Essentials of Economic Theory Part 7

_The Importance of the Residuum._--The above reasoning does not satisfactorily show what influence the capitalist can use to make the _entrepreneur_ pay over to him the entire amount of the residuum. It shows that after paying wages the _entrepreneur_ will have a certain amount left, but it is not thus far clear how the capitalist can get it from him. The fact that the laborers get only the amount represented by _ABDE_ and that the whole amount is _ACDE_ does, however, at least show that the _entrepreneur_ has the amount _BCD_ left in his hands, and that he is _able_ to pay this amount to the capitalist if by any appeal to compet.i.tion the capitalist is able to make him do it.

_Interest not determined Residually._--The fact is that the interest on capital is fixed exactly as are the wages of labor.

We will let another figure represent the entire product of the same amount of labor and the same amount of capital that were represented in the former case. We will a.s.sume that there is at the outset a complete force of laborers, and that no men are added to it or taken from it; but we will gradually introduce units of capital instead of units of labor as in the former case. The amount of capital is now represented by the line _A'E'_ and the product of the first unit of it by the line _A'C'_. The product of the successive units declines along the curve _C'D'_. The final unit of capital then brings into existence the amount of wealth represented by _E'D'_. As every other unit now produces the same amount, the capital as a whole creates the quant.i.ty represented by _A'B'D'E'_ and every unit of it makes its own separate contribution to that amount. In this we have simply applied to capital and its earnings the principle we formerly applied to labor and its earnings.

[Ill.u.s.tration]

_General Form of the Law of Final Productivity._--This principle is the law of final productivity, one of those universal principles which govern economic life in all its stages of evolution. Either one of the two agents of industry, used in increasing quant.i.ties in connection with a fixed amount of the other agent, is subject to a law of diminis.h.i.+ng returns. The final unit of the increasing agent produces less than did the earlier units in the series. This does not mean that at any one time one unit produces less than another, for at any one time all are equally productive. It means that the tenth unit produces less than the ninth did _when there were only nine in use_, and that the ninth unit formerly produced less than the eighth did in that still earlier stage of the process _in which there were only eight in use, etc._ If the productive wealth of the United States were only five hundred dollars per capita instead of more than twice that amount, interest would be higher than it is, because the productive power of every dollar's worth of capital would be more than the productive power of each dollar's worth is now; and, on the other hand, if we continue to pile up fortunes, great and small, till there are in the country two thousand dollars for every man, woman, and child of the population, interest will fall, because the productive power of a dollar's worth will become less than it now is.

_How Compet.i.tion fixes Interest._--We can now see how it is that the capitalist can make the _entrepreneur_ pay over to him the amount left in his hands after paying wages. Every unit of capital that any one offers for hire has a productive power. It can call into existence a certain amount of goods. The offer of it to any _entrepreneur_ is virtually an offer of a fresh supply of the kinds of goods which he is making for sale. Loaning ten thousand dollars to a woolen manufacturer is really selling him the amount of cloth that ten thousand dollars put into his equipment will bring into existence. Loaning a hundred thousand dollars to the manufacturer of steel, so as to enable him in some way to perfect his equipment, is virtually selling him the number of additional tons of steel, ingots, or rails that he can make by virtue of this accession to his plant.

_The Significance of Free Compet.i.tion._--Now, the tender of capital may be made to any _entrepreneur_ in a particular industry, and the existence of free compet.i.tion between these _entrepreneurs_ implies that a lender of capital can get from one or another of them the whole value of the product that this capital is able to create. A unit of capital in the steel business can produce _n_ tons of steel in a year, and if one employer will not pay the price of _n_ tons for the loan of it, another will. This, indeed, implies an absolutely free compet.i.tion; but that is the condition of the problem we have first to solve. When we know what ideally active compet.i.tion will do, we can measure the effects of the obstructions that, in practice, compet.i.tion actually encounters.

