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Chapter VIII.

The Law of Diminishing Return.

An analysis has been made of the principles which govern the rise and growth of land values. We have seen how they respond to every step in the march of progress, how they advance with the aggregation of population. Growing land values represent the growing inadequacy of the land of a community to meet the growing needs of such community. To satisfy the requirements of additional population recourse is had to inferior lands, or to less productive applications of labour and capital upon the same land. It is not the mere presence of population which creates land values. It is the demand of consumers, wherever situated, for the products of the land. Whilst it is true that the demand—the needs—of the people of New Zealand is most effective in its stimulus to local land values, it must not be ignored that the demand of British consumers for New Zealand mutton and butter has contributed in large measure to the remarkable advancement during the past fifteen years of the values of pastoral, and especially of dairy, land. The frozen meat trade with Britain has enhanced the value of land in New Zealand by increasing the number of buyers of New Zealand products without increasing the supply of the land from which the products are obtained.

Before this trade mutton in New Zealand was about 2s 6d the half sheep; now it is 4d and 5d per lb. Now, at the same time, the price of the same article, making allowance for costs of freight, tariffs, etc., is the same everywhere; so that the price which the New Zealander pays for his mutton approximates to the price paid by the British consumer, after allowing for cost of carriage, storage, and freezing. The burden of this increased price is borne by the consumer, the benefit is appropriated by the landowner. The farmer whose means have not permitted him to obtain the freehold of his farm finds that steadily increasing prices make his lot no better, as they are accompanied with steadily increasing rent.

In Taranaki, the most renowned of New Zealand provinces for its dairy produce, land has risen from £.1 or £3 to £30 or £40 an acre. This is the outcome of the extension of the market for butter, arising from the fitting of merchant ships with refrigerating chambers. Now if there is "sweating" and arduous child-labour in any of the industries of New Zealand, it is in dairying. Despite the high price for butter and the insatiable market which Great Britain offers, the farmer finds he needs the assistance of all the page 68 members of his family to make the industry profitable. Not a few have been the reports of grievous labour, in the form of milking and tending cattle, imposed on very young children to the detriment of health and education. The reason is not far to seek. Land values have sucked up like a sponge the gains as they arose. The competition for land suitable for dairying, under the stimulus of high prices for butter, enables the landowners to reap ultimately the whole benefit, arising from the high prices. By Britain's offering a market for illimitable supplies of New Zealand butter and cheese at high prices, the margin of the dairying industry is pushed on: and enlarged, taking in land of more and more inferior quality or land further and further removed from facilities of transportation, It is the high prices that enable these lands to be brought into service. If the prices were to decline seriously these could not be profitably fanned. With falling prices, the margin of the dairying industry would be drawn in and contracted, receding first from the most inferior land in point of fertility or situation. Rents rise or fall with the extension or contraction of the boundary or margin of the industry. The rent of any piece of land measures its superiority over the poorest land in use. Consequently, as poorer and poorer lands are resorted to, the superiority over the poorest land becomes greater. Rising prices enable poorer sod poorer land to be profitably farmed, but, concomitantly with this process, the relative advantage of the superior land increases and, of course, its rent. Again, we see that while the burden of high prices is borne by the New Zealand consumer, the benefit is not enjoyed by the farmer, but is appropriated by the landowner. What advantage, then, to the producer of high prices, when they involve commensurately high rents or high land-values, which prevent him from becoming a freeholder unless he can command a large sum of money?

We are now ready for the proposition that economic rent represents an unearned increment. Wages represent an increment to the labourer, earned by the expenditure of effort on the production of something. Interest represents an increment to the capitalist earned by the service rendered by capital as ancillary to labour in facilitating production. Rent represents an increment to the landowner unearned by any exertion he has put forth. All increasing sum paid in wages or interest indicates generally increasing productivity. The more labour and capital are employed the greater the fruits of industry and the greater the amount of produce for consumption. Growing rents do not indicate growing productiveness, but rather the reverse. They indicate the diminished productiveness of labour applied to land. They simply denote the increasing scarcity of land relative to the needs growing population. Land values do not rise in a progressive society, because the services which the land renders to production grow in importance. On the contrary, land yields proportionately less and less as cultivation becomes "more and more intensive or page 69 recourse is had to more and more inferior lands. When, from the national output, an increasing sum is paid in rent, it measures in-increasing scarcity of land, whilst when, from the national output, an increasing sum is paid in wages and interest, it measures an increasing abundance of commodities.

