a. Explanation of Wages and
Rent
Differences in the desirableness of land divide Wealth
into the two funds, Wages and Rent. Labor naturally
applies its forces to that land from which, considering
all the existing and known circumstances, most Wealth can
be produced with least expenditure of labor force. Such
land is the best. So long as the best land exceeds demand
for it, laborers are upon an equality of opportunity, and
the entire product goes to them as Wages in proportion to
the labor force they respectively expend. But when the
supply of the best land falls below demand for it, some
laborers must resort to land where with an equal
expenditure of labor force they produce less wealth than
those who use the best land. The laborers thus excluded
from the best land naturally offer a premium for it, or
what is the same thing, offer to work for its owners for
what they might obtain by working for themselves upon the
poorer land. This condition differentiates Rent from
Wages. Rent goes to land-owners as such, irrespective of
whether they labor or not; Wages go to laborers as such,
irrespective of whether they own land or not.85
85. Land of every kind may vary in
desirableness from other land of the same kind. Certain
farming land, for example, is so fertile that it will
yield to a given application of labor two bushels of
wheat to every bushel that certain other farming land
will yield; and it is obvious that, other things being
equal, farmers would prefer the more fertile land. But
some fertile land lies so far away from market that
less fertile land lying nearer is more productive,
because it costs less to exchange its products for what
their producer demands; in such cases farmers would
prefer the less fertile land. The same principle
applies to all kinds of land. Building lots at or near
a center of residence or business are preferable for
most purposes of residence or business to lots equally
good in other respects which are far away.
Now, the land that is preferable is of
course most in demand; and if it be all in use, with
demand for it unsatisfied, competition for the
preference sets in, and gives value to it.
All land cannot be equally desirable.
Some excels in fertility. Some is rich with mineral
deposits, a species of fertility. On some, towns and
cities settle, thereby adding to the productiveness of
the labor that uses it, because these sites are thus
made centers of co-operation or trade. And yet
production in the civilized state requires that the
producer shall have exclusive possession of the land
lie needs. This necessity inevitably gives to some
people more desirable land than others have, even
though all should have an abundance. Consequently the
returns to equal labor are unequal. The man who has
land that is more fertile or better located than that
of another gets more wealth than the other in return
for a given expenditure of labor. If, for example, one
with given labor produces 10 bushels of corn from
fertile land, equal, say, to $5 worth of any kind of
wealth in the market, and the other with the same labor
produces 8 bushels of corn, or $4 worth of any kind of
wealth in the market, the first receives 2 bushels (or
$1) more for his labor than the other receives for his,
though each labors with equal effort, skill, and
intelligence. Or, if the fertility of the land be the
same, but its situation in reference to the market be
such that the cost of transportation still preserves
the relation of $5 to $4, the same inequality of wages
results. It is this phenomenon that gives rise to Rent.
Rent is the market value of just such differences in
opportunity as are here illustrated. It is a premium
for choice land, for preferential locations, for site,
for space.
This premium is a very different thing
from compensation for labor. Nor is the difference
modified when premium owners first obtain Wages for
work and with them buy the premium-commanding land.
Rent can no more be turned into compensation for labor
by exchanging labor products for the power to exact it,
than a man can be turned into Wealth by exchanging
Wealth for him. Whether the fruits of purchase or of
conquest, or of fraud, Rent always constitutes that
part of Wealth which is deducted from current
production as premiums for superior opportunities for
production.
Wages and Rent are both drawn from
Wealth, and both go often to the same individual and in
the same form of payment, as when a freehold farmer
enjoys the use of the grain he raises from more fertile
land than his neighbors have, or a city freeholder
occupies or receives hire from his house and lot: but
Wages flow from Wealth to labor as compensation for
production, while Rent flows from Wealth to land-owners
in premiums for allowing labor to produce Wealth from
superior locations. Wages are appurtenant to Labor;
Rent is appurtenant to Land. It is as laborer that the
individual takes Wages, but as land-owner that he takes
Rent.
To illustrate: On the following page are four closed
spaces representing land which varies in productiveness
to a given expenditure of labor force, 86 from 4 down to
1. There is also an open space at the right, representing
land that is yet so poor as to yield nothing to the given
expenditure of labor force. Thus: [chart]
86. A unit of labor cannot be definitely
measured save by the value of some labor product. The
day's labor of one man may produce less than an hour's
labor of another. But for purposes of illustration it
is competent to refer to a unit of labor force as an
abstraction, intending thereby to denote all the labor
of muscle and brain requisite to acquire the necessary
knowledge and skill and to produce wealth to a given
value from given natural sources.
