Rent in modern economic theory: an essay in distribution
K6 ... V'7^*.^ ... ^ r< ^ -•' «r ^ •• A ++& ^0 •1 o »°*i » ' • «* o ^0* 0° .'^1. °o ,**. .0 .0^ % ^*^ ***** :m£K* **»c& :£mk'* *< 4o ,^ Digitized by the Internet Archive in 2010 with funding from The Library of Congress http://www.archive.org/details/rentinmoderneconOOjohn PUBLICATIONS OF THE AMERICAN Economic Association THIRD SERIES, VOLUME III PUBLISHED FOR THE AMERICAN ECONOMIC ASSOCIATION BY THE MACMIIXAN COMPANY NEW YORK LONDON : SWAN SONNENSCHEIN & CO. 1902 CONTENTS OF VOLUME THREE, THIRD SERIES. y NUMBER. PAGES. i. Papers and Proceedings of the Fourteenth An- nual Meeting, Washington, D. C, December 27-30, 1901 1-400 2. The Negro in Africa and America. By Joseph Alexander Tillinghast 401-638 3. A History of Taxation in New Hampshire. By Maurice Henry Robinson 639-872 4. Rent in Modern Economic Theory. By Alvin Saun- ders Johnson 873-1007 INDEX OF AUTHORS MENTIONED. Buchanan, 63. Cantillon, 5. Carey, 85. Carver, 63. Clark, 16, 19, 32, 34, 35, 40, 41, 61, 62, 64, 69, 70, 73, 77, 88, 91, 95, 113- Commons, 24. Ely, 105. Fetter, 25, 35, 90, 91. George, 47, 56. Gross, 113. Hawley, 112. Held, 19. Hobson, 13, 62, 70, 77, 87, 88, 91. Jevons, 86. I,eroy-Beaulieu, 112. Loria, 60, 73. Macfarlane, 66, 103. Macvane, 113. Mai thus, 5, 103. Mangoldt, 112. Marshall, 24, 33, 34, 87. Mill, 86. Nicholson, 38, 52. Patten, 9, 19, 20, 35, 49, 71, 85, 86, 92, 100, 105, 106, 109, no, 118, 123. Quesnay, 4. Read, in. Ricardo, 62, 63, 74, 78, 84. Roscher, 63. Say, 22, 23, 33. Senior, 22, 102, 103. Sidgwick, 26, 29. Sismondi, 62. Smith, 21, 22, 25, 47, 55, 56, 58, 102, 103. von Thiinen, 56, 74, 79, 112. Turgot, 5. Walker, 66, 70, 71, 84, 112, 119. Wieser, 60. Willett, 112, 114, 116. Publications OF THE American Economic Association THIRD SERIES. ISSUED QUARTERLY. Vol. Ill, No. 4. Price, $4.00 per Year. RENT IN MODERN ECONOMIC THEORY: AN ESSAY IN DISTRIBUTION. ALVIN SAUNDERS JOHNSON, A.M. NOVEMBER, 1902. published for the American Economic Association by the macmillan company, NEW YORK. LONDON : SWAN SONNENSCHEIN & CO. Entered as Second Class Matter at the New York, N. Y., Post Office, May 13, 1900. PRICE, IN PAPER, $.75. AMERICAN ECONOMIC ASSOCIATION Organized at Saratoga, September 9, 1885 OFFICERS ident Edwin R. A. Seligman, Ph.D. Ex-Presidents ♦Francis A. Walker, LL.D. ♦Charles F. Dunbar, LL.D. John B. Clark, LL.D. Henry C. Adams, LL.D. Arthur T. Hadley, LL.D. Richard T. Ely, LL.D. / Ice-Presidents Theodore Marburg Fred M. Taylor, Ph.D. John C. Schwab, Ph.D. Secretary and Treasurer Frank A. Fetter, Ph.D. Cornell University, Ithaca, N. Y. Publication Committee Jacob H. Hollander, Ph.D., Chairman. mas N. Carver, Ph.D. Davis R. Dewey, Ph.D. Willard C. Fisher, A.B. William A. ScoTT, Ph.D. 1 M. Taylor, Ph.D. * Deceased. Inquiries and other communications regarding member- ship, subscriptions, meetings, and the general affairs of the Association, should be addressed to the Secretary of the American Economic Association, Cornell University, Ithaca, New York. Orders for publications should be addressed to The Macmillan Co., 66 Fifth Avenue, N. Y. City. Publications OF THE American Economic Association I J! : THIRD SERIES. ISSUED QUARTERLY. Vol. Ill, No. 4. Price, $4.00 per Year. RENT IN MODERN ECONOMIC THEORY: AN ESSAY IN DISTRIBUTION. AL.VIN SAUNDERS JOHNSON, A.M. c J NOVEMBER, 1902. published for the American Economic Association by the macmilxan company, NEW YORK. LONDON : SWAN SONNENSCHEIN & CO :i. (Vjp *b .let THE LIBRARY OF CONGRESS, Two Copies Received MAR 23 1903 Copyright Entry r \jvol-. t—^'cz CLASS & XKc. No. COPY B. Copyright, 1903, by American Economic Association. PRESS OF ANDRUS & CHURCH, ITHACA, N. Y. PREFACE. • It is the belief of the author of the following study that the essential elements of the theory of rent are familiar to all serious students of economics. Present differences in point of view are due, not to ignorance of these elements, but to the fact that authorities disagree as to the proper emphasis which should be laid upon the various aspects of the problem. It is believed that by placing the points at issue in juxtaposition, and by paying due regard both to self-consistency and to relevancy to theoretical- needs, it will be possible to approximate a satisfactory view of the problem. No attempt has been made to trace to their original sources the ideas discussed in the following pages. Usually they are the common property of whole schools ; and if one author has been cited rather than another, it is because that author seemed to be the best available rep- resentative of the idea in question. That the positive views here advanced are largely based upon the theories of Professor J. B. Clark will, of course, be obvious to every reader. Acknowledgement of indebtedness is further due to Professors E. R. A. Seligman and F. A. Fetter, who have read this study in manuscript and have offered many valuable suggestions both as to form and matter. Alvin S. Johnson. Columbia University. CONTENTS. CHAPTER I. The Economic Surplus I_l8 I i. Relativity of economic analyses, i — \ 2. Surplus income, 3 — \ 3. The produit net, 4 — \ 4. Surplus from the point of view of his- torical materialism, 6 — \ 5. Surplus energy and progress, 8— § 6. Sur- plus of satisfaction or of utility, 9—$ 7. The dynamic surplus, 13—? 