A common feature of all the theories discussed in the last chapter is that they seek to explain social inequality by the operation of natural forces governing the production of wealth. Thus those who teach that the number employed and the amount of wages depend upon the existence of some pre-determined fund, whether it be capital or purchasing power, are, in effect, saying that the cause of the difficulties which face the peoples of the civilized world is that there is insufficient of this fund for industry to commence at all or, alternatively, for it to function profitably. It is strange that these theories should hold the field when it is now universally admitted that the difficulty is not the production of wealth but its distribution. So, while some economists are recommending that investments should be increased in order that production may be expanded and more men employed, others are urging that production should be restricted, for otherwise there will be too much, all investments will be threatened and more men thrown out of work. Doubtless these theories persist because the failure of distribution disturbs production.
This failure of production is intimately related to matters governing the distribution of wealth. For the major part, men engage in industry for the reward they expect to obtain. If society is so ordered that some may obtain greater returns by preventing production than they may obtain by expanding it, then it is highly probable that production will be restricted and unemployment will result. Again men who are impoverished are unable to give much in exchange for the things they want. This being so, a narrow limit will be set to the amount of wealth which can be profitably produced for them. Clearly a shoe manufacturer must fail unless he can obtain sufficient in return for his shoes to pay his expenses and give a reasonable reward to those whose work was necessary to produce them. There may be many people who want shoes, but there need will not keep the manufacturer's business afloat unless they are able to give sufficient in return for his products. This is the fact which has caused so many people to become frightened of what they call over- production. Where people are hungry, however, to speak of too much food is ridiculous. The difficulty is that those who are hungry cannot give enough in return for it. In these and other ways the distribution of wealth must have a very strong influence on the production of it.
It is proposed, therefore, to examine the fundamental principles underlying the distribution of wealth and the relation between distribution and production.
Business is not philanthropic. Men will not receive part of the product of industry unless they are in a position to demand it. They will be in such a position if they bring to the business one of the elements contributing to its success. Thus, land is essential to industry; without it there could be none. The landowner, therefore, is in a position to demand a share of the produce in return for the use of his land. In the same way labour is essential to industry and, consequently, the labourer will be able to obtain part of the produce as a reward for his work.
It is desirable to use special words to describe the shares of landowners and labourers, and to reserve them for this purpose. The customary economic terms will be used; rent for the landowners share; wages for the labourer's share.
The word rent is normally used to mean the weekly, monthly or annual payments made by one to another for the use of land and buildings. Now the owner receives this payment partly for the land on which the building stands and partly for the building itself. In short he is both a landowner and an owner of wealth and will receive payment in each capacity. Again part of the payment may be made to him so that he may pay it out again, as is the case where the owner pays rates or does repairs or provides constant hot water, porters or the like. Whether he pays these expenses or not, however, one thing is certain - the building will deteriorate. Part of the payment, therefore, will be in respect of the depreciation of the building. In order to discover what the owner retains for himself it will be necessary to deduct from the sums received by him all the expenses he has to meet. This is a common calculation amongst those who let out land and buildings as a business. This net income is the total amount received by them for their own use, and part of it is obtained for land on which the building stands and is rent, the rest for the building. Thus in one respect the word rent, as normally used, has too wide a meaning in that it includes depreciation of wealth, payment for the use of wealth, and may also include rates, taxes and payment for services.
In most other respects, however, the word rent, as normally used, is too narrow to describe the landowner's share of wealth. When one man buys a piece of land from another the payment is usually called the purchase price. It is quite clear that the vendor is able to exact the price solely because of his control of land. Strictly, therefore, it will be rent. The selling price of land is usually expressed in so many years' purchase, for example twenty years' purchase. This means that the vendor receives twenty years' rent in advance in exchange for the right to collect the rent for ever.
Again the word rent is usually restricted in its use to those cases where one man makes a payment to another. Thus where a farmer owns his own land he will not call any part of his takings rent. It must be clear, however, that part of his takings may come to him because he owns the land. Had he been a tenant he would, in most cases, have had to pay rent and the landowner would have been able to exact this rent through the control of the land. As a tenant the farmer's profits would have been smaller by the amount of rent he had to pay and they would have been smaller because he did not control the land. Clearly, therefore, in this illustration, part of the farmer's profits are rent though they are not paid to him by any other man but come to him as part of the proceeds of his farming.
Similarly a man may pay rent to a landowner and yet still receive rent for himself. For example the shopkeeper in a big town who holds his shop on a long lease may find himself in a position similar to that of a certain shopkeeper in the Strand, London. The sum which this man paid to his landlord was £50 per annum; yet he could have sub-let his shop at £1,000 per annum. The rent payable under the lease had been fixed many years before and in the meantime the yield from the property had risen greatly. His lease fell in at midnight on the 24th December. Under the terms of the new lease which operated from that moment the landlord demanded £1,000 per annum rent. The result of this change was that the shopkeeper's profits were reduced by £950 per annum. The reason for the drop is obvious. At midnight he lost control of the land which passed to the landowner. As a result of this the landowner was able to increase his demands so as to absorb the full rent of the land. Thus the shopkeeper on the one hand lost the £950 per annum because he lost control of the land and the landowner gained it because he recovered control of the land. This £950 per annum was obviously rent.