_Compet.i.tion for Capital among Different Industries._--The capitalist can invoke the aid of compet.i.tion outside of the limits of one particular business. He may offer his loan to steel makers, to woolen manufacturers, cotton spinners, silk weavers, shoemakers, etc. Within each one of these industries perfect compet.i.tion between the different employers will give him the value of the product which, in that business, his capital is able to create. If, however, what in this way he offers to men in one occupation is worth more than what he offers to men in another line,--if capital is worth more to steel makers than it is to cotton spinners,--he will find a market for his capital in the former industry; and this process of seeking out the employment in which capital is the more productive and there bestowing the loans of capital, will go on until every such local excess of productive power is removed and capital can produce as much wealth in one business as it can in another. Everywhere capital will then be both producing and receiving the same amount, and general interest will everywhere be determined by the final productivity principle acting all through the business world.

_When Interest as Directly Determined equals Interest as Residually Measured._--The area _BCD_ of the first figure measures what the _entrepreneur_ has left after paying wages. This amount and no more he can pay as interest, and he will pay it if he has to. The area _A'B'D'E'_ of the second figure represents what he must pay as interest; and we can now see that, if compet.i.tion is perfectly free, this amount equals the amount _BCD_ of the first figure. If, after paying wages, there is any more left in the _entrepreneur's_ hands than compet.i.tion compels him to pay out as interest, he is realizing a net profit; he is selling his goods for more than they cost him, and this, as we saw at the outset, is a condition that under perfect compet.i.tion cannot continue. The natural price of goods is the cost price. If the market price of anything is in excess of cost, _entrepreneurs_ receive a profit, and in order to do more business and make a larger aggregate of such profit they bring new labor and capital into their industry. The increased output lowers prices, and the excess of gain is thus taken from the _entrepreneur_. If _BCD_ is smaller than _A'B'D'E'_, the _entrepreneur_ incurs a loss and will curtail his business and let some labor and capital go where they can produce more.

Taking this remainder of income from the _entrepreneur_ by means of an addition to the output of goods and a reduction of the price of them does not annihilate the income, but bestows it on other recipients; for the reduction in price which destroys an employer's profit can come only in a way that benefits consumers. It means that enlarged production of which we have just spoken, which scatters more goods throughout the community and insures an addition to the real incomes of both laborers and permanent investors.

_Effect of Perfect Mobility of Labor and Capital._--Perfect mobility of labor and capital insures that the residuum in the _entrepreneur's_ hands after wages are paid shall all be made over to the capitalist.

We encounter here again the static law that, with compet.i.tion working without let or hindrance, the _entrepreneur_ as such can keep nothing for himself; though if he is also a worker he will get wages, and if he is also a capitalist he will get interest. His business will pay wages on all kinds of labor, including that of management, and interest on all capital, including his own. A net gain above all this it will not afford, and whatever the _entrepreneur_ has left after paying wages he will have to use in paying interest, and _vice versa_.

Laborers and owners of capital have, as it were, to take each others'

leavings. Such is the situation in an ideally static condition, though we shall see how it is changed in actual and progressive society.

The area _BCD_ of the first figure is, under static conditions, exactly equal to the area _A'B'D'E'_ of the second figure, because _ACDE_ represents the whole product, _BCD_ in the first figure represents all that is left of it after wages, measured by _ABDE_, are paid; and we know by evidence both theoretical and practical that the capitalist, whose share is directly expressed by _A'B'D'E'_ of the second figure, can claim and get the whole of this amount.

_Wages as a Residuum._--It is clear that the same reasoning applies to wages. In the second figure they are represented as a residuum. The area _B'C'D'_ represents what the _entrepreneur_ has left after paying interest, and n.o.body can get this amount but the wage earner. The reason, however, why the wage earner can get it is that free compet.i.tion will give him the amount _ABDE_ of the first figure, and this, under perfectly static conditions, must equal _B'C'D'_ of the second. Under perfect compet.i.tion the _entrepreneur_ cannot have any of the amount _B'C'D'_ left in his hands after meeting the claims that the wage earner makes on him. On the other hand, he must have enough left to pay interest, since otherwise he would be incurring a loss, and that could not fail to force him and others who are in the same situation to contract their operations or go out of business. If the output of goods is reduced, either by the retirement of some employers or the curtailment of product by all, the price of what continues to be sold will be raised to the point at which wages and interest can be paid.

