Essays in Economics   by   Leon Maclaren


The Structure of Industry

In organising industry, people are obliged to take into account the fundamental facts of the situation in which they find themselves. Amongst these must rank the operation of natural law, expressing itself in the primary division of wealth into rent and wages. Everywhere throughout the civilised world land is now enlosed and as a necessary result the body of the people have nothing but their labour to sell for a living. In the ensuing struggle for existence wages are reduced to the least the labourer is willing to accept and rent rises to absorb what is left.

This basic situation opens up two main and divergent lines of development, and that which will be chosen will depend on the genius of the particular community as it has been modified by tradition. Plainly, as wages are down to the least the labourer will accept, he will not as a rule be prepared, and probably will not be able, to supply himself with more than the most rudimentary tools to assist him in his work. Thus he will be denied the natural human advantage of extending and refining the power of his body by the development of instruments to aid him in his work.

If matters rest thus, ordinary folk will rent their little holdings from the owners of the soil and will carry on their several trades on small farms and in cottage workshops generation after generation, much as they have always done. Production per head will be low, the lion's share will go to the landlords, and the tenants will be pitifully poor. There will be little incentive to enterprise in industry. Increased production will probably mean increased demands by the landlord. The failure of a crop or of the market may mean eviction, and that will be the terror of the land. To people from other communities, these peasants and cottagers may appear indolent and feckless. Yet for all their poverty, such people are known for their independence of spirit and, when unaffected by any major catastrophe, for the way they enjoy life - a way which would seem to be denied to the people of more progressive communities.

In such a community the actual division of wealth between landlord and tenant will accord very nearly to the primary division of wealth between rent and wages, though other secondary claims, particularly taxation, will enter into it.

The other main line of development, however, opens up an entirely different prospect, and it is to the study of this development that it is now appropriate to turn.

The better to understand the rise of modern industry, it is well first to consider the effect of differing degrees of skill and industry on the primary distribution of wealth between labourers and the tenants in occupation of the land. Elsewhere in considering the distribution of wealth in rent and wages, it has been assumed that the quality and intensity of the labour expended on different sites has been equal. The conclusions reached are of equal validity when this assumption is removed. Thus it was observed that where land is free and any man who so wishes may easily acquire a piece for himself, wages will be related to what a man could earn working for himself on the best land open to use. The more skilful and efficient he is, the more he could earn on the best land open to use, and the more wages he will receive, wherever he is working.

In these circumstances, the share of the produce of his industry which a labourer would obtain bears a direct relation to the productivity of his labour. On whatever site a man works his skill and industry will affect the quality and quantity of his output, and whether his work is above or below the general standard, the difference would be reflected in his wages. In the same way, the quality and intensity of a man's labour will vary from time to time and will affect his output. This, too, in the supposed conditions, would have a direct effect on his share of he product - that is, on his wages.

Where men work in teams, as would normally be the case, this simple relationship of wages to productivity would, of course, be modified. In such cases the amount to be distributed in rent and wages would depend on the total result of the co-operative endeavour. The wages of those engaged would rise or fall with the productive achievement of the group and would be determined by what the group could earn on the best land open to use. The division of the fruits of their enterprise between members of these groups will not be considered at this stage, as other considerations have first to be weighed. It is sufficient to observe that where land is free, gross wages rise with efficiency and as a direct result of it.

At the same time, greater efficiency of any unit benefits the whole community. Any improvement in individual production must benefit all. The cumulative result of fluctuations in individual or group enterprise would, in this indirect manner increase the advantages to be gained from working on those sites where the benefit of the co-operative enterprise of the members of the community are most to be felt, that is, at the centres of population and at the junction of lines of communication. This indirect benefit would increase the rents to be made in these places.

To sum this up, where land is free and any man who so wishes may easily acquire a piece for himself, the immediate and direct result of differences in production will result in an immediate and direct difference in wages between those engaged in one undertaking and another; while the indirect and cumulative result of the efficiency of the units will flow together and be returned in the rents of those sites where the benefit of the co-operative enterprise of the community is to be enjoyed.

