e.g., that they stand in the near neighbourhood of a natural watercourse. Their value is exactly represented by the saving in costs -- saving of labour and transit -- which they assure as compared with the trees less favourably situated, to which no value is attached. Here is a capital which bears a perfect analogy to Ricardo's differential rent from lands of preferable quality. Even to the pure "intensity" rent there are analogies in capital. The sheep on the plains of South America do not receive value in their entire useful content -- I mean a value corresponding to the entire usefulness of similar sheep in Europe, or any other district of great demand -- but only in that portion of the same -- say, perhaps, the hides -- which repays the costs of transport to the sphere of the greater demand. The remaining part is meantime valueless, but may also receive value through an increase in demand. It is easy to infer from these examples the conditions for a purely differential rent.
2. A further fundamental defect in Ricardo's theory may be pointed out;that he has omitted to notice the reaction of land rent upon the return to capital and labour. Rent is certainly dependent upon the current valuations of cost, but, on the other hand, the valuations of cost are dependent upon rent, if not in the same degree. The return reckoned to capital and labour is essentially influenced by the amount of capital and labour which is required for working the land, and by the returns which they yield in so doing.
Finally, Ricardo might also be accused of having overlooked the universal importance of the differential valuation (compare Book III, chap. xiii). Even purely differential valuations may be met with elsewhere than in the case of land, as we saw by the examples just given of wood in a primeval forest and of the herds of cattle in South America. But of course it is in the case of land that we oftenest find the relation which leads to a net differential valuation of the preferable qualities: viz. quantitative superfluity as a whole beside quantitative limitation as regards the best and better qualities. Compare with this Menger, p. 143.
PART III: THE NATURAL RETURN TO CAPITAL
The Productivity of Capital
Land being permanent and indestructible, it is not a matter of surprise that it should continue yielding, year after year, that return which it yields in one year. And if we designate a continually-recurring return as "rent," the rent of land requires no special explanation. It is much the same with the fact that human labour is source of a permanent return. In the case of a healthy person, labour power is renewed constantly after pauses for rest and refreshment.
On the other hand, it is a matter for wonder to find that the perishable powers of the soil, and all the movable means of production, raw materials, auxiliary materials, implements, tools, machinery, buildings, and other productive apparatus and plant, which are consumed, quickly or slowly, in the service of production, are sources of permanent returns, -- returns which are constantly renewed, although the first factors of their production may have been long before used up. This brings us face to face with one of the most important and difficult problems of economic theory; with the question, namely, how we are to explain the fact that capital yields a net return.(1*)
All capital yields, proximately and directly, only a gross return; that is to say, a return purchased by a diminution of the parent capital. The condition under which this gross return may be the source of a net return is very easily formulated. In the gross return must be found newly produced all the consumed capital, and beyond this there must be a certain surplus. This surplus will be net return; -- a return which may, permanently and without diminution of the parent capital, be obtained and consumed.
If now we ask whether this condition is actually fulfilled, we find, in the first place, that the nature of capital does permit of it. If capital is, on the one side, perishable, on the other, it is reproducible. It serves for production and it is produced. Is it, however, produced in sufficient quantity, and produced from capital itself in sufficient quantity, to fully replace what has been consumed, and leave a surplus beyond? Before trying to answer this question I should like to make one observation of a formal nature.
Capitals which yield gross return may undoubtedly be designated "productive goods" on this account alone. They certainly produce; they transform themselves from an unfinished form of goods to a finished one, or to one that comes nearer a finished one. It is, however, preferable to speak of capital as productive only when it yields a net return. And in this sense exclusively we shall understand the "Productivity of capital."
As Bohm-Bawerk has shown, productivity may be either physical productivity or value productivity. It is important that this distinction should be clearly kept before us. Physical productivity exists where the amount of goods which form the gross return is greater than the amount of capital goods destroyed; and in the foregoing deduction of the conceptions of gross and net return we have assumed this physical productivity. Value productivity exists where the value of the gross return is greater than the value of the capital consumed. The task of our theory is, in the last resort, to prove the value productivity of capital; but for this purpose it is necessary first to prove the fact of physical productivity, as the scaffolding on which the other rests. The value productivity already presupposes the determination of the value of capital, but the value of capital can only be determined when the question of how to impute the physical return has been answered, because the value of capital rests on the share of return imputed to it. Just as the rent must first be ascertained before the value of any land can be calculated, and just as, generally speaking, the rules of imputation must be recognised before the value of production goods can be determined, so must also the imputation of the return to capital first be settled before we can take up the problem of its value. In pursuance of our division of the subject, we have meanwhile only the problem of the physical productivity of capital to deal with.
