General view of distribution

Book 6, Chapter 11

§1. Marshall’s summary of the book just past is really interesting to read; I don’t think I can summarise it, except to say that his consideration of scale and time is as necessary and insightful as the typical (modern) textbook is superfluous and opaque. Consider this:

Again, since human beings grow up slowly and are slowly worn out, and parents in choosing an occupation for their children must as a rule look forward a whole generation, changes in demand take a longer time to work out their full effects on supply in the case of human agents than of most kinds of material appliances for production; and a specially long period is required in the case of labour to give full play to the economic forces which tend to bring about a normal adjustment between demand and supply. Thus on the whole the money cost of any kind of labour to the employer corresponds in the long run fairly well to the real cost of producing that labour [p 550].

§2. Another interesting summary (worth a read) includes this:

A chief function of business enterprise is to facilitate the free action of this great principle of substitution. Generally to the public benefit, but sometimes in opposition to it, business men are constantly comparing the services of machinery, and of labour, and again of unskilled and skilled labour, and of extra foremen and managers; they are constantly devising and experimenting with new arrangements which involve the use of different factors of production, and selecting those most profitable for themselves [p 551].

§3. Managers and management have their role:

On the whole the work of business management is done cheaply—not indeed as cheaply as it may be in the future when men’s collective instincts, their sense of duty and their public spirit are more fully developed; when society exerts itself more to develop the latent faculties of those who are born in a humble station of life, and to diminish the secrecy of business; and when the more wasteful forms of speculation and of competition are held in check. But yet it is done so cheaply as to contribute to production more than the equivalent of its pay. For the business undertaker, like the skilled artisan, renders services which society needs, and which it would probably have to get done at a higher cost if he were not there to do them [p 552].

Marshall was no promoter of laissez faire. He often writes of abilities and effort rather than station or class. The excerpt above, followed by reminders of the risks capitalists take and the general rule that talent is rewarded, are meritocratic in the broadest sense (“society exerts…” translates easily as anti-discrimination).

§4 & §5. Capital(s) and labor(s), within and between, are competing and complementing, with each productivity gain “freeing” one input to find its use in other fields, thereby opening opportunities. People — as workers, managers and capitalists — will earn in direct proportion to their contribution to production and national wealth, with some random variations. Marshall’s optimistic vision here is unlikely to hold if/when transactions costs (delay) are high, market power inhibits entry and exit, and/or inputs do not have adequate buffers to absorb risks. Nevertheless, this feasible vision offers a benchmark for market promoters and regulators.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Land tenure

Book 6, Chapter 10

§1. Nobody really owns land 100%. There are “sleeping partners” such as the landlord and ruler/state/community that will restrict rights of use and/or collect taxes on land. The “managing partner” (who works the land) pays the sleeping partner, but this “money rent” is not the same “real rent” as defined by economists (see B5C10).

§2. Indeed, there is quite some confusion on defining money rents, which can deviate wildly from real rents.

§3. Landlords can (and do) find ways to extract more from tenants, perhaps by requiring work on the landlord’s estate or a share of crops. In most cases, the tenant loses out over time. In an extensive footnote, Marshall discusses how Indian tenants are subject to a range of changes from which they can often recover quickly, but he misses the fact that many Indians starved under British control (“recovery by death”?)

§4. A tenant paying cash rent will work harder to produce crops than a tenant paying a share of the crop yield, since sharecroppers give a percentage of all crops while a renting tenant keeps 100% of the yield (rental costs are “sunk). Sharecropping also requires more landlord oversight, if they landlord wants maximal yields.

§5. Land ownership brings pride and independence, but it can also trap those who work too hard to gain too little (compared to working elsewhere). Their children, likewise, may wait for an inheritance rather than go get work. Opportunity costs matter!

§6. The “English system” of renting for cash (not shares) means that landlords can focus on choosing good tenants and then staying out of the way. This system, Marshall claims (correctly, I think) leads to output “as good as in the Netherlands”.

§7. Innovation in agriculture is slower than in manufacturing, since (a) bright people tend to leave the land for towns, (b) it’s hard to adopt successful ideas from one farm to another (often, quite different) farm, and (c) bad manufacturers are driven out of business faster than bad farmers.