_Wages and Interest both adjusted at Social Margins of Production._--It is to be noted that wages and interest are fixed at the social margin of production, which means that they equal what labor and capital respectively can produce by adding themselves to the forces already at work in the general field of employment. In making the supposition that, owing to some disturbing fact, a particular _entrepreneur_ has not enough after paying wages to pay interest, we a.s.sume that the rate of interest is fixed, in this way, in the general field and not merely in his establishment.

If _B'C'D'_ were larger than _ABDE_, the _entrepreneur_ would be selling goods for more than cost and realizing a net profit, which he cannot do in a static state; but a pure profit is not only possible but actual in a dynamic state.

In actual business total returns represented by _ACDE_ amount to more than the sum represented by _ABDE_ (wages) plus _A'B'D'E'_ (interest).

There are conditions that in practical life are continually bringing this to pa.s.s in different lines of business, though not in all of them at once. The real world is dynamic and therefore the true net profit, or the share of the _entrepreneur_ in the strict sense of the term, is a positive quant.i.ty. This income is always determined residually. It is a remainder and nothing else. It is what is left when wages and interest are paid out of the general product. To the _entrepreneur_ comes the price of the products that an industry creates. Out of this he pays wages and interest, and very often he has something remaining.

There is no way of determining this profit except as a remainder. The return from the sale of the product is a positive amount fixed by the final utility principle. Wages and interest are positive amounts, and each of them is fixed by the final productivity principle. The difference between the first amount and the sum of the two others is profit, and it is never determined in any other way than by subtracting outgoes from a gross income. It is the only share in distribution that is so determined. _Entrepreneur's_ profits and residual income are synonymous terms. In the static state no such residual income exists, but from a dynamic society it is never absent.

Every _entrepreneur_ makes some profits or losses, and in society as a whole the profits greatly predominate.

_Summary of Facts concerning a Static Adjustment of Wages._--We know then that in any industry wages and interest absorb the whole product, because any deviation from that rule in a particular group is corrected in the way above mentioned. Moreover, general wages and interest, as determined by the law of final productivity, must equal those incomes when they are determined residually. The area of the rectangular portion of one of the foregoing figures must equal the area of the three-sided part of the other. The question arises why all _entrepreneurs_ might not get a uniform profit at once. This would not lure any labor or capital from one group or subgroup to another.

If, after paying wages and interest at market rates, the _entrepreneurs_ in each industry have anything left, the entire labor and capital are producing more than they get and there is an inducement to managers and capitalists to withdraw from their present employers and become _entrepreneurs_ on their own account. Such an _entrepreneur_ entering the field, drawing marginal labor and capital away from the _entrepreneurs_ who are already there and combining them in a new establishment, can make them produce more than he will have to pay them and pocket the difference. If such a condition were realized, there would be a gain in starting new enterprises, since luring away marginal agents and combining them in new establishments would always be profitable. When we introduce into the problem dynamic elements we shall see that centralization, which makes shops larger instead of smaller, makes industries more productive, and that what happens when net profits appear is more often the enlarging of one establishment than the creation of new ones. _Entrepreneurs_ in the large establishments can afford to resist the effort made by others to lure away any of the labor or capital which they are employing, and they will do this for the sake of retaining their profits. They can do it by bidding against each other, in case any of them are making additions to their mills or shops, and also by bidding against any new employers who may appear. Perfect compet.i.tion requires that this bidding for labor and capital shall continue up to the profit-annihilating point. Here, as elsewhere in the purely static part of the discussion, we have to make a.s.sumptions that are rigorously theoretical and put out of view in a remorseless way disturbing elements which appear in real life. The static state requires that all _entrepreneurs_ who survive the sharp tests of compet.i.tion should have equally productive establishments, which means that they should all be able to get the same amount of product from a given amount of labor and capital. The actual fact is that differences of productive power still survive. There are some small establishments which, within the little spheres in which they act, are as productive as large ones; but there are also some which are struggling hopelessly against large rivals in the general market and are destined erelong to give up the contest. In other words, the centralizing and leveling effects of compet.i.tion are approximated but never completely realized in actual life.

