Chapter IX
The National Dividend and Its Distribution¹

Sidney Webb

The weak point of economic theories as to the distribution of the National Dividend, or aggregate income of the community, is that they habitually ignore the prior determination of the distribution of the Means of Production. It is impossible to work out a consistent and complete theory as to rent, interest, profits, and wages, without first postulating an economically normal distribution of labour, skill, and capital upon the land. Let us therefore attempt a preliminary sketch of this distribution in a state of economic equilibrium. The annual produce of an advanced industrial community consists of a complex aggregate of commodities and services, produced under the most diverse conditions, varying indefinitely in advantage. The soil, that great mother of all utility, differs in fertility from field to field and from mine to mine. The other physical conditions of industry, such as climate, temperature, supply of sources of energy, and the like, are of equal variety. Human knowledge and skill, without which all labour is in vain, vary from individual to individual. Capital affords more aid to the hands of the labourer in one position and in one occupation than another. And other monopolies, by no means wholly artificial, interpose, as we shall see, to an important extent, to prevent equality of return to equivalent toil. It is this inequality of return which is the cause alike of rent, interest, and rent of ability; and our task is now to distinguish them from wages and from each other.

Each worker endeavours to secure a position in which his labour will be applied under the most favourable circumstances, and competes with his brethren throughout the industrial community in a struggle for the fortunate opportunities. But the operation of the ' law of diminishing return ' prevents them all crowding, like flies on a honey-pot, to the best site. Instead of the whole wealth production being concentrated at one point, the maximum net utility (that is, commodity in proportion to ( efforts and sacrifices ') will be found to result from one particular arrangement of labour, skill,, and capital upon the land; and it is to this particular distribution of these elements that industrial communities must steadily tend. The ideally perfect arrangement may never be actually reached, since it must be itself constantly changing as the complex conditions of international relations alter. But the play of economic forces causes a steady approximation to this ' line of least resistance,' and it may therefore be assumed as the normal in our theoretic statement.

This normal distribution of the Means of Production, producing the maximum return of utility in proportion to ' efforts and sacrifices,' can be proved mathematically to be that in which the last 'dose' of capital, skill, and human energy, applied at any point, causes as great a return for equivalent labour as the last 'dose' applied anywhere else. The distribution of the means of production over the earth constantly tends to conform everywhere to this law of ' equal returns to the last increments.'²

Of the main factors in wealth production, one large class — the land and the other physical conditions, such as climate, temperature, or water power — are fixed, as regards position in space, so as to be almost entirely beyond human control in this respect. In our industrial co-operation, we must therefore bring Mahomet to the mountain, and form the requisite ideal combination by varying the amount of human energy, skill, and capital applied to particular sites. We must of course assume, in this pure theory of economic distribution, that perfect frictionless mobility and universal omniscience prevail throughout the industrial community.

Human energy, in the form of ordinary labour force (omitting for the moment skill and capital), will obviously tend to be so distributed upon the land that the return of commodities produced by the last increment of force applied to any particular field will yield just as much as it would have done if added to that being applied to any other field. The return to the first labour force on the fertile Lothians will be much greater than the return to the first labour force applied to the rocky slopes of Ben Nevis; but it will clearly be economically advantageous not to abandon increased cultivation on the Lothians until the point is reached at which the last increment of labour force produces no more there than the last increment applied in the worst circumstances somewhere else. Up to that point, it would be more advantageous for the worker in the worst circumstances elsewhere to be transferred to the as yet unexhausted Lothians; and there would be a constant tendency for such transfer to take place. In perfect economic equilibrium, the last worker on each field produces the same amount of commodity per working day.

It is not less clear, though less commonplace, that skill or industrial ability of every kind tends to be distributed in an analogous manner. Its ideal economic distribution is equally expressed by the law of ' equal returns to the last increments.' But, as ability must always be ' fixed and embodied ' in particular human beings, and as these must each be taken with the défauts de ses qualités, it cannot attain so perfect a mobility as ordinary labour force or capital. Nevertheless, there is a constant tendency for as much ability to be employed in each industrial process as can be employed there to greater advantage than elsewhere. So long as the employment of a more skilled workman in any concern would cause a greater increase in the aggregate produce than is caused by his employment elsewhere, there will be a constant tendency for the transfer to take place. The return to the last increments of skill employed will, in economic equilibrium, be equal at all places and in all occupations.

