2. Land, labor and rent A. Rent
We have been using the term rent in our analysis to signify the higher price of the services
of goods. This price is paid for unit services, as distinguished from the prices of the whole
Whole Factors Yielding the Service
Since all goods have unit services, all goods will earn rents, whether they be consumers
goods or any type of producers goods.
Future rents of durable goods tend to be capitalized and embodied in their capital value and therefore
in the money presently needed to acquire them.
As a result, the investors and producers of these goods tend to earn simply an interest
return on their investment.
All goods earn gross rent, since all have unit services and prices for them.
If a good is rented out, it will earn gross rent in the higher charge.
If it is bought, then its present price embodies discounted future rents, and in the future
It will earn these rents by contributing to production.
All goods, therefore, earn gross rents.
And here there is no analytic distinction between one factor and another.
Net rents, however, are earned only by labor and land factors, and not by capital goods.
Net rents equal gross rents earned minus gross rents paid to owners of factors.
For the gross rents earned by a capital good will be imputed to gross rents paid to the
owners of the factors that produced it.
Hence, on net, only labor and land factors, the ultimate factors, earn rents.
And in the ERE, these, along with interest on time, will be the only incomes in the economy.
The Marshallian theory holds that durable capital goods earn quasi-rents temporarily,
while permanent lands earn full rents.
The fallacy of this theory is clear.
Whatever their durability, capital goods receive gross rents just as lands do, whether in the
In the changing real world or the ERE, in the ERE they receive no net rents at all,
since these are imputed to land and labor.
In the real world, their capital value changes, but this does not mean that they earn net
rents.
Rather, these changes are profits or losses accruing to their owners as entrepreneurs.
If then, incomes in the real world are net rents accruing to labor and land factors and
entrepreneurial profits, while the latter disappear in the ERE, there is no room in
either world for the concept of quasi-rent.
Nowhere does this special type of income exist.
A wage is the term describing the payment for the unit services of a labor factor.
A wage, therefore, is a special case of rent.
It is labor's hire.
On a free market, this rent cannot, of course, be capitalized, since the whole labor factor,
the man, cannot be bought and sold for a price, his income to accrue to his owner.
This is precisely what occurs, however, under a regime of slavery.
The wage, in fact, is the only source of rent that cannot be capitalized on the free market,
since every man is necessarily a self-owner with an inalienable will.
One distinction between wages and land rents, then, is that the latter are capitalized and
transformed into interest return, while the former are not.
Another distinction is purely empirical and not apodictically true for mankind.
It has simply been an historical empirical truth that labor factors have always been
relatively scarcer than land factors.
Land and labor factors can be ranged in order of their marginal value productivity.
The result of a relative superfluity of land factors is that not all the land factors will
be put to use, that is, the poorest land factors will be left idle, so that labor will be free
to work the most productive land, for example, the most productive agricultural land, urban
sites, fish hatcheries, natural resources, etc.
Those will tend to use the most value-productive land first, the next most productive second,
etc.
At any given time, then, there will be some land, the most value-productive, under cultivation
and use, and some not in use.
The latter, in the ERE, will be free land, since its rental earnings are zero, and therefore
its price will be zero.
This capital value will be positive, however, if people expect the land to earn rents in
the near future.
The former land will be supramarginal, and the latter land will be submarginal.
On the dividing line will be the poorest land now in use.
This will be the marginal land, and it will be earning close to zero rent.
It is important to recognize the qualification that the marginal land will earn not zero
but only close to zero rent.
As Frank Fetter stated, the last unit of product of any finite amount would have to pay its
corresponding rent.
The only product obtained in the strict theory of the case without paying rent would be one
One unit infinitesimally small, in plain Anglo-Saxon, would be nothing at all.
No finite unit of product can be shown to be a no-rent unit.
The reason is that in human action there is no infinite continuity, and action cannot
proceed in infinitely small steps.
Mathematically minded writers tend to think in such terms, so that the points before and
after the point under consideration all tend to merge into one.
Using marginal land, however, will pay only if it earns some rent, even though a small
one, and in cases where there are large discontinuities in the array of MVPs for different lands,
The Marginal Land might be earning a substantial sum.
It is obvious that there is no praxeological precision in terms like close, substantial,
etc.
All that we can say with certainty is that if we arrange the MVPs of lands in an array,
the rents of the Submarginal Lands will be zero.
We cannot say what the rent of the marginal land will be, except that it will be closer
to zero than that of the supramarginal lands.
The terms marginal, supramarginal, etc. are rather differently used here from the way
they have been used up to now.
Instead of dealing with the supply and demand for a homogeneous good or factor, we are here
We are referring to one class of factors, such as lands, and comparing different qualities
of the various factors in that class.
The near zero earning land is marginal because it is the one just barely put to use.
Now we have seen that the marginal value product of a factor decreases as its total supply
Supply Increases and Increases as the supply declines.
The three major categories of factors in the economy are land, labor, and capital goods.
In the progressing economy, the supply of capital per person increases.
Here we shift the definition of progressing economy to mean increasing capital per person,
So that we can contrast the effects of changes in the supply of one type of factor to changes
in the supply of another.
