Distributive justice : the right and wrong of our present distribution of wealth

Front matter

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Ho

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Preface

Five of the nine members of the late Federal Commission on Industrial Relations united in the declaration that the first cause of industrial unrest is, " unjust distribution of wealth and income." In all probability this judgment is shared by the majority of the American people. Regarding the precise nature and extent of the injustice, however, there is no such preponderance of opinion. Even the makers of ethical and economic treatises fail to give us anything like uniform or definite pronouncements concerning the moral defects of the present distribution. While the Socialists and the Single Taxers are sufficiently positive in their statements, they form only a small portion of the total population, and include only an insignificant fraction of the recognised authorities on either ethics or economics.

The volume in hand represents an attempt to discuss systematically and comprehensively the justice of the processes by which the product of industry is distributed. Inasmuch as the product is actually apportioned among landowners, capitalists, business men, and labourers, the moral aspects of the distribution are studied with reference to these four classes. While their rights and obligations form the main subject of the book, the effort is also made to propose reforms that would remove the principal defects of the present system and bring about a larger measure of justice.

Many treatises have been written concerning the morality of one or other element or section of the distributive process; for example, wages, interest, monopoly, the land question; but, so far as the author knows, no attempt has

PREFACE

hitherto been made to discuss the moral aspects of the entire process in all its parts. At least, no such task has been undertaken by any one who believes that the existing economic system is not inherently unjust. That the present essay in this field falls far short of adequate achievement the author fully realises, but he is sustained by the hope that it will provoke discussion, and move some more competent person to till the same field in a more thorough and fruitful way.

John A. Ryan.

The Catholic University of America,

Washington, D. C, June 14, 191 6.

Preface . . vii

Introductory Chapter: The Elements and Scope of the

Problem xiii

General References xvii

Section I The Morality Of Private Landownership And

RENT chapter page

I The Landowner's Share of the National Product 3

Economic Rent Always Goes to the Landowner . . 4

Economic Rent and Commercial Rent 5

The Cause of Economic Rent 6

II Landownership in History 8

No Private Ownership in Pre-Agricultural Conditions 10

How the Change Probably Took Place 12

Limited Character of Primitive Common Ownership 14

Private Ownership General in Historical Times . . 15

Conclusions from History 17

III The Arguments Against Private Landownership . . 19

Arguments by Socialists 19

Plenry George's Attack on the Title of First Occupancy 21

His Defence of the Title of Labour 24

The Right of all Men to the Bounty of the Earth . . 30

The Alleged Right of the Community to Land Values 39

IV Private Ownership the Best System of Land Tenure 48

The Socialist Proposals Impracticable 48

Inferiority of the Single Tax System 51

CHAPTER PAGE

V Private Landownership a Natural Right .... 56 Three Principal Kinds of Natural Rights .... 57 Private Landownership Indirectly Necessary for Individual Welfare 59

Excessive Interpretations of the Right of Private

Landownership 61

The Doctrine of the Fathers and the Theologians . 62

The Teaching of Pope Leo XIII 64

VI Limitations of the Landowner's Right to Rent . . 67 The Tenant's Right to a Decent Livelihood ... 69 The Labourer's Claim Upon the Rent 71

VII Defects of the Existing Land System 74

Landownership and Monopoly 75

Excessive Gains from Private Landownership ... .80 Exclusion from the Land 90

VIII Methods of Reforming Our Land System .... 94

The Leasing System 95

Public Agricultural Lands 97

Public Ownership of Urban Land 98

Appropriating Future Increases of Land Value . . . 100

Some Objections to the Increment Tax 102

The Morality of the Proposal 108

The German and British Increment Taxes . . . .114

Transferring Other Taxes to Land 117

The Morality of the Plan 120

Amount of Taxes Practically Transferable .... 122

The Social Benefits of the Plan 127

A Supertax on Large Holdings 130

References on Section I 133

SECTION II THE MORALITY OF PRIVATE CAPITAL AND INTEREST IX The Nature and the Rate of Interest 137

