Production A Synthesis Distribution An Analysis

The essential fact about production, as it is carried on by all

society, is that it is a synthetic operation, by which a grand total

is made up by the contributions of different industries. There is a

corresponding fact about the production which is carried on within a

particular line of business, or, as we should express it, within a

particular subgroup; for within the subgroup there are laborers, on

the one hand, and
capitalists, on the other, helping each other to

make a joint product. In our table A''', B''', and C''' are the goods

of which the social income is composed. Subgroups, such as A, A',

etc., help to make this grand total of finished goods; but in A, A',

and all the other subdivisions there are laborers and capitalists

working together. Farming, mining, cotton spinning, shoemaking,

building, and a myriad of other occupations all work together to

create an aggregate of goods which constitute the social income. In

each of these branches of business there are men and working

appliances contributing each a part to the quota that this branch


Distribution as an Analysis

The essential fact about distribution

is that it is an analysis. It reverses the synthetic operation step by

step, resolving the grand total produced by society into shares

corresponding with the amounts contributed by the specific industries,

such as mining, cotton spinning, shoemaking, etc. The men who own and

work the mines do not keep the ore they secure, nor do they wish to

keep it. The ore goes into a stock of goods for the general use of

society, and it constitutes a definite addition to the value of that

stock. As ore it is transmuted into a myriad of forms, merged with

other materials and lost; but the amount that it adds to the total

product of society is definite. It is a certain definable quantity of

wealth, and that quantity of wealth the producers of the ore should

get for themselves. Distribution further resolves the share of each

particular industry into final portions for the use of the laborers

and capitalists in that industry; and these correspond with the

amounts which these laborers and capitalists contribute. The result of

distribution is to fix the rate of wages, the rate of interest, and

the amount of the profits of employers, if such profits exist; and the

general thesis which is here advanced and remains to be proved is

that, if society were without changes and disturbances, if competition

were absolutely free, and if labor and capital were so mobile that the

slightest inducement would cause them to pass from one branch of

business to another,[1] there would be no true profits[2] in any

business, and labor and capital would create and get the whole social

income. Moreover, each laborer and each capitalist would get the

amount of his personal contribution to this sum total. Amid all the

complications of society the modern worker would be in a position akin

to that of the solitary hunter in a primitive forest--his income would

be essentially of his own making and would include all that he makes.

He would not, like the primitive man, get the literal things that he

fashions, but he would get the amount of wealth that he creates--the

value of the literal products which take shape under his hand.

[1] It will be seen that we here assume for the process known

as competition a degree of perfection which it does not

attain in actual life. This process would be absolutely free

if labor could and would instantly abandon one industry and

enter another whenever it appeared that it could create an

increased product by so doing, and if capital also moved with

the same promptness on the smallest inducement. In actual

life there is friction to be overcome in the making of such

transfers, and this constitutes one of the subjects of the

theory of Economic Dynamics and will in later chapters be

fully considered.

