WEBVTT

NOTE 7.04. Land and Capital Goods

1
00:00:00.000 --> 00:00:05.360
4. Land and Capital Goods

2
00:00:05.360 --> 00:00:11.560
The price of the unit service of every factor, then, is equal to its discounted marginal

3
00:00:11.560 --> 00:00:20.400
value product. This is true of all factors, whether they be original, land and labor,

4
00:00:20.400 --> 00:00:28.480
or produced capital goods. However, as we have seen, there is no net income to the owners

5
00:00:28.480 --> 00:00:35.800
of Capital Goods, since their prices contain the prices of the various factors that cooperate

6
00:00:35.800 --> 00:00:37.720
in their production.

7
00:00:37.720 --> 00:00:45.160
Essentially, then, net income accrues only to owners of land and labor factors, and to

8
00:00:45.160 --> 00:00:48.520
capitalists for their time services.

9
00:00:48.520 --> 00:00:56.360
It is still true, however, that the pricing principle, equality to discounted MVP, applies

10
00:00:56.360 --> 00:01:01.480
whatever the factor, whether capital good or any other.

11
00:01:01.480 --> 00:01:08.240
Let us assume for simplicity that we are dealing with one unit of one consumer's good, which

12
00:01:08.240 --> 00:01:17.920
sells for 100 ounces, and that one unit of each particular factor enters into its production.

13
00:01:17.920 --> 00:01:25.800
Purchase 1, purchase 1 capital good for 80 ounces and, we assume, 1 labor factor for

14
00:01:25.800 --> 00:01:30.560
8 ounces and 1 land factor for 7 ounces.

15
00:01:30.560 --> 00:01:38.800
The joint MVP for the 3 factors is 100, yet their total price is 95 ounces.

16
00:01:38.800 --> 00:01:45.440
The remainder is the discount accruing to the capitalists because of the time element.

17
00:01:45.440 --> 00:01:53.080
The sum of the discounted MVPs, then, is 95 ounces, and this is precisely what the owners

18
00:01:53.080 --> 00:01:56.460
of three factors received in total.

19
00:01:56.460 --> 00:02:05.320
The discounted MVP of the Labor Factors Service was 8, the DMVP of the Land Service was 7,

20
00:02:05.320 --> 00:02:14.200
the DMVP of the Capital Goods Service was 80, thus each factor obtains its DMVP as its

21
00:02:14.200 --> 00:02:24.440
In the case of the capital good, it has been sold for 80, but it has had to be produced,

22
00:02:24.440 --> 00:02:29.760
and this production cost money to pay the income of the various factors.

23
00:02:29.760 --> 00:02:38.040
The price of the capital good then is reduced to, say, another land factor paid 8 ounces,

24
00:02:38.040 --> 00:02:45.580
Another labor factor paid 8 ounces, and a capital goods factor paid 60 ounces.

25
00:02:45.580 --> 00:02:52.480
The prices and therefore the incomes of all these factors are discounted again to account

26
00:02:52.480 --> 00:02:58.320
for the time, and this discount is earned by capitalists too.

27
00:02:58.320 --> 00:03:08.720
The sum of these factor incomes is 76, and once again each factor service earns its DMVP.

28
00:03:08.720 --> 00:03:16.800
Each capital goods factor must be produced and must continue to be produced in the ERE.

29
00:03:16.800 --> 00:03:23.920
Since this is so, we see that the capital goods factor, though obtaining its DMVP, does

30
00:03:23.920 --> 00:03:31.120
does not earn it net, for its owner in turn must pay money to the factors that produce

31
00:03:31.120 --> 00:03:32.120
it.

32
00:03:32.120 --> 00:03:39.200
Ultimately, only land, labor and time factors earn net incomes.

33
00:03:39.200 --> 00:03:45.040
This type of analysis has been severely criticized on the following grounds.

