Chapter VII The distribution of wealth edit
Our reasoning has led us to the conclusion that each labourer produces his own wages and that increase in the number of labourers should increase the wages of each. This at least is clear - that the cause by which, in spite of the enormous increase in productive power, the great body of producers are confined to the least share of the product upon which they will consent to live, is not the lack of capital nor yet the limitation of the powers of nature that respond to labour. As it is not therefore to be found in the laws that bound the production of wealth, it must be sought in the laws that govern distribution. To them let us turn.
The produce or production of a community is the sum of the wealth produced by that community. It is the general fund from which, as long as previously existing stock is not lessened, all consumption must be met and all revenues drawn.
Production does not merely mean the making of things, but includes the increase of value gained by transporting or exchanging things. There is a produce of wealth in a purely commercial community, as there is in a purely agricultural or manufacturing community; and in the one case as in the others, some part of this produce will go to capital, some part to labour and some part, if land has any value, to the owners of land.
As a matter of fact, a portion of the wealth produced is constantly going to the replacement of capital, which is constantly consumed and constantly replaced. But it is not necessary to take this into account, since it is eliminated by considering capital as continuous, which, in speaking or thinking of it, we habitually do. When we speak of the produce, we mean therefore the wealth that is produced over and above what is necessary to replace the capital consumed in production; and when we speak of interest, or the return to capital, we mean what goes to capital after its replacement or maintenance.
It is further a matter of fact that, in every community that has passed the most primitive stage, some portion of the produce is taken in taxation and consumed by government. But it is not necessary, in seeking the laws of distribution, to take this into consideration. We may consider taxation either as not existing, or as by so much reducing the produce. And so too of what is taken from the produce by certain forms of monopoly, which exercise powers analogous to taxation. After we have discovered the laws of distribution we can then see what bearing, if any, taxation has upon them.
Rent, wages and interest edit
The three factors in production are land, labour and capital, and the whole produce is primarily distributed into three corresponding parts.
Three terms therefore are needed, each of which shall clearly, express one of these parts to the exclusion of the others.
Rent, as defined, clearly enough expresses the first of these parts - that which goes to the owners of land.
Wages, as defined, clearly enough expresses the second - that part which constitutes the return to labour.
But as to the third term - that which should express the return to capital - there is in the standard works a most puzzling ambiguity and confusion.
Of words in common use, the word interest comes nearest to expressing the idea of return for the use of capital. As commonly used it implies the return for the use of capital, exclusive of any labour in its use or management.
Profits an ambiguous term edit
The word profits, as commonly used, is almost synonymous with revenue. It means a gain, an amount received in excess of an amount expended, and frequently includes receipts that are properly rent while it nearly always includes receipts that are properly wages, as well as compensations for the risk peculiar to the various uses of capital. Unless extreme violence is done to the meaning of the word, it cannot therefore be used in Political Economy to signify that share of the produce which goes to capital, in contradistinction to those parts which go to labour and to landowners.
Adam Smith well illustrates how wages and compensation for risk largely enter into profits, pointing out how the large profits of apothecaries and small retail dealers are in reality wages for their labour, and not interest on their capital; and how the great profits sometimes made in risky businesses, such as smuggling and the lumber trade, are in reality but compensations for risks that in the long run reduce the returns to capital so used to the ordinary or below the ordinary rate. Similar illustrations are given in midst of the subsequent works, where profit is formally defined in its common sense with, perhaps, the exclusion of rent. In these works, the reader is told that profits are made up of three elements - wages of superintendence, compensation for risk, and interest or the return for the use of Capital.
Thus neither in its common meaning nor in the meaning expressly assigned to it in Political Economy can profits have any place in the discussion of the distribution of wealth among the three factors of production. To talk about the distribution of wealth into rent, wages and "profits" either in its common meaning or in the meaning expressly assigned to that term) is like talking of the division of mankind into men, women, and human beings. With profits this inquiry has manifestly nothing to do.
We want to find what it is that determines the division of their joint produce between land, labour and capital; and profits is not a term that refers exclusively to any one of these three divisions. Of the three parts into which profits are divided by political economists, namely compensation for risk, wages of superintendence and return for the use of capital, the third falls under the term interest, which includes all the returns for the use of capital, and excludes everything else; wages of superintendence falls under the term wages, which includes all returns for human exertion, and excludes everything else; and compensation for risk has no place whatever, as risk is eliminated when all the transactions of a community are taken together. Consistently with the definitions of political economists, I shall therefore use the term interest as signifying that part of the produce which goes to capital.
Definitions restated edit
To recapitulate: Land, labour and capital are the factors of production. The term land includes all natural opportunities and forces; the term labour, all human exertion; and the term capital, all wealth used to produce more wealth. In returns to these three factors is the whole produce distributed. The part that goes to landowners as payment for the use of natural opportunities is called rent; the part that constitutes the reward of human exertion is called wages; and the part that constitutes the return for the use of capital is called interest. These terms mutually exclude each other. The income of any individual may be made up from any one, two, or all three of these sources; but in the effort to discover the laws of distribution we must keep them separate.
There must be land before labour can be exerted, and labour must be exerted before capital can be produced. Capital is a result of labour, and is used by labour to assist it in further production. Labour is the active and initial force, and labour is therefore the employer of capital.
Labour can only be exerted upon land, and it is from land that the matter which labour transmutes into wealth must be drawn. Land, therefore, is the condition precedent, the field and material of labour. The natural order is land, labour, capital; and instead of starting from capital as our initial point we should start from land.