Chapter 9—Production: Particular Factor Prices
and Productive Incomes
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PRODUCTION:
PARTICULAR FACTOR PRICES AND PRODUCTIVE INCOMES
1.
Introduction
Up
to this point we have analyzed the determination of the rate of
interest and of the prices of productive factors on the market. We have
also discussed the role of entrepreneurship in the changing world and
the consequences of changes in saving and investment. We now return to
analysis of the particular ultimate factors—labor and
land—and to a more detailed discussion of entrepreneurial
incomes. Our analysis of general factor pricing in chapter 7 treated
prices as they would be in the ERE, a state toward which they are
always tending. Our discussion of entrepreneurship in chapter 8 showed
that this tendency is a result of drives toward profits and away from
losses by capitalist-entrepreneurs. Now let us return to the particular
factors and analyze their pricing, their supplies and incomes, and the
effects of a changing economy upon them.
2.
Land, Labor, and Rent
A.
Rent
We have been using the term rent in our analysis to
signify the hire price of the services of goods. This price is paid for
unit services, as distinguished from the prices of
the whole factors yielding the service. Since all
goods have unit services, all goods will earn
rents, whether they be consumers’ goods or any type of
producers’ goods. Future rents of durable goods tend to be
capitalized and embodied in their capital value and therefore in the
money presently needed to acquire them. As a result, the
investors and producers of these goods tend to earn simply an
interest return on their investment.
All goods earn gross rent, since all have unit
services and prices for them. If a good is “rented
out,” it will earn gross rent in the hire charge. If it is
bought, then its present price embodies discounted future
rents, and in the future it will earn these rents by contributing to
production. All goods, therefore, earn gross rents, and here there is
no analytic distinction between one factor and another.
Net rents, however, are earned only by labor and land
factors, and not by capital goods.
For the gross rents earned
by a capital good will be imputed to gross rents paid to the
owners of the factors that produced it. Hence, on net, only labor and
land factors—the ultimate factors—earn rents, and,
in the ERE, these, along with interest on time, will be the only
incomes in the economy.
The Marshallian theory holds that durable capital goods earn
“quasirents” temporarily, while permanent lands
earn full rents. The fallacy of this theory is clear. Whatever their
durability, capital goods receive gross rents just as lands do, whether
in the changing real world or the ERE. In the ERE, they receive no net
rents at all, since these are imputed to land and labor. In the real
world, their capital value changes, but this does not mean that they
earn net rents. Rather, these changes are profits
or losses accruing to their owners as
entrepreneurs. If, then, incomes in the real world are net rents
(accruing to labor and land factors) and entrepreneurial profits, while
the latter disappear in the ERE, there is no room in either
world for the concept of “quasirent.” Nowhere does
this special type of income exist.
A wage is the term describing the payment for the
unit services of a labor factor. A wage,
therefore, is a special case of rent; it is labor’s
“hire.” On a free market this rent cannot, of
course, be capitalized, since the whole labor factor—the
man—cannot be bought and sold for a price, his income to
accrue to his owner. This is precisely what occurs, however, under a
regime of slavery. The wage, in fact, is the only source of rent that cannot
be capitalized on the free market, since every man is
necessarily a self-owner with an inalienable will.
One distinction between wages and land rents, then, is that the latter
are capitalized and transformed into interest return, while the former
are not. Another distinction is purely empirical
and not apodictically true for mankind. It has simply been an
historical-empirical truth that labor factors have always
been relatively scarcer than land factors. Land and labor
factors can be ranged in order of their marginal value productivity.
The result of a relative superfluity of land factors is that
not all the land factors will be put to use, i.e., the poorest land
factors will be left idle, so that labor will be free to work the most
productive land (e.g., the most productive agricultural land,
urban sites, fish hatcheries, “natural resources,”
etc.). Laborers will tend to use the most value-productive land first,
the next most productive second, etc. At any given time, then,
there will be some land—the most
value-productive—under cultivation and use, and some not in
use. The latter, in the ERE, will be free land, since its rental
earnings are zero, and therefore its price will be zero.
The former land will be
“supramarginal” and the latter land will be
“submarginal.” On the dividing line will be the
poorest land now in use; this will be the
“marginal” land, and it will be earning close
to zero rent.