Meaning of Capital and Capitalist I37

Meaning of Interest 138

The Rate of Interest 141

CONTENTS CHAPTER PAGE

X The Alleged Right of Labour to the Entire Product

OF Industry 145

The Labour Theory of Value 146

The Right of Productivity 149

XI The Socialist Scheme of Industry 152

Socialist Inconsistency 152

Expropriating the Capitalists 154

Inefficient Industrial Leadership 158

Inefficient Labour 162

Attempted Replies to Objections 162

Restricting Individual Liberty 168

XII Alleged Intrinsic Justifications of Interest . . .171 Attitude of the Church Toward Interest on Loans . . 172

Interest on Productive Capital 175

The Claims of Productivity 177

The Claims of Service 181

The Claims of Abstinence 182

XIII Social and Presumptive Justifications of Interest . 187

Limitations of the Sacrifice Principle 187

The Value of Capital in a No-Interest Regime . . . 188

Whether the Present Rate of Interest is Necessary . 191

Whether at Least two Per Cent, is Necessary . . . 193

Whether any Interest is Necessary 196

The State is Justified in Permitting Interest .... 199 Civil Authorisation not Sufficient for Individual Justification 201

How the Interest-Taker is Justified 204

XIV Co-operation a Partial Solvent of Capitalism . . . 210

Reducing the Rate of Interest 211

Need for a Wider Distribution of Capital 213

The Essence of Co-operative Enterprise .... :2i4

Co-operative Credit Societies 216

Co-operative Agricultural Societies 217

Co-operative Mercantile Societies 220

Co-operation in Production 222

Advantages and Prospects of Co-operation .... 228

References on Section II 233

Section III The Moral Aspect Of Profits Chapter Page

XV The Nature of Profits 237

The Functions and Rewards of the Business Man . . 237

The Amount of Profits 239

Profits in a Joint- Stock Company 241

XVI The Principal Canons of Distributive Justice . . . 243

The Canon of Equality 243

The Canon of Needs 244

The Canon of Efforts and Sacrifice 246

The Canon of Productivity 247

The Canon of Scarcity 250

The Canon of Human Welfare 252

XVII Just Profits in Conditions of Competition .... 254 The Question of Indefinitely Large Profits .... 255

The Question of Minimum Profits 258

The Question of Superfluous Business Men . . . 260

XVIII The Moral Aspect of Monopoly 262

Surplus and Excessive Profits 263

The Question of Monopolistic Efficiency 265

Discriminative Underselling 267

Exclusive-Sales Contracts 270

Discriminative Transportation Arrangements . . . 272

Natural Monopolies 273

Methods of Preventing Monopolistic Injustice . . . 275

Legalised Price Agreements 2.'j']

XIX The Moral Aspects of Stockw^atering 279

Injurious Effects of Stockwatering 281

The Moral Wrong 284

The " Innocent " Investor 286

Magnitude of Overcapitalisation 288

XX The Legal Limitation of Fortunes 291

The Method of Direct Limitation 292

Limitation Through Progressive Taxation .... 296

CHAPTER

XXI

PAGE

The Proper Rate of Income and Inheritance Taxes . 299 Effectiveness of Such Taxation 300

The Duty of Distributing Superfluous Wealth . . 303

The Question of Distributing Some 303

The Question of Distributing All 308

Some Objections 311

A False Conception of Welfare and Superfluous Goods 314

The True Conception of Welfare 316

References on Section III 318

Section IV The Moral Aspects Of Wages

XXII Some Unacceptable Theories of Wage-Justice . . . 323

I The Prevailing-Rate Theory 323

Not in Harmony w^ith Justice 325

II Exchange-Equivalence Theories 326

The Rule of Equal Gains 326

The Rule of Free Contract 328

The Rule of Market Value 330

The Mediaeval Theory 332

A Modern Variation of the Mediaeval Theory . 337

III Productivity Theories 340

Labour's Right to the Whole Product . . . 341 Clark's Theory of Specific Productivity . . 347 Carver's Modified Version of Productivity . . 351

XXIII The Minimum of Justice; A Living Wage .... 356

The Principle of Needs 356

Three Fundamental Principles 358

The Right to a Decent Livelihood 360

The Claim to a Decent Livelihood from a Present Occupation 362

The Labourer's Right to a Living Wage 363

When the Employer is Unable to Pay a Living Wage 366

An Objection and Some Difficulties 370

The Family Living Wage 373

Other Arguments in Favour of a Living Wage . . . 376 The Money Measure of a Living Wage 378

