The distribution of income

Front matter

'-mKiL

Cornell XHniversit^

Xibrar^

Preface

This book reflects a part of my own mental history. A man who takes up the systematic study of Economics only after a considerable apprenticeship to practical business life, has to spend some years not so much in acquiring knowledge as in revising his experience and getting rid of misconceptions. He naturally becomes critical of common opinions, of wide generalisations, and of short cuts to serious conclusions. In a study which deals so much more with men than with things, he finds the difficulty of ascertaining the exact truth about even the most ordinary economic occurrence, and becomes, if not cynical, at least impatient of other men's credulity. He becomes less and less disposed to dogmatise, knowing very well that a man's development on any side of his subject often stops from the time when he comes to a reasoned conclusion about it. Hence he becomes known as a silent man who asks questions, and he incurs very likely the reproach of being a blind leader because he will not pronounce on such a thing as a labour dispute till long viii PREFACE

after the dispute has settled itself. He has nothing of the cloud-compelling confidence of other scientific teachers. By the nature of his subject he ought to be — and, I think, generally is — the humblest of men, and is indeed only too apt to spend the best years of his life in waiting for more light, and meantime throwing cold water on other people's enthusiasms. If afterwards he feels any superiority to his students, it is not that he knows a little more than they, but that he knows how little any one can know of law and order in this many-motived work-a-day life of man.

Thus for some years I shrank from grappling in earnest with the supreme problem of Distribution ; waiting, I might say, till the unconscious influences of learning and teaching made up my mind for me. For, as Adam Smith says, a teacher "obliged to go every year over the same ground, if he is good for anything, necessarily becomes, in a few years, well acquainted with it ; and if, upon any particular point, he should form too hasty an opinion one year, when he comes in the course of his lectures to reconsider the same subject the year thereafter, he is very likely to correct it." When, however, the duty could no longer be denied, I decided to take my own difficulties as probably representing those of the ordinary man. If my brother economists find this procedure tedious, and are disposed to think that I arrive at familiar conclusions by tortuous paths, I can only say that, from my business experience, I am perhaps more likely than they

PREFACE IX

to know what are the lines of thought along which the ordinary man moves, and what are the difficulties which prevent his freer acceptance of these familiar conclusions.

The first thing to be done was to get a definite idea of what it is that is distributed under the name of Wealth, and the result of the inquiry is contained in Book I. As I wrote this, it became clear to me that, of the vast National Income which this country enjoys, a great deal is distributed while and as it is made ; that, in short, the production process as we know it is also a distribution process. Following this clue, I began with the personage who, in the present state of things, is primarily the paymaster of organised industry, the employer, and tried to find how his payments are conditioned and overruled. Working along this line, I was forced to see that, whatever hard names may be applied to the results of this distribution, the distribution is not arbitrary, much less chaotic.

Hence, beginning with no thought of doing more than setting forth the methods of the present distribution of wealth, I have found myself led to express an opinion on its merits. One may, perhaps, imagine a better distribution, although, it seems to me, it is not easy to do so except by assuming that society is much simpler than it is, or that it is willing to renounce many of its motives as well as its gains. Nor am I insensible to its anomalies and hardships :

X PREFACE

I confess, indeed, that they are enough to confuse the generous mind and drive it to ill-considered action, and I find myself rather apt to think that there is something wrong with the student who begins his economic studies in any admiration of the status quo. But when the question is whether a regulated state control according to any social or socialist ideal would bring us conditions of life wherein all would have the possibility of realising their moral being, or of being what is called "happy," I am disposed to think that the " invisible hand "^however one interprets Adam Smith's reference — is bringing about these conditions more quickly than any deliberate rearrangement of industry would. As "man's unhappiness comes of his greatness," so does our dissatisfaction with the present distribution come from the knowledge of what wealth has done for some, and the want of knowledge that there is not yet enough of wealth to do it for all. A little better knowledge of history, or a teaching of history that would try better to reproduce the everyday life and environment of the common people in past generations, would make us more content. The fact that many rich men get more than they deserve is obvious j it seems to have been overlooked that even a very poor man may be getting more than he is worth.

