So far we have discussed for the most part those economic problems
that center round the production of wealth, such as the use of natural
resources, large-scale production, trusts and monopolies, labor
organizations, unemployment, industrial education and co-operation.
Now we shall consider briefly a few of the problems that are connected
with the distribution of wealth. Professor Blockmar[38] says that the
three great problems of economic society are: “First, how to create
the largest amount of utilities or wealth; second, how justly to
divide this amount; and third, how to make the product minister to the
permanent rather than to the transient well-being of society.” The
first problem we have already discussed; the second forms the subject
of the present section; while the third will be taken up in the next
section. Within the last century the center of interest in the
practical application of economic principles has decidedly shifted
from production to distribution. The earlier writers in economics, as
shown in the mercantile lists of the seventeenth and eighteenth
centuries, even Adam Smith, were chiefly interested in methods of
increasing a nation’s wealth. With the introduction of the factory
system and the opening up of vast natural resources by improvements in
mining and transportation, the production of wealth has enormously
increased, and now the question of the method of its distribution or
division is felt to be more pressing.
Under the term distribution two different processes are included,
which should be distinguished before going further. The first is
called functional distribution, and concerns the distribution of the
product of industry or the income of society, among the different
factors of production. That is to say, land, labor, capital and 120
managerial ability have contributed in varying degrees to the
production of a certain amount of current wealth, and the problem of
functional distribution is to ascertain how the net product resulting
from these joint efforts is divided. How much goes to rent, how much
to wages, how much to interest and how much to profits? The second
kind of distribution is the division of the wealth of society among
individuals or families; this is personal distribution, and raises the
question of poverty and great wealth. In discussing these problems,
however, we must remember that wealth production and distribution
takes place in modern society under conditions imposed by the social
order in which we live; these were defined as competition, private
property and personal liberty. If any modifications of the processes
of distribution were desired, it would undoubtedly be necessary to
alter these fundamental institutions.
John Stuart Mill held that production was governed by natural laws,
which could be ascertained and stated, but that distribution was
artificial and hence that it was not possible to discover constant and
certain laws governing it. Beginning mainly with Mill, the ethical
question has been more and more asked as to what share each factor in
production ought to get, not merely what he does receive. “Hence the
question is rising more and more as to what should be the basis of
division, and many proposals have been made. It is proposed that
laborers combine to get a larger share. Hence we have trade unions,
Knights of Labor, etc. It is proposed that capitalists and landlords
give a larger proportion of the produce to the laborers than they are
able to secure by mere private struggle. Hence we have proposals for
profit-sharing and various charities. It is proposed that laborers
combine to be their own capitalists and landlords; hence we have all
sorts of co-operative and communistic experiments. It is asserted that
the wealthy classes have so much power in their hands that private 121
co-operation cannot succeed in competing against them, and hence it is
proposed that all the people, through government (municipal, state,
and national), secure all the means of production (capital and land,
so far at least as land is used for production), and operate them
collectively for the equitable good of all, the people thus being
their own employers, capitalists, and landlords. Hence we have
municipalism, nationalism, socialism. It is claimed that capitalists
and landlords have been able to secure, and are today able to
maintain, their large share in distribution, only through the
favoritism of the Government. Hence we have proposals for free trade,
the single tax,… the extreme proposals of the very great minimizing
of the state in individualism, or the abolition of the Government in
anarchism.”[39] In view of this very imperfect list it is not too much
to say that most of the economic problems that are stirring society
today are connected with the distribution of wealth.
The first question that suggests itself in the discussion of
functional distribution is as to whether it is actually governed by
natural law, so-called. It is observable that the amounts which go to
rent, to wages, to interest, and to profits are regularly quite
constant. What determines this? The socialists contend that natural
distribution is the only just method and insist that the state should
regulate this just distribution; they are not clear, however, as to
what this natural method is. Henry George uses the same phrase when he
says, “the just distribution of wealth is manifestly a natural
distribution of wealth, and this is that which gives to him who makes
it and secures to him who saves it.” All such statements beg the
question for they all turn on the use of the word natural. Many modern
economists are inclined to assert that the question of distribution is
not an ethical one, not a question of what ought to be but of what 122
is. Thus Professor Tetter says[40]: “Distribution in economics is the
seasoned explanation of the way in which the total product of a
society is divided among its members. It is a logical question and not
an ethical one.” And Professor Clark writes, “There is, in short, a
deep-acting natural law at work amid the confusing struggles of the
labor market.” It will not be possible, in the brief limits of this
section, to take up all the theories as to the way in which this
distribution is effected among the claimants to a share of the
product, but a few of the more important practical results may be
stated. We shall take up the four different factors in turn.