CHAPTER PAGE

XXIV The Problem of Complete Wage Justice 381

Comparative Claims of Different Labour Groups . . 381

Wages Versus Profits 388

Wages Versus Interest 390

Wages Versus Prices 393

Concluding Remarks 398

XXV Methods of Increasing Wages 400

The Minimum Wage in Operation 400

The Question of Constitutionality ....... 405

The Ethical and Political Aspects 407

The Economic Aspect 408

Opinions of Economists 412

Other Legislative Proposals 416

Labour Unions 417

Organisation Versus Legislation 420

Participation in Capital Ownership 423

References on Section IV 425

XXVI Summary and Conclusion 426

The Landowner and Rent 426

The Capitalist and Interest 427

The Business Man and Profits 428

The Labourer and Wages 430

Concluding Observations 431

Index 453

INTRODUCTORY CHAPTER

THE ELEMENTS AND SCOPE OF THE PROBLEM

Distributive justice is primarily a problem of incomes rather than of possessions. It is not immediately concerned with John Brown's railway stock, John White's house, or John Smith's automobile. It deals with the morality of such possessions only indirectly and under one aspect ; that is, in so far as they have been acquired through income. Moreover, it deals only with those incomes that are derived from participation in the process of production. For example; it considers the labourer's wages, but not the subsidies that he may receive through charity or friendship. Its province is not the distribution of all the goods of the country among all the people of the country, but only the distrilDUtion of the products of industry among the classes that have taken part in the making of these products.

These classes are four, designated as landowners, capitalists, undertakers or business men, and labourers or wage earners. The individual member of each class is an agent of production, while the instrument or energy that he owns and contributes is a factor of production. Thus, the landowner is an agent of production because he contributes to the productive process the factor known as land, and the capitalist is an agent of production because he contributes the factor known as capital; while the business man and the labourer are agents not only in the sense that they contribute factors to the process, but in the very special sense that their contributions involve the continuous expenditure of human energy. Now the product of industry is

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XIV INTRODUCTORY CHAPTER

distributed among these four classes precisely because they are agents of production; that is because they own and put at the disposal of industry the indispensable factors of production. We say that the agents of production ** put the factors of production at the disposal of industry," rather than " exercise or operate the factors," because neither the landowner nor the capitalist, as such, expend continuous energy in the productive process. All that is necessary to enforce a claim upon the product is to contribute an instrument or factor without which production cannot be carried on.

The product distributed in any country during a single year is variously described by economists as the national product, the national income, the national dividend. It consists not merely of material goods, such as houses, food, clothing, and automobiles, but also of those non-material goods known as services. Such are the tasks performed by the domestic servant, the barber, the chauffeur, the public official, the physician, the teacher; or any other personal service '' that is valued, as material commodities are valued, according to their selling prices." Even the services of the clergyman are included in the national income or product, since they are paid for and form a part of the annual supply of good things produced and distributed within the country. In the language of the economist, anything that satisfies a human want is a utility, and forms part of the national wealth ; hence there can be no sufficient reason for excluding from the national income goods which minister to spiritual or intellectual wants. The services of the clergyman, the actor, the author, the painter, and the physician are quite as much a part of the utilities of life as the services of the cook, the chambermaid, or the barber ; and all are as clearly utilities as bread, hats, houses, or any other material thing. In a general way, therefore, we say that the national product which is available for distribution among the diilerent

THE ELEMENTS AND SCOPE OF THE PROBLEM XV

productive classes comprises all the utilities, material and non-material, that are produced through human agents and satisfy human desires.

In the great majority of instances the product is not distributed in kind. The wheat produced on a given farm is not directly apportioned among the farmers, labourers, and landowners that have co-operated in its production; nor are the shoes turned out by a given factory divided among the co-operating labourers and capitalists ; and it is obvious that personal services cannot be returned to the persons that have rendered them. Cases of partial direct distribution do, indeed, occur; as when the tenant takes two-thirds and the landowner one-third of the crop raised by the former on land belonging to the latter ; or when the miller receives his compensation in a part of the flour that he grinds. To-day, however, such instances are relatively insignificant. By far the greater part of the material product is sold by the undertaker or business man, and the price is then divided between himself and the other agents of production. All personal services are sold, and the price is obtained by the performers thereof. The farmer sells his wheat, the miller his flour, and the barber his services. With the money received for his part in production each productive agent obtains possession of such kinds and amounts of the national product as his desires dictate and his income will procure. Hence the distribution of the product is effected through the cpnversion of producers' claims into money, and the exchange of the latter for specific quantities and qualities of the product.