8. Pseudo-surplus, 15 — \ 9. Surplus as a purely economic concept, 17. CHAPTER II. Land as an Independent Factor in Production i9~45 \ 10. Basis of early distinction between land and capital, 19 — \ 11. Insufficiency of the distinction based on origin of capital in labor, 21. — \ 12. Extension and position as the fundamental attributes of land, 24_§ I3. Relation of land value to cost, 25— \ 14. Analogy between cost of land and cost of capital, 31— § 15. Possibility of increasing economic land, 33 — \ 16. Distinction between land and capital in dy- namic theory, 35 — \ 17. Theoretical need of distinction between land and capital, 40— § 18. Summary, 43. CHAPTER HI. Rent as Unearned or Exploitative Income 46-64 \ 19. Popular view of rent as unearned income, 46 — \ 20. Tests of earned incomes, 48—? 21. Confusion between necessary and earned income, 51— \ 22. Rent a necessary income, 53—? 23. View of rent as exploitative return, 55—$ 24. Analysis of productivity, 57— \ 25. Rent regarded as an income transferred from the consumer, 62. CHAPTER IV. Rent as a Differential or Residual Income 65-83 \ 26. Rent not due to differences in land or powers of land, 65 — \ 27. Dependence of differential doctrine upon the dogma that rent does not enter into price, 72— \ 28. Differential method of isolating specific product, 72 — \ 29. The "intensive" differential analysis, 75. —\ 30. Why the differential analysis has been applied to land alone, 77 — \ 31. Income to monopoly factors, Si. vi Contents. CHAPTER V. The Relation of Rent to Price 84-101 2 32. The classical dogma and its critics, 84—$ 33. Weakness of the Ricardian position, 86 — \ 34. Validity of the "intensive law of rent," 87 — \ 35. Relation of rent to cost, 90 — \ 36. Influence of in- comes upon production, 95 — \ 37. Importance of industrial mobility, 98. CHAPTER VI. Rent, Profit, and Monopoly Return 102-121 § 38. Rent and monopoly return in classical economics, 102 — \ 39. Analysis of monopoly return, 105 — \ 40. "Profit and rent the same fund," 109 — §41. Nature of profit, 111 — ? 42. Reward for risk-taking contrasted with rent, 114 — \ 43. Relation of " pure profit" to rent, 117 — \ 44. Income of the superior entrepreneur, 119. CHAPTER VII. Conclusion 122-128 # 45. Restatement of point of view, 122 — # 46. Distinction between land and capital, 124 — \ 47. Nature of rent, 126. Index of Authors Mentioned 129 CHAPTER I. THE ECONOMIC SURPLUS. Sec. i. Economic science, it has been well said, is not studied because of any inherent interest of its own. Natural curiosity may serve as a sufficient reason for the investigation of physical and vital laws ; interest in the duties and destinies of man may give to ethical and metaphysical studies an intrinsic value ; but divest economics of its bearing upon practical action or ulterior thought, and few would find it| worthy of attention. Historically, it was the need for principles of political action that was chiefly responsible for the creation of political economy as a special science ; and in the present day the student usually devotes his attention to economics because he wishes to understand the effects, proximate and remote, of taxation and of governmental control of industry, of trade unions and monopolies ; or, if his interests are those of the scholar rather than those of the practical man, because he wishes to understand the sociological and political effects of economic laws, or because he desires to throw light upon the historical development of society. In any case economic science cannot be considered a sufficient end in itself. It follows, accordingly, that the results of economic study must not merely be true, but must have a bearing upon practical or intellectual problems that are recog- nized to be of importance per se. The distinctions and classifications of the economist must submit to the two- fold test of truth and relevancy. And as the progress of events and of science brings new problems into the fore- ground, the old analyses may lose their significance, 2 American Economic Association. [8So although they may remain quite true. The work of economic theory, therefore, is never done. Each economic period will demand new analyses, based upon a point of view which is selected by the needs of the time. It is the purpose of this essay to review the position of the rent of laud in modern theory, to consider its nature viewed from the standpoint of economic science of to-day, and to discuss its relations with other economic incomes. It has long been customary with economists to treat rent not as an income sui generis, but as one species under a wide genus. Rent has been classed now with one kind of incomes, now with another, as one characteristic or another has seemed to be of vital importance. Econo- mists have not, however, always recognized that it is with reference to qualities which they have themselves selected as relevant that they classify rent with profits or interest or monopoly return. Most frequently they imagine that their classifications are based upon the essential nature of the phenomena under investigation. Reflection will, however, show that if such a classification is possible it is of no importance in economics, since phenomena which are similar in most of their relations may be widely dis- similar in the relations which may properly be called economic. But while economic phenomena are naturally grouped according to characteristics which the economist selects, it is not true that economic analyses may be arbi- trary. There are certain problems at the present time which will be recognized to be fundamental in economics. It is with reference to these problems, as the writer conceives them, that the point of view of this essay has been chosen. Criticism of other classifications will accordingly be based not only upon their inherent logic, but also upon their relevancy to the problems of to-day. In adopting such a basis for 88 1 ] The Economic Surplus. 