A fact that it is well to note is that the test of final productivity is inaccurately made when unduly large amounts of labor and capital are made the basis of the measurement. Take away, for instance, a quarter of the working force, estimate the reduction of the product which this withdrawal occasions, and attribute this loss entirely to the labor which has been taken away, and you estimate it too highly.

With so large a section of the labor withdrawn the capital would work at a disadvantage, and a part of the reduction of the product would be due to this fact. If we should take away all the labor, the capital would be completely paralyzed, and the product would become _nil_. It would obviously be inaccurate to say that the whole product is attributable to the labor, on the ground that withdrawing the labor annihilates it all. With any large part of the labor treated as a single unit, the loss of product occasioned by a withdrawal of such a unit is more than can be accurately imputed to it as its specific product. The smaller the increments or units are made, the less important is this element of inaccuracy, and it becomes a wholly negligible quant.i.ty when they become very small. A study of the forms of the productivity curves will show that if we take as the increment of labor used in making the test only a tenth of the whole force, we exaggerate the product imputable to it by a very minute fraction, say by less than a one-hundredth part; and if we take a hundredth of the labor as a final unit, we exaggerate the product that is solely attributable to it by an amount so minute that it is of no consequence in practice or in any theory that tries to be applicable to practice.

A question may be raised as to whether we are correct in saying that the _entrepreneur's_ profit is residual, in view of the fact that the entire product of a business is at the mercy of the management, so that a bad manager may reduce it or a good one may increase it. It may be further claimed that that part of the management of a business which consists in making the most far-reaching decisions cannot safely be intrusted to a salaried superintendent or other paid official and must get its returns, if at all, in the form of profits. Even in this case the gains are secured by making the gross return, which is the minuend in the case, large, leaving the two subtrahends, wages and interest, unchanged, and thus creating a remainder or residuum. We shall later see to what extent _entrepreneurs_ do in fact create the profits that come to them.

The complete static conception of society requires that no _entrepreneur_ should be left in the field who cannot continue indefinitely to hold his own against the compet.i.tion of his rivals, and this requires essential equality of productive power on the part of all of them. It is not necessary, however, that all should operate upon an equal scale of magnitude, for an interesting feature of modern life is the need of many small productive establishments that cater to local demands and to wants which, without being local, call for only a few articles of a kind. Repairs, small orders, and peculiar orders are executed more cheaply in small establishments, and they survive under the very rule of essential equality of productive power which static conditions require. For catering to the general market and producing staple goods the large establishment has a decisive advantage, and this insures the centralization which is the marked feature of recent industrial life.

CHAPTER X

RENT

_The Term "Rent" as Historically Used._--The word _rent_ has a striking history. The science of political economy first took shape in a country in which direct employers of labor were not, as a rule, the owners of much land. Farmers, merchants, and many manufacturers hired land and furnished only the auxiliary capital which was necessary in order to utilize it. In a practical way the earnings of land were thus separated from those of capital in other forms, since they went to a different cla.s.s of persons; and in the thought of the people the charges made for the use of mere ground came to const.i.tute a unique kind of income. If, during the last century, the land in England had been a highly mercantile commodity, and if it had been the common practice of _entrepreneurs_ not to hire it but to buy and own it, as they bought and owned all other industrial instruments, there is little probability that land would have been considered, either in practical thought or in science, as a thing to be as broadly distinguished as it has been from all other capital goods. A business man would have measured his permanent fund of capital in pounds sterling and would have included in the amount whatever he had invested in land. As in America any representation of the capital of a corporation includes the sums invested in every productive way, and this includes the value of all land that the company holds, so in England, under a similar system of conducting business, any statement of the amount of a particular business capital would have included the whole of the productive wealth embarked in the enterprise; and in any statement of the forms of it there would have appeared, besides a list of all tools, buildings, unfinished goods, and the like, a schedule of the prices of land that the company owned and used. In "putting capital into his business" a man might buy land, in "withdrawing his capital" he might sell it; and the land in the interim would be the obvious embodiment of this part of his fund. The fact, then, that land was owned by one cla.s.s of persons and let to another for hire, and that the lessees were the _entrepreneurs_ or users of it, caused practical thought and speech to put land in a cla.s.s by itself.