It is important to recognize the qualification that the marginal land
will earn not zero, but only close
to zero, rent.
The reason is that, in
human action, there is no infinite continuity, and action
cannot proceed in infinitely small steps. Mathematically
minded writers tend to think in such terms, so that the points
before and after the point under consideration all tend to merge into
one. Using marginal land, however, will pay only if it earns some
rent, even though a small one. And, in cases where there are large
discontinuities in the array of MVPs for different lands, the marginal
land might be earning a substantial sum. It is obvious that
there is no praxeological precision in terms like
“close,” “substantial,” etc.
All that we can say with certainty is that if we arrange the MVPs of
lands in an array, the rents of the submarginal
lands will be zero. We cannot say what the rent of the marginal land
will be, except that it will be closer to zero than that of the
supramarginal lands.
Now we have seen above that the marginal value product of a factor
decreases as its total supply increases, and increases as the supply
declines. The three major categories of factors in the economy are
land, labor, and capital goods. In the progressing economy, the supply
of capital per person increases.
The supply of all
ranks of capital goods increases, thereby decreasing the marginal value
productivities of capital goods, so that the prices of capital goods
fall. The relative MVPs of land and labor
factors, in the aggregate, tend to rise, so that their income
will rise in real terms, if not in monetary ones.
What if the supply of capital remained the same, while the supply of
labor or land factors changed? Thus, suppose that, with the same
capital structure, population increases, thus expanding the total
supply of labor factors. The result will be a general fall in
the MVP of labor and a rise in the MVP of land factors. This
rise will cause formerly submarginal, no-rent lands to earn rent and to
enter into cultivation by the new labor supply. This is the process
particularly emphasized by Ricardo: population pressing on the land
supply. The tendency for the MVP of labor to drop, however,
may well be offset by a rise in the MPP schedules of labor, since a
rise in population will permit a greater utilization of the advantages
of specialization and the division of labor. The constant supply of
capital would have to be reoriented to the changed conditions, but the
constant amount of money capital will then be more physically
productive. Hence, there will be an offsetting tendency for the MVPs of
labor to rise. At any time, for any given conditions of capital and
production processes, there will be an
“optimum” population level that will
maximize the total output of consumers’ goods per
head in the economy. A lower level will not take advantage of
enough division of labor and opportunities for labor, so that the MPP
of labor factors will be lower than at the optimum point; a higher
level of population will decrease the MVP of labor and will therefore
lower real wages per person.
Recognition of the existence of a theoretical
“optimum” population that maximizes real
output per head, given existing land and capital, would go far to end
the dreary Malthusian controversies in economic theory. For
whether a given increase in population at any time will lead
to an increase or decrease in real output per head is an empirical
question, depending on the concrete data. It cannot be
answered by economic theory.
It might be wondered how the statement that increasing
population might increase MPP and MVPs can be reconciled with
the demonstration above that factors will always be put to work in
areas of diminishing physical returns. The
conditions here are completely different, however. In the previous
problem we were assuming a given total supply of the various factors
and considering the best method of their relative arrangement.
Here we are dealing, not with particular production processes and given
supplies of factors, but with the vague concept of
“production” in general and with the effect of
change in the total supply of a factor. Furthermore, we are dealing not
with a true factor (homogeneous in its supply), but with a
“class of factors,” such as
land-in-general or labor-in-general. Aside from the problem of
vagueness, it is evident that the conditions of our present
problem are completely different. For if the total
supply of a factor changes and it has an effect on the productivity of
the labor factor, this is equivalent to a shift in
the MPP curves (or schedules) rather than a movement along
the curves such as we considered above.
Because we are accustomed to viewing labor implicitly as scarcer than
land factors, we speak in terms of zero-rent land.
If the situations were reversed, and lands were scarcer than labor
factors, we would have to speak of zero-wage laborers,
submarginal labor, etc. Theoretically, this is certainly
possible, and it might be argued that in such static societies with
institutionally limited markets as ancient Sparta and medieval or
post-Medieval Europe, this condition actually obtained, so that the
“surplus labor” earned a below-subsistence wage in
production. Those who were “surplus” and did not
own invested capital were curbed by infanticide or reduced to beggary.
