3. The Structure of Production, A World of Specific Factors
Crucial to understanding the process of production is the question of the specificity of factors,
a problem touched on in Chapter 1. A specific factor is one suitable to the production of
only one product. A purely non-specific factor would be one equally suited to the production
It is clear that not all factors could be purely nonspecific, for in that case all factors
would be purely interchangeable, that is, there would be need for only one factor.
But we have seen that human action implies more than one existing factor.
In the existence of one purely non-specific factor is inconceivable if we properly consider
suitability in production in value terms rather than in technological terms.
The literature in economics has been immeasurably confused by writers on production theory who
deal with problems in terms of technology rather than valuation.
In fact, if we analyze the concept, we find that there is no sense in saying that a factor
is equally suitable in purely technological terms, since there is no way of comparing
the physical quantities of one product with those of another.
If X can help to produce three units of A or two units of B, there is no way by which
we can compare these units.
Finally the valuation of consumers establishes a hierarchy of valued goods, their interactions
setting the prices of the consumer's goods.
Relatively non-specific factors, then, are allocated to those products that the consumers
have valued most highly.
It is difficult to conceive of any good that would be purely non-specific and equally valuable
in all processes of production.
Our major distinction, then, is between the specific factor, which can be used in only
one line of production, and the non-specific factor, of varying degrees of convertibility,
which can be used in more than one production process.
Now let us for a time consider a world where every good is produced only by several specific
factors.
In this world, a world that is conceivable, though highly unlikely, every person, every
piece of land, every capital good, would necessarily be irrevocably committed to the production
of one particular product.
There would be no alternative uses of any good from one line of production to another.
In the entire world of production, then, there would be little or no economic problem that
That is, no problem of allocating scarce means to alternative ends.
Certainly the consumers would still have to allocate their scarce monetary resources to
the most preferred consumer's goods.
In the non-market sphere, everyone, again as a consumer, would have to allocate his time
and energies to the enjoyment of various consumer's goods.
There would still, in the sphere of production of exchangeable goods, be one allocation that
every man would make, how much time to devote to labor and how much to leisure.
But there would be no problem of which field to labor in, no problem of what to do with
any piece of land, no problem of how to allocate capital goods.
The employment of the factors would all depend on the consumer's demand for the final product.
Now that we have traced the direction of productive effort, we must trace the direction of monetary
income.
This is a reverse one, from the consumers back to the producers.
The consumers purchase the stock of a consumer's good at a price determined on the market,
Building the Producers a Certain Income
Two of the crucial problems of production theory are the method by which the monetary
income is allocated and the corollary problem of the pricing of the factors of production.
First, let us consider only the lowest stage of production, the stage that brings about
the final product.
In that stage, numerous factors, all now assumed to be specific, cooperate in producing the
consumer's good.
There are three types of such factors, labor, original nature, and produced capital goods.
We must hasten to add that this does not signify adoption of the old classical fallacy that
treated each of these groups of factors as homogeneous.
Clearly, they are heterogeneous, and for pricing purposes and in human action are treated as such.
Only the same good, homogeneous for human valuation, is treated as a common factor,
and all factors are treated alike, for their contribution to revenue by producers.
The categories land, labor and capital goods are essential, however, for a deeper analysis
Let us assume that on a certain day consumers purchase a certain quantity of a good X for, say, 100 ounces of gold.
Given the quantity of the goods sold, the price of the total quantity is equal to the gross income obtained from the sale of the good.
The price of the total quantity is equal to the gross income obtained from the sale of the good.
The quantity of the goods sold, the price of the total quantity, is equal to the gross income obtained from the sale of the good.
How will these 100 ounces be allocated to the producing factors?
In the first place, we must make an assumption about the ownership of the consumer's good just before it is sold.
It is obvious that this owner or these owners will be the immediate recipients of the 100 ounces of gold income.
Let us say that in the final stage there have been seven factors participating in the production.
Two types of labor, two types of land and three types of capital goods.
There are two alternatives in regard to the final ownership of the product before it is sold to the consumer.
A. All the owners of these factors jointly own the final product,
or B. The owner of each of the factors sells the services of his factor to someone else,
and the latter, who may himself contribute a factor, sells the good at a later date to the consumer.
and Consumer.
Although the latter is the nearly universal condition, it will be convenient to begin
by analyzing the first alternative.
Those who own the final product, whatever the alternative adopted, are capitalists,
since they are the owners of capital goods.
It is better, however, to confine the term capitalists to those who have saved money
capital with which to buy factors.
This by definition does not occur under the first alternative, where owners of factors
are joint owners of the products.
The term product owner suffices for designating the owner of the capital assets, whatever
the alternative adopted.
Product owners are also entrepreneurs, since they assume the major entrepreneurial burden
of adjusting to uncertain future conditions.
To call them entrepreneurs alone, however, is to run the danger of forgetting that they
are also capitalists or product owners, and that they would continue to perform that function
in an evenly rotating economy.