During the 99 years of the lease, the rent, hidden in the profits of the shop, was steadily increasing, but under the agreement with the landlord the tenant had only to pay the same fixed sum each year. Towards the end of the lease the tenant's profits were growing very substantial, but, after the lease had been renewed, the business only just paid. Formerly the tenant had been able to collect these increasing profits because his control of the land was protected by his lease. Part of the rent went to the landowner but the major portion was retained by the tenant. The tenant could have sublet the shop if he had wished for the £1,000 and let someone else run the business, retaining for himself the £950 per annum. This was, in fact, what had been done by others under similar leases.
The ordinary meaning of the word wages, like that of the word rent, is in important respects, too narrow. It is commonly restricted to a payment made by an employer to an employee. This was not it's original meaning, which was the reward for work done. This is the sense in which it will be used. Thus a man who works for himself clearly obtains at least part of his income from his own labour; this part is his wages. Again, the distinctions drawn in ordinary speech between wages, salaries and incomes have no economic significance. In so far as the wealth received by a man is obtained by him in return for his own work it will be called wages.
In using the word "rent" to mean that share of wealth which goes to a landowner, and "wages" to mean that share which goes to labourers, economists have used them in their ordinary associations. It will be seen from what has already been written, that in daily use the words do not describe the true relation between incomes and the means by which they are obtained. In their ordinary use, therefore, these words have become a source of confusion rather than clarity.
As has been seen, land and labour differ fundamentally from each other. Land is the source from which man draws all his material possessions; labour is the human agency by which he produces the means of life. Because these factors differ in there very nature, the control of them gives very different powers to their owners. Had the words rent and wages attained in ordinary speech precise meanings which would have distinguished clearly between the parts of wealth a man received from his ownership of land, and his work respectively, then much of the difficulty in understanding how wealth is distributed would never have arisen. As it is, the words are used indiscriminately and whilst suggesting that they discover the means by which a man obtains his wealth, in fact they conceal it.
When a man wishes to buy a piece of land but has not the funds available to pay for it, not infrequently, he will obtain a loan to buy the land and give a mortgage as security for it. It is usual under the terms of the loan for the borrower to agree to pay, in addition to the sum borrowed, an annual charge for the duration of the loan. This periodic payment is normally called interest. In this particular case, however, no capital has been involved in the transaction at all. The man borrowed the money because he wanted to purchase land. Under the terms of the mortgage, if he does not pay the annual charge his creditor will take the land. The only reason why the borrower acquired the money and agreed to pay the charge was because he wanted the land. It must be clear, therefore, that the annual payment does not relate to capital at all, but is exacted from the borrower by the lender in virtue of the loan.
Similarly, in the management of a company, directors, wishing to acquire land, may float a loan with which to purchase it, and give the subscribers as security debentures secured upon it. Again, in the normal case, the company will agree to pay the subscribers a fixed annual sum in return for the loan, and the annual sum will be called interest. Should the company fail to pay this interest or redeem the loans on their due dates, the aggrieved debenture holders may, amongst other things, take the land. In this case again, capital is not involved in the transaction at any point.
Indeed, whether or not capital enters into the scheme will depend on the use which the borrower makes of the loan; but, whatever use he makes of it, he may have to pay interest just the same. Clearly, the power of the lender to command interest has nothing to do with the use to which the loan is put. Whether the borrower uses it to build a factory or acquire a dwelling-house, whether he spends it on tools of his trade or gambling on horses, will make no difference. The power of the lender arises from the dual facts that he has command of wealth and the borrower wants it.
The coupling of interest with capital has been an unfortunate error prolific in its progeny of falsehoods. It arises from confusing the power to exact payment for loans with the use to which some of the loans are put. It glosses over the fact that they may not be used to produce wealth at all; that they may be consumed in princely extravagance, as by autocratic governments; in the prevention of production, as when men seeking monopoly buy up competitive undertakings to close them down; or in the destruction of wealth as in the prosecution of war. It gives to the idea of a loan a quality it should not possess, a suggestion of productiveness and of social benefit, obscuring the indebtedness and dependence which the loan so plainly advertises. Whether the power over wealth which the borrower acquires is used productively, unproductively, or destructively, will depend on the borrower, not on the lender.
Whereas rent and wages are the claims of landowner and labourer respectively, arising out of the fruitful interaction of labour and land; interest arises from a human relationship, the relationship of creditor and debtor. Plainly interest is a secondary manifestation. Before a man can have control of wealth, the wealth must be produced and labourers must have been at work on land. Before a man can lend, he must have acquired an effective claim to wealth and the primary methods by which this claim may be asserted are through labour and the control of land - that is through wages and rent. Moreover, production must be continuous or all claims to wealth will soon be airy nothings.