The supply of all ranks of capital goods increases, thereby decreasing the marginal value productivities
of capital goods, so that the prices of capital goods fall.
The relative MVPs of land and labor factors in the aggregate tend to rise, so that their
income will rise in real terms, if not in monetary ones.
What if the supply of capital remained the same, while the supply of labor or land factors
changed?
Thus, suppose that, with the same capital structure, population increases, thus expanding
The General Fall in the MVP of Labor and a Rise in the MVP of Land Factors
This rise will cause formerly sub-marginal no-rent lands to earn rent and to enter into cultivation by the new labor supply.
This is the process particularly emphasized by Ricardo, population pressing on the land supply.
The tendency for the MVP of labor to drop, however, may well be offset by a rise in the MPP schedules of labor,
since a rise in population will permit a greater utilization of the advantages of specialization and the division of labor.
The constant supply of capital would have to be reoriented to the changed conditions, but the constant amount of money capital will then be more physically productive.
Hence, there will be an offsetting tendency for the MVPs of labor to rise.
At any time, for any given conditions of capital and production processes, there will be an optimum population level that will maximize the total output of consumers' goods per head in the economy.
A lower level will not take advantage of enough division of labor and opportunities for labor,
so that the MPP of labor factors will be lower than at the optimum point.
A higher level of population will decrease the MVP of labor and will therefore lower
real wages per person.
There is, of course, no reason to assume that maximum real income per head is necessarily
the best ethical ideal.
For some, the ideal might be maximum real income plus maximum population.
In a free society, parents are free to choose their own ethical principles in the matter.
Recognition of the existence of a theoretical optimum population that maximizes real output
per head, given existing land and capital, would go far to end the dreary Malthusian
controversies in economic theory.
For whether a given increase in population at any time will lead to an increase or decrease
is an empirical question, depending on the concrete data.
It cannot be answered by economic theory.
Economics can say little else about population and its size.
The inclusion of a corpus of population theory under economics instead of biology or psychology
is the unfortunate result of the historical accident that the early economists were the
The First to Delve into Demographic Problems
It might be wondered how the statement that increasing population might increase MPP and
MVPs can be reconciled with the demonstration that factors will always be put to work in
areas of diminishing physical returns.
The conditions here are completely different, however.
In the previous problem we were assuming a given total supply of the various factors
and considering the best method of their relative arrangement.
Here we are dealing not with particular production processes and given supplies of factors, but
with the vague concept of production in general and with the effect of change in the total
supply of a factor.
Furthermore, we are dealing not with a true factor, homogeneous in its supply, but with
a class of factors, such as land in general, or labor in general.
Aside from the problem of vagueness, it is evident that the conditions of our present
problem are completely different.
For if the total supply of a factor changes, and it has an effect on the productivity of
of the Labor Factor, this is equivalent to a shift in the MPP schedules.
The Lausanne way of Valra and Pareto of phrasing this distinction would be to say that in the
former case we implicitly assumed that the supply of tastes, techniques and resources
remains given in the economy.
In the present case, we are considering a change in a resource, for example, an increase
in the supply of labor.
We would amend this to say that only tastes and resources were considered given.
As we saw in the previous section, techniques are not immediate determinants of production
changes.
The techniques must be put to use via saving and investment.
In fact, we may deal with tastes and resources alone, provided that we include time preferences
among the tastes.
Because we are accustomed to viewing labor implicitly as scarcer than land factors, we
speak in terms of zero-rent land.
If the situations were reversed and lands were scarcer than labor factors, we would
have to speak of zero-wage laborers, sub-marginal labor, etc.
Theoretically this is certainly possible, and it might be argued that in such static
societies with institutionally limited markets as ancient Sparta and medieval or post-medieval
Europe this condition actually obtained, so that the surplus labor earned a below subsistence
Inventor's wage in production, those who were surplus and did not own invested capital were
curbed by infanticide or reduced to beggary.
That sub-marginal land earns no rent has given rise to an unfortunate tendency to regard
the very concept of rent as a differential one, as referring particularly to differences
is in quality between factors.
Sometimes the concept of absolute or pure rents is thrown overboard completely, and we hear
only of rent in a differential sense, as in such statements as the following.
If land A earns 100 gold ounces a month and land B earns zero, land A is making a differential
rent of 100.
If laborer A earns 50 gold ounces a month and laborer B earns 30 gold ounces, A earns
a rent of ability of 20 ounces.
On the contrary, rents are absolute and do not depend on the existence of a poorer factor
of the same general category.
The differential basis of rent is purely dependent on, and derived from, absolute rents.
It is simply a question of arithmetical subtraction.
Thus, land A may earn a rent of 100, and land B a rent of zero.
Obviously, the difference between 100 and zero is 100.
In the case of the laborer, however, laborer A's rent, that is, wage, is 50, and B's
is 30.
If we want to compare the two earnings, we may say that A earns 20 more than B. There
is little point, however, in adding to confusion by using rent in this sense.
