WEBVTT NOTE 1.07. Factors of Production: Convertibility and Valuation 1 00:00:00.000 --> 00:00:07.000 7. FACTORS OF PRODUCTION, CONVERTIBILITY AND VALUATION 2 00:00:07.000 --> 00:00:16.000 Factors of production are valued in accordance with their anticipated contribution in the eventual production of consumers' goods. 3 00:00:16.000 --> 00:00:27.000 Factors, however, differ in the degree of their specificity, that is, the variety of consumers' goods in the production of which they can be of service. 4 00:00:27.000 --> 00:00:35.000 Certain goods are completely specific, are useful in producing only one consumer's good. 5 00:00:35.000 --> 00:00:41.720 Thus when, in past ages, extracts from the mandrake weed were considered useful in healing 6 00:00:41.720 --> 00:00:47.600 ills, the mandrake weed was a completely specific factor of production. 7 00:00:47.600 --> 00:00:50.720 It was useful purely for this purpose. 8 00:00:50.720 --> 00:00:56.500 When the ideas of people changed and the mandrake was considered worthless, the weed lost its 9 00:00:56.500 --> 00:01:06.500 Other producers' goods may be relatively non-specific and capable of being used in a wide variety of employments. 10 00:01:06.500 --> 00:01:13.500 They could never be perfectly non-specific, equally useful in all production of consumers' goods, 11 00:01:13.500 --> 00:01:21.500 for in that case they would be general conditions of welfare available in unlimited abundance for all purposes. 12 00:01:21.500 --> 00:01:24.500 There would be no need to economize them. 13 00:01:24.500 --> 00:01:26.500 to economize them. 14 00:01:26.500 --> 00:01:31.500 Scarce factors, however, including the relatively non-specific ones, 15 00:01:31.500 --> 00:01:34.500 must be employed in their most urgent uses. 16 00:01:34.500 --> 00:01:41.500 Just as a supply of consumers' goods will go first towards satisfying the most urgent wants, 17 00:01:41.500 --> 00:01:45.500 then to the next most urgent wants, etc., 18 00:01:45.500 --> 00:01:49.500 so a supply of factors will be allocated by actors 19 00:01:49.500 --> 00:01:53.500 first to the most urgent uses in producing consumers' goods, 20 00:01:53.500 --> 00:02:13.100 The Less Specific a factor is, the more convertible it is from one use to another. 21 00:02:13.100 --> 00:02:19.300 The mandrake weed lost its value because it could not be converted to other uses. 22 00:02:19.300 --> 00:02:25.340 Factors such as iron or wood, however, are convertible into a wide variety of uses. 23 00:02:25.340 --> 00:02:31.940 If one type of consumer's good falls into disuse, iron output can be shifted from that 24 00:02:31.940 --> 00:02:34.380 to another line of production. 25 00:02:34.380 --> 00:02:40.620 On the other hand, once the iron ore has been transformed into a machine, it becomes less 26 00:02:40.620 --> 00:02:45.940 easily convertible and often completely specific to the product. 27 00:02:45.940 --> 00:02:51.500 When factors lose a large part of their value as a result of a decline in the value of the 28 00:02:51.500 --> 00:02:58.580 consumer's good, they will, if possible, be converted to another use of greater value. 29 00:02:58.580 --> 00:03:04.220 If despite the decline in the value of the product, there is no better use to which the 30 00:03:04.220 --> 00:03:11.340 factor can be converted, it will stay in that line of product or cease being used altogether 31 00:03:11.340 --> 00:03:14.940 if the consumer's good no longer has value. 32 00:03:14.940 --> 00:03:21.060 For example, suppose that cigars suddenly lose their value as consumers' goods. 33 00:03:21.060 --> 00:03:23.200 They are no longer desired. 34 00:03:23.200 --> 00:03:29.700 Those cigar machines, which are not usable in any other capacity, will become valueless. 35 00:03:29.700 --> 00:03:35.420 Tobacco leaves, however, will lose some of their value, but may be convertible to uses 36 00:03:35.420 --> 00:03:39.460 such as cigarette production, with little loss of value. 