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The Pamphlet Collection of Sir Robert Stout: Volume 81

Chapter VII. — Distribution

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Chapter VII.


The false lights of many popular but erroneous theories having been extinguished, the mind is open to the light of reasonable guidance afforded by first principles. Our enquiry has led us to condemn every proposed measure of reform winch would slacken the energy of production. The most particular insistence has been laid upon the folly of pursuing the millenium along the lines of embarrassed and lessened productivity. At every turn the examination has pointed to the department of distribution as that in which reforming zeal must employ itself. Not that the conditions under which production is carried on are incapable of improvement. The chapter on Socialism has indicated the extensive waste of effort to which the present competitive system subjects society. The possibilities of co-operative enterprise and municipal enterprise have been pointed out. Indeed quite a multitude of expedients might be suggested for diminishing the widespread waste. Any reform which will enlarge a nation's productive capacity is sound and urgent. Whatever facilitates exchange and transportation, whatever economises effort or utilises by-products, whatever strengthens the body, gives moral grit, or adds resources to the mind; whatever, in short, stimulates productive energy and multiplies its fruits should command the support of every well-wisher of his country. Therefore, let the arms be opened wide to labour-saving appliances. Let Labour rejoice at every invention and discovery which shifts more of the burden of toil upon the shoulders of Nature. Let the nations shout an eager welcome to the science which teaches men to harness the rivers and tides and air, that these may draw the world's loads, animate its workshops, illumine its darkness, and propel its engines of locomotion. Let educational activities be multiplied until industrial equipment is carried to its highest point of efficiency. Whilst man's capacity to consume and enjoy wealth retains its illimitability the volume of production cannot be too large.

Attention must now be directed to the shares of the national output obtained by the three factors of production Land, Labour, and Capital—and an analysis made of the laws which determine the relative proportions of those shares. Land will be first dealt with.

In most books of economics, land is made to embrace in its meaning all natural agents of production, such as air, rivers, and page 60 mines. The leading idea to grasp in distinguishing it from other factors of production is that it is passive. It furnishes the material upon which Labour and Capital expend themselves. These fashion what Nature supplies into articles ready for human consumption. Land represents Nature's part in production as distinct from man's. It is the passive, man the active, factor. Sometimes land is regarded as private wealth. When so regarded, it must not be forgotten it is wealth by mere appropriation, not by creation of industry. It is not the product of man's labour or capital.

The mind must be fortified here against misconception arising from the loose, indefinite meaning given to the term land in popular phraseology. Land, in the popular acceptation of the word, is usually made to include the improvements effected upon it by human labour. Thus, when we speak of the value of farmer's land, we commonly include the value of the buildings upon it and the improvements wrought in the soil. This wide use of the term is due probably in some degree to its legal signification In our system of law, to transfer land is to pass the ownership of all that is fixed upon the land or is beneath it. But its meaning must he narrowed before any clear ideas of economic principles can be gained. Speaking in the language of economics, land comprises nothing which is the outcome of labour. It denotes the gift of Nature, and that only. So when the value of land is the subject of treatment, whatever value is due to the expenditure of Labour and Capital must be carefully distinguished from the value of the natural agent. If bogey land is drained, the value added by drainage represents the results of industry, and cannot he regarded as the value of land in its economic sense. No doubt the greatest difficulty is experienced in separating the unimproved from the improved value. Certain kinds of improvements, after the lapse of years, become merged with the soil and arc indistinguishable from it. Despite the practical difficulties here and there, however, the economic conception is a just one. There are three grand factors in production—Nature (or Land). Labour, and Capital. Their separation must be rigid, and each examined in isolation, if true conclusions as to their tela ship are to be obtained.

