IV. The Various Alternatives

LET ME AGAIN START FROM OUR CONCRETE ILLUSTRATION, AND DISCUSS, one by one, the various alternatives. What is typical and generally true in each individual case will thus easily become clear, and, moreover, specially stressed and summarized at the end.

Temporarily, as we have seen in our assumed conflict between the power of entrepreneurs and workers, any wage rate between $1.50 and $10 was economically possible, although it was not likely to be fixed, not even for a short period, near the extreme upper of lower limit possible, but rather somewhere near the middle of the total range of wages. In order to make our discussion theoretically exhaustive, we shall have to consider both extremes, as well as each one of the possible rate levels within the total range of wages.

1. I need not waste any words about the fact that a wage rate below the minimum of existence—thus in our example below $3—cannot possibly be permanent. This follows from the familiar reasons stated often and in detail elsewhere, pointing to the diminution of the labor supply as the inevitable consequence of a wage level no longer sufficient for the support of the workers’ families, and to the subsequent increase of wages, necessitated by the law of supply and demand—allowing, of course, for familiar exceptions in favor, or rather in disfavor, of those exceptional types of occupations which are being followed merely as a sideline by people who draw their real means of subsistence from other sources.

2. Nor can wages be fixed permanently below the rate of the most common type of labor, in our illustration, below $3.10. This hardly needs any further explanation, for the reason that all the causes applying to point 3 which follows, will evidently apply here too, even to a greater degree. The exceptions, familiar since Adam Smith, for occupations connected with special attractiveness or privileges and in which, therefore, many people are satisfied with a smaller remuneration than that available in other less attractive or less honorable occupations, will, of course, also apply here, without, however, affecting the general theory of distribution.

3. Wages higher than those of common labor, but below the “marginal product of the last laborer” (in our illustration, wages between $3.10 and $5.50), will hardly be able to remain in force, if imposed through temporary preponderance of power, certainly not when the use of that power was limited to one particular group, such as to the workers of a single factory, or to a single branch of production, while in other occupations, requiring the same or a similar amount of skill, wages prevail commensurate with the natural amount of the marginal product (in our case, of $5.50). For although the personal discomfort connected with a change of occupation may prevent a large-scale exodus of an entire generation of skilled workers from a less remunerative branch of production into other, better-paid occupations, the gradual effect upon the selection of occupation among the younger generation of workers will be all the greater. They will naturally seek the better-paid occupations, and shun those with exceptionally poor wages. Normal deficiencies in the original stock of workers will no longer be met, and the gradual depletion of employees will ultimately force the employers to offer their workers a wage rate equal to that obtainable in other industries of a similar type.

A more complex analysis would have to be made in the case of a universal reduction of wages through artificial forces affecting all lines of production. Such a contingency is, however, far less likely ever to occur, for the reason that a universal coalition of entrepreneurs of all branches of industry which alone could exert such control would be extremely hard to organize, and still harder to hold together. But let us assume such a case, at least for a certain period of time, for our theoretical analysis. Obviously, the worker would then no longer find it possible to escape into another, more remunerative branch of production, and thus there would cease to exist that most influential factor, which, in the case of a partial reduction of wages, would sooner or later ensure the restoration of the original wage rate.

Instead, there would now appear some new, although slow-working, factors within the ranks of the entrepreneurs. A wage level fixed below the marginal productivity of labor results in a special gain that goes to the employer, first, in the form of an increased profit, which, however, in case of a prolonged continuance of this condition, will have to be surrendered in part to the capitalist in the form of higher interest, for the reason that pending on and owing to this condition other equally profitable types of investment will be open to capital. The very fact of an increased entrepreneur’s profit will in itself alone work as an incentive to the expansion of existing enterprises (this incentive might perhaps be temporarily curbed by binding the old entrepreneurs to coalition agreements) and also to the formation of new enterprises founded by outsiders, not belonging to the coalition, who, of course, can attract the needed number of workers only by offering somewhat higher wages. The increased interest rate, moreover, will shift the margin of profits among the various more or less capitalistic methods of production toward those with more machinery, labor-saving devices, and so forth.

An increased interest on capital and a cheaper supply of labor will transform the smaller profits into losses among those producers near the margin of profitability, especially in these enterprises where a low rate of interest prevails coupled with higher wages, so that where previously a slight advantage had been found to exist in a more capitalistic method of production, it now becomes more profitable to reverse the methods of production through increase in the use of manpower, and a less intense use of capital equipment.¹² Naturally, this incentive will not lead to quick results. Capital invested in such a manner in instruments of production will not suddenly be abandoned, but rather tend to be used up first, or at least not be replaced, because human labor, having become cheaper, will be preferred in its place. This again will lead to an increased demand for labor which can only be met by granting somewhat higher wages. These, of course, must not completely neutralize the advantages of the less capitalistic method of production. This motive may be operative both within and without the employers’ coalition, and to a very different degree among the various types of producers. It will be hardly at all operative among those who had employed very little fixed capital and much physical labor; very little among those with whom capital predominates to such great technical advantage that even considerable changes in the level of wages or interest will not bring about any transition towards a less capitalistic method; but far more among a third group of producers, whose technical equipment is such as to divide their methods of production just equally between machinery and labor. These great individual differences will not remain without profound influence on the probable course of events.