I am well aware that to give a deliberate judgment on this subject is probably the most responsible act of an economist's life, and that to give the one I

PREFACE XI

have expressed will probably relegate me, in the opinion of many with whom I have been associated and whose goodwill I most value, to the rank of the " high and dry " economists ; but, as an honest man, ich kann nicht anders. It may, perhaps, carry the more weight if I say that I began writing with a long-rooted conviction that the present distribution was bad, even unjust, and that I did not know from chapter to chapter where the argument would finally lead me.

Part of my task, I gratefully acknowledge, has been made easier than it would have been two years ago by the publication of Mr. and Mrs. Webb's Industrial Democracy. Accepting it as by far the most able and exhaustive account and defence of Trade Unionism, I have not gone outside its pages for information of what Trade Unionism is and what it aims at.

My thanks are due to my colleague. Professor Stockman, the Rev. Bruce Taylor, and Mr. John G. Kerr, who have assisted me with statistics, and to many others. But most of all am I indebted to the Nestor of English economics. Professor Alfred Marshall, and to my friend Mr. Edwin Cannan. The book itself could not have been written but for Proressor Marshall's Principles^ which I have used as text - book for some years, and in which, at each revision, I find unexpected depth and fresh xu PREFACE

suggestion j and its author, in this as on many other occasions, has been my kindliest critic and helper. If the chapters on the Mobility and the Subsistence of Capital are at all clear, I owe it to Mr. Cannan's scholarly and exhaustive Theories of Production and Distribution, and to his keen and patient criticism when the sheets were in proof.

Finally, I should be untrue to the conviction as to what I have called on p. 70 " the greatest unpaid service of all," if I did not acknowledge that if I have done anything worth doing, either in this book or elsewhere, it has been by the faithful co-operation of her who has given me the necessary condition of continuous quiet work, the peace of home.

WILLIAM SMART.

University of Glasgow, July 1899.

Contents

THE NATIONAL INCOME

CHAP. PAGE

II

3. The Real Income ....

4. The Relation of the Real Income to the

Money Income ....

5. The Real Income as a Sum of Goods pro

DucED OR Services rendered

6. Income as an Annual Phenomenon

7. Income as a Growth from some Permanent

8. The only Permanent Stock

9. The Real Income of a purely Economic

10. The Real Income of the Modern State

11. Income which escapes both Notice and

Assessment .....

12. The Limitation of Money Incomes by the

Real Income .....

23 34

38 47

53 62

CONTENTS

CHAP.

I. 2.

.4-

5- 6.

II.

13- 14.

15- 16.

17- 18.

•9- 20.

DISTRIBUTION

The Problem .....

The Employer .....

The Employer's Interest in keeping up

Prices ......

The Employer's Interest in keeping down

Cost : Substitution ....

The Defence of Substitution The Employer's Interest in keeping down

Cost : Buying Labour cheap .

The Appeal from the Individual Masters and Men The Appeal to the Trade .

The Appeal from Trade to Trade The Trade Mobility of Labour .

The Mobility of Capital Taking our Reckoning

Subsistence Wages . . . .

The Subsistence of Capital The Weakness of a Subsistence Theory of

Distribution ......

The Failure of Efficiency to sustain Wages A Wrong Scent ......

A Supposititious Case and its Lessons .

Trade Unionism : for and against Cheap

Labour

Trade Unionism : the Powerlessness of the

Individual ......

PAGE

95 113

159 167

173 181 186 196 206

213 219 226

248 261

CONTENTS XV

CHAP, PAGE

22. Trade Unionism : Collective Bargaining and

THE Standard Rate ..... 264

23. Trade Unionism : its Disclaimer . . . 274

24. Trade Unionism : its Direct Effect on

25. Trade Unionism : its Indirect Effect on

27. Professional Incomes ..... 309

28. Is it a "Bad Distribution"? . . . 324

INDEX 337

Chapter I

T'wo tAlngs get the name of National Income ; the money ineomes annually received, and the commodities and services annually prodiKed. These things require, first ^ to be separately explained and analysed, and, afterwards, to be put in definite relation to each other.

