THE POLITICAL SIGNIFICANCE OF RECENT

ECONOMIC THEORIES

BY SIMON N. PATTEN, PH.D.,

Professor of Political Economy, University of Pennsylvania, Philadelphia.

An American economics is a new creation, so new, in fact, that we scarcely realize its existence. I say this not because there is in the best of American work a break with the traditions of European schools, but because the underlying premises of economic thought are brought in America into clearer light and thus both their defects and strength become visible. Progress can be made by radical breaks with the past; it can also be made by bringing into sharper contrast ideas and premises which in the earlier thought were blended into a seemingly harmonious whole, but which, after all, represented opposing modes of thought. Economists can create systems, but it is only the trend of events that decides between them. Each generation compromises oppositions or holds tenaciously to opposing systems so long as there is nothing in environing conditions that forces the isolation of two differing but temporarily harmonized principles. The recent changes in economics have been of this kind.

American conditions have developed latent oppositions that by earlier writers were smoothed over because nothing vital turned on them. The progress in American economics has set aside these compromises and built a more logical scheme of thought on fewer premises better interpreted and more logically stated. There are thus two diverging schools arising from a different emphasis of elementary principles, each with a body of theory and a program of action. Their contrasts would be of little moment if there were not also a steady shifting of public interest in directions that make the differences in economic theories correspond to differences in public policies advocated by publicists and statesmen. The road of the economist becomes the road of the people and the differences of economists are settled, not by their logic, but by the success or failure of the policy which each theory calls for.

It is in this spirit that I approach the problem of distribution which I shall try so to restate as to show its bearings on public

questions. To do this calls for a bit of history, for the two theories now contending for supremacy are stated by Adam Smith and expounded by later writers. They were compromised, however, both by Smith and his followers, so that economics seems at once on both sides of what is in reality a fundamental contrast. It is to the credit of American economists that this compromise is broken down. Much of this work has been done by Professor Clark, who has taken one element of economic thought and expanded it into a system the merit of which is superior to any that has preceded it. His premises are clear, his thought is logical and his conclusions as to public policy are equally definite. His theory of distribution is called a productivity theory, because he assumes that each share in distribution is fixed by its contribution to the production of income. What a capitalist gets, what a laborer gets or what a landlord gets depends on the productivity of each of these factors in distribution. All income is related to its service in production and its distribution is but a corollary to the laws of production. There is thus a natural justice, giving to each his share and preventing any one else from despoiling him of his just. reward. This natural reward is the cost price needed to evoke the effort of production. Professor Clark thinks prices tend to this cost level, and when they do reach it the return of each producer is on a just basis.

It is plain that so simple an analysis of industrial conditions has elements of great popularity. It appeals to long-standing sentiments and to many popular instincts. But before accepting it we should see what can be said by those who oppose it and why an increasing number of economists find its premises and conclusions unsatisfactory. To do this we must contrast the productivity theory of distribution with a price theory which assumes that distribution is effected solely by price movements. In this way the elements in price become the factors in distribution instead of the agents in production, as Professor Clark assumes. Each share in distribution grows or falls off as it becomes a larger or smaller element in the price of commodities. Changes in price levels result not in a general loss or gain to all producers, but in a loss to some and a gain to others. If seven pounds of steel have been exchanged for a bushel of wheat and the ratio is so changed that six pounds of steel will buy a bushel of wheat, all farmers lose and steel makers gain;

while when eight pounds of steel must be given for a bushel of wheat, steel makers lose and farmers gain. If this be true, there is no general fall of prices following improvements in production. The gains in production constantly remain as price elements and are distributed by price changes. Values are thus put at a higher level than costs by improvements lowering the expenses of production. The difference between total values and total costs is the social surplus for which each group of producers contends. The successful in this endeavor become monopolists and get a larger share than do their less successful competitors. Monopoly is thus a natural phenomenon due to the growth of the social surplus. Its form may be changed, but it is always present and is of ever increasing importance as the productive power of men grows and their surplus is augmented.

