12: Final Productivity Regulates of Wages and Interest
Thus far, we have considered the productivity of a specific company and competition in a specific market - but nothing exists in isolation in an interconnected world. Consumers demand many goods made of metal, so the manufacturers of these goods must bid to purchase the metal they need as well as for workers skilled in working with metal. And workers are mutable and can move from one industry to the next: if metal-working is less profitable than carpentry, the metal-worker seeks to become a carpenter. Thus considered, labor is the factor of production for which all firms in all industries must compete.
Producers compete to supply the demand of the market and this demand is determined by consumers - they consider what goods they wish to consumer and how much they are willing to give for them. As such, it is the consumers who determine how much of what products will be purchased, and this ultimately determines what items and quantities must be produced. A producer may spend his capital on creating goods regardless of whether consumers wish to purchase them, but only until he has exhausted his wealth or the wealth of his investors, who will abandon him. So while producers may have the illusion of control, they will in the long run be put right.
So if consumers determine how many shoes they will purchase, they determine how many shoes are to be made, how much leather must be provided to make those shoes, and how many cattle must be raised to produce that leather. And in the same way, they determine how many men will be employed as cobblers, tanners, and herdsmen. Suppliers, by lowering the price of the shoes they make, may influence customers to buy more - but in order to charge the customer less, they must give less to their suppliers of materials and labor. If they are unable to bargain down their costs, they cannot lower their prices, and the customers will respond by purchasing fewer shoes at the higher prices suppliers must charge.
As such, we can think of a community as a collective of laborers, seeking how best to assign themselves to needful occupations in producing the goods and services the community desires of them. Where there are not enough workers to produce the goods that are needed, compromises must be made: customers will indicate their preference by paying more for the things they desire more and labor will be directed accordingly. Where there are more workers than needed to produce the goods demanded by the community, some will be idle and must leave the community to go to one in which their labor is needed (if consumers will not pay enough for products so that suppliers can keep idle hands on the payroll).
All of this assumes a fixed amount of capital, which is another consideration: invest a fifty million in capital and hire a thousand workers, and each worker can have fifty thousand dollars worth of capital at his disposal - a very well-designed workshop full of many tools and supplies of the most excellent quality with which to produce goods. Hire ten thousand workers and each can have five thousand dollars at his disposal, which will still furnish a decent workshop, serviceable tools, and supplies of moderate quality. Hire a hundred thousand, and there is only five hundred dollars per man - and they will work in a shabby factory, employing cheap tools on poor quality supplies. With each increment, the quantity and quality of product will diminish.
Just as there is a diminishing marginal value of labor, so is there a diminishing marginal value of capital. Increase the capital from five hundred to five thousand per worker and they can make good use of the additional tools and supplies furnished to them, producing more and better products to cover the cost of this investment. But at the point where fifty thousand is being spend on each worker, they will likely have more tools than they can use.
There's an odd bit about the inheritance of capital. To have capital at all, it must have been produced - so whatever capital is invested in an operation is inherited from those who produced it in the first place. From there, the costs of maintaining and replacing capital is taken from profits, with the remainder being shared out to laborers and other stakeholders (such as investors) - but if any amount is invested in the growth of the operation, this capital is also inherited from the workers who produced it. (EN: so perhaps it can be said that when a company "reinvests" its profits in growth it is actually taking rewards that ought to be paid to its workers to invest in growth.)
Returning again to an earlier point, the profits of labor are averaged out to provide equal wages for workers. And likewise, the profits of capital are averaged out to provide equal returns for investors: he who invested the first dollar is not compensated more richly than one who invested the last dollar, even though there was a decreasing return on investment as more dollars were added.
It should also be noted that men are not fond of seeing their wages diminish: if the average share of profit was $10/man when the first thousand were employed, the next thousand wish to be compensated at the same rate, even if their addition means the average share of profit is only $8/man, they will demand an even wage. But the indication of first, next, and last are coincidental because the order in which men or dollars were engaged is of little difference. In the example above, it is clear that 1,000 men create $10,000 in value and 2,000 men create $16,000 in value - but it is not any particular set of men. If the force were to be reduced to 1,500 men creating $14,000 in value it does not matter which five hundred men are removed, the first or last hired.
He returns to the notion of the "natural" price of goods - which takes the profit generated by selling a good and apportions it to those who are responsible for creating it. Some measure of the profit must pay for materials and to maintain/restore equipment and facilities. Some measure of the profit must repay those who provided funds (investors and creditors). And finally, some funds must pay to compensate the laborers who created and delivered the good to the customer and performed other services. It is the selling-price of the good (agreed to by the seller and buyer) that provides the funds to compensate these parties and the sum total of their compensation must not exceed this revenue if the operation is to be sustained.
A recap of some of the conclusions this far:
- The wages of labor are subject to the interplay of supply and demand, just like any other good or service.
- The employer's ability to pay a wage depends on the profit to be made from the work he is buying,
- Labor is not homogeneous - different workers have different skills and different levels of productivity
- The share of profits that can be offered as wages to each worker is therefore not homogeneous
- This consideration is made in aggregate, and is based on the marginal utility of the last worker
- Other factors (facility, equipment, supplies, financing, investment, etc.) also contribute to production, so labor is not due the whole of the profits.
- There is no universal formula for labor/capital in production, but they may be combined in various proportions
- The calculation is never perfect because the profit is aggregate and in some cases may not be separate (the pick yields no ore without a miner, the miner yields no ore without a pick)
- Any calculation of wages/shares a moment in time in a dynamic situation
The author notes that during his time (the Industrial Revolution), the contribution of capital to production is undergoing rapid advancement. The tools, equipment, and materials of production were becoming more productive, more durable, less expensive, etc. But at the same time, this capital is the product of labor (the invention of the tractor eliminated the need for many field hands, but created the need for many machinists to build and repair the tractor).
It is generally observed that automation and technology has made societies wealthier. Even though the calculations have not been done to validate that the manual labor saved by machines costs more than the labor necessary to build and maintain the machines, we can witness that there are more goods than before. It is also anticipated that this trend will continue, because tools and equipment are durable - while they are not permanent, they continue to improve production long after they are purchased - as even a cheap axe, well cared for, can provide decades of service.
It must also be noted that capital is not always the most efficient method of increasing production. A tractor is valued because it can replace the work of a number of men, but if the machine is more expensive to the producer than the labor it replaces, it will not be adopted. It is also true that machinery is not cost effective where work is done periodically or in small increments. A farmer with only five acres to tend will not benefit from the purchase of a tractor, nor will the farmer whose crop is taken from an orchard, as trees need be planted only once to be productive for decades.