_The Origin of the Theory of Rent._--Scientific thought powerfully strengthened this tendency. At a very early date a formula was attained for measuring the rent of land, while no satisfactory formula was, then or for a long time afterward, discovered for measuring the amount of interest. Men contented themselves with saying that the rate of interest depends on demand and supply. In the case of the rent of land the same thing might have been said, but here such a statement was not mentally satisfying, and investigators tried to ascertain why demand and supply so act as to fix the income that land yields at a certain definable amount.

_The Traditional Formula for Rent._--The formula which has long been accepted as measuring the rent of a piece of land, though it bears the name of Ricardo, grew into shape under the hands of several earlier writers. In its best form of statement this principle a.s.serts that "the rent of a piece of land is the product that can be realized by applying labor and capital to it, minus the product that can be realized by applying the same amount of labor and capital to land of the poorest grade that is in cultivation at all." The quant.i.ty of the poorest land must be left indefinite, and all that the given amount of labor and capital can economically utilize must be left at their disposal. It would not do to say that the rent of _an acre_ of good land equals its product less that of _an acre_ of the poorest land in cultivation tilled with the same expenditure of labor and capital. If we should select a bit of wheat land in England tilled at a large outlay in the way of work, fertilizers, drains, etc., and try the experiment of putting the same amount of labor and capital on a piece of equal size in the remotest part of Canada, we should find that, so far from securing wheat enough to pay the bills that we should incur in the way of wages and interest, we should not have enough to help us greatly in the defraying of these costs, and the cultivation of this piece of land would be a losing venture. Instead of being no-rent land, yielding merely wages and interest for the labor and capital used in connection with it, it would be minus-rent land, deducting something from the earnings which the agents combined with it might elsewhere secure. In order to utilize such land at all, one must till it in what is termed an extensive rather than an intensive way, putting a small amount rather than a large amount of work and expenditure on it. By tilling ten acres of a remote and sterile farm with as much labor and other outlay as a very good acre of land in England receives, one can perhaps get enough to pay the required wages and interest. In general no-rent land is commonly utilized in an extensive way and very good land in an intensive way; and in stating the old formula for rent we need to be careful to make it mean that the rent of the good piece is its total product less the product that can be had by taking from the good piece the labor and capital it now absorbs and setting them at work on a piece of the poorest land which is enough larger than the good one to enable us to secure a crop which will be worth just the amount of wages and interest we must pay. The larger size of the poor piece of land is an essential condition.

_Real Significance of Rent Formula._--It will be seen that this formula amounts to saying that the rent of land is what the land itself adds to the marginal product of labor and capital. Put a certain amount of labor and capital on a piece of land of good quality, and you get a certain amount of product. Withdraw the land from the combination, and you force the labor and capital to become marginal increments of these agents. They must go elsewhere and get what they can. One alternative that is open to them is that of seeking out land of a grade so poor that it has not been previously utilized and doing what they can to get a product out of it. Whatever they can make such land yield is, in an economic sense, wholly their own product. There is an indefinite quant.i.ty of this kind of land to be had, and wherever labor and capital utilize any part of it, they can have all that they produce. Now if we subtract what they there create from what was created when they were working on the good land, we have the rent of that land.