That submarginal land earns no rent has given rise to an
unfortunate tendency to regard the very concept of rent as a
“differential” one—as referring
particularly to differences in quality between
factors. Sometimes the concept of “absolute” or
pure rents is thrown overboard completely, and we hear only of rent in
a “differential sense,” as in such statements as
the following:
If
land A earns 100 gold ounces a month, and land B earns zero, land A is
making a differential rent of 100.
If
laborer A earns 50 gold ounces a month, and laborer B earns 30 gold
ounces, A earns a “rent of ability” of 20 ounces.
On the contrary, rents are absolute and do not depend on the existence
of a poorer factor of the same general category. The
“differential” basis of rent is purely dependent
on, and derived from, absolute rents. It is simply a question of
arithmetical subtraction. Thus, land A may earn a rent of 100,
and land B a rent of zero. Obviously, the difference between 100 and
zero is 100. In the case of the laborer, however, laborer A’s
“rent,” i.e., wage, is 50 and B’s is 30.
If we want to compare the two earnings, we may say that A earns 20 more
than B. There is little point, however, in adding to confusion
by using “rent” in this sense.
The “differential rent” concept has also been used
to contrast earnings by a factor in one use with those of the same
factor in another use. Thus, if a factor, whether land or labor, earns
50 ounces per month in one use and would have
earned 40 ounces in some other use, then its “rent”
is 10 ounces. Here, “differential rent” is
used to mean the difference between the actual DMVP and the opportunity
forgone or the DMVP in the next best use. It is sometimes believed that
the 10-ounce differential is in some way not
“really” a part of costs to entrepreneurs, that it
is surplus or even “unearned” rent acquired by the
factor. It is generally admitted that it is not without cost to individual
firms, which have bid the factor up to its MVP of 50. It is
supposed, however, to be without cost from the
“industry point of view.” But there is no
industry “point of view.” Not
“industries,” but firms, buy
and sell and seek profits.
In fact, the entire discussion concerning whether or not rent is
“costless” or enters into cost is valueless. It
belongs to the old classical controversies about whether rents are
“price-determined” or
“price-determining.” The view that any
costs can be price-determining is a product of the old
cost-of-production theory of value and prices. We have seen that costs
do not determine prices, but vice versa. Or more
accurately, prices of consumers’ goods, through market
processes, determine the prices of productive factors (ultimately land
and labor factors), and the brunt of price changes is borne by specific
factors in the various fields.
B.
The Nature of Labor
As we have mentioned earlier, “labor” is a category
that includes a myriad variety of services. Generally, labor is the
expenditure of pure human energy on a production process.
Catallactically, labor is hired by entrepreneur-capitalists.
It is grossly unscientific
to separate laborers into arbitrary categories and to refer to one
group as “labor” and “workers,”
while the other group receives various other names. To give them other
names implies a difference in kind between their
contribution and the contribution of others, but this
difference does not exist. Thus, the popular custom is to call some
hired labor, “labor,” while others are called
“managers,” “executives,” etc.
“Management” is a particularly popular category as
contrasted with “labor,” and we hear a great deal
of the term “labor-management relations.” But these
categories are valueless. “Management” is hired by
the owners or owner to direct production; managers are supposed to obey
the orders of their superiors—something they consent to do as
part of the terms of their employment. The lower-quality workers,
further down the scale—the
“laborers”—are treated by these writers
as a different breed.
Their function is supposed
to be not to obey orders and engage in a production process, but in
some way to be different—to act as an independent entity,
asserting its “rights,” quarreling with
“management,” etc.
Yet there is no difference in kind between
“workers” and
“management.” The vice president of a
company, if hired by its owners, has exactly the same amount of
justification, or lack of justification, for joining a union
as does a hired mechanic. Both are supposed to abide by the
terms of their employment, i.e., to obey the relevant orders of their
superiors. Both are free at any time to haggle over the terms of their
employment, just as in any other voluntary exchange on the market. Both
are laborers, who expend human energy in the
production of goods. No special quality attaches to one set of laborers
or another that makes it more or less justifiable for them to join a
union.
The union question will be explored below, in chapter 10 on Monopoly
and Competition. Here we might note that this false
“labor-management” dichotomy crops up in an
interesting way in the struggle over foremen’s unions.