§8. Clever farmers cannot thrive with smaller farms because they lack the scale that will reward planning, management and capital (machine) investments. Smaller farms then just “blunder along”.

§9. Small-scale farms should pay higher rents per acre, to compensate landlords for their attention, but smaller farms should also be encouraged (required? subsidised?) to maintain a local “balance”. Co-operatives can help smaller farms with productivity and profitability, by sharing capital goods, marketing expenses, etc.

§10. Landlords should not pursue rents at all costs. Sometimes, it is better to leave a less productive tenant in place, for the good of the community, or to share the costs of disaster or risk, for the sake of future cooperation. In towns, likewise, it is good to set aside some open lands for all to enjoy, rather than building everywhere and leaving no open spaces (“parks”).


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Rent of land

Book 6, Chapter 9

§1. The returns to land ownership depend on some fixed elements (e.g., sunshine or rain) as well as variable elements (e.g., effort to improve output). Taxes on the former will not affect effort as much (at all?) compared to taxes on the latter.

§2. Land use improvements will continue as long as marginal gains outpace marginal costs. They will ignore existing (sunk) gains and costs, but they can vary by crop, skill, etc.

§3. A rise in the value of the produce of land vis-a-vis labor (wages are falling) might reflect overpopulation (labor losing purchasing power) whereas a general rise (a stable relationship) due to, say, technical progress, can result in higher wages.

§4. The value of land (its producer surplus) is not due to Nature’s bounty, but land’s limited supply. An increase in production (due to, say, technology) will lower surplus by increasing supply of produce in the face of level demand. Land value also depends on distance to (or difficulty in reaching) markets. Rich land without road, rail or canal access to markets is worth less than poor but convenient land. Some land value reflects past improvements but some of those “improvements” might be subtracting value today.

§5. The “English system” of charging rents in proportion to average surplus benefits renters who are more productive (they keep more profit) and encourages less-productive renters to leave before they lose more money. This system of free enterprise encourages efficient land use, for the benefit of all English.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Profits of capital and business power, continued

Book 6, Chapter 8

§1. Profits in small and large businesses need to be calculated on a like-for-like basis. Small business owners often forget to deduct their “implied wages” from profits, which may actually be lower. Profits are smaller when it’s easy for competing firms to enter the market and larger when it is harder (e.g., lots of capital investment or expertise needed).

§2. The profits accruing to management will be greater if the labor/capital ratio is high (= more “management”), risk is high (= needs to be managed), or the manager is more skilled than average (= payment for “excess” returns). Profits are lower in high-capital, low-risk, commodified businesses.

§3. Average profits per annum will be similar across different industries. High turnover, low-profit/transaction industries can make the same annual returns as low turnover, high-profit/transaction industries.

§4. Some industries have “traditional” rates of profit, but these figures usually apply to profits on turnover (high or low), not annual profits.

§5. (A lack of) skill and/or (bad) luck can result in deviations from “normal” profits.

§6. Profits vary by more than prices or wages, since they are residual to income and expenses. A small price increase can heavily boost profits, just as a small price decrease can lead to big losses.

§7. Average profits in trade will hide the gains from those few who succeed and often miss the losses from those who fail (survivor bias).

§8. Profits from heavy (prior) capital investments are not the same as profits of (current) labor or (ongoing) natural talent.

§9. Higher profits to one participant in a static industry means lower profits to another participant. Profits can only rise for all if the industry is expanding in scope, scale or efficiency.

§10. The shares of profits between owners and workers (capital and labor) will depend on their relative bargaining powers.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Profits of capital and business power

Book 6, Chapter 7

§1. “Business power” relies on capital (prior chapter), managerial talent, and an organization that combines inputs into outputs. In cases of “beating the trodden path,” the returns to talent will be proportional to their social value but not so for innovators, as they will rarely be able to capture the entire value of good ideas that diffuse to competitors nor share the risks of failures. Economists to this day are interested in this problem of public goods and/or positive externalities (Paul Romer won the 2018 Nobel for his work on “endogenous innovation”).

§2. The ratio of supervisors to “floor” employees will depend on their wages as well as their contribution to overall productivity. A supervisor who boosts employee productivity should be paid in proportion to that gain. One who does not should perhaps be replaced by workers.