In determining the share of the produce of these three factors which accrues to land, an analysis is needed of the causes which give value to land. Value signifies not utility, but general purchasing power. Air has the highest utility, but strictly has no value in that it cannot be bought and sold. By value is meant exchange value, or the power of purchasing other goods, or being converted into money, which is general purchasing power. What gives this exchange value to land, while air, whose utility is certainly equal, has none? Why should land, a gift of Nature be a marketable commodity? Its value arises from its being limited in quantity. page 61 Being so limited, great advantages arise from its ownership. Were land as plentiful as air, then, although a man entered into possession of a large tract of it, no value would arise whilst there was abundant land remaining free to satisfy the needs of all those who wanted it. Land could have no value giving it power to purchase other things if anyone could get as much as he wanted without paying for it. It is the limited supply of land which gives it value. Indeed the value of land arises from the operation of the general law of supply and demand. The supply has been fixed by the Creator for all time. The infinitesimal additions made to the aggregate quantity of the world's land by reclamation from the sea or rivers can be ignored. Anyhow, reclaimed lands are rather to be regarded as products of labour than as gifts of Nature.

Now, although the supply is rigidly fixed, the demand greatly varies As a general principle, it may be laid down that demand varies directly with population. The demand for land arises from the people's need of it for productive purposes. Therefore, other tilings being equal, an increase of population will intensify demand, and vice versa. The truth of this statement is borne out by abundant evidence. Look where we will, we find it exemplified. In new countries, where population is sparse and land relatively abundant, land values are low. Land upon which the city of Wellington in New Zealand now stands was a little more than half a century ago purchased for 2s 6d an acre. At that time the population of the Dominion numbered but a few thousands; the demand for land was meagre, the supply ample; consequently land bad little or no value. But with every step in the increase of population there was an increase in land values. The two were concomitant. And to-day land formerly sold for 2s 6d an acre is valued at upwards of £200 a foot frontage. Land is more valuable in the town than in the village, in Melbourne than in Wellington, in London than in Melbourne, because more densly peopled. Land values are the economic barometer, indicating with infallible regularity fluctuations in population. As a country progresses, the demand for land increases, and as the supply cannot be augmented, the value rises. A country's advancement is registered with unfailing accuracy in its land values.

The discovery of the cause which determines land values enables us to ascertain the share of the national output which land will be able to secure. This share is generally spoken of as rent, and rent bears the closest correspondence with land value The term rent of course, must be used in the same restricted meaning as land. In popular language, rent invariably includes the rent Economic rent is limited to the latter. As land values rise or fall, the rents must rise or fall, for rent is nothing but the annual value of the capital value. The argument leads then to this conclusion: in young countries, sparsely populated, land values being low and page 62 rents low the share of the produce of the factors of production accruing to land is small. The greater part of the produce, almost the whole in" fact, will be divided between Labour and Capital in the form of wages and interest and profits. Land, having little exchange value, cannot command much of the fruits of industry. With every increase in population land's share increases in proportion. Advancing population invests land with power to levy increasing tribute upon the national output—and the increase is a relative one.

Rising land values do not cause or contribute to prosperity. They are the result. They measure prosperity; they do not promote it.

A railway is projected into a district hitherto inaccessible; tit land of the district at once rises in value; men are eager to purchase farms; demand, once sluggish, is now active. The land has not changed, but the demand for it has changed, because that product of labour, the railroad, has made the fruits of it available to merchants.

An electric tram car draws a distant suburb near the centre of a large town: immediately business men clamour for suburban homes. The exigencies of their occupation would not have permitted it but for the power of electric propulsion to annihilate distance. The demand for suburban land is increased by that product of labour, animated by Nature, the electric car; and land values sensitive as quicksilver, increase pro tanto. The utility of the electric car finds its measurement in land values. There in Arizona and the Central States of North America is a wilderness of desert and boulder, miles and miles of it, millions of acres valueless, not worth possessing; the possibilities of irrigation are discovered: the Sahara bursts into fertility at the magic touch of water; at once men stream into the desert, dam up rivers into reservoirs, make canals, and dig ditches; now the once valueless land is keenly competed for; all the foreseen possibilities of the watered sand are measured in the value of the unwanted sand. As soon as it is discovered that the desert can be reclaimed before any work of irrigation has commenced, the land acquires value. Land values show that there is a demand, actual or prospective, for land, and that the supply cannot expand with the expansion of the demand.