3 criticism, injustice is necessarily done to the systems of earlier periods, but not to their survivals in modern economics. SEC. 2. The rent of land is usually treated as a species of the genus " surplus income." To show that any form of income is a surplus has been regarded as equivalent to demonstrating its kinship with rent. But rent is a category of economic theory, while surplus in- come may be a category of ethics, politics or sociology, as well as of economics. What is surplus income from the point of view of ethics or sociology may not be a surplus from the point of view of modern economic theory. It is, therefore, not legitimate for the purposes of economic classification to group together all incomes that from one point of view or another may be regarded as surplus. The economic surplus must consist in a part of the social income which exerts upon the central phenomena of economic science an influence differing from that of the incomes classed as non-surplus. It must possess economic potency if it is not to fall outside of the domain of economics ; it must affect phenomena that are recognized as secondary, from the economic point of view, else the term "surplus" is a misnomer. The classification of the social income into surplus and non-surplus is as old as economic theory, although early writers did not usually treat it as one of fundamental im- portance, as do many modern writers. But there has been little uniformity in the determination of the concrete forms of income that constitute the surplus. The history of economic science presents a series of surplus funds no two of which cover identically the same elements. This is what one would expect, since those " funds" have been constructed with reference to widely different cen- tral problems. 4 American Economic Association. [882 Sec. 3. The first demand upon the resources of a community is the covering of the barest needs of those who procure from nature wealth in its raw form. If nothing is left after this primary need has been met, it is evident that highly elaborative industry, organized government, art, science, and other forms of cultural activity are practically impossible. If, however, an ex- cess of wealth above such primary costs remains, one of the most essential conditions of higher social activities is present. A surplus of this order was the produit net of the Physiocrats. The needs of the agricultural laborer could be met by a portion of the produce of the soil, while such wealth as exceeded the demands of agricultural labor could be employed for the support of trades and arts and government. The extent of the surplus measured a community's potentialities for cultural development. It is these primary riches, continually renewed, which support all the other states of the realm, which give activity to all the other pro- fessions, which cause commerce to flourish, which favor population, which animate industry, which create the prosperity of a nation.1 What the Physiocrats were seeking to establish was a material basis for the complex of phenomena that dis- tinguish a civilized and refined community from a bar- barous one. The produit net had no importance apart from its political and social effects. Again and again we are reminded that it is not really wealth until a population has arisen to demand it.2 It is of no signi- ficance until it has transmuted itself, so to speak, into the activities of the artisan and trading and professional classes. The transformation of surplus revenue into 'Quesnay, Grains, printed in Physiocrates, ed. E. Daire, vol. 1, p. 272. 2 Quesnay, Grains, p. 299. 883] The Economic Surplus. 5 higher social forms is explained according to the some- what naive common sense of the time. The assemblage of a number of rich proprietors who reside in a single place is sufficient to form what is called a city, where mer- chants, manufacturers, artisans, workingmen and domestics come to- gether in proportion to the revenues which the proprietors spend there. In each case, the magnitude of a city is naturally proportioned to the number of proprietors of lands, or rather, the produce of the lands which belong to them. The capital city is formed in the same way as a city of the provinces, with this difference, that the great pro- prietors of the whole state reside in the capital.1 Two assumptions are manifestly necessary in order to give definiteness and meaning to the surplus thus con- ceived. It is necessary to assume first, that the wages of labor are fixed at the minimum of subsistence ; and secondly, that population will automatically increase until the whole product of the soil is consumed by laborers engaged either in extractive or elaborative industry. Under these assumptions the produit net would be a fair measure of the labor force at the command of society, and this, in a society only slightly capitalistic, would