DISTRIBUTING THE INCOME OF INDUSTRY
82. THE PROBLEM PRIOR TO THE INDUSTRIAL REVOLUTION.--The distribution
of industrial income has to do with dividing the products of industry,
or the money which represents those products, among the various
individuals who have aided in their creation.
The problem of distribution has existed ever since men first combined
for purposes of production, but until the period of the Industrial
Revolution the question was relatively unimportant. When, three
hundred years ago, most necessities were produced within the family
circle, there was little or no question as to whether or not
individuals outside the family ought to be rewarded for having helped
in the production of those commodities. If one member of the family
made an entire pair of shoes, for example, he was clearly entitled to
those shoes, at least so far as economic principles are concerned.
Even where different members of the family combined to produce a pair
of shoes or an article of clothing, the small number of persons
involved, as well as the close identity of interests among the family
members, kept the problem of distribution from becoming a serious one.
83. EFFECT OF THE INDUSTRIAL REVOLUTION UPON THE PROBLEM.--The
Industrial Revolution greatly increased the importance of the problem
of distribution. Indeed, the growth of the factory system, and the
greater and greater complexity of the division of labor, have made the
distribution of industrial income the basic problem in our economic
and social life. Many commodities are still produced by individuals
working independently, or by the joint efforts of the members of a
family, but the vast majority of commodities are now produced by the
joint efforts of numerous individuals who are not bound together by
family ties. The production of a factory-made shoe, for example,
involves large numbers of people, including the cattle grower, the
transportation agent, the tanner, numerous laborers, the individuals
who supply land and capital to the entrepreneur, and the entrepreneur
who conducts the enterprise. The welfare of millions of people is
involved in the distribution of industrial income among individuals
who co÷perate in such enterprises as this.
84. DIFFICULTY OF THE PROBLEM.--Under modern industrial conditions
most commodities are produced by the combined efforts of large numbers
of people. All these people help along the productive process, though
in different ways and to a varying degree. Since all help, all are
entitled to payment. But this is less simple than it sounds. How shall
we determine how much each one helps, and how shall we decide how much
each one is to receive?
At the outset of the discussion, we can be sure of at least one fact,
_i.e._ that since all the individuals involved in a given enterprise
must be paid out of the value of the finished product, the combined
sums received by them cannot long exceed the total value of that
product. Unfortunately, this fact is often overlooked. Many of the
individuals who aid in production often become so intent upon securing
their share, that they are over-ready to explain their contribution to
the product, but loath to give due credit to those who have co÷perated
with them. It is the belief that some individuals receive too little
of the joint income of industry, while other individuals receive too
large a share, which has given rise to the charge of injustice in the
distribution of wealth.
85. SIGNIFICANCE OF THE ENTREPRENEUR IN DISTRIBUTION.--For the sake of
clearness, let us continue to illustrate the nature of distribution by
reference to the shoe industry, carried on under conditions which are
not unduly complicated.
The individual having control of the actual manufacture of the shoes
is the entrepreneur. It is he who, in anticipation of a demand for
shoes, has initiated the enterprise. Suppose, for the sake of
simplicity, that the entrepreneur has secured land from the land-
owner, capital from the capitalist, and labor from the workmen.
Protected in a legitimate enterprise by the government, he has set
himself up as a manufacturer of shoes. Since he is in control of the
enterprise, it is he who pays the land-owner, the capitalist, and the
laborers, for their respective contributions toward the finished
shoes.
The amounts received by the individuals co÷perating with the
entrepreneur are not, however, arbitrarily determined. The
entrepreneur must bow to economic law, and give these individuals what
free competition in industry sets as a proper reward for their
respective services. Let us examine into this conformity to economic
law.
86. THE LAND-OWNER RECEIVES RENT.--The land-owner is rewarded because
he extends the use of land to the entrepreneur. A land-owner could not
be expected to, and will not, allow the entrepreneur free use of this
land. The land-owner must therefore be paid for the use of the land.
The entrepreneur, on the other hand, is able and willing to pay for
the use of the land because upon it he expects to build a factory in
which to manufacture shoes. He therefore pays the land-owner an amount
of money called rent. The amount of rent paid for a piece of land
depends partly upon how much the entrepreneur wants the land, and
partly upon the available supply of land of the type wanted. This is
equivalent to saying that rent is determined by the interaction of the
two forces of supply and demand.
