WEBVTT NOTE 3.06. Producers’ Expenditures 1 00:00:00.000 --> 00:00:04.560 6. Producer's Expenditures 2 00:00:04.560 --> 00:00:10.560 The previous section concentrated on the case of Mr. Brown, whose entire money expenditures 3 00:00:10.560 --> 00:00:17.720 were on consumers' goods. His money income, aside from the sale of old, previously produced 4 00:00:17.720 --> 00:00:24.460 goods, came from the sale of current, productive labor services. His expenditures were purely 5 00:00:24.460 --> 00:00:26.460 The Theory of Money and Credit 6 00:00:54.460 --> 00:01:17.820 Producers of capital goods and consumers goods are in a different position from sellers of 7 00:01:17.820 --> 00:01:19.980 labor service only. 8 00:01:19.980 --> 00:01:26.260 Mr. Brown, for example, a seller solely of labor service, need not spend any money on 9 00:01:26.260 --> 00:01:28.280 purchasing capital goods. 10 00:01:28.280 --> 00:01:34.740 Purely from his expenditure on desired consumers' goods, he derives the energy to be able to 11 00:01:34.740 --> 00:01:38.460 produce and sell labor services on the market. 12 00:01:38.460 --> 00:01:45.780 But the producers of capital goods and consumers' goods, the nub of any civilized society, since 13 00:01:45.780 --> 00:01:52.100 Since labor services alone could produce very little, are not, and cannot be, in such a 14 00:01:52.100 --> 00:01:58.980 fortunate position, for a man to produce a consumer's good, he must obtain labor services 15 00:01:58.980 --> 00:02:05.380 and the services of land and capital goods, in order to use the technological know-how 16 00:02:05.380 --> 00:02:08.420 available in the production of the good. 17 00:02:08.420 --> 00:02:14.180 Pushing the problem back, we find that in order to produce a capital good, the would-be 18 00:02:14.180 --> 00:02:20.540 The producer must obtain the necessary land, labor and capital goods. 19 00:02:20.540 --> 00:02:26.980 Each such individual producer or group of individuals in partnership obtains the required 20 00:02:26.980 --> 00:02:33.580 factors and then directs the combination of factors into producing a capital good. 21 00:02:33.580 --> 00:02:40.440 This process is repeated among numerous individuals until the lowest stage of production is reached 22 00:02:40.440 --> 00:02:43.500 and a consumer's good is produced. 23 00:02:43.500 --> 00:02:50.560 The producer of the capital good must obtain the needed factors, land, labor and capital, 24 00:02:50.560 --> 00:02:56.420 by purchasing them for money, and when the lower order capital good is completed, he 25 00:02:56.420 --> 00:02:58.820 sells it for money. 26 00:02:58.820 --> 00:03:04.660 This capital good is in turn used for the production of a still lower order capital 27 00:03:04.660 --> 00:03:08.740 good, and the latter is sold for money. 28 00:03:08.740 --> 00:03:15.340 This process continues until the final producer of the consumer's good sells it for money 29 00:03:15.340 --> 00:03:18.460 to the ultimate consumer. 30 00:03:18.460 --> 00:03:25.020 Now let us call those producers who use their money to invest in the purchase of factors, 31 00:03:25.020 --> 00:03:29.260 either outright or for hire, capitalists. 32 00:03:29.260 --> 00:03:36.220 The capitalists then produce and own the various stages of capital goods, exchanging them for 33 00:03:36.220 --> 00:03:40.220 for Money until their products reach the consumers. 34 00:03:40.220 --> 00:03:45.220 Those who participate in the productive process are therefore the capitalists 35 00:03:45.220 --> 00:03:48.220 and the sellers of land and labor services. 36 00:03:48.220 --> 00:03:54.220 The capitalists are the only ones who spend money on producers' goods, 37 00:03:54.220 --> 00:03:59.220 and they therefore may here be termed the producers. 38 00:03:59.220 --> 00:04:04.220 It is evident that a dominant characteristic of the production process is that 39 00:04:04.220 --> 00:04:10.500 Each individual must produce in anticipation of the sale of his product. 40 00:04:10.500 --> 00:04:18.740 Any investment in production is made in anticipation of later sale to lower order producers and, 41 00:04:18.740 --> 00:04:20.940 finally, to consumers. 42 00:04:20.940 --> 00:04:28.140 Clearly, the consumer must have money in his cash balance in order to spend it on consumers' 43 00:04:28.140 --> 00:04:34.140 and, likewise, the producer must have the original money to invest in factors. 44 00:04:34.140 --> 00:04:37.140 Where does the consumer get the money? 45 00:04:37.140 --> 00:04:44.140 As has been shown above, he may obtain it from gifts or from the sale of previously produced goods, 46 00:04:44.140 --> 00:04:50.140 but in the last analysis he must have obtained it from the sale of some productive service. 47 00:04:50.140 --> 00:04:55.140 These are the sellers of labor services and of the services of land. 48 00:04:55.140 --> 00:05:03.140 These laborers and landowners use the money thus obtained to buy the final products of the production system. 