4: The Basis of Distribution in Universal Economic Laws
When an individual produces for his own benefit, the matter is straightforward (he receives 100% of the benefit of his work, unless someone steals the item he has made for himself). It is only when more than one person contributes to production, there is the question of how the benefit should be apportioned between them. If two men fell a tree, how do they share out the lumber - or if they sell the lumber, how to they share out the proceeds?
Clearly, all parties want to be treated fairly - but what is fair? In some instances, they can work things out among themselves and will be pleased with the result. In other instances, they may disagree. And in still others, one or more may seek to take more than is fair. All of this requires some reflection on fairness of distribution as a means to enter into agreeable arrangements or settle disputes that may arise.
It is often said that the distribution of wealth is a problem of the modern age, but it is not. Even before civilization existed, primitive humans hunted in groups and shared out the meat. The modern-day relationship between hundreds or thousands of people who work in a factory is essentially no different, but the number of individuals and differentiation of their roles simply make the problem more complex. As such, there is still much to be learned from classical and pre-industrial economics. The specific details are merely a matter of accounting.
In terms of wages, they are a factor in a contractual agreement, be it verbal or written. The employee agrees to contribute a certain amount and manner of labor, and receive in exchange a certain wage. Where the amount of wages received and work required are not as agreed upon, the employee may renegotiate or declare that his employer has violated the terms of his agreement - and no just standard of law would bind men to their work or hold them to fulfill a promise when they have been deceived by another party. In most situations men are honest with one another and happily abide by their agreement.
But even when men are happy at the onset, no situation is entirely static. A man who has agreed to work for a wage in currency will find himself disadvantaged when the currency is debased and he is unable to provide for his household given the same nominal wage to which he previously agreed (hence most employers increase wages each year to account for inflation). An employer who hires ten men may find that he needs only eight when a competitor decreases the volume of his business or when his product falls out of fashion, and may negotiate with his employees to accept a decrease in pay to retain two of their colleagues.
An agreement made at a specific moment in time cannot be expected to be eternal - and the expectation that economics can define universal and permanent truths is simply irrational. This is not to say that economics can provide no assistance, as it can define general principles and theories that provide guidance in a specific situation - they are generalizations that provide a starting point for considering a specific situation.
Stepping up a level, consider the distribution of wealth between labor and capital. The fundamental relationship is that capital facilitates labor and increases its productivity. When an employer invests in a steam-powered loom, the worker is able to produce far more cloth than he was with a manual loom - but this is to the credit of the machine rather than the man who operates it. In this situation, the capitalist who has provided the loom is credited for the additional income: if the machine produces five times as much as a manual device, then 80% of the production is contributed by the machine and not the man. (EN: Taken to extremes, the provider of the manual loom makes man productive - it is impossible to weave without a loom, but it is inaccurate to say that all of the production is because of the loom because it does not run itself. Some credit must be given to the operator.)
(EN: In the author's time, this was very much a problem: employers invested a great deal of capital in mechanizing their operations, and laborers wanted to claim the full credit for the increased productivity. This led to all manner of bizarre arrangements, such as employers charging employees rent for using the machinery, or paying a lower price for piecework for machine operators than manual producers, and so on. This may have been a significant incentive for employers to switch to fixed hourly wages, so that automating their operations would not be a profitless exercise.)
Clark's conception of the "Universal Laws of Economics" are based on the relationship between mankind and nature, as differentiated from the social laws that depend on the relationship between man and his fellow man. "Natural" law deals with natural occurrences - if you drop a glass it will shatter. Social law deals with arrangements among men - if you break someone else's glass, you should compensate them for its loss. Politics can affect the behavior of men and change the rules by which they relate to one another (indicating it is not necessary to compensate others for damaged property) and influence human behavior, but it cannot change the laws of nature (a law that declares glass shall not shatter has no power to prevent glass from shattering).
That said, the universal/natural laws of economics maintain that ...
- Nature provides very little that is fit and available for consumption. Man's welfare and survival depend on his expending effort to gather or adapt things in nature to serve his needs.
- Some amount of labor must be performed and some amount of material is usually consumed to produce a benefit
- While there are similarities in wants and needs, each person values benefits subjectively
- There are many benefits to be pursued, and men assess them comparatively (some needs/wants are prioritized and considered more valuable)
- A person will decide whether the benefit is worth the loss of his time, effort, and capital. A rational man never spends more than the value of the benefit he hopes to obtain.
- There are often different ways to obtain a benefit. A rational man will usually seek the most efficient method to achieve a benefit.
- The benefit a person hopes to obtain is very seldom exactly what he receives. There are misjudgments, unknown factors, and unexpected occurrences.
- More of the same is not always equally valued - there is a decreasing marginal utility. For this reason, a diversity of goods and services is more desirable than a massive quantity of one and man apportions his budget (time and capital) to producing different things.
- Man can produce to the best of his ability, and mens' abilities differ by nature, habit, and experience. Because it takes time to learn and practice a skill, a person cannot be very good at everything. A jack-of-all-trades is master of none.
- Not all men are rational. Through want of knowledge or lack of common sense, men will act irrationally and will suffer for their own foolishness.
When we examine man's behavior in a social context, we find that he ignores many of the natural laws. A man may fancy that he can have all that he desires without any expenditure of effort or capital, or he may fancy that he should receive the benefits he desires regardless of what he does. Men may experience profits or losses as a result of their interactions with other men. And of course, men may interfere with one another's affairs and are often a significant cause of variance between expectations and outcomes.
The "deepest" social economic problems have to do with what individuals are expected to contribute to cooperative efforts and what they will receive to compensate them for their contribution to any collaborative effort. Working alone, man's natural inclination to get as much as he can while giving as little as possible makes him innovative and efficient - but when men work together, there are often instances in which one man's gain is another man's loss. For example, the worker's demand to have more pay for the same amount of work will require other workers to be paid less, or his employer to profit less, or the customer to pay more. Unless he increases the amount of benefit he creates, the additional share must be taken from someone else.
A man living in solitude has only nature to contend with. A man living in society must also contend with other men. And in that sense economics guides his principle choice to live in solitude or live in society, to perform one role or another in a given society, to choose to be part of one society or another. He is inclined to seek the greatest benefit and the least inconvenience. For now, the situation favors a more social existence - but things change, and it may not always be thus.