Where land is all enclosed, however, and wages are determined by the least the labourer will accept, wholly different considerations arise. Here, too, differing degrees of labour will affect the productivity on any site both in quality and quantity. The share to be taken by the labourer, however, will be determined, not by the productivity of his labour, but by the least he is willing to accept. There will be a common level of wages throughout the community irrespective of the individual differences in skill and industry; people in the same grade of occupation will, generally speaking, have similar claims in virtue of their grading. The grading itself will inevitably pay some regard to the degree of education, intelligence, or skill required to attain that grade - just enough to make it seem worth while to expend the necessary effort requisite to remove oneself from the lowest grade; but, between members of the same grade differences will generally be slight.

Even in those cases where the more skilful man is able to demand more than others in his grade, this more will, in the normal case, be substantially less than the increased output flowing from his greater skill. In short, where all land is enclosed, the immediate and direct result of differences in the quality and intensity of labour will be to raise or lower rent, and not wages. Even where some increase in wages does mark this difference between men in the same grade of occupation, the increase in their productivity will outstrip the difference in their wages and an increase in rent will still be affected.

Again, of course, increased productivity of individuals or individual undertakings must benefit all, and the general lot may be improved. Thus, clothes, cinemas, wireless sets and the like may come within the reach of the humblest of homes, and the minimum standards demanded by the labourer may be, by this indirect method, enhanced, and wages to that extent, raised. Wages will not, however, rise or fall as a direct result of the productivity of the unit.

It has already been observed that where land is all enclosed the ordinary labourer will not be in a position to equip himself with more than rudimentary tools for his work; that he will be denied the great advantage which flows from the development of machinery and improved techniques and, as a result, the productivity of his labour will be relatively low. This low productivity will be reflected in low rent.

This situation may be represented on a diagram similar to that used to illustrate the primary division of wealth into rent and wages. Representing the productivity of labour on the best site as 100 and taking that as the basic figure, the division of this relatively low product between wages and rent may be represented as 40:60, and in the successive sites as 40:50, 40:40, and so on.


In this illustration, by hypothesis, each site is equally well worked; wages are 40 and rent is 60, 50, 40 and the landlord's claim is for the sake of simplicity assumed to absorb the whole of the rent.

By equipping the labourers with the buildings, stock, equipment and tools with which they are too poor to supply themselves, the productivity of their industry may be considerbly increased. The result of this increased output will be immediately and directly to increase rent. Where the instruments at the disposal of the ordinary man lag far behind those which may be had in the community, this increase may be very substantial.

Now, let it be supposed that by equipping the labourer on the best site, productivity may be raised to 150. The maximum increase in rent would, therefore, be from 60 to 110, 50 more than the landlord's claim, and 50 more than the ordinary labourer, equipped with rudimentary tools, would be willing to pay.

To achieve this result, however, certain things are necessary; first, access to the site; second, a supply of the right labourers; and thirdly, wealth with which to equip the labourers.

By inducing people to part with claims on wealth (to lend him money), the promoter may purchase whatever equipment he deems necessary. He may succeed in this by offering the lenders interest, and the prospect of the increased rent promises to provide the means of making this payment. In his calculations, therefore, he will set aside part of this anticipated rent to meet the interest charge. To obtain the site he may offer the landlord more than is being paid, and in his calculations, therefore, he must set aside part of the increased rent to meet this increase in the landlord's claim. No doubt so far as his requirement of labour is concerned, there will be plenty of unemployed men looking for work. However, everything depends on the increased productivity of the labour to be applied to the site and the promoter will naturally wish to fill at least the key positions with people on whose skill and diligence he can rely.

These people are the least likely to be unemployed and he will, therefore, wish to attract the most qualified men and women on to his site from whatever occupations they may be then following. To do this, and to persuade the cottagers to sacrifice their independence, he will have to offer them something substantially more than they earn on their own holdings. He will therefore have to set aside part of the increased productivity which he expects to attain against an increase in wages, thereby sacrificing part of his rent.