For some reason, even the
most ardent union advocate thinks absurd the idea of
unionizing the vice presidents. Those more critical of unions
think it monstrous if unions attempt to organize foremen, who are in
the lower echelons of “management,” and would of
course be horrified at the very thought of unionizing vice presidents.
Yet if there is no real dichotomy and all employees are labor, then our
views on unions must be altered accordingly. For if everyone admits
that the unionizing of vice presidents is absurd or evil, then perhaps
the same adjective would have to apply to the unionization of any
workers.
C.
Supply of Land
We have seen throughout that the processes of price
determination for the unit services of land and labor are
exactly the same. Both sets of factors tend to earn their MVP; both
receive advances of present money from capitalist-entrepreneurs; etc.
The analysis of the pricing of unit services of original or
“permanent” factors applies equally to each. There
are three basic differences between the conditions of land and those of
labor, however, that make separation of the two important. One we have
already dealt with in detail: that (in the free economy) land can be
capitalized in its price as a “whole factor” and
therefore earns simply interest and entrepreneurial changes in asset
value; while labor cannot be capitalized. A second difference we have
been considering—the empirical fact that labor has been more
scarce than land factors. A corollary of this is that labor is
pre-eminently the nonspecific factor, which is applicable to all
processes of production, whereas land tends to be far more specific. A
third difference derives from the fact that laborers are human beings
and—also an empirical fact—that leisure is always a
consumers’ good. As a result, there will be reserve prices
for labor against leisure, whereas land—in the broadest
sense—will not have a reserve price. We shall deal with the
effects of this distinction presently.
The fact that labor is scarcer and nonspecific means that there will
always be unused land. Only the best and most
productive land will be used, i.e., the land with the highest DMVPs.
Similarly, in the real world of uncertainty, where errors are
made, there will also be unused capital goods,
i.e., in places where malinvestments had been made which
turned out to be unprofitable.
We may now trace the supply and demand curves for land factors. We have
shown above that, for any factor, the particular
demand curve for any use, i.e., the particular MVP curve for a factor
in that use, will slope downward in the region in which the factor is
working. Also, we have seen that the general demand
curve for the factor in the range of all its uses will slope
downward. What of the supply curves for
land factors? If we take the general supply curve
(the factor considered in relation to all of its uses), then it is
clear that there is no reservation demand curve for land; at least this
will be true in the ERE. The particular supply
curves for each use will depend on the alternate uses a piece of land
may have. If it has any alternative uses, its supply curve for each use
will slope upward as its price increases, since it can be shifted from
one use to another as a use yields a higher rental return.
In its particular uses, the landowner will have a
reservation demand, since he may obtain a higher return by shifting to
another use. The greater the extent of alternate uses, the flatter each
particular supply curve will tend to be.
In Figure 62, the left-hand diagram depicts the supply and demand
curves for the general use of a land factor, including all uses. The
supply curve will be the stock—a vertical straight line. The
right-hand diagram below depicts typical demand and supply
curves for a particular use; here, the supply curve slopes upward
because it can shift to and from the alternative use or uses. The
intersection of the supply and demand curves, in each
instance, yields the rental price, equaling the discounted marginal
value product for the total quantity of the factor available. The price
for the general uses, 0C, will be the same as the
prices 0E, etc., for any particular use, since the
price of the factor must, in equilibrium, be the same in all uses. The general
diagram also yields the total quantity that will be sold for rent, 0S1,
which will equal the total supply of the land factor available. The sum
of the equilibrium quantities (such as EB
on the diagram) supplied for particular uses would equal the
total supplied for all uses, 0S1.
We have seen that the prices of consumers’ goods are set by
consumers’ demand schedules, as determined by their
value scales, i.e., by the way that the quantity supplied by producers
(the first-rank capitalists) will be valued by consumers. When, in the
changing economy, producers have speculative reservation
demands, the price will, at any moment, be set by the total
demand for the given stock, and this will always tend to approach the
true consumers’ demand price. A similar situation obtains in
land. The prices of land factors will be determined by the general
schedule of the factors’ DMVPs and will be set according to
the point of intersection of the total quantity, or stock, of the
factor available, with its discounted marginal value productivity
schedule. The DMVP, in turn, is, as we have seen at length,
determined by the extent to which this factor serves the
consumers. The MVP is determined directly by the degree that a factor
unit serves the consumers, and the discount is determined by the
extent that consumers choose saving-investment as against
present consumption. Therefore, the value scales of the
consumers determine, given the stocks of original
factors, all the various results of the market economy that need to be
explained: the prices of the original factors, the allocation of
original factors, the incomes to original factors, the rate of time
preferences and interest, the length of the production processes in
use, and the amounts and types of the final products. In our changing
real world, this beautiful and orderly structure of the free
market economy tends to be attained through the drive of the
entrepreneurs toward making profit and avoiding loss.
