Much of the conflict between mutualism and other schools of economics seems to be based on terminology. Mutualists lack the terminology to properly separate returns from land, capital, and labor, while Georgists, and others, divide them classically into rent, interest, and wages. Georgists, and others, lack the language necessary to describe returns on these factors due purely to privilege, while mutualists describe these usurious returns as rent, interest, and profit. Naturally, this brings us to conflict.
One reason the mutualists lack terminology to divide the fair and unfair returns on the three factors of production may be because of their belief that competitive markets (or, as I argue, bilateral monopolies) push prices to costs. Because they oppose patent-restrictions, land monopoly, and other privileges, they believe that, fairly quickly, in a free market, positive innovations will be assimilated into the industries which benefit from them, driving down interest to a cost of acquisition that is very small in comparison to today’s markets (transition costs associated to new technologies, of course, could be facilitated with mutual credit). Francis Tandy, mutualist, and author of Voluntary Socialism, clarifies in this lengthy quote:
If an article suddenly acquires an increased utility, people will be willing to give articles which embody a great amount of labor in order to obtain the more useful article. So the producers of that article, will be able to reap a greater reward for their labor than the other members of the community. This immediately causes a number of the producers of other commodities to leave their old occupations and engage in the one which promises higher remuneration. Thus the supply is increased to meet the demand, until the equilibrium is once more established. So likewise the converse holds good. If for any reason the demand for any commodity decreases, the wages of the producers of that commodity fall, and many of them will seek more lucrative positions. Thus an increase in the demand is met by an increase of the supply, and a decrease in the demand by a decrease of the supply. So while exchange-values fluctuate considerably, they always trend to remain at the cost of acquisition. The operation of this law is often hindered by such artificial restrictions as trusts, etc., which, by limiting the supply, increase the margin of utility and consequently the price.
But of what does this cost of acquisition consist? If labor were the only factor in production, no one would be able to obtain anything which he did not produce, unless he exchanged it for some article which embodied an equal amount of labor, or received it as a free gift. But there are other factors which must be taken into account. In the first place, it is necessary to apply labor to land. If this land is monopolized, the holders of it can demand a very great portion of the product of the labor applied to it. Under a form of complete monopoly, the only limit to this tribute is the portion which the laborer finds absolutely necessary to the maintenance of life. That it does not reach this point at present, is due to the vast areas of unoccupied land in various parts of the world.
In order to produce anything except the very simplest forms of wealth, money is required to effect the necessary exchange of labor. If a man has a labor-saving machine which increases the productiveness of the community ten-fold, and no one else can obtain that machine, or any substitute for it, without the consent of that man, he will be able to rent it for at least nine times the former average productiveness of labor. By these means the producer will receive twice as much return for his labor as before, but the owner of the machine will receive more than four times as much as the producer. As money is the greatest of all labor-saving machines, for it is representative of all forms of capital, those who are able to monopolize money are able to reap the lion’s share of all the advantages of civilization.
Thus the twin monopolies of land and money, by means of their tribute, rent and interest, prevent an equal exchange of the products of labor. Under free conditions A, the shoemaker, would exchange a pair of shoes for a coat made by B, the tailor. When rent and interest exist, A has to pay three pairs of shoes for a coat, and B pays three coats for a pair of shoes, while the capitalist and the landlord each have a pair of shoes and a coat.
In addition to rent and interest, profit and taxes must also be added to the actual amount of labor embodied in the commodity – which is known as the cost, or labor value, – before the cost of acquisition is fully accounted for.
By profit is usually meant, the difference between the price which a merchant pays for goods, and the price at which he sells them. But this is not a sufficiently accurate definition for economic purposes. Such profit is composed largely of rent, interest, taxes, wages and the necessary expenses of business. Economically speaking, profit is that which is left between the cost and the price, after the factors above mentioned have been deducted. Much of this is often due to some special privilege, such as the existence of a protective tariff, patent, copyright, or other similar form of monopoly. But it depends principally upon the existence of rent and interest. With the elimination of these various factors, the cost of acquisition will depend solely upon the labor value. Free competition will then force the price down to the actual labor value, making cost and price equal.[i]
If what Tandy, and the rest in the mutualist tradition, is continually saying is true, wages and a temporary premium remain the only fair return, because, in a free economy, wages are all that can exist for long. For example, say the four pieces of land below, with their respective productive ratings, are claimed by individuals exerting average labor.