Industrial coalitions comprising the producers of one and the same line of industry, or of similar industries will as a rule be based on a harmony of interest, sufficient to favor a continuation of the coalition that benefits all members equally. But if the coalition should include certain groups whose interest makes them disagree in regard to the desirability of a continuance of the coalition, then in all human experience, harmony cannot be maintained, particularly not when the inevitable appearance of outsiders pierces a hole through the victorious phalanx of entrepreneurs. All employers, of course, stand to gain to some extent by keeping the wages down, but these gains will differ widely in the various industries, according to the physical distribution of capital and labor. In those branches of production in which this gain is comparatively small, it may be neutralized by the enforced inability to expand or to introduce more profitable methods of production. Now, if an industrialist sees that the benefits he has sacrificed in favor of the coalition are unscrupulously reaped by outsiders and feels their competition more and more keenly, then the psychological moment has come for his withdrawal from the ranks of the coalition; for those industrialists whose particular situation would enable them to profit most from an expansion and a change in their methods, in violation of the rules of the coalition, will prefer to reap these advantages for themselves, before their last chance has been destroyed by outsiders. And that is the beginning of the end of the coalition: the reappearance of a steadily widening stream of competitors with the final effect that the wage level will again be raised from that dictated by superior control to the level of free competition, i.e., to the level of the marginal product!

This kind of deductive reasoning may perhaps be found to be convincing only in part. But it should be remembered that in problems of this nature there are no other than deductive methods at our disposal. We shall never be so fortunate as to assemble reliable direct observations, or to make experimental tests. The assumed employers’ coalition embracing all industries has never actually existed, and if it should ever come into being, it would soon disappear again, like all social groupings, and it could not even be considered as an empirical proof of my deductions. The question might still be, whether its dissolution was caused by the factors cited in my deduction, or by some other, new factors. The reasons given in my argument can, by their very nature, operate gradually only. And conditions would hardly remain unchanged for so long a period as might be necessary to produce these effects.

One would never be able to determine beyond a question through purely empirical methods, whether the ultimate result was due to the gradual undermining influence brought about by these alone within the original state of affairs, or whether, and to what extent, it might be ascribed to the advent of new factors. But precisely because we are dependent in these questions upon deduction as the sole source of our knowledge, and because they cannot be verified through direct observation, as is possible in other cases, we have no choice other than to elaborate such deductions; and these, of course, must be made on the basis and according to the methods of economic theory, which alone after all, as we have seen, will explain the influences of outside power. At the same time, we must observe that supreme caution and precaution which the use of the deductive method always requires, particularly where the lines of deductive reasoning are long and complex, and where it is not possible to check them up, step by step, through empirical observations.¹³

It is from these considerations that I wish to submit here and in the following pages a few suggestions which, I realize, constitute only a rough, unfinished sketch of such deductive thoughts as may lead to a more detailed investigation later on, and in a general way at least, may indicate the direction in which, in my opinion, the attainable amount of knowledge and understanding may be found.

Let us then continue our inquiry into the wage rates located above the level of the marginal product (within the range of possible wages), and beginning from above, start with the highest conceivable rates.

4. It is obvious without any further discussion that such extremely high wages cannot endure, because they would cause such great capital losses to the entrepreneur that their perpetuation would lead to bankruptcy, although temporarily they might represent the minor evil as against a prolonged shutdown. (See above.)

5. Nor can the wage level following next, as is equally obvious, remain in force permanently because, though not threatening the entrepreneur with immediate financial ruin, it would still cause him actual losses, although of a smaller extent. If continued over a long period of time, even small losses must also lead ultimately to financial ruin, so that case 5 would flow over into case 4; and without doubt, in such cases the entrepreneurs would prefer to liquidate their unprofitable business, or at least give up the unprofitable branches.

6. The greatest theoretical interest attaches to the next-following level of wages: can that wage rate endure which, though not causing any actual loss of capital to the entrepreneur, absorbs or reduces the interest on his capital investment?

Let us first answer a preliminary question. Would it be possible for the entrepreneur’s profits proper to disappear or to be permanently reduced, while in other branches of business, such as in the loan market or unproductive investments like real estate (apartment houses), the rate of interest remained unchanged?

The answer is emphatically, No! Entrepreneurs working with borrowed capital would suffer an actual loss from the difference between the higher rates of interest that they would have to pay to their creditors, and the lower rate which that capital would bring them in their business, and thus the matter would lead back into the situation presented under point 5 above.

Nor would those entrepreneurs who work wholly or in part with their own capital be able to stay in business under such a state of affairs. Once capital is invested in an enterprise, it may have to content itself with a lower rate of interest, when and because its withdrawal would not be feasible nor possible without a great depreciation of the capital stock itself. There would be little inducement to replace usedup capital funds, if the investment should promise a smaller return to its owners than the same capital could produce in other kinds of investments, such as in real estate or in the loan market. And the familiar and often-discussed causes which, generally speaking, tend to equalize the interest rate in the various markets of capital (not artificially isolated) would surely also tend to prevent a one-sided diminution or elimination of the entrepreneur’s original capital gains. Their reduction would thus either have to extend all over the other fields of capital employment, or they could not occur at all.

