WEBVTT NOTE 5.04. Joint Ownership of the Product by the Owners of the Factors 1 00:00:00.000 --> 00:00:06.000 4. Joint Ownership of the Product by the Owners of the Factors 2 00:00:06.000 --> 00:00:14.000 Let us first consider the case of joint ownership by the owners of all the final cooperating factors. 3 00:00:14.000 --> 00:00:24.000 It must be understood that factors of production include every service that advances the product toward the stage of consumption. 4 00:00:24.000 --> 00:00:31.520 Thus, such services as marketing costs, advertising, etc., are just as legitimately productive 5 00:00:31.520 --> 00:00:34.460 services as any other factors. 6 00:00:34.460 --> 00:00:41.200 The fallacy in the spurious distinction between production costs and selling costs has been 7 00:00:41.200 --> 00:00:46.200 definitely demonstrated by Mises in Human Action. 8 00:00:46.200 --> 00:00:52.040 It is clear that the 100 ounces of gold accrue to the owners jointly. 9 00:00:52.040 --> 00:00:58.740 Let us now be purely arbitrary and state that a total of 80 ounces accrues to the owners 10 00:00:58.740 --> 00:01:05.960 of capital goods and a total of 20 ounces to the owners of labor and nature-given factors. 11 00:01:05.960 --> 00:01:11.920 It is obvious that whatever the allocation it will be on the unhampered market in accordance 12 00:01:11.920 --> 00:01:18.800 with the voluntary contractual agreement of each and every factor owner concerned. 13 00:01:18.800 --> 00:01:23.920 Now it is clear that there is an important difference between what happens to the monetary 14 00:01:23.920 --> 00:01:31.320 income of the laborer and the landowner on the one hand and of the owner of capital goods 15 00:01:31.320 --> 00:01:32.800 on the other. 16 00:01:32.800 --> 00:01:40.120 For the capital goods must in turn be produced by labor, nature and other capital goods. 17 00:01:40.120 --> 00:01:46.320 Therefore, while the contributor of personal labor energy, and this of course includes 18 00:01:46.320 --> 00:01:52.240 Since the energy of direction, as well as what are called laborers in popular parlance, 19 00:01:52.240 --> 00:01:58.840 has earned a pure return, the owner of capital goods has previously spent some money for 20 00:01:58.840 --> 00:02:04.640 the production or the purchase of his owned factors. 21 00:02:04.640 --> 00:02:11.120 Now it is clear that since only factors of production may obtain income from the consumer, 22 00:02:11.120 --> 00:02:17.740 The price of the consumer's good, that is, the income from the consumer's good, equals 23 00:02:17.740 --> 00:02:25.280 the sum of the prices accruing to the producing factors, that is, the income accruing to the 24 00:02:25.280 --> 00:02:26.280 factors. 25 00:02:26.280 --> 00:02:32.840 In the case of joint ownership, this is a truism, since only a factor can receive income 26 00:02:32.840 --> 00:02:34.840 from the sale of a good. 27 00:02:34.840 --> 00:02:40.960 It is the same as saying that 100 ounces equals 100 ounces. 28 00:02:40.960 --> 00:02:47.740 But what of the 80 ounces that we have arbitrarily allocated to the owners of capital goods? 29 00:02:47.740 --> 00:02:51.060 To whom do they finally accrue? 30 00:02:51.060 --> 00:02:56.760 Since we are assuming in this example of joint ownership that all products are owned by their 31 00:02:56.760 --> 00:03:04.600 factor owners, it also follows that capital goods, which are also products, are themselves 32 00:03:04.600 --> 00:03:09.580 jointly owned by the factors on the second rank of production. 33 00:03:09.580 --> 00:03:16.420 Let us say that each of the three first-order capital goods was produced by five cooperating 34 00:03:16.420 --> 00:03:17.420 factors. 35 00:03:17.420 --> 00:03:22.820 Two types of labor, one type of land, two types of capital goods. 36 00:03:22.820 --> 00:03:27.500 All these factor owners jointly owned the 80 ounces. 37 00:03:27.500 --> 00:03:33.400 Let us say that each of the first-order capital goods had obtained the following. 38 00:03:33.400 --> 00:03:36.360 Capital Good A, 30 ounces. 39 00:03:36.360 --> 00:03:39.220 Capital Good B, 30 ounces. 