be an approximate measure of its productive powers. In the later writings of the E^conomistes we find both assumptions developing : Turgot states explicitly that the laborer normally receives his bare living ; and Malthus, who in his doctrine of rent may be classed with the Physiocrats, expresses with clearness the assumption that the surplus tends to create its own consumers, an artisan class that has to purchase it with their toil. Thus the ferti ity of the land gives the power of yielding a surplus, a rent, by yielding a surplus quantity of necessaries beyond the wants of the cultivators ; and the peculiar quality belonging to the neces- saries of life, when properly distributed, tends to strongly and con - stantly give a value to this surplus by raising up a population to demand it.2 ^antillon, Essai sur la nature du commerce, p. 5, 6. 2 Malthus, Principles of political economy, Boston, 1821, p. 113. 6 American Economic Association. [884 We are not here concerned with the imperfect theory of distribution which assigned to the landlord the entire produit net, nor with the fantastic theory of production which imputed it wholly to the soil, or, sometimes, to agricultural labor. What is of interest is the extent of the surplus fund and the significance ascribed to it. The assumptions upon which its definitions are based are sufficiently unreal as applied to modern economic life ; but before the development of capitalistic society they were, perhaps, approximately correct. When habits of consumption were fixed and methods of pro- duction unchanging, the social development of each community was indeed closely connected with a distin- guishable surplus. Sec. 4. The Physiocrats, then, attempted to establish a physical basis for the growth of that part of society which distinguishes civilization from barbarism. They sought an explanation for the greatness of states con. ceived as units. Assuming at the outset, as they did, that the surplus flowed into the hands of the landowner, they did not enter into a discussion of its distribution among smaller units within the state. Yet they recog- nized the existence of a capitalist class, and admitted that the laborer could save "by parsimony." Thus a part of the surplus above the bare subsistence of labor remained in the possession of other classes besides the landlords. Unconsciously they had introduced a new class of problems, the further development of which was left to the so-called historical materialists. An increase in social income, distributed to the dif- ferent classes of a society in proportion to their original incomes, would increase the happiness of the society as a whole and advance it in civilization and culture. It would also increase its power to cope with other societies 885] The Economic Surplus. 7 in peace and in war. A surplus thus distributed is therefore a factor of great importance in international politics. Increase in social wealth, however, is not likely to result in a universal augmentation of the original in- comes of the members of society. Certain individuals and classes will almost inevitably receive more than the average proportion of it. The appearance of a surplus, therefore, will usually create new class distinctions, or emphasize those that already exist. The flow of new income causes one class to gain in power and another to decline. It is a potent factor in state politics, just as the surplus which is conceived of as an acquisition of an entire community is a potent factor in the politics of the world. It is, however, only upon the assumption of static methods of utilization that a surplus of this nature can at all adequately explain the relative rise and decline of societies or of social classes. A change in the habits of consumption, taking place simultaneously with an in- crease in wealth, may wholly neutralize its social and political influence. A wealthy state with luxurious habits is not necessarily more fitted to survive than a poorer state whose citizens have simpler tastes. If the development of the personal wants of a class keeps pace with the increase in its resources, it will not necessarily gain either in numbers or strength. Now in the ages preceding the distinctly modern epoch, standards of consumption were for the most part definite. The sur- plus of food produced was a rough indication of the probable magnitude of the non-agricultural population, and the wealth at the command of a social class was a not inaccurate index of its probable growth in power. In modern society, on the other hand, wants are so com- plex and subject to such great variations that it would 8 American Economic Association. [886 be hazardous to predict the result of any but the most striking changes in income. While, then, a surplus consisting in mere increase in wealth may, even in modern times, occasion changes in the relative political and social position of states and of classes, so many other factors enter into the problem that it is hardly safe to attempt to explain concrete phenomena by the emergence of surplus. The distinction between such surplus and non-surplus parts of income is of great im. portance in the discussion of certain historical problems, but it is questionable whether it throws any light upon problems of the present day. Sec. 5. As a rule the production of goods entails the loss of a certain amount of vital