On this land, the rent and wages look like this with average labor:
| Party |
|
A |
B |
C |
D |
| Total Production |
|
4 |
3 |
2 |
1 |
| Wages |
– |
1 |
1 |
1 |
1 |
| Rent |
= |
3 |
2 |
1 |
0 |
Where workers use the same intensity of labor but get different returns from different land, wages fluctuate with the margin of production and are not a reflection purely of the labor exerted.[1] For instance, if one worker were to leave, the margin of production would shift, making wages equal to 2 instead of 1. This also changes the rent:
| Party |
|
A |
B |
C |
D |
| Total Production |
|
4 |
3 |
2 |
0 |
| Wages |
– |
2 |
2 |
2 |
0 |
| Rent |
= |
2 |
1 |
0 |
0 |
It can be seen that the rent of land is measured against the margin of production, and when there is no margin of production relative to others, there is no rent. If there was only one occupant, only wages would exist, with the same amount of production.
| Party |
|
A |
B |
C |
D |
| Total Production |
|
4 |
0 |
0 |
0 |
| Wages |
– |
4 |
0 |
0 |
0 |
| Rent |
= |
0 |
0 |
0 |
0 |
The rent here does not exist, even though, in the slide provided before, the same wealth is present, but is divided into wages and rent, due to the newcomers. This is because rent is the difference between returns on land. If there are no differences in those returns, and all of the land produces the same number of units when using the same intensity of labor, there can be said to be zero rent, even when there are more people present. It is only the difference between returns on land that creates rent. Likewise, it is the difference between returns on capital that creates interest or premium, and, if capital were freed from state-privilege, interest would cease to exist entirely.
Some may point to the amount of time, preceding economic assimilation, when an entrepreneur will make an increase due to innovation, and will say that, at the very least, this must be interest. I, and most other mutualists, will likely admit this temporary disequilibrium as some form of Ricardian interest or profit, but this is only necessary so long as we are restricted to only using wages, interest, and rent as descriptions of economic returns in their classical senses. Sticking rigidly to classical categories may prove inefficient at this point, however; definitions of words become hazy when interest refers simultaneously to “returns on capital” and “returns on privileged capital.” It is time to be more specific.
Obviously, in the innovative use of new capital, returns will be made that aren’t due to state-protection, but nonetheless may offer product-pricing that drifts away from, or punctuates, equilibrium. Mutualists in the past have confused people, by allowing for such times of innovative disequilibrium, and small amounts of banking interest, by suggesting “minimal interest” or “interest at cost,” while at other times suggesting in a more general sense that interest is to be avoided “at all costs.” It is no longer necessary to cause confusion, so long as factors and returns are divided according to the method expressed in “Interest and Premium.” In such a model, clearly making distinctions, interest, given by state-privilege, never exists without aggression, but premium, the result of innovation and skill, exists only until these are learned by others. If this model is not used, any mutualist contempt for interest and profit must not be a hard one, as they will always have to admit the justice in small amounts of interest, and can then not be said to thoroughly support the abolition of interest and rent. The model in “Interest and Premium” offers hard distinctions between privileged and fair returns.
Although land values cannot easily reach physical equilibrium, to completely eliminate economic rent (making all land produce the same number of units), this is not so of capital. Competitive and inexpensive capital (the tools of production) can easily be manufactured according to demand and allocated through the market, making the (non-spurious[2]) “interest” the same, and thus, nonexistent.[3]
Say, for sake of illustration, that on the three plots above, the worker on the best land, among two other participants, gets a tool, which increases productivity by twice as much. The worker now has 8 units total wealth, 4 of which are wages, 4 of which are premium, evenly sourced between yield and rent.[4]
The potentials in this equation are divided between the rent and yield, and further between wages and premium. The potential rent is equal to the (classical economic) rent in the previous table. The potential yield is equal to the (classical economic) wages in the same table. These land-potentials are then individually multiplied by the potential wages, which are equal to the amount of labor exhausted (in this case, it is average labor, so we leave it as a factor of 1; if the worker was twice as productive they would be given a factor of 2), and then by the potential premium, which we have decided results in a doubling of production in the case of this worker, which merely gives them a second line, mirroring the value of the other. The other workers, B and C, would have the same equations with the numbers for potential rent changed accordingly, and an absence of premium altogether.