At this point, let us consider a great bugaboo of the Henry
Georgists—speculation in land that withholds productive land
from use. According to the Georgists, a whole host of economic evils,
including the depressions of the business cycle, stem from speculative
withholding of ground land from use, causing an artificial scarcity and
high rents for the sites in use. We have seen above that speculation in
consumers’ goods (and the same will also apply to capital
goods) performs the highly useful function of speeding
adjustment to the best satisfaction of consumer demand. Yet, curiously,
speculation in land is far less likely to occur and
is far less important than in the case of any other economic
good. For consumers’ or capital goods, being
nonpermanent, can be used either now or at some later date.
There is a choice between use in the present or use
at various times in the future. If the owner of the good estimates that
demand for the good will be higher in the future and therefore its
price will be greater, he will, provided that the length of waiting
time is not too costly in terms of time preference and storage, keep
the goods on hand (in inventory) until that date. This serves the
consumers by shifting the good from use at present to a more highly
valued use in the future.
Land, however, is a permanent resource, as we have seen. It can be used
all the time, both in the present and
in the future. Therefore, any withholding of land from use by the owner
is simply silly; it means merely that he is refusing monetary rents
unnecessarily. The fact that a landowner may anticipate that his land
value will increase (because of increases in future rents) in a few
years furnishes no reason whatever for the owner to refuse to acquire
rents in the meanwhile. Therefore, a site will remain unused simply
because it would earn zero rent in production. In many cases,
however, a land site, once committed to a certain line of production,
could not easily or without substantial cost be shifted to
another line. Where the landowner anticipates that a better line of use
will soon become available or is in doubt on the best commitment for
the land, he will withhold the land site from use if his
saving in “change-over cost” will be greater than
his opportunity cost of waiting and of forgoing presently obtainable
rents. The speculative site-owner is, then, performing a great service
to consumers and to the market in not committing the land to a poorer
productive use. By waiting to place the land in a superior productive
use, he is allocating the land to the uses most desired by the
consumers.
What probably confuses the Georgists is the fact that many sites lie
unused and yet command a capital price on the market. The capital price
of the site might even increase while the site
continues to remain idle. This does not mean, however, that some sort
of villainy is afoot. It simply means that no rents on the site are
expected for the first few years, although it will earn positive rents
thereafter. The capital value of ground land, as we have seen, sums up
the discounted total of all future rents, and these rental sums may
exert a tangible influence from a considerable distance in the future,
depending on the rate of interest. There is therefore no mystery in the
fact of a capital value for an idle site, or in its rise. The site is
not being villainously withheld from production.
Let us now consider the effect of a change in the supply of a land
factor. Suppose that there is an increase in the supply of land in
general, the supply of labor and savings remaining constant.
If the new land is submarginal in relation to land presently in use, it
is obvious that the new land will not be used, but will, instead, join
its fellow submarginal land sites in idleness. If, on the other hand,
the new land is superior, and therefore would earn a positive rent, it
comes into use. There has been, however, no increase in labor or
capital, so that it will not be profitable for these factors to be
employed on a greater total amount of land than before. The new
productive land, competing with the older land, will therefore push the
previously just-marginal land into the submarginal category. Labor will
always employ capital on the best land, and so the new acquisition of
supramarginal land will oust the previously marginal land from
production. Since the new land is more value-productive than the old
marginal land which it replaces, the change increases the
total output of goods in the society.
D.
Supply of Labor
In the case of a labor factor, the particular demand curve for its use
will slope downward, and the particular supply curve of a labor factor
for a specific use will slope upward to the right. In fact, since labor
is the relatively nonspecific factor, the particular supply
curve of a labor factor is likely to be flatter than the supply curve
of the (usually more specific) land factor. Thus, the particular
supply and demand curves for a labor factor may be as represented in
Figure 63.
