Essentials of Economic Theory / As Applied to Modern Problems of Industry and Public Policy

by John Bates Clark

The Mode of Calculating the Rent of Concrete Instruments.—Now the rent of such instruments of production, whether artificial or not, can be measured in exactly the same way in which the rent of land is measured. We saw that there are two margins of utilization of land, an extensive and an intensive one, and that the product of labor and capital at either of these margins may be used as a basis for computing the surpluses which constitute the rent of the land. The landlord gets from a good field what it produces minus what the labor and capital that are used on this field would produce if they were used on the poorest land in cultivation; or, what is the same thing, he gets from the field what it produces minus what this labor and capital would produce if they were set working somewhere on the intensive margin of cultivation. Take the men out of this field, add them in small detachments to the men who are already cultivating other fields, in order that such fields may be tilled a little more intensively, and measure the product which the laborers create when they are so placed. Withdraw also the capital from the field, add it, in small amounts, to the capital that is working elsewhere, and measure its specific product. The sum of these two specific products is the same amount that is arrived at by using the former standard. This labor and capital, formerly used on the good field, scattered as they now are among the users of other good land, will create the same amount that they would have created if they had been employed on the poorest land in cultivation. This amount is, as it were, what they produce by their own unaided power; and whatever is produced in excess of this amount when a good field comes to their assistance is the rent of that field, for it is the contribution which the field makes to the joint production. Total product of land, labor and auxiliary capital minus the product created by the labor and auxiliary capital when these agents are put in marginal positions equals the rent of the land.

The Rent of an Instrument measured from the Intensive Margin.—We can measure the product of any instrument in this way. If it is a ship, it takes labor to sail it and requires a considerable amount of auxiliary capital. We must fill the bunkers with coal, stock the steward's department with provisions, furnish and light the staterooms and the saloons, and provide cordage and a wide variety of other ship stores. All this labor and all this capital we could take out of the ship and use elsewhere. We could convert them into marginal labor and capital. We could divide them among the owners of other ships where they would be used in a way that would make these other ships somewhat more efficient and cause each of them to earn a little more than it now earns. Whatever the labor and capital could, in this way, produce furnishes the basis for computing the rent of the ship. Subtract it from the total joint product of labor, capital, and ship, and you have what the vessel separately earns.

The Mode of Testing the Productive Power of a Ship.—Put the labor and capital into the ship and set it doing its proper work of carrying freight and passengers, and you cause a certain product to be created. The steamship company gets an aggregate amount for the service it renders by means of the labor, the auxiliary capital, and the ship. A certain smaller amount would be realized if the labor and the auxiliary capital were taken out of the ship, distributed, and used in the way we have just described. The difference between the two amounts is the rent of the ship, or its particular contribution to the general product. This gives us a formula for computing the rent, not only of land, but of buildings, tools, machines, vehicles, and every other concrete instrument of production. The formula, indeed, is so general that it enables us to compute the earnings of any agent whatsoever. The rent of any such agent is what it adds to the marginal product of labor and capital used in connection with it.

No-rent Instruments.—The majority of instruments that are in use add something to the marginal product of the labor and capital used in connection with them. Some add more and some add less, according to their several qualities. As a rule, any tool of trade produces most when it is new and less and less as it grows older. In the end it is discarded because it has so deteriorated that it no longer adds anything to the marginal product of the labor and capital that are used in connection with it. A wagon has become so rickety that it no longer pays to furnish a horse, a harness, and a driver for it. The capital and labor that these represent would earn as much if they were detached from the old vehicle and added to the equipment of some person who has a stock of good ones. The rent of this old wagon is nothing. As in the case of the poorest land in cultivation, it is a matter of indifference whether certain amounts of labor and capital are used in connection with it, or whether they are withdrawn and employed elsewhere. This poor vehicle, like the poor land, may be used without positive loss; but if it is so used, nobody gets any income from it. It has no power to enter in a really productive way into combination with labor and capital, for it cannot so combine with them as to add anything to those marginal products which the labor and capital could create if they remained detached from it.