Whenever either labor or capital thus moves to a new place in

the group system, it becomes an active competitor of the

labor or capital that was already there. We need a

definition of the competing process. In the case of producing

agents it consists in a rivalry in selling. The laborer who

moves from A' of the table that, in the preceding chapter,

has been used to represent organized industry to B', offers

for sale, as some would say, his service, or more accurately,

the product which his labor can create. The purchasers are

the employers in the subgroup B', and in order to induce them

to accept the new labor it is necessary to offer it at a rate

of pay which will make it worth their while to take it. If

the workers already in this division of the field are getting

just what they are worth, a larger force cannot be employed

at the same rate of wages, because, for a reason that will

later appear, the new labor cannot offer for sale as large a

product as an equal amount of the labor that is already

there. If the transfer to B' were made, the new labor would

have to accept lower pay than the old has been getting, and

the old labor would be forced to accept a cut in its rate of

pay or be supplanted by the new. A rate sufficiently low

would insure the employment of all. If the labor formerly in

this subgroup has been getting less than it is worth, there

will ensue a competition among employers who desire to

realize, each for himself, the margin of profit which can be

made by getting additional labor, and this will either raise

the pay of the men already in this subgroup or call new men

into it, or do both. In any case it will, in the absence of

all trace of monopoly on the side of the employers, end by

giving to the men what they are worth. It is, in fact, such a

bidding for new labor by employers in any branch of business

that moves labor from point to point in the industrial

system. The entrepreneur is the agent in the case, profits

are the lure, and competition--rivalry in buying--is the

means; and competition is, as we use terms, absolutely free

whenever it is certain that the smallest margin of net profit

will set it working and draw labor or capital to the

profit-yielding point.

There is competition among the entrepreneurs at A''' in

selling this finished product to the consuming public, and

among different purchasers in buying it. Whenever the price

of A''' is so high that the whole output of it cannot be

sold, each vender tries to supplant others and insure a sale

of his own product rather than that of any one else.

Competition here is overt and active. When all can be sold at

the current price, finding a market for one vender's supply

does not require that he win away another's customers, and

although the different sellers continue to be rivals and each

would welcome an increase of patronage made at others' cost,

no one is forced to underbid others in order to continue to

sell his accustomed output. Competition is here quiescent,

since actual underbidding and the luring away of rivals'

customers do not take place. When entrepreneurs who are not

now in the subgroup A''' are ready to enter it and to become

rivals of those already there whenever any profit is to be

had by such a course, their competition is not actual but

potential; and yet it is a real influence and serves to deter

producers already in the field from establishing such a price

for their product that the possible competitors will become

real and active ones. These three influences may conceivably

act without obstruction or may be hindered and deprived of

much of their power. In actual life they are subjected to

hindrances, and whether they shall hereafter insure a certain

approximation to the general state which a perfectly free

competition would insure or whether the economic condition of

the world shall be permitted to drift far from that normal

state, depends on the success which governments will have in

reducing or removing the hindrances.

[2] In this treatise the term profits will be used to

designate the net increase which may remain in employers'

hands after paying the wages of labor of every kind and

interest on all capital used. The term gross profits

describes a sum made up of this net profit and interest on

the capital.

Standards of Wages and Interest

This accurate correspondence

between men's incomes and their contributions to the general earnings

of society would exist only in the absence of certain changes and

disturbances which it will be our aim, in the latter part of this

work, to study. These changes give to society the quality that we

shall term dynamic, and we shall examine them at length. What can,

however, be asserted in advance is that the rates of wages and

interest which would prevail if the changes and disturbances were

entirely absent constitute standards toward which, in spite of all the

changes that are going on, actual wages and interest are continually

tending. How nearly in practice the earnings of labor and capital

approximate the ideal rates which perfect competition would establish

is a question which it is not necessary at this point to raise. We

have to define the standard rates and show that fundamental forces

impel the actual rates toward them. The waters of a pond have an ideal

level toward which they tend under the action of gravity; and though a

gale were to force them to one end of the pond and cause the surface

there to stand much higher than the surface at the other end, the

standard level would be unaffected and the steady force of gravity

would all the while be drawing the actual surface toward it. In our

study of Economic Dynamics we shall encounter influences which act

like the gale in the illustration, but at present we are studying what

is more akin to gravity--a fundamental and steady force drawing wages

and interest toward certain definable levels. In our present study of

Economic Statics we must seek to discover how these standards are

fixed, in the midst of the overturnings which industrial society


A''' B''' C''' H'''

A'' B'' C'' H''

A' B' C' H'


We have already represented, in a highly simplified form, the

synthesis by which the goods which make up the income of society are

produced. A, B, and C represent different raw materials, and they are

changed by a series of transmutations into A''', B''', and C''', which

stand for all the consumers' goods that the society uses. They

represent food, clothing, furnishings, vehicles, and countless means

of comfort and pleasure.