_Rent as a Product Imputable to Land._--The difference between what the labor and capital produce at the margin of cultivation of land and what they can produce on good land, or land that lies within the margin, is clearly attributable to the qualities of the land itself.

Given _X_ units of labor and _Y_ units of capital, combine with them no land except such as is too poor to have been previously utilized, and you get a certain product. It is the product of the labor and capital using something which is free to any one. Now put a piece of good land into the combination; to the _X_ units of labor and _Y_ units of capital add a piece of productive land and see what you can create. We do this by taking these units of labor and capital away from the worthless marginal land and setting them to tilling that which is of the better quality. The product is of course larger than they got before, and the difference measures what the land itself adds to the output of the other agents in the combination. The true conception of rent is that of the specific addition which land makes to the product of other agents used in connection with it. There are various ways of measuring this addition, but the method just used will at least show that the presence of the good land is the cause of the excess of product which given amounts of labor and capital secure over what they could create on land of the poorest quality.

_Rent as a Differential Product._--In the early statements of the rent law it was not said that the rent of a piece of land is the product specifically attributable to it. If it had been, the chances are large that a much broader and more scientific use of the rent formula would have resulted. The law of rent, as it was actually stated, made it consist of a differential amount. It was what a given amount of labor and capital would produce under one set of conditions minus what they would produce under another. Since it is the presence or the absence of the productive land which makes the only difference between the two conditions, rent, even as it is thus defined, is really the amount of product specifically attributable to the land. It is what is created when the land is used in excess of what would be created if it were not used and if the cooperating agents did the best they could without it. We may use, as the most general formula for the rent of land, the contribution which land itself makes to the product of social industry.

If we use the same method in measuring the rent of land which we used in measuring the wages of labor and the returns of capital, we shall represent the rent of a given piece of land as the sum of a series of differential amounts. In the accompanying figure the vertical belts bounded by lines rising from the letters _A_, _B_, _C_, etc., represent the products realized by applying successive increments of labor and capital to a given piece of land; and the horizontal lines running toward the left from _A'_, _B'_, _C'_, etc., separate the wages and interest from the amounts that are successively added to rent. When one composite unit of labor and capital is working, its product and its pay is measured by the belt between the line _AA'_ and the line _NN'_. A second composite unit produces the amount represented by the area between _AA'_ and _BB'_, and that is the amount which each unit separately considered will produce and get as its pay. This leaves the area between the horizontal line running from _B'_ and the section of the descending curve as the rent of the land.

A third unit of labor and capital produces what is represented by the area between _BB'_ and _CC'_, and this becomes the standard of pay for all units, leaving the enlarged area above the horizontal line at _C'_ as rent. In the end there are ten units of labor and capital. Their total earnings are expressed by the area of the rectangle below the horizontal line running from _J'_, and the sum of all the areas above that line is rent.

[Ill.u.s.tration]

_The Intensive Margin of Cultivation._--The extensive margin of cultivation is the land that is adjacent to an imaginary boundary line separating the grades of land that are good enough to be used from those that are too poor to be used. There is, however, what may be called the intensive margin of cultivation. A given bit of land is said to be cultivated more and more intensively when more and more labor and capital are used on it. Land is subject to what is called the law of diminis.h.i.+ng returns.

_Law of Diminis.h.i.+ng Returns._--The more labor and capital you employ on a given piece of land, the less you will get as a product for each unit of these agents. What the last unit of labor adds to the antecedent output is less than was added by any of the other units, and the same is true of the last unit of capital. As we continue the process of enlarging the working force and adding to the working appliances, we reach a point at which it is better to cease putting new men with their equipment at work on this piece of land and to set them working on a bit of land so poor that it was not formerly utilized at all. We may a.s.sume here that what a man needs, in the way of auxiliary capital, goes with him, whether he joins a force that is working on good land or migrates to a less productive region. He will go if it will pay him to do it. In this way we make a sort of dual unit of labor and capital and apply a series of such units to land.

