The Factor Distribution of Income: a New Perspective on a Matter of Classical Importance.

Ó 1996 Keith Rankin, Economics Department, University of Auckland

Paper presented to the Conference of the New Zealand Association of Economists Conference, Auckland, 26-28 August 1996

"New Perspectives in Economics"

 

  1. Introduction 1
  2. It is wrong to say that God made Rich and Poor; he made only Male and Female; and he gave them the earth for their inheritance.

    Thomas Paine (1796), preface to Agrarian Justice.

     

    In the writing of economic history at present there is a tendency to focus attention on the quantity of material goods ... in the past a major concern in economic history - from Adam Smith and Karl Marx to Gustav Schmoller and Richard Tawney - has been dissecting the forms of justice and injustice in economic life.

    Frederic Lane (1958), "Economic Consequences of Organized Violence".

     

    The new trends in economy and society evident in the 1980s render it necessary to re-examine the whole question of the rationale for economic distributions. If rents continue to increase, even if partly disguised as high salaries, this will prove to be important as both a symptom and a warning of possible new trends in distribution and their effects on the entire social fabric.

    Folke Dovring (1991), Inequality: the Political Economy of Income Distribution. (p.28)

     

    My teaching of the economic history of industrialisation, my research into the political economy of industrialisation of New Zealand and other settler economies, combined with a more general interest in the generation and distribution of income as historical processes, have lead me into an eclectic synthesis of classical, public choice, historical and sociological economics. The result - a form of social capitalism - I would like to think can justify the "new perspective" label which is the theme of this conference.

    The essence of the approach is that the collective ownership of the intangible and indivisible forms of social capital that contribute to economic growth should determine the distribution of growing economic surpluses. To do this, I seek to explore the meaning, determination and implications of economic sovereignty; to show that the public interest is a class interest in essentially the same way as labour and capital represent class interests. Indeed, in a modern context, the domain of the democratic sovereign displaces that of the landlord in the classical tripartite distribution of income.

    Inequality growth and the productivity slowdown have emerged simultaneously as the most puzzling problems of our day (Dovring 1991, Krugman 1994). Is the relationship between the two issues a coincidence of historical timing? The classical economists gave primacy of importance to the factor distribution of income - the proportion of the gross product allocated to each factor interest - not least because they saw distribution as the key determinant of economic growth. Economic justice and economic growth were not contradictory goals,2 at least with respect to capital and land. In the spirit of classical enquiry, a renewed focus on distribution as an end in itself may yield, albeit as a by-product, insights into problems relating to productivity growth and allocative inefficiency.

     

  3. Deriving the Public Domain
    1. from Classical Economics
    2.    The produce of the earth - all that is derived from its surface by the united application of labour, machinery, and capital, is divided among the three classes of the community; namely, the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the labourers by whose industry it is cultivated.
         But in different stages of society, the proportions of the whole produce of the earth which will be allotted to each of these classes, under the names of rent, profit and wages, will be essentially different; depending mainly on the actual fertility of the soil, on the accumulation of capital and population, and on the skill, ingenuity and instruments employed in agriculture.
         To determine the laws which regulate this distribution, is the principle problem in Political Economy: much as the science has been improved by the writings of Turgot, Stuart, Smith, Say, Sismondi, and others, they afford very little satisfactory information respecting the natural course of rent, profit, and wages."

      David Ricardo (1817), preface to On the Principles of Political Economy and Taxation.

       

      Since [land, capital and labour] may be separately appropriated, the industrial community may be considered as divided into landowners, capitalists and productive labourers. Each of these classes, as such, obtains a share of the produce: no other person or class obtains anything except by concession from them.

      John Stuart Mill (epigraph, Weldon 1988)

       

      In classical economics land, labour and capital were considered to be the "agents of production" (Weldon, p.37).3 One of the meanings of the modern word 'factor' is in fact 'agent'.4 Another meaning, more prominent today, is 'ingredient'.5 The ambiguities of the word factor have helped neoclassical analysis to completely drop the class element central to the classical problem. While Mill (1909 [1848], contents - eg. book 1, chapter 7) uses the term "agents of production" (land, labour and capital), he also uses the term "requisites of production" (labour and natural objects) in another sense (book 1, chapter 1), as the necessary historical prerequisites for economic activity to take place. By chapter 7, Mill uses the words "requisites" and "agents" interchangeably, with the requisites of ch. 1 becoming "primary" requisites. The word 'factor' thus has emerged with two distinct meanings - 'requisite' and 'agent' - which have become muddied into one. I wish to emphasise the Ricardian view, that factors of production are people, are interests, are class interests.

