Cause And Effect

Economists have long proclaimed that there are three factors of production -- land, labor and capital -- and that the distribution of production is rent to landowners, wages to labor and interest to capital. This economic theory of production and distribution was developed by eighteenth and nineteenth century philosophers and economists. The implication is that the three factors cause the effect production and production causes the effect distribution.

Many arguments have been developed over the years to support this theory. These arguments go to great lengths defining the terms rent, wages and interest. Economists then tell us it is because of our misuse of these terms that we fail to understand economic cause-effect relationships. We are told that to understand economics we must think of these terms as they have been defined by economists. To assist us in this endeavor they distinguish ordinary rent, wages and interest from economic rent, economic wages and economic interest.

We usually consider rent to mean the price we pay for use of things we do not own. We pay rent to use cars, apartments, furniture and land. Economists say this is in error. They say economic rent includes only the price we pay for the use of land.

According to them, the rent we pay for the use of cars and furniture contains no economic rent. Our payments consist partly of economic interest for use of the owner's capital and partly economic wages to compensate the owner for oversight of his assets, accounting for which is left to the experts.

They say rent for an apartment includes economic interest to the owner for his capital invested in the apartment building, economic wages for overseeing his investment and economic rent for the land the building occupies.

Their definition of economic rent also differs from ordinary rent in that it does not have to be paid. It includes the advantage of the natural productivity or location value of land that accrues to owners by their possession of this land. This accrual of value is called economic rent even when this value is consumed by personal use or is held idle in anticipation of future demand.

Economic rent, then, includes only the benefits from land and excludes the economic interest and economic wages that we mortals include in our meaning of rent.

Wages as we commonly use the term means only money received in exchange for our services. Economic wages include not only the wages of hirelings but also the economic wages excluded from rent by the definition of economic rent and the value of products we make for our own use.

Interest to most people is the charges paid for the use of money. Economists say economic interest is a charge for use of capital. They also explain that money is not capital. Economic interest is not a charge for the use of money. It is a charge for use of capital the money lender could have bought. Economic interest excludes what we think of as interest and includes a part of what we consider rent.

Why is it that economists explain money is not capital but then say capital shortage or capital flight is the current problem as evidenced by monetary statistics?

Another term that economists define their own way is economic profit. We generally call profit the difference between price and cost. Economists call this accounting profit. Economic profit, also called monopoly profit, they define as accounting profit minus opportunity cost. Opportunity cost is defined as the return owners could receive if they invested their time and capital in the best available alternative opportunity.

Accounting profit, or what we usually simply call profit, is the return to business owners for selling things for more than they cost. Ordinary rent is the return to owners of things that exist. Opportunity costs that separate economic profit from profit are like the economic wages and economic interest that distinguish economic rent from rent. Economic profit can, therefore, be said to be the economic rent for a business. But, there is a difference.

Before the industrial revolution most economic activity was based on agricultural production with only about five percent of the economy based on industrial production. These percentages have now just about reversed.

Agriculture now uses about five percent of the work force and the production of other goods and services employs the rest. It is because of this that economists have changed their emphasis from rent to profits but, they are speaking the same theory developed by earlier economists. They simply develop more definitions to fit the new emphasis.

Henry George, in his masterpiece Progress and Poverty, exposed this semantic exercise for the nonsense it was and is. He summarized his analysis of the laws of distribution as follows:

In the current statement the laws of distribution have
no common center, no mutual relation; they are not the
correlating divisions of a whole, but measures of
different qualities. ... [Book III, Chapter VII]

Personally I find this semantic exercise more confusing than helpful. I say there are only two factors of production. They are nature and people. There are three ways people cause production. They are husbandry, work and saving. And, finally, production is distributed among four groups. Self-employed and capitalists reap profits; hirelings are paid wages; money lenders collect interest; and, owners of things that exist collect rents, dividends and capital gains. Some may prefer to add government as a fifth group called tax collectors, but I prefer to recognize that government revenue is ultimately distributed to the citizens as social benefits. At any rate, this substantial departure from the wisdom of the experts deserves an explanation.

To understand why there are only two factors of production we must clarify what is meant by production and consumption. Production and consumption do not mean that anything is added to or subtracted from the substance of nature. They mean only that substance that exists is increased or decreased in economic value. When there is no change in economic value there is neither production nor consumption. Change in economic value can be caused only by nature or by people.

Production by nature includes such things as growth of plants and animals; creation of fertilizer by decay of dead plants and animals and the distillation of sea water into the fresh rain that irrigates the world.

Consumption by nature includes such things as the growth of weeds in our gardens or termites in our houses; the decay of dead plants and animals as wood rots or food spoils and destruction by storm or flood from the distillate of the sea.