" The National Income," say the statisticians, " is The two about j^ 1,500,000,000 a year."

" The National Income," say the economists, " is the net aggregate of commodities, material and immaterial, including services of all kinds, produced within the year." ^

Unless statisticians and economists are speaking of two different things under one ambiguous name, it would seem to be the case that the net aggregate of " commodities " produced within the year is, somehow or other, priced at ^^ 1,500,000,000.

When the two propositions are thus set side by side, and the relation between them directly challenged, this would probably be accepted without question.

' Marshall : Principles of Economics, 4th ed. p. 594, " Everything that is produced in the course of " year, every service rendered, every fresh utility brought about, is a part of the national income." — Ibid. p. 150.

But they are not usually put side by ^ide. The business man, whether landowner, or capitalist, or wage-earner, thinks with the statistician. His income appears at his credit in money figures or is paid over to him in money. It is his income that he " spends," and what he spends is money. He never thinks of it but in terms of pounds, shillings, and pence.

The economist, on the other hand, with some reason, rather distrusts the money income. The first years of his training are spent in getting behind the disguise which money throws over the real wealth it names and measures : he becomes so conscious of the inadequacy and ambiguity of the money measurement that he often fights shy of it altogether, and speaks of income as " commodities and services," forgetting that in so doing he has stepped off the platform of the ordinary man. At the same time it may be confessed that he is not altogether consistent in this attitude. Usually when he passes from the consideration of the making of goods to that of selling them and paying the various agents for the making, he falls into the habit of the people around him, and thinks of income as merely so many shillings or sovereigns. It almost looks as if people generally think of income alternatively in one or other of two ways.

Subjects of Three things, then, claim our consideration. First, the money income requires explanation and analysis. Second, we require to get behind the money income to the real income which it represents, and find its nature and sources. Third, the money income and the real income require to be put in definite relationship.

Book I.

Chapter II

Extracting Jrom the Income Tax returns the income attributable to capital^ ive get a total of ;^488,ooo,ooo. Adding incomes earned in Trades and Professions but not returned, incomes attributable to the small capitals of those under the tax limit, and incomes from foreign investments ivhich escape, nve get another £1^1,000,000. This makes a total of £f>i<j,ooo,ooo, presumably derived from capital. The incomes in Schedules E and D, and the ^666,000,000 of ivorking-class income, make up ;^896,ooo,ooo as income presumably derived from labour. The total is, roughly, ^1,500,000,000.

The National Income, in terms of money, is about j^ 1,500,000,000. Of this the income " derived from capital " may be put at j^6oo,ooo,ooo, and the income otherwise derived at ^^900,000,000.

These amounts are based on Sir Robert GiiFen's The admirably clear figures in the first series of his Essays in Finance, No. VII., revised ten years later in The Growth of Capital.^ All that I have done is to bring

' The original calculations were based on the returns for year ending 31st March 1875. The income, calculated on the lines here followed, amounted then to about ;f 1,200,000,000, and the capital value of the nation's property (arrived at by taking the actual and estimated income at 90 many years' purchase, and adding in moveable property and government and local property not yielding revenue) 10,^8,500,000,000, The revised calculations were based on the returns for year ending 31st March 1885. Here the income was about ;f 1,350,000,000, and the capital value ,^10,037,000,000. It may be noted, for purposes of comparison, that Dudley Baxter, in his National Income (i868), computed the aggregate income of the people for the previous year at ;r8 14,000,000.

statistical

6 THE MONEY INCOME book i

them up to date from the 41st Report of the Commissioners of Her Majesty's Inland Revenue for the year ended 31st March 1898.

We begin with the Income Tax Assessments as affording the most convenient basis. For the year 1896-97 the gross annual income thus assessed was ;^700,447,o64.i In these returns, however, income from capital is put along with income from other sources. The first thing to do is to analyse the returns and eliminate all incomes which are not " presumably derived" from capital. The principal items then stand as follows : —

^ Since 1885 there have been several new exemptions and abatements, and the gross return of incomes assessed has accordingly been diminished. But probably this has not greatly affected the total.