While the national product as a whole is divided among the four productive classes, not every portion of it is distributed among actually distinct representatives of these classes. When more than one factor of production is owned by the same person, the product will obviously not go to four different classes of persons. For example; the crop raised by a man on his own unmortgaged land, with

XVI INTRODUCTORY CHAPTER

his own instruments, and without any hired assistance; and the products of the small shopkeeper, tailor, and barber who are similarly self sufficient and independent, — are in each case obtained by one person, and do not undergo any actual distribution. Even in these instances, however, there occurs what may be called virtual distribution, inasmuch as the single agent owns more than one factor, and performs more than one productive function. And the problem of distributive justice in such cases is to determine whether all these productive functions are properly rewarded through the total amount which the individual has received. Where the factors are owned by distinct persons, or groups of persons, the problem is to determine whether each group is properly remunerated for the single function that it has performed.

The problem of the morality of industrial incomes is obviously complex. For example; the income of the farmer is sometimes derived from a product which he must divide with a landowner and with labourers; sometimes from a product which he shares with labourers only ; and sometimes from a product which he can retain wholly for himself. The labourer's income arises sometimes out of a product which he divides with other agents of production; sometimes out of a product which he divides with other labourers as well as other agents; and sometimes out of a product of which he receives the full money equivalent. The complexity of the forces determining distribution and income indicate a complexity in the forces affecting the morality of income. Moreover, there is the more fundamental ethical question concerning the titles of distribution : whether mere ownership of a factor of production gives a just claim upon the product, as in the case of the landowner and the capitalist; whether such a claim, assuming it to be valid, is as good as that of the labourer and the business man, who expend human energy in the productive process; whether different kinds of pro-

THE ELEMENTS AND SCOPE OF THE PROBLEM XVll

ductive activity should be rewarded at different rates; and if so in what proportion. Why should the capitalist receive six per cent, rather than two per cent., or sixteen per cent. ? Why should the locomotive engineer receive more than the trackman ? Why should not all persons be compensated equally? Should all or any of the benefits of industrial improvements go to the consumer? Such are typical questions in the study of distributive justice. They are sufficient to give some idea of the magnitude and difficulty of the problem.

Scarcely less formidable is the task of suggesting means to correct the injustices of the present distribution. The difficulties in this part of the field are indicated by the multipHcity of social remedies that have been proposed, and by the fact that none of them has succeeded in winning the adhesion of more than a minority of the population. We shall be obliged not only to pass moral judgment upon the most important of these proposals, but to indicate and advocate a more or less complete and systematic group of such reforms as seem to be at once feasible and righteous.

GENERAL REFERENCES

Taussig: Principles of Economics. Macmillan; 1911.

Devas: Political Economy. Longmans; 1901.

HoBSON : The Industrial System. Longmans ; 1909.

Clark: The Distribution of Wealth. Macmillan; 1899.

Smart: The Distribution of Income. London; 1899.

Willoughby: Social Justice. Macmillan; 1900.

Carver: Essays in Social Justice. Harvard University Press; 1915.

Ely : Property and Contract in Their Relations to the Distribution of Wealth. Macmillan; 1914.

Nearing: Income. Macmillan; 1915.

Streightoff: The Distribution of Incomes in the United States.

Longmans ; 1912.

Wagner: Grundlegung der Nationaloekonomie. Leipzig; 1892-1894. Pesch : Lehrbuch der Nationaloekonomie. Freiburg; 1905-1913. Antoine: Cours d' Economie Sociale. Paris; 1899.

XVlll INTRODUCTORY CHAPTER

HiTZE : Capital et Travail. Louvain ; 1898.

Hollander: The Abolition of Poverty. Houghton Mifflin Company;

1914.

Ellwood: The Social Problem. Macmillan; 1915. Garriguet: The Social Value of the Gospel. Herder; 191 1. Parkinson: A Primer of Social Science. Devin-Adair Co.; 1913. Vermeersch : Quaestiones de Justitia. Bruges; 1901.