The question under investigation thus assumes the following form: “Can that wage rate remain in force permanently which, though not affecting the entrepreneurs’ capital stock, takes away capital interest from business, or at least reduces the ‘natural’ rate of interest prevailing under free competition?” In other words, can a wage increase obtained by the use of power permanently absorb interest on capital, or reduce it below its natural level?

The rather difficult answer to this question will be somewhat facilitated if we investigate separately the two stages involved, namely, the total and the partial absorption of interest on capital.

I consider it impossible that interest could disappear completely from a nation’s economic life, with the exception of the almost unthinkable case, hardly applying here, of capital accumulation far exceeding all demand. The disappearance of the “incentive to thrift,” contained in interest, would eliminate that most important portion of capital, which is formed through savings made only for the sake of interest. It might happen, of course, that that other type of savings, intended as a “rainy-day penny,” might then be somewhat increased, if people were to provide for their future by accumulating capital alone, without the support of interest. But it is generally believed that on the whole there would result a substantial diminution of capital stock, and the subsequent shortage of capital supply would probably exert a strong pressure in the opposite direction, i.e., in the direction of a renewed increase, rather than in that of a permanent disappearance of interest.

But even though the supply of capital were to be reduced, the thing that would be of decisive importance is the demand side of capital. Let us assume for a moment that interest had actually disappeared from economic life, i.e., that present and future goods could be exchanged for each other on the same level without discount, and that loans could be obtained without interest. The inevitable consequence of this would be an increase exceeding all bounds in the demand for present goods. The empirical law of the larger productivity of time-consuming, more highly capitalistic, roundabout methods of production, could not fail to make itself felt, in the sense that industrialists would compete with each other in lengthening the periods of production, and would adapt their enterprises to the technically most economical, but at the same time, most extended and time-consuming methods of production.

The automatic check that counteracts such tremendous lengthening of the productive process at present would have ceased to exist; that check is the interest payment that automatically places a progressive tax on lengthened methods of production. But once the lengthened method of production were freed from the burden of interest, and did not cost more than the shorter one, and at the same time, produced more than the latter, a general incentive to an enormous prolongation of the productive process would be called forth. It would, however, find its physical limitation in the diminished subsistence fund of the workers during the increased period of waiting, imposed by the lengthened period of production. From the existing, and possibly reduced, subsistence fund, it would be impossible to support the same number of workers for an indefinitely prolonged period of waiting.

Instead, the trend of wages will necessarily be held down from two sides within the margins of the possible price range.¹⁴ First, the duration of the periods of production, although somewhat longer, will be restricted to the shortest possible time through a process of selection which will be made under free competition in favor of the most profitable among the various possible extensions of the productive process; and as this selection can only be effected in regard to the most effective part of demand by granting higher prices, which means, in this case, by granting a correspondingly higher premium on the demanded subsistence fund, then, at least in regard to this phase of the inevitable development, interest will be restored to business—as I have described more fully in my Positive Theory of Capital.¹⁵

But at the same time something else will happen. The justdescribed process of selection leads to a restoration of interest and the periods of production will no longer be indefinitely lengthened, although they will still continue to be somewhat longer. The entrepreneurs, who profit by paying the highest premium on present goods, will under normal circumstances be forced to resort to longer periods of production than they employed originally. For while before the advent of wage increases, the permanency of which we are investigating, they had to pay only as much for interest and wages jointly as they now have to pay for the increased wages alone, now, moreover, they have to pay for the restored interest. This condition can only be met through larger profits than before, and these increased profits can be made only through a corresponding lengthening of the period of production, unless we should invoke the advent of new inventions with a subsequent increase in the output, like a deus ex machina, instead of concluding our argument by sticking to the original assumptions. But then it would be impossible for the same number of workers as before to be provided for throughout this extended period of production out of the existing reduced, rather than increased, subsistence fund. There must therefore be a limitation in another direction, a restriction in the number of employed workers, in approximately the same proportion in which the subsistence fund has been extended. This physical necessity will be met economically through the motive of self-interest, with high wages and a low interest rate under a more capitalistic method of production; that is, the employment of fewer workers in lengthened periods of production is more profitable.¹⁶

As long, therefore, as the enforced wages prevail at that high level, there will come about a provisional state of equilibrium of approximately this description: The general adoption of the lengthened period of production will tend to increase the workers’ per capita output. The “marginal product of labor” will thus be increased, as also by a reduction in the number of workers, and it will now correspond with the enforced higher wage level that had risen beyond the “marginal product” of the previous stage. Interest on capital that has been restored is now lower than previously. The entrepreneurs manage to survive because, with the increased “marginal productivity of labor,” even the last worker in their employment will still produce to them the higher wage to be paid, and also because the surplus productivity of the entire lengthened process of production will leave them a sufficient amount above the wage increase to compensate them for the interest on capital. But this new equilibrium is possible only at the expense of employing a smaller number of workers. And it is for this reason that, in all probability this temporary equilibrium will again be disturbed.