Notes to Table

' Including agricultural lands, ornamental grounds, gardens attached to houses when exceeding one acre in extent, farmhouses and buildings,

^ Including factories, workshops, warehouses (probably about one-fifth of the total), but excluding farmhouses, which are comprised under "Lands." It is rather interesting to note that the amount is almost identical with the " drink bill " of the United Kingdom, presented in Dr. Dawson Burns's annual letter to the Timej, February 1899.

3 By the Finance Act of 1896, one-third the full annual value of lands under Schedule A is assessed as farmers' profits, subject to appeal if the ascertained profit falls short of that amount. In comparing the present contents of Schedule B with those of 1885, notice should be taken of the great changes introduced by the above Act.

* Including chiefly Foreign and Colonial Funds, ;f 16,790,472 ; Indian Government Stocks and Loans, ^^3,48 5,6 54 ; Indian Guaranteed Railways, Canals, Irrigation Works, ^4,580,212; but excluding the permanent charge on the National Debt.

" Including Banks, Telegraphs, Insurance Companies, and the like.

Under Schedule A

Houses 2 . ... 158,774,515 Other property (including

Tithes, Manors, Fines) . 623,915

-

^214,199,332

Under Schedule B

Farmers' Profits' .

.

18,496,701

Under Schedule C

Public Funds* .

24,856,338

Under Schedule D

Quarries ....

1,200,511

Mines

10,509,292

Ironworks ....

1,840,350

Gasworks ....

5>529.456

Salt Springs or Works and

Alum Works

182,082

Waterworks

4,015,316

Canals, etc

Fishings and Shootings .

726,720

Markets, Tolls, etc.

738,001

Cemeteries ....

165,346

28,341,005

Other Public Companies ^

87,570,834

Foreign and Colonial Securities and Possessions and other

Profits ....

9,351,688

Coupons ....

9,277,808

Railways in the U. K. .

37,541,260

Railways out of the U.K.

12,833,133

Interest on Municipal and Corporation Stocks and Loans

(paid out of Rates)

5,235,680

Other Interest and Profits

165,271,528

Capital employed in " Trades and Professions," say, one-fifth of the total £^ 1 80,000,000

36,096,000

Total under Income Tax . ^487,260,904

Incomes

from

capital

which

escape

taxation.

This ^^48 7,260,904 is the income derived from capital which appears in the Income Tax returns. To this two items must be added.

( 1 ) It is notorious that the Income Tax returns do not show all the income attributable to capital. Many an Englishman will smuggle, if he can with safety, and think little shame of being found out : considering, as in poaching, that the sport of matching his ingenuity against that of an official condones the offence. So many people seem to count the assessment of their income to taxation as a game in which they match their wits against those of the assessor. To this we owe the calculation that 20 per cent of the incomes made in trades and professions escape from Schedule D — say, ^^7,200,000 ;^ and that no less than j^50,000,ooo of incomes from foreign investments escape from Schedules C and D.^

(2) A proportion of the income of working people, who are below the tax limit, may properly be ascribed to the possession of capital in the

^ Mr. Gladstone, in his Budget Speech of 1853, said that when Cannon St. was constructed, twenty-eight persons claimed compensation for loss of business, putting in their claim at ^£'48,159 as one year's income. They obtained from the jury £,^(>,')^^^. It was found subsequently that they had returned their profit to the Income Tax at £i)000 !

2 For the calculation by which this very large amount is arrived at, see Essays, p. 170, and Th Grmvth of Capital, p. 27. " It should be explained that a great deal of this income may escape assessment to the Income Tax in no improper way. The partners residing abroad of firms which are really English, but which are domiciled abroad, are perhaps under no obligation to return the income, though their wealth and income are English wealth and income, and much profit that may be made by such partners may be eventually brought home as capital and not as income, and so escape assessment " ( The Growth of CapitaL p. 27).