37 00:03:39.460 --> 00:03:46.020 A loss of all desire for tobacco, however, will result in a far wider loss in the value 38 00:03:46.020 --> 00:03:52.280 of the factors, although part of the land may be salvaged by shifting from tobacco to 39 00:03:52.280 --> 00:03:54.500 the production of cotton. 40 00:03:54.500 --> 00:04:00.960 Suppose on the other hand that sometime after cigars lose their value, this commodity returns 41 00:04:00.960 --> 00:04:05.180 to public favor and regains its former value. 42 00:04:05.180 --> 00:04:11.340 The cigar machines, which had been rendered valueless, now recoup their great loss in 43 00:04:11.340 --> 00:04:12.380 value. 44 00:04:12.380 --> 00:04:18.980 On the other hand, the tobacco leaves, land, etc., which had shifted from cigars to other 45 00:04:18.980 --> 00:04:23.220 uses, will re-shift into the production of cigars. 46 00:04:23.220 --> 00:04:29.500 These factors will gain in value, but their gain, as was their previous loss, will be 47 00:04:29.500 --> 00:04:33.980 less than the gain of the completely specific factor. 48 00:04:33.980 --> 00:04:40.120 These are examples of a general law that a change in the value of the product causes 49 00:04:40.120 --> 00:04:47.740 a greater change in the value of the specific factors than in that of the relatively non-specific 50 00:04:47.740 --> 00:04:49.220 factors. 51 00:04:49.220 --> 00:04:55.220 To further illustrate the relation between convertibility and valuation, let us assume 52 00:04:55.220 --> 00:05:04.480 Assume that complementary factors 10x, 5y and 8z produce a supply of 20p. 53 00:05:04.480 --> 00:05:10.220 First suppose that each of these factors is completely specific and that none of the supply 54 00:05:10.220 --> 00:05:14.340 of the factors can be replaced by other units. 55 00:05:14.340 --> 00:05:22.320 Then if the supply of one of the factors is lost, say 10x, the entire product is lost, 56 00:05:22.320 --> 00:05:25.060 and the other factors become valueless. 57 00:05:25.060 --> 00:05:31.460 In that case, the supply of that factor, which must be given up or lost, equals in value 58 00:05:31.460 --> 00:05:38.980 the value of the entire product, 20p, while the other factors have a zero value. 59 00:05:38.980 --> 00:05:44.540 An example of production with purely specific factors is a pair of shoes. 60 00:05:44.540 --> 00:05:50.940 The prospect of a loss of one shoe is valued at the value of the entire pair, while the 61 00:05:50.940 --> 00:06:14.940 The other shoe becomes valueless in case of a loss. Thus, jointly, factors 10x, 5y, and 8z produce a product that is valued, say, as rank 11 on the actor's value scale, lose the supply of one of the factors, and the other complementary factors become completely valueless. 62 00:06:14.940 --> 00:06:21.260 Now let us assume, secondly, that each of the factors is non-specific, that 10x can 63 00:06:21.260 --> 00:06:27.180 be used in another line of production that will yield a product, say ranked 21st on the 64 00:06:27.180 --> 00:06:33.940 value scale, that 5y and another use will yield a product ranked 15th on the actor's 65 00:06:33.940 --> 00:06:40.460 value scale, and that 8z can be used to yield a product ranked 30th. 66 00:06:40.460 --> 00:06:47.520 In that case, the loss of 10x would mean that instead of satisfying a want of rank 11, the 67 00:06:47.520 --> 00:06:55.220 units of y and z would be shifted to their next most valuable use, and wants ranked 15th 68 00:06:55.220 --> 00:06:58.420 and 30th would be satisfied instead. 69 00:06:58.420 --> 00:07:04.360 We know that the actor preferred the satisfaction of a want ranked 11th to the satisfaction 70 00:07:04.360 --> 00:07:28.500 Convertible factors will be allocated among different lines of production according to 71 00:07:28.500 --> 00:07:34.820 to the same principles as consumers' goods are allocated among the ends they can serve. 72 00:07:34.820 --> 00:07:42.060 Each unit of supply will be allocated to satisfy the most urgent of the not yet satisfied wants, 73 00:07:42.060 --> 00:07:46.820 that is, where the value of its marginal product is the highest. 74 00:07:46.820 --> 00:07:52.900 A loss of a unit of the factor will deprive the actor of only the least important of the 75 00:07:52.900 --> 00:08:00.900 and the presently satisfied uses, that is, that use in which the value of the marginal product is the lowest. 76 00:08:00.900 --> 00:08:10.900 This choice is analogous to that involved in previous examples comparing the marginal utility of one good with the marginal utility of another. 77 00:08:10.900 --> 00:08:21.900 This lowest ranked marginal product may be considered the value of the marginal product of any unit of the factor with all uses taken into account. 78 00:08:21.900 --> 00:08:28.780 Thus, in the above case, suppose that X is a convertible factor in a myriad of different 79 00:08:28.780 --> 00:08:29.780 uses. 80 00:08:29.780 --> 00:08:36.860 If one unit of X has a marginal product of, say, 3P, a marginal product in another use 81 00:08:36.860 --> 00:08:45.820 of 2Q, 5R, etc., the actor ranks the values of these marginal products of X on his value 82 00:08:45.820 --> 00:08:47.260 scale. 83 00:08:47.260 --> 00:08:55.820 Suppose that he ranks them in this order. 4s, 3p, 2q, 5r. In that case suppose he is 84 00:08:55.820 --> 00:09:02.780 faced with the loss of one unit of x. He will give up the use of a unit of x in production 85 00:09:02.780 --> 00:09:09.140 of r, where the marginal product is ranked lowest. Even if the loss takes place in the 86 00:09:09.140 --> 00:09:16.780 production of p, he will not give up 3p, but shift a unit of x from the less valuable use 87 00:09:16.780 --> 00:09:18.780 The Theory of Money and Credit 88 00:09:46.780 --> 00:10:07.780 We now can see further why, in cases where products are made with specific and convertible 89 00:10:07.780 --> 00:10:14.820 factors, the general law holds that the value of convertible factors changes less than that 90 00:10:14.820 --> 00:10:21.340 of Specific Factors in response to a change in the value of P, or in the conditions of 91 00:10:21.340 --> 00:10:22.900 its production. 92 00:10:22.900 --> 00:10:28.860 The value of a unit of a convertible factor is set not by the conditions of its employment 93 00:10:28.860 --> 00:10:36.060 in one type of product, but by the value of its marginal product when all its uses are 94 00:10:36.060 --> 00:10:38.380 taken into consideration. 95 00:10:38.380 --> 00:10:44.740 Since a specific factor is usable in only one line of production, its unit value is 96 00:10:44.740 --> 00:10:51.620 set as equal to the value of the marginal product in that line of production alone. 97 00:10:51.620 --> 00:10:58.340 Hence in the process of valuation, the specific factors are far more responsive to conditions 98 00:10:58.340 --> 00:11:05.140 in any given process of production than are the non-specific factors. 99 00:11:05.140 --> 00:11:11.460 As with the problem of optimum proportions, the process of value imputation from consumers 100 00:11:11.460 --> 00:11:18.460 good to factors raises a great many problems which will be discussed in later chapters. 101 00:11:18.460 --> 00:11:24.580 Since one product cannot be measured against other products and units of different factors 102 00:11:24.580 --> 00:11:31.980 cannot be compared with one another, how can value be imputed when, as in a modern economy, 103 00:11:31.980 --> 00:11:38.180 The structure of production is very complex, with myriads of products and with convertible 104 00:11:38.180 --> 00:11:40.780 and inconvertible factors. 105 00:11:40.780 --> 00:11:47.540 It will be seen that value imputation is easy for isolated Crusoe-type actors, but that 106 00:11:47.540 --> 00:11:53.820 special conditions are needed to enable the value imputing process, as well as the factor 107 00:11:53.820 --> 00:11:58.740 allocating process, to take place in a complex economy. 108 00:11:58.740 --> 00:12:05.900 In particular, the various units of products and factors, not the values, of course, must 109 00:12:05.900 --> 00:12:08.940 be made commensurable and comparable.