For now, the labor union will be split in two, one group employed at a high wage, and another group not employed at all. The greater an increase in wages has been enforced and the more the new methods of production are protracted, the bigger will be the number of unemployed. Two developments are possible. Both groups of workers may stay together within the union, which implies that the unemployed members would have to be supported by contributions from their employed fellow workers. If these contributions are large, they will absorb the surplus accruing to the workers from the wage increase, for it should not be overlooked that the total output that can be produced by a reduced number of workers with the same capital, must, even with improved methods of production, remain below that obtainable from a full employment of capital and labor. Thus, nobody would be benefited from the new artificially created order of things; as against the previous “natural” order; many would indeed be at a disadvantage, which fact would again be distinctly unfavorable to the prolonged maintenance of a situation created through a strong combined pressure of power. But if the standard of living of the unemployed workers were to be substantially reduced, these latter again would not allow such a condition to persist; there would be discontent, discord, and ultimately dissolution of the union. The malcontents would sooner or later become outsiders, and compete by offering their services to the entrepreneurs; the revived competition, with its underselling, would put an end to the monopolistic dictation of wages back to the level economically justified under the full employment of all workers, i.e., to the “marginal product” of the last worker employed in an again reduced period of production.¹⁷ If, ultimately the employed workers should fail to provide for their unemployed fellow workers, then the same process would take place, even more rapidly. The mass of the unemployed would enter into competition and even more violently underbid wages.

One might perhaps think of an alternative in another direction; namely, that the unionized workers might enforce not only higher wages, but also the full employment of all workers at that higher wage rate. But even though the workers might have the power temporarily to enforce these conditions, they could not be permanent. For this would necessarily lead over into one of the two alternatives considered above, under numbers 4 and 5. By being forced to pay the workers not only a wage that in itself is higher than the entire amount of the original interest on capital, and in addition to this a restored interest on capital (although somewhat smaller in the aggregate), the entrepreneur will find that his costs have increased, and he will suffer losses and sooner or later abandon the enterprise, or go into bankruptcy.

Moreover, it is almost unthinkable that any employer could ever be compelled to employ all workers available at a given time. At best, the labor union may, through violence, prevent dismissals from the former stock of workers. But any attempt to enforce the employment of additional workers, in proportion to the natural deficiencies in their ranks, or even that of an increasing number of workers, corresponding to the natural growth of population, would be well-nigh impossible.

From all these considerations, which could and probably ought to be elaborated in far more detail, I believe that a complete absorption of interest and capital through artificial, enforced wage increases is out of the question in the economic life of a nation. But would, perhaps, even the partial elimination of natural interest on capital be permanently possible?

I do not see any reason for assuming a course of events differing from the one assumed above. A smaller increase in wages at the expense of interest on capital will cause exactly the same reactions and swing the pendulum back from the extreme towards the starting point to intervene long before that point had been reached, and to keep the swing of the pendulum within much narrower limits, thus restricting the technical changes in production necessary in adaptation to the respective prices of the factors of production. But as I did not wish to make any omission in the method of presentation, I was anxious to consider also the extreme cases, with their counter effects, just as if they actually occurred in practical life. effects, only in a correspondingly smaller degree. A mere reduction in the interest rate will at first not destroy the premium for saving contained in interest, but merely diminish it; the effect of this on the amount of future savings cannot be predicted with certainty.¹⁸

Possibly the amount of savings would decrease, and possibly not. But this would not alter the general trend of events, as shown in the preceding chapter of this inquiry, where I have purposely mentioned incidentally only, the probable reduction in the supply of capital, without ascribing to it any decisive influence. The determining factor is to be found in the demand for capital, and in this phase of the problem it is inevitable that each increase in wages beyond the actual marginal product, followed by a reduction in the interest-rate, will tend to cause a lengthening of the methods of production and thus a diminution in the number of workers. If the entrepreneur is not to suffer any actual loss, which he could not take for any length of time, the wage increase must be covered by an increased marginal productivity of labor, which can best be brought about through an extension of time for the various stages of production. This again, under otherwise equal circumstances, can be accomplished only by a simultaneous reduction in the number of workers, unless improvements through inventions, etc., should happen to be introduced, or other developments of an accidental nature should take place, contingencies which can be left out of account.

Enforced unemployment of a portion of the workers would also tend to lead toward the dissolution of the labor union, only in a less intense degree, in accordance with the smaller extent of wage increases attained by the labor union, under this assumption. The weakening of the forces counteracting the continuance of such a temporary condition does not mean a different result, but merely the postponement of effect. It cannot mean that an adjustment exceeding the natural limits, if only by very little, could last, nor can it mean that the suspension of a smaller number of workers would not cause them to compete for employment. But it does mean that such a condition will continue to exist for a longer period against the pressure of minor influences, so that, for instance, trifling losses caused by this temporary situation could be borne for a considerably longer time by the employers, before they would go into bankruptcy or go out of business; or else a small number of the unemployed might be supported from union funds for a longer period, or, through moral pressure, be prevented from underbidding the union members.