The general demand curve for a labor factor will also slope downward in
the relevant area. One of the complications in the analysis of labor is
the alleged occurrence of a “backward supply curve of
labor.” This happens when workers react to higher wage rates
by reducing their supply of labor hours, thus taking some of their
higher incomes as increased leisure. This may very well occur, but it
will not be relevant to the determination of the wages of a factor. In
the first place, we saw that particular supply curves of a factor will
be flat because of the competition of alternative uses. But
even the general supply curve of a factor will be
“forward-sloping,” i.e., rightward-sloping. For
labor, though hardly homogeneous, is a peculiarly nonspecific factor.
Therefore, higher wage rates for one set of factors will tend to
stimulate other laborers to train themselves or bestir themselves to
enter this particular “market.” Since skills
differ, this does not mean that all wages will be equalized. It does
mean, however, that general supply curves
for a labor factor will also be forward-sloping. We might arrange an
array of general supply and demand curves for various labor factors as
in Figure 64.
The only case in which a backward supply curve may occur is for the
total supply of all labor factors, and here the
elements are so imprecise, since these factors are not homogeneous,
that diagrams are of little avail in analysis. Yet this is an important
question. As wage rates in general rise, in all their connexity
between various specific labor markets, the supply of all
labor (i.e., the quantity of labor-hours) can either increase or
decrease, depending on the value scales of the individuals
concerned. Rising wages may draw nonworking people into the labor force
and induce people to work overtime or to obtain an extra part-time job.
On the other hand, it may lead to increased leisure and a falling off
in total hours worked. Rising wages may lead to population growth,
swelling the total supply of labor “in general,” or
may lead to a cutback in population and the taking of some of the gains
of increased wages in the form of increased leisure and an increased
standard of living per person in the population.
Changes in the total
supply or stock of labor-in-general will affect the particular
markets by shifting all the specific schedules to the left if the stock
decreases, or to the right if it increases.
A backward supply curve might conceivably take place for a land factor
as well, when the owner has a high reserve demand for the land in order
to enjoy its unused (in the catallactic sense) beauty. In that case,
the land would have an increasing marginal disutility of visual
enjoyment forgone, just as leisure is forgone in the process of
expending labor. In the case of land, since there is not as great a
connexity between land factors as there is between nonspecific labor
factors, this circumstance will, in fact, impinge more directly on the
market rental price. It may be revealed in a backward general supply
curve for the land factor. Higher rental prices
offered for his land will then induce the landowner to withhold more of
it, taking the higher income partially in nonexchangeable
consumption goods as well as in more money received. These
cases may be rare in practice, but only because of the freely chosen
values of the individuals themselves.
Thus, there is no reason for the would-be preserver of a
monument or of a park to complain about the way the market
treats his treasured objects. In the free society, these
conservationists are at perfect liberty to purchase the sites and
preserve them intact. They would, in effect, be deriving
consumption services from such acts of preservation.
To return to labor, we have mentioned another component in wage rates.
This is the psychic income, or psychic disutility,
involved in any particular line of work. People, in other
words, are often attracted to a certain line of work or to a specific
job by other considerations than the monetary income. There may be
positive psychic benefits and satisfactions derived from the
particular type of work or from the particular firm employing
the worker. Similarly, psychic disutilities may be attached to
particular jobs.
These psychic elements will enter into the curves for particular uses.
In order to isolate such elements, let us suppose for the moment that
all laborers are equally value-productive, that labor is a homogeneous
factor. In such a world, all wage rates in all occupations would be
equal. All industries need not be equally value-productive for this
result to occur. For as a result of the connexity of labor, i.e., its
nonspecificity, laborers can enter wide ranges of occupations. If we
assume, as we do for the moment, that all laborers are equally
value-productive, then they will enter a high-wage industry to push the
particular supply curve of labor in that industry downward, while
quitting workers raise the supply curve of labor in the low-wage
industry.
This conclusion follows from the general tendency toward the uniformity
of the price of any good on the market. If all labor were
homogeneous and therefore one factor, its price (wage rate) would be
uniform throughout industry, just as the pure interest rate tends to be
uniform.
Now let us relax one of the conditions of our hypothetical
construct.
