Chapter XIII: Problems of Distribution

So far we have discussed for the most part those economic problems that center round the production of wealth, such as the use of natural resources, large-scale production, trusts and monopolies, labor organizations, unemployment, industrial education and co-operation. Now we shall consider briefly a few of the problems that are connected with the distribution of wealth. Professor Blockmar[38] says that the three great problems of economic society are: “First, how to create the largest amount of utilities or wealth; second, how justly to divide this amount; and third, how to make the product minister to the permanent rather than to the transient well-being of society.” The first problem we have already discussed; the second forms the subject of the present section; while the third will be taken up in the next section. Within the last century the center of interest in the practical application of economic principles has decidedly shifted from production to distribution. The earlier writers in economics, as shown in the mercantile lists of the seventeenth and eighteenth centuries, even Adam Smith, were chiefly interested in methods of increasing a nation’s wealth. With the introduction of the factory system and the opening up of vast natural resources by improvements in mining and transportation, the production of wealth has enormously increased, and now the question of the method of its distribution or division is felt to be more pressing.

Under the term distribution two different processes are included, which should be distinguished before going further. The first is called functional distribution, and concerns the distribution of the product of industry or the income of society, among the different factors of production. That is to say, land, labor, capital and 120 managerial ability have contributed in varying degrees to the production of a certain amount of current wealth, and the problem of functional distribution is to ascertain how the net product resulting from these joint efforts is divided. How much goes to rent, how much to wages, how much to interest and how much to profits? The second kind of distribution is the division of the wealth of society among individuals or families; this is personal distribution, and raises the question of poverty and great wealth. In discussing these problems, however, we must remember that wealth production and distribution takes place in modern society under conditions imposed by the social order in which we live; these were defined as competition, private property and personal liberty. If any modifications of the processes of distribution were desired, it would undoubtedly be necessary to alter these fundamental institutions.

John Stuart Mill held that production was governed by natural laws, which could be ascertained and stated, but that distribution was artificial and hence that it was not possible to discover constant and certain laws governing it. Beginning mainly with Mill, the ethical question has been more and more asked as to what share each factor in production ought to get, not merely what he does receive. “Hence the question is rising more and more as to what should be the basis of division, and many proposals have been made. It is proposed that laborers combine to get a larger share. Hence we have trade unions, Knights of Labor, etc. It is proposed that capitalists and landlords give a larger proportion of the produce to the laborers than they are able to secure by mere private struggle. Hence we have proposals for profit-sharing and various charities. It is proposed that laborers combine to be their own capitalists and landlords; hence we have all sorts of co-operative and communistic experiments. It is asserted that the wealthy classes have so much power in their hands that private 121 co-operation cannot succeed in competing against them, and hence it is proposed that all the people, through government (municipal, state, and national), secure all the means of production (capital and land, so far at least as land is used for production), and operate them collectively for the equitable good of all, the people thus being their own employers, capitalists, and landlords. Hence we have municipalism, nationalism, socialism. It is claimed that capitalists and landlords have been able to secure, and are today able to maintain, their large share in distribution, only through the favoritism of the Government. Hence we have proposals for free trade, the single tax,… the extreme proposals of the very great minimizing of the state in individualism, or the abolition of the Government in anarchism.”[39] In view of this very imperfect list it is not too much to say that most of the economic problems that are stirring society today are connected with the distribution of wealth.

The first question that suggests itself in the discussion of functional distribution is as to whether it is actually governed by natural law, so-called. It is observable that the amounts which go to rent, to wages, to interest, and to profits are regularly quite constant. What determines this? The socialists contend that natural distribution is the only just method and insist that the state should regulate this just distribution; they are not clear, however, as to what this natural method is. Henry George uses the same phrase when he says, “the just distribution of wealth is manifestly a natural distribution of wealth, and this is that which gives to him who makes it and secures to him who saves it.” All such statements beg the question for they all turn on the use of the word natural. Many modern economists are inclined to assert that the question of distribution is not an ethical one, not a question of what ought to be but of what 122 is. Thus Professor Tetter says[40]: “Distribution in economics is the seasoned explanation of the way in which the total product of a society is divided among its members. It is a logical question and not an ethical one.” And Professor Clark writes, “There is, in short, a deep-acting natural law at work amid the confusing struggles of the labor market.” It will not be possible, in the brief limits of this section, to take up all the theories as to the way in which this distribution is effected among the claimants to a share of the product, but a few of the more important practical results may be stated. We shall take up the four different factors in turn.

Rent is usually defined as the return for the use of natural objects and agencies. Rent has usually been low in the United States because of the large amount of land and other natural agents available. In general it may be said that when any factor of production is relatively abundant in comparison with the other factors, its share of the product will be small.[41] Henry George, however, argues that as the amount of land is limited and is now practically all taken up, the future will see a constantly increasing demand for land, and hence the landlords will absorb most of the future income of society. This is true of most of land and other natural agents especially in demand, as choice sites in our cities, anthracite coal mines, etc. The practical problem that suggests itself is, do we wish private property in land? The socialists answer no, but the individualists insist that the best use has been and can be made of land only by reducing it to private ownership. In practice, however, even in modern individualistic societies, the absolute and unregulated use of land by the owner is restricted in various ways.

Interest is the amount paid for the use of capital. From the time of 123 the church fathers in the Middle Ages down to the present-day socialists, interest and the private ownership of productive capital have formed favorite objects of attack. The justification of interest lies in the fact that men prefer present goods to future goods--a bird in the hand is worth two in the bush--and interest is the difference in value between the two at the present moment; it is time value. The justification of private property, on the other hand, lies rather in its expediency than in any inherent and unalterable law of nature. It has developed with civilization and has been, without question, a fundamental cause of material progress. But moderate individualists even, as John Stuart Mill, have attacked the institution of inheritance while leaving the main edifice of private property untouched. They would limit absolutely the amount of bequest or, as President Roosevelt advocated, would use inheritance taxes as a means of breaking up large fortunes.

Profits are the reward which the manager of a business receives for his services in organizing and superintending the business. This share of the social income was the last to be recognized by economists, and its rightfulness is even yet denied by the socialists. They insist that profits are really the earnings of labor which have been withheld from the laborer by the superior skill and economic strength of the capitalist manager; they are institutional robbery, the exploitation of labor. It is not possible to take up the arguments on this point, but it may be said in a word that the manager of business contributes a needed service to the work of society just as truly as the laborer does, and receives his earned reward in the form of profits.

Wages are the reward of labor. It is often assumed that wages are lower than they should be, that the laborer in some way is deprived of a portion of what he has rightfully earned. It is worth while inquiring briefly how the share of labor in the distribution of the 124 social income is determined. Various theories have been developed to explain the distributive process, of which we may notice three. The oldest in point of time and the most pessimistic theory held that wages were fixed by competition and the growth of population at the bare subsistence minimum, a bare starvation level. If by some happy chance wages were raised above this point, then the population would speedily multiply and the increased competition thus brought about among the laborers would depress wages again to the lowest amount sufficient to support a family. Under the name of the “iron law of wages,” this theory is still put forth by the socialists as the explanation--together with the institution of private property--of wages. Historically, however, this theory has happily been proven untrue, as the advance in the standard of living among the working class during the past century testifies. It has now been almost wholly superseded by the so-called productivity theory,[42] which asserts that wages depend upon the productivity of labor; that the laborer gets what he produces, and that this share is assured him by the working out of the competitive process under free competition. If this theory is true, there can be no ethical question raised; if labor is dissatisfied with its share, then it must increase its productive efficiency. As a matter of fact wages have always been high in the United States because labor has been relatively scarce compared with land and capital, and consequently its marginal productivity has been high. The third theory says that wages are a result of bargaining, of competition in the labor market, a question of supply and demand. Under these circumstances it is largely a question of economic strength between labor and capital, and if labor is well-organized, alert, and able to drive a good bargain, then wages will be high; otherwise they will be low. While there is an element of truth in the last theory, the second one seems the truest explanation of 125 general wages; certain it is that no monopoly power of labor, however great, could permanently maintain wages at a level higher than the actual produce of labor. The element of truth in the first theory is that wages can never, for any length of time, fall below the cost of subsistence.