energy, and the con- sumption of the goods produced restores energy to the human organism. Man has frequently existed in en- vironments which afforded him subsistence only in re- turn for the expenditure of all the energy which he possessed. In such circumstances a change in activities which would require greater exertion would be injurious, and any change in the direction of energy, even though it did not mean an increase in its absolute amount, would be attended with serious risks, and would natu- ally be avoided. Where, on the other hand, the environ- ment has been so favorable that the consumption of the goods created by a day's labor has yielded a quantity of energy more than sufficient to produce an equal amount of goods, variations in the forms of activity have been possible. Where under such circumstances a compe- tition for existence took place among individuals or groups of individuals, a law of survival may have forced the surplus of energy to find a vent in new forms of activity. The presence of surplus energy thus ap- pears as a possible basis for variation in activity, and 887] The Economic Surplus. 9 under the pressure of competition for life may become a real cause of economic and social progress. Such is the part that is assigned to surplus energy in Professor Patten's theory of progress,1 in which each adaptation to the environment sets free new surplus energy which automatically transmutes itself into progress. Whether or not one accepts Professor Patten's theory as a satisfactory account of progress, one can hardly deny that it points out a factor which deserves consider- ation from all who seek for an explanation of the development of a dynamic society out of apparently changeless barbarism. There is accordingly a set of problems which justifies the distinction between the energy which is necessary to conserve human life in its existing conditions and the energy which is free and available for new uses, and which justifies the parallel distinction between the parts of income which may be regarded as the objective forms of such classes of energy. The three forms of surplus that have been described may indeed be properly denominated surpluses. Those parts of income — or income transmuted into energy — which account for continued, though unchanging, con- ditions of life represent the non-surplus. Those parts of income that explain change or progress form the sur- plus fund. If it is indeed the essential function of eco- nomics to explain progress or change, political and social, some one of these is rightly termed the economic surplus. SEC. 6. Much of the pleasure and pain of life results 1 Theory of prosperity, pp. 186, 187, et passim. It is to be observed that in Professor Patten's exposition the first step in progress, from which surplus energy originally results, is mere chance adjustment to the environment. This requires the unnecessary assumption that primitive man actually lived in an environment that barely afforded him subsistence. io American Economic Association. [888 from the consumption and production of economic goods. A popular measure of welfare is the net amount of pleasure that results from the entire economic process. It has often been said that the true criterion of economic amelioration is the growth of the surplus of happiness afforded by economic activities. Not increase in power or in wealth or in energy, but increase in the sum of pro- ducers' and consumers' rents is the index of progress.1 One need not accept the growth of surplus satisfaction as an adequate explanation of the meaning of progress, yet it may serve as a working principle in default of a better. The distinction between those satisfactions which are merely sufficient to cover economic discom- forts and those which are a net gain to man thus serves to satisfy an intellectual need, and hence requires no further justification. Psychological science has for a long time protested vehemently against the view which makes economic life a mere balancing of pleasures against pains. The pro- test has received little attention from economists — prob- ably less than it deserves. Economic conduct consists in a series of options determined by a complex of final causes, of which pleasure and pain may be selected as typical, although they are perhaps not even the most important ones. It would be erroneous, however, to suppose that the adoption of the psychologist's point of view would revolutionize economic theory. Economists are not particularly interested in the analysis of motives. They seek to explain activities, and assume motives merely as a convenient starting point. In every eco- nomic act there is a balancing of motives, and what the particular motives may be is to the economist a matter ' For a detailed discussion of progress regarded from this point of view see Nicholson, Principles of political economy, iii, book iv. 889] The Economic Surplus. 