_Ground Capital and Auxiliary Capital Distinguished._--Land itself is a component part of the permanent fund of productive wealth to which we have given the generic name _capital_. It differs from other capital goods in that it does not wear out and require renewing.

Working appliances, however, as they wear out and are replaced, const.i.tute a permanent fund of auxiliary capital, and we shall apply this term to the abiding stock of such instruments except in connections in which the adjective is not needed, because it is clear that the land, or ground capital, cannot be referred to. In dynamic studies the distinction between land and auxiliary capital becomes very important.

_How the Intensive Margin locates the Extensive One._--The labor and the auxiliary capital that betake themselves to new land of the inferior quality represent an overflow from the better land. As long as men can do as well by staying where they are as they can by migrating to new regions, where inferior lands are to be had, they will stay; but when they incur a loss by staying, they move. What a laborer can create by securing the use of an equipment and adding himself to the force that is at work on some good farm, can be approximately estimated; and if there is somewhere a piece of land not thus far used to which he can remove, and if, by going to work upon it, he can create any more than he created while working on the older farm and taking his products as his pay, he will till that poor piece.

But neither he nor any one else will till a piece that is still less productive. If any one were to set himself working on land of still poorer quality, he would lose and not gain by the change, since there he would produce even less than he can when he is the last man set working on the good piece.

_To what Extent the Movement of Labor and that of Capital are Interdependent._--The early statements of the law of rent did not usually define the intensive margin of cultivation in connection with labor and capital separately, but spoke of these two agents as employed together upon land in quant.i.ties increasing up to a limit beyond which both labor and capital would best be employed elsewhere.

The supposition that labor and capital go thus together from one grade of land to another is only approximately accurate. If we consider one man and five hundred dollars' worth of productive wealth as a dual unit of labor and capital, and add such units, one after another, to the forces at work on a tract of good land, we shall reach a point at which it will not be profitable to increase the amount of one of the agents, while it will still be profitable to increase the amount of the other. It will perhaps not pay to use any more capital, but it may still pay to add to the number of workers. On land that is tilled more and more intensively, labor and capital are not tied together in fixed proportions in such a way that, when there is more of one of them used, there is _proportionately_ more of the other. Moreover, when a unit of one of them abandons a piece of land and goes elsewhere, there is no probability that exactly one unit of the other will do the same. There is, indeed, no such thing as a dual unit of labor and capital that can be thought of as moving to and fro among different employments till it finds the point at which, as a dual unit, it can create its largest product. These two agents so locate themselves that a final unit of each one, separately considered, produces as much where it is as it can produce anywhere else.

It is, however, to be noted that the amount of labor that can profitably be employed on a piece of land grows larger the more capital there is employed in connection with it. An acre of land and a thousand dollars' worth of auxiliary funds can enable more men to get good returns than can an acre combined with a fund of five hundred dollars. Conversely, the more men there are working on the area, the more auxiliary capital it pays to use there. If there are five men working on a small field it may be that a thousand dollars may be well invested in aiding them, while with only one man it would not pay to use so large an amount. The capital and the labor, as it were, attract each other. Additional capital attracts further labor, and _vice versa_, till a condition is reached in which neither of them can so well be used on that particular piece of land as it can elsewhere. Each one has then been used on this area up to its own intensive-marginal limit. So also when one of these agents betakes itself to marginal land, it attracts the other agent thither. When there are ten men on the poorest piece of land in a locality, it is possible to make a considerable amount of capital at that point pay the return generally prevailing, whereas only a small amount would pay it if there were only five men working. With a thousand dollars invested on that land more laborers will be lured thither by the prospect of fair returns than would be lured thither if there were only half as much capital. The general apportionment of both agents tends to be such that a unit of either is as well off on one piece of land as on another, and each is as well off at the extensive margin of cultivation of land as it is on the intensive margin.