And this again may imply something else. As I have already shown above, protracted periods of time are likely to bring in their wake changes in other directions. If a process of economic change is spread over a certain length of time, its general progress will, in most cases, be affected by other incidental or independent outside causes, which almost spontaneously will affect the general situation. Over a period of several years, methods of production, or the business cycle, never remain unchanged. The latter may move up or down, the former will most likely progress, and if the interval is very long, there may even occur considerable changes in the general economic structure, such as the number of population, and their relation to the capital stock.

Besides this, another alternative is possible. Those very impulses, whose normal effects I am trying to observe and investigate, may themselves contain certain additional, almost accidental effects on other external factors. For example, they need not necessarily, but may, affect the technique of production. These chances should thus not be left altogether out of consideration, but should not be inserted as a factor in the series of deductions, as they cannot be foretold with absolute certainty. In our case, for instance, the entrepreneurs may find themselves pressed by the enforced wage increase, and this may form a powerful and effective incentive for the adoption of technical improvements in the methods of production, just as free competition is generally credited with forming a powerful incentive to industrial progress. Or it may happen that the permanent improvement in the standard of living attained by the workers by way of an enforced wage increase may retard the growth of population, as is commonly the case among wealthier classes, etc. Now, should some accidental or incidental development occur that would directly or indirectly increase the marginal productivity of labor, then it may also happen that the initial wage increase, exceeding that marginal productivity, might subsequently counterbalance the unexpected increase in the marginal productivity, and thus remain in force permanently. This would be all the more frequent, the less excessive the original enforced wage increase had been, i.e., the less it had gone beyond the marginal productivity of labor existing at that time. But of course, in the case of small wage increases, it is impossible to expect this with any degree of certainty, because such accidental events as these may fail to take place, or even have opposite effects. Business cycles may show a downward trend, population may increase more rapidly than capital supply, etc., in which case wages would be reduced all the more rapidly.

Those cases, however, in which a subsequent change of economic environment may render permanent an originally excessive wage increase obtained through force, might tend to confuse the theoretical analysis. They appear to give empirical proof of the fact that, through the dictate of power, wages can be raised above the limits laid down by marginal productivity, not only for the time being, but with a lasting effect. On close observation, however, they do not furnish this proof. The original wage increase was the effect of a dictate of power. Its permanent duration, however, is not the result of power, but of outside influences of a third order, which have increased the marginal productivity of labor, and with that increased the possible permanent higher wage level, quite independently from the dictate of power, or at least without necessary connection with it. I shall have to return to this point further on, in summarizing the results of this investigation.

Before that, however, for the sake of completeness, I shall have to consider a seventh possibility, so small, however, in practical importance, as to be out of all proportion to its theoretical complexity.

7. In the scale of the possible wage rates, there enters, between that wage that already absorbs a part of the interest and that wage level which coincides with the marginal product of labor, another rate of wages which, though exceeding the marginal productivity of labor, does not cut into the reward of capital with this excess amount, but remains within the total produce of labor. For when an increasing number of workers cooperate with a given stock, each additional worker entering the field will contribute only a decreasing addition to the joint product.¹⁹ The last worker employed at a given time adds the “marginal product”; each one previously hired adds a little more to the total product. That is why the entrepreneur gains nothing from the last worker employed—provided his wages just equal the marginal product, and successively more and more from each previous worker, leaving out of consideration the share to be attributed to the contribution of capital. Now, if the wages increase above the marginal product, the entrepreneur will suffer a loss from the employment of the last worker, or workers. This loss may, however, be offset to some extent by the gain from the workers employed previously. So long as this is the case, so long as the total amount of wages does not consume more than is covered by the joint output of all workers together, the share of capital need not be reduced.²⁰ The share of wages exceeding the marginal product will then be paid at the expense of the real, pure profits which previously had gone to the entrepreneur.

For the purposes of this investigation we must now ask whether such a wage increase, affecting or absorbing, as it would, only the entrepreneur’s profits, if achieved temporarily through a dictate of power, could possibly remain in force permanently. This question is, it seems, even harder to answer through methods of deductive reasoning than was the case in previous parts of this inquiry, and it is altogether unsuited for an empirical test. There would be no lack of forces counteracting the continuance of the new wage level, but they would be weak, and only gradual.

The entrepreneurs suffering losses from the last worker employed will endeavor to reorganize their enterprise at an early opportunity, so as to reduce the number of workers by eliminating those causing losses. There may be some opposition made to such a reorganization on the part of the workers who will not tolerate any dismissals; this may postpone the elimination of the excessive number, until natural vacancies occur that are no longer filled. Moreover, the best possible organization of the enterprise with a reduced number of workers will require a change in technical equipment. If extra losses through the sudden elimination of capital equipment are to be avoided, this can also be effected only gradually, by using up the old equipment.