There is no doubt that the total return of all three productive factors, land, capital, and labour, taken together, is large enough to replace the capital consumed, and give a net return. This is a notorious economic fact, and as little in need of proof as the fact that there are such things as goods, or such a thing as production. Of course, now and then, a productive undertaking may be unsuccessful, and fail to cover its outlay; indeed many undertakings furnish no usable product whatever. But these are exceptions. The rule is that net returns are obtained, -- indeed, net returns of such enormous magnitude, that not only can the millions of human beings be supported, but capital can go on accumulating out of the surpluses.
There remains, therefore, but one thing to ask -- whether a share in this undoubted net return can be imputed to the factor capital. But the question can not be put seriously. Why to capital alone should no such share be imputed? Once understood and granted that capital is one of the economic factors of production, to which, with the others, the productive return is ascribed (Book III. chap. iii), it is also understood and granted that to it belongs by right a share in the net return in which the productive return first embodies itself. Are we to suppose that capital is always in a position to produce only somewhat less than replace itself? This would obviously be an arbitrary supposition. Are we, then, to suppose it capable only of replacing its own loss, however various the success of production may be? This supposition would clearly be no less arbitrary. Whoever denies net return to capital can only do so by denying it any return.
I should fear to repeat myself were I to bring forward any formal proof of the fact that capital does have a share in the productive net return. I shall content myself with mentioning one or two cases which show, in eminently clear fashion, the necessity for attributing net return to it.(2*)
Wherever labour is crowded out by capital, as, e.g., where a machine takes over the work hitherto accomplished by human labour -- a thing which will happen no less frequently in the communistic state than it does now, -- the capital, or machine, must be credited with at least the same return as that formerly imputed to labour. But this was a net return: therefore, the capital or machine must also be credited with a net return. Were the machine capable of reproducing only its own substance as that is worn away in course of use, it would be less effective than human labour, and would not have had power to displace it. But why should a machine such as this be favoured in the imputation more than any other form of capital? What experience would speak for this?
In accordance with the universal law of differential imputation, every form of concrete capital of better quality has a higher return imputed to it than the concrete capital of lower quality, and this return is measured by the amount of increase in productive results which the employment of the better qualities brings. And as, when we look at production and its results as a whole, it is only net returns that are taken into consideration, it is thereby proved that, in comparing qualities of capital, the standard of imputation must be taken from the net return.
Whoever employs his capital according to the measure in which he sees it influence the productive net return, employs it well; whoever does otherwise, employs it badly. On this point universal opinion is united now, as it will be in the communistic state. The universal opinion to which we refer is not, however, the untrained judgment of the public in matters of theory, but the ripe expression of experience.(3*)
1. In what follows I understand by the term capital the perishable or (with the extended meaning explained in the text) the movable means of production. This conception is adapted to the conditions of a communistic state, in which the national income is obtained solely through production. To take note of those forms of capital which serve in the formation of income outside of production, seemed to me out of place, these being too closely connected with the specific conditions of the existing economic order of things. For the same reason I also refrain from taking into consideration those constituent parts of an undertaker's capital which do not belong to the technical means of production. I have, however, appended, in Book IV. chap. viii, a discussion of the interest on consumption loans and house rent, and, at the end of Book V. chap. xi, I have looked at the intent which comes from the undertaker's wage fund.
To avoid misunderstanding, I wish once more to emphasise the fact that, among the technical means of production, I do not include the means of subsistence which must be held ready at hand for the labourers. These are conditions of production, but not its causes. The cause is here the labourer alone. And this is no contradiction to our previous statement in Book III. chap. iii. The things on which the labourer employs his strength, and the things which maintain his strength, stand in totally different relations to the productive return. The former have a direct influence upon return; the latter influence it only through the medium of the labour power into which they must first transform themselves. If we wish to make the latter factors of production, it can only be done by regarding the labourer as their first product (compare Book V. chap. vii, on the "costs of production" of labour). So far as regards his conception of the means of subsistence for labourers I am thoroughly at one with Sax (in particular p. 324), although I explain otherwise the emergence of intent from this part of an undertaker's capital.
Immediately before these pages went to press, Menger's treatise Zur Theorie des Capitals appeared in Conrad's Jahrbucher. In this treatise he defends in animated fashion the popular as against the scientific conceptions of capital, and interprets the popular conception as embracing all the parent wealth of an acquisitive economy existing in or calculated in money, without respect to the technical nature of the instruments of acquisition. As a matter of fact, the circumstance that acquisitive instruments are calculated in money is of decisive importance for their valuation. To calculate in money means -- leaving the form out of consideration -- first, to calculate exactly, and second, to calculate with reference to exchange and the unit of all exchange goods which it creates. We also look at valuation entirely under these two assumptions, although we substitute the internal exchange of goods in a state economy for the exchange of private individuals. The natural laws we have deduced hold only as regards industries on a large scale and under a highly developed economy.