The shift in production, due to the new equipment, changes the margin of production of the average worker, of course. If we multiply the average marginal-land productivity of the worker (2) times 2 (premium), giving us 4 (2 x 2 = 4), and then add this number to the productivity of the two other workers on the same land (4 + 2 + 2 = 8), and divide this number by 3 (the number of participants), we get our new rate of marginal land production while using average labor, which is 2.6667, or 2 2/3; an increase to 133% of the marginal worker’s production who have no access to capital. If all of the workers were using average labor, with no capital, and with yield determined by average productivity (2 2/3), it would look like this:
| Party |
|
A |
B |
C |
D |
| Total Production |
|
5 1/3 |
4 |
2 2/3 |
0 |
| Average Yield |
– |
2 2/3 |
2 2/3 |
2 2/3 |
0 |
| Rent |
= |
2 2/3 |
1 1/3 |
0 |
0 |
However, when using real labor, the marginal worker does not produce as much on a marginal piece of land as an average worker. This leaves them making a negative “rent”[ii] (if the yield is determined by the average), which translates as an unmet yield of 2/3 (according to the average):
| Party |
|
A |
B |
C |
D |
| Actual Production |
|
8 |
3 |
2 |
0 |
| Average Yield |
– |
2 2/3 |
2 2/3 |
2 2/3 |
0 |
| “Rent” |
= |
5 1/3 |
1/3 |
-2/3 |
0 |
If using only real production, and when premium (2) is added into the yield of A, the actual rent can be determined.
| Party |
|
A |
B |
C |
D |
| Total Production |
|
8 |
3 |
2 |
0 |
| Yield |
– |
4 |
2 |
2 |
0 |
| Rent |
= |
4 |
1 |
0 |
0 |
The other workers see the productivity due to the capital, and, if unrestricted by patents and the like, copy use of the tool, either by purchasing or creating their own. This gives them the same capital advantage, similar to what Tandy suggested earlier. Now, the wealth looks like 8, 6, and 4, and each worker has gained premium, doubling their production (in this example, but it can fluctuate even with the same capital). Of course, the margins have shifted again. (4 + 4 + 4 = 12. 12 ÷ 3 = 4.).
| Party |
|
A |
B |
C |
D |
| Total Production |
|
8 |
6 |
4 |
0 |
| Yield |
– |
4 |
4 |
4 |
0 |
| Rent |
= |
4 |
2 |
0 |
0 |
The worker with 8 has 4 yield (2 wages and 2 premium) and has 4 rent. The worker that now has 6 has the same yield, and 2 rent. The marginal land’s worker receives a similar yield with no rent. All that is left now is for the community to charge for the rent.
With proper allocation of credit and community compensation for the exclusion of rentable land, along with the end of other state-given privileges, anything that could be considered “interest” (and which I call premium), even by Georgist standards, drops considerably, and should be contrasted with interest which is due to monopoly-privilege. So long as geo-anarchists and mutualists work toward the same root goals—ending state-privilege—any qualms they have will hopefully be minor and semantic in nature. Still, it would be beneficial for both schools to break down returns into further categories, in order to be more scientific. This would allow Georgists the language to describe privileged returns (rather than simply being called spurious), as well as returns on above-marginal labor, and would allow mutualists to stick to a hard definition of usurious returns (interest, rent, profit), and the language to distinguish between fair and unfair returns.
Notes
[1] It is interesting to note here that Georgists, while recognizing rent on land and interest on capital, do not have a word for a return on labor that is due to a higher grade. Profit, to George, was merely an “unexpected return.”
[2] That is, increased from rent: Say a piece of machinery adds x2 productivity, it will multiply the rent as well as the wages. Spurious returns are returns resulting from rent.
[3] Natural monopolies, however, are discussed in my other articles. They should be held in common. For now, I will say that I encourage bilateral control of natural monopolies, as in mutual ownership, with surpluses, due to its monopolization, paid as dividends to its membership. Also, a transition to such a society would be easier without state-interference, and protection by way of legislation (like Taft-Hartley) that keep monopolies from being bilateralized. See: “Revolutionary Incrementalism and Rebellions of Scale.”
[4] See: “Interest and Premium” for more definition on these terms.
References
[i] Francis Dashwood Tandy, 82.
[ii] This is classical economic rent as measured by the Henry George Institute on their online seminar, which can be found at:: http://www.henrygeorge.org/mannahatta/manh14c.html.
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