When land is abundant, as in a new country, and the best and most profitable land is available land has little or no value; other words, it demands nothing for the service it renders to production. Land is given by God, and He asks no share in the output. But as this relative abundance is turned into relative scarcity by general progress, land acquires the power of effectually demanding a share, and a share that enlarges itself with the diminishing abundance. A fertile farm renders no greater service to production, when a colony is thickly populated, after a century of progress and industry than when, with a handful of settlers, the colony is commencing its industrial history. The properties of the soil are the same; the power to furnish man with raw material is the same. Yet in the one case there is a high rent, and in the other the rent is quite a negligible quantity. The owner of the land receives this rent. How has he promoted production that he should receive this ever-growing share of the produce of industry? It is not payment for work done, for energy expended. It is not payment for capital invested in machinery or appliances to facilitate industry and augment productiveness. No! the landowner observes his share grow as the competition for his land grows in intensity; he sees industries expand; he sees population increase—and all this advancement intensifies the need of his land. Upon this competition he fattens. His land will not produce more than formerly, but more are wanting it. So without labour, without effort, his land rises in value and his rents increase. He flourishes upon the necessities of advancing population. Without contributing to prosperity, he secures a share of its gains. The more men clamour for what he has to give, the more he asks for the right to use it. He asks more because the need is more. As the difficulties of production increase, as the labourer gets a diminishing return for his labour and capital owing to the necessity of cultivating poorer land, the landowner gets an increasing return. Having that, the supply of which cannot be increased, he prospers on the community's growing need.

The full force of the argument will be best seen by taking an extreme case. Let us suppose a country parcelled amongst one hundred landlords, and that no progress in invention, machinery and the arts of production (which tend to increase the efficiency of labour and make it more productive) has taken place. Population steadily increases. The arts of production being stationary, the law of diminishing return will operate unchecked, and without conditions the state of the people will become worse and worse. page 70 Increments of labour will give less increments of yield, and at the same time rents will steadily rise. Productiveness will fail and rents rise. The landowners will grow into riches, the labourers decline into poverty. As population presses more and more on the means of subsistence, the share of the landowner of the produce of industry will increase, the share of the labourer will decrease. Even if rents did not increase, the condition of the people would be worse, owing to the diminishing return to increasing applications: labour. But the evil is immeasurably aggravated by the lessened productiveness being accompanied by enhanced consumptiveness on the part of landowners.

Such is really what happened in Britain before the repeal of the Corn Laws. The duty upon corn was so high as almost to prohibit the importation of foreign supplies. The country was thrown upon its own agricultural resources. The result was inevitable. Foreign supplies being cut off, the demand for bread could not easily be met. The poorest land was brought under cultivation, and the fertility of all land was drawn upon to the utmost. The soil everywhere was highly, intensively tilled. The high price of corn rendered this extension of cultivation profitable. Land which, with a low price, would not have paid to farm brought to its owner a profit for his labour. But the law of diminishing return was in acute operation. The inferior soils yielded less to the exertions of labour than the more fertile ones, and it was only the high price of produce which enabled them to be profitably cultivated. In agriculture, as in other industries, men go on applying labour and capital to a point at which any further application will not yield a remunerative return. A rise in price causes that point to advance; a decline causes it to recede. The argument is clear. Cultivation can be carried further with profit when prices are high than when prices are low. But notice the double effect of this more extensive and intensive cultivation necessitated by the insufficiency of less extensive cultivation to meet the demand of the people for bread. In the first place, prices must rise to cover the extra cost of production on the margin of cultivation. If the price did not so rise, the needed supply would not be forthcoming. In the second place, the value and rent of agricultural land rises. Every widening of the area of tillage by the inclusion of less fertile soils enhances the value of the more fertile land. The rent of any piece of land is nothing but the measure of its superiority in fertility or situation over the most inferior in use. Consequently, as more inferior soils are resorted to rents rise. If through high prices it-becomes profit able to till a patch of land hardly redeemed from barrenness, and far removed from facilities of transportation, the profitableness of another patch, fertile and accessible to; market where its products can be readily sold, is still further augmented; and the difference is represented by rent. This truth, that resort to inferior land raises land values and rent, may be made obvious by a simple illus- page 71 tration. Let the adjoining circle represent the land of a country.