King : The Wealth and Income of the People of the United States. Macmillan; 1915.

Commission on Industrial Relations. Final Report; 1915.

CHAPTER I THE landowner's SHARE OF THE NATIONAL PRODUCT

That part of the national product which represents land, and is attributed specifically to land, goes to the landowner. It is called economic rent, or simply rent. We say that rent '' is attributed specifically to land," rather than '' is produced specifically by land," because we do not know what proportion of the joint product of the different factors of production exactly reflects the productive contribution of any factor. Economic rent represents the productivity of land in so far as it indicates what men are willing to pay for land-use in the productive process. In any particular case rent comes into existence because the land makes a commercially valuable contribution to the product; and it goes to the landowner because this is one of the powers or rights included in the institution of private ownership. And the landowner's share is received by him precisely in his capacity as landowner, and not because he may happen to be labourer, farmer, or proprietor of agricultural capital.

It is perhaps superfluous to observe that not all land produces rent. While almost all land is useful and productive, at least potentially, there is in almost every locality some land which in present conditions does not warrant men in paying a price for its use. If the crop raised on very sandy soil is so small as to cover merely the outlay for labour and capital, men will not pay rent for the use of that soil. Yet the land has contributed something to the product. Herein we have another indication that rent is not an adequate measure of land productivity. It merely represents land value, — at a given time, in given circumstances.

Economic Rent Always Goes to the Landowner

All land that is in use, and for the use of which men are willing to pay a price yields rent, whether it is used by a tenant or by the owner. In the latter case the owner may not call the rent that he receives by that name; he may not distinguish between it and the other portions of the product that he gets from the land; he may call the entire product profits, or wages. Nevertheless the rent exists as a surplus over that part of the product that he can regard as the proper return for his labour, and for the use of his capital-instruments, such as, horses, buildings, and machinery. If a farmer employs the same amount and kind of labour and capital in the cultivation of two pieces of land, one of which he owns, the other being hired from some one else; if his net product is the same in both cases, say, i,ooo dollars; and if he must pay 200 dollars to the owner of the hired land, — then, 200 of the 1,000 dollars that he receives from his own land, is likewise to be attributed specifically to his land rather than to his capital or labour. It is rent. While the whole product is due in some degree to the productive power of land, 200 dollars of it represents land value in the process of production, and goes to him solely in his capacity as landowner. The rent that arises on land used for building sites is of the same general character, and goes likewise to the owner of the land. The owner of the site upon which a factory is located may hire it to another for a certain sum annually, or he may operate the factory himself. In either case he receives rent, the amount that the land itself

THE LANDOWNER S SHARE OF NATIONAL PRODUCT 5

is worth for use, independently of the return that he obtains for his expenditure of capital and labour. Even when a person uses his land as a site for a dwelling which he himself occupies, the land still brings him economic rent, since it affords him something for which he would be obliged to pay if his house were located on land of the same kind owned by some one else.

Economic Refit and Commercial Rent

It will be observed that the landowner's share of the product, or economic rent, is not identical with commercial rent. The latter is a payment for land and capital, or land and improvements, combined. When a man pays nine hundred dollars for the use of a house and lot for a year, this sum contains two elements, economic rent for the lot, and interest on the money invested in the house. Assuming that the house is worth ten thousand dollars, and that the usual return on such investments is eight per cent., we see that eight hundred dollars goes to the owner as interest on his capital, and only one hundred dollars as rent for his land. Similarly the price paid by a tenant for the use of an improved farm is partly interest on the value of the improvements, and partly economic rent. In both cases the owner may reckon the land as so much capital value, and the economic rent as interest thereon, just as the commercial rent for the buildings and other improvements is interest on their capital value; but the economist distinguishes between them because he knows that they are determined by different forces, and that the distinction is of importance. He knows, for example, that the supply of land is fixed, while the supply of capital is capable of indefinite increase. In many situations, therefore, rent increases, but interest remains stationary or declines. Sometimes, though more rarely, the reverse occurs. As we shall see later, this and some other specific characteristics of land and rent have important moral aspects; consequently the moralist cannot afford to confuse rent with interest.