40 00:03:39.220 --> 00:03:47.540 Capital Good C, 20 oz. The income to each capital good will then be owned by five factor 41 00:03:47.540 --> 00:03:55.800 owners on the second rank of production. It is clear that conceptually no one in the last 42 00:03:55.800 --> 00:04:03.840 analysis receives a return as the owner of a capital good. Since every capital good analytically 43 00:04:03.840 --> 00:04:09.720 When money actually resolves itself into original nature-given and labor factors, it is evident 44 00:04:09.720 --> 00:04:14.360 that no money could accrue to the owner of a capital good. 45 00:04:14.360 --> 00:04:21.440 All 100 ounces must eventually be allocated to labor and owners of nature-given factors 46 00:04:21.440 --> 00:04:22.440 exclusively. 47 00:04:22.440 --> 00:04:29.240 Thus, the 30 ounces accruing to the owners of capital good A will be allocated to the 48 00:04:29.240 --> 00:04:35.240 of the Five Factor Owners, while the, say, four ounces accruing to one of the capital 49 00:04:35.240 --> 00:04:43.300 goods of third rank helping to produce good A will in turn be allocated to land, labor 50 00:04:43.300 --> 00:04:47.880 and capital goods factors of the fourth rank, etc. 51 00:04:47.880 --> 00:04:55.360 Eventually, all the money is allocated to labor and nature-given factors only. 52 00:04:55.360 --> 00:05:01.300 To the truism that the income from sale of the consumer's good equals the consumer's 53 00:05:01.300 --> 00:05:09.180 expenditure on the good, we may add a corresponding truism for each stage of production, namely, 54 00:05:09.180 --> 00:05:15.000 that the income from sale of a capital good equals the income accruing to the factors 55 00:05:15.000 --> 00:05:17.400 of its production. 56 00:05:17.400 --> 00:05:23.140 In the world that we have been examining, where all products at whatever stage are owned 57 00:05:23.140 --> 00:05:29.860 Jointly by the owners of their factors, it is clear that first work is done on the highest 58 00:05:29.860 --> 00:05:37.700 stage. Owners of land and of labor invest their land and labor to produce the highest order, 59 00:05:37.700 --> 00:05:44.820 in this case, the fifth, capital good. Then these owners turn the good over to the owners of labor 60 00:05:44.820 --> 00:05:52.260 and land at the next lower stage. These produce the fourth order capital good, which in turn 61 00:05:52.260 --> 00:05:59.260 The first stage of the production cooperates with labor and land factors on that stage to produce the lower order good, etc. 62 00:05:59.260 --> 00:06:07.260 Finally, the lowest stage is reached and the final factors cooperate to produce the consumer's good. 63 00:06:07.260 --> 00:06:11.260 The consumer's good is then sold to consumers. 64 00:06:11.260 --> 00:06:19.260 In the case of joint ownership, then, there does not arise any separate class of owners of capital goods. 65 00:06:19.260 --> 00:06:27.260 All the capital goods produced are jointly owned by the owners of the producing land and labor factors. 66 00:06:27.260 --> 00:06:40.260 The capital goods of the next lower order are owned by the owners of the land and labor factors at the next lower stage, along with the previously cooperating owners, etc. 67 00:06:40.260 --> 00:07:00.260 In sum, the entire capital goods structure engaged in any line of production is jointly owned by the owners of land and labor, and the income gained from the final sale of the product to the consumers accrues only to the owners of land and labor. 68 00:07:00.260 --> 00:07:07.260 There is no separate group of owners of capital goods to whom income accrues. 69 00:07:07.260 --> 00:07:13.260 In practice, one or more persons can be the owners of any of the factors. 70 00:07:13.260 --> 00:07:18.260 Thus, the original factors might also be jointly owned by several persons. 71 00:07:18.260 --> 00:07:21.260 This would not affect our analysis. 72 00:07:21.260 --> 00:07:30.260 The only change would be that the joint owners of a factor would have to allocate the factor's income according to voluntary contract, 73 00:07:30.260 --> 00:07:34.260 but the type of allocation would remain the same. 74 00:07:34.260 --> 00:07:44.260 It is obvious that the production process takes time, and the more complex the production process, the more time must be taken. 