34
00:03:45.040 --> 00:03:51.880
This Austrian method of tracing everything back to land and labor and time may be an

35
00:03:51.880 --> 00:03:58.120
Interesting Historical Exercise, and we may grant that if we trace back production and

36
00:03:58.120 --> 00:04:04.360
investment far enough, we shall ultimately reach the world of primitive men who began

37
00:04:04.360 --> 00:04:07.680
to produce capital with their bare hands.

38
00:04:07.680 --> 00:04:13.840
But of what relevance is this for the modern complex world around us, a world in which

39
00:04:13.840 --> 00:04:19.240
a huge amount of capital already exists and can be worked with?

40
00:04:19.240 --> 00:04:24.360
In the modern world, there is no production without the aid of capital, and therefore

41
00:04:24.360 --> 00:04:30.580
the whole Austrian capital analysis is valueless for the modern economy.

42
00:04:30.580 --> 00:04:36.400
There is no question about the fact that we are not interested in historical analysis,

43
00:04:36.400 --> 00:04:41.520
but rather in an economic analysis of the complex economy.

44
00:04:41.520 --> 00:04:48.160
In particular, acting man has no interest in the historical origin of his resources.

45
00:04:48.160 --> 00:04:55.800
He is acting in the present on behalf of a goal to be achieved in the future.

46
00:04:55.800 --> 00:05:02.160
Praxeological analysis recognizes this and deals with the individual acting at present

47
00:05:02.160 --> 00:05:10.760
to satisfy ends of varying degrees of futurity, from instantaneous to remote.

48
00:05:10.760 --> 00:05:16.600
It is true, too, that the presentation by the master of capital and production theory,

49
00:05:16.600 --> 00:05:22.880
Byrne Boehm-Bawerk sowed confusion by giving an historical interpretation to the structure

50
00:05:22.880 --> 00:05:24.900
of production.

51
00:05:24.900 --> 00:05:31.560
This is particularly true of his concept of the average period of production, which attempted

52
00:05:31.560 --> 00:05:38.520
to establish an average length of production processes operating at present, but stretching

53
00:05:38.520 --> 00:05:41.400
back to the beginning of time.

54
00:05:41.400 --> 00:05:47.220
In one of the weakest parts of his theory, Boehm-Bawerk conceded that the boy who cuts

55
00:05:47.220 --> 00:05:54.720
a stick with his knife is, strictly speaking, only continuing the work of the miner, who,

56
00:05:54.720 --> 00:06:01.000
centuries ago, thrust the first spade into the ground to sink the shaft from which the

57
00:06:01.000 --> 00:06:04.120
ore was brought to make the blade.

58
00:06:04.120 --> 00:06:10.160
He then tried to salvage the relevance of the production structure by averaging periods

59
00:06:10.160 --> 00:06:29.820
Mises has succeeded, however, in refining the Austrian production theory so as to eliminate

60
00:06:29.820 --> 00:06:37.500
reliance on an almost infinitely high production structure and on the mythical concept of an

61
00:06:37.500 --> 00:06:48.080
As Mises states, acting man does not look at his condition with the eyes of an historian.

62
00:06:48.080 --> 00:06:52.400
He is not concerned with how the present situation originated.

63
00:06:52.400 --> 00:06:59.180
His only concern is to make the best use of the means available today for the best possible

64
00:06:59.180 --> 00:07:02.380
removal of future uneasiness.

65
00:07:02.380 --> 00:07:08.460
He has at his disposal a definite quantity of material factors of production.

66
00:07:08.460 --> 00:07:13.420
He does not ask whether these factors are nature given or the product of production

67
00:07:13.420 --> 00:07:16.100
processes accomplished in the past.

68
00:07:16.100 --> 00:07:23.020
It does not matter for him how great a quantity of nature given, that is, original material

69
00:07:23.020 --> 00:07:29.620
factors of production and labor, was expended in their production, and how much time these

70
00:07:29.620 --> 00:07:32.900
These processes of production have absorbed.

