Time Will Run Back

by Henry Hazlitt

  “In other words, chief, manufacturers bidding for workers act in the long run on the same type of calculation as manufacturers bidding for raw materials?”

  “Exactly, Adams. Their competition bids up the price of labor’s services in the same way as it bids up the prices of raw materials.” “As they pay the market price for raw materials, so they pay the market price for labor?”

  “Exactly. We can put this in another way by saying that the worker gets the value that he adds to the manufacturer’s total product. Wages are determined by the final or marginal productivity of labor. The worker gets what he creates. He gets the value that his labor adds to production.”

  “Then it isn’t the generosity of the employers, chief, but their selfishness and cupidity that leads them to keep bidding up wages to the point where they correspond with the worker’s marginal productivity?”

  “That’s one way of putting it.”

  “That’s a pretty convincing argument,” said Adams finally. “But maybe—Well, for example: there are a lot of workers competing against each other, but only a relatively few employers. Doesn’t that tend to push wages down below the point of marginal productivity?”

  “I’ve had that question investigated by our statisticians in the Supreme Economic Council,” said Peter, “and I find that in Free-world there is about one employer for every twenty workers. But even if there were only one employer for every hundred workers, or one for every five hundred, the result would still be approximately the same. As I just pointed out, only two employers in an industry, if they are really competing, can push up wage levels to the point of marginal productivity.”

  “And then if there were only one employer in an industry,” added Adams, “even if he had a monopoly in that industry, I suppose he would still have to bid labor up in order to keep it from drifting into other industries, or perhaps to attract it out of other industries. For he must still compete with other industries as a buyer of labor’s services, even if not as a seller of his product.”

  “That is true,” agreed Peter. “He would certainly have to compete with other industries at least for new labor, or for common labor. He might be able to some extent, perhaps, to exploit his skilled labor—provided he did not have to employ any additional skilled labor and provided it would take his skilled workers a long time to acquire other skills. But apart from such exceptional situations, the worker must tend to get what he creates. He tends to get the value of his marginal productivity.”

  “All right, chief. You’ve sufficiently convinced me on that point. But I still have a few questions to ask....”

  Chapter 36

  IN Washington, Adams and Peter sat listening to a shortwave broadcast of one of Bolshekov’s speeches in Moscow’s Red Square. It was full of the usual cliches of Communist propaganda, but suddenly Peter was pulled up:

  “... I should like in passing to say a few additional words about the two traitors who were hung in the square as part of this morning’s program. Their numbers were EN-57 and L-92. The first was an engineer who passed under the name of John Maxwell and the other a young woman—very pretty, like most women traitors—who posed as his daughter under the name of Edith Maxwell. Those of you who were here to witness their hanging were told that they had confessed their crime, but I think you all ought to know that they confessed also that they had committed each of their acts of sabotage and treason at the direct orders of the archtraitor and criminal, Peter Uldanov....”

  It was not until several weeks later that Adams could get Peter to discuss once more the larger problems of Freeworld.

  “Bolshekov’s terrible crime, chief,” Adams kept repeating, “only provides a stronger reason for you to try to create a world in which such things will be forever impossible. We can only do that with completely transformed political and economic institutions. And we must be terribly sure that in substituting new institutions for those of Wonworld we are substituting the right ones.”

  “I suppose you’re right, Adams,” Peter at last conceded. “The past is irrevocable; what’s done’s done; the future is the only thing we can do anything about. But I wish I could get this horror out of my mind. I know that they’re dead; and compared with my ugliest fears about their fate, and all the tortures my imagination has put me through, that knowledge comes at last as a sort of release. But I wish I knew whether they had really ‘confessed’ or not; I wish I knew whether they had really accused me, or whether that is just a pure lie of Bolshekov’s....”

  “Which would you prefer to believe, chief? That they ‘confessed’ and accused you of their own free will, for trivial reasons? Or that they did it only after unendurable torture? Or that they withstood terrible torture—which they could have saved themselves merely by consenting to accuse you?”

  “Don’t, Adams. I wouldn’t want to believe any of those things.”

  “Then why not stop torturing yourself? Bolshekov was probably only lying.”

  “The horrible communist system of Wonworld debases and poisons the existence of everybody, Adams. It becomes impossible under it for anybody to believe in human dignity, decency...” He made an effort to pull himself together. “What do you want to discuss?”

  “I want to come back to the questions we were debating a month ago, chief. You said the worker in our new system gets the value of what he produces. But how can he, when the owners of capital insist on a share of it?”

  Peter passed his hand across his brow as if trying to rub out the distractions that were not relevant to this question.

  “Let’s begin, Adams, by simplifying the problem. You and I are two workmen. I produce a hatchet. I lend it to you, and you chop down trees with it. Suppose you were paid in accordance with the number of trees you chopped down? Would you say you had done all this yourself, and that I was grasping to expect to be paid for the use of my hatchet?”