75 00:07:44.260 --> 00:07:50.260 During this time, all the factors have had to work without earning any remuneration. 76 00:07:50.260 --> 00:08:00.260 They have had to work only in expectation of future income. Their income is received only at a much later date. 77 00:08:00.260 --> 00:08:12.260 The income that would be earned by the factors in a world of purely specific factors depends entirely on consumer demand for the particular final product. 78 00:08:12.260 --> 00:08:20.260 If consumers spend 100 ounces on the good, then the factors will jointly earn 100 ounces. 79 00:08:20.260 --> 00:08:25.260 If they spend 500 ounces, the factors will earn that amount. 80 00:08:25.260 --> 00:08:38.260 If they spend nothing on the product and the producers have made the enormous entrepreneurial error of working on a product that the consumers do not buy, the factors earn precisely zero. 81 00:08:38.260 --> 00:08:48.260 The joint monetary income earned by the owners of the factors fluctuates pari passu with consumer demand for the product. 82 00:08:48.260 --> 00:08:58.260 At this point, a question naturally arises. What happens to owners of factors who earn a zero return? Must they starve? 83 00:08:58.260 --> 00:09:13.260 Fundamentally, we cannot answer this question for concrete individual persons, since economics demonstrates truths about functional earnings in production, and not about the entire earnings of a given person. 84 00:09:13.260 --> 00:09:20.860 A particular person, in other words, may experience a zero return on this good, while at the same 85 00:09:20.860 --> 00:09:26.100 time earning a substantial return on ownership of another piece of land. 86 00:09:26.100 --> 00:09:32.180 In cases where there is no such ownership in another area, the individual may pursue 87 00:09:32.180 --> 00:09:38.900 isolated production that does not yield a monetary return, or if he has an accumulated 88 00:09:38.900 --> 00:09:45.600 monetary cash balance, he may purchase goods by reducing the balance. Furthermore, if he 89 00:09:45.600 --> 00:09:52.340 has such a balance, he may invest in land or capital goods, or in a production organization 90 00:09:52.340 --> 00:09:59.420 owning them, in some other line of production. His labor, on our assumptions, may be a specific 91 00:09:59.420 --> 00:10:05.700 factor, but his money is usable in every line of production. 92 00:10:05.700 --> 00:10:12.500 Suppose we assume the worst possible case, a man with no cash balance, with no assets 93 00:10:12.500 --> 00:10:18.620 of capital, and whose labor is a specific factor, the product of which has little or 94 00:10:18.620 --> 00:10:20.740 no consumer demand. 95 00:10:20.740 --> 00:10:27.820 Actually, this case cannot occur, since labor, as we shall see, is always a non-specific 96 00:10:27.820 --> 00:10:29.140 factor. 97 00:10:29.140 --> 00:10:35.060 Is he not truly an example of an individual led astray by the existence of the market 98 00:10:35.060 --> 00:10:38.020 and the specialization prevalent on it? 99 00:10:38.020 --> 00:10:43.500 By subjecting himself to the consumer, has he not placed his happiness and existence 100 00:10:43.500 --> 00:10:45.100 in jeopardy? 101 00:10:45.100 --> 00:10:50.740 Even granting that people chose a market, could not the choice turn out to be tragic 102 00:10:50.740 --> 00:10:53.140 for many people? 103 00:10:53.140 --> 00:10:59.700 The answer is that there is no basis whatever for such strictures on the market process. 104 00:10:59.700 --> 00:11:05.580 For even in this impossible case, the individual is no worse off than he would have been in 105 00:11:05.580 --> 00:11:07.700 isolation or barter. 106 00:11:07.700 --> 00:11:14.560 He can always revert to isolation if he finds he cannot attain his ends via the market process. 107 00:11:14.560 --> 00:11:21.140 The very fact that we consider such a possibility ludicrous is evidence of the enormous advantages 108 00:11:21.140 --> 00:11:24.140 that the market confers upon everyone. 