The essence of production and consumption by nature are the differing values people place on changes caused by nature. It is not nature that defines economic worth, it is only value perceived by people that distinguishes production and consumption.

People produce by applying the laws of nature in ways that make nature more productive. This includes such activities as the care and feeding of livestock rather than leaving it to forage; the arranging of trees into orchards where they can be more easily irrigated, fertilized, pruned and picked; the sowing and harvesting of grains, fruits and vegetables to ease the burden of finding, collecting and transporting the food people need to sustain themselves; the storing of wine and cheese to let nature work her magic; the control of fire to heat their homes or power their cars; etc. The most inclusive term I could find for this type of activity is husbandry.

People also produce by changing things they find in nature. This includes the finding, catching and transporting of fish from the sea; the cutting of trees into lumber; the assembly of lumber into boats and houses; the making and using of tools to ease the burden of changing the substance of nature to more satisfying forms and myriad other tasks to fulfill the desires and needs of people. This type of activity we usually call work.

People can also be said to produce when they prevent nature's consumption. This activity includes the painting of surfaces to slow degradation; sheltering of works of art and other things from the ravages of nature; guarding the remnants of ancient civilizations or particularly magnificent displays of nature's wonders from despoiling by vandals or greed of the insensitive, etc. This activity is called conservation.

These causes and methods are not exhaustive but one would find great difficulty in finding other cause than the two or other method than the three. Also, the analysis has shown nothing about the causes of distribution. This last item, however, is the very purpose of the analysis. As previously noted by the quotation from Henry George, neither cause nor method of production determines distribution.

Distribution is determined by power, control or governance. Distribution may be just or unjust. It depends on one's opinion of what is fair. But justice does not determine the level of production. Production depends on producers producing. Mother nature does her thing even though she receives none of the value produced. People tend not to be so gracious.

The major reason people use their skills, strength and diligence to produce value is to fulfill their needs and desires. Sometimes people produce for their own use or enjoyment. Other times they produce to exchange for the produce of others. The choice to produce for themselves or produce for exchange depends on their opportunities.

If people have the ability, strength and patience to fulfill all their wants and needs by their own efforts and there are no opportunities to exchange with others at lesser cost in time or unpleasantness then they will produce for themselves. That which they want but lack the required ability, strength and opportunity to produce they do without.

If people have the opportunity to exchange what they can produce with ease and enjoyment for what they can only produce with difficulty or discomfort or cannot produce at all, then they will exchange for the produce of others. All exchanges are productive because each party to an exchange receives [absent fraud] a greater value than given.

We each find some activities easier or more enjoyable than others. The greater the opportunities to exchange what we find easy or enjoyable to produce for those things we find impossible, difficult or unpleasant to produce then the greater is our satisfaction. Why can we not each produce that which we enjoy and exchange for the products of others who enjoy doing what we find discomforting? What impedes, limits or prevents us from dividing the labor of production into the pleasures of production?

The seemingly obvious answer to these questions is that some jobs are neither easy nor enjoyable to anyone. But ease, enjoyment and difficulty are all relative terms. Each of us has but twenty four hours a day. Some of that time we need to eat and sleep. No matter how easy or enjoyable we find the activity we choose to earn our keep, without nourishment and sleep the job ceases to be either easy or enjoyable. But, if the price is right, we perform the most difficult and unpleasant of tasks. We do these tasks because the higher wages we are paid gives us more time to eat, sleep and be merry.

The limit imposed by the unpopularity of some tasks is the same limit mother nature imposes on us to nourish and restore ourselves with food and rest. But nature is not the only impediment to enjoyable production. And our need for food and rest are not the only impediments imposed by nature.

The impediments nature imposes on production are part of what we call natural law. Natural law is the way nature works. When we understand and follow natural laws we can become better husbanders and more efficiently exploit the productivity of nature. We can also become better workers by using the forces of nature to ease the burdens on our muscles or better savers by learning to avoid the consumptive forces of nature. Natural laws can be used to the benefit or harm of people but they cannot be changed by people. Because of this we can benefit production by learning and obeying natural law but we cannot cause production by calling our beliefs and superstitions natural law. Mother nature doesn't much care what we claim to be natural law, she follows her own counsel.

All the popes, ayatollahs and witch doctors that have ever lived have not changed one natural law. Kings, dictators and elected leaders have done no better. Research, analysis, reasoning and study increase our understanding of nature. But these are but division of labor. These are causes of, not impediments to, production. If we are to find the impediments to production we will have to look elsewhere.

We could limit the size of government but is this really the thing to do? Governments, when they do the things we can not efficiently do alone, are an appropriate division of labor. They protect us from foreign invaders or the thieves and incorrigibles among us. They also provide services in the form of road building and maintenance, flood water control, park and resource conservation, etc. These are things we want and have found more efficient to have government provide.