We are now prepared to deal with the distribution of capital, the only remaining factor in wealth production. This, too, can be shown to be expressed by the same law of ' equal returns to the last increments.' Capital will tend to flow towards those opportunities in which its use will afford the greatest return. Each worker will be able to enjoy the assistance of as much as he can effectively demand; and the limit of his effective demand is reached when any further addition to the capital he uses would not result in so great an increase of his product as that final increment of capital would enable some other worker to produce. This limit is reached more quickly in the case of some workers than of others; but it is, in economic equilibrium, reached in every case, since, until this happens, there is some worker in a position to attract additional capital to himself from some other employer, by ceding for its use a larger product than that employer could afford. Conversely, the limit cannot economically be permanently overpassed in any case, since, otherwise, the product caused by the use of the last increment of capital would not be equal to what that portion would produce if applied elsewhere. The worker who could thus employ it to greater advantage would be able to cede a larger product for its use than its former user could afford to cede. We shall see hereafter that this equality of return to the last increments of capital is the true form of the ordinary dictum that ' profits tend to an equality,' so mercilessly exposed by Cliffe Leslie.³

The combination of the factors of production in a state of economic equilibrium may therefore be declared to be such that the last increments of labour force, skill, and capital in use at any point cause exactly as great an increase in the aggregate produce as those last increments of the factors cause which are in use at any other point.

We are now in a position to determine, within the sphere of abstract economics, the normal distribution of the product of a community in economic equilibrium.

We start from the ' margin of cultivation,' where ordinary labour force is employed on the worst land in use. We must, at the same time, select the corresponding instance as regards skill and capital, so that we may assume as the datum-line the worker using the minimum of skill and capital, engaged in wealth production under the most unfavourable circumstances. It is obvious that the return to his labour is the measure of the wages of similar workers throughout the community. They do not receive more, because, if they did, our contemplated worker would abandon his outpost on the margin of cultivation, to go and compete with them. They do not receive less, or they would leave their positions to take up farms alongside of him. His produce includes no economic rent either for land or skill, for he has none of either which others covet; and, though theoretically it may include a trifle of interest for his minimum of capital, we may ignore this as merely equivalent to that ' gratuitous capital,' such as roads, pavements, and policemen, elsewhere provided free of charge to other producers.

We accordingly reach here a standard of what it will be convenient to call ' economic wages,' to be defined as the return to the labour of the ordinary unskilled worker, with the minimum of capital, on the worst soil at that time in use, and in the worst natural circumstances. This is the true ' margin of cultivation,' on which all economic deductions depend. To this normal level the wages of all unskilled workers tend to come; and from this economic datum-line the extra produce known variously as rent, interest, wages of superintendence, or generally as profits or surplus value, must be computed.

Assuming, as Ricardo and apparently Karl Marx always did, an entirely unregulated increase of population, it is evident that this ' economic wages ' is coincident with Ricardo's natural or normal wages, and with the wages worked out by Marx as the inevitable result of capitalism; that is to say, the minimum produce upon which the average unskilled labourer will maintain himself sufficiently long to rear a generation to replace him. If, at any moment, the ' economic wages ' should be in excess of this minimum, the resulting rapid increase of population would force the worst labourers into still worse positions beyond the former ' margin,' where the return to their work would not be so great. If, on the other hand, it fell below the minimum, there would, ex hypothesi be a diminution of population, which would allow the worst surviving labourer to move to more advantageous surroundings left vacant by this modern « Black Death.'

Even Marx, however, did not assert these 'normal wages ' to be invariable. The minimum requirements of the labourer were admitted by him to vary with his intellectual and moral condition, and to be capable of change. It seems now more correct to say that the amount of the ' economic wages ' determined by the position of the margin of cultivation is only one of the factors on which variations of population depend, and that the position of the margin of cultivation is itself partly determined by the ' standard of comfort,' which each social grade does not willingly abandon. Yet much truth unfortunately still remains in the Ricardian and Marxian theory. The involuntary check on population constantly exercises its frightful influence, especially on the infantile death-rate. The death-rate of infants in Bethnal Green is twice that in Belgravia. If the iron hand of capital be uplifted ever so little, so that market wages rise above normal, fewer of the families of the crowded toilers succumb to the misery of their lot; and the number of their class automatically rises, so as quickly to bring clown wages again. This involuntary and automatic action is a potent factor in keeping down unskilled wages to the minimum level in the slums of our great cities. It is the economic form of Sir Walter Besant's 'law of elevenpence ha'penny.'