_Labor and Capital combined in Varying Amounts._--The amount of capital that is combined with a unit of labor is not often the same on good land as it is on poor. The proportions in which labor and capital will be combined on the marginal field will be almost certain to vary from those in which they were combined in the better field from which they came. It may be that they leave industries in which an average man uses an equipment worth a thousand dollars. When they reach the margin of cultivation, capital may be so scarce that the thousand dollars will not stay in the hands of the one man but will divide itself among several.

_The General Law of the Extension of the Margin of Cultivation._--Sometimes, when labor moves to new land that is now at the margin, it takes its new equipment with it; but such land is not always tilled by independent settlers. Employing farmers may set men working on it and pay them all that they produce; and the farmers may furnish the men with capital of their own or borrow capital for them to use. In either case a static condition requires the equalizing of the productivity of labor at the intensive margin with that of labor at the extensive margin; and it requires a similar leveling of the productivity of capital at the two margins. When this leveling has taken place in both cases, the all-around marginal product of labor fixes the rate of wages, and that of capital fixes the rate of interest. What a man creates on the good land and with the adequate capital, or on poor land with proportionate capital,--in any occupation on land of either grade,--determines the pay that he and other men can get. It const.i.tutes in itself the wages of labor. In so far as the overflow of labor and capital into any one limited region of marginal land is concerned, the full statement is this: that the margin of utilization of land will be extended to the point at which a unit of labor, _using as much of the marginal land as it is economical to use, and such amount of auxiliary capital as is economical to combine with this unit of labor and the land it occupies, will create a product equal to the wages of the unit of labor as they are determined by the product it created when it was employed on the good land and in connection with the full equipment of auxiliary capital_.

_The Rent of a Fund of Capital._--We saw that one unit of labor employed in connection with a given amount of capital produces more than does a second; that the second produces more than the third; and that, if we continue to supply units one at a time, the last unit in the series produces the least of all. Wages are fixed by the amount that one unit of labor produces when the working force is complete, and that is what is contributed to the general product by the unit of labor which comes last in the imaginary series by which the force is built up. Owing to the more favorable conditions under which, in their time, the earlier units worked, they were able to produce surpluses above the amount produced by the last one. When they entered the field they were supplied with excessive amounts of capital. The first one had the whole fund cooperating with it, till it had to share it with the second; and after that each had a half of it till they had to share evenly with a third, etc. We have seen that all the surpluses appearing in connection with the earlier units are attributable in reality to capital. The area _BCD_ (page 139) represents the amount by which the presence of an excess of capital increases the products attributable to the earlier units of labor. It represents the sum of all the differences between the products of the earlier units and the product of that final one which in the end sets the standard of productivity of labor. It might be called the rent of the fund of capital. It is composed of a sum of differences exactly like those which const.i.tute the rent of a piece of land.

_The Rent of a Permanent Force of Labor._--In the figure on page 148, the working force was supposed to be fixed in amount, the capital increasing by increments, or as some earlier economists would have said, by "doses" along the line _A'E'_. The last unit of capital produces the amount _D'E'_, and all the capital produces _A'B'D'E'_, while products of the earlier units of capital, as they come successively into the field and are used by an excessively large labor force, are represented by the area _B'C'D'_. Here this area represents what may be called the rent of the force of labor, since it is a sum of surpluses that, again, are entirely akin to those that const.i.tute the rent of a piece of land.

_A Question of Nomenclature._--It may be an open question, as a matter of mere nomenclature, whether these surpluses which are thus traceable to a permanent fund of capital, on the one hand, and to a permanent force of labor, on the other, can with advantage be called rents. In this treatise we do not think it best to employ that nomenclature.

What is not uncertain is that these gains are measurable by the same formula that measures the rent of a piece of land. If the essential thing about rent were that it is a material product and consists of a sum of differential quant.i.ties, these incomes certainly would be rents. Popular thought, however, attaches another meaning to this term, and we therefore limit ourselves to saying that these differential incomes or surpluses may be determined in amount by the principle of rent. They can be described and measured exactly as the Ricardians described the income of landlords.[1]