The Universality of the Test of Rent.—This test, whether an instrument can or cannot add something to the marginal product of labor and capital, may be universally used. It may be applied to everything that is made as an aid to labor. There are no-rent buildings, locomotives, cars, tracks, ships, wagons, furnaces, engines, boilers, and, in short, instruments of every description that figure in production. Combine any one of them with labor and capital and see what you get out of the combination; then take the labor and capital away and see what they will produce as marginal labor and capital; and the difference between the two amounts, whatever it is, is the rent of the instrument. If the difference is nil, the instrument is at the point of being abandoned.[1]

True Capital rather than Capital Goods moved in Making such Tests of Productivity.—In applying these tests with scientific accuracy we should take away the true capital used in connection with a rent-paying instrument and use it as marginal capital elsewhere, rather than take away the particular concrete thing in which that capital is now embodied. In the case of the ship the accurate test is made, not by taking stores, etc., bodily out of it and putting them into other ships, but by letting the stores first earn what they can where they are, converting the earnings into money, and, when the stores are completely used up, spending the money to procure marginal additions to the outfit provided for the other ships.

One Difference between Land and Artificial Capital Goods.—In the case of land a particular area is marginal or no-rent land, and, in a static state, it remains so. Any particular ship, wagon, engine, or other made tool begins its career as a rent payer and ends it as a no-rent instrument. If we watch the whole social stock of instruments of production, we shall see the no-rent points not fixed in location, but shifting from place to place. Now this machine, now another, and now still another reaches the unproductive state and is supplanted by instruments of similar kind that are new and efficient.

Original Elements in the Soil.—The real difference between the rent of a piece of land and that of a building, machine, vehicle, or any similar instrument arises from the fact that the land is not going to destruction and the artificial instrument is. There are elements in what is commonly called land that wear out as do the tools that are used in tilling it, but these elements are not land in the economic sense. Land, as Ricardo long ago said, consists in the "original and indestructible powers of the soil." He singles out certain constituent elements of every farm, forest, building site, or other piece of what is called land in ordinary usage, and gives to this new concept the name land in an economic sense. These so-called "powers" are original elements because man does not make them; they are provided altogether by nature, and the only way in which man may be said to impart any productive power to them is by putting them into combinations in which they can produce. When men settle upon what has been vacant land, they bring the land into combination with labor, and when they break up the land for tillage and put buildings on it, they combine it with artificial capital. By means of these combinations land acquires productive power; but physically considered, it is altogether a natural product.

Indestructible Elements in the Soil.—Land in the economic sense is indestructible because the natural effect of use is not to destroy it. This does not mean that it is not physically possible to destroy land to the extent of making it forever impracticable to use it in the ways in which land is commonly utilized. Nature may do this by sinking it beneath the ocean, and man can, if he will, do something akin to this; but he does not naturally destroy what is truly land in the using. It is impossible to use a plow, a spade, or a reaping machine without injuring it and, in the end, wearing it out. It is also impossible to draw the nutritive constituents out of the superficial loam and convert them into crops without exhausting the supply of these sources of fertility and so spoiling that which is commonly called the land, though it is not so in the economic sense. What is really land in this sense is not affected. Nitrates and phosphoric acid that lie in the topmost stratum of the soil are among the destructible instruments of agriculture. The supply of them has to be renewed, if cultivation is continued, and they are therefore in the class with the plows, spades, and reaping machines which also wear out. But whatever there is in the soil that suffers no deterioration from any amount of use is the land with which political economy has to deal.

The Gross and the Net Rent of Land Identical.—As land does not wear out and require renewal, all that it adds to the products of the labor and capital that are used in connection with it may be taken by the landlord as an income without reducing the amount of his property. Whatever land produces at all is a net addition to the general income of society.