It is unnecessary here to pursue the subject of market wages as compared with normal, or of the different remuneration of the various grades of labour. It must suffice to say that ' normal wages ' underlie them all, and that any variations from this level are but the result of economic monopoly, temporary or durable, in which other labourers do not share.

It is, however, worth noticing how far the wages class extends. For economic purposes, the share of product (abstraction being made of all ' rent of ability ' or other monopoly gains) which remunerates the ' efforts and sacrifices ' of all persons who actually co-operate in reproduction, must be, in the theory of distribution, called wages. The separation from one another of the several grades of workers has, here as elsewhere, tended to obscure the uniformity in character of all the productive classes, which was dwelt upon by Jevons. ' Masters ' have been in the habit of receiving not ' wages ' alone, but ' profits,' which, besides ' rent of ability,' include interest and often land rent. ' Men,' on the other hand, often receive much ' rent of ability ' with their ' economic wages.' Inventors usually receive not wages, but payments for royalties and licenses. Accumulators of social capital generally obtain as such no more for their services than absolutely idle inheritors; that is, interest for ever on the capital belonging to them. But we must not be misled by this confusion of names or characters. The services of all those who personally assist the production of utility form — as Jevons pointed out — economically one great class, as opposed to those who do not contribute to social production. The best terms for the remuneration of these services appear to be ' rent of ability ' and ' economic wages,' since the other persons must live on tribute of some kind, usually, in fact, upon economic rent or interest.

This conception of society is assisted by the development of modern industry. Managers tend more and more to be paid by salary in some vast concern, instead of personally taking the ' profits ' of a small one. Such industrial leviathans now employ their own inventors, at regular wages, to invent and design for them. If these industrial monsters do not yet engage persons at weekly wages to accumulate capital for them, it is because their command of surplus value makes abstention from immediate consumption an easy task, not worth escaping by any such ' vicarious atonement'

With these explanations, we may now leave the share of the aggregate social produce to be known as ' economic wages.' It may be summarily defined as the amount of produce produced by the worker at the margin of cultivation with the minimum capital and skill, multiplied by the number of persons actually assisting in social production of utility in any form, whatever the social rank or grade.

But it is in the classification of the remainder of the aggregate produce that the interest of the problem chiefly lies. That there is any product over and above ' economic wages,' as above defined, is obviously due to the fact that man labours with varying degrees of efficiency. On the ' margin of cultivation,' without skill or capital, the whole of the product is 'economic wages.' Any larger product obtained elsewhere by an equivalent amount of labour must be the result of the employment of more advantageous land, of more effective labour, or of capital. According as it can be ascribed to one or the other of these causes, ' surplus value ' must be allotted to land rent, to the so-called ' rent of ability,' or to what is, in an economic sense, interest, however widely it may differ from the actual payment for the hire of capital in the market at any particular moment.

Now, as regards the extra produce over that at the margin of cultivation, which is due to greater advantages of site, there is no difficulty. Various economists since F. A. Walker have abundantly demonstrated how all the differences fall under the head of ' economic rent' The economic student will be prepared to include in this term all advantages permanently fixed to any ' immovable,' and doubtless also to extend it to those derived from unchangeable and durable forms of capital, such as ships and some heavy machinery.

We are also enabled to put aside the extra produce due to the superior skill or ability of the worker, over and above the commonest unskilled labourer. This extra produce, due to the superior ability of the mechanic, foreman, manager, doctor, or statesman, is a real economic rent, called ' rent of ability.'⁴

But there is still variation in the product of equal labour under different circumstances, even after allowing for the economic rent of ' land ' and ' ability.' In our complex modern industry, we cultivate other things as well as land, and know how to create value at several removes from the mother earth. The use of capital enables the worker to produce more than he otherwise could, in a degree varying with the particular industry and with the circumstances of industrial development. This surplus is not land rent or 'rent of ability,' for we have already eliminated all resulting from these factors. It is not wages so long as the worker in the worst circumstances is unsupplied with capital equally advantageous, for his scanty product determines ' economic wages ' all over the community. Surely the best name for this extra produce, resulting from the use of capital and the enjoyment of special industrial advantages not due' to superiority of site or skill, will be simply ' economic interest.'

