Writings on Distribution and Welfare (Routledge Revivals)

J. A. Hobson

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135962692
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The articles in this volume, originally published in a variety of journals between 1890 and 1937, deal with the themes of the distribution of income and welfare. Highlighting the contribution which Hobson made to welfare economics and the way in which he distanced himself from his more orthodox contemporaries in interpretation, the articles also show the changes in Hobson's views over the decades in which they were written. This is a fascinating collection of material that provides an unparalleled depth of insight into the views of one of the most important economic thinkers of the early twentieth century.

Article 1

The

Quarterly Journal

of

Economics

April, 1891

The Law of the Three Rents.

THE law of rent is perhaps only a law in the sense that it provides an exceedingly convenient rule of measurement for fluctuations in the value of land. It is strange that writers like General Walker and Mr. Gunton, who have rigidly applied this law to profits, should have failed to see that it is equally applicable to the other participants of the net product. In the case of General Walker, the failure is perhaps explained partly by the anomalous position which he assumes for labor as a residual claimant who comes in for all that is left of the product after the relatively fixed charges for rent, profit, and interest have been defrayed, and partly by his apparent belief that the validity of the law of rent requires that the margin of cultivation should be represented by a “zero” rent. Having found as regards the earnings of employers “a theoretical no-profits stage of production,” he felt himself able to apply the law of rent. He did not find a no-interest and a no-wage stage of production, and therefore concluded that the “law of rent” would not apply. If we look more closely at the subject, we shall see that the “law of rent” will, in its essential features, apply to interest and wages as clearly as it applies to profits. Such an application will, among other results, upset entirely the position of wages as a residual claimant.

It is sometimes easier to attack a large subject from what may seem at first sight a side issue than to tilt straight at the giant. As a deduction from the law of rent, it has commonly been held that rent is not a determinant of agricultural prices. The statement is strictly true; but let us look at the proofs generally offered. They are two.

First. If a landlord were foolish enough to remit the whole of a rent he might have taken, the price of agricultural produce to the consumer would not fall: the tenant farmer would take in higher profits the whole sum saved; or, if he were guilty of the same weakness as his landlord, and lowered his prices as he might, the miller and the butcher would take the extra profit which the farmer declined. Rent cannot be a determinant of price; for annihilate the rent, and the price remains the same. This contention, if we do not follow it in its further effects outside of agriculture, is unassailable. But what applies to rent applies equally to the profit of the farmer or any of the middlemen between producer and consumer. If the farmer, seized with some mania of equality, decided that he ought to take no more of his farm produce than one of his laborers got in wages, and lowered his prices, we have just seen that the gain would be taken by the next middleman, and the price to consumers would stand firm. Since profit at any stage between producer and retail salesman could be remitted without affecting price, we must conclude that profit, like rent, is not a determinant of price. The same obviously will hold of the wages of the farm laborer. If he could be got to work for nothing in a particular, case, it would not affect the price of agricultural produce. By the rigid application of the inductive Law of Difference, we are led to the conclusion that neither rent nor profit nor wages are determinants of price. This dilemma we will for a moment leave, and turn to the second proof, which, to do it justice, generally figures as the first.

Rent cannot be a determinant of or even an element in agricultural prices, because produce raised at the margin of cultivation, where no rent is paid, fetches the same price as other produce raised on rented land. This is quite correct. But can we apply the same reasoning to capital and labor? If for the term “margin of cultivation” we substitute the more convenient term “margin of employment,” we shall see that the very same argument will apply to capital and labor that applies to land. There is a single point of difference, an important one, but not touching the application of the theory of the “law of rent.” The margin of cultivation or employment in the case of land marks a “zero” return or payment to the land-owner: the margin of employment in the case of capital and labor stands at a fixed point above zero. What no-rent is to the land-owner and (according to General Walker) to the employer, the minimum interest and the minimum wages are to capital and labor. Ah! but that just makes all the difference, it may occur to some. I think not. I think it can be clearly shown that the minimum point in interest and in wages plays precisely the same economic part as the no-rent point does in land and the no-profit point in work of superintendence. The reason for the difference in margin of employment is obvious when we co-ordinate the three.