The differential rent concept has also been used to contrast earnings by a factor in one
Differential rent is used to mean the difference between the actual DMVP and the opportunity
for Gone or the DMVP in the Next Best Use.
It is sometimes believed that the 10-ounce differential is in some way not really a part
of costs to entrepreneurs, that it is surplus or even unearned rent acquired by the factor.
It is generally admitted that it is not without cost to individual firms, which have bid the
In fact, the entire discussion concerning whether or not rent is costless or enters into cost is valueless.
But there is no industry point of view. Not industries, but firms buy and sell and seek profits.
In fact, the entire discussion concerning whether or not rent is costless or enters into cost
is valueless. It belongs to the old classical controversies about whether rents are price
Price Determined or Price Determining
The view that any costs can be price determining is a product of the old cost of production
theory of value and prices.
We have seen that costs do not determine prices, but vice versa, or more accurately, prices
of Consumers' Goods Through Market Processes Determine the Prices of Productive Factors,
Ultimately, Land and Labor Factors, and the Brunt of Price Changes is Born by Specific
Factors in the Various Fields.
b.
The Nature of Labor
As we have mentioned earlier, labor is a category that includes a myriad variety of services.
Generally, labor is the expenditure of pure human energy on a production process.
Catallactically, labor is hired by entrepreneur capitalists.
When an owner performs and earns a return for an essentially labor activity, which he
could also perform as an employee, for example, the owner-manager, that return is an implicit
wage.
It is grossly unscientific to separate laborers into arbitrary categories and to refer to
one group as labor and workers, while the other group receives various other names.
To give them other names implies a difference in kind between their contribution and the
contribution of others.
But this difference does not exist.
Thus, the popular custom is to call some hired labor, labor, while others are called managers, executives, etc.
Management is a particularly popular category as contrasted with labor, and we hear a great deal of the term labor-management relations.
But these categories are valueless.
Management is hired by the owners or owner to direct production.
Managers are supposed to obey the orders of their superiors, something they consent to do as part of the terms of their employment.
The lower quality workers further down the scale, the laborers, are treated by these writers as a different breed.
When we use the term quality here and in other parts of catalactic analysis, we are not employing it in some metaphysical sense,
Management, etc.
Yet there is no difference in kind between workers and management.
The vice president of a company, if hired by its owners, has exactly the same amount
of justification or lack of justification for joining a union as does a hired mechanic.
Both are supposed to abide by the terms of their employment, that is, to obey the relevant
and orders of their superiors.
Both are free at any time to haggle over the terms of their employment, just as in any
other voluntary exchange on the market.
Both are laborers, who expend human energy in the production of goods.
No special quality attaches to one set of laborers or another that makes it more or
less justifiable for them to join a union.
The union question will be explored in Chapter 10 on monopoly and competition.
Here we might note that this false labor management dichotomy crops up in an interesting way in
the struggle over foreman's unions.
For some reason, even the most ardent union advocate thinks absurd the idea of unionizing
the vice presidents.
Those more critical of unions think it monstrous if unions attempt to organize foremen who
are in the lower echelons of management and would, of course, be horrified at the very
thought of unionizing vice presidents.
Yet if there is no real dichotomy and all employees are labor, then our views on unions
must be altered accordingly.
Or if everyone admits that the unionizing of vice presidents is absurd or evil, then
perhaps the same adjective would have to apply to the unionization of any workers.
C. Supply of Land
We have seen throughout that the processes of price determination for the unit services
The prices of land and labor are exactly the same. Both sets of factors tend to earn their MVP. Both receive advances of present money from capitalist entrepreneurs, etc.
The analysis of the pricing of unit services of original or permanent factors applies equally to each.
There are three basic differences between the conditions of land and those of labor,
however, that make separation of the two important.
One we have already dealt with in detail, that in the free economy land can be capitalized
in its price as a whole factor and therefore earns simply interest and entrepreneurial
A second difference we have been considering, the empirical fact that labor has been more
scarce than land factors.
A corollary of this is that labor is pre-eminently the non-specific factor, which is applicable
to all processes of production, whereas land tends to be far more specific.
A third difference derives from the fact that laborers are human beings, and, also an empirical
fact, that leisure is always a consumer's good.
As a result, there will be reserve prices for labor against leisure, whereas land, in
the broadest sense, will not have a reserve price.
We shall deal with the effects of this distinction presently.
The fact that labor is scarcer and non-specific means that there will always be unused land.
Only the best and most productive land will be used, that is, the land with the highest
DMVPs.
Similarly, in the real world of uncertainty, where errors are made, there will also be
the Unused Capital Goods, that is, in places where malinvestments have been made, which
turned out to be unprofitable.
We have seen that the prices of consumers' goods are set by consumers' demand schedules,
as determined by their value scales.
That is, by the way that the quantity supplied by producers, the first-rank capitalists,
will be valued by consumers.
When in the changing economy producers have speculative reservation demands, the price
will, at any moment, be set by the total demand for the given stock, and this will always
tend to approach the true consumer's demand price.
A similar situation obtains in land.
The prices of land factors will be determined by the general schedule of the factors DMVPs,
will be set according to the point of intersection of the total quantity or stock of the factor
available with its discounted marginal value productivity schedule.