      David Ricardo (1971 [1817] ch.II, p.91; ch.X, p.188) well understood that economic class and social class are not the same thing. In particular he noted, that while pure rent to land was an appropriate source of tax revenue, the rent actually paid by farmers to their landlords was as much a return to landlords' improvements (ie profit) as it was an economic rent. As a result, all tenants paid a sum they called 'rent', even tenants farming the poorest quality land. On such marginal land all such rent was really profit, not economic rent. In addition, capitalists and landlords were also labourers - productive or unproductive - inasmuch as they consumed some wage goods. So the classical analysis of class does not presuppose that all individuals belong to one economic class or another. Each individual can be part lord, part capitalist, and part labourer. I will use the term 'class interests' to mean 'economic classes'.

      To Ricardo all factors were complements, not substitutes, each with special characteristics. Land was in fact singled out in his preface as a primary requisite; a factor which could be transformed when acted upon by three other ingredients, labour, fixed capital and circulating capital. Furthermore, taking his cue from the French classical economist J.B. Say, the concept of land - "the original and indestructible powers of the soil" - came to include all "indestructible" sources of wealth, whether or not divisible to individual landlords and whether or not original (Ricardo 1971 [1817] ch.II, pp.91-93). Thus any form of non-depreciating capital was 'land', and any form of partially depreciating fixed capital was partly 'capital' and partly 'land'. Social capital incorporates all of Ricardo's 'land', less the 'soil' and the exclusive private spaces which define private landlords' estates.6

      Despite their emphasis on class interests, Ricardo and Mill treated one very important interest - that of the government ("sovereign" or "commonwealth" in Smith [Introduction, p. lix]) - differently. Indeed, inferring from Mill, the income to the sovereign is a "concession" on the part of the other interests. Yet it is clear that much of the 'land' that brings about rent is the property of the sovereign - is part of the commonwealth - rather than the property of freehold land owners taken individually or collectively.

      Ricardo's approach is understandable for a number of reasons. First, he followed the lineage of his physiocratic and classical predecessors in identifying the critical tripartite division of interests (although his preface does add 'machinery' as a 4th factor). As such, they focused entirely on tangible requisites; soil for land, corn for capital, and the population for labour. Interestingly, money is also treated as a commodity requisite; as gold and silver coin. While the owner of corn was the capitalist, and the owner of mines was the landlord, the owner of this key requisite, specie, was the sovereign. A monetary system certainly qualifies as non-original but indestructible social capital.

      Although treating taxation as a second order of distribution - a redistribution that acknowledged the legitimate rights of the sovereign to revenue - Ricardo regarded both landed and sovereign interests similarly, as unproductive consumers. He could have simply treated the sovereign as a supreme landlord. But he was seeking arguments to support public policies which would yield high returns to capitalists, not because he was a capitalist, but because he believed that only profits would be reinvested to drive economic growth.7 Thus, for Ricardo, growth was dependent on distribution to the various interests. Landlords as capitalists would invest, while landlords as landlords would consume. While neoclassical economics focuses on the requisites of production rather than class interests, the 'trickle-down' theory of popular economics retains Ricardo's dubious sociology.

      While Ricardo did not believe that taxes were any more distorting than rents, by treating rents as a given and taxes as a burden, the overwhelming impression that carries over into, for example, public choice economics, is that taxes are fundamentally different from rents. Certainly, a landed interest with monopoly power would be able to raise the rent share of the economic surplus. Any analytical treatment of governments that might encourage such monopoly rent-taking was therefore to be avoided. While in 18th and 19th century Britain landlords were probably taking as much rent as they could take - so their income was a 'given' - the British sovereign, unlike some other sovereigns, was not seeking to maximise its take. J.C. Weldon goes so far as to see the social wage - ie the sovereign's 'wage' - as having fallen progressively as a factor share in Britain from the 17th to the 19th century:

      The theorist today who would follow the classicists in deferring to reality must notice at least one great change in the structures that determine distribution. There is an ever widening difference between the private and the social wage, between the private and social share of the surplus. ... One would not be at all surprised, incidentally, to learn that the ratio of social to private wage declined from Petty to Marx, and that its rise in this century has been a return to the much earlier proportion.

      J.C. Weldon (1988), "The Classical Theory of Distribution". (p.41, incl.n62)

       

      Ricardo did not want the "unproductive" government sector to expand to match its relative size in the earlier years of absolute sovereigns. Indeed, in the liberal spirit of the Enlightenment, such a sovereignty had in his lifetime come to a dramatic end in France. The 16th century views of Hobbes and Bodin, the founder of the quantity theory, had been much more partial to absolute sovereignty. The sovereign or public domain was that of a monopoly overlord:

      Le domaine public de sa nature inalienable ... le domaine est le plus seur moyen de faire fonds.