2. Among such cases I should include also those where the use of capital increases the previous productiveness of production. Here we see with particular clearness that the additional net return must be credited to the capital. It would, however, be an error to believe that capital can receive a share of net return only when its use has directly increased the previous productiveness of production, or that it would be deprived of this share as soon as the world became accustomed to the increased effects. Experience shows us the productivity of capital even in a stationary economy. On this account all theories are inadequate which derive the productivity of capital solely from its capacity to promote the development of economic life.
3. The theory of interest, like that of rent, has always been discussed very much by itself; discussed, I mean to say, without any previous examination of the general laws of imputation. The result, however, as regards interest, has been immensely less satisfactory than as regards rent. It is easy to understand that in the case of interest we have to deal with the essential point in the problem of imputation, while in the case of rent we have to deal substantially with a detail capable of being conceived by itself, -- that, namely, of the differential imputation. Bohm-Bawerk's great work Geschichte und Kritik der Capitalzinstheorien (Innsbruck, 1884), translated as Capital and Interest (Macmillan), has clearly shown to the scientific world how unsatisfactory all previous attempts at explanation have been.
Ties of family and of friendship bind me too closely to the author to allow of any praise of his work from my lips being counted of value by outsiders. I therefore confine myself to remarking that everything contained in the following pages on the subject of the return to capital and the value of capital, was written under the influence of his penetrating criticism, and that, if there is aught of value to be found in it, it could never have originated without that influence. It is not inconsistent with this that I should, nevertheless, arrive at other conclusions than those towards which Bohm-Bawerk -- so far at least as may be recognised from the critical and preparatory work already published -- appears to point.
Note. -- Since writing the above, Bohm-Bawerk has published the second part of his work, Die Positive Theorie des Capitals (Innsbruck, 1888), translated by me as The Positive Theory of Capital (Macmillan, 1891). -- W.S.
The Calculation of Return to Capital in Primitive and in Developed Economies
Those writers who maintain the productivity of capital prefer to take the most primitive economic circumstances in order to make their meaning clear. Thunen, for instance (in his Isolirter Staat, 2nd edition, Book II, division I, p. 74) takes his readers to a land in which there is no capital to begin with. In its tropical climate the inhabitants live, in the most literal sense, by the labour of their hands. There a labourer is in a position to produce yearly the total amount required to maintain him for a year -- we shall put this down at 100 -- and, besides that, 10% more, or 110 units in all. At that he can live and also lay past. And now some man, supporting himself meantime upon his savings from former years, succeeds, after a whole year's labour, in producing a bow, arrows, and a net. He is rewarded for this by being enabled, with the assistance of the new tools, to obtain henceforward a yearly return of 150 units, by means of which he finds time to repair the damage suffered by his little capital through wear and tear, and to maintain it always in the same condition. The total increase to his income per year amounts to 40 units, and this increase is a permanent one in spite of the perishable nature of the capital, because not only is the capital perishable, but it can also be, and is continually being, reproduced. To what factor is this increase to be imputed? Obviously to the capital. To its credit alone can the increase be attributed. This will be seen, e.g., in the fact that every other labourer will be inclined to hire the capital at a price which is based on the calculation and ascription to it of this surplus result.
Similar statements are given by other writers. They are, indeed, well adapted to clear up our ideas concerning the productivity of capital in its most general outlines, and to persuade the reader to its acceptance. On the other hand, they are misleading almost in every detail as regards our developed conditions of production, and, in particular, they give a thoroughly false impression as to the measure of productivity.
In such primitive conditions as those pictured by Thunen, where capital emerges for the very first time, the return to capital is calculated at the entire increase of income, which labour assisted by capital obtains as against labour unassisted. In other words, the whole "share dependent upon its co-operation" (see p. 91) is imputed to capital as its "contribution." And rightly so. In these most primitive conditions there is a considerable supply of labour power; indeed, as compared with the scant occasions for using it, almost too much; on the other hand, capital is scarce and greatly in demand. Much labour must be expended without aid from capital, and the comparison between labour assisted by capital and labour unassisted, forces itself naturally upon every one. This is no fact found out by subtle economic investigation; it is seen practically in men having constantly to choose between the two kinds of labour.
But this is very different from the conditions under which we now live. Practically such a choice is never placed before any one. It would never occur to any one but a theorising economist, to measure the value of capital by estimating what would be the amount of loss if capital should not co-operate at all in the production, -- any more than it would occur to any one to measure the value of labour by estimating the amount of loss that would ensue should labour refuse its co-operation. All labour is judged on the quite intelligible assumption that it is brought into co-operation with capital; all capital under the assumption that it is brought into co-operation with labour. Production has become ever so much more complicated, and with it the art of calculating production. The simple formulae of former times are not now adequate, and examples based on them can only be misleading.
How, then, are capital and labour under present conditions to be distinguished? The answer is not doubtful. According to that complicated formula, and according to all those rules which obtain, as regards the imputation of return in general.