Herein it differs fundamentally from all other things which have exchange value. If the demand for pianos was rapidly to increase from any unanticipated cause, the price would rise also, but instantly there would be set in operation the machinery of Production to increase the supply of pianos proportionately to the demand. With respect to all commodities which are the product of labour, the law may be laid down that their price, or exchange value, tends to approximate to the cost of their production. When the price is much above, profit, are abnormally high; the page 63 high profits attract Labour and Capital until the supply is so far increased as to cause profits to fill to normal. An unusually high price for wheat one season, due to an enhanced demand which seems likely to be permanent, induces farmers to grow more wheat for the following year, and the increased supply reduces the price. The normal price of any article is its cost of production, including, of course, average profits. Where in any industry the price of its products falls below this, Labour and Capital tend to leave that industry for more profitable fields. When the price rises above it there is a tendency for Labour and Capital in less profitable industries to be diverted to the more profitable one. Prices always fluctuate about this normal level of cost of production.

But not so with land. Land is not produced by labour, and cannot be increased by it. Consequently the price-raising property of increasing demand cannot he counteracted by the increase of supply.

The difference between land and the products of labour is well brought out by economists in their statement of the opposition of the Laws of Increasing Return and Decreasing Return operating in modern society.

The Law of Increasing Return governs the supply of practically all commodities produced by labour. Concisely put, it is this: The greater the demand for a commodity, the larger the scale upon which it can he produced; the larger the scale of production, the more machinery can be specialised and the more economies can be secured; the greater the economics, the less the cost of production, so that as the scale of industry is enlarged the return is increased more than proportionately. Boots can be produced cheaper in a large factory than in a small one. The large factory can use more elaborate and more specialised machinery, and can carry the division of labour to the point of perfect economy; buying its raw materials in larger quantities, it can buy cheaper; indeed, it can adopt innumerable economies to lessen the cost of production which are not available in the small factory. The more extensive the scale of production, the cheaper the product can be marketed. And the scale upon which an industry is carried on depends upon the demand for its products. Hence the great advantage winch such countries as Great Britain and the United States have over a Dominion like New Zealand. New Zealand finds it hard to establish manufactures because her population being sparse the demand for manufactured goods is relatively small. The demand is not sufficient to call into existence factories such as those in America and Britain, whose size enables them to be organised so as to secure every possible economy, and thus to reduce the cost of production to a minimum.

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An illustration may be drawn from the pin industry. It would be utter madness for New Zealand to endeavour to manufacture pins for home consumption. The demand is not adequate for the scale of production requisite to cheapness. Long ago Adam Smith assured us that to obtain the maximum economy in pin making the industry must be divided into some sixteen distinct operations, with a set of workmen exclusively devoted to each operation—pointers, headmakers, etc. There would require also to be twice as many headmakers as pointers, since to make the head look twice as long as to sharpen the point. Thus before pins can be marketed at the minimum cost many more men must be continuously employed. But one factory organised with ten men, Smith tells us, would produce 48,000 pins a day. We have no means of estimating the consumption of pins in New Zealand, tat it is doubtful whether so many are consumed in the course of a day. If not, the demand in the Dominion is not sufficient to keep one well-organised factory in full operation. Pin making, therefore, in New Zealand could not be carried on at the minimum cost of production, apart from the development of an export trade.

The great truth that as the demand for commodities increases the cost of their production diminishes and their price is reduced to the consumer, finds abundant confirmation. The Law of Increasing Return is at work on every hand. Clothing, boots, watches, furniture, etc., have got cheaper with every increase in the demand for them, because the scale of production has been ever enlarging. The same weekly wage can produce incomparably more of these goods now than it could a generation, or still more a century, ago.