11 of small moment. It is convenient to class all motives which make for the performance of an act under a single head, utilities, and all those which dissuade from action under the head of disutilities. Nothing more detailed is needed for the purposes of economic theory. Whether one chooses to regard economic conduct as the result of a balancing of pleasures and pains, or of utilities and disutilities, denned as above, it is evident that the economic process will usually yield a surplus of pleasure or utility above pain or disutility. Utilities will fall into two classes, those which merely over- balance disutilities, and those which are without any offset. Now it is clear that the former class will ac- count for the totality of economic phenomena. The surplus has no economic potency whatsoever. Whether the motives that lead to an act just outweigh the mo- tives that tend to prevent it, or enormously overbalance them, the act is performed.1 Whether the pay for the 1 The objection will be raised that the surplus determines the order of economic choices, and therefore possesses economic potency. If the commodity A yields a surplus of ten and B of five, will not A be chosen first? Certainly. But what is the net economic effect of this order of selection if both are chosen anyway? If it is necessary to choose between the two, A yields a surplus of only five, since the choice involves the surrender of B. The question that then arises has to do with the economic potency of the pure surplus of A, represented here by five. Say that the surplus were reduced to one, would not A still be chosen ? So long as A affords the least surplus it will be selected in preference to B. It is the part of surplus above the minimum which determines choice that is here affirmed to be of no importance in the t xplanation of economic conduct. A kind critic has suggested that if ten units of labor in producing A yield a surplus, while the eleventh just pays, and out- unit of labor in producing B just pays, the surplus really determines the apportion- ment of labor. We may say that the first unit in the production of A yields a surplus of 10, the second 9, and so on, down to almost nolh- ing. If, however, the surplus on the earlier units of A were reduced to such a mere -f, the apportionment would remain the same. It is the extent to which production may be carried on without descending below the minimum ground of choice, and not the amount of the sur- plus, that determines the apportionment. 12 American Economic Association. [890 first hour of a day's labor merely suffices to insure its performance, or is far more than sufficient to do so, the work is accomplished. Whether the former relation of motives holds through the day, or whether each hour up to the last affords an appreciable surplus, the quantity of economic activity remains the same. It cannot be objected that the laborer would refuse to work under the former conditions, or would work less diligently, for in that case the alleged surplus would not be surplus at all, but would form a part of the sum of utilities necessary to determine the choice to work. The same analysis may be applied to the so-called consumers' sur- plus. If it is indeed a surplus, it is an economic epi- phenomenon. Economic theory has no occasion to take cognizance of its existence. It may be said that if the first hour of labor yields no surplus, the second hour will probably yield a nega- tive surplus, and will therefore be left undone. That is quite true, but it merely signifies that the presence of a surplus serves as a basis for predicting the con- tinuance of labor. It is not therefore a cause of con- tinued labor. The shape of the utility curve gives us important information as to the value of a commodity under varying conditions of supply and demand, but the surplus included by the utility curve plays no part in economics until it ceases to be a surplus.1 1 The price curve of any commodity is theoretically ascertained by establishing the importance of any unit under all possible relations of supply and want. Say that but one unit is in existence, and the im- portance of it is one hundred. With the same volume of wants, a hundred-fold increase in the number of units of supply may reduce the importance of any unit to ten. It is usually assumed that the theoretically first unit will then yield a surplus of ninety. If we analyze the nature of this alleged surplus, we find that in the first place it contains an element of actual satisfaction, or rather utility. A hungry man does unquestionably receive more pleasure from the 891] The Economic Surplus. 13 Sec. 7. At any particular time there is a rate of wages that a workman will consider natural and there- fore just. A skilled laborer may believe that three dollars a day is a fair wage. Offer him two and a half and he will probably refuse it with indignation. This does not mean that the reduced wage might not cover all the sacrifice that the performance of labor involves, nor does it mean that the money earned in the last hour does not cover the actual disutilities, consisting in weari- ness and deprivation of liberty, entailed by that hour of labor. When unemployed he may crave the exercise of his accustomed activity, yet he would feel that to work for the low wages would mean the incurring of a net loss. If, on the other hand, he is offered three dollars and a half for a day's labor, he feels that he is receiving a net gain. Manifestly there is no a priori reason why three dollars should be the income selected as the pre- eminently just one. It is a matter of common experi- first slice of bread which he consumes than from the last. This sur- plus, however, is insignificant when compared with the total surplus which figures in the diagrams so popular in economic discussions. The second part of the surplus consists in the " pain obviated " by the presence of food. The first part of the surplus is a fact of conscious- ness, the second part is something which exists neither in conscious- ness nor outside of it. It is an idea with no foundation in reality. Hobson, Economics of distribution, p. 41 etseq., has pointed out the true nature of this curious " surplus." Deprivation of food is the destruction of human life ; therefore when the supply of food is threatened the whole worth of life objectifies itself momentarily in the possession of food. The control of the bare means of existence represents the utility of all that one has or ever hopes to have. To assign the utility of all of the goods of life to each one of the neces- saries of life is so obviously fallacious that it is astonishing that it has ever been done outside of the popular rhyme that ascribes the loss of horse and rider and battle "all to the want of a horse shoe nail." The subjective surplus, described in the only legitimate way as an actual surplus of satisfaction, does not even give us information with regard to the price curve. That it exists is a ground for optimistic reflections as to human destiny, but it seems to have no further signifi- cance in economics. 14 American Eco?w7nic Association. [892 ence that the standard of just payments varies from age to age and from place to place. The coolie no doubt has his ideas of what is fair in wages, just as the skilled mechanic of America has his. The standards, we can readily see, are based upon experience. What a man has been accustomed to have, and what he sees those whom he regards as of his kind receiving, determines what he will feel should be his in the present. There are likewise rates of interest that are conceived to be just, and rates that the natural man, at any rate, would pronounce unjust. The same thing is true of prices. These standards, like the standards of just wages, are indisputably the result of experience of what has been or of what is elsewhere the case. It is possible to divide actual incomes into two parts, one of which corresponds with such standards, while the other measures the variation, positive or negative, from them. The same classification will hold for prices, since prices are merely undistributed incomes. Now it is clear that the first part of income, if isolated, would tend to perpetuate the kinds and volume of the activities which produced it. The second part, whether positive or negative, would lead to a change in such activities. The laborer who feels that he is not treated fairly as compared with others of his kind, who believes that his income is diminished by the existence of negative sur- plus, will seek to put himself in a position where he may secure greater advantages. He may be personally un- able to do so, but his active discontent will serve to urge others who are in a like unfavorable situation, but who are not so specialized that they are unable to change their place in the economic organism, to seek the oppor- tunities that more favored workers possess. If the entire class is degraded, and movement is impossible, 893] The Economic Surplus. 15 there are still likely to be influences at work lessening the efficiency of laborers, and cutting down their num- bers. A positive surplus has a similar set of effects, but in the opposite direction. A surplus of this kind is an evidence of a dynamic change that has taken place. The existence of standards points to the fact that within a certain limited field incomes have been static. A perpetually changing rate could afford no expectation as to the future. Viola- tion of standards shows that a change in the economic situation of the classes who hold standards of income has taken place. But the existence of the surplus has a more important significance for economics than this. It indicates that further dynamic movements must take place. Industry must be rearranged until the surplus annihilates itself in the creation of new standards.1 SEC. 8. It is a well recognized fact that the productiv- ity of any economic agent is conditioned both by its own inherent qualities and by its quantitative relations with complementary agents. The productivity of a ■The writer is aware of the fact that the term " standard " as em- ployed in this section violates, to a certain extent, established usage. By "standard" incomes we usually mean those which would exist if industry were suddenly to obey the laws of free competition The term is here used to designate an income which has been established long enough to have become a fixed datum in the social consciousness. If the incomes of all laborers were suddenly to conform to produc- tivity, large numbers of laborers would at first be influenced exactly as though they found themselves in a specially favored environment. Instead of rendering society static, the change would render it in- tensely dynamic. When, however, the laborers have become accus- tomed to their new incomes, and look upon them as a matter of course, the dynamic influence of the new order becomes unimportant. Income which is socially regarded as a surplus, even though from the point of view of pure theory it is not a surplus, exerts the dynamic influence of a surplus income. In seeking for a distinction between incomes which account for change and incomes which account for persistence, it appears to be best to define the latter as incomes which are socially regarded as normal. 