      Jean Bodin (1576), Les Six Livres de la République (VI, ch.2).

       

      To Ricardo, land is a source of rent as a fertile space; specifically because some spaces are more fertile than others. The fertility of the sovereign's domain, on the other hand, represented intangibles such as culture, institutions and laws. It required a more sophisticated interpretation of the classical paradigm to incorporate the economic contribution of indivisible and intangible requisites. J.S. Nicholson (1922) attributes the development of this insight to Friedrich List, whose main work - The National System of Political Economy - was published in 1841.

      It was Johann von Thünen (Schwartz 1994; Ekelund & Hebert 1975, pp.231-234), a capitalist landowner writing in isolation, who, in 1826, showed that pure rent would accrue in a closed economy with all (three) factors homogeneous.8 Distance from the central market was the only variable factor. Rent would accrue to the owners of well located spaces; eg to land in the centre of the territory. It does not take much imagination to recognise that the domain of a secure sovereign, as a monopoly space, is strategically located so as to be able to claim the lion's share of pure rent.

      The upshot of this analysis is the idea that the landlord interest and the sovereign interest are one and the same (as economic classes), representing property rights over an entire domain of space, natural fertility, and inappropriable (largely intangible and indivisible) capital stock. Landlords themselves (as a social class) reduce to capitalists (ie proprietors and claimholders), in that their freehold titles constitute part of the capitalist exchange economy.9 Rent accrues to capitalists as realised or unrealised capital gains. The sovereign maintains the right of eminent domain, and has the power to tax all capitalists to the point that only the sovereign receives rent in the stationary state of long run equilibrium. A modern Ricardian analysis therefore yields three class interests: labour, capital, and the sovereign or commonwealth. In this formulation, taxation is rent, fully analogous to both parts of the payment made by Ricardian farmers to their landlords. The resulting income fund is a social wage made up of a (capital) return on the productive investments undertaken by the sovereign, and pure rent deriving from the sovereign's monopoly powers over its dominion.

      A flat tax on all market income (as the sovereign's profit), combined with a 100% tax on pure capital gains (realised or unrealised gains resulting from increased social inputs,10 as the sovereign's rent) logically follows from such post-Ricardian schematics. An economically rational monopoly sovereign possessing a productive domain would be expected to exert a high rate of flat tax. In a democratic sovereignty, all subjects would own an equal share of the resulting social wage fund, which could be paid in cash (eg as a tax credit), in kind (as public expenditure), as transfers,11 or as a combination of the three. All subjects would receive an income at or above the level of 'cultural subsistence'.12 Market failure would exist on account of the monopoly power of the sovereign. Under such market failure, however, under a secure democratic commonwealth, the error would be on the side of equality; an error quite acceptable in terms of Smith's concepts of social well-being and growth (Prasch 1991).

       

    3. from Public Choice
    4. A roving bandit leader, if he could secure and hold a given domain, had an incentive to become a public good providing king. ... Any autocrat by definition has sovereign power and thus the power to take any asset that he wants.

      Mancur Olson 1995, p.445.

       

      Unlike classical economics, the emphasis in public choice is on redistribution as being distinctly different from distribution. I have argued that, for Ricardo, the difference between rent and taxation, although treated separately as distribution and redistribution, is one of context rather than fundament. In Ricardo, the claims of the government and of private property owners are equally legitimate. Both sets of claims are historical 'givens' (Weldon, p.36). In public choice the claims of the government can be classed as concessions under duress. Hence, for example, from Gordon Tulloch we get specialist analyses of redistribution: The Economics of Income Redistribution, The Economics of Wealth and Poverty (which is all about redistribution), and The Rhetoric and Reality of Income Redistribution.

      The sovereign is unambiguously masculine in public choice metaphor.13 The mode of analysis is essentially derived from a Hobbesian framework; a framework of amoral individual calculating rationality. Mancur Olson (1995) considers the absolute sovereign as a "stationary bandit" controlling his "mafia domain". A Hobbesian sovereign will create a society that is more stable, secure and retains more private wealth, than will a contested sovereignty of roving bandits.

      Olson sees taxation as theft, however, and considers that any level of theft creates a distortion. While some taxation is accepted as necessary (enough and only just enough to invest in "good institutions" which provide, inter alia, protection services for private property) as a lesser evil, Olson prefers a Smithian over a Hobbesian world; a world of low taxes, minimal rent-seeking, yet high rents.14 Thus, for Olson, the ideal sovereign is morally responsible, so limits his theft while maintaining his monopoly powers to steal and commit acts of violence. He is a frugal, socially responsible overlord with the power to prevent his subjects from participating in criminal activity.