Let the segment A B C represent the most fertile land of the country. This is sufficient at first to produce the cereals required by the inhabitants. Now, let population increase, and with it the demand for cereals. To meet this enlarged demand the land represented by the segment A C D has to be brought "under the plough; but it is inferior to the land A B C, and does not give so large a return to the same amount of labour. Consequently the cost of producing cereals from A C D is greater than from A B C, and the price of the produce must be raised to cover this additional cost, otherwise no cultivation, of A C D will take place. And, of course, if the price of the produce raised from A C D requires to be increased to cover the added cost 1 production, the price of the product raised from A B C is raised to the same figure, for in the same market, at the same time, there cannot be two prices for the same article. Thus the resort to the more inferior soil A C D will have rendered the cultivation of A B C more profitable than formerly, and this extra profitableness will be absorbed in rent. The men who own the superior laud A B C will be able to obtain for the use of it a rent representing the advantage which it possesses over A C D. Those cultivating the inferior soil will be always ready to offer a rent for the superior soil measuring the advantage which the latter possesses over the former. Thus competition will secure a rent for superior land, as recourse is had to inferior soil and prices of produce are raised. As population still further increases the demand for cereals will grow until the supply from A B C and A C D is insufficient. Prices must then rise to make it profitable to cultivate the still more inferior land represented by the segment A D E. This will cause a corresponding rise in the rent of the superior laud A B C, and enable A C D to command a, rent measuring its superiority over A D E. Rents will still further rise as the necessities of a growing population bring the most inferior soil of all, A E B, into cultivation ft thus appears rents increase as the difficulties of supplying the demand for the produce of land increase, or, in other words, as the cost of production increases.

The British Corn Laws occasioned high prices and high rents, and this double effect is now explainable. Consumers had to devote more of their earnings to the purchase of bread, and the incomes of the landlords were enlarged. Or the truth may be stated thus:—The Corn Laws, by diverting labour and capital from manufactures, which are governed by the law of increasing return, to agriculture, which obeys the law of diminishing return, lessened the total annual output of the nation's industry. The wealth of page 72 the nation, estimated in consumable goods was diminished, whilst at the same time the shave of that wealth which the Owners of agricultural land appropriated was increased. With diminished total wealth, from which all the three agents of production—Land. Labour, and Capital—could be remunerated, the landowner's wealth was augmented. Thus the landowner waxed rich as the nation grew poor. Wealthy landlordism jostled with indigent Labour.

The repeal of the Corn Laws removed the barriers to the importation of foreign supplies. It widened the area from which corn and raw produce could be drawn. The effect was the same as multiplying manifold the quantity of agricultural land available for the supply of cereals to meet the needs of the British people It was an enlargement of the acreage of supply. The land of Russia, America, Canada, and Australasia was brought into the service of the British people. In many of these lands the law of diminishing return was but feebly operating; labour was revelling in the cultivation of virgin soil, with its treasures of fertility unexploited; land was liberally, lavishly responsive to the first touches of cultivatioN. Yet the value of land was low, and its share of the produce in the shape of rent was negligible. Wages were higher than in Britain; but rent was lower, and land was more productive. The cost of producing corn was much less. Hence, after paying for freight, cereals were brought to British consumers at largely reduced prices. The sufficiency of supply of foreign produce at low prices made the prices for home corn fall to the same level. As prices fell, inferior lands fell out of cultivation, and the better lands were not cultivated so intensively. Hence rents fell. Freetrade in corn for Britain arrested the law of diminishing return by enlarging the area of supply, gave to the people cheap bread, and curtailed the share of the national output obtained by the owners of agricultural land. It was in the effect upon the principle of diminishing return lay the conspicuous virtue of Freetrade. Raw produce being cheaply supplied from foreign trade internal labour and capital were released from the necessity of wringing produce from unfertile, inhospitable soil, and of draining to their last reluctant element the resources of the better land. The labour and capital thus liberated were devoted to the manufacture of textiles, hardware, etc. These were exported in exchange for the imported foodstuffs. The benefit to Britain was enormous. Labour passed from exertion in a sphere where the law of diminishing return was dominant into a sphere where the law of increasing return prevailed. The labour of the people became more productive. The same amount of industry produced an immeasurably greater return of the fruits of industry. The labour devoted to manufacture by exchanging its textiles for the foodstuffs of foreign countries was enabled to procure a much larger quantity than had been the case when the labour had been applied directly" to the production of such foodstuffs. Freetrade meant to Britain the passage from the supremacy of the law of diminishing return to that of increasing page 73 return. But it meant more. Whilst the aggregate produce, from which alone the agents of production could be remunerated, was augmented the share of land was decreased. There was increased wealth, but diminished land values. There was a larger national dividend for distribution among Land, Labour, and Capital, but lessened rents. Diminished reins and augmented productiveness were necessarily followed by enhanced wages and profits.