1 6 American Economic Association. [§94 given agent will increase or decline with the increase or diminution in the quantity of complementary agency combined with it in production. If we assume the worst possible economic position for labor, its economic product will be zero. It will be a " free good," and the entire return which it cooperates in producing will be imputable to the other factors in production. If the quantitative relations are varied, the share of labor emerges and increases, while that of the other factors diminishes. When such changes in the relations of the factors of production actually take place, the resulting increase in income for the favored factor, and decline for the factors which are prejudiced, are at first felt to be sur- pluses, positive and negative, similar to the surpluses discussed in the last section. They set in motion second- ary dynamic forces opposite in direction to the forces which created them. If the secondary force is less power- ful than the primary one, it spends itself before it can re- store the former quantitative relations, and new standards for the incomes affected are established. When, for ex- ample, capital increases relatively to labor, the immedi- ate effect is to create higher wages and lower interest. A positive surplus appears in wages, a negative surplus in interest ; and the effect of the existence of such sur- pluses is a further dynamic change. Labor will probably increase in volume, while the rate of saving will be somewhat diminished. These effects need not, however, be sufficient to neutralize the effects of the original in- crease of capital. After the second set of dynamic forces have exhausted their influence, there may be a net gain to labor and a net loss to capital.1 1 As will readily be seen, this is essentially the surplus which appears in Professor Clark's discussion of static incomes. For the sake of simplicity Professor Clark has abstracted from the effects of 895] The Economic Surplus. 17 If we wish to explain consistently the existence in the present of the standards that are so important in eco- nomic life, we can but begin by assuming a time when each concrete income was felt to be a surplus. That surplus, unneutralized by dynamic results, was first crys- talized into a standard ; and that standard has received a succession of accretions, as the dynamic forces which create surplus income have exceeded in power the dy- namic forces which surplus income itself creates. Stand- ard or static incomes thus resolve themselves into series of surpluses which we may term static, not from their causes but from their freedom from dynamic results. SEC. 9. It is not claimed that the foregoing classifica- tion of surplus funds exhausts the list that economic writings offer. In current theory, however, when an in- come is classed as surplus, it is usually from one of the points of view which have been enumerated. It is here maintained that for the purposes of economic classifica- tion all are not equally significant. Economic science exceeds its domain when it creates classifications that have no immediate bearing upon its own central prob- lems. What those problems will be in the future we have no means of knowing, but in the present economic interest unquestionably centers in the problems of value and distribution in a state of society in which competi- tion rules. Current theory seeks to explain the activi- ties which result in the establishment of standards, and those which cause the standards to change. A present income reacts upon future economic activity. Some in- the secondary dynamic influences — not overlooked them, as some of the critics of ' ' The distribution of wealth ' ' have supposed. In order to escape a similar misunderstanding, it is here assumed that the stand- ards which may historically be analyzed into surpluses result from the net force which remains active after opposing forces have been neutralized. 2 i8 American Economic Association. [896 comes tend to maintain themselves unchanged ; others possess a power to induce change, a power which by its own nature must disappear, leaving behind it a perma- nent income which assimilates itself to the class of stand- ard incomes, tending in like manner to perpetuate it- self. The phenomena of standards, of economic persist- ence, are manifestly primary in a theoretical sense ; the phenomena of change, though accounting genetically for the existence of standards, are at any given point of time secondary. Accordingly, to classify as surplus the incomes which at a given time promote change meets the claims of economic logic. The dynamic surplus is the economic surplus par excellence. Normal wages may be taken as a type of standard in- comes, and pure profit, or at least certain elements in pure profit, as typical of economic surplus. Where are we to place the rent of land ? Does it develop standards which tend to perpetuate themselves, or does it tend to disappear ? A satisfactory answer to this question, it is here maintained, would sufficiently determine the posi- tion of rent in economic theory. It would decide whether rent is to be classed with wages and in- terest, or with profits and monopoly return. The con- ception of rent is, however, far from clear, and its eco- nomic relations are the subject of vigorous controversy. 