      Once we remove the idea that taxation is conceptually distinct from rent, the sovereign's "mafia domain" becomes legitimate income-earning property in the same sense as the landlords' domains. Then the distortions arising from theft disappear from Olson's analysis, and the externality costs from monopoly sovereignty are shown to be outweighed by the costs of contested sovereignty.

      A fiscally prudent Smithian commonwealth would preside over a more just dominion than a tax-maximising Hobbesian autocrat. However, by democratising the sovereign, the justice of the situation would change. Ceteris paribus, the people would own the former royalties as their social wage; the social wage would no longer be a fund available for conspicuous consumption by a monarch. On the other hand, a Smithian sovereign, having conceded much of its interest, would be allowing the social surplus to accrue to another interest; the "unproductive" gentleman interest or the "productive" interest of the Ricardian capitalist. In fact, a sovereign which concedes his role as monopoly rentier opens the gate for a class or classes of private rentiers: nobles, "gentleman capitalists" (Cain and Hopkins 1986/87), merchants (Smith), even an aristocracy of labour. The market forces which limit wages and profits operate essentially the same whether a nobility or a sovereignty is the predominant class of rentiers. Indeed, in practice, the sovereignties of the ancien régime were tense coalition arrangements between kings and nobles, as monarchs were rarely secure without the support of the dominant private interest.

      In a democratised sovereignty, Olson's mafia domain becomes the public domain, the stationary bandit's interest becomes the public interest. A post-Ricardian economy of social capitalism emerges. The social wage remains a combination of monopoly rent accruing to the sovereign and a return on the productive assets of the public domain.

      The ceteris paribus condition is hard to sustain, however, following a democratic coup d'état. A democratic sovereignty is in fact a potentially unstable cartel, a nominal monopoly that can be broken when the private interests of sufficient members of the public outweigh their perceived individual stakes in the public interest.15 Because autocratic sovereigns are also insecure, the cartel problem is not an argument against democracy. Nevertheless, the ability of any class interest to extract rent ultimately depends on the collective unity of that interest group. The public interest has the potential to be either the most united, or the least united, of the interests. A divided public, individually conditioned to an ideology of placing self ahead of community and society, may concede much of its legitimate income to one or more of the private interests.

       

    5. from Economic History / Growth Accounting
    In order to deal more easily with factor productivity variations stemming from technological innovations ... we have introduced into our production function the symbol St , which represents the society's fund of applied knowledge. ... Similarly, in order to treat the impact of social, cultural, and institutional changes upon the productivity of the economy, we also include in our production function a symbol a symbol Ut , which represents the socio-cultural milieu within which the economy operates. ... As social scientists gain a better insight into the relevant dimensions of these two classes of forces, a judicious choice of indicators may permit a rough ordinal valuation of St and Ut . Our framework suggests how one could then use these concepts in economic analysis.

    Irma Adelman (1961), Theories of Economic Growth and Development. (pp.9,12.)

     

    The economic history perspective follows from the major question addressed in modern macroeconomic history; the measurement and causes of long-run economic growth. Much empirical work has been done, by Colin Clark, Simon Kuznets and Angus Maddison, to name just three. Their focus on growth is classical, in that it is long term, and that they look far beyond simple increments of capital or labour to explain what are seen as essentially historical processes.16

    Twentieth century economic historians' production functions derive from Mill's "requisites" rather than his "agents" of production. Even better is the Marxian term "forces of production", which gives the historical approach its dynamic quality. Forces of production are added to the classical production function by various writers in order to highlight whichever particular story each is telling.

    _____________________________________________________________________________________________________________________________________

    THREE PRODUCTION FUNCTIONS for GROWTH ANALYSIS

    Ricardo:

                Y = f (P, L, K)

    where  Y = output

                P = population/labour

                L = land / non-depreciating fixed capital

                K = machinery and circulating capital

     

     

    Cameron: (ref. Cameron 1993, pp.3-19)

                Y = f (P, R, T, X)

    where  Y = output

                P = population

                R = resources (ie from land)

                T = technology

                X = social institutions

     

     

    Adelman/Rostow: (ref. Rostow 1990, pp.5-6; Adelman 1961)

                Y = f (L, K, N, S, U)

    where  Y = output

                L = labour force

                K = capital stock

                N = natural resource endowment

                S = society's knowledge

                U = socio-cultural milieu

    _____________________________________________________________________________________________________________________________________

     

    For Rondo Cameron (1993, pp.10-12), "resources is the 'land' of classical economics writ large". Population represents all the ways humanity has "a bearing on a population's economic performance", including 'entrepreneurship' a requisite that is frequently added to the classical triad. "Technology" represents innovations, whereas "social institutions" is essentially Marx's "relations of production", often seen as a conservative force (eg Ayres 1978 [1944], Olson 1982, Mokyr 1992). Capital transcends all four factors in Cameron's growth model.