The DMVP in turn is, as we have seen at length, determined by the extent to which this factor
serves the consumers.
The MVP is determined directly by the degree that a factor unit serves the consumers, and
the discount is determined by the extent that consumers choose saving investment as against
present consumption.
Therefore, the value scales of the consumers determine, given the stocks of original factors,
all the various results of the market economy that need to be explained.
The prices of the original factors, the allocation of original factors, the incomes to original
factors, the rate of time preferences and interest, the length of the production processes
in use, and the amounts and types of the final products.
In our changing real world, this beautiful and orderly structure of the free market economy
tends to be attained through the drive of the entrepreneurs toward making profit and
avoiding loss.
This rule by consumers' valuations holds insofar as entrepreneurs and owners of factors
aim at maximum money income, to the extent that they abstain from higher money income
to pursue non-monetary ends. For example, looking at one's untilled land or enjoying leisure, the producer's own valuations will be determining.
From the general praxeological point of view, these producers are to that extent acting as consumers.
Therefore, the full rule of consumer's value scales would hold even here.
However, for purposes of catalactic market analysis, it may be convenient to separate man as a producer from man as a consumer, even though, considered in his entirety, the same man performs both functions.
In that event, we may say that to the extent that non-monetary goals enter, not consumers' values are determining, but the values of all individuals in society.
At this point, let us consider a great bugaboo of the Henry Georgists' speculation in land that withholds productive land from use.
According to the Georgists, a whole host of economic evils, including the depressions of the business cycle,
stem from speculative withholding of ground land from use, causing an artificial scarcity and high rents for the sites in use.
We have seen that speculation in consumers' goods, and the same will also apply to capital goods,
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Use in the Present or Use at Various Times in the Future
If the owner of the good estimates that demand for the good will be higher in the future
and therefore its price will be greater, he will, provided that the length of waiting
time is not too costly in terms of time preference and storage, keep the goods on hand in inventory
until that date.
This serves the consumers by shifting the good from use at present to a more highly valued
use in the future.
Land however is a permanent resource as we have seen.
It can be used all the time, both in the present and in the future.
Therefore any withholding of land from use by the owner is simply silly.
It means merely that he is refusing monetary rents unnecessarily.
The fact that a landowner may anticipate that his land value will increase because of increases
in future rents in a few years furnishes no reason whatever for the owner to refuse to
acquire rents in the meanwhile.
Therefore, a site will remain unused simply because it would earn zero rent in production.
In many cases, however, a land site, once committed to a certain line of production,
could not easily or without substantial cost be shifted to another line.
Where the landowner anticipates that a better line of use will soon become available or
is in doubt on the best commitment for the land, he will withhold the land site from
from use if his saving in changeover cost will be greater than his opportunity cost
of waiting and of forgoing presently obtainable rents.
The speculative site owner is then performing a great service to consumers and to the market
in not committing the land to a poorer productive use.
By waiting to place the land in a superior productive use, he is allocating the land
and to the uses most desired by the consumers.
What probably confuses the Georgists is the fact that many sites lie unused and yet command
a capital price on the market.
The capital price of the site might even increase while the site continues to remain idle.
This does not mean, however, that some sort of villainy is afoot.
It simply means that no rents on the site are expected for the first few years, although
it will earn positive rents thereafter.
The capital value of ground land, as we have seen, sums up the discounted total of all
future rents, and these rental sums may exert a tangible influence from a considerable distance
in the future, depending on the rate of interest.
There is, therefore, no mystery in the fact of a capital value for an idle site or in
its rise.
The site is not being villainously withheld from production.
In the free society, as we have indicated, the site could not originally become the property
of anyone until it had been used in some way, such as being cleared, cultivated, etc.
There need be no subsequent use, however, until rents can be obtained.
Let us now consider the effect of a change in the supply of a land factor.
Suppose that there is an increase in the supply of land in general, the supply of labor and
savings remaining constant.
If the new land is sub-marginal in relation to land presently in use, it is obvious that
The New Land will not be used, but will instead join its fellow sub-marginal land sites in
idleness.
If, on the other hand, the New Land is superior, and therefore would earn a positive rent,
it comes into use.
There has been, however, no increase in labor or capital, so that it will not be profitable
for these factors to be employed on a greater total amount of land than before.
The new productive land, competing with the older land, will therefore push the previously
just marginal land into the sub-marginal category.
Labor will always employ capital on the best land, and so the new acquisition of supramarginal
land will oust the previously marginal land from production, since the new land is more
More value productive than the old marginal land which it replaces, the change increases
the total output of goods in the society.
D. Supply of labor.
One of the complications in the analysis of labor is the alleged occurrence of a backward
supply of labor.
This happens when workers react to higher wage rates by reducing their supply of labor
For Labor, Though Hardly Homogeneous, Is a Peculiarly Non-Specific Factor, Therefore,
Higher Wage Rates for One Set of Factors Will Tend to Stimulate Other Laborers to Train
As wage rates in general rise, in all their
In addition to their connexity between various specific labor markets, the supply of all labor, that is, the quantity of labor hours, can either increase or decrease depending on the value scales of the individuals concerned.
