Problems in American Democracy Part 13

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 ent.i.tled 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 cooperated 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 ill.u.s.trate 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 antic.i.p.ation 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 cooperating with the entrepreneur are not, however, arbitrarily determined. The entrepreneur must bow to economic law, and give these individuals what free compet.i.tion 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 a.s.sume 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 acc.u.mulation 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 compet.i.tive 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 x.x.xII.] 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 compet.i.tion. The entrepreneur's demand for land, labor, or capital will depend upon whether or not he sees an opportunity, under a particular set of circ.u.mstances, 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 circ.u.mstances the compet.i.tion 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 compet.i.tion 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 compet.i.tive 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 x.x.x and x.x.xi.

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