    Irma Adelman's formulation, adopted by W.W. Rostow, retains a more classical approach to capital, while recognising that the labour force is not a simple function of the population. The three other factors read as essentially social wage generating inputs - certainly that would be true for natural resources in the perspective of Thomas Paine,17 for whom all 'land' represented a social birthright - although Rostow and Adelman do not develop a distribution analysis. Dovring (1987, p.2) proposes another version in which 'technology' and 'management' take the place of 'knowledge' and 'milieu'. I prefer the Adelman/Rostow version, because of its all-encompassing perspective.

    The neo-classical growth accountants, of whom Edward Denison provided the seminal contribution,18 simply place Adelman's social inputs into the production function as a residual.19 They represent no interest as such, they cannot be bought and sold. The recognised factors, those with exchange value, impact on both growth and income distribution, whereas the residual factors only impact on growth, generating a growing surplus to be divided between the interests of capital and labour. Thus capital can be taken as all property with a market value. Denison's production function can be expressed:

     

         Y  =  f (L, K, u)

     

    where u is the 'unknown', the residual ingredients that make total factor productivity growth possible. The residual allows output to grow faster than the sum of the growth rates of labour and capital.

    It is a simple step to redesignate labour and capital as interests, rather than as requisites, and to redesignate the residual as the public domain, representing a class interest, that of the public:

     

         Y  =  f (L, K, S)

     

    where S is the sovereign or public domain.20 Thus, in effect, S becomes the natural environment, the body of knowledge and the socio-cultural milieu of Adelman's model. The word 'milieu' conveys a hint of something more; a territory, a civilised space, a basis for a social rent. It certainly includes the concept of "trust" central to Fukuyama's (1995) social capitalism.

    Human capital can have components that are owned by individuals (labour skills), by firms (a form of capital, especially when it is firm-specific on-the-job training) or that are in the public domain (education). A form of intra-firm human capital - eg the "Nissan Way" - becomes part of the public domain once the secret is out. Ceteris paribus, there should be a redirection of an income flow from Nissan's interest, to the public interest. Where such intangible property is the basis for a return to capital in the private domain, then, identical property in the public domain is equally the basis for a return to the public.

    Public policy is part of the public domain. Thus, when a bad policy is replaced by a less bad policy, or when a good policy is replaced by a better policy, and GDP growth ensues, the growth increment is solely due to a contribution from the public domain, so the beneficiary should be the public interest.

    The public domain is everything that might affect the level of market production which is not contained within individual persons (labour) or that cannot be freeholded (capital). A technology - as a form of knowledge - moves fully into the public domain when its patent expires.21 The income that flows to a copyright-holder should be thought of as belonging to the public domain when the copyright expires.

    William Parker (1990, pp.8-9) conveyed a very broad concept of public domain in his 1988 Davidson lecture. His "productivity history in the spirit of Schumpeter" covers "intangibles like education, technology, national defence and the pleasures of domestic life". His figure 1 locates the circular flow of a national economy within a domain of productive forces including culture, politics, "para-economic institutions" and innovation all located in an external environment providing physical and intangible social inputs.

    Joel Mokyr, in a major work of economic history inspired by Joseph Schumpeter's theories of unbalanced growth (eg Schumpeter 1947), emphasises technological creativity - specifically "macroinventions" - as the principal source of the "free lunch" (Mokyr 1990, p.3) that is modern economic growth. The "mildly comical" aphorism "there is no such thing as a free lunch" (McCloskey 1985, pp.65,62) reflects the divide between the classical 'half-full' approach focusing on the distribution of the economic surplus, and the neoclassical 'half-empty' approach predicated on scarcity, in which surpluses are allocated to firms and individuals as producer and consumer surpluses.

    Mokyr doesn't directly address the issue of how the free lunch should be distributed. Implicitly, he accepts the neoclassical maxim that the consumer is sovereign. Under consumer sovereignty, each person gets a share of the growing surplus made possible by increased public domain inputs, in proportion to their consumption. Thus, the neoclassical allocation has a built-in bias to consumption over (say) leisure, because the price mechanism is its only means of conferring a productivity dividend made possible by a growing residual. In effect, the consumer surplus acts as additional rent to those whose incomes already incorporate an economic rent. Thus, if any particular private interest is receiving economic rent on a class basis (eg as Ricardian landlords) then that class is going to get the lion's share of the consumer surpluses that together make up society's technology dividend. The public domain approach, on the other hand, emphasises the sovereignty of ownership; that the technology dividend is part of the common wealth, due essentially to public domain inputs. Thus, each member of the public should receive the same technology dividend, regardless of how much they consume.