49 00:05:03.140 --> 00:05:10.140 The capitalist producers also receive income at each stage of the production process. 50 00:05:10.140 --> 00:05:18.140 Evidently, the principles regulating these incomes require careful investigation, which will be undertaken. 51 00:05:18.140 --> 00:05:35.140 Here it might be noted that the net incomes accruing to the owners of capital goods are not simply the results of the contribution to production by the capital goods, since these capital goods are in turn the products of other factors. 52 00:05:35.140 --> 00:05:41.140 Where then do the producers acquire their money for investment? 53 00:05:41.140 --> 00:06:00.940 Clearly from the same sources only. From the income acquired in production, individuals can, in addition to buying consumers' goods, purchase factors of production and engage in the productive process as producers of a good that is not simply their own labor service. 54 00:06:00.940 --> 00:06:11.180 In order to obtain the money for investment then, an individual must save money by restricting his possible consumption expenditures. 55 00:06:11.180 --> 00:06:23.380 This saved money first goes into his cash balance and then is invested in the purchase of factors in the anticipation of a later sale of the produced good. 56 00:06:23.380 --> 00:06:32.880 It is obvious that investment can come only from funds that are saved by individuals from their possible consumption spending. 57 00:06:32.880 --> 00:06:45.880 The producers restrict their consumption expenditures, save their money and go into business by investing their funds in factors that will yield them products in the future. 58 00:06:45.880 --> 00:07:01.880 Producers could also borrow the saved funds of others, but the whole process of lending and borrowing is omitted in this section in order to clarify the analysis. Loans will be analyzed in a later chapter. 59 00:07:01.880 --> 00:07:09.420 Thus, while every man must spend part of his money income in consumption, some decide to 60 00:07:09.420 --> 00:07:15.980 become producers of capital or consumers' goods, and to save money to invest in the 61 00:07:15.980 --> 00:07:18.180 required factors. 62 00:07:18.180 --> 00:07:24.860 Every person's income may be spent on consumption, on investment in the production of goods, 63 00:07:24.860 --> 00:07:28.200 or on an addition to his cash balance. 64 00:07:28.200 --> 00:07:36.080 For any period an individual's money income equals his consumption expenditures plus investment 65 00:07:36.080 --> 00:07:44.640 expenditures plus additions to cash balance minus subtractions from cash balance. 66 00:07:44.640 --> 00:07:49.720 Investment expenditures may be defined as the sum of the money expenditures made in 67 00:07:49.720 --> 00:07:54.040 investment in factors of production. 68 00:07:54.040 --> 00:08:00.580 Let us take the hypothetical case of Mr. Fred Jones and his balance of payments for November 69 00:08:00.580 --> 00:08:02.580 1961. 70 00:08:02.580 --> 00:08:08.020 Suppose his income from various sources during this month is 50 ounces. 71 00:08:08.020 --> 00:08:15.000 He decides to spend, during the month, 18 ounces on consumers' goods, to add 2 ounces 72 00:08:15.000 --> 00:08:21.280 to his cash balance, and to invest the other 30 ounces in a business for the production 73 00:08:21.280 --> 00:08:23.060 of some good. 74 00:08:23.060 --> 00:08:29.180 It must be emphasized that this business can involve the production of any good at all. 75 00:08:29.180 --> 00:08:33.800 It could be a steel factory, a farm, or a retail shoe store. 76 00:08:33.800 --> 00:08:39.500 It could be for the purchase of wheat in one season of the year in anticipation of sale 77 00:08:39.500 --> 00:08:41.380 in another season. 78 00:08:41.380 --> 00:08:48.440 All of this is productive enterprise, since in each instance a good is produced. 79 00:08:48.440 --> 00:09:13.260 Let us assume that Jones expends the saved funds on investment in a paper factory. 80 00:09:13.260 --> 00:09:18.340 His income expenditure account for November may appear as follows. 81 00:09:18.340 --> 00:09:25.580 November 1961, Fred Jones Income from sale of land, 20 oz. 82 00:09:25.580 --> 00:09:28.380 From sale of a building, 30 oz. 83 00:09:28.380 --> 00:09:31.460 Total, 50 oz. 84 00:09:31.460 --> 00:09:34.540 Expenditures Food, 7 oz. 85 00:09:34.540 --> 00:09:36.740 Clothing, 4 oz. 86 00:09:36.740 --> 00:09:38.820 Shelter, 4 oz. 87 00:09:38.820 --> 00:09:42.020 Entertainment, 3 oz. 88 00:09:42.020 --> 00:09:50.540 Investment Expenditures, 18 oz. On Paper Machinery, 12 oz. On Wood Pulp, 10 oz. On 89 00:09:50.540 --> 00:10:01.940 Labor Services, 8 oz. Investment Expenditures, 30 oz. Addition to Cash Balance, 2 oz. Total, 90 00:10:01.940 --> 00:10:04.100 50 oz. 91 00:10:04.100 --> 00:10:10.780 Of course, these figures are purely illustrative of a possible situation. There are innumerable 92 00:10:10.780 --> 00:10:20.780 and several other illustrations, for example, there could have been a subtraction from cash balance to enable greater investment. 