The Making of Active Instruments of Production

It is necessary

always to have and use a stock of tools, machines, buildings, and

other active instruments of production; and as these wear out in the

using, it is necessary that there should be persons who occupy

themselves in keeping the stock replenished. Under a system of

division of labor there would be special industries devoted to the

making of new appliances of production to take the place of those

which are worn out and discarded, and also to make repairs on those

which are still in use. For illustration, we may let the symbol H'''

represent all active capital goods that the society uses, the various

raw materials which enter into such active goods being represented by

H and the partly made instruments by H' and H''. If the stock of

appliances is not growing larger, just enough of the articles H''' are

made to replace the discarded ones. No producer gets new machinery,

but every one keeps his stock intact.

The Simplified Representation Correct in Principle

We have now a

very simple representation of what actually goes on under the name of

the division of labor, and yet the representation is in essential

points accurate. In reality a very detailed and minute division and

subdivision of industries takes place and the varieties of goods

produced are innumerable. Society, as a whole, is making the most

highly composite product that can be conceived; namely, consumers'

wealth in its countless forms. Each of the grand divisions of

society--the general groups that we have represented by the series of

A's or of B's--makes a complete article; but even that is in its own

way far more composite than the symbol indicates, for it is apt to

contain several kinds of raw material and to be made up of a large

number of distinct utilities, each of which has its own set of

producers. This complexity of the process of production does not

change the principle of distribution, by which the product is

virtually analyzed into its component elements and the value of each

element is assigned to those who create it. This principle can be

clearly represented by assuming that each subgroup has one distinct

utility to create and that it takes only four of these to make an

A''', a B''' or a C'''.

A Synthesis within Each Subgroup

There is within each subgroup a

synthesis going on, and this also may be complex. Labor and capital

dig ore from the ground--an unusually simple process; and yet there

are several distinct operations to be performed before the ore is

ready for smelting. When it comes to fashioning the metal into useful

shapes, the operations become very numerous and require many

subordinate trades even for the making of one product. How many

mechanical operations go to the making of a bicycle, an automobile, or

a steam yacht? Too many to be represented in any table, but not

enough to change at all the principle according to which those who

help to make one of these composite products are paid according to

their contributions to it. We may consider that all the work that is

done in one kind of mill creates one utility. Though there are many

subtrades in making a shoe and many more in making a watch, we may

proceed as though there were only one transformation of the raw

material required in each case. We may let the division between the

contiguous subgroups be made commercially rather than merely

mechanically, and regard the establishments that buy material and sell

it in a more highly wrought condition as moving it forward by one

stage on the road to completion, however many changes they may have

made in it in the different departments of their several mills. The

difference between shoes, on the one hand, and the leather and

findings of which they are made, on the other, thus passes for one

utility. A manufacturer of shoes puts his leather and findings through

many operations before he has shoes for sale; but it is convenient to

call all that the manufacturer imparts to these raw elements before he

makes them over in their new form to the merchant, one subproduct.

Further Complexities which may be Disregarded

One man may be in

several of the general groups. It is possible, for example, that he

may furnish raw materials which enter into more than one finished

article. Iron is so extensively used that it goes into more products

than can easily be counted. The man who digs iron ore contributes to

the making of bridges, rails, locomotives, buildings, machines, ships,

and tools in indefinite number and variety. The price of each of the

articles into which any of this material goes contains in itself the

price of that part of the raw material which goes into it. There is

steel in a ship, and the maker of that part of the output of raw steel

which goes into a ship gets his pay from the price of the vessel; and

so with the crude metal which goes into a bridge, a building, an

engine, etc. What the producer of a material gets from each source

tends, under perfectly free competition, to equal in amount what he

contributes toward the value of the corresponding article. In terms of

our table a miner may furnish ore from which iron is taken for the

making of both A''' and B'''; and if so, when the distributive process

analyzes these products into their elements, the value of what he has

in each case contributed will fall to him. He will be paid according

to the help he has afforded in the making of the A''' and the B''',

and this fact does not change in principle the manner in which the

income of society is divided. If the man helped to make only one

thing, he would get a part of the price of that one thing; but if he

helps to make several, he will get a part of the price of each of

them. Each group has one grand function to perform, such as the making

of an A''', and if the man helps in more than one, and is paid

accordingly, his total pay is according to the amount he produces in

all the different functions he performs, and the principle of

distribution works as perfectly as it would if the man were confined

to the single subgroup A. For simplicity we assume that he is so.

The Functions of Capitalist, Laborer, and Entrepreneur often

performed by One Person

One person may perform several functions,

not only by contributing to the products of several groups, but by

contributing in more than one way to the product of one subgroup. He

may, for example, both labor and furnish capital, and he may, further,

perform a special cooerdinating function which is not labor, in the

technical sense, and scarcely involves any continuous personal

activity at all, but is essential for rendering labor and capital

productive. What this function is we shall presently see. We shall

term it the function of the entrepreneur, using this term in an

unusually strict way. We shall keep this function quite distinct from

the work of the superintendent or manager of a business.

How Much the Term "Labor" Covers

We include under the term labor

all effort expended in a routine way in carrying on business. The

overseers in the shops, the bookkeepers, clerks, secretaries,

treasurers, agents, and, in short, all who perform any of the labor of

management for which they get or can get salaries are laborers in the

comprehensive sense in which we use the word. It comes about that the

employer usually labors; for he does the highest and most responsible

work in his own mill or shop. It is not, however, in his capacity as

entrepreneur, or "undertaker," that he labors; for, as the

entrepreneur, properly speaking, he employs and pays for all the

work that receives a stipend. He may employ himself, indeed, and set

aside a stated sum to pay his own salary; but this means that in his

capacity as entrepreneur he needs a good manager and hires himself

to act in that capacity. Scrupulous fidelity is the most important

quality that a manager can possess, and the employer can always trust

himself to possess it so long as it is his own interests that he


Entrepreneur and Capitalist

In the same way we include in the

capital of an establishment whatever invested funds the employer

himself supplies, as well as what he hires from others. Here again a

man is likely to serve in more than one capacity, for as an

entrepreneur he hires capital and as a capitalist he lets it out for

hire, so that in the one capacity he hires capital from himself acting

in the other capacity. The man "puts money" into his own business and

gets interest for the use of it.

The Different Functions of the Same Man distinguished in


This distinction between the different functions that one

person may perform is not a mere refinement of theory, but is

something that is recognized in business and has great practical

importance. In a corporation officials who are also stockholders

receive salaries that are usually reckoned on the basis of the amount

that they could get in the market if they were to enter the employment

of other corporations and do the same kind of work they are now doing.

Favoritism may give them considerably more than this amount, but even

then this amount is the basis of the calculation which fixes their

stipend. If they are paid more than their work is worth to their own

corporations, what they get is something besides wages or any other

normal and legitimate income. If they accept for their time less than

they are worth, they make a donation to the corporation. Neither

filching something for nothing out of the returns of the corporation,

nor giving it a gratuity, is to be here assumed as existent, since we

are not dealing with the phenomena of quasi-plunder or eccentric

benevolence. The character of wages of management, as the reward for a

high grade of labor, is recognized in business life, and the salary

of the manager, whether he is a stockholder or not, is usually

expressed in a definite sum of money and is gauged, crudely or

accurately, according to his value as a servant of the company.

Dividends often Composite

In like manner it is important in the

bookkeeping of a company to ascertain how much of the return to the

stockholders is merely interest on the capital they have themselves

invested and how much is true profit, or the net gain which is over

and above interest. In business life a distinction is pretty clearly

maintained between the three kinds of income that have been described;

namely, the reward of labor in all its forms, the reward of capital,

going to whoever furnishes it, and the reward of a cooerdinating

function, or the function of hiring both labor and capital and getting

whatever their joint product is worth above the cost of the elements

which enter into it. This essentially commercial margin of returns

from production above all costs of production is profits in the strict

sense and would be nonexistent in an absolutely static industry. It

comes into existence in consequence of the changes with which social

Economic Dynamics deals.

Three Incomes entirely Distinct

Wages, interest, and profits,

then, are the three incomes that we shall distinguish. We shall keep

profits completely separated from the wages of any kind of labor and

from the interest on any kind of capital. This income falls to the

entrepreneur, otherwise called the undertaker, or the employer and

cooerdinator of labor and capital, and it comes only when the product

of the operations carried on in his establishment exceeds all wages

and all interest that he has to pay.

How a Man could be an Entrepreneur Only

If a man should hire all

the capital that he needs in a business and also all the labor,

including the labor of every man in the office force, and reside

thereafter in a distant country, holding no consultations with his

managers, whatever income he might get would be purely an

entrepreneur's profit. It would not be interest--for that amount

would have to be paid to the men who had loaned the capital--and it

would not be wages--for they would have to be made over to the men

actually doing the work. The absent entrepreneur would be, in the

eye of the law, the purchaser of all the elements which go into the

product, since all the purchases are made in his name. The managers

are only his agents, and when they buy raw materials or supplies for

the mill, they buy them for him and by his authority, and he is under

the obligation to pay for them. Moreover paying wages is, in reality,

buying the share which labor contributes to the product of the mill.

The workmen have a natural right to the value which their work, of

itself and aside from the aid furnished by others, imparts to the

material that is put into their hands, and when they sell their labor,

they are really selling their part of the product of the mill. In like

manner paying interest is buying the share which capital contributes

to the product. The owners of the capital have an original right to

what the machines, the tools, the buildings, the land, and the raw

materials, of themselves and apart from other contributions, put

into the joint product. In reality they sell this share for a

consideration in the form of interest. In a static state labor and

capital together create the whole product of the mill; wages and

interest are the prices that they get for their several

contributions, and the entrepreneur pays these purchase prices and

by virtue of this becomes the owner of the whole product. Having the

product, he sells it in the market for what he can get. If this were

more than the cost to him of all the elements that have gone into it,

he would have a net profit remaining. It would be a remainder accruing

to the owner and seller of the product after the costs of getting a

title to it have been defrayed. Whether the absent entrepreneur of

our illustration gets anything from his business or not depends on the

question whether such a remainder of returns above costs is afforded.

Profits Nil in a Static Society

We shall see that if labor and

capital can move about in the system of groups so freely that each

agent is as productive in one place as it is in another, there will be

no product anywhere in excess of wages and interest. Labor and capital

then create and claim for themselves the whole output of their

industries. When the entrepreneur has given them their shares, by

paying wages and interest, and has paid for raw materials, he has

nothing left. In actual business competition is often sharp enough to

prevent men from getting more than interest on their capital and a

fair return for the labor they spend in directing their business; and

pure theory here assumes that competition is always and everywhere

sharp enough to do this. It is ideally efficient. Labor and capital

are ideally mobile and ready to flow at once to the points where any

net profits can be made. Such a condition implies that society is in a

static state, and we shall see what this condition is. It implies an

absence of organic change in society. The great collective producer

does not alter either its form or its mode of producing wealth.

Industry goes on, indeed, but it goes on in a changeless way.

Reserving the full description of this state for a later chapter, we

note here that the adjustment which would theoretically bring a

society to such a state would preclude all gains for its


[3] The preceding paragraphs may seem to show that if an

entrepreneur ever gets an income, he does it by wresting

from labor and capital a part of their products. We shall see

that in dynamic industry there is a normal way in which he

may get an income without taking anything from the incomes

that labor and capital would get if he did not perform his

part. His return may come from the result of an enabling act

which he performs, whereby both the labor and the capital of

a particular subgroup become more productive than other labor

and capital are and more so than they would be if the

entrepreneur's enabling act were not performed.