  “No, chief. Your work in producing the hatchet is as necessary to chopping down the trees as my direct work on the trees. Therefore I would pay you for the hatchet, and buy the hatchet from you.”

  “Very well. But suppose you didn’t yet have the money to do that. Then you might propose, instead, either one of two things. You might come to me and say that you needed a hatchet for chopping down trees, and that if I would lend you one of my hatchets you would give me, in return, part of what you earned with it.”

  “That would be only fair.”

  “So you have already admitted, Adams, that I, as the maker or owner of the capital instrument, have been responsible for, have helped to create, part of the product that you, in turn, have completed by the joint use of capital and labor—that is to say, by the joint use of the ax and your muscles.”

  “I have admitted it.”

  “Now suppose I, as the owner of the hatchet, decline your proposal that I get some definite percentage of your earnings. Perhaps I don’t want to be dependent upon your particular industriousness or your particular ability to get contracts to chop down trees. I may nonetheless agree to let you hire my hatchet for a definite sum each month.”

  “Such an arrangement would seem to me entirely fair, chief—provided you did not try to charge too much for the use of your hatchet.”

  “The amount of rental I could get for my hatchet would depend, Adams, on the one hand, on how many tree choppers there were like yourself who wanted my hatchet, and on how high the top bidder was willing to bid for it. And it would depend, on the other hand, on how many hatchet owners there were and for how low the lowest offerer was willing to rent. But the tendency would be for the woodchoppers to bid anything up to the amount by which the hatchets would increase their earning power—and that would depend, in turn, upon how much the hatchets increased their productivity.”

  “But how could you possibly separate, chief, the production of the hatchet from the production of the worker who swung the hatchet?”

  “It might help us if we look at the problem in another way,” said Peter. “Suppose I made a hatchet, b
ut that a third man, putting in much more time and work, made one of these portable power saws with an endless chain of whirling teeth. Now suppose that with the ax you could only chop down 10 trees a day, but with the motorized saw you could cut down 25 trees a day. The additional productivity of the power saw would be 15 felled trees a day. So if you hired out as a tree-feller and charged for each tree you felled, you could earn 150 per cent more with the power saw than with the ax. And therefore you would be willing to bid anything up to that much more for the rental of the power saw. Being a sensible man, you would know that it wasn’t your productivity that had suddenly gone up 150 per cent, but that what was responsible for the result was the joint productivity of yourself and the power saw.”

  “Very well, chief. I see all that. I acknowledge that capital instruments and land and labor each contribute towards what is inextricably a joint product, and that the immediate naked labor is not entitled to the sole credit for that product—”

  “And with free competition,” said Peter, “each factor tends to get paid the relative or proportionate share that it contributes to the total value of the product that all the factors jointly produce.”

  “But what I can’t understand is this,” said Adams. “If everything is jointly produced by tools and labor—by capital instruments and labor—how can you tell which part of the product to attribute to each? An ax can’t chop down trees without a worker to swing it; a worker can’t chop down trees without an ax to swing. And therefore you might argue that the worker does everything, because without him no trees would be chopped down; or you might argue that the ax does everything, because without it no trees would be chopped down. But the one thing that wouldn’t make any sense at all would be to argue, for example, that the ax chopped down two-fifths of the tree and that the worker was responsible for chopping down the other three-fifths.”

  “You are entirely correct, Adams, in saying that it wouldn’t make any sense to state the matter that way. The proportional contributions, the relative productivity, of the ax and the worker can’t be calculated in physical terms. But they can be calculated in terms of value. How much would a power saw increase my earnings? That’s a practical question; it has a practical answer; and I can afford to bid up to that amount as rental on the power saw. Or if I own a factory employing a hundred men, I can ask, ‘How much would ten more men increase my earnings?’—and I can afford to bid up to that amount as wages. Or take a more complicated problem. Fertilizer is only one element contributing to the total productivity of a farm. It can never be used by itself, but only in combination with land, capital, labor and waiting. How much can a farmer afford to pay for a given quantity of fertilizer? This will depend on how much more corn he can grow by using more fertilizer, how much less he can grow by using less, and upon the existing or expected price of corn. So the answer depends upon the marginal productivity of the fertilizer. That is, it depends upon the difference that a given increment or decrement of fertilizer makes to the final product—or more accurately, to the value of that product. In sum, with free competition, wages are determined by the marginal productivity of labor; and the rental of land and of capital instruments is determined by the marginal productivity of land and of capital instruments. Each factor gets the amount of wealth or income that it specifically brings into existence.”

  Adams took a pinch of snuff and looked thoughtful.

  “I’m still not satisfied,” he said at last. “Take money. People are lending money now, and they are demanding for it what is being variously called use-money, usury, or interest. I can’t see the slightest justification for that. I’ll admit that a power saw—or land, or a factory, or any kind of machine or tool whatever—adds to a worker’s production. All these things are productive instruments; and therefore it is perfectly fair to charge a rental for them, corresponding to their productivity, to repay the people who have made these things or who furnish these things. But money? Money is sterile. Gold is sterile. It produces nothing. Why should anything be paid for the loan of it?”