The "contribution" of capital is to-day far from amounting to the whole "share dependent upon its co-operation." While that share is very much equal to the total return of production, the "contribution" is merely one single quota alongside of the quotas of land and labour.
Only in one connection has the frustration of Thunen anything to teach us about the measure of the return to capital. It proves dearly that, in any case, there is a net return to be imputed to capital -- in so far as it is properly employed; a return which can be permanently obtained in spite of the perishable nature of the various items forming the capital, and in spite of their continual transformation in consumption and reproduction. Capital, rightly employed, does more than simply renew itself; it yields beyond this a surplus which must be imputed to it. This proposition is proved beyond a doubt, as regards primitive economic conditions, by Thunen and others; and in these primitive conditions the progress of economy generally is shown through the discovery and development of forms of capital. But will any one assert that what was the due of primitive capital is not also the due of the developed modern capital?
The Imputation of Gross Return and of Net Return
We have said that capital, rightly employed, shows itself productive, inasmuch as it reproduces itself with a surplus. This proposition, although undoubtedly correct as a conclusion, requires one essential modification. Do the arrows, bows, and nets -- the capital of Thunen's illustration -- really reproduce themselves in the strictest sense of the term? Certainly not. They produce nothing but fish and the spoils of the chase; in this they exhaust their direct and proximate activity. They do not in the least degree themselves bring forth new arrows, bows, and nets, nor do they give direct assistance in doing so. The return which, in the first place, falls to be imputed to them is, consequently, a gross return in foreign things; things, that is, from among which they cannot replace themselves; things with which they may possibly be compared in value but not in quantity, and by means of which a physical net return cannot therefore be represented. But we cannot stop short in our consideration at this point: as a matter of fact the indirect efficiency of capital goes much further. The bows, arrows, and nets once obtained lighten the conditions of their reproduction, if they do not actually co-operate in it. They lighten it by means of the extraordinary increase in the gross return of fish and game, as consequence of which immensely more labour than formerly is free to be employed in the creation of capital. Therefore, in the total result, a net return does come in the end to be imputed to these concrete forms of capital, just as if they did directly reproduce themselves with a surplus.
The same argument holds for capital in the developed economy, only that here the conditions are much more complicated and the process, consequently, more difficult to follow. No capital, even in the most highly developed economy, directly reproduces itself; each produces first a gross return in foreign things, in which, physically, its productivity cannot be seen. The capital of a baker produces bread, that of a miller, meal, that of a peasant, grain. In order that the baker may replace his capital again, he must turn to the miller, and to all the other persons who can provide him with the necessary materials and apparatus for his production. The gross return of every capital must be exchanged against the gross returns of other capitals, -- indeed, against those returns which are attributed to land and labour, -- in order that the capital may be replied, and the net return become physically cognisable. The only imputation that ever takes place directly is an imputation of gross return, but from that follows, as a final consequence, an imputation of net return, however circuitous the route may be, -- so long, I mean, as the efficiency of capital is considered undiminished, and so long as it is suitably employed. It is just as though every capital did directly reproduce itself with a surplus.
In most cases the return to all the capital invested in one business or one undertaking is grouped in one estimate. It requires no proof, however, that, from the total return, each separate bit of capital (assuming suitable employment) will have its share. Every bit of capital, rightly employed, produces directly a gross return of goods different from itself, and finally, after the necessary exchange between similar gross returns, reproduces itself and yields a net return. In this sense machines, tools, raw materials, auxiliary materials, in short, all forms of concrete capital, the smallest and the most perishable, even those from which, materially speaking, nothing passes over into the product, replace themselves and yield a surplus. From this point of view every piece of coal which is burned for purposes of production creates, in the last resort, another similar piece of coal, and, beyond that, a perishable net return. And, inasmuch as the replied portions of capital are employed again and yet again, each piece of capital -- the smallest and most perishable -- becomes the source of a permanent rent.(1*)
1. In the exchanges necessary to procure the goods which are to replace the capital, in lieu of the directly obtained goods which form the gross return, goods are, of course, estimated according to their value. Capital goods, are, therefore, estimated at their capital value. To this extent it appears that the knowledge of the value of capital and of the laws which regulate it, must precede the imputation of net return. Only in such a simple instance as that given by Thunen can an imputation of net return be made without a previous knowledge of the value of capital, and this destroys our proof that the imputation of net return is fundamentally independent of the valuation of capital. It is, of course, practically impossible to employ this fundamental principle so soon as production becomes complicated. But whenever production becomes complicated every new calculation must practically be laid on the lines of the old ones; otherwise no conclusion could be come to. Every new determination of value practically presupposes old ones (compare Book III. chap. v. at end). As little, then, as the conclusion can be drain from this, that theory requires value in order to explain value, so little can it be concluded that, theoretically, the value of capital conditions the imputation of net return.