Land, however, we are told, obeys the Law of Diminishing Return. The greater the demand for it, the greater—not the less—the cost of obtaining it. As a general principle (the modifications we do not need to consider) the best land in a country is taken up first. As population advances recourse has to he had to inferior land—inferior either in fertility or position. Once the needs of a growing population compel use of the inferior lands, land value and rent rise. The value of the superior land is measured by its superiority over the inferior land. The value of the one represents its differential advantages over the other. A few simple illustrations will make the point clear. The value of land in the center of a town is greater than that of land in the outskirts; the higher value of the former corresponds to the greater advantage it has in situation. The value of a farm near a railway is greater than that of a farm far removed from such means of transportation of its products; the higher value of the former measures exactly the advantage which "the proximity of the railway affords. A farm on the plains of the Mississipi, rich with the fertilising deposits brought down by mighty river through countless ages, is more valuable than page 65 a farm on the rocky hilltops; the higher value of the one is proportioned exactly to its superiority in fertility over the other. As the aggregation of population proceeds, these superior lands are fully occupied and tilled., necessitating recourse to the inferior lands in order to satisfy the growing demand for land and its products. Hence values rise and rise, and rents grow and grow. The same amount of labour and capital applied to poor land will not bring so large a return as when applied to better land. It is differential advantage of the latter which gives it the power to secure a higher rent than the former. Advantage in situation has the same effect as advantage in fertility. To be far removed from a distributing center enhances the cost of production in the same way as the niggardliness of the soil. Thus land obeys the Law of Diminishing Return. The requirements of a growing population force into cultivation and use land possessing less fertility or less advantage of situation—land that yields less to the application of labour and capital.

The conclusions to which our argument leads are of supreme importance. The greater the demand for land, the greater its value and the greater the price that must be paid for it. Progress may mean a diminished price for commodities made by labour, but it means an augmented price for land. As the need of land increases with advancing prosperity and populousness, the difficulties of obtaining it increase. As the appetite for land grows, the price at which that appetite can be satisfied grows also. Land, with its stationary supply and rising value, stands as a force resistant to advancing prosperity. It levies toll upon progress. The price at which it can be obtained grows as the need for it grows.

The Law of Diminishing Return is operative even where inferior soils are not brought into use. After a certain point is reached, any further cultivation of the best land will yield a diminishing return. Every farmer knows that after a certain amount of labour and capital has been applied to his land additional applications of labour and capital do not yield the same proportionate result. There comes a point when, on account of a diminishing return, it does not pay a farmer to devote labour and capital in more intensive cultivation. Here, again, we observe that the products of land obey a different and opposite law to the products of manufacture—in the one case obeying the Law of Diminishing Return, in the other the Law of Increasing Return.

This book is designed to give a popular statement to the economic truths which underlie the social problems crying out for solution. The technical terms and mathematical treatment of modern economists have been avoided as far as is consistent with a treatment of governing principles adequate to convey a true meaning to the reader. Nevertheless, a passage from Marshall's "Economics of Industry "may well conclude this chapter:—

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"The Law of Diminishing Return is a statement of a tendency which may indeed be held in check for a time by improvements in the arts of production and by the fitful course of the development of the full powers of the soil, but which must ultimately become irresistible if the demand for produce should increase without limit. Our final statement of the Law may then be divided into two parts, thus:—

"Firstly, although an improvement in the arts of agriculture may raise the return which land generally affords to any given amount of capital and labour; and although the capital and labour already applied to any piece of land may have been so inadequate for the development of its full powers that some further expenditure on it even with the existing arts of agriculture would give a more than proportionate return; yet these conditions are rare in an old country; and except when they are present, the application of increased capital and labour to land will add a less than proportionate amount to the produce raised unless there be meanwhile an increase in the skill of the individual cultivator. Secondly, whatever may be the future developments of the arts of agriculture, a continual increase in the application of capital and labour to land must ultimately result in a diminution of the extra produce which can be" obtained by a given extra amount of capital and labour.

"Making use of a term suggested by James Mill, we may regard the capital and labour applied to land as consisting of equal successive doses. The return to the first doses may perhaps be small, and a greater number of doses may get a larger proportionate return; the return to successive doses may even in exceptional cases, alternately rise and fall. But our Law states that sooner or later (it being always supposed that there is meanwhile no change in the arts of cultivation) a point will be reached after which all further doses will obtain a less proportionate return than the preceding doses."

Thus, whilst its operation may be stayed temporarily by improved processes of agriculture, the Law is rigorous. Indeed, in all civilised countries it is active; progress in the arts of production weakens, does not suspend, its activity. Wherever land has exchange value the Law of Diminishing Return operates. There could not be such exchange value if there were an ample supply of first-class land in point of fertility and situation, just as air cannot possess exchange value because of its illimitable abundance.