The Distribution among Social Classes: The Classical Economists

The unprecedented growth of output and productivity which characterized the after­math of the first Industrial Revolution posed a new challenge to human civilization: not only could improvements and successful business yield great fortunes for investors; by their extension and persistence, they also offered the opportunity of decent standards of comfortable living for the great bulk of the population.

The relation of economic activity (particularly in agriculture) to population growth was their central argument. According to Smith:

the demand for men, like that for any other commodity, necessarily regulates the production of men; quickens it when it goes on too slowly, and stops it when it advances too fast. It is this demand which regulates and determines the state of propagation in all the different countries of the world. (WN I, viii: 40)

The “demand for men”, in turn, increased with the scale of economic activity and the “production of men” increased with real wages. As a consequence, the real wages tended to be higher than mere subsistence in periods of sustained economic growth, but they were bound to be kept down to a minimum in a stationary state. Hence Smith concluded that “it is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour”; (WN I, viii: 22).

The analysis of the actual proportion between the provision of food and population growth has been greatly extended in Malthus’s theory of population. He argued in favour of a natural tendency of population growth, if unchecked, to grow far faster than the provision of food (see Malthus 1826 [1986]: 7-13): in the absence of moral, preventive checks, there was no hope that the condition of the working classes could be permanently improved, even in the presence of some economic growth and productivity increase. The tortoise would never catch the hare unless the latter could be set to sleep. Of course, Malthus did not overlook the benefits of technological improvements in agriculture. Nor did he neglect those for the workers of an individual country arising from the importation of food and emigration. Yet, in his view, the effects of such changes - remarkable as they were in given contingencies - were temporary. The only possibility of a permanent improvement was a widespread adoption of a preventive check based on moral qualities, which unfortunately were not yet in sight during his lifetime, but he thought they could be slowly cultivated.

By contrast, J.S. Mill, who lived two generations after Smith and witnessed a material change in the social climate around the mid-nineteenth century, foresaw the possibility that the working classes may take a full and lasting advantage from the increase in pro­ductivity. The diffusion of the Malthusian moral restraint through the skilled artisans first and then to factory workers was the essential condition for this to happen (Mill 1871 [1965] bk IV: ch. VII; see Schwartz 1972; Opocher 2010).

Obviously, the theory of wages was not complete until it was integrated with a theory of rents and profits. Only then there emerged a proper theory of distribu­tion. A series of pamphlets in 1815 by Sir Edward West, Malthus and Ricardo were precisely aimed at explaining the formation of rents and profits, assuming wages as broadly given at subsistence levels. It is a matter of debate whether Ricardo has been the first to develop such a theory, but certainly he is commonly credited with priority (cf. Sraffa 1951: 4-7). His typical mode of reasoning was to isolate single aspects of the question, and then integrate them into a realistic overall picture. In particular, he first isolated the peculiar effects of economic growth on income distribution; then he focused on the countervailing effects of technological improvements and the removal of trade restrictions; finally, he could isolate the specific effect of increasing or dimin­ishing real wages on the rate of profits. Ricardo’s 1815 Essay on Profits (Works IV) contains the main ingredients of the theory of distribution that he later developed in his Principles (Works I). He considered an agricultural activity (corn production) in which wages, profits and rents were all measured in terms of the output itself. The main argument, consisting of the explanation of extensive rent, assumes that there are qualities of land of different fertilities. Let an acre of land (of any quality) be culti­vated by a team of a workers, each paid in advance a corn-wage equal to w.

^ri = q_i ^- qj,ⁱ ≤ ^{j (1)}

Since r_j = 0, the whole product of the cultivated lands of the least good quality is distrib­uted to wages and profits. Denoting by π the profit per acre of such a land, we have q_j = π + wa. Moreover, if wages are the only form of capital, and i is the profit rate, we have π = i(wa). Now competition forces i and w to be uniform on all lands (as well as in the other sectors of the economy). It follows that the rate of profits and the wage rate in the economy as a whole must satisfy the following equation:

Equations (1) and (2) determine the rent and profit rates, assuming the margin of cul­tivation and the wage rate as given. It should be stressed that, since wa is the amount of corn anticipated to the workers employed in an acre of land, then the rate of profits corresponds to the rate of surplus on the least fertile quality of land among all lands cultivated.

A series of important results follow at once: (1) an economic expansion, represented here by an increase of index j, per se increases each rent rate and total rents, while the profit rate falls, assuming the wage rate is constant; (2) at a given total output, significant technological improvements in agriculture reduce the index j, thereby diminishing rents and increasing the profit rate, at constant wages; (3) a similar effect follows from the removal of restrictions on the importation of corn, which reduces the domestic output of corn; (4) at a given total output and technical and trade conditions, an increase in wages is always at the expense of profits, and not of rents.

If this “corn model” is referred to, as in Ricardo, an economic system in which there are other sectors, we must say very clearly how a “corn” measure of capital (and notably wages) is to be interpreted. For if all capital literally consists of corn, the above model of income distribution is self-contained and determines the rents and the rate of profits without involving commodity prices. However, if there are components of capital other than corn (for example, when the significant wage basket contains a variety of commodi­ties), then a theory of relative prices is necessarily involved. If labour receives a constant basket of commodities, including manufactured goods, the extension of cultivation to less fertile lands must reduce the corn-value of wages, because the relative price of corn has increased; the same is true of the manufactured components of capital (such as fixed capital). It follows that a change in relative prices naturally modifies the surplus of corn, to be divided between profits and rents. Ricardo correctly argued that his qualitative results hold even in the presence of non-corn components of capital, provided that the change in relative prices is governed by labour inputs per unit of output. It was all a matter of measure and not of principle: the higher the share of the non-corn component, the lower the fall in the rate of profits associated with economic growth (see Works IV: 16-17, fn; for a general interpretation of the corn model, see the debate between Hollander 1973 and Eatwell 1975).

In the second edition of the Principles Ricardo was clear that prices are not exactly proportional to labour inputs per unit of output: much depends on the composition of capital, which generally differs across sectors. He saw that there was an intimate relation between prices and distribution, which was highly complex, and that it was beyond his capability of providing a theoretically satisfactory discussion of it. He believed that the main qualitative conclusions remained true as sound approximations, but did not prove them on logical grounds.

Marx, in particular, claimed that hidden in the labour theory of value was the proof that profits were based on the exploitation of labour: he argued that they consisted in a positive difference (“surplus value”) between the quantity of labour hired by employers and the quantity of labour embodied in the goods received by workers as wages (and forming the bulk of circulating capital). He took pains to prove that this concept of profits could be retained even when relative prices differed from relative labour values and that the general rate of profits, which was given by the ratio between aggregate

surplus value and total capital, tended to decrease, owing to the increase of “constant capital” (means of production) relative to “variable capital” (wages). His theory of dis­tribution, however, important as it is on historical and philosophical grounds, did not add substantially to the Ricardian idea that, in real terms, profits and rents originate in the commodity surplus generated in the economic system and in the inability of workers to appropriate it (for an assessment of Marx’s theory of value and distribution, see Steedman 1977).

Some proper mathematical developments of the “surplus” theory of interest were discussed later, in the early twentieth century, especially in German-speaking countries. Meanwhile the “marginal revolution” set the Ricardian themes aside, in favour of a different approach.