Rising wages may draw non-working people into the labor force and induce people to work overtime or to obtain an extra part-time job.
On the other hand, it may lead to increased leisure and a falling off in total hours worked.
Rising wages may lead to population growth, swelling the total supply of labor in general,
or may lead to a cutback in population and the taking of some of the gains of increased wages in the form of increased leisure and an increased standard of living per person in the population.
There will be such a backward supply if the marginal utility of money falls rapidly enough
A backward supply might conceivably take place for a land factor as well, when the owner has a high reserve demand for the land in order to enjoy its unused, in the catallactic sense, beauty.
In that case, the land would have an increasing marginal disutility of visual enjoyment foregone, just as leisure is foregone in the process of expending labor.
In the case of land, since there is not as great a connexity between land factors as there is between non-specific labor factors, this circumstance will, in fact, impinge more directly on the market rental price.
It may be revealed in a backward general supply for the land factor.
Higher rental prices offered for his land will then induce the landowner to withhold
more of it, taking the higher income partially in non-exchangeable consumption goods, as
well as in more money received.
These cases may be rare in practice, but only because of the freely chosen values of the
of the Individuals themselves.
Thus, there is no reason for the would-be preserver of a monument or of a park to complain
about the way the market treats his treasured objects.
In the free society, these conservationists are at perfect liberty to purchase the sites
and preserve them intact.
They would, in effect, be deriving consumption services from such acts of preservation.
To return to labor, we have mentioned another component in wage rates.
This is the psychic income or psychic disutility involved in any particular line of work.
People, in other words, are often attracted to a certain line of work or to a specific
job by other considerations than the monetary income.
There may be positive psychic benefits and satisfactions derived from the particular
In order to isolate such elements, let us suppose for the moment that all laborers are equally value-productive, that labor is a homogeneous factor.
In such a world, all wage rates in all occupations would be equal.
All industries need not be equally value-productive for this result to occur.
For, as a result of the connexity of labor, that is, its non-specificity,
laborers can enter wide ranges of occupations.
If we assume, as we do for the moment, that all laborers are equally value-productive,
Then they will enter a high-wage industry while quitting low-wage industry.
This conclusion follows from the general tendency toward the uniformity of the price of any
good on the market.
If all labor were homogeneous and therefore one factor, its price, wage rate, would be
uniform throughout industry, just as the pure interest rate tends to be uniform.
Now let us relax one of the conditions of our hypothetical construct.
It will be noted that we have avoided using the very fashionable term model to apply to
the analyses in this book.
The term model is an example of an unfortunate bias in favor of the methodology of physics
and engineering as applied to the sciences of human action.
The constructs are imaginary because their various elements never coexist in reality,
yet they are necessary in order to draw out, by deductive reasoning and Ceteris Paribus
assumptions, the tendencies and causal relations of the real world.
The model of engineering, on the other hand, is a mechanical construction in miniature,
All parts of which can and must coexist in reality.
The engineering model portrays in itself all the elements and the relations among them
that will coexist in reality.
For this distinction between an imaginary construct and a model, the writer is indebted
to Professor Ludwig von Mises.
While retaining the assumption of equal productivity of all laborers, let us now introduce the
possibility of psychic benefits or psychic disutilities accruing to workers at particular
jobs.
Some jobs are actively liked by most people, others actively disliked.
These jobs may be common to certain industries or, more narrowly, to individual firms which
What will happen to money wage rates and to the supply of labor in the various occupations?
It is obvious that in the generally disliked occupation or firm, higher money wage rates
will be necessary to attract and hold labor in that job.
On the other hand, there will be so much labor competing in the generally liked jobs that
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The question is an empirical one. It is a fundamental, empirically-derived postulate of this book that there is a great variety among men in labor skills, in insight into future events, in ability, intelligence, etc.
In the book, that there is a great variety among men in labor skills, in insight into
future events, in ability, intelligence, etc.
It seems empirically clear that this is the case.
The denials seem to be based on the simple faith that all men are really equal in all
respects, or could be made equal under proper conditions.
Generally, the assumptions of uniformity and equality are made implicitly rather than explicitly,
perhaps because the absurdities and obvious errors of the position would then become clear.
For who would deny that not everyone could be an opera singer or a batting champion?
Some writers try to salvage the uniformity assumption by demonstrating that differences
Expenses in wages occur solely because of the heavy cost of training for certain jobs.
Thus, a doctor will earn more than a clerk because, in the nature of the task, a doctor
will have to undergo the expenses of years of training, the expenses including actual
money costs as well as opportunity costs foregone of earning money in such jobs as clerking.
Therefore, in long-run equilibrium, money wage rates will not be uniform in the two fields,
but income rates will be enough higher in medicine to just compensate for the loss,
so that the net wage or income rates, considered over the person's lifetime, will be the same.
It is true that costs of training do enter in this way into market wage rates,
But they do not account for all wage differentials by any means.
Inherent differences in personal ability are also vital.