§3. The owner’s role depends on their ability to manage, since they need to create enough value to pay the cost of supervising others rather than being directly productive. If they lack such skills, then they should not grow the firm, because that’s not profitable.

§4. Larger firms might have access to cheaper inputs and capital but smaller firms have fewer managers to pay.

§5. New entrepreneurs are often willing to work harder, for lower rewards, than incumbents. In fast-moving industries, these newcomers can succeed, but they will have a hard time when turnover is slow, much capital is needed, and incumbents with cheaper capital prefer the profits of work over the price they’d receive by selling out.

§6. Joint-stock [publicly traded] companies have elaborate (costly) relations among managers, shareholders and directors but they can dominate in businesses where professional management, heavy capital requirements and slow change are more useful than nimbleness.

§7. There is no “correct” mix of large and small companies, old or new, since success can flow from different mixes of inputs. The business “ecosystem” (not Marshall’s term) will therefore be evolving and complex like a natural ecosystem, as profits and opportunities are revealed, exploited and lost. For most participants, it’s hard to see the whole, let alone understand their relative position, besides ongoing existence.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Interest of capital

Book 6, Chapter 6

§1. Marshall begins with a caveat often omitted these days:

The aid which economic science has given towards understanding the part played by capital in our industrial system is solid and substantial; but it has made no startling discoveries. Everything of importance which is now known to economists has long been acted upon by able business men, though they may not have been able to express their knowledge clearly, or even accurately. (p 482)

Then he lists a number of uses for capital, all of which are reconciled via interest rates: Everyone is aware that the accumulation of wealth is held in check, and the rate of interest so far sustained, by the preference which the great mass of humanity have for present over deferred gratifications, or, in other words, by their unwillingness to “wait” (p 483). I teach students that discount rates (which vary by individual) are related to interest rates in the following way: People with low discount rates are patient relative to those with high discount rates, and they “trade” money — as lenders and borrowers, respectively — at an interest rate that lies between their discount rates.

§2. Ancient prejudice against lending money for interest (usury) makes no sense if it is ok to charge interest when lending things (a house or horse). In both cases, the lender forgoes the use of the money or thing; in both cases, the borrower pays to make use of the money or thing.

§3. Claims by Marx and others that surpluses should be attributed to labor but not capital are based on the same confusion over money and things. If one sees capital as contributing to production and understands that capital accumulation depends on “patience”, then it is hard to deny that productive surpluses should be jointly attributed to capital and labor.

Indeed it is hard to find examples of labor-only production that is equally efficient to production that combines labor and capital. Yes, I can dig a hole with my hands, but it’s much easier to use a shovel, which is why I am happy to pay the shovel-owning capitalist for its use.

§4. With Marx dismissed (one page!), Marshall differentiates between net and gross interest — or what we now call “risk-free” and “market” rates respectively. Gross interest is the rate a lender charges while net interest is what the lender receives after deducting losses from deadbeat borrowers and other elements of a “troublesome business.”

§5. Lenders face risks from borrowers who are unable to put borrowed money to good use (adverse selection) or who are lazy or dishonest (moral hazard). Borrowers face risks from lenders who might refuse to renew their loans, leaving them to face a “cash crunch” that no other lender — on hearing of that refusal — will relieve.

§6. A large share of “investments” merely replace capital that has been lost in use (depreciation). Only a small share of investment adds to capital stocks.

§7. Interest rates must take inflation into account. If buying power is falling, then rates must be higher to return the lender to status quo ante –– and vice versa.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Earnings of labour, continued

Book 6, Chapter 5

§1. Workers need training and education whose value often outlasts capital equipment. Investing in such education requires a long time horizon. Parents might be better equipped to evaluate such an investment than their children or employers.

§2. Parents often choose potential trades (and training) for their children based on current trends, conditions and wages. Such a view  implies that future supply will be (mis)calibrated to past demand.

§3. That said, labor can and will switch between trades in direct proportion to workers’ ability to adapt skills to other work.

§4. Since labor skills are slow to change, it is not sure that they will be efficiently awarded for productivity or matched to demand at all times.