Rent is usually defined as the return for the use of natural objects
and agencies. Rent has usually been low in the United States because
of the large amount of land and other natural agents available. In
general it may be said that when any factor of production is
relatively abundant in comparison with the other factors, its share of
the product will be small.[41] Henry George, however, argues that as
the amount of land is limited and is now practically all taken up, the
future will see a constantly increasing demand for land, and hence the
landlords will absorb most of the future income of society. This is
true of most of land and other natural agents especially in demand, as
choice sites in our cities, anthracite coal mines, etc. The practical
problem that suggests itself is, do we wish private property in land?
The socialists answer no, but the individualists insist that the best
use has been and can be made of land only by reducing it to private
ownership. In practice, however, even in modern individualistic
societies, the absolute and unregulated use of land by the owner is
restricted in various ways.
Interest is the amount paid for the use of capital. From the time of 123
the church fathers in the Middle Ages down to the present-day
socialists, interest and the private ownership of productive capital
have formed favorite objects of attack. The justification of interest
lies in the fact that men prefer present goods to future goods--a bird
in the hand is worth two in the bush--and interest is the difference
in value between the two at the present moment; it is time value. The
justification of private property, on the other hand, lies rather in
its expediency than in any inherent and unalterable law of nature. It
has developed with civilization and has been, without question, a
fundamental cause of material progress. But moderate individualists
even, as John Stuart Mill, have attacked the institution of
inheritance while leaving the main edifice of private property
untouched. They would limit absolutely the amount of bequest or, as
President Roosevelt advocated, would use inheritance taxes as a means
of breaking up large fortunes.
Profits are the reward which the manager of a business receives for
his services in organizing and superintending the business. This share
of the social income was the last to be recognized by economists, and
its rightfulness is even yet denied by the socialists. They insist
that profits are really the earnings of labor which have been withheld
from the laborer by the superior skill and economic strength of the
capitalist manager; they are institutional robbery, the exploitation
of labor. It is not possible to take up the arguments on this point,
but it may be said in a word that the manager of business contributes
a needed service to the work of society just as truly as the laborer
does, and receives his earned reward in the form of profits.
Wages are the reward of labor. It is often assumed that wages are
lower than they should be, that the laborer in some way is deprived of
a portion of what he has rightfully earned. It is worth while
inquiring briefly how the share of labor in the distribution of the 124
social income is determined. Various theories have been developed to
explain the distributive process, of which we may notice three. The
oldest in point of time and the most pessimistic theory held that
wages were fixed by competition and the growth of population at the
bare subsistence minimum, a bare starvation level. If by some happy
chance wages were raised above this point, then the population would
speedily multiply and the increased competition thus brought about
among the laborers would depress wages again to the lowest amount
sufficient to support a family. Under the name of the “iron law of
wages,” this theory is still put forth by the socialists as the
explanation--together with the institution of private property--of
wages. Historically, however, this theory has happily been proven
untrue, as the advance in the standard of living among the working
class during the past century testifies. It has now been almost wholly
superseded by the so-called productivity theory,[42] which asserts
that wages depend upon the productivity of labor; that the laborer
gets what he produces, and that this share is assured him by the
working out of the competitive process under free competition. If this
theory is true, there can be no ethical question raised; if labor is
dissatisfied with its share, then it must increase its productive
efficiency. As a matter of fact wages have always been high in the
United States because labor has been relatively scarce compared with
land and capital, and consequently its marginal productivity has been
high. The third theory says that wages are a result of bargaining, of
competition in the labor market, a question of supply and demand.
Under these circumstances it is largely a question of economic
strength between labor and capital, and if labor is well-organized,
alert, and able to drive a good bargain, then wages will be high;
otherwise they will be low. While there is an element of truth in
the last theory, the second one seems the truest explanation of 125
general wages; certain it is that no monopoly power of labor, however
great, could permanently maintain wages at a level higher than the
actual produce of labor. The element of truth in the first theory is
that wages can never, for any length of time, fall below the cost of
subsistence.
Of more practical interest are questions connected with the personal
distribution of wealth. In this connection arise such problems as the
increase of large fortunes, the causes of poverty, and similar
questions. The boast of our Republic has long been that here
opportunity was open to all, that wealth was widely diffused, and that
such inequalities of fortune as characterized the nations of the Old
World were happily lacking. In the fifty-five years, 1850-1904, the
per capita value of all property in the United States exactly
quadrupled; how has this increase been distributed? Unfortunately we
have no complete statistics on this point, yet reliable estimates by
authoritative writers all tell the same story--of great concentration
of wealth in the possession of a comparatively few rich families. In
1893 Mr. George K. Holmes concluded from a study of the statistics of
farm and home ownership in the United States that “91 per cent of the
families of the country own no more than about 29 per cent of the
wealth, and 9 per cent of the families own about 71 per cent of the
wealth.” A more accurate and satisfactory statement can be drawn from
the income-tax returns for Prussia, which tells almost the same story
with regard to income. The table on the following page is condensed
from an article by Professor A. Wagner:
According to these figures over two-thirds of the persons--heads of
families or single adults--had only one-third of the income, while
3½ per cent had another third. Another striking fact shown by the
table is the large proportion of persons receiving incomes of less