Spurious Returns and The Three Factors of Production

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If a worker works twice as hard (2, potential wages) as the average, and uses capital which increases that productivity by two (2, potential interest), and they use land which produces 2 units with average labor (2, potential wealth), the total wealth will be 8 (2 x 2 x 2 = 8). If there is no rent, all wealth can be attributed to the total (not potential) wages and interest, or total wealth = total wages + total interest, each being equal to 4.

This equation is true so long as unhampered by monopoly. If rent enters the equation, potential wealth needs to be divided into potential rent (surplus) and potential yield (marginal production), in which case total wealth = total rent and total yield. Total yield = potential interest x potential wages x potential yield. Total rent = potential interest x potential wages x potential rent.

(For sake of this example, rent is the surplus of land, and yield is equal to its marginal rate of production.)

This method allows us to sort out spurious wages and interest.

Say the margin of production produces 1 unit of wealth, and the best land produces 2 units. This means that the rent is equal to 1, and the yield is equal to 1. 1 potential yield x 2 potential wages x 2 potential interest= 4 total yield. Likewise with the rent. Total yield + total rent = total wealth.Therefor, in the example above, half of the wages and interest (those multiplied by rent) are spurious.

The larger equation and a more in-depth explanation can be found in my book, The Evolution of Consent: Collected Essays.

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