The Cause of Economic Rent

The cause of economic rent is the fact that land is limited relatively to the demand for it. If land were as plentiful as air mere ownership of some portion of it would not enable the owner to collect rent. As landowner he would receive no income. If he cultivated his land himself the return therefrom would not exceed normal compensation for his labour, and normal interest on his capital. Since no one would be compelled to pay for the use of land, competition among the different cultivators would keep the price of their product so low that it would merely reimburse them for their expenditures of capital and labour. In similar conditions no rent would arise on building sites. The cause of the amount of rent may also be stated in terms of scarcity. At any given time and place, the rent of a piece of land will be determined by the supply of that kind of land relatively to the demand for it. However, the demand itself will be regulated by the fertility or by the location of the land in question. Two pieces of agricultural land equally distant from a city, but of varying fertility, will yield different rents because of this difference in natural productiveness. Two pieces of ground of equal natural adaptabihty for building sites, but at unequal distances from the centre of a city, will produce different rents on account of their difference of location. The absolute scarcity of land is, of course, fixed by nature ; its relative scarcity is the result of human activities and desires.

The definition of rent adopted in these pages, " what men are willing to pay for the use of land," or, '' what land is worth for use," is simpler and more concrete, though possibly less scientific, than those ordinarily found in manuals of economics, namely : *' that portion of the

THE LANDOWNER S SHARE OF NATIONAL PRODUCT 7

product that remains after all the usual expenditures for labour, capital, and directive ability have been deducted ; " or, " the surplus which any piece of land yields over the poorest land devoted to the same use, when the return from the latter is only sufficient to cover the usual expenses of production."

The statement that all rent goes to the landowner supposes that, in the case of hired land, the tenant pays the full amount that would result from competitive bidding. Evidently this was not the case under the feudal system, when rents were fixed by custom and remained stationary for centuries. Even to-day, competition is not perfect, and men often obtain the use of land for less than they or others might have been willing to give. But the statement in question does describe what tends to happen in a system of competitive rents.

Before discussing the morality of the landowner's income, and of rent receiving, we may with profit glance at the history of land tenure. Thus we shall get some idea, first, of the antiquity of the present system, and, second, of its effects upon individual and social welfare. Both these considerations have an important bearing upon the moral problem ; for length of existence creates a presumption in favour of the social, and therefore the moral, value of any institution; and past experience is our chief means of determining whether an institution is likely to be socially beneficial, and therefore morally right, in the future.

Chapter II

Thirty or thirty-five years ago, the majority of economic historians seemed to accept the theory that land was originally owned in common.^ They held that in the beginning the community, usually a village community, was the landowner; that the community either cultivated the land as a corporation, and distributed the product among the individual members, or periodically divided the land among the social units, and permitted the latter to cultivate their allotments separately. The second of these forms of tenure was the more general. The primitive time to which the theory referred was not the period when men got their living by hunting and fishing, or by rearing herds, but the agricultural stage of economic development, when life had become settled. Of the arguments upon which the theory was based, some consisted of ambiguous statements by ancient writers, such as Plato, Caesar, and Tacitus, and others were merely inferences drawn from the existence of certain agrarian institutions : family ownership of land; common pasture lands and woodlands; periodical distribution of land among the cultivators, as in the German Mark, the Russian Mir, the Slavonic Zadruga, and the Javanese Dessa. All these practices

1 The most notable exponents of this view were : Von Maurer, " Einleitung zur Geschichte der Mark," 1854; Viollet, *' Bibliotheque de r ecole des chartres," 1872; Maine, "Village Communities? in the East and the West," 1872 ; and De Laveleye, " De la propriete et ses formes primitives," 1874, of which an English translation appeared in 1878 under the title, " Primitive Property."

have been interpreted as *' survivals " of primitive common ownership. Only on this hypothesis, it is argued, can they be satisfactorily explained.

More recent writers have subjected the various arguments for this theory to a searching criticism.^ To-day the great majority of scholars would undoubtedly accept the conclusion of Fustel de Coulanges, that the arguments and evidence are not sufficient to prove that in the earliest stages of agricultural life land was held in common; and a majority would probably take the more positive ground that common ownership in the sense of communal cultivation and distribution, never existed for any considerable length of time among any agricultural people. The present authoritative opinion on the subject is thus summarized by Professor Ashley: