Progress and Poverty

Rent is “that part of the produce which accrues to the owners of land or other natural capabilities by virtue of their ownership” (165). In the economic sense, rent excludes “payments for the use of any of the products of human exertion” (165) and its meaning is narrower. However, the owner and user of land may be the same person. Land’s capacity to generate rent is what gives it value. Since pieces of land have many owners, their rent has price limits through competition.

Land plays a central role in an industrialized society, “for there is no occupation in which labor and capital can engage which does not require the use of land” (169). Ricardo’s law of rent regarding non-agricultural land is as follows: “The rent of land is determined by the excess of its produce over that which the same application can secure from the least productive land in use” (168). This law is “a deduction from the law of competition” (170).

From the law of rent, George determines that “Produce = Rent + Wages + Interest,” thus “Produce – Rent = Wages + Interest” (171). This equation shows that “wages and interest do not depend upon the produce of labor and capital” (171). Thus, it is the growing rent in advanced industrialized countries that is the “key that explains why wages and interest fail to increase with the increase of productive power” (171). As the value of land increases, “there may be a very large production of wealth, and yet a low rate of wages and interest, as we see in old countries” (171-72). Therefore, even technological developments that improve the productive power of the industries impact both interest and wages “not by the increase, but by the manner in which rent is affected” (172).

In the strict, abstract sense, the term “interest” refers to “all returns for the use of capital, and not merely those that pass from borrower to lender” (173). In this context, interest does not include risk compensation, contrary to the common usage of the term. In practice, the general interest rate includes compensation for the added risk. Interest varied greatly historically and geographically. For instance, the U.S. interest rates exceeded those in Britain.

Many consider interest to be “the robbery of industry” (175) because it seems to be the reward for doing nothing. Those who oppose interest hold the same kind of erroneous beliefs as those who believe that capital furnishes wages. After all, “[w]hoever uses capital and obtains the increase it is capable of giving receives interest” (188).

Production features three key modes: adapting, growing, and exchanging. Adaptation refers to “changing natural products either in form or in place so as to fit them for the satisfaction of human desire” (186). Growing refers to agriculture and farming. Exchanging, or using, refers to increasing wealth through “the higher powers of those natural forces which vary with locality” (186). Capital may support labor in all three modes and may thus increase its efficiency. As a result, “interest springs from the power of increase which the reproductive forces of nature, and the in effect analogous capacity for exchange, give to capital” (187). Interest is, therefore, just and “not the result of a particular social organization, but of laws of the universe which underlie society” (187).

The reason many believe that interest is “the robbery of industry” is rooted in the inability to correctly identify what capital is and the sources of profits (from interest or otherwise) (189). For instance, land values are not part of capital but are often erroneously considered to be. Similarly, stocks and bonds are not part of capital, either. In general, if it does not constitute wealth, it cannot be capital.

Furthermore, the concentration of capital may lead to corruption. Profits from such ventures should not be mistaken for capital returns obtained legitimately as part of the production process. Concentrated capital is linked to “bad social adjustments” (194). In most cases, such cases occur due “to a maladjustment of forces in the legislative department of government” (193). The concentration of wealth is thus often linked to the concentration of power.

When there is an element of risk, profits accurately incur interest. In the realm of stocks, which is a form of gambling, and other types of speculation, taking a risk may often lead to losses. However, the vast fortunes of such families as the Rothschilds and the Vanderbilts did not come from interest but from other elements.

There are two key issues worth mentioning here. First, it is labor that employs capital, not the other way around. Second, capital does not exist as a predetermined amount but can be increased or lowered. The change in the amount of capital occurs through using labor to produce capital, or by transforming wealth into capital, or vice versa.

The average growth of capital is linked to the normal interest rate. A normal interest rate “lies between the necessary maximum and the necessary minimum of the return to capital” (198). There exists a “natural relation between interest and wages”—a point of equilibrium (199). Thus, both the general rate of wages and interest increase or decrease at the same time. Herein lies the law of interest:

The relation between wages and interest is determined by the average power of increase which attaches to capital from its use in reproductive modes. As rent arises, interest will fall as wages fall, or will be determined by the margin of cultivation (202).

It is important to note that as part of wealth, “[c]apital is but a form of labor, and its distinction from labor is in reality but a subdivision” (203). Thus, products may be split between rent and wages. These are the “two factors” which “by their union produce all wealth” (203).

Wages vary for individuals, organizations, and professions. For example, the wage difference between professions depends on supply and demand. However, there exists a law for wages. The wages come from the value of labor. Indeed “the wages which an employer must pay will be measured by the lowest point of natural productiveness to which production extends, and wages will rise or fall as this point rises or falls” (205).

In addition to wage variations between professions and within professions, there also are some fundamental professions that “procure wealth directly from nature” (212). It is for those professions that the law of wages “must be the general law of wages” (212). It is also in those professions that labor produces “at the lowest point of natural productiveness” (212). The law of wages is “the corollary of the law of rent” (213). It is important to note that wages—as an amount of wealth paid for labor—do not necessarily decrease with the rise in land rent, “but that the proportion which it bears to the whole produce is necessarily less” (216).

The law of wages also corresponds to the law of interest, as “Wages depend upon the margin of production, or upon the produce which labor can obtain at the highest point of natural productiveness open to it without the payment of rent” (213). This law may explain many differing facts. For instance, in those places where land is free, wages will comprise the entirety of the product (except for “storing up of labor as capital”) (213). Such was the case in places where land was open to settlement. There also must be a minimum wage, as demonstrated by Adam Smith and David Ricardo, who called it a “natural wage” (213).

Rent, wages, and interest each have their own law. The law of rent, since the time of David Ricardo, is generally accepted and remains true: “Rent depends on the margin of cultivation, rising as it falls and falling as it rises” (218). However, in the case of wages and interest, the accepted thinking differs from the truth. In the current political economy, wages are believed to “depend upon the ratio between the number of laborers and the amount of capital devoted to their employment” (218). In reality, wages actually “depend on the margin of cultivation, falling as it falls and rising as it rises” (218, emphasis added).

Similarly, the current political economy argues that interest “depends upon the equation between the supply of and demand for capital; or, as is stated of profits, upon wages (or the cost of labor), rising as wages fall, and falling as wages rise” (218). However, interest “depends on the margin of cultivation, falling as it falls and rising as it rises” (218). What the three accepted statements of political economy have in common is that they “have no common center” and no correlation to each other. In contrast, the new statements “spring from one point, support and supplement each other” (218).

The three new statements from the previous chapter about rent, wages, and interest present a “consistent theory of the distribution of wealth” (219). Production is based on labor, capital, and land. Its products are divided between the land power, the capitalist, and the laborer. Even though modern production is complex, the relationship between land and labor remains. Rent grows at the expense of wages and interest as a share of the laborer and capital, respectively. For example, when production increases, but the laborer and the capitalist do not receive more, then it is the landowner who benefits the most.

Material progress is accompanied by the rise in land value and rent. When it comes to land, its value depends “wholly upon the power which its ownership gives of appropriating wealth created by labor,” so that “the increase of land values is always at the expense of the value of labor” (222).