We have already commented upon the optimistic tendencies of certain American economists. Carey was a case in point; so is Walker. In a work entitled The Wages Question, published in 1876, Walker made a successful attack upon that most pessimistic of theories, the wages fund, and forced economists to recognise that to some extent at any rate the wages depended upon the productivity of the undertaking. But to show the possibility of wages growing with the increased productivity of industry was hardly enough to satisfy sensitive consciences. Walker was particularly anxious to foil the socialists by showing that profit is not the outcome of exploitation, and it was with a view to such demonstration that the doctrine of rent was so greedily seized upon.
By the term “profit” Walker understands the special remuneration of the entrepreneur,[1158] omitting any interest which he may draw as the possessor of capital. This distinguishes him from the majority of English economists, who, contrary to Continental practice, have always persisted in confusing the functions of the entrepreneur and the capitalist. Neither is he content to regard his work as confined to simple business arrangement and superintendence, which would result in his being paid a salary equal to that of a managing director. His work is altogether of a more dignified character, and consists largely in anticipating the fluctuations of the market and in organising production to meet them—in a word, in adapting supply to demand. The entrepreneur is the true leader of economic progress—a real “captain of industry.”[1159]
All this implies, says Walker, differences in industrial revenues exactly analogous to the differences in agricultural incomes. Some industries yield no profit at all beyond remunerating capital and labour at the normal rate and leaving enough for the entrepreneur to prevent his abandoning the undertaking altogether. Other industries yield a little more, and by imperceptible gradations we pass from such mediocre undertakings to more prosperous ones, and finally reach those that yield immense profits. The question then arises as to whether such abnormal profits in any way represent wages that have been withheld from the workers. This is not at all likely, because wages are often highest where profits are greatest. Cæteris paribus, the probability is that the greater profit in the one industry as compared with another implies the greater capacity of the entrepreneur in the one case than in the other. The superior income is a pure surplus like the rent of land. “Under free and full competition,” says Walker, “the successful employers of labour would earn a remuneration which would be exactly measured, in the case of each man, by the amount of wealth which he could produce, with a given application of labour and capital, over and above what would be produced by employers of the lowest industrial, or no-profits, grade, making use of the same amounts of labour and capital, just as rent measures the surplus of the produce of the better lands over and above what would be produced by the same application of labour and capital to the least productive lands which contribute to the supply of the market, lands which themselves bear no rent.”[1160]
Walker’s theory contains a good deal of truth, although it is not, perhaps, quite as new as he thought it was. The opinions of Mill and Senior have already been referred to, and more than one Continental economist, from J. B. Say to Mangoldt, and including Hermann,[1161] have propounded similar views. Nor has the doctrine ever been completely triumphant in economic circles. Most contemporary writers, no doubt, regard profit as a kind of rent, due partly, but only partly, to the personal ability of the entrepreneur.[1162] Other economists—such as Marshall,[1163] for example—think that they can trace some other elements as well, such as insurance against risk and payment for the necessary expenses of training the entrepreneur.[1164] Walras, on the other hand, omits these last two items and points out that under static conditions the entrepreneur would neither gain nor lose. The sole source of profit, then, are those “dynamic” rents which are the result, so to speak, of the perpetual displacements of equilibrium in a progressive society. But these dynamic rents are extremely varied in character and bear no relation to the personal qualities of the entrepreneur.
Clark[1165] and others, although subscribing to Walras’s dictum that profits are really composed of rents, think that there may be static as well as dynamic rents and that Walras’s hypothesis of a uniform net cost for all undertakings is altogether too abstract. Only in the case of the marginal producer, whose expenses are highest, is there anything like equilibrium between costs and price. The other producers even when there is no such thing as a temporary displacement of equilibrium, are able to make substantial incomes out of the various species of differential rents already mentioned—proximity to market, better machinery, greater capital, etc. Marshall speaks of such incomes as composite rent.[1166]
Walker’s theory has evidently not been accepted without considerable reservations. And we need only remind ourselves of the way in which dividends are usually distributed among shareholders to realise the inadequacy of his conception of rent and the exaggerated nature of his attempted justification. Would anyone suggest, for example, that such dividends are merely the result of exceptional ability?[1167]
This attempted explanation of profit affords, perhaps, the most interesting illustration of the extension of the concept rent, although it is by no means the only one. The Ricardian theory, worked out to its logical conclusion, reveals the interesting fact that there are as many kinds of rents as there are different situations in the economic world. Whenever it becomes necessary to unravel the mystery surrounding individual inequalities of income recourse is had to a generalised theory of rent. “All advantages, in fact, which one competitor has over another, whether natural or acquired,[1168] whether personal or the result of social arrangements … assimilate the possessor of the advantage to a receiver of rent.”[1169] Something of the variety of concrete life is thus reintroduced into the Classical theory of distribution, although all this was at first rigidly excluded by the doctrine of equality of interest and uniformity of wages.[1170] The theory of rent is an indispensable complement of the Classical theory of distribution, giving the whole thing a much more realistic aspect. It is, as it were, the keystone of the whole structure.
(b) But the theory has also undergone another species of transformation. Ricardo conceived of rent as essentially a differential revenue arising out of the differences in the fertility of soils.[1171] Were all lands equally fertile there would be no rent. The same remark applies to the various species of rent discovered since then. There is always some inherent difference which explains the emergence of rent, such as the greater suitability of a building site, the greater vigour of the worker, or the superior intelligence of the entrepreneur. They are all of a type. Entrepreneurs who produce the same article, workmen toiling at the same trade, capitals employed in the same kind of undertaking, may be grouped in an order of diminishing productivity, much as Ricardo grouped the various species of lands. The last entrepreneur of the series, the last worker, or the last item of capital each earns just enough to keep them at that kind of employment. All the others produce more, and, seeing that they all sell their goods or services at the same price, they draw a rent which is greater than the income enjoyed by the others by the difference between their productivity and that of the last of the series. The whole economic world seems to be under the dominion of a kind of law of unequal fertility, not of lands merely, but of capital and individual capacity as well—a law which is sufficiently general in its application to explain all inequalities in the revenues of the different factors of production.
We cannot help feeling the artificiality of this conception and wondering whether the differences in revenues are not capable of explanation upon the basis of a simpler and more general principle. Is it impossible to take account of them directly and to treat them as something other than an exception or an anomaly? One cannot avoid asking such questions, and the reply is not far to seek.
Doubts arise as soon as we realise that land may yield rent apart from any inequality in its fertility. “If the whole land of a country were required for cultivation, all of it might yield a rent,” says Stuart Mill.[1172] Apparently all that is needed is an intense demand and a supply that is never equal to that demand, so that the price is permanently above the cost of production.[1173] In such a case even the worst land—assuming that all is not of equal fertility—would yield a rent. Mill was of opinion that this rarely happened in the case of land, but was by no means uncommon in the case of mines.[1174] Obviously, then, rent is not merely the outcome of unequal fertility, and the cause must be sought elsewhere. Stuart Mill had obviously foreseen this when he said that “a thing which is limited in quantity is still a monopolised article.”[1175]