We are now in a position to set forth the independent definition of interest, which is necessary to complete the theory of distribution. ' Economic interest ' is the amount of produce over and above ' economic wages ' which is obtained through the use of capital, upon land at the margin of cultivation by the skill of the worst worker employed in the industrial community, or upon better land with greater skill, after deduction of the economic rent of the land and ability. This obviously exhausts the whole product by the ' rate of interest ' in the popular sense; for no such phenomenon would be known.

It is true that the amount of 'economic interest' to be obtained from a given quantity (not value) of capital is an important motive for the accumulation of that capital, and that it is possible that accumulation may diminish where the result of the use of capital falls off. But, unless it can be proved that this is the only motive for accumulation (which it is not), it is clear that it cannot be assumed that the supply of capital is automatically regulated by the return to be obtained from its use, let alone by the current ' rate of interest ' on the currency valuation of it.

The definition of 'economic interest' here attempted enables another gap to be filled in the determination of ' profits,' which economists are prone to overlook. Profits actually depend, not only on skill and on the amount of capital employed, but largely also upon opportunity and chance. The constantly changing conditions of the industrial community make the economic position of every member of it to vary from day to day. Mere priority and proximity are constantly found to be as effective guards of temporary monopoly as a patent or a favourable site. The profits of business depend largely upon seizing those frequently recurring separate advantages; and, though this may be claimed as an element of business ability, it is so much a matter of chance that many of these ' windfalls ' must be put down as adventitious advantages of the possession of capital, in a certain form, at a particular point of time and space. This 'rent of opportunity' forms a considerable part of ' economic interest'

'Economic interest,' as here defined, is expressed by a law similar to the Ricardian law of rent. It varies according to the advantage of the particular capital over that minimum capital employed by the worker at the margin of cultivation. That capital yields theoretically no ' economic interest,' since its amount is so small that it is but the equivalent of capital, the use of which is supplied elsewhere gratuitously to all workers by the community. It may however be objected that the ' law of rent ' depends also upon the existence of the ' law of diminishing return which has been supposed not to apply to manufacturing industries.' This, however, is clearly erroneous. Capital has its ' law of diminishing return,' as much as land. The man of business making good profits naturally tries to take the fullest possible advantage of his advantageous opportunity, and borrows loan capital to increase his business. But he, like the farmer with his land, finds that, after a certain not invariable point, an addition of capital ceases to enable the labour employed to obtain a proportionately increased return. Up to that point, the increased economy in production is not counterbalanced by disadvantages; and the undertaking increases. This is equally true of agriculture, as the farmer with insufficient capital finds to his cost. But, when the point is reached, the counterbalancing disadvantages begin to exceed the increased efficiency. It is irresistibly argued that, if this were not true of agriculture, we should raise all our corn in the one most fertile valley. It may equally be urged that, if it were not true of manufactures, we should spin all our cotton in the one most favourably situated gigantic mill. If it were not equally true of distributive industry, one huge shop would supply a city. There is a certain limit to the business which any one industrial concern can carry on to greater advantage than its neighbours. Beyond that point, although a still further increase would offer further economies in establishment charges and the like, it cannot apparently be obtained on remunerative terms. It is not want of capital, or inability to effect greater economies, that prevents Mr. Whiteley from supplying all London or Sir Thomas Lipton all England. He may probably have reached his point of maximum economic ' cultivation,' and, though still maintaining his old superiorities, is unable to supply any larger circle of customers to greater advantage than his surviving competitors. The ' economic advantage ' of a plot of land, or a ship, or a factory, is subject to narrower limits than those set by its greatest possible productivity. Considerations of distance, of local specialities, of difference in taste, and the personal element, all combine in preventing the ' one-man power ' in production. God takes care, the child Goethe was informed, that the trees shall not grow up into the sky; and there is still economic use for those of our factories, hands and brains, as well as of our lands, which are not equal to the best in their respective departments. Those who are most favoured will produce the greatest utility, but even the best of all will find a limit beyond which the humblest may successfully compete with him. Beyond this point, the 'law of diminishing return' becomes patently effective; and though, for instance, there are in London printing establishments varying in magnitude from the proprietor of a hundred machines down to the jobbing compositor with his hand-press, a whole century of competition leaves the various businesses competing with each other on apparently equal terms, for they continue to exist side by side.