The argument can now be summed up. The share of the fruits of industry, which agricultural land will be able to secure, depends upon the operation of the law of diminishing return. Where the law operates acutely this share will be large, where it operates feebly the share will be negligible. The residue of the fruits of industry is divided between Labour and Capital. Rents, by an inexorable law, advance only at the expense of wagss and profits.

But agricultural land is not the only kind of land which has value and yields rent. Indeed, the peculiar property of land to absorb the fruits of a community's advancing prosperity is more accentuated in urban than in rural lands. City lands have an amazing capacity for large appropriations of the produce of labour and capital. As a city grows, as its people increases and its industries develop, land values grow, claiming ever larger and larger shares in the city's wealth. In the country the unit of measurement is the acre; in the town it is the foot frontage. Double the population of any city and you will enormously enhance the value of its land, for the same old reason that the supply is stationary, whilst the demand has increased twofold. The rent of a section at the heart of a city's commerce is higher than that of a section on its outskirts. This arises from the superior advantage in situation, and consequently greater productiveness for business purposes, of the former, as compared with the latter. In other words, the return to effort on the latter section is less than on the former. Again we see the law of diminishing return in play and determining rents. One business site commands greater rent than another because of its greater profitableness. The house on land along the electric car route is more valuable than that on land far removed from any such convenience of transportation. Similarly the residence close to the business area fetches a higher rent than the residence of the same kind in a distant suburb; there is a saving of car or railway fares, as well as greater convenience.

Whatever increases the demand for land increases its value Increasing demand is essentially characteristic of progress. Land is the very staple of industry. Manufactures do not require the same extent of it as agriculture, but where they locate themselves they create an intensity of demand for neighbouring land for workmen's homes and other purposes which enables such land to appropriate a share, and a large one, such workmen's wages, and also of the manufacturer's profits. Let an industry plant itself down in an page 74 unpopulated place, and at once there is a marvellous accession to the value of the land of that place. The industry cannot established without the land, consequently the landowners make a claim at the outset for a share of the anticipated produce.

The argument requires no further elaboration to conduct us to the grand conclusion that the share of the national output which land secures is an unearned increment. It does not represent reward for labour or effort of any kind. It does not measure the service which land renders to production; it measures the need of the community. The need grows with advancing population, and consequently there is a concomitant growth of land's share of the national produce. Growing land values do not indicate that land is growing more serviceable, but that it is growing scarcer relative to the need of it. Indeed, growing land values represent declining serviceableness, or, in other words, declining productivity. It is the necessity of recourse to inferior soils that gives rise to rent. "Were there an abundant supply of land of prime quality the soil would yield generously to man's labour, and yet claim no rent.

Thus the return to the landlord is an unearned increment, and therefore unjustifiable. Indeed, only Labour, in the broadest sense, has any defensible title to remuneration. Capital is the stored-up fruits of labour. It is the labour of the past, accumulated and expressed in such forms as will most facilitate industry and augment its productiveness. By the aid of capital labour is sustained whilst engaged in enterprises, such as the construction of railways, which interpose a long period between the effort and the result. It is only the expenditure of human energy, at one time or another, which justifies the consumption of the products of the earth. We have the highest Authority for saying that "he who will not work neither shall he eat." Now land is a gift of God. It is not a outcome of man's industry, and, except to a degree so slight as to be negligible, does not yield fruit apart from the application of such industry. This proposition may be taken as the foundation of the contention that the owner of land as such, is entitled to no reward, seeing he has exerted no labour. To get a remuneration under such circumstances is to obtain that which is unearned. The mere possession of what is necessary before production can proceed should give no claim to the fruits of production, unless such possession has in some way facilitated production.

But the return to land in the shape of rent is not merely an unearned increment to the landlord; it measures the extent of the advantage which he can take of the necessities of the community. This is important. Rent increases because of the hindrance which the limitation of the supply of land imposes to production. To say of land that it gives to its possessor an income he does not earn is to assert the negation merely of merit; it charges no reprehensible qualities. But to say that the landlord page 75 grows wealthy on a community's needs, that he battens on a people's necessities, that he demands more rent simply because more men are clamouring for the use of his land, that he thrives at the expense of wages of labour and profits of capital, imports something of demerit. This is what the usurer does. The poorer the borrower, the more dependent upon the lender, the higher the rate of interest he is charged. Justice cannot uphold an income which has no other foundation than scarcity. Simply because twice as many mouths are to be fed in a country, landowners should not receive twice as much riches.