So long as these services can be more efficiently provided by government than by other groups or individuals then this is a productive division of labor. Government provision of these services is not an impediment to production. But, governments are only people. The revenue collected to pay for these services must be sufficient to encourage people to perform these jobs. But, we do, unfortunately, also ask government to provide some things better left unprovided. And, there is at least one impediment to production that is not natural law. That impediment is the abuse of monopoly power.

Monopoly itself, as we shall see as this argument progresses, is not an impediment. In fact, it is a necessary condition to the existence of exchange value. Without the ability to monopolize the products of our labors we have no ability to exchange those products for the products of others. That is, the value we produce by our labors is not exchange value. It is use value. It is the value we associate with satisfying our needs and desires. To produce exchange value another condition is necessary. That condition is monopoly.

Economists attempt to define monopoly as something that is inherently bad. This also seems to be the understanding most people have about monopoly. However, when one recognizes that unless one can legitimately monopolize the products of his labor nothing he produces can be exchanged for the possessions of others.

Monopoly must be permitted if we are to have the advantages of exchange. And it is government monopoly of force that frees us from the time and individual expense it would otherwise take to defend our persons and property. Without the security provided by government force we cannot assemble and defend i.e. monopolize even the meagerest of possessions.

It is possessions that satisfy many of our needs and desires. When greed, fear or ego lead us to claim more than we need or can use then we impede the opportunities of others to be productive. Each item of nature that is monopolized by one of us is denied to all others.

Our ability to monopolize the results of our production allows us to produce more than our immediate needs and save the excess for future use. But, our ability to monopolize nature allows us to exploit the labor of others by denying to them an opportunity to produce for themselves. It is this abuse of monopoly, not monopoly itself, that impedes our production. How do we separate the good i.e. that which encourages production from the bad i.e. that which denies others opportunity?

The abuse of monopoly can be the result of government dictates. The force of government can deny citizens their freedoms and wealth. It makes no difference if the dictator is a king holding his throne by claim of divine right, a chief climbing to power by military force or an elected or appointed official or council. Nor does it matter if the abuse is the result of vindictive revenge, ignorant piety or arrogant certainty. The effect of abuse of monopoly will have the same end. Abuse of monopoly power reduces the opportunities of people.

I believe it is our arrogance of knowing what we can only assume that leads to abuses of monopoly power. It comes from our refusal to question our most cherished beliefs - calling them knowledge instead of the assumptions they are. Only by taking the advice of Thomas Paine and others to:

... return to the first principles of things
for information and think, as if we were the
first men that thought can we progress.

The abuse of monopoly powers impedes the production of husbanders, workers and savers. But these abusers of monopoly powers are the very same people who produce all wealth by their husbandry, work and saving. Each of us determines our share of production not by our contribution to production but by our command of what we have. It is our ability to forcefully limit the supply of what we have by preventing others from competing that unjustly increases the price others must pay.

As self-employed we can choose to sell or not to sell our products or services. As hirelings we can choose to sell or not sell our talents or strengths. As money lenders we can choose to lend or not lend our money. As owners we can choose to sell or not sell our property. As individuals our ability to control the supply of our time, money and property is limited by nature and our need for food and rest. But, by control of opportunities, some can deny others their chance to be productive.

People can deny opportunity by organizing into corporations and monopolizing the economies of scale created by society. They can also organize into unions, lodges or trade and professional associations to monopolize the supply of labor to defend against the monopoly abuses of large corporations. But, none of these monopolies are as significant as the use of government force to deny opportunity.

People can use their organized vote to intimidate governments into imposing minimum wage laws, tariffs and quotas, licensing regulations, transportation regulations, fair price requirements, zoning ordinances, usury laws, and myriad other laws and rules that deny the less privileged the freedom to pursue their happiness.

No one can deny that it is freedom and justice to use our talents and property as we see fit. It is also defensible to assemble ourselves to defend against monopolists having greater power than our own. But it is not freedom and justice to deny others their freedoms. That is slavery and tyranny.

Abuse of government power by the privileged can be eliminated only by understanding natural law. The writings of Henry George, Thomas Paine and others have suggested the way. The benefits become obvious once we relinquish our prejudice of knowing that prevents us from seeing the truth. We start with:


by learning the measure of economic value and how to maintain a constant value of money. Next comes:


to see how the abolition of monopoly abuse causes growth in economic value, then:


shows how this understanding justifies distribution of the economic value created by society to set ourselves free. Finally we reach the:


and investigate the implications of changing from an economy dependent on the burdens of production to one of the pleasures of production.

Comments or discussion of any of these articles or related material is invited.

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