meet this demand a problem that takes the concrete form of producing goods that will sell for more than the expense of production. On the one hand he has to estimate the quantities which he can sell at certain prices; on the other hand, he has to take account of the quantities which various units of land, labor, and capital will contribute to his product, together with the prices (rent, wages, cost of capital goods, and interest) that he has to pay for these units. Through his mediation the demand of society for want-satisfying goods becomes a demand for the services of certain quantities of land, labor, and capital, combined in certain proportions. And the principle that guides the entrepreneur's transformation of the community's demand for the products of land, labor, and capital into his own demand for the services of these factors in production is the principle of marginal productivity. The wages, rent, and interest that are actually paid for the services of the factors in production are the resultants of the demand of entrepreneurs, on the one hand, and of the supply of these factors on the other hand. The forces determining these prices are focused at the margin. The principle of marginal productivity is an illuminating way of stating the problem of the distribution of wealth, rather than a solution of it. Just how supply and demand operate in the case of each factor in production is a topic to be considered in later chapters. Just as utility is at the same time the cause and effect of price, so marginal productivity is at the same time the cause and effect of wages, rent, and interest. From one point of view it is seen that the competition of producers makes it necessary that specific units of land, labor, and capital should get a reward proportionate to the selling price of the amounts which they contribute to the social dividend; from another point of view it is equally clear that the necessary expenditures for land, labor, and capital are, in the long run, potent factors in determining the prices of the things that make up the social dividend. Furthermore, we should The Meaning of "Productivity." not forget that the word "productivity" as used in economics (and generally in current discussions of economic topics) has a distinctly limited meaning. To digress for a moment in order to make the point clearer: In the theory of consumption we emphasize the fact that many of the most important human wants are satisfied by "free goods," which, simply because they are free, lie outside the proper field of economic investigation. But the enjoyment of these free goods is usually dependent upon the possession of economic goods. Air is a free good, -to any one who can demand the economic goods necessary to life. The glorious scenery of our national parks is a free good, to any one who can afford traveling expenses and hotel bills. In general, the enjoyment of many of the finer pleasures of life, involved in the common human relations of an individual to his physical and social environment, are "free," but free only to the individual who can afford the leisure and the economic goods without which many of these "free" pleasures are impossible. For present purposes, however, the important point is that there are free production goods as well as free consumption goods. Nature furnishes some of these. The oceans and lakes furnish free pathways for commerce; natural forces of all kinds are freely utilized by men in the work of production. But we do not call these things productive, because no part of the annual product is dependent on the utilization of any particular unit of them. In this technical sense the wind is not productive, but windmills are. In order to utilize the ocean we have to invest money in vessels and docks. We have to impute productivity to these things because they will not be furnished unless it is estimated that they will yield a remunerative income, and because the annual product will obviously be reduced if they are not furnished. Much has been written about the "productivity" of the Panama Canal. But we would have to impute productivity to the Strait of Gibraltar if England were able to charge a toll for its use! Somewhat analogous to these "free productive goods" is society's fund of accumulated knowledge of productive methods, -the heritage of centuries of economic evolution. This accumulated industrial experience is an infinitely more precious possession than the existing store of productive goods. Compare the productive possibilities of a community of men possessing this knowledge, but forced to begin work absolutely without a ready-made stock of capital goods, with those of a tribe of savages suddenly and miraculously equipped with all the productive appliances of modern civilization. Yet this vast fund of productive knowledge, so far as it is common property, is not thought of as "productive." The social dividend is continually being increased as a result of the discovery of new natural forces, or new ways of harnessing and utilizing natural forces. Secrecy or government patents make it possible for those who first introduce these new methods of production to reap an income from the temporary advantage it gives to them as producers. For the time being these new methods themselves have to be regarded as " productive," although they contribute much more to the increase of the social dividend after they have become matters of common knowledge and use, and hence have ceased to be called "productive." Disinterested scientists, especially those in the employment of the government or of universities, have often given the results of their improvements in industrial methods freely to the world, thereby swelling the social dividend, but not reaping for themselves the pecuniary reward which goes to those who patent their improvements and thereby render them "productive." Moreover, many of the world's greatest advances in the technique of production have been made possible only by the patient researches of investigators in the " unproductive " field of pure science, working solely for love of the work, and without hope of pecuniary reward.1 We impule productivity only to goods or services which are the objects of property rights or of analogous rights of control, such as a man's power to dispose of his own labor. The fact is that just as the benefits of free consumption goods are bound up with the possession of larger or smaller quantities of economic goods, so the utilization of free productive agencies is possible only in 1 See a note on this point in Merz, History of European Thought in the Nineteenth Century, Vol. i, p. 92, note. The list there given could be greatly extended. combination with labor, waiting, and scarce and appropriable natural objects, and these have to be paid for. We harness natural forces for the work of production, but we impute productivity only to the harness. We continually learn better and better methods of doing our productive work, but we impute productivity only to the expenses involved in utilizing these methods, not to the methods themselves. Productivity implies merely a relation of dependency between the amount of the product and the use of a particular unit of one of the agents in production. It is important that the reader should see the truth in the statement that the laborer, the landlord, and the capitalist get paid in proportion to their respective products. It is equally important that he should see clearly that there are definite limitations to the meaning and significance of the statement. The statement that rewards tend to equal products has no ethical significance, and should not be interpreted as a justification of the present economic order, and this for the following reasons among others: (1) That distribution ought to be according to productivity is itself a debatable proposition. Some socialists, for example, maintain that distribution according to needs is a higher ideal. (2) The ethical side of the problem of distribution relates to personal distribution, while the marginal productivity doctrine relates to the determination of the incomes going to the different agents in production. To state that the rent of an acre of land tends to equal the value of its product is not to say that the landowner has "earned" his income. The private receipt of rent depends upon such social institutions as private property and inheritance, and these have to be judged from the broad point of view of social welfare. (3) The efficiency of the individual laborer, which is one of the things determining his productivity, often depends upon the opportunity he has had to "make the most of himself." But opportunity depends largely on environment, and this in turn is to a large extent amenable to social control. (4) The amount of the marginal product of any one factor in production is itself a resultant of all the forces affecting the supply of all the factors in production and of all the conditions that affect their fitness to serve in the production of the things that consumers are demanding. (5) This theory is only a statement of a normal tendency. It does not, properly understood, conflict with the fact that such things as custom and other forms of economic friction and inertia, the higgling of the market, the conscious efforts of social classes to better their condition, imperfections in the monetary system, short-sighted selfishness on the one hand, altruism on the other, as well as the conscious social control expressed in labor legislation, usury laws, and the like, all have important effects upon the incomes actually received by those who furnish labor, capital, and land for the work of production. Actual wages may differ from the normal wages measured by marginal product just as contractual rent may differ from economic rent. (6) We can imagine an economic order very different from the present one in which it would still be true that incomes would tend to equal products. If, for example, wages were arbitrarily increased 50 per cent by law, while one result would undoubtedly be an increase in unemployment, it would still be true that wages would tend to equal the marginal product of labor, or, rather, that the marginal product of labor would tend to equal wages. To attempt to avoid this difficulty by assuming that the present order, or a purely competitive order, is the "natural" order of things, is to beg the whole question in favor of the existing status. Social Aspects of Diminishing Productivity. Since the entrepreneurs are only the intermediaries between society viewed as a body of consumers and society viewed as a body of producers, we may, for present purposes, leave them out of consideration, in order to fix our attention upon some of the more general results of the fact of diminishing productivity. If the number of laborers within the boundaries of a nation is increased by immigration, without a corresponding increase in capital or in the amount of land available for use, the result will be an increase in the total amount of goods produced, which means an increase in the amount of wealth produced per unit of land and capital, but (on account of the operation of the law of diminishing productivity) a decreased amount per laborer; a higher marginal product for land and capital, and a lower marginal product for labor; consequently, higher rent and higher interest, but lower wages. If the supply of capital within a country is increased. le labor and land remain constant, the result will be high es and higher rents, but a smaller remuneration for c milarly, if the available supply of provements in transportation facilitively less, an nd interest land creased tiek will me of the to Live in a Country chnical |