Land at the margin of employment pays no rent, because the owner will allow his land to be used for a nominal payment rather than let it lie idle. The employment of land involves no effort on the part of the owner. If the Earth were, as was held in some mythologies, a goddess, and could extract payment for her services, the worst land under cultivation would not produce its fruit without the payment of more than a nominal rent to Mother Earth. If the owner of land had to feed or otherwise tend it, to keep it alive and in working order, the land on the margin of cultivation would always yield an actual rent. Wherever the owner does by such service sustain the fertility of his soil, he takes care to get a “rent.” A no-rent margin of cultivation is only possible where no exertion of the owner is required.

Capital at the margin of employment pays a minimum interest (say 3 per cent.), because otherwise the owner will not keep it in economic existence and allow its use. The continued existence of the least advantageously employed capital requires some exertion or sacrifice on the part of its owner. Hence the payment for use of such capital must be always above zero under present industrial conditions.

Labor at the margin of employment is paid a minimum subsistence wage, because otherwise the owner will prefer to beg, borrow, steal, or starve. The payment for use of labor must, therefore, always stand above zero.

In short, land continuously exists as a requisite of production; and, in order to place capital and labor on terms by which their action can be co-ordinated with that of land, we must first provide for their continuous existence. That which has to be paid for keeping in economic existence that capital and labor which lie at the margin of employment should be separated from any further gain which will accrue to their respective owners. Suppose that for convenience we assume that interest at the margin of employment of capital is 3 per cent., and wages at the margin of employment of labor is 15s. We will reserve the names “interest” and “wages” for these minimum payments, using the terms “rent of capital,” “rent of ability,” for any extra payments which are received by capital and labor. Our three requisites now fall into line as follows: —

Land at the margin of employment pays zero rent.

Capital at the margin of employment pays 3 per cent, interest.

Labor at the margin of employment pays 15s. wages.

Land below the margin of employment is waste or prairie, which can only come into employment by a raising of the zero rent at the margin into a positive quantity, thus lowering the margin of employment. Capital below the margin of employment includes both unemployed capital and potential capital; i.e., capital which would be created if the inducement to save were a little greater. This potential capital, or capital below the margin of employment, must be regarded as only bounded by the total produce in excess of what is necessary to support life. Any raising of the rate (3 per cent.) at the margin of employment will call some of this reserve into actual use, lowering the margin of employment. So far as a limited field of industry is concerned, all foreign capital will be included as capital below the margin, which a sufficient inducement would bring into employment. Labor below the margin of employment includes all unemployed labor and all foreign labor which a sufficient remuneration will render available.

Different pieces of land may be graded in quality and rental by the amount of their respective superiority in fertility or convenience over the land at the margin of employment, the rental of each grade rising and falling with each rise and fall in the margin of employment. So different pieces of capital may be graded in quality and rental by the superiority which (a) size and consequent economy of management, (b) monopolic character of employment, or other advantages natural or conventional give them over the capital at the margin of employment; i.e., the capital which is normally employed at the least advantage. The rental of each superior piece of capital will rise and fall with each rise and fall in the margin of employment; for it must be considered that there exists an enormous quantity of potential capital, which cannot, with the present position of the 3 per cent. margin of employment, find a profitable use so as to yield 3 per cent., and which, therefore, does not actually figure in the market. It is useful to regard this unemployed capital as inferior in quality and unable to find employment because of its inferiority. So labor may be graded in quality and rental by the superiority which (a) inherent properties, strength, skill, and other abilities, or (b) opportunities partaking of a monopolic character, give it over the labor at the margin of employment; i.e., the 15s. labor normally employed at the least advantage to the laborer. The rental of each superior piece of labor will rise and fall according as a rise or fall in the margin of employment lets in or drives out inferior or unemployed labor.

Any increase in demand for the use of land, raising the value of all land in present supply, gives a positive rent to the no-rent land, and thus lowers the margin of employment, calling into economic use land which formerly lay below the margin. Any increase in demand for the use of capital raises the rent of all capital; and, in the case of capital at the margin of employment which formerly paid only 3 per cent., rent emerges, the margin is lowered, and potential or foreign capital conies into employment. Any increase in demand for the use of labor raises the rent of ability, and in the case of labor at the margin, which formerly earned 15s., a rent emerges; i.e., the 15s. becomes (say) 18s. The margin of employment is thus lowered, and unemployed or foreign labor is attracted into employment.

