22: The Law of Economic Causation Applied to the Products of Concrete Instruments
Capital is always embodied in a tangible thing, which makes it easier to measure and observe than labor - it is the materials, products, equipment, facilities, and other things that are involved in production. We can measure how much material is turned into how much product, and see what facilities it passes through, what tools work upon it, etc.
He turns to the classical idea of "rent," which represents the amount of value created by virtue of physical space. Some "rent" was due to the land-lord of a tenant farmer because the crops were grown upon his land. Since industrialization, rent has been applied to commercial spaces such as offices, stores, warehouses, and the like. In some instances, rent is applied to other things that are assumed to be permanent, such as a ship or a carriage (though we see these items depreciated with usage and time, the same way the fertility of land is reduced by farming).
This all seems like a tidy way to assign value to things that are used, but not consumed, in a single cycle of production but are depleted over many productive cycles. So in a sense, the rent of an item compensates its owner for the loss of its productive capability caused by its use in a cycle of production. Or rather than a compensation of loss, it is remuneration and funding for the maintenance needed to restore productive capability - the cost to fertilize land or repair a ship to restore it to its former state is paid for by its rent.
The degree to which the use of an asset that persists across multiple cycles is difficult to observe. We know that an axe can only fell so many trees before it must be sharpened, and can only be sharpened so many times before the metal has worn away to the point that the axe is no longer useful. But exactly how much of the tool is depleted per board-foot of lumber is difficult to assess with any accuracy. So the notion that "rent" represents a share of the proceeds of sale repaid to the owners of capital is entirely notional.
What determines the cost of a capital good is, like any other good, supply and demand. There are only so many axes available in the market, and those who wish to use them for various purposes must bid to obtain them. Those who offer the most shall have use of the axes - and ideally will recover their cost through their use in productive activity. This cost will ideally be recovered when the product is sold, but this is not without risk - and the entrepreneur assumes all the risk of an inaccurate estimation. If the amount paid for the item is less than the revenue generated by its use, there is a profit of rent; if the amount paid does not recover the cost, there is a loss of rent.
There is some disagreement over the distinction between rent and interest, or if there be any difference at all. Most often the term "rent" is confined to land, as it is assumed to be permanent, whereas any other capital asset is deemed to return interest on its purchase because the item is perishable, even though it may last for centuries. For practical purposes, the distinction is insignificant - the investor or adventurer who is faced with the choice between establishing a farm or a shipping company considers whether to invest his money in land or ships, and is indifferent to the means by which his profit is made.
Some time is devoted to the observation that land is fixed in its amount whereas capital in other forms is variable. (EN: This is an academic debate and becomes quite tedious, so I'm skipping much.) It is a fact that land is available in a finite amount, but given that so little of the land is being used, much more land can be brought into productive use. It is also a fact that land is suitable to a given purpose, but except for mining it is generally possible to adapt the land to make it fit for a given purpose - a forest can be cleared to create farmland or pasture, a pasture can be planted to grow a forest. It merely takes time.
It is only in the short run that the amount of available and suitable land is available in fixed amounts - but the same can be said of most capital goods. The entrepreneur who means to start or grow a spinning factory can only use as much wool as is available on the market today. More may be produced, but it may take a few years to raise the sheep to produce it. This is no different than the entrepreneur who means to start a farm - his immediate undertaking is limited to the land that is already suitable to that purpose, though more land may be cleared for planting in the following year.
The cost of adapting land makes it impractical or unprofitable for use to enter a mature market. Where many suppliers are selling wheat grown on existing field, the market price of grain will not provide compensation for the cost of preparing a new field unless the price of grain is significantly inflated. It is much more important to consider the productive efficiency of land for a given purpose rather than its gross volume by acreage. In this sense land has no value independent of the use to which it can be devoted, which is much the same as any other capital asset. To be emphatic: land is not special, and does not need to be separated from other capital assets.
There is another digression about the suitability of land to a given purpose: not all fields are fertile, and given the same care and maintenance one will be more productive than another - the less productive field produces less product at the same cost, for a higher cost per unit. The producer seeks to use the most productive resources first (the farmer plants the most fertile field) and brings others to bear only to the degree that they are profitable because he predicts that the customer will pay enough for the good to cover the cost of producing it.
He then turns to labor, whose unit is "a day's labor of a man of average quality." The quality of a man is measured in the profit he creates - a worker creates a given number of units of product of a given value. One man may produce more units of the same value as the next, or even fewer units of greater value - but as a standard of measurement we take the work output of many men in aggregate and calculate the mathematical average to arrive at a standard unit. As with other factors of production, the producer seeks to leverage his most productive workers and divest himself of the least productive.
It's suggested that one of the reasons that marginal utility decreases is that the producer seeks to use the best of anything - land, materials, equipment, labor, etc. - and accepts lower quality resources when he must increase his operations. Hence the workers and land that are of the poorest quality, which produce the least product per unit of input, are the last engaged. And the marginal utility becomes negative when the available workers and other factors are not sufficiently productive to cover their costs.
Clark uses the term "no-rent" for factors of production that create no profit because their productivity is less than the cost of maintaining them. In general, the no-rent resource is employed because the entrepreneur's estimate was incorrect: be believed it would be barely profitable, when in reality it is not. For example, the entrepreneur may have predicted the ability to sell his product at a given price, based on which there were resources that would be marginally profitable to employ - but when the goods are sold at a price lower than expected, then the resources are found to have produced no rent.
A no-rent resource may be employed or kept in production by an entrepreneur who recognizes its unprofitability. It may be because the entrepreneur refuse to admit his error, or insists that he will be able to make that resource productive. There are also instances in which there are ulterior motives. An entrepreneur may employ a friend or family member who is no-rent, continue to employ an injured or aged worker as an act of charity, rent a facility that is less productive to maintain a relationship with its landlord, etc. All of these motives detract from the profitability of the operation.
If his decisions be rational, the entrepreneur only uses any factor of production when it adds to his own profit. It is also difficult for an individual who is not aware of the particular details of an operation to assess whether an asset is low-rent. It might seem that aged persons work more slowly and produce less than those in the prime of life - but if the price that their product will fetch covers the cost of their labor, it is entirely rational to employ them, particularly if younger and more able-bodied workers are not available. He makes specific mention of child laborers in factories and mines, which were not unusual at the time the book was written: their labor creates less profit than those of an adult, but adults being unavailable and the price of the products being sufficient, child labor was entirely sensible.
And while the focus is on labor, this is also true of other capital resources. Many firms choose to repair older equipment rather than replace it with newer machines, and farmers will continue to work the same spent fields instead of clearing newer ones that would be more productive - and their operations remain profitable so long as the price given by the customer will be sufficient to recover the cost of the resource, whatever its level of productivity.