§5. The slow pace of change in labor supply means that workers will make excess profits when demand in their industry rises quickly but also face excess losses when demand flees.

§6. Ignoring wages, physical and mental stress will rise (fall) as demand for labor rises (falls).

§7. Although it may be tempting to describe the extra wages (or reduction in  effort) to good workers as “rents” (see 6.1), Marshall describes them as “lucky” — in explicit contrast to the losses and extra work that “unlucky” workers face from be mismatched into a job or trade that they might have a hard time leaving for another.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Earnings of labour, continued

Book 6, Chapter 4

§1. Wages might reflect custom more than current values. In cases where the interaction of supply and demand pushes down wages, workers’ difficult conditions are made worse.

§2. A businessman investing in machines (or slaves) will do so with the intention of future returns. Improvements to workers stays with those workers, which can lead to underinvestment by outsiders but efficient investment if the worker makes those decisions. (Marshall quotes Smith’s point that a slave-owner will not invest as wisely as the slave would themself.) While parents are eager to invest in their children (converting financial into human capital), it is easier for middle-class parents than working-class parents, which can trap generations in poverty.

§3. Within families, the father can earn wages to help the family and introduce his sons into trade, while the mother raises and improves children as they grow. Among the poor, fathers are often tired and mothers forced to work, leaving their children worse off in the present and future.

In a footnote on page 469, Marshall discusses the “net contribution” of migrant workers and warns against overvaluing men and undervaluing women due to the their joint-importance in raising children (the next generation of workers). This topic (migration, national accounts, and brain-drain) is still hotly debated.

§4. An employer’s investment in workers will only be partially repaid in higher output and profits, but a minority of employers invest as part of their overall quest for performance. Their workers will benefit immediately, as will their families. A majority of employers will not invest more than they immediately get back — weakening future returns to themselves, their workers and society.

§5. The location and quality of the workplace matters. Workers will demand higher wages in dirty or dangerous workplaces. A big distance between home and workplace limits the supply of labor unless wages rise. Immobile workers have fewer options and lower wages. Related:  US-labor mobility is at an all-time low:

§6. Workers who lose their jobs lose wages. If they do not have reserve savings, they suffer from a lack of necessities as well as a decline in their labor value based on greater hunger and poverty. (The homeless are challenged by a lack of an address for employers, bad sleeping conditions, needing to buy food “by the plate” and other burdens.) Workers with special skills and/or union membership will have greater job security and earn a larger share of their “value added.”


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Earnings of labour

Book 6, Chapter 3

§1. This chapter looks more deeply into the factors (e.g., natural skills or experience) affecting wages, as later chapters will examine business profits and land rents.

§2. The prices of commodities vary with their quality or the terms of sale, so wages for (more irregular) labor will very more. Assuming a competitive labor market and similar capital inputs, then we will see a greater difference in wages between workers with different skills (i.e., efficiency). Put differently, wages will be equal for workers of different skill if laws prohibit wage discrimination or if there is little competition. More interesting (or counterintuitive), it makes sense to pay more to higher skilled workers because they can operate expensive machinery more efficiently and produce  more output per hour per machine than the less skilled.

§3. Real wages, unlike nominal wages (cash payments), depend on the cost of living and the mix of goods workers consume. (They usually care more for the price of bread than the price of opera tickets.)

§4. Gross wages do not translate into real wages as it is necessary to deduct the cost of education, special tools, and other expenses needed to do one’s job. In some cases, those expenses may include membership to a club, fancy clothes, etc. (My dad was a real estate agent in Southern California, where a fancy car is de rigeur.)

§5. The employee’s value of non-cash “wages” often differs from their cost to the employer, so it’s a mistake to assert their value based on cost, price or some other number. In some cases, the value is less than the cost; in others the opposite (read Marshall’s footnote on scams). It’s no problem that these matters affect employer-employee dynamics. It’s a problem when outsiders misunderstand how values, prices and costs affect decisions.

§6.  A 50% chance of earning either x or 3x is less valuable than 100% chance at 2x (cf. Book 3, Chapter 6). Entry-level workers will accept below-market wages if they can potentially be promoted to above-market-wage positions (young men often take these odds). To compensate for the “anxiety and worry of waiting,” irregular employment requires higher wages than steady employment.