    Following from the growth accounting derivation of the public domain, which emphasises the increasing importance of social capital to production, it follows that a sovereign government should levy a high flat tax on all market production;22 ie income tax would simply be a fixed share of a producer's contribution to GDP, in accordance with the assumption that the public to private ratio (S to L+K) is the same at any point in time for all producers. Because the value of that share cannot be measured,23 it must therefore be valued through the political process. If existing taxes do in fact undervalue the public domain, then, given that an increase in the social wage fund must by definition raise equality, a rise in taxes would achieve increased efficiency and equality at the same time. From a long term growth perspective, if the economic historians are right about the contribution to growth of the residual factors, then the social wage should be rising in line with total factor productivity growth, if not ahead of that growth as a means of ensuring ongoing investment in the public domain.

    The falls in tax rates that have predominated in the industrialised world since the 1970s have been moving in a direction counter to that suggested by historical growth analysis. If rents have indeed been skewing the distribution of income in favour of elite private interests, whereas contributions to growth have been coming from increasingly disadvantaged labour and public domain interests, then it is likely that the under-rewarded factors will be unable to maintain the growth of their contributions. A lack of reward to social capital and many forms of human capital should lead to a diminished supply of these requisites.24 Thus, the classical position in which conditions favourable for the growth of private rents led to a productivity slowdown may indeed be part of the reality of the late twentieth century.

     

  4. The Factors Together
  5. Rent distributes the proceeds of production between factors. It does so based on criteria that do not reflect the worthiness of each factor considered in the abstract, but rather reflect some combination of inherent productivity and scarcity.

    Folke Dovring (1991), Inequality: the Political Economy of Income Distribution. , (p.26).

     

    The upshot of my argument is that our economic system, like the classical system, can be understood as the interplay between three inclusive class interests. The classical / physiocratic emphasis on land is replaced by that of the public domain. The simplest way to model the public domain is through treating the public interest as equivalent to that of a secure economically rational monarch, whose domain is a legitimately possessed means of production. Thus the analysis of the public interest is fully parallel to the interest of a monopoly landlord in the Ricardian system. Likewise, the productive contents of the public domain are fully comparable with the "indestructible" soil, improvements and forces of nature that together make up a landed estate, such as that of von Thünen. Some of the resources of the public domain may be modelled as depreciating - as being subject to diminishing returns over time - and therefore in need of ongoing investment from the monarch. Some others appreciate with use (eg language, the Internet),25 and some may be regarded as neither appreciating nor depreciating.

    Public domain investment results not only from a government retaining part of the social wage for purposes such as education, public science and public works, but also by distributing part of the social wage. An equal cash dividend to all citizens - eg a social wage tax credit - can help overworked people to commit less time to the labour market, giving them more opportunities to provide the essential creative inputs that vitalise the public domain as well as more opportunities to gain skills in demand. Whereas Hobbesian economic man is an effort minimiser, real human beings are curious, creative, imaginative, seeking to make their mark on their society,26 wanting to participate, to contribute. Such publicly motivated investments are the sine qua non of economic civilisation. Most of the important creative contributions in the history of science, mathematics, economics, philosophy and literature have been made by people whose private means allowed them to make public contributions. In history, creative people have been either beneficiaries of public or private patronage, or had private means. A social dividend would provide a person with the same opportunities to make a public contribution as a company dividend of the same value.

    If the main source of growth is the contents of the public domain, then the main factor to nurture is the public domain, and public policy needs to focus on the whole range of incentives and disincentives that determine the growth rate of public domain assets. Thus, whereas Ricardo sought policies that would add to, maintain, or limit the erosion of the profit share, a modern policymaker - pursuing Ricardo's goals - would need to expand the social wage. Yet the specific characteristics of the factors make it very difficult for a modern sovereign to do this.

    As in the classical system, each factor has unique characteristics. A mode of analysis that simply models the different requisites as substitutes cannot answer the questions which were central to classical political economists. Ricardo attributed rent to one fixed factor (land), growth to the income share of another factor (capital), and value to another (labour). From a closed economy perspective, the public domain is immobile, like land; from an open economy perspective, it diffuses whereas other factors may migrate.

    While it cannot be claimed that any economic or social class, per se, is associated with a high marginal rate of saving, we do know that capital and labour have very different characteristics. Capital is now close to being perfectly mobile - nationally and internationally - whereas labour is much less mobile; sometimes more mobile internationally than within a nation (Williams 1929). Indeed the growth of the mobility gap between financial capital and commodity labour has been one of the features of recent economic development. Ricardo explicitly avoided the problem of internationally mobile capital by simply asserting that capital was fully mobile between London and Yorkshire, but essentially immobile between countries (Ricardo 1971 [1817], p.153).