87. THE CAPITALIST RECEIVES INTEREST.--Besides land, the entrepreneur
needs machinery, office equipment, raw materials, the services of
laborers, and numerous other aids in production. Let us assume that
the entrepreneur borrows of a capitalist the money required to procure
these necessities. The entrepreneur can afford to pay interest for the
use of this money, since with the aid of the goods and services which
it will buy, he can produce more shoes than would otherwise be
possible. Not only can he afford to pay interest, but he is obliged to
pay it, since otherwise he could not secure the required loan. Though
some people tend carelessly to overlook this fact, saving and
abstinence are necessary to the accumulation of money. The individual
who has money, therefore, cannot be expected to allow the entrepreneur
to use it without payment, especially not when, as we have just seen,
the entrepreneur can acquire wealth by the use of the goods and
services which that money will buy.
The amount of interest which the capitalist receives for the use of
his money will depend, as will rent, upon the law of supply and
demand. If there is a large amount of funds available for investment,
and at the same time few borrowers, then a given capitalist must be
content to accept a relatively low rate of interest, lest his refusal
cause the entrepreneur to close a bargain with a competing capitalist.
If, on the other hand, available funds are scarce and entrepreneurs
are greatly in need of money, then capitalists are at an advantage and
entrepreneurs must offer relatively high rates of interest.
88. THE LABORERS RECEIVE WAGES.--The payment which the laborers
receive for their part in the production of the shoes is called wages.
Since the laborers help in shoe manufacture, the employer can afford
to pay them. Not only can he afford to pay them, but he must pay them.
Otherwise the laborers would not work for this particular
entrepreneur, but, in a freely competitive market, would offer their
services to a competing employer.
Wages, like rent and interest, depend upon the conditions of supply
and demand. If, in comparison with other aids in production, the
services of laborers are wanted badly, and if, at the same time, there
is a scarcity of the desired type of labor, then wages will be high.
If, on the other hand, there is an over supply of laborers, and also a
small demand for that type of labor, then wages will tend to be low.
89. THE GOVERNMENT RECEIVES TAXES.--In addition to paying the land-
owner, the capitalist, and the laborers for their share in producing
the shoes, the entrepreneur must pay taxes to the government. These
taxes may be considered as payment for that maintenance of law and
order without which the economical manufacture of shoes would be
impossible. The share which goes to the government is determined by a
unique method: the government does not try to secure as large a share
of the product as possible, but strives, on the contrary, to exact as
little as possible, and still meet its expenses. The subject of
taxation requires special treatment [Footnote: See Chapter XXXII.] and
does not, therefore, call for further mention in this chapter.
90. THE ENTREPRENEUR RECEIVES PROFITS.--That share of the income
derived from the sale of the shoes which goes to the entrepreneur is
called profits. It is only fair that the entrepreneur receive some
reward, for it is he who conceived the idea of shoe manufacture and
then carried out the project. Without his efforts the land-owner, the
capitalist, and the laborers would not have combined in this
enterprise, with the result that there would have been fewer shoes in
the community. Fewer shoes would probably mean more expensive shoes.
And not only does the entrepreneur deserve some reward for thus adding
to the well-being of the community, but if he did not receive that
reward, he would not go to the trouble of initiating and maintaining a
shoe manufacturing establishment.
The share going to the entrepreneur is determined less exactly than is
the share of the land-owner, the capitalist, and the laborers. In
dividing up the income of the business, the shoe manufacturer must, in
an important sense, put himself last. Before there are finished shoes
to sell, he must pay the land-owner rent, the capitalist interest, and
the laborers wages. Before he is allowed to count out his own share he
must also pay taxes to the government, pay insurance on his plant, and
set aside an amount sufficient to keep his buildings and machinery in
repair. He cannot evade the payment of rent, interest, or wages on the
plea that these payments will diminish his profits. He has contracted
to pay the landlord, the capitalist, and the laborers, and he must
fulfill that contract. If, after paying all of his expenses, there is
anything left, the entrepreneur retains it as profits. Sometimes this
share is very large, sometimes it is so small as to force the
entrepreneur out of business. In any case, the chief risks and
responsibilities of the whole enterprise are concentrated upon the
entrepreneur, rather than upon the land-owner, the capitalist, or the
laborers.
91. THE DETERMINANTS OF EACH SHARE.--To sum up, the share of the joint
industrial income going respectively to the land-owner, the
capitalist, and the laborers is determined by the interaction of the
forces of supply and demand, operating under conditions of free
competition. The entrepreneur's demand for land, labor, or capital
will depend upon whether or not he sees an opportunity, under a
particular set of circumstances, to add to his product by the
employment of each or all of these factors. Where the supply of
laborers is large, relatively to demand, the promised product of any
one laborer is likely to be relatively small, and in this case the
entrepreneur or employer will be unwilling or even unable to offer a
particular laborer high wages. Under these circumstances the
competition of the many laborers for the few jobs will accordingly
bring about lower wages. Where, on the other hand, the supply of
laborers is small, relatively to demand, the chances that a particular
laborer will be able to add to the product are relatively great, and
the competition of employers for laborers will result in higher wages.