It is in this way that capitalist competes with capitalist. The statement is true that, abstraction made of land and ability rent, 'profits' — that is, the return to capital — ' tend to equality '; but it is equality only of the r&turn to the last increment of capital employed in each case. The possessor of a prosperous mine or business does not go on increasing it beyond the economic ' margin of cultivation ' merely because, on an average of the whole capital employed, he could still earn the market rate of loan interest. He will not borrow to extend his operations unless the extension itself will yield more than the loan interest on the new capital employed therein. He, like the tiller of the soil, stops at the point where further profit would be a relative loss; and he thus maintains safely the ' economic interest ' of the more advantageous earlier undertakings.

We thus see that the aggregate gains of business men, like the incomes of landlords or men of genius, in no way tend to equality either of rate or of amount. They often consist in part of the economic rent of land. They are made up to a still greater degree of the economic rent of ability; and they are completed by ' economic interest,' varying according to each man's opportunity and to the amount (not value) of capital his business can effectively employ. There is no 'tendency to equality' in any of these items, and they vary without reference to each other. There is accordingly no tendency to equality in their aggregates. The amount (and also the proportion of surplus value to wages) varies in each case.

The element of truth in the ' tendency of profits to equality ' lies in the two facts, that loan capitals, by the 1 law of indifference,' will realise equal loan interests when the circumstances as to risk and other conditions are equal; and that in a state of economic equilibrium the returns to the last increments of capital, wherever applied, will be equal. It may be shown that these two statements are equivalent, and the abstract determination of the nature and amount of interest will then be complete.

We have seen that the capital of an industrial community in economic equilibrium is so distributed that the last increment of it will result in a return less than the return to any of the earlier increments. The amount of that last return will depend upon the facts of each community, — upon the relative position of the ' margin of cultivation ' of land, capital, and ability respectively. When capital is relatively scarce, so that even the last increment is applied upon fertile land and with considerable ability, the return will be great (and land rent and rent of ability will be small). As capital increases, and the ' margin of cultivation ' for its employment retreats, the return to the last increment will be less (and land rent or rent of ability, or both, will be greater). It may be added that ' economic wages,' dependent as they are upon the return to labour at the absolute contemporary ' margin of cultivation,' may vary independently of ' economic interest,' though not of economic land rent. The amount of capital relatively to the amount of fertile land and ability may remain stationary, while the population is increasing. In this case 'economic interest 1 would be stationary, while all the other shares of the product were varying.

Now, the return to the last increment of capital is the most that a lender of capital can normally obtain for its use. The borrower intends to add the borrowed capital to that which he already employs. It then becomes itself the last increment; and its return, by hypothesis not exceeding the return to the former last increment, is the measure of the maximum loan interest that the borrower will pay. At a loan interest a shade less in amount, it will pay him to extend his business; and he will borrow. At a shade more, he will prefer to stand on the old lines. The normal amount of loan interest will therefore be the return to the last increment of capital within the community; and, by the law of 'indifference,' this will tend to equality throughout the community. If this return induces an increase of capital, the effect upon ' loan interest ' depends upon the facts of the community. If all the additional capital can be employed so as to produce a return only fractionally less than the return to the previous ' last increment,' the normal loan interest will fall only to that small extent, however much the increase of capital may be. If it produces more (e.g. by a simultaneous increase of ability or improved fertility), the normal loan interest will rise, in spite of the increase of capital. These tendencies usually coexist, and the normal loan interest is the resultant.

We have hitherto spoken of the amount of interest, and not the rate. The return to capital is not currency, but commodities. The valuation of the capital, and the valuation of the commodities obtained by its use is an entirely different and subsidiary problem, not affecting the principles of distribution. The American railways do not produce more utility because their stock is ' watered ': the amount of capital and the return to that capital remain unaffected by even the most ingenious of bookkeeping transactions. The real inducement to save the amount of capital called £100 is not a nominal rate per cent, but (among other objects) the amount of commodities to be obtained by its use; and this depends in no way upon the number of pieces of metal or paper at which the capital and the interest may be assessed.

If these views be correct, the principles upon which the economic classification of the produce must be determined are complete and mutually consistent. The amount of produce obtained by the labour of the man at the margin of cultivation, with the minimum capital and ability, sets the standard of normal wages throughout the community. The excess produced owing to the greater advantages of better land is economic rent of land. The excess produced owing to the employment of more skilled workers is rent of ability. The excess produced owing to the employment of capital (including the occasional gains due to temporary monopoly or other commercial advantage) should be called 'economic interest.' The three latter elements all follow the 'law of diminishing return,' and depend upon the position of the ' margin of cultivation ' of land, ability, and capital respectively; and this position results from the economic facts of the particular community at any given time.

