This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. Factors of production must be combined. § 2. Non-contractual and contractual incomes. § 3. From small shop to large factory. § 4. The residual share. § 5. The typical owner-manager. § 6. Empirical methods of estimating and apportioning the residual share. § 7. Utmost possible degree of separation of investment and management. § 8. Corporations and their control. § 9. Single investment function of minority stockholders.
§ 1. Factors of production must be combined. Every separate thing that enters into the making of goods is called an economic agent; as in agriculture, the seeds, plows, fields, fences, barns, cattle, and labor; in manufacture, the buildings, machines, material, labor, etc. But these numerous agents fall into two great groups called factors of production, variously named as man and nature, labor and material agents, or humanity and wealth. We have studied separately the processes by which value is attributed to these agents, yet we have borne in mind always that they are complementary agents and complementary factors. (See Chapter 18, section 10, and Chapter 19, section 14.) Labor in a void and wealth without labor would be equally useless. The process of valuing uses of goods and services of labor goes on while all of these goods help make up the situation in which the desires exist.
The stock of economic goods of whatever sort is limited, while the upspringing desires are practically unlimited. To increase goods, labor is applied to material objects. Man's part in production is almost passive when goods come into existence without his effort. One can imagine the indolent savage of the tropics, lying under the banana-tree, letting the fruit drop into his mouth. But at least he must be there ready for it to drop. One can conceive of a tribe living on natural fruits, where every day the people awoke to find the various kinds of food provided, like manna, at each person's hand. Tho the existing amounts were secured without effort, nevertheless any differences in flavor would cause differences in value to arise and trade to take place. Now there is something analogous to that in daily experience. There are some goods which effort can do little to increase. Usually, however, there is a possibility of change and adaptation to make them better suited to needs, and there is required the use of intelligence to choose among the goods and to employ them in the best way. Further, man can intervene and direct the course of industry; he does not merely gather what is provided. It is this active intervention and effort that is here to be considered.
§ 2. Non-contractual and contractual incomes. It is from this process of combining the factors that the various yields and incomes emerge which have been heretofore treated. The various laborers and kinds of wealth when brought together produce goods and the values attributable respectively to the various agents are their yields. The various persons to whom the yields accrue are said to secure incomes out of these yields. The incomes are of two kinds.
(1) A non-contractual (impersonal or "economic") income is obtained from the yield of the agents, not from an-other person to whom the agent has been rented or loaned. The laborer gets an economic income from his labor when he gathers wood for his own fire, or builds a house for himself. Wealth yields an economic income to its owner, as the products of the field, the use of (or the objects made with) the tools of the craftsman. Direct labor-incomes and the usances of wealth appear first as economic incomes. This is the only kind of income possible on Crusoe's Island and in any non-exchanging economy.
(2) A derivative kind of income appears as soon as men begin to hire labor and borrow the uses of wealth. A contractual income is one received from a person for the right to receive an economic income. For example, the carpenter building a house for another man does not possess the economic yield of his own labor as it is performed. That belongs to the owner of the materials from whom the carpenter gets a contractual income. All wages and rents (as we use the terms) are contractual incomes.
To cases that appear puzzling to classify this test may be easily applied. In whom is the legal title of a use or of a service vested at the instant it is yielded? To him belongs, in first instance, the economic income, subject to the claims of others who must look to him for their pay. Thus the owner of the factory owns the product altho he may have to pay rent to a landlord and wages to his workmen.
People thus are of two classes as regards the mode of receiving income: self-employed,, earning economic labor-incomes; and employed, receiving (contractual) wages from active capitalists. Capitalists are of two classes: the active capitalists, risk-takers, getting non-contractual capital-incomes, whom we shall call enterprisers; and the passive capitalists, risk-limiters, getting contractual incomes from active capitalists. The self-employed laborer is in every case to some slight degree an active capitalist. The neediest fisherman must have title to the string of fish before he sells it to change it for a money income. Every economic product that endures an instant, rests in the hands of an active capitalist.
§ 3. From small shop to large factory. Some examples applying these terms may make the matter clearer. A furniture-maker (a joiner) in a village owns his little shop, the land on which it stands, his tools, some lumber, and a few pieces of finished goods. From day to day he sells the ready furniture, or takes orders for which he receives money or lumber or articles of food and other supplies for his own household use. If with his money and goods he can pay for the materials he needs and have left a living for himself, his income of goods is the combined result of his labor and of his capital (that is, of his right to the uses of his shop, tools, and stock of goods). He is enterpriser, manager, and laborer, all in one, and gets one non-contractual income, which as to its value is imputable to several different economic sources. Now this man takes an apprentice or two, hires two or three workmen to keep up with the increasing orders, hires another shop next door for which he pays rent, and borrows some money to buy new tools and more materials so that he can keep a larger stock of ready goods. Less of his time is given to handwork and more to meeting customers, making new designs and patterns, hiring and directing his assistants, buying materials, and keeping his accounts. As the business grows he finds he must employ salesmen to meet customers, a foreman to direct the workmen in the shop, a bookkeeper to relieve him of the mere clerical labors, perhaps finally a special artistic designer and pattern maker. At length there remain for him to do only the larger planning of the business as a whole, the hiring of his subordinates, and the general oversight and criticism of all departments so that everything may be kept smoothly working.