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7. Production: General Pricing of the Factors

3. The Source of Factor Incomes

Our analysis permits us now to resolve that time-honored controversy in economics: Which is the source of wages—capital or consumption? Or, as we should rephrase it, which is the source of original-factor incomes (for labor and land factors)? It is clear that the ultimate goal of the investment of capital is future consumption. In that sense, consumption is the necessary requisite without which there would be no capital. Furthermore, for each particular good, consumption dictates, through market demands, the prices of the various products and the shifting of (nonspecific) factors from one process to another. However, consumption by itself provides nothing. Savings and investment are needed in order to permit any consumption at all, since very little consumption could be obtained with no production processes or capital structure at all—perhaps only the direct picking of berries.10

In so far as labor or land factors produce and sell consumers’ goods immediately, no capital is required for their payment. They are paid directly by consumption. This was true for Crusoe's berry-picking. It is also true in a highly capitalistic economy for labor (and land) in the final stages of the production process. In these final stages, which include pure labor incomes earned in the sale of personal services (of doctors, artists, lawyers, etc.) to consumers, the factors earn MVP directly without being discounted in advance. All the other labor and land factors participating in the production process are paid by saved capital in advance of the produced and consumed product.

We must conclude that in the dispute between the classical theory that wages are paid out of capital and the theory of Henry George, J.B. Clark, and others that wages are paid out of the annual product consumed, the former theory is correct in the overwhelming majority of cases, and that this majority becomes more preponderant the greater the stock of capital in the society.11

  • 10. See Wicksell, Lectures on Political Economy, I, 108.
  • 11. See the excellent analysis in ibid., pp. 189–91, 193–95.