During these protracted periods, however, which thus would counteract the effectiveness of the other influences, weak in themselves, all sorts of changes in the general situation may arise that will affect the upward and downward trend of wages far more violently, or counteract them altogether; the small waves emanating from these influences will melt away unnoticed and imperceptible under the much higher wave of new economic factors. To test this in practice would be practically impossible; all the more since changes in wages affecting merely profits, without affecting the other factors of production, must of necessity be of very limited nature. A general wage increase enforced over the entire nation would affect both great and small, strong and weak enterprises, and a wage increase that is to be fully met out of the net profits of entrepreneurs, even in the weakest types of enterprises with the lowest profits, can hardly extend very far. For as soon as it became appreciable, it would cut into the capital gain of at least some of the entrepreneurs, or into capital itself, whereby the matter would lead over into one of the cases discussed above. A conclusive theoretical investigation, therefore, should not pass by this seventh case without at least an attempt at a more detailed investigation, which would meet even greater difficulties then those indicated here. However, the greatest practical and theoretical interest does not attach to this, but to the previous case, number six, which is concerned with the question as to whether any artificial influence of power may or may not be able permanently to increase the share of labor at the expense of that capital.

As the reader has seen, I was not able to answer this question affirmatively. I know quite well that this part of my belief will probably meet with very strong opposition, and that I will be accused of relapsing into the old, outgrown theory of “pure natural laws” in economics. I also know that many will find a strong empirical contradiction of my views in the undeniable fact that during the last decades countless strikes have led to an improvement in the workers’ economic status never abrogated afterwards, and that almost universally and everywhere the standard of living of organized labor, which is able to apply the lever of power, is higher than that of unorganized workers.

But I believe I am able to meet both these objections. It would certainly never occur to me to attempt a revival of the old concept of “pure natural laws” in our economic science and therewith to oppose the belief in the effectiveness of the influence of control. On the contrary, I do believe in the effectiveness, in fact in a considerable and far-reaching effectiveness, of power, but I do not believe in its omnipotence; and since a careful analysis has shown me that these economic influences of power are in themselves based on motives of economic self-interest, I cannot close my eyes to the fact that any situation brought about by means of “power” may in itself again bring into play motives of self-interest, tending to oppose its continuance.

If an entrepreneur is induced, through the motive of self-interest, to select the “minor evil,” and permits a wage increase exacted from him, then an analogous motive of self-interest will urge him to reorganize the various factors of production by means of which he produces his goods. If the factor of production called “labor” has become more expensive than before, in comparison with the other factors of production, through an extorted wage increase, then it is almost unthinkable that the same relative apportionment of the various factors of production would remain the most rational in an economic sense.

If the entrepreneur finds his hands tied by the price of labor, but not in regard to the physical equipment of his factory, and he desires to adopt the presently cheapest combination of factors of production, he will prefer a combination different from the one used before, one that will enable him to make savings in the now more costly factor of labor, just as, for example, an increase in the cost of land may cause the transition from extensive to intensive methods of cultivation. If, ultimately, this saving in the now more expensive factor of labor continues to lead to the reduction in the demand for labor described before, which will ultimately render the enforced wage rate untenable, then it is no longer nature that has won a victory over power, but it is merely a new motive of self-interest, produced by changed conditions, that has prevailed over another motive of self-interest operative at another, no longer existing condition; or, stated more correctly, the same motive of self-interest that has led to the selection of the relatively most favorable combination of means of production will, under changed conditions, have made itself felt in a different direction.

This is not a belief in “natural economic laws,” but merely the rebuttal of the shortsighted idea that if, after a profound change in the costs of the various factors of production, the trend of economic self-interest continued to work in the same direction as before, that therefore, one had to submit to the dictates of power as if they were imposed by providence, and to cease to defend one’s self-interest. I emphatically repeat that I do recognize the effectiveness of the influence of outside power in distribution, both in theory and, to a considerable extent, in practice. And I might also mention the fact that it makes no difference whether these artificial influences of outside control emanate from monopoly, such as employers’ coalitions of labor unions, or from a direct intervention by government authority. The reason why I have not specially mentioned or discussed this latter case is merely that it seems to me to differ in motive rather than in method of application from the far more frequent case of control exerted by contending parties. I believe, for instance, that the legal fixation of a minimum wage will have to be interpreted in its effects in the same way as the dictate of wages by a well-organized labor union.

But in order not to leave any room for misunderstandings, I shall once more summarize the results of my investigation: Temporarily at least, the influence of outside control may produce intense and far-reaching, in fact very profound, effects. Under certain conditions these effects may become permanent, particularly when they are merely applied to neutralize an opposite influence of control that previously had deflected the dividing line away from its natural position. Thus, for instance, a strike may achieve an increase of wages up to the point of the marginal product, whenever the entrepreneurs had previously held the wages down below the product by force of their monopoly power. Furthermore, when a subsequent economic development suddenly transforms the original, artificial dividing line into a natural one, then the advent of power simply means a temporary anticipation of a development that would equally have taken place without such intervention, only later. Finally, control may temporarily be equally successful when it leads to certain lasting effects, and to efforts among the defeated party to improve its economic status, so that this improved condition may again become the “natural” condition. This contingency, however, will always occur only as an exception to the general rule, and can never be expected with certainty to take place, but it does represent the most favorable and outstanding combination for effective dictates of power: For in this case, and probably in this case alone, can we claim with a certain amount of justification that not only the advent, but also the continuance of a rate of distribution elevated beyond the natural rate has, even though only indirectly, been caused through the influence of power.