71
00:07:32.900 --> 00:07:39.420
He values the available means exclusively from the aspect of the services they can render

72
00:07:39.420 --> 00:07:45.260
him in his endeavors to make future conditions more satisfactory.

73
00:07:45.260 --> 00:07:51.420
The period of production and the duration of serviceableness are for him categories

74
00:07:51.420 --> 00:07:57.740
in planning future action, not concepts of academic retrospection.

75
00:07:57.740 --> 00:08:03.900
They play a role insofar as the actor has to choose between periods of production of

76
00:08:03.900 --> 00:08:05.900
different length.

77
00:08:05.900 --> 00:08:12.700
Boehm-Bawerk was not fully aware of the fact that the period of production is a praxeological

78
00:08:12.700 --> 00:08:20.060
category and that the role it plays in action consists entirely in the choices acting man

79
00:08:20.060 --> 00:08:24.880
makes between periods of production of different length.

80
00:08:24.880 --> 00:08:30.520
The length of time expended in the past for the production of capital goods available

81
00:08:30.520 --> 00:08:34.800
today does not count at all.

82
00:08:34.800 --> 00:08:41.940
But if the past is not taken into account, how can we use the production structure analysis?

83
00:08:41.940 --> 00:08:48.700
How can it apply to an ERE if the structure would have to go back almost endlessly in

84
00:08:48.700 --> 00:08:49.700
time?

85
00:08:49.700 --> 00:08:55.300
If we base our approach on the present, must we not follow the Niteans in scrapping the

86
00:08:55.300 --> 00:08:58.260
production structure analysis?

87
00:08:58.260 --> 00:09:04.900
A particular point of contention is the dividing line between land and capital goods.

88
00:09:04.900 --> 00:09:12.260
The Niteans, in scoffing at the idea of tracing periods of production back through the centuries,

89
00:09:12.260 --> 00:09:19.740
wrap the land concept altogether, and include land as simply a part of capital goods.

90
00:09:19.740 --> 00:09:24.420
This change, of course, completely alters production theory.

91
00:09:24.420 --> 00:09:30.260
The Nightians point correctly, for example, to the fact that present-day land has many

92
00:09:30.260 --> 00:09:35.220
varieties and amounts of past labor mixed with it.

93
00:09:35.220 --> 00:09:42.180
Canals have been dug, forests cleared, basic improvements have been made in the soil, etc.

94
00:09:42.180 --> 00:09:51.180
They assert that practically nothing is pure land anymore, and therefore that the concept has become an empty one.

95
00:09:52.180 --> 00:10:03.180
As Mises has shown, however, we can revise Boehm-Bawerk's theory and still retain the vital distinction between land and capital goods.

96
00:10:03.180 --> 00:10:11.180
We do not have to throw out, as do the Niteans, the land baby with the average period of production bathwater.

97
00:10:11.180 --> 00:10:17.340
With Water, we can instead reformulate the concept of land.

98
00:10:17.340 --> 00:10:23.960
Up to this point we have simply assumed land to be the original nature given factors.

99
00:10:23.960 --> 00:10:29.760
Now we must modify this, in keeping with our focus on the present and the future rather

100
00:10:29.760 --> 00:10:31.600
than the past.

101
00:10:31.600 --> 00:10:39.660
Whether or not a piece of land is originally pure land is in fact economically immaterial,

102
00:10:39.660 --> 00:10:45.740
so long as whatever alterations have been made are permanent, or rather, so long as

103
00:10:45.740 --> 00:10:53.820
these alterations do not have to be reproduced or replaced, non-replaceable as a criterion

104
00:10:53.820 --> 00:11:01.320
for land, in contrast to capital goods, is not equivalent to permanent.

105
00:11:01.320 --> 00:11:04.540
Permanent is a subdivision of non-replaceable.

