This system was displaced in the latter part of the eighteenth century, in France, by the economists or physiocrats, who denied any peculiar advantage to the possession of money or the maintenance of commercial restrictions. All net surplus, they taught, comes from agriculture. Those who engage in commerce and manufactures consume exactly as much as they produce. Those who cultivate the soil alone produce more than is consumed in culti vation, and the whole community therefore de pends upon its agriculture for its increase of wealth. Public burdens should be placed upon land, where it must ultimately fall, and all other occupations should be left free from both bur dens and restrictions. The cooperation of nat tire was thought by this school of economists to be the real source of surplus wealth. The modification which they proposed in its disposi tion did not reach so far as a positive distribu tion among different classes. They proposed simply that all classes should be put upon an equal footing by a removal of the positive regu lations and restrictions imposed in the mercan tilist system and a transfer of public burdens to bring them as near as possible to the source of all surplus wealth — agricultural produce.
Adam Smith, whose Wealth of Nations ap peared in 1776, likewise favored a removal of restrictions and an introduction of complete commercial and industrial freedom. But he thought that the surplus came rather from the division of labor, by which he meant the whole organization of industry. His urgent plea is for the abolition of all traces of the mercantile and colonial systems, leaving each person free to choose his own interest and to establish such economic relations with fellow-workers as would be to his advantage. Adam Smith is remem bered by people in general chiefly for his attack on the mercantilist teachings and on the system 2C of protective tariffs, bounties, and restrictions on labor, but his work is of interest to students of economics, not for those things alone, but even more for his complete demonstration of the general principle of industrial and commer cial freedom, and for the manner in which the operation of self-interest works to the advantage of society. The surplus will distribute itself, if there is no interference, in such a way as most effi ciently to promote industry and the general good.
The socialist theory, held by many who desire to abolish the present industrial system of wages, private property, and private contract, is that the surplus, though created by labor, is seized by those who control the physical means of produc tion, such as land and capital, and that the labor ers who do not own property may be kept at the verge of starvation, with incomes only large enough to keep up the necessary supply of labor ers. The law of population, the law of rent, and the peculiar explanation of the nature of capital worked out by Karl Marx and others, constitute an argument for transferring the en tire control of the instruments of production to the State. It is claimed that the surplus belongs to all and that all should share in its enjoyment. " From each according to his abilities ; to each according to his need," is a favorite saying of those who hold to this view.
Still another method of accounting for and disposing of the surplus may be mentioned. It is held by those who look upon rent as the only real surplus, and who propose a single tax on land values as the solution of the problem of poverty and the condition of social progress. All incomes may be reduced to rent, wages, or interest. The law of wages, as given by Henry
George, is that laborers will receive all that their labor can produce upon the poorest land which it is necessary to cultivate. The law of interest is that capital will receive whatever capital adds to labor when employed upon the poorest land which it is necessary to cultivate. Even on better grades of land, capital and labor will obtain only these minimum shares, the balance of the product going to the owners of the better grades of land as rent. It is the landlords alone, therefore, who receive a surplus share, and the right way of securing this surplus for the community is to abolish private property in land, —leaving the owners in possession, but depriving them of all advantage from the superior quality of their land by taxation. It is thought by advocates of the single tax, that the revenue from this source would be so large that all other forms of taxation could be abolished, and that the sur plus obtained would be sufficient, not only to meet the expenses of all activities now under taken by the State, but to enable it to undertake vast improvements in the direction of better schools, libraries, parks, roads, etc., and even to completely abolish poverty and want.
No one has yet ventured to say that wages are the only true surplus, although, as will be seen from the preceding paragraphs, this claim has been put forward for the returns from nat ure, capital, money, industrial freedom, and land. But in his theory of wages, one of the most eminent American economists, Francis A. Walker, comes near taking this position. In his theory of distribution, wages, though they do not absorb the entire surplus, are neverthe less the residual share, and it is to wages that all the gains are added which spring from improvements in the arts or more efficient pro duction, whatever the cause, unless these im provements are of a kind that call in new grades of land and so increase rent, increase the demand for capital and so raise interest, or enable a poorer class of employers to survive and so in crease profits. It is held by Walker that there is a definite law of rent, as set forth in the early part of this chapter, and a law of profits closely corresponding to the law of rent, based on dif ferences in the managing abilities of employers, as rent is based on differences in soils. Interest is determined, according to Walker's theory of distribution, by the supply of and the demand for capital, the rate always rising or falling in such a way as to maintain an equilibrium between them. Thus, there is a law for rent, for profits, and for interest, definitely fixing the amount that can be claimed by landlords, employers, and capitalists. All that remains is wages. Labor ers are the residual claimants, and, if they are intelligent and look to their interest, they will have no difficulty in securing the chief benefits of progress, whether it take the form of improve ments in the arts, social development, or in creased resources. If new lands are discovered, it is probable that the result will be to reduce rents and increase wages. If capital is increased, interest will fall and wages rise. If employers of a higher grade replace those who are incom petent, the total amount of profits will be less rather than greater, and wages will absorb what is thus set free. The laborers are, therefore, in a favorable economic position, whatever the char acter of the improvement ; and although they do not obtain the whole surplus, they secure by far the larger part.