Chap. II The Money Income 9

shape of tools, small retail stocks, etc. ; say, onetenth of the j^740,000,000 drawn by such classes, or, ^^74,000,000.1

These sums amount to j^ 13 1,000,000. Adding The total this to the previous figure of j^488,ooo,ooo, we get a {."^^""^ total income of ^^6 19,000,000 which would be liable capital. for Income Tax if all incomes from capital paid this tax. This is the part of the National Income which may be ascribed to capital.

The balance of the ^^1,500,000,000 comes, broadly speaking, from three sources.

(i) Schedule E of the Income Tax consists of Incomes " Salaries, etc. — Employees of Corporate Bodies, etc.," lab^r ;^38,594,5o8, and of " Salaries, etc. — Public Offices, including Army, Navy, and Civil Service," ^^17,854,757; in all, ^^56,449,265. This includes pensions.

(2) Schedule D covers incomes from trades and professions amounting to j^i 80,000,000. But, as was said, one - fifth of the incomes here earned are not returned, which would add ^^36,000,000 ; making j^2 1 6,000,000 in all. But one -fifth has already been deducted from this and included among the income from capital, leaving ^^ 173,000,000, as income which must be considered due to the labour engaged in trades and professions.

(3) The income earned by working people and others under the Income Tax limit was estimated, according to Dudley Baxter's method, at ^^600,000,000 for 1875, and ^^670,000,000 for 1885. If, to be safe, we add only another ^70,000,000 for the intervening twelve years, we get ^^740,000,000 : deducting one-

' See calculation on following page.

The total income.

tenth for the small capitals employed (already noted), there remain j^666,ooo,ooo.

The total of these three items is j^896,ooo,ooo. This is income derived, presumably, from labour.

If, now, we add these two great divisions together — the ^896,000,000 from labour and the ^^6 19,000,000 from capital — the total of the National Income is j^i,5 1 5,000,000. This is the sum that would be assessable to Income Tax if all incomes whatsoever were subject to Income Tax and no incomes escaped it.^

It3 COO-

stituents.

The National Income, then, expressed in money is a total composed of rents (land and buildings rent), of profits (made by farmers, manufacturers, merchants, traders, by the owners of mines, iron, water, and gas works, of canals and railways), of dividends and interest (for money lent at home and abroad), of salaries of professional persons and officials, and of wages of labour. To put it technically : it consists of Rents and Quasi-rents ; of Profits remunerating organisation, management, and risk j of Interest on capital ; and of Wages of all kind of labour. Roughly, we may say that it amounts to ^^i, 500,000,000, of which j^6oo,ooo,ooo are presumably derived from capital and j^90o,ooo,ooo from labour.

' It may be as well to emphasise that I make no criticism on these categories. It is not necessary for the object [I have in view in what follows. But obviously any scheme which divides the National Income between " Labour " and " Capital " must be generously interpreted.

Chapter III The Real Income

In the frimhhie community the goods produced were evidently the income, and if such a community, in course of progress, had produced their goods in association and taken claims on the central store ivhere they deposited their supply, the income would still evidently have been the goods claimed. It is not essentially different to-day, when, instead of selling our goods for a claim, we sell them for the universal commodity, money. Thus f^e ^1,500,000,000 represent a real income which the community supplies for its otvn living.

The National Income, in the form which we have just considered, is a total of money payments handed over or credited to the individuals of various classes during the year. What does this money represent ? We shall find this most easily if we look back at the simpler system from which money delivered us.

In the good old times — of which we know very Goods conlittle, and very little that is good — the family or tribal prf^-tiye" group was almost self-contained, producing for the income. most part what it consumed. It would scarcely be denied that the income of each group was the food, clothes, and buildings, plus any other comforts which it might obtain by bartering its surplus for the surpluses of other groups. And the income of the community was the total food, clothes, buildings, and surpluses.

If we could imagine such a community dividing its labour and bartering its goods, it would be clear that the " demand " of each group of producers — what it bought with — was the goods it supplied ; that the total demand of the community was the total supply of that community ; and that, accordingly, the community's income was this total demand or total supply of goods.