For simplicity let the market be equally convenient to
each space. Let it be assumed also that one space is as
accessible to labor as another, and that the differences
in their productiveness are known. Now, to which space
would labor first resort? Obviously to that which would
yield most Wealth to the given expenditure of labor force
— the space to the extreme left.
Suppose, then, that labor appropriates only as much of
the best space as is required for use — say half of
it. We may note the fact with red color upon the
chart:
Here we see that Wages are 4 and Rent 0. The laborers,
as such, take the entire product, dividing it among
themselves in proportion to their services. There is no
Rent because other laborers find equally good
opportunities to produce in the uncolored part of the
space; the supply of the best land exceeds the demand for
it, and of course it commands no premium.87
87. "No land ever pays rent unless in
point of fertility or situation it belongs to those
superior kinds which exist in less quantity than the
demand." — Mill's Prin., book ii, ch. xvi, sec.
2.
"The produce of labor constitutes the
natural recompense or wages of labor. In that original
state of things, which precedes both the appropriation
of land and the accumulation of stock, the whole
produce of labor belongs to the laborer." —
Smith's Wealth of Nations, book i, ch. viii.
"Rent or land value does not arise from
the productiveness or utility of land. It in no wise
represents any help or advantage given to production,
but simply the power of securing a part of the results
of production. No matter what are its capabilities,
land can yield no rent and have no value until some one
is willing to give labor or the results of labor for
the privilege of using it; and what any one will thus
give, depends not upon the capacity of the land, but
upon its capacity as compared with that of land that
can be had for nothing. I may have very rich land, but
it will yield no rent and have no value so long as
there is other land as good to be had without cost. But
when this other land is appropriated, and the best land
to be had for nothing is inferior, either in fertility,
situation, or other quality, my land will begin to have
a value and yield rent. And though the productiveness
of my land may decrease, yet if the productiveness of
the land to be had without charge decreases in greater
proportion, the rent I can get, and consequently the
value of my land, will steadily increase. Rent, in
short, is the price of monopoly, arising from the
reduction to individual ownership of natural elements
which human exertion can neither produce nor increase."
— Progress and Poverty, book iii, ch. ii.
But if demand for land should continue until the best
space was monopolized, 88 and some laborers were forced
to resort to the next, the best space would command a
premium; 89 Rent would rise and Wages would fall. Even
though but few laborers were forced to the poorer space,
they would be perpetual bidders for the advantages of the
other space. The effect may be illustrated by indicating
with red in our chart the overflow of labor from the
first into the second space: [chart]
88. "Rent is the effect of a monopoly;
though the monopoly is a natural one, which may be
regulated, which may even be held as a trust for the
community generally, but which cannot be prevented from
existing. . . If all the land of the country belonged
to one person he could fix the rent at his pleasure. .
. The effect would be much the same if the land
belonged to so few people that they could and did act
together as one man and the rent by agreement among
themselves . . . The only remaining supposition is that
of free competition. — Mill's Prin., book ii, ch.
xvi, sec. I.
Rent "considered as the price paid for
the use of the land is naturally a monopoly price."
— Smith's Wealth of Nations, book o, ch. xi.
89. The line of separation between the
poorest land thus commanding a premium, and the best
land for which labor will not pay a premium, was
formerly called "the margin of cultivation," probably
because the law of rent was not understood with
reference to any but agricultural land; but it is now
more generally called "the margin of production," since
it is understood that the law of rent applies to all
kinds of land, including, of course, the building lots
of cities.
The premium for land falls not into the
fund termed Wages, but into the fund termed Rent.
Henceforth Wages consist not of the entire product of
labor, but of so much of that product as might with the
same expenditure of labor force be produced from the
best land that commands no premium. The remainder goes
to the owners of the land from which it is in fact
produced, in proportion to the advantages which their
land respectively contributes to its production. This
excess is the premium. It is what constitutes Rent as
distinguished from Wages. And both the amount of the
general fund Rent, and the amount of rent which each
land-owner obtains, are determined by the competition
of labor for superior opportunities.