But apart from these special cases stated before, there is, in my opinion, not a single instance when the influence of control could be lasting as against the gently and slowly, but incessantly and therefore successfully, working counterinfluences of a “purely economic” order, called forth through that artificial interference and the new situation created thereby.

And, I hope to have made clear, there is one more thing that not even the most imposing dictate of power will accomplish: It can never effect anything in contradiction to the economic laws of value, price, and distribution; it must always be in conformity with these; it cannot invalidate them; it can merely confirm and fulfill them. And this, I think, is the most important, and the most certain, conclusion of the foregoing industry.

But how about the second objection I anticipate, namely the alleged empirical counterproof that the practical experiences with strikes and wage struggles seem to have supplied during the past generations?

Well, if these are interpreted correctly, they do not supply such a counterproof. For whenever a strike has led to an enduring success, there always appears to have prevailed one or the other additional circumstance by which, in my opinion, the permanency of this result can be explained. In most of these successful cases, the labor organizations have very generally found a condition favorable to their efforts, because competition among the entrepreneurs to the detriment of the workers had been absent. Under such conditions, when employer organizations enjoy a great advantage over the unorganized workers through their monopoly or quasimonopoly, the influence of power is applied, in the sense of our theoretical assumption, merely to neutralize and eliminate for all time an opposed influence of power. This is probably at least a plausible explanation for the actually improved condition of organized labor over unorganized labor.

A second reason for this may be found in the fact that, wherever an increase of wages in the economic world is about to take place, organized labor may accelerate its advent by using their power, and thus always keep a step ahead of unorganized labor. And, finally, one should not overlook the fact that sometimes it only appears as if conditions among organized labor had been improved. For as the skillful or more highly qualified types of workers are more often and more generally in the advantageous position of organizing than are the common or unskilled workers, the contrast between organized and unorganized labor may often coincide with that between skilled and unskilled labor. The former, by virtue of general economic laws, have in themselves a claim to higher wages than the common workers. The higher wage level of labor unions as compared to unorganized labor must not, or at least must not unreservedly and exclusively, be ascribed to the influence of power exerted by their unions.

Moreover, our generation has passed, and is passing, through a period when, omitting ephemeral fluctuations, the general trend of economic progress was and is continuously highly favorable to a wage increase. Therefore, it has never been really possible to test by way of experiment or actual observation whether an enforced increase in wages, achieved by means of a strike, might not perhaps have been gradually demolished again by those gently and slowly working counterforces, the undermining effects of which I have referred to above. In every case there always is a great amount of counteracting and modifying outside influences which, in the majority of cases, in their net results were favorable to the elevation of the productivity of labor and the increase of its marginal product, which alone ultimately determines the wage rate.

And thus the great part of the considerable and lasting wage increases of the past generation may easily be explained by the combined factors referred to in my analysis: At first, these wage increases were caused by the labor unions and strikes. But the reason why they could be maintained without being rescinded was that the stupendous progress of our times continuously produced such great technical improvements, improved methods of utilizing human labor, and coincided with a substantial increase of population, and an even larger increase of capital. But we have no way of showing how things would have turned out, or what they would be at present, if those successful strikes had led into a period of depression, or of moderate, slow progress, instead of coinciding with a period of the most stupendous progress, so impetuous that many a blind enthusiast has seriously begun to question the iron foundations of Malthus’s “law of population.”

And finally there is here too a sense in which merely the impression of a lasting wage increase is being created, where in reality no increase has taken place at all. Many a wage increase obtained through strikes has been neutralized, not through any formal wage reduction, but through the increase in the cost of living. To what extent a subsequent rise in prices of certain important means of subsistence, together with a general indirect increase in the cost of living through depreciation of money, has deprived wage increases of their reality and transformed them into quite immaterial nominal money increases at best, is a much contested question. Personally I do not by any means agree with the contention often made by socialists that the wage increases obtained during the past prewar decade have altogether disappeared in this manner. I rather believe that a considerable part of them have been genuine and permanent in character; but this is true only in part, and as regards the other part, that process of absorption through quiet and imperceptible counterforces, to which I have referred already, has actually taken place; it is the same story in a different form.

It may be that my analysis, which I personally do not consider exhaustive by any means, may have to be amplified, elaborated, and corrected in many points. To me, the essential thing is that in the problems discussed here we need, in any event, a new method of approach, free from the preconceived notion that this entire question has been decided long ago. The struggle between the natural and the social categories has been fought over twice already in economic science, and in both instances decided by an error of judgment: the first time by the classicists in a one-sided manner in favor of the natural laws; the second time in the modern theories of social distribution, with a similar partiality in favor of social control. What is needed is to institute the whole procedure again, and to finish it, without prejudice, on the basis of the trivial truth, not sufficiently acknowledged so far, that the influence of social control does and must harmonize with the formulas and laws of pure economic theory.

