This surplus exists whenever there are differ ences in fertility, unless the poorer soils are cultivated at an actual loss. This may no doubt be done temporarily and even for many years, if there are personal reasons for keeping up an estate or sinking each year capital with drawn from other sources. Such a policy is unsound except in so far as such motives in duce keener activity and so lead to the creation of new capital. Ordinary economic motives would prompt the withdrawal of capital from the unprofitable cultivation. This would usually involve merely a change of products, and prob ably such change would affect only the less productive portions of the farms or estates in question. Careful examination would show that there are even in small farms some fields the cultivation of which pays more liberally than that of others. The margin of cultivation is kept lower because of the natural reluctance to radical change in location, in crops, or in methods of cultivation. The conception of rent has been extended to cover differences in pro ductive capacity, whether arising from fertility or from peculiarly favorable location. Rent is paid on lands other than agricultural, in accord ance with the same general principle. A mini mum rent is fixed by the relative fertility of the soil for agricultural purposes, but the rent may rise indefinitely from this point in accordance with the desirability of location.
The payment of rent does not increase the ex tenses of production. This follows from the manner in which rent is determined. The ex penses of production are greatest on the land which pays no rent. The value of the commodi ties are not greater on account of this greater expense, since there is but one price for com modities in a given market. Rent is paid on the superior soils, because the value is great enough to leave a surplus, after meeting the ordinary expenses of production. The value is not high because rent is paid, but rent is paid because the value is high enough to warrant it. Rent is, then, an effect, not a cause, of the high value. If the value were to fall, the result would be to diminish rents, but it would be done indirectly. The fall in value would render unprofitable the cultivation of the marginal lands, and this cul tivation would cease. The margin would then be at a higher point, since the rent of a given piece of land is determined by the difference be tween its yield, and the yield of the land at the margin of cultivation, and since the subtrahend is now larger than before, while the minuend remains the same, it follows that the remainder, constituting rent, will be smaller. This result can be permanent only when the total demand has actually diminished. With an increasing, or even with a stable population, the demand constantly augments, and rent will not fall in the manner just described, except on lands suited only for the production of some particular crop which has been displaced by others of greater utility.
There is, however, another manner in which rents may be made to fall, viz., by the improve ment of the poorer lands. A rise in the margin which results from the fact that poorer lands have been improved more rapidly than the better ones, is accompanied, not by a lessening, but by an increase, of the total supply. But the effect is to diminish rents since it lessens the differences in soils, and it is upon the differences that rent depends. Farmers spend more on the improvement of the less productive portions of their farms, and public internal improvements are directed toward the bringing into cultivation of soil not now available. The general effect is a diminution of agricultural rents. In the cities the improvement of transportation facili ties, the clearing out of the slums, the tendency of population into the suburbs, have a similar influence upon land rents. The receipt of rent, then, is due to the possession of superior soils at a time when the cultivation of inferior soils is essential to the supply. The degree
of superiority over the poorest land in use is the measure of rent. It is a surplus revenue and does not add to the expenses of produc tion.
The profits of employers add nothing to the ex pense of production. Profits, in the more accu rate use of that term, which excludes interest, insurance, and the like, is a surplus revenue like rent, and is determined in a similar manner. The credit for first working out the analogy between profits and rent belongs to Francis A. Walker. A manager of superior ability takes charge of an industry in which there has been no profit, and by his better management creates one. He discovers economies, secures materials at less expense, introduces better methods, finds a better market, and in general adds a net surplus to the product of the industry. As there are soils of different grades of fertility, so there are employers of different grades of ability. Those at the lower margin carry on their indus tries with at least as great expense in the way of wages, interest, materials, etc., as fall to the share of the superior managers, and their lack of skill keeps the output relatively small.
Here, as in the case of land, a fall in profits may be brought about in either of two ways, one socially disadvantageous, the other with an opposite effect. If the general condition of in dustry is unfavorable, so that fewer goods are demanded, many employers will fail and suspend their business. The margin of employment will then rise. Many laborers will be thrown out of employment. Capital will lie idle. The more able and skilful employers will continue their productive enterprises, but since the dif ferences between employers are now less, prof its which depend upon those differences will be smaller. If, on the other hand, the differences are diminished by a change in the character of the poorer grades, the social result will be favorable. The ignorant and shortsighted busi ness man is replaced by one of keen insight and executive ability. The new competition causes 2A a decline of profit, but the community in general is better off.
The test of productiveness is the net produce or surplus. Both rent and profits have been looked upon as a part of the net produce or surplus of industry. A reduction of rent and of profits has been represented to be of social advantage if caused by a rise of the margin of production through the process of improving the quality of the land at the margin, or the men whose con trol of industry is marginal. The essential element in such a decrease of rent or profits is that it does not in any respect decrease the surplus, but merely transfers it from a partic ular class of producers to consumers, or to other producers.
Speaking generally, all of rent and of pure profit, all that part of interest which is not a return for present saving, and a considerable part of laborers' income, belongs to the net prod uce or social surplus. Those who engage in production at a real cost 1 must receive from the total industrial product, as a minimum share, whatever amount is necessary to replace their 1 See p. 155.
costs. This is the absolute condition of a con tinuance of industrial activity. Whatever re mains is the surplus created, not by the personal activity of the individual, but by the coopera tion of all industrial classes aided by the forces of labor and by the accumulations of past in dustry. The real test of industry is the amount of this surplus. The physiocrats, who were the most prominent economists before Adam Smith, thought that a net produce was to be found only in agriculture. Adam Smith discovered it in manufactures also and traced it chiefly to the division of labor. Modern economics still further expands the idea to make it include whatever portions of the product of industry and com merce are not to be set aside for the reimburse ment of costs.