106
00:11:04.540 --> 00:11:10.500
It is clear that permanent improvements do not have to be replaced, however, depletable

107
00:11:10.500 --> 00:11:19.460
natural resources, such as coal, ores, etc., are not permanent, but are also non-replaceable.

108
00:11:19.460 --> 00:11:26.060
The key question is whether a resource has to be produced, in which case it earns only

109
00:11:26.060 --> 00:11:28.060
gross rents.

110
00:11:28.060 --> 00:11:34.060
If it does not or cannot, it earns net rents as well.

111
00:11:34.060 --> 00:11:41.700
Things that are being depleted obviously cannot be replaced and are therefore land, not capital

112
00:11:41.700 --> 00:11:43.740
goods.

113
00:11:43.740 --> 00:11:49.460
Land that has been irrigated by canals or altered through the chopping down of forests

114
00:11:49.460 --> 00:11:53.940
has become a present, permanent given.

115
00:11:53.940 --> 00:12:00.140
Because it is a present given, not worn out in the process of production and not needing

116
00:12:00.140 --> 00:12:19.140
In the ERE this factor will continue to give forth its natural powers unstinted and without further investment. It is therefore land in our analysis.

117
00:12:19.140 --> 00:12:37.140
Once this occurs and the permanent are separated from the non-permanent alterations, we see that the structure of production no longer stretches back infinitely in time, but comes to a close within a relatively brief span of time.

118
00:12:37.140 --> 00:12:50.640
We may use permanent and non-permanent in this section because resources that are being depleted obviously cannot be included in any evenly rotating equilibrium.

119
00:12:50.640 --> 00:12:58.640
With depletable resources left aside, permanent becomes identical with non-reproducible.

120
00:12:58.640 --> 00:13:06.040
The capital goods are those which are continually wearing out in the process of production,

121
00:13:06.040 --> 00:13:11.040
and which labor and land factors must work to replace.

122
00:13:11.040 --> 00:13:16.840
When we consider physical wearing out and replacement, then it becomes evident that

123
00:13:16.840 --> 00:13:22.740
it would not take many years for the whole capital goods structure to collapse if no

124
00:13:22.740 --> 00:13:29.060
No work were done on maintenance and replacement, and this is true even in the modern highly

125
00:13:29.060 --> 00:13:31.420
capitalistic economy.

126
00:13:31.420 --> 00:13:38.380
Of course, the higher the degree of capitalist development and the more stages in production,

127
00:13:38.380 --> 00:13:43.920
the longer will it take for all the capital goods to wear out.

128
00:13:43.920 --> 00:13:50.460
The permanence with which we are dealing refers, of course, to the physical permanence of the

129
00:13:50.460 --> 00:13:56.460
and not to the permanence of their value. The latter depends on the shifting

130
00:13:56.460 --> 00:14:02.420
desires of consumers and never could be called permanent. Thus there might be a

131
00:14:02.420 --> 00:14:08.300
land factor uniquely and permanently suitable as a vineyard. It is land and

132
00:14:08.300 --> 00:14:14.100
remains so therefore indefinitely. If at some time the consumers should

133
00:14:14.100 --> 00:14:19.820
completely lose their taste for wine and the land becomes valueless and no longer

134
00:14:19.820 --> 00:14:28.820
It is still a permanent factor, and therefore is land, although now sub-marginal.

135
00:14:28.820 --> 00:14:34.820
It should be noted that the permanence is relevant to present considerations of human action.

136
00:14:34.820 --> 00:14:42.820
A piece of land might give forth a permanent marginal physical product without necessity of maintenance,

137
00:15:12.820 --> 00:15:20.620
Permanence or Non-Permanence and the Cosmological Question of the Permanence of Matter and Energy

138
00:15:20.620 --> 00:15:27.820
George Stigler charges that the various distinctions between land and capital goods based on permanence

139
00:15:27.820 --> 00:15:34.780
or origin, such as are discussed herein, are physical rather than economic.