We are thus brought to a view of the economic nature of interest, and of the circumstances determining its amount, which, although not absolutely original, differs widely from current doctrines. What the economic lecturer still ordinarily teaches, and what public opinion still commonly believes, was lucidly expressed by F. A. Walker ten years ago, as the uncontroverted conclusion of economic science. ' Interest,' he unhesitatingly observed, 'is to be deducted as the remuneration for the use of capital, its amount being determined by the relation of supply and demand, but always tending, through the operation of a natural law on which all economists, from Adam Smith down, have delighted to dwell, towards a minimum, — the minimum, in the case of interest, being that rate which will induce the possessors of wealth to refrain from consuming it for the immediate gratification of their tastes and appetites, and to save and store it up to the extent of making good the waste and wear of the existing stock of capital and of answering the demands for the enlargement of that stock to meet new occasions for productive expenditure. This condition may imply, in one state of society, an interest rate of eight per cent; in another, of five; in another, of three. But, whenever the rate is eight per cent, it continually tends to become five; and, whenever it is five, it continually tends to become three, inasmuch as the occasions for an increased expenditure of wealth for productive uses are certain to be transcended, at any given rate of interest, by the rapid accumulations of capital, which go forward by geometrical progression.'⁵

Now, though this theory of interest has been repeated by nearly all the English economists, from Ricardo down to Cairnes, it does not seem to have occurred to any one of them that, even assuming it to be correct, it affords no such sufficient determination of the share of interest, in relation to the other shares of the annual produce, as would warrant us in accepting it as adequate for a theory of distribution. It is one of the acute remarks of Henry George that, ' in the current statement, the laws of distribution have no common centre, no mutual relation; they are not the corresponding divisions of a whole, but measures of different qualities.'⁶ The current doctrine of interest, as here applied in a theory of distribution, is, in fact, another surviving-remnant of those obsolete economic errors which incited Mr. George's eloquent but ill-judged onslaught. It has no ' mutual relation ' with the laws of rent, wages, and rent of ability. It is not defined in the same terms. It is by no means apparent that it exactly completes the annual sum of produce to be divided. Let us suppose that there is an exceptionally large produce due to natural causes one year: does the surplus go to rent, interest, rent of ability, or wages? The problem to be solved is the classification of the produce of each year, and the laws of distribution must all be given in similar terms, so as theoretically to account for the whole annual product, and to account for it with scientific exactness.

Many other criticisms on the theory of interest might be made, did time permit. It might be observed, for instance, that, whereas rent, wages, and rent of ability are defined as amounts, interest is spoken of as a ' rate.' But we are concerned with dividing an aggregate amount; and the law of interest must therefore be given in terms of quantity, and not in terms of a percentage upon an element outside the problem, such as the pecuniary valuation of the capital stock, which itself depends upon the current rate of interest. This leads to considerations of a very complex character,⁷ and it is clear that the amount of the produce to be assigned to interest is not thereby determined.

But the theory has been attacked in an even more fundamental point. It can by no means be admitted that the accumulation of capital depends solely or even mainly upon the rate of interest. Economists have always laid stress upon the other motives for thrift, which led, for instance, the French peasant up to 187 1, the Maltese cottager up to 1886, and the Indian ryot to this day to hoard metallic currency without the inducement of interest at all. The enormous and universal increase of investments in savings banks, where but trifling interest is paid, shows how little the rate affects even the investment of capital. Indeed, there are everywhere a large number of depositors in savings banks who deliberately exceed the limit on which interest is allowed, content to get only safe custody for their savings. And it is now clear that, in certain not unimportant cases, the rate of interest acts partly in a contrary direction, stimulating accumulation in some directions to a greater degree when the rate is low than when it is high.⁸