109 00:11:24.140 --> 00:11:39.640 Indeed, empirically, we can certainly state that without the modern developed market and thrown back into isolation, the overwhelming majority of individuals could not obtain enough exchangeable goods to exist at all. 110 00:11:39.640 --> 00:11:52.140 Yet this choice always remains open to anyone who, for any reason, voluntarily prefers isolation to the vast benefits obtainable from the market system. 111 00:11:52.140 --> 00:11:59.640 Certainly, therefore, complaints against the market system by disgruntled persons are misplaced and erroneous. 112 00:11:59.640 --> 00:12:06.340 Any person or group on the unhampered market is free to abandon the social market at any time 113 00:12:06.340 --> 00:12:11.640 and to withdraw into any other desired form of cooperative arrangement. 114 00:12:11.640 --> 00:12:18.040 People may withdraw into individual isolation, or establish some sort of group isolation, 115 00:12:18.040 --> 00:12:22.460 or start from the beginning to recreate their own market. 116 00:12:22.460 --> 00:12:28.640 In any case, on the free market, their choice is entirely their own, and they decide according 117 00:12:28.640 --> 00:12:34.720 to their preferences, unhampered by the use or threat of violence. 118 00:12:34.720 --> 00:12:41.560 It is therefore our contention that the term consumer's sovereignty is highly inapt, and 119 00:12:41.560 --> 00:12:47.560 that individual sovereignty would be a more appropriate term for describing the free market 120 00:12:47.560 --> 00:12:49.680 System. 121 00:12:49.680 --> 00:12:56.380 Our example of the worst possible case enables us to analyze one of the most popular objections 122 00:12:56.380 --> 00:13:00.920 to the free society, that it leaves people free to starve. 123 00:13:00.920 --> 00:13:06.860 First, from the fact that this objection is so widespread, we can easily conclude that 124 00:13:06.860 --> 00:13:12.280 there will be enough charitable people in the society to present these unfortunates 125 00:13:12.280 --> 00:13:13.740 with gifts. 126 00:13:13.740 --> 00:13:17.240 There is, however, a more fundamental refutation. 127 00:13:17.240 --> 00:13:24.720 It is that the freedom to starve argument rests on a basic confusion of freedom with abundance 128 00:13:24.720 --> 00:13:26.960 of exchangeable goods. 129 00:13:26.960 --> 00:13:30.960 The two must be kept conceptually distinct. 130 00:13:30.960 --> 00:13:37.080 Freedom is meaningfully definable only as absence of interpersonal restrictions. 131 00:13:37.080 --> 00:13:43.520 Robinson Crusoe on the desert island is absolutely free, since there is no other person to hinder 132 00:13:43.520 --> 00:13:44.520 him. 133 00:13:44.520 --> 00:13:51.000 not necessarily living an abundant life. Indeed, he is likely to be constantly on the verge of 134 00:13:51.000 --> 00:13:58.440 starvation. Whether or not man lives at the level of poverty or abundance depends upon the success 135 00:13:58.440 --> 00:14:05.400 that he and his ancestors have had in grappling with nature and in transforming naturally given 136 00:14:05.400 --> 00:14:13.160 resources into capital goods and consumers' goods. The two problems therefore are logically separate. 137 00:14:13.160 --> 00:14:27.160 Crusoe is absolutely free, yet starving, while it is certainly possible, though not likely, for a given person at a given instant to be a slave while being kept in riches by his master. 138 00:14:27.160 --> 00:14:37.160 Yet there is an important connection between the two, for we have seen that a free market tends to lead to abundance for all of its participants, 139 00:14:37.160 --> 00:14:46.160 And we shall see that violent intervention in the market and a hegemonic society tend to lead to general poverty. 140 00:14:46.160 --> 00:14:55.160 That a person is free to starve is therefore not a condemnation of the free market, but a simple fact of nature. 141 00:14:55.160 --> 00:15:01.160 Every child comes into the world without capital or resources of his own. 142 00:15:01.160 --> 00:15:15.160 On the contrary, as we shall see further, it is the free market, in a free society, that furnishes the only instrument to reduce or eliminate poverty and provide abundance.