140
00:15:34.780 --> 00:15:37.260
These strictures miss the point.

141
00:15:37.260 --> 00:15:44.340
No one denies that these homogeneous factors can change greatly in value over time, but

142
00:15:44.340 --> 00:15:52.620
whether or not a given factor is original or improved or permanent or needing to be maintained

143
00:15:52.620 --> 00:15:59.420
is a physical question and one that is very relevant to economic analysis.

144
00:15:59.420 --> 00:16:05.860
Certainly the Nightian argument that all land is capital goods because no land is original

145
00:16:05.860 --> 00:16:10.660
is also an argument in the physical realm.

146
00:16:10.660 --> 00:16:16.580
The concept of land as used throughout this book, then, is entirely different from the

147
00:16:16.580 --> 00:16:19.480
popular concept of land.

148
00:16:19.480 --> 00:16:25.860
Let us in this section distinguish between the two by calling the former economic land

149
00:16:25.860 --> 00:16:29.100
and the latter geographic land.

150
00:16:29.100 --> 00:16:36.240
The economic concept includes all nature-given sources of value, what is usually known as

151
00:16:36.240 --> 00:16:43.820
natural resources, land, water and air, in so far as they are not free goods.

152
00:16:43.820 --> 00:16:49.980
On the other hand, a large part of the value of what is generally considered land, that

153
00:16:49.980 --> 00:16:57.860
is, that part that has to be maintained with the use of labor, is really a capital good.

154
00:16:57.860 --> 00:17:03.900
That agricultural land is an example of the latter may surprise the reader, who is likely

155
00:17:03.900 --> 00:17:07.100
to think of it as permanently productive.

156
00:17:07.100 --> 00:17:08.900
This is completely wrong.

157
00:17:08.900 --> 00:17:15.100
The marginal physical productivity of geographic land varies greatly in accordance with the

158
00:17:15.100 --> 00:17:22.120
amount of labor that is devoted to maintaining or improving the soil, as against such use

159
00:17:22.120 --> 00:17:35.400
The basic soil, and here we are referring to the soil that would remain now if maintenance

160
00:17:35.400 --> 00:17:42.820
were suspended, not to the soil as it was in the dim past before cultivation, is the

161
00:17:42.820 --> 00:17:50.100
land element, while the final product, which is popularly known as agricultural land, is

162
00:17:50.100 --> 00:17:55.780
is usually a capital good containing this land element.

163
00:17:55.780 --> 00:18:02.980
As Vansickel and Rogge say about the soil, land, as the top 12 to 18 inches from which

164
00:18:02.980 --> 00:18:10.140
grains, vegetables, grasses and trees draw almost their entire nourishment, is highly

165
00:18:10.140 --> 00:18:11.500
destructible.

166
00:18:11.500 --> 00:18:18.380
Topsoil can be washed or blown away, eroded, or its organic and mineral content can be

167
00:18:18.380 --> 00:18:25.620
be dissolved and drawn down out of reach of plant life, leached in a relatively few years,

168
00:18:25.620 --> 00:18:29.600
unless great care is exercised in its use.

169
00:18:29.600 --> 00:18:33.220
It can also be rebuilt by careful husbandry.

170
00:18:33.220 --> 00:18:40.500
Hence, it can be said of all soils that their maintenance requires saving.

171
00:18:40.500 --> 00:18:46.980
The indestructibility of land is much more clearly exemplified in what is commonly called

172
00:18:46.980 --> 00:18:48.560
Urban Land

173
00:18:48.560 --> 00:18:56.140
For land in urban areas, and this includes suburban land, land for factories, etc., clearly

174
00:18:56.140 --> 00:19:04.020
evinces one of its most fundamentally indestructible features, its physical space, its part of

175
00:19:04.020 --> 00:19:05.900
the surface of the earth.