    The sheer mobility of modern capital acts as a basis for economic rent. The mafia protection racket described by Olson works as a form of blackmail: 'I, the ruler of this domain, will hurt you if you do not pay tribute to me'. Likewise, today, the owners of capital can say to a national sovereign: 'I, as the owner of a resource that you need to combine with your resources, have the power to move my resources elsewhere, virtually overnight, if another sovereign government charges me less for the use of its domain'. In a global domain that is not subject to the hegemony of any specific imperial power, national sovereigns have become subject to the same kinds of competition as other divided class interests.

    In a sense the Ricardian relationship between capital and land has been overturned. Capital has become the overlord class, and the social wage has become the analogue of Ricardo's profits. The policy problem remains one of how to raise the social wage in the face of interests that have been increasingly able to extract rent at the expense of the public domain. A classical-like stationary state arises when new public domain investment ceases.

     

  6. Conclusion
  7. It is not charity but a right - not bounty but justice, that I am pleading for. ... I care not how affluent some may be, provided that none be miserable in consequence of it.

    Thomas Paine (1796), Agrarian Justice.

     

    We can define the public domain as a factor of production, and a social wage as a factor income, in the classical sense. The social wage represents a financial return to social capital; to a collection of significant though diverse resources that are not subject to private ownership. The social wage represents a property right; a right to a profit from the collective resources in the public domain and a right to a scarcity rent from the sovereign's monopoly control over its domain. Any social dividends paid out as a part of each person's social wage entitlement can no more be called "charity", "hand-outs" or redistributive "transfers" than can dividends accruing to private property. The public domain is a legitimate income-maximising factor interest.

    A greater emphasis on the public domain as the basis of an income stream in no way impairs the integrity of the market economy; social capitalism - neither socialism nor state capitalism - depends upon the profit motive. The public domain is simply an under-rewarded factor of production, and the social wage is a factor income that, if raised, can be a means to reduced inequality, improved static efficiency and, by enabling replenishment of and addition to social capital, to rising long run productivity. Productivity growth depends, however, on social wage increases not being eroded by predatory claims on the social surplus from private interests.

    Regardless of the impact on the economic growth rate, economic justice is an end in itself. That was the essence of the liberal, classical, enlightenment spirit of Adam Smith and Thomas Paine. If any rent should accrue to any particular economic class, then surely that class interest should be the public interest. A responsible sovereign in a world of imperfect information should seek to err in its own interest, favouring a public over a private rentier class. Error in the opposite direction helps to create the conditions for the emergence of a nobility. Indeed, just as the beneficiaries of the "commercial system" that Adam Smith opposed and the "gentlemen capitalist" imperialists of Cain and Hopkins can be taken as kinds of nobility, so can Dovring's salaried rentiers. They can be said to constitute a new aristocracy of labour and capital, by virtue of their very high salaries and the investments made possible by those salaries. Yet an appropriable economic surplus can only exist with the help of collectively owned inputs and must take place within a public environment:

    All accumulation, therefore, of personal property, beyond what a man's own hands produce, is derived to him by living in society; and he owes, on every principle of justice, of gratitude, and of civilisation, a part of that accumulation back again to society from whence the whole came.

    Thomas Paine, Agrarian Justice, 1796.

     

    A more assertive, less divided sovereign interest is required to ensure an equitable allocation of the economic product, to address problems of market failure that give scarcity rents to private interests, and to revitalise the public domain without which gentlemen cannot prosper.

      

