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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.[1] 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.[2] 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.[3] 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.[4]

     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.[5] 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.[6]

     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.[7]

     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.[8]

     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.[9] 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.[10] 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.[11] 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.[12]

     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.[13]

     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.[14] 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.[15] 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.[16] 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.[17]

     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.[18] 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.



[1]Net rents equal gross rents earned minus gross rents paid to owners of factors.

[2]Its capital value will be positive, however, if people expect the land to earn rents in the near future.

[3] 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)

[4]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.

[5]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.

[6]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.

[7]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.

[8]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.”

[9]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.

[10]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.

[11]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.

[12]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.

[13]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.

[14]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.

[15] 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.

[16]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.

[17]Cf. Van Sickle and Rogge, Introduction to Economics, pp. 178–81.

[18]For a treatment of wage rates and geography, see the section below on “The Economics of Location and Spatial Relations.”

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