Of more practical interest are questions connected with the personal distribution of wealth. In this connection arise such problems as the increase of large fortunes, the causes of poverty, and similar questions. The boast of our Republic has long been that here opportunity was open to all, that wealth was widely diffused, and that such inequalities of fortune as characterized the nations of the Old World were happily lacking. In the fifty-five years, 1850-1904, the per capita value of all property in the United States exactly quadrupled; how has this increase been distributed? Unfortunately we have no complete statistics on this point, yet reliable estimates by authoritative writers all tell the same story--of great concentration of wealth in the possession of a comparatively few rich families. In 1893 Mr. George K. Holmes concluded from a study of the statistics of farm and home ownership in the United States that “91 per cent of the families of the country own no more than about 29 per cent of the wealth, and 9 per cent of the families own about 71 per cent of the wealth.” A more accurate and satisfactory statement can be drawn from the income-tax returns for Prussia, which tells almost the same story with regard to income. The table on the following page is condensed from an article by Professor A. Wagner:

According to these figures over two-thirds of the persons--heads of families or single adults--had only one-third of the income, while 3½ per cent had another third. Another striking fact shown by the table is the large proportion of persons receiving incomes of less

Distribution of Income in Prussia, 1902 126

==============+============+============
| Per cent | Per cent
Income | of persons | of income
--------------+------------+------------
Below $214 | 70.7 | 33.0
$214 to $714 | 25.8 | 34.9
Over $714 | 3.5 | 32.1
--------------+------------+------------

than $214 a year, the minimum taxable income. It shows the poverty of the mass of the people as well as the concentration of wealth among the few rich. In the United States, where the natural resources have been so much richer than in Germany, a similar table would probably show a much smaller proportion under the Prussian minimum, but on the other hand it would probably show a greater concentration of income in the hands of a few. Europe has as yet no billionaire. The great fortunes of the United States have been made possible by the unrivaled opportunities for the exploitation of rich natural resources, the appropriation of natural monopolies, and to special privileges and opportunities in manufactures and transportation. The importance of monopoly privileges in the distribution of wealth is well shown by the results of an investigation made in 1892 by the New York Tribune into the sources of the fortunes of millionaires. It was undertaken to show that protection was not the main cause; but while it proved this, it showed clearly that most of them were built up on monopoly. “Of the 4,047 millionaires reported, only 1,125, or 28 per cent, obtained their fortunes in protected industries…. About 78 per cent of the fortunes were derived from permanent monopoly privileges, and only 22 per cent from competitive industries unaided by natural and artificial monopolies…. Furthermore, if the size of fortunes is taken into account it will be found that perhaps 95 per cent of the total values represented by these millionaire fortunes is due to those investments 127 classed as land values and natural monopolies, and to competitive industries aided by such monopolies.”[43] It is essential to the stability of our democratic institutions that all special privileges be absolutely prohibited, and that monopoly be brought under strict government control and regulation. Improper methods of wealth accumulation should certainly be prevented.

The opposite question of poverty has already been discussed and some of the causes of poverty pointed out. It will be sufficient here to try to answer the question which has often been asked: Are the rich growing richer and the poor poorer? Though the first part of the question has just been affirmed, the second part may be denied. The nineteenth century has witnessed a vast improvement in the condition of the laboring man, who has shared in the increasing wealth which he has helped to produce. Wages have steadily increased, the hours of labor have been reduced, and the material well-being of the wage-earner is greater today than it has ever been before. It has more than once been pointed out by writers on this subject that with an equal distribution of wealth no one would be well-to-do, while many others insist that inequality in itself is a desirable thing. Greater diffusion of wealth can come about only by very slow processes, and permanent plenty can be secured only by a great increase in the accumulations of capital and the efficiency of each worker. Any suggested reform, therefore, that would weaken the motives to thrift and industry must be rejected.