93 00:10:20.780 --> 00:10:26.780 Investment expenditures are always made in anticipation of future sale. 94 00:10:26.780 --> 00:10:35.780 Factors are purchased and transformed into the product and the product is then sold by the enterpriser for money. 95 00:10:35.780 --> 00:10:45.780 The businessman makes his outlays with the expectation of being able to sell the product at a certain price on a certain future date. 96 00:10:45.780 --> 00:11:02.780 Suppose that Jones makes the investment of 30 ounces with the expectation of being able to transform his factors into the product, in this case, paper, and sell the product for 40 ounces at some date in November 1962. 97 00:11:02.780 --> 00:11:20.780 If his expectation proves correct, he will succeed in selling the paper for 40 ounces at that date, and his income account for any period that includes that date in November 1962 will include 40 ounces from sale of paper. 98 00:11:20.780 --> 00:11:28.420 It is obvious that other things being equal, an investor will attempt to acquire the greatest 99 00:11:28.420 --> 00:11:35.220 possible net income from his investment, just as, with the same qualification, everyone 100 00:11:35.220 --> 00:11:40.420 attempts to acquire the greatest income from other types of sales. 101 00:11:40.420 --> 00:11:47.200 If Jones is confronted with investment opportunities for his 30 ounces in different possible lines 102 00:11:47.200 --> 00:11:54.300 Jones or processes of production and he expects one will net him 40 ounces in a year, another 103 00:11:54.300 --> 00:11:59.340 37 ounces, another 34, etc. 104 00:11:59.340 --> 00:12:03.800 Jones will choose that investment promising the greatest return. 105 00:12:03.800 --> 00:12:10.640 A crucial difference then between man as an entrepreneur and man as a consumer is that 106 00:12:10.640 --> 00:12:16.600 in the latter case there is no drive to have exports greater than imports. 107 00:12:16.600 --> 00:12:24.000 A man's imports are his purchase of consumers' goods, and are therefore the ends of his activity. 108 00:12:24.000 --> 00:12:28.280 The goods he imports are a source of satisfaction to him. 109 00:12:28.280 --> 00:12:34.920 On the other hand, the businessman is importing only producers' goods, which by definition 110 00:12:34.920 --> 00:12:37.560 are useless to him directly. 111 00:12:37.560 --> 00:12:44.320 He can gain from them only by selling them or their product, and therefore his imports 112 00:12:44.320 --> 00:12:49.160 Imports are merely the necessary means to his later exports. 113 00:12:49.160 --> 00:12:55.360 Therefore he tries to attain the greatest net income, or in other words, to attain the 114 00:12:55.360 --> 00:12:59.760 largest surplus of exports over imports. 115 00:12:59.760 --> 00:13:05.760 The larger his business income, the more the owner of the business will be able to spend, 116 00:13:05.760 --> 00:13:11.640 that is, to import, on consumers' goods that he desires. 117 00:13:11.640 --> 00:13:18.860 It is clear, however, that the man considered as a whole has no particular desire to export 118 00:13:18.860 --> 00:13:23.900 more than he imports or to have a favorable balance of trade. 119 00:13:23.900 --> 00:13:30.460 He tries to export more than he imports of producers' goods in his business. 120 00:13:30.460 --> 00:13:38.420 Then he uses this surplus to spend on imports of consumers' goods for his personal wants. 121 00:13:38.420 --> 00:13:45.680 On total balance, he may, like Mr. Brown, choose to add to his cash balance or subtract 122 00:13:45.680 --> 00:13:52.140 from his cash balance, as he sees fit and considers most desirable. 123 00:13:52.140 --> 00:13:58.300 It was partly confusion between the total action of the individual and his action as 124 00:13:58.300 --> 00:14:05.520 a businessman that led writers to extrapolate from the behavior of the businessman and conclude 125 00:14:05.520 --> 00:14:13.000 that nations are better off if they export more than they import. 126 00:14:13.000 --> 00:14:19.200 Let us take as an example Mr. Jones after he has been established in his business. 127 00:14:19.200 --> 00:14:25.800 Over a certain period he may decide to subtract five ounces from his cash balance even though 128 00:14:25.800 --> 00:14:33.240 he tries his best to achieve the largest net income from business and thus add to his cash 129 00:14:33.240 --> 00:14:40.240 Fred Jones, Income from Business 150 oz. Expenditures in Business on Factors of Production, Producers' Goods 100 oz. For Consumers' Goods 55 oz. Total Expenditures 155 oz. Subtracts 100 oz. 130 00:15:03.240 --> 00:15:06.760 Fraction from Cash Balance, 5 oz.