Thus, in the beginnings all Wealth would
be Wages; but as labor was forced from better to poorer
lands, or, what is the same thing in its principle of
operation, as greater capabilities attached to
particular lands in consequence of social development,
good government, industrial improvement, etc. Rent
would arise, and as a proportion of the gross
Wealth-product, would increase as labor was forced to
poorer land or new capabilities were added to land by
society. The law derived from these phenomena is known
as Ricardo's law of rent. Henry George formulates it as
follows:
"The rent of land is determined by the
excess of its produce over that which the same
application can secure from the least productive land
in use." — Progress and Poverty, book iii, ch.
ii.
As will be noticed, the law is the law of
Wages as well as the law of Rent. For whatever
determines the proportion of Wealth to be taken as Rent
necessarily determines the proportion to be left as
Wages.
b. Normal Effect of Social Progress upon
Wages and Rent
In the foregoing charts the effect of social growth is
ignored, it being assumed that the given expenditure of
labor force does not become more productive.93 Let us now
try to illustrate that effect, upon the supposition that
social growth increases the productive power of the given
expenditure of labor force as applied to the first closed
space, to 100; as applied to the second, to 50; as
applied to the third, to 10; as applied to the fourth, to
3, and as applied to the open space, to 1. 94 If there
were no increased demand for land the chart would then be
like this: [chart]
93. "The effect of increasing population
upon the distribution of wealth is to increase rent ..
. in two ways: First, By lowering the margin of
cultivation. Second, By bringing out in land special
capabilities otherwise latent, and by attaching special
capabilities to particular lands.
"I am disposed to think that the latter
mode, to which little attention has been given by
political economists, is really the more important."
— Progress and Poverty, book iv, ch. iii.
"When we have inquired what it is that
marks off land from those material things which we
regard as products of the land, we shall find that the
fundamental attribute of land is its extension. The
right to use a piece of land gives command over a
certain space — a certain part of the earth's
surface. The area of the earth is fixed; the geometric
relations in which any particular part of it stands to
other parts are fixed. Man has no control over them;
they are wholly unaffected by demand; they have no cost
of production; there is no supply price at which they
can be produced.
"The use of a certain area of the earth's
surface is a primary condition of anything that man can
do; it gives him room for his own actions, with the
enjoyment of the heat and the light, the air and the
rain which nature assigns to that area; and it
determines his distance from, and in great measure his
relations to, other things and other persons. We shall
find that it is this property of land, which, though as
yet insufficient prominence has been given to it, is
the ultimate cause of the distinction which all writers
are compelled to make between land and other things."
— Marshall's Prin., book iv, ch. ii, sec. i.
94. Of course social growth does not go
on in this regular way; the charts are merely
illustrative. They are intended to illustrate the
universal fact that as any land becomes a center of
trade or other social relationship its value rises.
Though Rent is now increased, so are Wages. Both
benefit by social growth. But if we consider the fact
that increase in the productive power of labor increases
demand for land we shall see that the tendency of Wages
(as a proportion of product if not as an absolute
quantity) is downward, while that of Rent is upward. 95
And this conclusion is confirmed by observation. 96
95. "Perhaps it may be well to remind the
reader, before closing this chapter, of what has been
before stated — that I am using the word wages
not in the sense of a quantity, but in the sense of a
proportion. When I say that wages fall as rent rises, I
do not mean that the quantity of wealth obtained by
laborers as wages is necessarily less, but that the
proportion which it bears to the whole produce is
necessarily less. The proportion may diminish while the
quantity remains the same or increases." —
Progress and Poverty, book iii, ch. vi.
96. The condition illustrated in the last
chart would be the result of social growth if all land
but that which was in full use were common land. The
discovery of mines, the development of cities and
towns, and the construction of railroads, the
irrigation of and places, improvements in government,
all the infinite conveniences and laborsaving devices
that civilization generates, would tend to abolish
poverty by increasing the compensation of labor, and
making it impossible for any man to be in involuntary
idleness, or underpaid, so long as mankind was in want.
If demand for land increased, Wages would tend to fall
as the demand brought lower grades of land into use;
but they would at the same time tend to rise as social
growth added new capabilities to the lower grades. And
it is altogether probable that, while progress would
lower Wages as a proportion of total product, it would
increase them as an absolute quantity.
... read the
book