Out of this fact arises the dilemma of modern economic thought. We instinctively feel that we ought to have a surplus over the cost of work and we also instinctively feel that others ought to work for cost prices. When we become producers we ask, "What will be the gain in this or that act of production?" thereby admitting that values are higher than costs and that each man's motive in production is the acquisition of some part of the surplus. Everyone would admit this and see nothing wrong in it, but when these same acts are passed in review as parts of public policy a standard of cost production is set up and the claim is made that cost prices are just prices. Either we are wrong as individuals to demand a gain in each act of production or we are wrong in asking that other people work for cost.

We remove this difficulty when we assume that the share of each claimant is fixed by the relative increase of his products. Years ago I stated the resulting theory of distribution as follows:

Of the factors necessary for production, that factor which tends to increase at the slowest rate will reduce the shares of the other factors to their lowest limits, will have the benefit of all improvements and must bear all permanent burdens.

This law is merely a corollary of the law of supply and demand. Given different rates of increase of products some must go

rise until all the free surplus is absorbed. Falling prices are due to consumers' choices, and the more nearly complete this power of choice the more must competing producers lower their prices to get a market for their goods. High prices persist where no substitutes are at hand; low prices prevail where consumers' wants can be supplied in many ways. The slowly increasing factors in distribution are therefore in the fields where the power of substitution is poorly developed, while rapidly increasing factors correspond to the fields where the power of substitution is so nearly complete that low prices dominate. Factors in distribution thus fall into two classes: growing factors where the power of substitution fails, and the limited or losing factors where this power prevails.

It should be remembered that by a growing factor is meant one that is becoming a larger element in the price of commodities. In a progressive society all factors probably get more if we measure their total receipts, but many of them may at the same time be a smaller element in price and thus have reduced relative share even when the amount of their share is greater than before. The rent of a city lot, for example, may rise from $1,000 to $5,000 a year, and yet if ten times the amount of goods is produced on the lot this rent will be a smaller part of the price of each article produced. Rent may thus be a smaller part of the total value of goods, although its total amount is greater. By growing shares are meant only those which grow both in amount and in relative importance. These growing factors are at the same time the most slowly increasing factors, for the less the rate of increase of the product is, the more rapid is the growth of the share as an element in price. They gain what the power of substitution takes from other factors who have definite claims that must be allowed, but who cannot expand them so as to get a share in the social surplus created by improvement. Growing shares are thus residual claimants who absorb all the benefits of progress.

There are thus a number of limited claims due to the fact that certain shares are subject to definite laws, and there is a residual claimant that gets what is left because other factors fail to secure it. There are also factors whose shares are falling because the power of substitution is cutting down the price at which their products are sold; and there is a growing factor which gains what the pressure of competition takes from its rivals. With the aid of

these contrasts the place of the various factors in distribution becomes evident. The residual claimant is monopoly, the growing share is wages, while the shares that are limited and tending to fall in amount as society progresses are rent, profits, interest and risk. Where the power of substitution acts against the growth of a share the only problem is: What resists a fall in prices which if effected would wipe out the share? Definite laws of rent, profits and interest have been formulated which show what the lower limits of each share is. None of these limited shares can claim a larger amount of the gross product of industry than it now receives, and against them the power of substitution will act with increasing force. These shares can therefore be said to fall off with progress and in an ideal state of society to disappear if we assume that in such a society the power of substitution is complete and the environmental conditions of men are improved to their maximum.

The growing shares as we find them to-day are plainly monopoly and wages. There is, however, this difference between them: Wages at any one moment is fixed like the other limited shares. It is not, as President Walker taught, a residual claimant. And yet it is a growing claimant which secures in the end what the other shares lose. The more productive land is, the lower will be rent; the greater the ingenuity of inventors and industrial managers, the less enduring will be their reward, and the larger the productive power of capital the less will be the rate of interest. This is because the power of substitution cuts down the return of all effective agents except labor. Through the increase of their mobility the laborers substitute better opportunities of labor for the poorer ones they formerly utilized; they go from poorer land to the better land, from worn-out regions to those with increasing fertility, from mechanical occupations to those demanding skill and efficiency. They thus move from the margin of production that vields small returns to points of higher productivity, and by wiping out the old margin set a new standard for wages and force the public to pay them. The increase of wages is measured by the laborers' mobility, and wages will be a growing share in distribution so long as this agent is active in forcing new adjustments of population and in creating a wider spread of the knowledge that makes production efficient.