The fact is that economists have as yet failed to carry on to interest that powerful economic analysis which they have already applied with so much success to rent, profits, and wages. Throughout the whole science, it is of the utmost importance to distinguish between what are merely scientific categories, not necessarily possessing separate objective existence, and those actual payments from man to man which are often called by the same name. The abstract economist does not deal with the rent actually paid by Farmer Jones to his squire, nor with the wages paid by Jones to his labourers. It is with rent and wages as scientific categories that he is dealing, and he makes abundantly clear to how great an extent the economic rent and wages may differ from the payments popularly known by those names. When he comes to treat of interest, he is content, strangely enough, to confine his view to the actual payment made by the borrower of a certain form of capital to the lender of it. But suppose the lender of it reclaims the loan, and uses the capital himself: does he cease to obtain interest? It may be confidently asserted that, in political economy, interest has no more to do with the lending of capital than rent with the hiring of land, and that the popular 'rate of interest' is no more the interest with which we are concerned than the annual price of an Irish holding is the 'economic rent' of that particular plot of the earth's surface. It is evident that something more than a reference to the market rate for loans on good mortgage security is necessary, before the doctrine of interest can be brought into line in a complete theory of distribution.

It will be well here to guard somewhat further against what is a serious ambiguity of language. Professor Sidgwick⁹ has already pointed out the difficulty, as well as the necessity, of distinguishing accurately between ' the interest paid to professional lenders of money ' and ' interest in the sense with which we are concerned with it in the theory of distribution.' But there are, in reality, four senses in which the word ' interest ' is commonly used, all to be carefully distinguished by scientific economists: —

1. The current rate paid 'in the money market' for short loans of credit or capital in certain forms (chiefly legal tender currency). This is sometimes called the 'rate of discount,' and it depends on the relative supply of the particular form of capital.
2. The current rate paid for more permanent loans on good security. This may conveniently be distinguished as 'loan interest': it varies quite independently of the rate of discount, which it usually exceeds, and it depends on the relative supply of capital in any mobile form seeking durable investment.
3. The normal rate to which the variations in the current rate of 'loan interest' tend to conform over a long period in any community. This is the 'interest' usually dealt with by economists, which 'tends to equality' and to decline.

None of these can be the ' interest ' to be defined as a share in the distribution of the annual product, if only because each of them is merely a percentage rate on an arbitrary valuation of an element not within the definition. The interest with which we are concerned must clearly be a definable quantity of produce. This quantity of produce — this definite share of the aggregate of commodities and services making up the National Dividend — may conveniently be called ' economic interest' It is the amount of produce over and above ' economic wages ' which is obtained through the use of capital upon land at the margin of cultivation by the skill of the worst worker employed in the industrial community, or upon better land with greater skill after deduction of the economic rent of land and ability.

It is this ' economic interest,' and not the ordinary payment for loan capital, that must be considered as a constituent element in ' profits.' Business profits would equally exist in a community where borrowing was unknown. Unless we are prepared to say that in such a community these ' profits ' would exclusively consist of ' rent of ability,' we must admit that their amount could not in that case be affected.

Notes

1. In this essay in abstract economics is incorporated the greater part of an article contributed to the Quarterly Journal of Economics for January 1 888, entitled 'The Rate of Interest and the Laws of Distribution.' This general view of the theoretic relation between rent, interest, and wages in a condition of perfect competition, is further elucidated and applied to the concrete facts of actual life in Industrial Democracy, part iii. ↩
2. Compare Mathematical Psychics, by F. Y. Edgeworth (London, 1881). ↩
3. T. E. Cliffe Leslie, Essays in Moral and Political Philosophy. ↩
4. It may, however, be submitted for perfect accuracy that it is only 'within the limits of the same trade or profession,' or at most within competing groups, that the normal remuneration is exactly proportionate to the relative ability as compared with that of the worst worker. As between workers in what Cairnes called 'non-competing groups,' the remuneration of the worst worker in each will vary in proportion to the relative final utility ' of those kinds of labour,— a conclusion not differing in result from Cairnes's 'Law of Reciprocal Demand,' but not exactly in accordance with the pure ' rent of ability ' doctrine. ↩
5. Quarterly Journal of Economics, April 1887. ↩
6. Progress and Poverty, book iii. chap. vii. A more elaborate and scientific criticism on the same lines will now be found in the History of the Theories of Production and Distribution by Edwin Cannan (London, 1893). ↩
7. See, for instance, Principles of Political Economy by Henry Sidgwick (London, 1S83), book ii. chap. vi. ↩
8. A more complete examination of the relation between interest and the rate of accumulation will be found in Industrial Democracy, part iii. chap. i. ↩
9. Principles of Political Economy, book ii. chap. vi. ↩