Decades of training will not convert the average person into an opera star or a baseball champion.
Many writers have based their analyses on the assumption of the homogeneity of all workers.
Consequently, when they find that generally well-liked jobs, such as television directing, pay more than such disliked jobs as ditch-digging, they tend to assume that there is injustice and chicanery afoot.
A recognition of differences in labor productivity, however, eliminates this bugbear.
In such cases, a psychic component still exists that relatively lowers the wage of the better-liked
job, but it is offset by the higher marginal-value productivity and skill attached to the latter.
Since TV directing takes more skill than ditch-digging, or rather, skill that fewer people have,
E. PRODUCTIVITY AND MARGINAL PRODUCTIVITY
Great care must be taken in dealing with the productivity concept.
In particular, there is danger in using a term such as productivity of labor.
Suppose, for example, we state that the productivity of labor has advanced in the last century.
The implication is that the cause of this increase came from within labor itself.
That is, because current labor is more energetic or personally skillful than previous labor.
This however is not the case.
An advancing capital structure increases the marginal productivity of labor, because the
labor supply has increased less than the supply of capital goods.
This increase in the marginal productivity of labor, however, is not due to some special
improvement in the labor energy expended.
It is due to the increased supply of capital goods.
The causal agents of increased wage rates in an expanding economy, then, are not primarily
the workers themselves, but the capitalist entrepreneurs who have invested in capital
goods.
The workers are provided with more and better tools, and so their labor becomes relatively
scarcer as compared to the other factors.
It should be understood throughout that when we refer to increases in wage rates or ground
rents in the expanding economy, we are referring to real and not necessarily to money wage
rates or ground rents.
That each man receives his marginal value product means that each man is paid what he
is worth in producing for consumers.
But this does not mean that increases in his worth over the years are necessarily caused
by his own improvement.
On the contrary, as we have seen, the rise is primarily due to the increasing abundance
of capital goods provided by the capitalists.
It is then clearly impossible to impute absolute productivity to any productive factor or class
of factors.
In the absolute sense, it is meaningless to try to impute productivity to any factor,
since all the factors are necessary to the product.
We can discuss productivity only in marginal terms, in terms of the productive contribution
of a single unit of a factor, given the existence of other factors.
This is precisely what entrepreneurs do on the market, adding and subtracting units of
factors in an attempt to achieve the most profitable course of action.
Another illustration of the error in attempting to attribute increased productivity to the
workers themselves occurs within the various segments of the labor market.
As we have seen, there is a definite connexity between all the occupations on the labor market,
since labor is the prime non-specific factor.
As a result, while wage rates are not equalized, psychic wage rates will all tend in the long
run to move together and maintain a given skill differential between each occupation.
Therefore, when a certain branch of industry expands its capital and production, an increase in DMVP, and therefore in wage rates, is not confined to that particular branch.
Because of the connexity of the supply of labor, labor tends to leave other industries and enter the new ones, until finally all the wage rates throughout the labor market have risen,
While Maintaining the Same Differentials as Before
Suppose, for example, that there is an expansion of capital in the steel industry.
This assumes, of course, that there is no offsetting decline in capital elsewhere.
If there is, then there will be no general rise in wages.
The MVP of the steel worker increases, and his wage rates go up.
The increase in wage rates, however, is governed by the fact that the rise will attract workers from more poorly paid industries.
For example, suppose that steel workers are receiving 25 grains of gold per hour, while domestic servants receive 15 grains per hour.
Now, under the impetus of expansion, the MVP and hence the wage rate of the steel workers go up to 30 grains.
The differential has been increased, inducing domestic servants to enter the steel industry,
lowering steel wages and especially raising servants' wages, until the differential is re-established.
Thus a rise in capital investment in steel will increase the wages of workers in domestic service.
The latter increase is clearly not caused by some sort of increase in the productivity or in the quality of the output of the domestic servants.
Rather, their marginal value productivity has increased as a result of the greater scarcity of labor in the service trades.
The differentials will not remain precisely constant in practice, of course, since changing investment and changing methods also alter the types of skills required in the economy.
The shift in labor supply will not usually be as abrupt as in our example.
Generally, it will take place from one occupation or one grade to a closely similar grade or
occupation.
Thus, more ditch-diggers might become foremen, more foremen, supervisors, etc., so that shifts
will take place from grade to grade.
It is as if the labor market consisted of linked segments, a change in one segment transmitting
A note on overt and total wage rates It is total wage rates that are determined
on the market.
They tend to be equalized on the market and to be set at the DMVP of the worker.
Total wage rates are the money paid out by the employer for labor services.
They do not necessarily correspond to the take-home pay of the worker.
The latter may be called the overt wage rates.
Thus, suppose that there are two competing employers bidding for the same type of labor.
One employer, Mr. A, pays out a certain amount of money, not in direct wages, but in pension
funds or other welfare benefits.
These benefits, it must be realized, will not be added as a gift from the employer to
the workers.
They will not be additions to the total wage rates.
Overt wage rates paid out by Mr. A will instead be correspondingly lower than those paid out
by his rival, Mr. B, who does not have to spend on the welfare benefits.