In order finally to avoid new misunderstandings, let me add a last word that should not remain unsaid at this place. John Bates Clark, whom I had to oppose polemically on several occasions on important questions, and whom I look upon as one of the most original and deepest authorities of our science, has, on a certain occasion, set up a very important and distinctive line of demarcation, with the felicitous and characteristic terms of “functional” and “personal” distribution.²¹

“Functional” distribution determines the rate according to which the individual factors of production are to be recompensed for their share in production, irrespective of the person who has made that contribution, and without regard to the question of whether any single person has contributed much or little. Functional distribution thus explains the division of the total national dividend into the great categories of wages, rent, capital, and profits.

“Personal” distribution, however, explains the size of the share that each individual obtains for himself from the national dividend without regard to the function from which he obtains it, and particularly regardless of whether he receive his share for one single, or for several, functions contributed simultaneously.

Functional distribution explains high and low wages, high and low rates of interest, etc.; personal distribution explains large and small incomes, indicating how one and the same income of $100,000 may just as well result from wages of a well-paid bank president, or from rent, or from high or low interest, or from a mixture of several functional types of income, or how a modest income of $1000 may just as well be that of a worker without capital or that of a small capitalist or landowner.

Functional distribution explains relatively few and simple facts of a general nature; personal distribution gives us highly colored, mosaic-like pictures, resulting from the application of those simple and general laws of distribution to a vast variety of data, and explains the function, amounts, and qualities that have been contributed by each individual to the total production. The primary object of all scientific theory of distribution, and thus also the object around which have centered the old disputes referred to above, is functional distribution.²²

These statements I have made regarding the limitations of outside control of distribution apply only to functional distribution. As to the influence of control on personal distribution, the limits are infinitely more elastic, both as to intensity and as to the lasting effectiveness of that influence. Since outside control may also permanently change the other factors to which the laws of functional distribution apply, it may happen that certain effects in the sphere of personal distribution may be brought about without temporal limitation. When the government of a country turns proletarians into landlords through distribution of land, they and their descendants may, for all time, find their income increased by rent from land, quite regardless of how the line of division between rent from land and wages of labor may be drawn in functional distribution. And if a socialist state should introduce common ownership of all means of production and transform all capital and all land into social property, in the produce of which each member of society share in one way or the other, then for all future, or at least as long as such socialistic order may continue, all personal shares would, in the same or similar way, be composed of the produce of each one’s own labor, and an equal contribution from the produce of the social property, in a manner widely and permanently differing from our present system of personal distribution.

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¹² That, and how low interest and high wages tend to make for the lengthening, and high interest and low wages for a shortening, of the average period of production, I have shown in my Positive Theory of Capital, Book VI, Chapter X.

¹³ See preface to my Positive Theory of Capital.

¹⁴ I do not wish to take into account that the assumed increase in wages would also increase the standard of living at which the workers would have to be maintained; this, however, may be offset by the lower rate of interest with which the “propertied classes” would have to content themselves after the elimination of interest on capital.

¹⁵ Book VII, Chapter III.

¹⁶ On this subject, see my detailed discussion in Positive Theory of Capital, particularly the comparison on the table of p. 451, to which I merely wish to add that the assumption of a totally perfect competition has in this case been eliminated by our present assumption, at least on the side of the workers who have eliminated underbidding by strictly cooperating with each other.

¹⁷ I fully realize that a lengthening and shortening of the process of production cannot be carried out at a moment’s notice, without trouble, in that it always affects the entire structure of fixed capital. But, on the other hand, it is hardly probable that the pendulum would swing to the full extreme of a complete disappearance of interest and back toward the original starting point. It would be far more likely for those economic forces that swing the pendulum back from the extreme towards the starting point to intervene long before that point had been reached, and to keep the swing of the pendulum within much narrower limits, thus restricting the technical changes in production necessary in adaptation to the respective prices of the factors of production. But as I did not wish to make any omission in the method of presentation, I was anxious to consider also the extreme cases, with their counter effects, just as if they actually occurred in practical life.

¹⁸ Compare this problem with the interesting discussion in Cassel’s “Nature and Necessity of Interest,” pp. 144 ff.

¹⁹ According to a not entirely uncontested variation of the law of “diminishing returns.”

²⁰ I wish to state that, in reasoning thus, I purposely omit all such losses as may be caused by the partial elimination of workers through interference with the existing organization. I assume, as it were, an enterprise that can be reorganized without difficulty, as indicated above, when I said that the capital employed was to be constant in its amount, although not in its physical composition.

²¹Distribution of Wealth, p. 5.

²² “The science of distribution does not directly determine what each person shall get. Personal sharing results from another kind of sharing; only the resolving of the total income of society into wages, interest, and profits, as distinct kinds of income, falls directly and entirely within the field of economics.” Clark, Distribution of Wealth, p. 5.