Claims as If, again, we could imagine such a community

income. getting rid of the awkwardness of barter by establishing a central store, where each group of producers took its goods and got in exchange a " claim " for a similar value of other goods (however that value was assessed), we have the phenomenon that, instead of a number of individual incomes taken directly into consumption, there is one income on which the various contributing groups take claims, these claims being exchangeable at will into any aliquot part of the one income. The name of " income " might in this case be given to the claims, without any one being misled into thinking that the income was anything more than representative of the goods claimed.

Money in- It is not Otherwise in essence in the modern

of daims"*" ^^onomic state, where, as the result of a tacit agreement, the producing groups do not sell their goods for a claim but for a commodity, itself the product of capital and labour, valued for other purposes than money, and exchangeable at will for any commodity or commodities of equal value.

To-day the prominent phenomenon is, not only that labour is almost infinitely divided during time and over space, but that all goods are sold before they enter into the consumption of the nation. The self-contained groups are replaced by groups working on a

CHAP. Ill THE REAL INCOME 13

plan under an organising paymaster, and the making of each good now takes the form of a short or long production process. During the course of the process this " employer," as he is called, pays out to the various people employed by him a money income, equivalent in his estimate to the contribution rendered ; and when the goods, which are the outcome of the production process, finally come into his hands, he sells them, recoups himself for all the incomes he has advanced during the process, and keeps the balance. He and all working under him take their " payment " in that unique good which potentially is anything else, and the money arrogates the name of income.

The modern phenomenon, then, is that the entire on a product of industry, which in simpler times was retained in the household for consumption, and was visibly the " income," is now taken to the shops and called " goods," while the various claims on the shops are called " income." It seems clear that the money income is still practically only a sum of claims against the one real income of goods.

The answer, then, to our question as to what the money represents, is that the ;^i,500,ooo,ooo is really representative of a concrete income which the community supplies for its own living. Underlying the modern money form is a real national income of " goods," or good things, corresponding to the food, clothes, and buildings which constitute the primitive income.

concrete income.

Chapter IV The Relation Of The Real Income To The Money Income

The relation suggested is that the real income is what the money income pays for. But this gives us the unfamiliar conception that the real National Income, •which ive naturally think of as the "finished " goods by ivhich a man may live, consists of intermediate products and services, down a long hierarchy of processes. These, however, are really alternative tvays of reckoning the same sum of things. The helpful but indefinite Austrian division into production and consumption goods suggests that the National Income may be conceived of as the sum of consumption goods, plus any additions to capital, but calculated as the sum of the services ivhich issue in them. The identity of the two suggests that there is a parallel identity in price. Whether the conduction of value is back'ward or forward, the total payments for the contributory services must equal the total price of the consumption goods and added capital, and these payments appear in our schedules as Incomes. Thus the total money income is seen to be a payment for a total goods income produced, and each money income may be economically conceived as an output of goods.

The money The National Income thus takes two forms. On the

pays'for °"^ hinA is a money income of ^1,500,000,000. On

the real the Other hand is a concrete income on which certain

income. persons have established claims to the amount of

j^i, 500,000,000. The relation between the two

suggests itself. It is that the various money incomes

are paid in virtue of contributions rendered to the

real income. Down the long hierarchy of industry

shown on p. 7, which begins with land and mine

Chap. IV The Relation 15

owners, includes all those engaged directly or indirectly in manufactures and transport, and ends with the retail dealer ; from the prime minister guiding an empire to the comic singer doing his " turn " in a music-hall — all these people get their income because they are producers of goods. The real income is what the money income pays for.

But when we follow this line of connection it leads what us to a conception of the real National Income which "on^Jj [„ is certainly unfamiliar. We readily accepted the pro- the primiposition that in the primitive community the income o/food^'""^ was undoubtedly the " food, clothing, buildings, and etc-? surpluses." But when production is broken up into processes of various length and complexity, we are compelled to ask what now precisely corresponds to the primitive income.

Say that the making of furniture is divided up between four industries. Are we prepared to say that the real income of the modern community consists ot the screw-nails which are the final product of one trade ; of the oak planks turned out by a second trade ; of the fitting together of the planks and nails in the form of tables and chairs, which is a third ; of the warehousing and selling and delivering, which make up a fourth ? Or does it consist of the furniture ?