These loans which give rise to a payment of interest are different in their nature from the hiring of a chattel, such as a car or wireless set. When an article of wealth is lent, it is lent to be used, that is, to be consumed. From the nature of wealth, it depreciates and requires maintenance. The hiring of wealth involves service, service which in the interests of the owner, he usually performs himself. The business of letting out on hire involves land and labour, and the payment made for it by those who make use of it, is like payment made for any other service. The loans which give rise to interest payments, however, are entirely different. The lender does not lend any wealth at all. He transfers to the borrower a claim on wealth, thereby divesting himself of it. The claim transferred to the borrower, may or may not be exercised, but normally will be exercised in purchasing something or making some payment, but once it is exercised, it is exhausted. The borrower undertakes on some date to give to the lender a similar claim to wealth in repayment of the loan. In the meantime, if the borrower acquired wealth with the claim transferred to him, the wealth may have been consumed lost or destroyed; but he does not escape his liability for repayment or interest thereby.
In far off days, when marauding Danish forces would land in these islands burning and pillaging the villages and carrying off the people into captivity, the government of the day offered tribute to the Danes in return for leniency. Needless to say the more that was paid the more was demanded and the taxation levied to pay this Danegold grew very heavy. What was more, it was only paid when the Danes came to collect it, which might be any time. So far as the ordinary taxpayer was concerned these sudden and heavy exactions were very harsh. If the harvest happened to be bad, the freemen would often be unable to pay. As a result the government enacted that if the Danegold was not paid within five days the first man who did pay could take the taxpayer's land. In face of such a severe penalty the ordinary freemen entered into arrangements with their rich and powerful neighbours under which, in return for the payment of the Danegold when it was levied, the yeomen undertook to pay at regular intervals a sum to cover the Danegold plus a little more. In short the small man was saying to his neighbour, "If you pay my taxation when I should pay it, I will pay my taxes to you with a little over." In modern times the same thing happens. The mass of the people through their government say to wealthy companies and individuals, "If you pay our taxation when we should pay it, we will pay you an annual sum in return." This practice, which has gone on in England since the reign of Charles I, has resulted in taxes being paid to private individuals by the government amounting in normal times to one-third of the total national expenses, and this without reducing the amount of the debt by one penny.
Whatever use may have been made of these loans, any benefit to the public at large has for the greater part expired long since. Still interest is payable.
Interest is a payment made by one person to another in return for a loan of a claim to wealth.
Before leaving the discussion of the relation between words and the facts which they are supposed to represent, it it useful to consider the meaning of the word profits. The indiscriminate use of this word has led to very considerable confusion in thought upon social matters. Its real meaning is simple enough and is the excess of income over expenditure. Its opposite is loss, or an excess of expenditure over income.
A shopkeeper, who owns the site upon which the shop is built, who owns the shop and stock, and who works in the shop, will calculate his expenditure and income from time to time and so access his profits. In this case his profits are due partly to his control of land, partly to his work aided by his capital - in short - his profits contain rent and wages. Suppose now, that he no longer controls the land but pays a full rent for it, that he still controls the shop and stock and still works. In these new conditions his profits will be less than before, less by the amount of rent he has to pay. Clearly he gained the greater profit because he controlled the land in the first instance and was reduced to the lower profit because he lost control of it. In the second instance, his profit would include wages. Let the shop-keeper now pay a full rent for the land and full interest on a loan with which he originally acquired the shop and stock, but let him still work. At the end of the accounting period he would still assess his profits and would, no doubt, be described in some quarters as a "capitalist", as distinct from a "worker". In this instance his miserable profits would consist of wages less interest, they would be reduced by both the rent he paid and the interest he paid. Finally suppose that this man did not own the land, did not own the shop or stock and did not work in the shop - clearly he would make nothing.
From this it will be seen that if used in any sense other than its ordinary and proper meaning of the difference between income and expenditure, the word profits is very confusing; for profits may consist of rent, or wages and, in truth, may be neither of these. To say, as some economists do, that wealth is distributed in rent, wages, interest and profits, is as much as to say that the human race is divided into men, women, children and workers.
Dividends upon shares in industry are the means by which profits are distributed to those who control companies or partnerships. Because accountants call the nominal value of the shares the capital of the undertaking, the idea has grown that the dividend is a return on capital, but it is nothing of the kind. The profits of the company, like the profits of the shop-keeper, may come from the control of land or wealth or from the work of the shareholders. Clearly in a property owning company, its income is gained, for the major part, from land, and its dividends must, therefore, be mainly rent. At the other extreme, in those private companies, where the directors and principal shareholders do all the work, it may well be that the dividend is purely wages. Stocks and shares are simply certificates of title to the future incomes of the companies concerned. Only on further enquiry could the source of the income be ascertained and the power which enabled the shareholders to obtain it, discovered.
To sum up: