WEBVTT NOTE 5.03. The Structure of Production: A World of Specific Factors 1 00:00:00.000 --> 00:00:08.080 3. The Structure of Production, A World of Specific Factors 2 00:00:08.080 --> 00:00:14.960 Crucial to understanding the process of production is the question of the specificity of factors, 3 00:00:14.960 --> 00:00:21.640 a problem touched on in Chapter 1. A specific factor is one suitable to the production of 4 00:00:21.640 --> 00:00:28.800 only one product. A purely non-specific factor would be one equally suited to the production 5 00:00:28.800 --> 00:00:38.720 It is clear that not all factors could be purely nonspecific, for in that case all factors 6 00:00:38.720 --> 00:00:45.020 would be purely interchangeable, that is, there would be need for only one factor. 7 00:00:45.020 --> 00:00:51.000 But we have seen that human action implies more than one existing factor. 8 00:00:51.000 --> 00:00:58.960 In the existence of one purely non-specific factor is inconceivable if we properly consider 9 00:00:58.960 --> 00:01:05.800 suitability in production in value terms rather than in technological terms. 10 00:01:05.800 --> 00:01:12.140 The literature in economics has been immeasurably confused by writers on production theory who 11 00:01:12.140 --> 00:01:18.400 deal with problems in terms of technology rather than valuation. 12 00:01:18.400 --> 00:01:24.920 In fact, if we analyze the concept, we find that there is no sense in saying that a factor 13 00:01:24.920 --> 00:01:31.920 is equally suitable in purely technological terms, since there is no way of comparing 14 00:01:31.920 --> 00:01:36.800 the physical quantities of one product with those of another. 15 00:01:36.800 --> 00:01:43.960 If X can help to produce three units of A or two units of B, there is no way by which 16 00:01:43.960 --> 00:01:47.040 we can compare these units. 17 00:01:47.040 --> 00:01:54.520 Finally the valuation of consumers establishes a hierarchy of valued goods, their interactions 18 00:01:54.520 --> 00:01:58.400 setting the prices of the consumer's goods. 19 00:01:58.400 --> 00:02:04.180 Relatively non-specific factors, then, are allocated to those products that the consumers 20 00:02:04.180 --> 00:02:06.600 have valued most highly. 21 00:02:06.600 --> 00:02:13.320 It is difficult to conceive of any good that would be purely non-specific and equally valuable 22 00:02:13.320 --> 00:02:16.460 in all processes of production. 23 00:02:16.460 --> 00:02:22.500 Our major distinction, then, is between the specific factor, which can be used in only 24 00:02:22.500 --> 00:02:30.860 one line of production, and the non-specific factor, of varying degrees of convertibility, 25 00:02:30.860 --> 00:02:35.740 which can be used in more than one production process. 26 00:02:35.740 --> 00:02:43.580 Now let us for a time consider a world where every good is produced only by several specific 27 00:02:43.580 --> 00:02:44.620 factors. 28 00:02:44.620 --> 00:02:51.160 In this world, a world that is conceivable, though highly unlikely, every person, every 29 00:02:51.160 --> 00:02:58.720 piece of land, every capital good, would necessarily be irrevocably committed to the production 30 00:02:58.720 --> 00:03:01.360 of one particular product. 31 00:03:01.360 --> 00:03:07.880 There would be no alternative uses of any good from one line of production to another. 32 00:03:07.880 --> 00:03:14.500 In the entire world of production, then, there would be little or no economic problem that 33 00:03:14.500 --> 00:03:20.660 That is, no problem of allocating scarce means to alternative ends. 34 00:03:20.660 --> 00:03:26.260 Certainly the consumers would still have to allocate their scarce monetary resources to 35 00:03:26.260 --> 00:03:29.140 the most preferred consumer's goods. 36 00:03:29.140 --> 00:03:35.460 In the non-market sphere, everyone, again as a consumer, would have to allocate his time 37 00:03:35.460 --> 00:03:40.020 and energies to the enjoyment of various consumer's goods. 38 00:03:40.020 --> 00:03:46.720 There would still, in the sphere of production of exchangeable goods, be one allocation that 39 00:03:46.720 --> 00:03:53.180 every man would make, how much time to devote to labor and how much to leisure. 40 00:03:53.180 --> 00:03:59.160 But there would be no problem of which field to labor in, no problem of what to do with 41 00:03:59.160 --> 00:04:04.480 any piece of land, no problem of how to allocate capital goods. 42 00:04:04.480 --> 00:04:12.240 The employment of the factors would all depend on the consumer's demand for the final product. 43 00:04:12.240 --> 00:04:18.520 Now that we have traced the direction of productive effort, we must trace the direction of monetary 44 00:04:18.520 --> 00:04:20.060 income. 45 00:04:20.060 --> 00:04:25.000 This is a reverse one, from the consumers back to the producers. 46 00:04:25.000 --> 00:04:31.560 The consumers purchase the stock of a consumer's good at a price determined on the market, 47 00:04:31.560 --> 00:04:34.660 Building the Producers a Certain Income 48 00:04:34.660 --> 00:04:40.080 Two of the crucial problems of production theory are the method by which the monetary 49 00:04:40.080 --> 00:04:47.280 income is allocated and the corollary problem of the pricing of the factors of production. 50 00:04:47.280 --> 00:04:54.160 First, let us consider only the lowest stage of production, the stage that brings about 51 00:04:54.160 --> 00:04:56.100 the final product. 52 00:04:56.100 --> 00:05:03.460 In that stage, numerous factors, all now assumed to be specific, cooperate in producing the 53 00:05:03.460 --> 00:05:05.260 consumer's good. 54 00:05:05.260 --> 00:05:13.420 There are three types of such factors, labor, original nature, and produced capital goods. 55 00:05:13.420 --> 00:05:20.220 We must hasten to add that this does not signify adoption of the old classical fallacy that 56 00:05:20.220 --> 00:05:24.460 treated each of these groups of factors as homogeneous. 57 00:05:24.460 --> 00:05:32.060 Clearly, they are heterogeneous, and for pricing purposes and in human action are treated as such. 58 00:05:32.060 --> 00:05:39.660 Only the same good, homogeneous for human valuation, is treated as a common factor, 59 00:05:39.660 --> 00:05:46.300 and all factors are treated alike, for their contribution to revenue by producers. 60 00:05:46.300 --> 00:05:53.900 The categories land, labor and capital goods are essential, however, for a deeper analysis 61 00:05:53.900 --> 00:06:00.900 Let us assume that on a certain day consumers purchase a certain quantity of a good X for, say, 100 ounces of gold. 62 00:06:00.900 --> 00:06:07.900 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. 63 00:06:07.900 --> 00:06:14.900 The price of the total quantity is equal to the gross income obtained from the sale of the good. 64 00:06:14.900 --> 00:06:23.900 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. 65 00:06:23.900 --> 00:06:29.900 How will these 100 ounces be allocated to the producing factors? 66 00:06:29.900 --> 00:06:37.900 In the first place, we must make an assumption about the ownership of the consumer's good just before it is sold. 67 00:06:37.900 --> 00:06:46.900 It is obvious that this owner or these owners will be the immediate recipients of the 100 ounces of gold income. 68 00:06:46.900 --> 00:06:53.900 Let us say that in the final stage there have been seven factors participating in the production. 69 00:06:53.900 --> 00:06:59.900 Two types of labor, two types of land and three types of capital goods. 70 00:06:59.900 --> 00:07:07.900 There are two alternatives in regard to the final ownership of the product before it is sold to the consumer. 71 00:07:07.900 --> 00:07:13.900 A. All the owners of these factors jointly own the final product, 72 00:07:13.900 --> 00:07:20.900 or B. The owner of each of the factors sells the services of his factor to someone else, 73 00:07:20.900 --> 00:07:28.900 and the latter, who may himself contribute a factor, sells the good at a later date to the consumer. 74 00:07:28.900 --> 00:07:30.180 and Consumer. 75 00:07:30.180 --> 00:07:35.820 Although the latter is the nearly universal condition, it will be convenient to begin 76 00:07:35.820 --> 00:07:39.640 by analyzing the first alternative. 77 00:07:39.640 --> 00:07:45.980 Those who own the final product, whatever the alternative adopted, are capitalists, 78 00:07:45.980 --> 00:07:49.580 since they are the owners of capital goods. 79 00:07:49.580 --> 00:07:55.340 It is better, however, to confine the term capitalists to those who have saved money 80 00:07:55.340 --> 00:07:58.740 capital with which to buy factors. 81 00:07:58.740 --> 00:08:04.460 This by definition does not occur under the first alternative, where owners of factors 82 00:08:04.460 --> 00:08:07.300 are joint owners of the products. 83 00:08:07.300 --> 00:08:14.140 The term product owner suffices for designating the owner of the capital assets, whatever 84 00:08:14.140 --> 00:08:16.860 the alternative adopted. 85 00:08:16.860 --> 00:08:23.260 Product owners are also entrepreneurs, since they assume the major entrepreneurial burden 86 00:08:23.260 --> 00:08:26.940 of adjusting to uncertain future conditions. 87 00:08:26.940 --> 00:08:32.640 To call them entrepreneurs alone, however, is to run the danger of forgetting that they 88 00:08:32.640 --> 00:08:40.240 are also capitalists or product owners, and that they would continue to perform that function 89 00:08:40.240 --> 00:08:42.640 in an evenly rotating economy.