Let us suppose that the promoter, estimating his increase in productivity at 50 on the first site, distributes this increase as follows:- First, an increase in wages from 40 to 45: this will automatically reduce his rent from a possible 110 to 105. Suppose the interest charge is 20; that will leave him with 85. If he offers the landlord 65 instead of 60, he will gain for himself the remaining 20, which will be his margin of profit.

If he has calculated well, and if the labourers, the moneylenders and the landlord respond to his proposals, and if productivity comes up to expectations, he will do very well. This situation is illustrated by Fig. 2.


There are several points worthy of notice here. Firstly, the landlord's claim has fallen as a proportion of the wealth produced. It is now 65 in 150 instead of 60 in 100. Secondly, the landlord's claim has increased as an amount above that which the poorly equipped tenant would be prepared to pay. Thirdly, the landlord's share has been reduced by the moneylender's claim. Fourthly, the success or failure of the undertaking will depend, not on its total productivity, that is the total wealth distributed between the labourers, the moneylenders, the landlord and the tenant, but on the last 20, the excess over 130 or the margin of profit. If it produces as much as 129, it will still fail.

Good judgement, deft bargaining, a wise choice of labourers and a capacity to get the last ounce out of production will be the qualities needed by the tenant. If he succeeds, his reputation with all concerned will grow. If he fails, he will be cursed by the men thrown out of work, the moneylenders who lose their funds, and the landlord who is put to the trouble of finding another tenant.

In England, aided by the work of the inventors, and by their own ruthless skill and devotion, men have succeeded in this kind of industrial enterprise. Their success, not unnaturally, attracted others who were similarly endowed, or thought they were endowed, with what has come to be known as organising ability. This movement, not unnaturally, led to a competition for those sites where production could be substantially raised. Use of the new tools demanded access to new materials - coal, iron, water and the like - and demanded lines of communication - railways, canals, bridges and rivers.

Landlords were not slow to take advantage of this new situation. They pressed their claims. The tenant who offered the best payment, other things being equal, would get the site - unless the landlord felt that none of the offers were sufficient and witheld the land until someone came forward who satisfied his demands. The amount payable to the landlord in these circumstances tended to the most the tenant could afford to pay, leaving him with the least on which he was willing to operate. This least, in turn, was determined by the amount of the secondary claims which the tenant had to meet out of the rent, plus the smallest margin of profit which he was willing to accept.

Let it be supposed that the minimum margin of profit which tenants generally will accept is 10% and that the interest charge remains even at 20. The result on the diagram would be as in Fig. 3.


In the supposed conditions the landlord's claim would be 70, 61 and 52 on the three sites, as against the 60, 50, 40 which ordinary folk would pay. Thus, as this system extends itself, it becomes increasingly difficult and, for growing numbers of people, quite impossible to be their own masters on their own holdings. They are obliged to work for the new captains of industry whose undertaking depends on the moneylender and the margin of profit, and the fortunes of the people becomes dependent on these same factors.

The supposition on which the diagram has so far been based, the assumption that the landlord's claim would in the first instance be equal to the rent, would not of course be correct. In such a condition as was imagined, taxation would fall upon the industry of the cottagers and peasants. In deciding, therefore, the most they would be willing to pay a landlord, they would take taxation into account, and they would expect, after paying the taxes, to receive in wages just the same as if no taxes were payable. To put this another way, they would not be willing to pay the landlord the full rents produced on their sites but would be willing at the most to pay him the rents minus taxation.

Let this situation be shown on the diagram taking for simplicity's sake a tax of 10% on the productivity of the industry. The result would then be as in Fig. 4.


In these circumstances, with wages standing at 40 and taxation at 10% of the whole product, that is, 10 on the first site, 9 on the next, and 8 on the next, the landlord's claim would be at most 50, 41 and 32.

It has already been observed that the landlord's claim will tend to rise towards the full amount of rent. He will get as much as he can and the tenant who pays most will get the land. On the other hand, the tenant will resist the claims of rent at some point, at the least he is willing to accept. Therefore, any increase in taxation on his industry will operate to reduce the amount he is willing to pay the landlord. Conversely, any reduction in taxation will operate to increase the amount he is willing to pay to the landlord.