§7. Besides the worker’s wages, it’s important to consider the situation (e.g., potential jobs and wages) affecting the worker’s family.

§8. The attraction of a trade — and thus its wage level — depends on the tastes, skills, background, social position of potential workers. Some are willing to accept jobs others won’t. After lamenting that “the progress of science has kept alive many  people who are unfit for any but the lowest grade of work” (p 464), Marshall explains that some jobs are kept dirty (not made attractive to skilled workers) employers know they can save money by hiring the lowest classes to do them. “There is no more urgent social need than that labour of this kind should be made scarce and therefore dear” (p 464).


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Preliminary survey of distribution, continued

Book 6, Chapter 2

§1. Labor earnings are not — as some assert — only a function of the “value” of production. They depend on the supply of labor relative to demand for labor.

§2. Workers, like machines, need time to recover from work. The first hours of work are easier than the last hours but wages are paid at the margin (i.e., to motivate those last hours of work), which implies that workers gain much more surplus from their earlier hours of work. That said, some workers (“from Southern climes”) may see higher wages as an incentive to stop working earlier, since they more quickly hit their “earnings target.”

§3. The supply of labor should increase with wages, assuming higher wages increase productivity-enhancing (e.g., good food or entertainment) rather than productivity-weakening (e.g., alcohol and gambling) consumption.

[D]emand and supply exert coordinate influences on wages; neither has a claim to predominance; any more than has either blade of a pair of scissors, or either pier of an arch. Wages tend to equal the net product of labour; its marginal productivity rules the demand-price for it; and, on the other side, wages tend to retain a close though indirect and intricate relation with the cost of rearing, training and sustaining the energy of efficient labour. The various elements of the problem mutually determine (in the sense of governing) one another; and incidentally this secures that supply-price and demand-price tend to equality: wages are not governed by demand-price nor by supply-price, but by the whole set of causes which govern demand and supply (p 442).

§4.

We have seen that the accumulation of wealth is governed by a great variety of causes: by custom, by habits of self-control and of realizing the future, and above all by the power of family affection: security is a necessary condition for it, and the progress of knowledge and intelligence furthers it in many ways. But though saving in general is affected by many causes other than the rate of interest: and though the saving of many people is but little affected by the rate of interest; while a few, who have determined to secure an income of a certain fixed amount for themselves or their family, will save less with a high rate than with a low rate of interest: yet a strong balance of evidence seems to rest with the opinion that a rise in the rate of interest, or demand-price for saving, tends to increase the volume of saving.

…that said, higher interest only gradually attracts more capital since it takes time to reallocate capital from existing investments.

§5. Increases in the supply and productivity of labor and capital (and thus returns to either) lead to increases in national income, for the benefit of all. Land is different because it is fixed in quantity, which means that increased land use by one user leaves less land for others.

§6. Increases in national income benefits factors in proportion to demand for each of those factors. Higher returns to a factor dampen demand for it as cheaper alternatives are investigated, with a long-run result of factor prices tracking their “real” contribution to productivity.

§7. An increase in the supply of a factor will lower returns to that factor and benefit other factors that that combine with that input without lowering their returns. In general, factors will be able to buy as much as their productivity (=wages) implies, with more productive or scarce factors having more “buying power” than less productive or abundant factors.

§8. Do not assume “perfect information” of any factors but labor and capital are always looking for opportunities.

§9. Since capital can also be understood as the embodiment of past labor, it is better to see capital-labor competition as past vs present labor. Greater savings (or patience) will increase the stock of capital, which can increase labor productivity but also displace demand for labor!

§10. Although labor contributes to finishing products on behalf of capital, most wages to labor are advanced by capitalists planning to repay those advances by selling consumption goods and using (new) capital goods.

Capital in general and labour in general co-operate in the production of the national dividend, and draw from it their earnings in the measure of their respective (marginal) efficiencies. Their mutual dependence is of the closest; capital without labour is dead; the labourer without the aid of his own or someone else’s capital would not long be alive. Where labour is energetic, capital reaps a high reward and grows apace; and, thanks to capital and knowledge, the ordinary labourer in the western world is in many respects better fed, clothed and even housed than were princes in earlier times (p 452).


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.