176
00:19:05.900 --> 00:19:12.540
For the surface area of the earth is, except in rare cases, eternally fixed, as is the

177
00:19:12.540 --> 00:19:18.180
The Geographic Position of Each Piece of Geographic Land on the Surface

178
00:19:18.180 --> 00:19:26.240
This eternally fixed, permanent, positional aspect of geographic land is called the site

179
00:19:26.240 --> 00:19:33.540
aspect of the land, or as Mises aptly puts it, the land as standing room.

180
00:19:33.540 --> 00:19:39.500
Since it is permanent and non-reproducible, it very clearly comes under the category of

181
00:19:39.500 --> 00:19:41.260
economic land.

182
00:19:41.260 --> 00:19:46.580
The permanence once again refers to its physical spatial aspect.

183
00:19:46.580 --> 00:19:52.060
Its site values, of course, are always subject to change.

184
00:19:52.060 --> 00:19:58.300
But while the position is permanent, even the land itself was necessarily altered by

185
00:19:58.300 --> 00:20:02.420
man to prepare it for urban use.

186
00:20:02.420 --> 00:20:09.180
Midtown Manhattan is on the same site, the same geographical location now as it was in

187
00:20:09.180 --> 00:20:16.300
in the 1600s, although the monetary values accruing to it have changed.

188
00:20:16.300 --> 00:20:23.260
Suppose that a piece of currently unused land can be used for various agricultural purposes

189
00:20:23.260 --> 00:20:25.520
or for urban purposes.

190
00:20:25.520 --> 00:20:32.320
In that case, a choice will be made according to its alternative values as non-replaceable

191
00:20:32.320 --> 00:20:40.120
Economic Land between its discounted MVP as a result of the fertility of its basic soil

192
00:20:40.120 --> 00:20:44.560
and its discounted MVP as an urban site.

193
00:20:44.560 --> 00:20:51.400
And if a decision must be made whether land now used in agriculture and being maintained

194
00:20:51.400 --> 00:20:58.720
for that purpose should remain in agriculture or be used as a site for building, the principles

195
00:20:58.720 --> 00:21:00.840
of choice are the same.

196
00:21:00.840 --> 00:21:07.920
The marginal value return to the agricultural or urban land is broken down by the owner

197
00:21:07.920 --> 00:21:15.160
of the land, the landlord, into the interest return on the capital maintenance and improvement

198
00:21:15.160 --> 00:21:22.120
and the discounted marginal value return to the basic economic land.

199
00:21:22.120 --> 00:21:29.240
Basic land or ground land in this treatise refers to the soil without maintenance in

200
00:21:29.240 --> 00:21:46.080
The Basic Land, therefore, whether it be soil or site, earns for its owner an ultimate unit

201
00:21:46.080 --> 00:21:51.920
price, or rent, equaling its DMVP.

202
00:21:51.920 --> 00:21:58.660
Working on this Basic Land, labor and investment create a finished capital good.

203
00:21:58.660 --> 00:22:06.460
This capital good, like all capital goods, also earns unit rents equal to its DMVP.

204
00:22:06.460 --> 00:22:13.280
However, this earning is broken down, and relevantly so in the current market, not as

205
00:22:13.280 --> 00:22:21.780
an historical exercise, into basic land rent and interest return on the capital invested.

206
00:22:21.780 --> 00:22:28.380
As well, of course, as returns to labor that works on the basic land, that is, labor's

207
00:22:28.380 --> 00:22:33.880
wage or rent price equaling its DMVP.

208
00:22:33.880 --> 00:22:41.540
This capital good land we have variously termed geographic land, land in the popular sense,

209
00:22:41.540 --> 00:22:44.880
final land, finished land.

210
00:22:44.880 --> 00:22:51.580
When we speak simply of land on the other hand we shall always be referring to the true

211
00:22:51.580 --> 00:22:55.940
Economic Land, The Currently Nature-Given Factor.