The same reasoning is applicable to rent and interest. The automatic
operation of the law of supply and demand, functioning in a freely
competitive market, determines the shares which go to land, labor, and
capital. The share going to the individual entrepreneur is, as has
already been pointed out, a residual share, _i.e._ what is left over.
QUESTIONS ON THE TEXT
1. What is meant by the distribution of industrial income?
2. Why was this distribution of relatively small importance prior to
the Industrial Revolution?
3. In what way did the Industrial Revolution accentuate the importance
of the problem of distribution?
4. What are the chief difficulties which confront the student of this
problem?
5. What belief has given rise to the charge of injustice in the
distribution of wealth?
6. Explain the significance of the entrepreneur in distribution.
7. What is the nature of rent?
8. Why does the capitalist receive interest?
9. Why does the laborer receive wages?
10. What is the government's share in distribution?
11. What is the nature of profits, and how are they determined?
REQUIRED READINGS
1. Williamson, _Readings in American Democracy_, chapter ix.
Or all of the following:
2. Carver, _Elementary Economics_, chapters xxx and xxxi.
3. King, _Wealth and Income of the People of the United States_,
chapter vii.
4. Thompson, _Elementary Economics_, chapters xx to xxiv inclusive.
QUESTIONS ON THE REQUIRED READINGS
1. What is meant by non-competing groups? (Thompson, page 296.)
2. What are the chief causes of the difference in wages in different
occupations? (Carver, page 268.)
3. Upon what factors does the efficiency of the laborer depend?
(Thompson, page 303.)
4. What is the functional theory of wages? (Carver, pages 261--262.)
5. Have wages increased or decreased since 1850? (King, page 173.)
6. What is the relation of risk to interest? (Thompson, pages 351--
353.)
7. What is meant by the term "unearned increment"? (Thompson, pages
335--337.)
8. Define profits. (King, pages 155--156.)
9. Have profits increased since 1880? (King, page 177.)
10. Name some of the characteristics of the business man. (Thompson,
pages 357--358.)
TOPICS FOR INVESTIGATION AND REPORT
I
1. Select for study some common commodity which passes through all or
most of the stages of manufacture in your community, as, for example,
a hammer, a shoe, flour or canned goods. Make a list of the various
individuals who are connected with the production of this commodity.
By whom are these various individuals paid? Does it appear to you that
their services bear a close relation to the sums which they receive?
Explain fully.
2. Select for study a plot of land which the owner has leased to a
tenant in your community. Why is the tenant willing to pay rent for
this plot? Why is he able to pay rent? Do you believe that under the
existing circumstances he would be able to pay an increase of 10% in
the rent? An increase of 50%? Explain.
3. Select for study an enterprise in your community in which the
employer utilizes various groups of workmen. Classify the workmen on
the basis of the amount of wages received. Why does the employer pay
some high wages and others low wages?
4. Select for study a successful entrepreneur in your community.
Outline, either as the result of hearsay, or personal interviews with
him, the qualities to which he apparently owes his success.
5. Make a study of an enterprise in your community which has either
recently failed, or which is not now in a thriving condition. Attempt
to discover the reasons for the failure to progress.
II
6. The law of variable proportions. (Carver, _Elementary Economics_,
chapter xxix.)
7. The nature of income. (King, _Wealth and Income of the People of
the United States_, chapter v.)
8. Relation of public education to income. (Thompson, _Elementary
Economics_, pages 299-303.)
9. Reasons for the scarcity of capital. (Carver, _Elementary
Economics_, chapter xxxvi.)
10. The productivity of capital. (Taussig, _Principles of Economics_,
vol. ii, chapter xxxviii.)
11. Historical changes in the rate of interest. (Bullock, _Selected
Readings in Economics_, pages 563-568.)
12. The rent of land. (Carver, _Elementary Economics_, chapter
xxxiii.)
13. Causes of the scarcity of labor. (Carver, _Elementary Economics_,
pages 270-271.)
14. Historical changes in the rate of wages. (Bullock, _Selected
Readings in Economics_, pages 533-543.)
15. The nature of profits. (Carver, _Elementary Economics_, chapter
xxxvi.)
16. Relation of profits to risk. (Taussig, _Principles of Economics_,
vol. ii, chapter xlix, section 1.)
17. Qualities of a successful entrepreneur. (Taussig, _Principles of
Economics_, vol. ii, chapter xlix, sections 3 and 4.)
18. Motives of business activity. (Taussig, _Principles of Economics_,
vol. ii, chapter xlix, section 6.)
19. The government's share in distribution. (Carver, _Elementary
Economics_, chapter xxxvii.)