The Merging of Functions Desirable

The uniting in one person of

the functions of capitalist, laborer, and entrepreneur contributed

much to the productivity of the small-shop system of former days. The

man who had a few thousand dollars invested in a little shop and

employed a few men to assist him got three different kinds of income,

and the sum of the three was larger than anything he could have

secured if he had been only a laborer or only a small capitalist and

entrepreneur. He worked harder and more intelligently than a hired

superintendent would have done; he was led to be cautious because his

own capital was risked in his business, and yet he was spurred to

enterprise by the fact that when, by virtue of the influences which we

call dynamic, profits were made, he got them. Even in the largest

corporations the same conditions contribute to success, and it is best

that managers should be owners of some part of the capital which they

handle and receivers of some portion of the profits which they try to

secure for their companies. Where competition is sharp, companies

directed by their owners may supplant those of which the direction is

given over to hired managers. The growth of corporations does,

however, tend to put salaried men more and more into controlling

positions and to reduce the power of the body of stockholders, who

perform a joint function as capitalists and entrepreneurs. In itself

this tends to reduce profits and detracts from the advantages which

the incorporation of a business offers.

Distribution primarily Functional rather than Personal

Where men

get incomes that are composed of wages, interest, and profits,

economic science should, in the first instance, tell us how the rates

of wages and interest and the amount of profits are determined. A

study of the static laws of distribution concerns itself with the

reward of labor as such, and the reward of capital as such, while

a study of dynamics takes account of pure profits. When we know

what the rates of wages and interest are, we can tell what any

capitalist-manager should have by knowing how much capital he

furnishes and how much and how well he works as a manager. If the

business is yielding a net profit, over and above the interest on its

capital, we can tell what part of this net income any one stockholder

will get--in the form of a rate of dividends in excess of the rate of

interest--if we know how much of the common stock of the company he

owns. His personal income depends on the incomes attaching to the

functions he performs. The science of distribution should tell us

primarily, not what any man personally gets as a total income and how

well off he is as compared with other men, but in what way the wages

of his labor, the interest on his capital, and the return for the

entrepreneur's function are fixed. In technical terms this is saying

that distribution is primarily functional and not personal. Certain

forces assign certain rewards to different functions which are

involved in the creating of wealth, and the science of distribution

tells us how these forces work--tells us, in short, how wages,

interest, and true profits are, in and of themselves, determined. If

any man works and gets wages, that part of his income will be

determined by the wages law. If he furnishes capital, a second part of

his income will be determined by the interest law. If he also

cooerdinates labor and capital, whatever he may thus gain is determined

by the law of profit. Economic science has to ascertain and state what

these three laws are, though in its static division it has only to

account for two of them.

Costs as well as Gains Apportioned

The term distribution, as

commonly used, denotes a division of the gains of industry; but as we

have said, there are sacrifices which have to be borne in getting the

gains, and these also have to be shared. Wealth benefits men in the

using, but puts burdens upon them in the making; and when all society

does the making, it has to apportion, in some way, not only the

benefits but the burdens. We shall take account of these sacrifices

because of the relation that they bear to the gains. They act as an

ultimate check on production. Men would go on producing indefinitely

if the operation cost them nothing, since it would always be agreeable

to have a further income; but they necessarily encounter pains and

sacrifices that, sooner, or later, bring the enlargement of their

incomes to an end. Much that is of importance occurs at that critical

point where the sacrifices of production put an end to the extension

of it. It is the positive fruits of production that we have first to

consider; and what in this connection we wish first to know is how

wages and interest are determined when industry is carried on in a

social way and under a system of competition. We shall find that these

incomes are always tending toward standards which they would reach if

society were in the state which we have described as static. How they

are forced away from their standards by the changes and disturbances

of actual life, and how the standards themselves change with social

development, will be the subject of the latter part of this treatise.