Thus, applying the formula of the law of rent to all three requisites of production, we get the following result: —

The rent of a piece of

is the excess of its produce over that of the

which is employed to the least advantage and which pays no rent.

Or, taking General Walker’s definition of rent,— “It represents the surplus of the produce over the cost of cultivation on the poorest lands actually contributing to the supply of the market at the time,”¹ — and substituting the term “employment” for “cultivation,” we can apply it to the rent of capital and labor with the same force with which it is applied to land.

That this is no wire-drawn analogy, obtained by convenient alteration in the use of economic terms, will be shown conclusively if we apply the test of other economic laws closely related to the law of rent.

What gives real value to the law of rent as a rule of economic measurement in the case of land is the law of diminishing returns. It is because, after a certain point is reached, each £100 of capital or labor applied to a given piece of land produces a proportionately smaller increase, that it pays to lower the margin of cultivation and employ inferior land rather than attempt to get intenser work out of land already in use. It is sometimes concluded that, because the operation of this law is closely related to a rise in the cost of production of an increased supply of agricultural produce, the general fall in the cost of production of an increased supply of manufactured goods proves that the law is not operative there. As land is the most prominent requisite of production in agriculture, and labor and capital in manufacture, a loose idea has got abroad that the law of diminishing returns applies to land, and not to capital or labor. In point of fact, the law applies with equal force to capital and labor as to land. As each extra dose of capital or labor applied to a given piece of land fails after a certain point to produce a corresponding increase of yield, so does each extra dose of labor applied to a given piece of capital bring a diminishing return. Take the plant and stock which represent the capital of a shop: the net profits from employing two assistants may be greater than from employing only one; but the addition of a third may add nothing to the net return, while a fourth would not be worth his wages. Here the law of diminishing returns comes into operation when more than two laborers are applied to a given piece of capital. The fact that the shop-owner may perhaps find it pay to enlarge his shop and his stock and then to take in more assistants confirms the application of the law of diminishing returns; for it is the action of this law which lowers the margin of employment of capital, and calls into economic existence and use forms of capital which formerly did not exist because they did not pay. The same applies to the plant, stock, and cash which form the capital of a factory. It will not pay the owner of this piece of capital to apply to it more than a certain number of hands. It may pay him to increase his business indefinitely; but, to do so, he must increase his capital, for there will always be a limit to the number of hands he can with advantage apply to each £1,000 worth of capital, and, if he were to pass that limit, each additional hand would entail on him a growing amount of loss. And so it is also with labor. It will pay to lower the margin of employment and take an inferior quality of labor rather than attempt to work beyond a given point the better labor. The work of a man in connection with a machine may be looked upon either as an application of labor to capital or as an application of capital to labor. Just as from the former point of view we find there is a limit to the quantity of labor which may be advantageously applied to a piece of machinery, each excessive application involving an increasing loss, so from the latter point of view there is a limit to the quantity of capital usefully applied to a given piece of labor. In a stress of work it may pay a mill-owner to get his hands to work overtime. But there is obviously a limit here. If ten hours is the normal working day, it might pay to work the same hands for two hours’ overtime. It might be an open question whether it were better to hire outside and presumably inferior labor if four extra hours were necessary. If it was required to extend the working day by six hours, the margin of employment must certainly be lowered in preference to so great an intensification of the strain upon the labor-power of present employees. A skilled hand may be able to tend one thousand cotton spindles, but it does not follow that it will pay the employer to tax the skill of such experts by putting them to eleven or twelve hundred spindles. If he should attempt thus to increase the quantity of capital applied to a given piece of labor, he will certainly find that each fresh application produces a diminishing return. Each laborer, both in length of hours and in intensity, has his limit; and, when this is reached, it will pay to lower the margin of employment so as to include inferior unemployed labor. The law of diminishing returns thus applies with equal precision to capital and labor as to land.

We may sum up our argument thus far as follows: An intenser use of any given piece of land, capital, or labor, beyond a certain point, causes a diminishing return. The margin of employment is thus lowered in each case. And an inferior (or more costly) quality of land, capital, or labor, is called into use, the rent of each rent-paying portion rising with each fall in the margin of employment.

This co-ordination of the three requisites of production in relation to the law of rent throws useful light upon (I.) the constituents of price, (II.) the apportionment of the product between the owners of the requisites of production. The extent of these subjects prevents anything like a full discussion, a...