  8. Notes
    1. I wish to thank Ian Ritchie (UBINZ), the Massey University Economics Department (Albany) and the New Zealand Political Studies Association for their active interest in my 'social wage project', Chris Trotter for his propensity to publish provocative articles on policy issues, and John Gilbert and Christine Woods for their comments. The usual disclaimers apply. [return]
    2. Prasch (1991, p.342) argues that, for Adam Smith, "his overriding concern [was] the bringing of civilisation". Economic growth meant the growth of social capital as an end in itself, with some concept of economic justice being integral to civilisation. Note Robert Putnam's concept of social capital (eg Helliwell and Putnam, 1995, p.297) which maintains such a Smithian classical vein. [return]
    3. Note that Ricardo actually identifies four factors in his preface, introducing a distinction between ordinary capitalists (typified by tenant farmers) and industrial capitalists (Rostow 1991, p.399) that opens the door for a wider set of distinct class interests within the rubric of capitalist. Merchant capitalists, gentleman capitalists and finance capitalists - for example - are additional, potentially distinct, interests from manufacturers and farmers. [return]
    4. "A person to whom goods are consigned for sale and who is paid a factorage" (Collins English Dictionary). [return]
    5. "An element or cause that contributes to a result" (Collins English Dictionary). [return]
    6. See Dovring's (1987, chapter 2) discussion of land as soil and as space. [return]
    7. In the Ricardian system, rents were spent on unproductive consumption, profits on (productive) investment, and wages on productive consumption. One of the main weaknesses of this mode of analysis is the idea that additions to rents, profits or wages would be spent in a way determined by their source. Arguments that social class conditions the way discretionary income is spent are in the realm of economic sociology. The sociological argument is particularly dubious when one appreciates that Ricardian men each belong to up to three economic classes. [return]
    8. Von Thünen likened his own large estate to that of a sovereign. [return]
    9. If we assume that all private land was originally acquired as purchases from the sovereign at true market value, then land is just one of many forms of capitalists' fixed capital. [return]
    10. Such capital gains taxes, strongly advocated by Henry George, were also supported by J.S. Mill but not at the 100% level (Hawke 1985, p.26). [return]
    11. Transfers can be understood as all cases in which any person or interest receives an allocation of the social wage fund greater than the average allocation. [return]
    12. In a modern context, 'cultural subsistence' can be taken as the line of relative poverty. The word 'poverty' has misleading connotations, however, as there is no logical requirement for a socially determined minimum standard of living to be related in any way to poverty. [return]
    13. See Deirdre McCloskey (1996). McCloskey talked at length on the topic of masculine metaphor in her July 9 address to the recent University of Auckland conference - "Narrative and Metaphor Across the Disciplines". [return]
    14. Smith's theory of rent was somewhat more 'physiocratic' than Ricardo's. In Physiocracy, land rents constituted the social surplus, an item therefore to be maximised. [return]
    15. This could be due to misappropriation of the social wage. [return]
    16. Kuznets addressed the American Economic Association in 1954 on the links between economic growth and income distribution (Kuznets 1955; Dovring 1991, pp.87-89). Kuznets saw an "inverted U-shaped curve" in the long term data sets; a propensity for the early stages of modern economic growth to be associated with equality, but for inequality to grow in the later stages. While Kuznets' curve has been much contested, Dovring suspects Kuznets may be right, but notes that increased inequality should not be regarded as inevitable; perhaps instead it "follows from some of the ways the world has happened to work". Keller (1973, p.271) found that rising inequality occurred in just one of the periods of expansion in the United States between 1899 and 1957, namely the 1920s, suggesting that on balance, there is a significant correlation between growth and reduced inequality. [return]
    17. Paine was not opposed to the sale of land. Rather, he believed that the capital gain from sales of public assets should be invested in a permanent fund that would yield a social wage return equivalent to the conceded revenue. [return]
    18. Rostow (1991) p.413: "Denison ... sought to fill the empty boxes of neoclassical growth models". [return]
    19. 'Natural resources' effectively splits into 'capital' and 'environment'. The latter, as a collective input and a space in which economic activity is located, is consigned to the residual. [return]
    20. We can say that labour, capital and the public domain are requisites of production. The agents of production are the workforce, the owners of private property, and the public. [return]
    21. In addition, external economies arising from new technology enter the public domain through the products that embody that knowledge. And the public domain includes "unforeseen secondary benefits" arising from "the impact of innovations [Rostow's emphasis] generated by problems and profit possibilities in one sector on productivity and output in other sectors" (Rostow 1991, pp.426-427). [return]
    22. Note that high flat taxes do not seem as high if part of the social wage is distributed as a substantial tax credit. [return]
    23. See Helliwell and Putnam(1995, p.297) for an attempt to build an index of social capital. [return]
    24. While orthodox factor supply theory also suggests reduced labour inputs as a response to falling labour prices, the heterodox but frequently observed backward-bending labour supply schedule may be generating a growth in the supply of commodified labour, despite falling real wage rates. Increased time consuming employment and private education costs can be expected to lead to a deceleration in the demand for tertiary education. A supply bottleneck in human capital ensures increased rents to existing stocks of human capital, creating, in some occupations, the conditions for a new aristocracy of labour. [return]
    25. As in the slogans: "Use it or lose it" and "Learn by doing". [return]
    26. In the spirit of Francis Fukuyama - a modern Hegelian - calculating, labour-shirking economic men fit the category of those lacking the part of the soul "that Plato called thymos or spiritedness" spending "their lives calculating their long-term interest for the satisfaction of no more than petty wants" (Windschuttle 1994, pp.162,164). Fukuyama's "Last Man" is 'economic man'. Fukuyama's end of history thesis is wrong, I believe, because human beings will never lose their public spiritedness, their innate power to destabilise any 'stable' equilibrium by wreaking 'creative destruction'. I say this, despite Schumpeter's (1976 [1943]) own pessimism in his version of the 'end of history'. [return]

     

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