While retaining the
assumption of equal productivity of all laborers, let us now introduce
the possibility of psychic benefits or psychic disutilities accruing to
workers at particular jobs. Some jobs are actively liked by most
people, others actively disliked. These jobs may be common to certain
industries or, more narrowly, to individual firms which may be
considered particularly pleasant or unpleasant to work for. What will
happen to money wage rates and to the supply of labor in the various
occupations? It is obvious that, in the generally disliked
occupation or firm, higher money wage
rates will be necessary to attract and hold labor in that job. On the
other hand, there will be so much labor competing in the generally
liked jobs that they will pay lower wage rates. In
other words, our amended conclusion is that not money
wage rates, but psychic wage rates, will be
equalized throughout—psychic wage rates being equal
to money wage rates plus or minus a psychic benefit or psychic
disutility component.
Many economists have assumed, implicitly or explicitly, an essential
homogeneity among laborers. And they have made this assumption not, as
we have done, as a purely temporary construct, but as an attempt to
describe the real world. The question is an empirical one. It is a
fundamental, empirically derived postulate of this book that
there is a great variety among men in labor skills, in insight into
future events, in ability, intelligence, etc. It seems empirically
clear that this is the case.
The denials seem to be
based on the simple faith that all men are “really”
equal in all respects or could be made equal under proper
conditions. Generally, the assumptions of uniformity and
equality are made implicitly rather than explicitly, perhaps because
the absurdities and obvious errors of the position would then become
clear. For who would deny that not everyone could be an opera singer or
a batting champion?
Some writers try to salvage the uniformity assumption by
demonstrating that differences in wages occur solely because
of the heavy cost of training for certain jobs.
Thus, a doctor will earn more than a clerk because, in the nature of
the task, a doctor will have to undergo the expenses of years of
training (the expenses including actual money costs as well as
opportunity costs forgone of earning money in such jobs as clerking).
Therefore, in long-run equilibrium, money wage rates will not be
uniform in the two fields, but income rates will be enough higher in
medicine to just compensate for the loss, so that the net
wage or income rates, considered over the person’s lifetime,
will be the same.
It is true that costs of training do enter in this way into market wage
rates. But they do not account for all wage differentials by any means.
Inherent differences in personal ability are also vital. Decades of
training will not convert the average person into an opera star or a
baseball champion.
Many writers have based their analyses on the assumption of the
homogeneity of all workers. Consequently, when they find that generally
well-liked jobs, such as television-directing, pay more than such
disliked jobs as ditch-digging, they tend to assume that there is
injustice and chicanery afoot. A recognition of differences in
labor productivity, however, eliminates this bugbear.
In such cases, a psychic
component still exists that relatively lowers the wage of the
better-liked job, but it is offset by the higher marginal value
productivity and skill attached to the latter. Since TV-directing takes
more skill than ditch-digging, or rather skill that fewer people have,
the wage rates in the two occupations cannot be equalized.
Net rents
equal gross rents earned minus gross rents paid to
owners of factors.
Its capital value will be
positive, however, if people expect the land to
earn rents in the near future.
As Frank Fetter stated in
“The Passing of the Old Rent Concept,” Quarterly
Journal of Economics, May, 1901:
The
last unit of product of any finite amount would . . . have to pay its
corresponding rent. The only product obtained, in the strict theory of
the case, without paying rent, would be one unit infinitesimally
small—in plain Anglo-Saxon, would be nothing at all. No
finite unit of product can be shown to be a no-rent unit. (p. 489)
The terms
“marginal,” “supramarginal,”
etc., are rather differently used here from the way they are used
above. Instead of dealing with the supply and demand for a homogeneous
good or factor, we are here referring to one class
of factors, such as lands, and comparing different qualities
of the various factors in that class. The near-zero-earning land is
“marginal” because it is the one just barely put to
use.
Here we shift the definition of
progressing economy to mean increasing capital per person,
so that we can contrast the effects of changes in the supply of one
type of factor to changes in the supply of another.
There is, of course, no reason to
assume that maximum real income per head is necessarily the best
ethical ideal; for some, the ideal might be maximum real income plus
maximum population. In a free society, parents are free to choose their
own ethical principles in the matter.
Economics can say little else
about population and its size. The inclusion of a corpus of
“population theory” under economics instead of
biology or psychology is the unfortunate result of the historical
accident that the early economists were the first to delve into
demographic problems.
The Lausanne way (of Walras and
Pareto) of phrasing this distinction would be to say that, in the
former case (when we are moving along the curve), we implicitly assumed
that “(the supply of) tastes, techniques, and resources
remains given in the economy.” In the present case, we are
considering a change in a resource (e.g., an increase in the supply of
labor). We would amend this to say that only tastes
and resources were considered given. As we saw in the previous section,
techniques are not immediate determinants of production changes. The
techniques must be put to use via saving and investment. In fact, we
may deal with tastes and resources alone, provided
that we include time preferences among the “tastes.”
When an owner performs, and earns
a return for, an essentially labor activity which he could also
perform as an employee (e.g., the owner-manager), that return
is an implicit wage. On definitions of “labor,” see
Spencer Heath, Citadel, Market, and Altar
(Baltimore: Science of Society Foundation, 1957), pp.
235–36.
When we use the term
“quality” here and in other parts of catallactic
analysis, we are not employing it in some metaphysical sense or from
some “higher” ethical point of view. We mean
quality as expressed by choice of the market, in
the form of a higher MVP and therefore a higher wage.
For an example of an interesting
work on bargaining with unions based squarely on the false
labor-management dichotomy, see Lee H. Hill and
Charles R. Hook, Jr., Management at the Bargaining Table
(New York: McGraw-Hill, 1945). On foremen’s unions, see
Theodore R. Iserman, Industrial Peace and the Wagner Act
(New York: McGraw-Hill, 1947), pp. 49–58.
This “rule” by
consumers’ valuations holds in so far as entrepreneurs and
owners of factors aim at maximum money income. To the extent that they
abstain from higher money income to pursue nonmonetary ends
(e.g., looking at one’s untilled land or enjoying leisure),
the producers’ own valuations will be determining. From the
general praxeological point of view, these producers are to that extent
acting as consumers. Therefore, the full rule of
consumers’ value scales would hold even here. However, for
purposes of catallactic market analysis, it may be convenient to
separate man as a producer from man as a consumer, even though,
considered in his entirety, the same man performs both
functions. In that event, we may say that to the extent that
nonmonetary goals enter, not consumers’ values are
determining, but the values of all individuals in
society. For further discussion of this question and of
“consumer sovereignty,” see chapter 10 below.
In the free society, as we have
indicated above, the site could not originally become the
property of anyone until it had been “used” in some
way, such as being cleared, cultivated, etc. There need be no
subsequent use, however, until rents can be obtained.
There will be such a backward
supply curve if the marginal utility of money falls rapidly enough and
the marginal disutility of leisure forgone rises rapidly enough as
units of labor are sold for higher prices in money.
It will be noted that we
have avoided using the very fashionable term
“model” to apply to the analyses in this book. The
term “model” is an example of an unfortunate bias
in favor of the methodology of physics and engineering, as applied to
the sciences of human action. The constructs are imaginary
because their various elements never coexist in reality; yet they are
necessary in order to draw out, by deductive reasoning and ceteris
paribus assumptions, the tendencies and causal relations of
the real world. The “model” of engineering, on the
other hand, is a mechanical construction in miniature, all
parts of which can and must coexist in reality. The
engineering model portrays in itself all the elements and the relations
among them that will coexist in reality. For this distinction between
an imaginary construct and a model, the writer is indebted to Professor
Ludwig von Mises.
For some philosophical discussions
of human variation, see Harper, Liberty,
pp. 61–83, 135–41; Roger J. Williams, Free
and Unequal (Austin: University of Texas Press,
1953); George Harris, Inequality and Progress
(Boston: Houghton Mifflin, 1898); Herbert Spencer, Social
Statics (New York: D. Appleton & Co., 1890), pp.
474–82; A.H. Hobbs, The Claims of Sociology
(Harrisburg, Pa.: The Stackpole Co., 1951), pp. 23–64; and
Hobbs, Social Problems and Scientism (Harrisburg,
Pa.: The Stackpole Co., 1953), pp. 254–304.
Cf. Van Sickle and Rogge, Introduction
to Economics, pp. 178–81.
For a treatment of wage rates and
geography, see the section below on “The Economics of
Location and Spatial Relations.”
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