To the employer, in other words, it makes no difference in what form workers cost him
money, whether in take-home pay or in welfare benefits, but he cannot pay more than the
worker's DMVP, that is, the worker's total wage income is set by this amount.
The worker, in effect, chooses in what form he would like his pay, and in what proportion
of Net Wage Rates to Welfare Benefits Part of these benefits is money that the employer
might spend to provide particularly pleasant or plush working conditions for all or some
of his employees.
This cost is part of the total and is deducted from the overt wage rates of the employee.
The institutional manner of paying wage rates is a matter of complete indifference to our
Analysis.
Thus, while peace rates or time rates may be more convenient in any given industry,
they do not differ in essentials.
Both are wage rates paid for a certain amount of work.
With time rates, the employer has in mind a standard of performance which he expects
from a worker, and he pays according to that rate.
G. The Problem of Unemployment
An economic bugbear of our times is unemployment.
Not only is this considered the preeminent problem of the depression in the business cycle,
it is also generally considered the primary problem of the capitalist system,
that is, of the developed free market economy.
Well, at least socialism solves the unemployment problem, is supposed to be the most persuasive
argument for socialism.
Of particular interest to us is the sudden emergence of the unemployment problem in economic
theory.
The Keynesians in the mid-1930s inaugurated the fashion of declaiming neoclassical economics
is all right for its special area, but it assumes full employment.
Since orthodox economics assumes full employment, it holds true only so long as full employment prevails.
If it does not, we enter a Keynesian wonderland where all economic truths are vitiated or reversed.
Full employment is supposed to be the condition of no unemployment, and therefore the goal at which everyone aims.
In the first place, it should be emphasized that economic theory does not assume full employment.
Economics, in fact, assumes nothing. The whole discussion of alleged assumptions reflects the
bias of the epistemology of physics, where assumptions are made without originally knowing
their validity and are eventually tested to see whether or not their consequences are correct.
The economist does not assume. He knows. He concludes on the basis of logical deduction from self-evident axioms, that is, axioms that are either logically or empirically incontrovertible.
Now, what does economics conclude on the matter of unemployment or full employment?
In the first place, there is no problem involved in the unemployment of either land or capital goods factors.
The latter condition is often known as idle or unused capacity.
We have seen that a crucial distinction between land and labor is that labor is relatively scarce.
As a result, there will always be land factors remaining unused or unemployed.
Capital goods will remain unemployed because of previous entrepreneurial error, that is, investing in the wrong type of capital goods.
As a further result, labor factors will always be fully employed on the free market, to the extent that laborers are so willing.
There is no problem of unemployed land, since land remains unused for a good reason.
Indeed, if this were not so, and it is conceivable that someday it will not be, the situation would be most unpleasant.
If there is ever a time when land is scarcer than labor, then land will be fully employed,
and some labor factors will either get a zero wage or else a wage below minimum subsistence level.
This is the old classical bugbear of population pressing the food supply down to below subsistence levels
and certainly this is theoretically possible in the future.
This is the only case in which an unemployment problem might be said to apply in the free market.
But even here, if we consider the problem carefully, we see that there is no unemployment problem per se.
For if what a man wants is simply a job, he could work for zero wages, or even pay his employer to work for him.
for him.
In other words, he could earn a negative wage.
Now this could never happen, for the good reason that labor is a disutility, especially
as compared to leisure or play.
Yet all the worry about full employment makes it appear that the job, and not the income
from the job, is the great desideratum.
If that were really the case, then there would be negative wages, and there would be no unemployment
problem either.
The fact that no one will work for zero or negative wages implies that in addition to
whatever enjoyment he receives, the laborer requires a monetary income from his work.
So what the worker wants is not just employment, which he could always get in the last resort
by paying for it, but employment at a wage.
But once this is recognized, the whole modern and Keynesian emphasis on employment has to
be revalued, for the great missing link in their discussion of unemployment is precisely
the wage rate.
To talk of unemployment or employment without reference to a wage rate is as meaningless
is talking of supply or demand without reference to a price, and it is precisely analogous.
The demand for a commodity makes sense only with reference to a certain price.
In a market for goods, it is obvious that whatever stock is offered as supply, it will
be cleared, that is, sold, at a price determined by the demand of the consumers.
No good need remain unsold if the seller wants to sell it.
All he need do is lower the price sufficiently, in extreme cases even below zero if there
is no demand for the good and he wants to get it off his hands.
The situation is precisely the same here.
Here we are dealing with labor services.
Whatever supply of labor services is brought to market can be sold, but only if wages are
are set at whatever rate will clear the market.
We conclude that there can never be on the free market an unemployment problem.
If a man wishes to be employed, he will be, provided the wage rate is adjusted according
to his DMVP.
But since no one wants to be simply employed without getting what he considers sufficient
Payment, we conclude that employment per se is not even a desired goal of human action,
let alone a problem.
The problem, then, is not employment, but employment at an above subsistence wage.
There is no guarantee that this situation will always obtain on the free market.
The case mentioned above, scarcity of land in relation to labor can lead to a situation
where a worker's DMVP is below a subsistence wage for him.