This relationship between taxation and the landlord's claim has on occasion been noted. Thus, when in 1929 in England the Local Government Act sought to relieve industry from the pressure of rates by reducing the assessment of industrial hereditaments to one-quarter of the nett annual value, the result was that landlords' claims rose to absorb the relief. Again, those rural areas subject to tithe payments show between one farm and another that the payment by a tenant both to the landlord and to the tithe owner were approximately equal to the payment to a landlord of an equally good farm where no tithe was payable.

In short, that part of taxation which is levied on industry operates to reduce landlords' claims. None the less, landlords' claims press towards the most obtainable, which will in each case be the total rent less all other secondary claims upon it.

This situation may be illustrated as it applies itself to modern industry by observing how taxation operates when production is increased by the introduction of tools and equipment and the employment of labourers by the tenant of the land.

The increase in the total product of industry will of course carry with it an increase in taxation. Keeping to the figure of taxation at 10% of productivity, the result will be as in Fig. 5.


Each new secondary claim that is put upon industry will operate in the same way. As wages are at their lowest, the secondary claim must come out of rent. Thus, not merely will tenants in occupation of land have to pay taxes on the materials they use, licences on the vehicles they employ and all the other forms of national taxation, but they will also have to pay the local rates which in England are levied on the landlord's claim in respect of land or what it is assessed a landlord could claim it there were one. In practice it is fair to say that the rates will not infrequently be about half the landlord's claim. If these rates are put upon the diagram, the result is as in Fig. 6.


However many of these charges are imposed and whatever their weight, they must come out of rent. The tenant's profit (except in so far as it consists of wages) must also come out of rent. The amount by which the total of all secondary claims, other than the landlord's claim, plus the least the tenant is willing to accept by way of profit, falls short of the total rent will be taken up by the landlord's claim. This claim, howevever, will not be a mere residuary in which what is left is taken up. The power of the landlord to withhold the land and the fact that no tenant can operate without it enables him to press his claim. The tenant, therefore, who can so arrange his undertaking that the other secondary charges are reduced to the least possible, will be able to pay the landlord more and will obtain the best site. This fact is of major importance in determining the structure of industry and in ascertaining who obtains the sites and therefore runs industry.

If at any time the total of these secondary claims exceeds the rent, not merely will the tenant take no profit for himself but he will fall into debt, and, if his reserves are insufficient to meet the situation, will fail. It is evident, therefore, that the maximum increase in these claims which an undertaking may withstand for any prolonged period is roughly measured by the margin of profit. An increase in taxation or rates or in the landlord's claim may readily eliminate this margin and the undertaking.

Conversely, a relatively small drop in productivity may reduce the rent below the total of the secondary charges and have the same effect. A drop in efficiency, the difficulty of the market, industrial unrest, any of these may only too easily eliminate the margin of profit already reduced low by the struggle for access to land.

Where industry is built upon the fundamental pattern established by the enclosure of land, it becomes very vulnerable. Though it may produce far more than sufficient to satisfy the labourers whose work constitute the industry, yet it may be unable to succeed.

It is important, therefore, to turn to the consideration of these secondary charges and the measure of control which the tenant in occupation may exercise over them and the effect they have on the organisation of industry.

First, however, it is as well to reflect on the difference which would flow from a condition where land is free and any man who so wishes may obtain easy access to land.

Applying this condition to the developed industry which has been illustrated under conditions of land enclosure, the result would be as in Fig. 7.


In these conditions wages would be determined by what would be earned on the best site open to use, that is, 120. Any drop in efficiency or weakening of the market would result simply in a corresponding fall of wages. The industry would not fail and as wages are well above the least which the people would be willing to accept, there would be an ample margin to allow for bad seasons, mistakes and the like. If the rent was taken to pay for the public services, the wages could be received free of deduction. The wage earners in this condition, like the rent receivers in the other, might burden themselves with secondary claims on their earnings. A discussion of secondary claims on wages, however, must be postponed until the discussion of the secondary claims themselves has been completed.

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