  “There are several ways of answering your question, Adams. Perhaps the quickest would be simply to point out that creditors don’t force loans or money on borrowers. Borrowers pay interest voluntarily; they even bid against each other in raising interest rates because of their competitive desire for money. Evidently the borrowers don’t consider money sterile.”

  “But—”

  “Let me put it this way,” continued Peter. “What difference is there in principle between your borrowing a power saw from me and paying me a rental on it, or your borrowing from me instead enough money to buy the power saw yourself, and paying me interest on the borrowed money? Is the second process any less ‘productive’ for you than the first?”

  Adams paused for another pinch of snuff. “Well, I can see one difference, at least. As soon as your power saw wore out, chief, or became obsolete, I would return it to you. If you wanted to continue renting it out, you would have to take a diminishing rental on it. Its rental and its value would keep falling until it was finally worthless. But if you lent me the money, you would expect the same amount of interest on it in perpetuity, and at any time that the loan expired you would expect to get back the full amount of your original principal, undiminished.”

  It was Peter’s turn to think a while before answering. “That is true,” he said finally. “But what does it mean? It simply means that if I lent you the power saw or some other capital instrument that would sooner or later wear out or become obsolete, I would have to charge you a rental for it much higher than the interest I could charge you for the same amount of money. Then out of the rental that I got for the capital instrument, I would have to set aside each month a certain sum, so that by the time the capital instrument had become worthless I would have enough money to buy a new capital instrument. And so on.”

  “But how do you know, chief, that there is in fact such a difference between rental rates and interest rates?”

  “Because both the lender and the borrower, Adams, are free to choose either course of action they wish. This freedom of choice, plus competition in borrowing and lending, must tend to bring about precisely this relationship. Look at it now from the borrower’s standpoint. Suppose you borrow 10,000 goldgrams at 5 per cent a year interest in order to buy a house for 10,000 gold-grams and rent it out for 900 goldgrams or 9 per cent a year. This gives you an apparent profit above mortgage interest of 400 goldgrams a year. But you must set aside at least part of this 400 goldgrams for repairs, maintenance and depreciation of your house. You would probably allow another part as compensation for the risk of finding your house sometimes without a tenant, and still another part as compensation for your labor and responsibilities as a landlord. And so, as long as lenders and borrowers act with equal foresight, it will become a toss-up whether it is more profitable to lend out money for interest or to build houses with it and rent them. Certainly we won’t be able to say in advance that the lender of capital will necessarily be better off in the end because he gets interest perpetually and gets back the full amount of his principal. The long-run tendency must be for rentals minus maintenance or replacement cost to equal interest rates.”

  Adams took still another thoughtful pinch of snuff. He did not seem to be quite convinced, but appeared to be on the verge of being convinced.

  Peter continued: “Suppose we look at the matter in still another way. Lending 10,000 goldgrams to a woolen manufacturer is really selling him the amount of cloth that 10,000 goldgrams, put into his equipment, will bring into existence.”

  Adams thought about this. “That is a striking way of putting the matter,” he said at last; “but I don’t think it is correct.”

  “Why?”

  “Let’s see what happens, chief. When you lend 10,000 goldgrams to a woolen manufacturer you really don’t sell him anything. True, he uses the money to buy 10,000 goldgrams’ worth of equipment. Now he’s got to pay you perpetual and undiminished interest. In order to enable him t
o do that, he’s got to earn a good deal more in each year with his new machines than he pays you in interest, because he has to put aside each year a certain amount of money—we might call it a depreciation allowance—in order to buy new machines out of the accumulated sum when the old machines have worn out or become obsolete. Now if everything works out perfectly, he won’t merely produce 10,000 goldgrams’ worth of cloth. He will produce a certain additional amount of cloth perpetually. And as this would mean an infinite amount of cloth, it ought to have an infinite value, and not merely 10,000 goldgrams’ worth of value. In fact, as the new machines, after proper replacement allowances, produce an infinite amount of additional cloth with an infinite value, the machines themselves ought to sell for an infinite price. And as a piece of land, also, can continue to yield crops infinitely, if properly fertilized, it also ought to sell for an infinite price.”

  What was the answer to that? Peter lit another cigarette.

  Adams finally broke into the train of his thoughts: “You know, chief, I’ve been puzzled about this matter for a long time. I’ve been discussing it with Patelli. And he has what seems to me to be an entirely different theory of interest.”

  “Oh?”

  “Patelli, chief, argues that interest isn’t the price paid for the services of capital at all, but something quite different. He says that interest springs out of the fact that people value present goods more than future goods of the same kind and quality. In other words, future goods are bought and sold at a discount as against present goods. Interest, he contends, is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remoter periods of the future. It is a ratio of commodity prices, not a price itself. In other words, Patelli says that interest arises out of what he calls ‘time-preference.’ “