There also may be so little capital invested per worker that any wage will be below subsistence
for many people.
Even in a relatively prosperous society, there may be individual workers so infirm or lacking
In those cases, of course, where a worker insists on a certain type of job, or a certain
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Going on, there may be a shift of industry away from one town or region and toward another.
A worker may decide that he wants to remain in the old town and insists on looking for
a job there.
If he fails to get one, however, the fault lies with himself and not with the capitalist
system.
The same is true of a clerk who insists on working only in the TV industry, or of a radio
Radio Employee who refuses to leave for television and insists on working only in radio.
We are not condemning these workers here, we are simply saying that by their decisions
they are themselves choosing not to be employed.
The able-bodied in a developed economy can always find work, and work that will pay an
over-subsistence wage.
This is so because labor is scarcer than land, and enough capital has been invested to raise
the marginal value product of laborers sufficiently to pay such a wage.
But while this is true in the general labor market, it is not necessarily true for particular
labor markets, for particular regions or occupations, as we have just seen.
If a worker can withdraw from the labor market by insisting on a certain type of work or
location of work, he can also withdraw by insisting on a certain minimum wage payment.
Suppose a man insisted that he would not work at any job unless he is paid 500 gold ounces
per year.
If his best available DMVP is only 100 gold ounces per year, he will remain unemployed.
Whenever a man insists on a wage higher than his DMVP, he will remain unemployed.
That is, unemployed at the wage that he insists upon.
But then, this unemployment is not a problem, but a voluntary choice on the part of the
idle person.
As Mises concludes, unemployment in the unhampered market is always voluntary, particularly
The full employment provided by the free market is employment to the extent that workers wish
to be employed.
If they refuse to be employed except at places, in occupations, or at wage rates they would
The Theory of Money and Credit The Theory of Money and Credit
This, however, applies to the owner of any goods up for sale.
The very function of marketing is the acquisition and dissemination of information about the goods or services available for sale.
Except to those writers who posit a fantastic world where everyone has perfect knowledge of all relevant data,
the marketing function is a vital aspect of the production structure.
The marketing function can be performed in the labor market as well as in any other, through agencies or other means for the discovery of who or where the potential buyers and sellers of a particular service may be.
In the labor market, this has been done through want ads in the newspapers, employment agencies used by both employer and employee, etc.
Of course, full employment as an absolute ideal is absurd in a world where leisure is a positive good.
A man may choose idleness in order to obtain leisure.
He benefits, or believes he benefits, more from this than from working at a job.
The idleness referred to here is catallactic and not necessarily total.
In other words, it means that a man does not seek to sell his labor services for money, and therefore does not enter the societal labor market.
He might well be very busy, working at hobbies, etc.
We can see this truth more clearly if we consider the hours of the work week.
Will anyone maintain that an 80-hour work week is necessarily better than a 40-hour week?
Yet the former clearly represents a fuller employment of labor than the latter.
One alleged example of a possible case of involuntary unemployment on the free market has been suggested by Professor Hayek.
Hayek maintains that when there is a shift from investment to consumption,
and therefore a shortening of the production structure on the market,
There will be a necessary temporary unemployment of workmen thrown out of work in the higher stages, lasting until they can be reabsorbed in the shorter processes of the later stages.
It is true that there is a loss in income as well as a loss in capital from a shift to shorter processes.
It is also true that the shortening of the structure means that there is a transition period when, at final wage rates, there will be unemployment of the men displaced from the longer processes.
However, during this transition period, there is no reason why these workers cannot bid down wage rates until they are low enough to enable the employment of all the workers during the transition.
This transition wage rate will be lower than the new equilibrium wage rate, but at no time
is there a necessity for unemployment.
The ever-recurring doctrine of technological unemployment, man displaced by the machine,
is hardly worthy of extended analysis.
Its absurdity is evident when we look at the advanced economy and compare it with the primitive
one.
In the former, there is an abundance of machines and processes completely unknown to the latter, yet in the former, standards of living are far higher for far greater numbers of people.
How many workers have been displaced because of the invention of the shovel?
The technological unemployment motif is encouraged by the use of the term labor-saving devices for capital goods, which to some minds conjure up visions of laborers being simply discarded.
Labor needs to be saved because it is the pre-eminently scarce good, and because man's wants for exchangeable goods are far from satisfied.
."
Furthermore, these wants would not be satisfied at all if the capital goods structure were
not maintained.
The more labor is saved, the better.
For then, labor is using more and better capital goods to satisfy more of its wants in a shorter
amount of time.
Of course, there will be unemployment if, as we have stated, workers insist on their
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of the Automobile.
A technological improvement in an industry will tend to increase employment in that industry
if the demand for the product is elastic downward, so that the greater supply of goods induces
greater consumer spending.
On the other hand, an innovation in an industry with inelastic demand downward will cause
It allows consumers to spend less on the more abundant products, contracting employment in that industry.
In short, the process of technological innovation shifts workers from the inelastic demand to the elastic demand industries.
One of the major sources of new employment demand is in the industry making the new machines.