Study Guide to Man, Economy, and State with Power and Market
Study Guide to Man, Economy, and State with Power and Market Study Guide to Man, Economy, and State with Power and Market
Chapter 5: Production: The Structure 57 Chapter Outline 1. Some Fundamental Principles of Action A review of concepts discussed earlier. 2. The Evenly Rotating Economy The evenly rotating economy (ERE) is a fictitious mental construction in which all economic activities repeat themselves in a perfectly predictable manner. The ERE is the final end state toward which the market would tend if all disturbing influences were held at bay. There is no uncertainty in the ERE. The ERE allows the conceptual distinction between profit and interest: Because there is certainty, there can be no profits or losses in the ERE. However, there is still time preference, and hence interest. 3. The Structure of Production: A World of Specific Factors This section analyzes a hypothetical world in which each good is produced by several completely specific factors; i.e., each factor of production is suited to produce only one good. There is thus no “economic problem” in deciding on the allocation of factors: Once consumers decide upon which goods they desire, it is a simple matter to employ the factors in the proper fashion. It is clear that the total revenue obtained from consumers for a given good must be the total incomes paid to the factors used in its production. To analyze the distribution of this total income among the various complementary factors, Rothbard deals with two possible cases: joint ownership versus ownership by the capitalists (sections 4 and 6 below, respectively).
58 Study Guide to Man, Economy, and State with Power and Market 4. Joint Ownership of the Product by the Owners of the Factors In this simple case, Rothbard assumes that the owners of the (completely specific) factors, which are used in the production of a given consumer good, maintain joint ownership of the goods-in-process as they “move down the pipeline” from the highest orders to the final consumer good. The main purpose of this analysis is to drive home the point that there can be no independent return to the owners of capital goods; all income received at the point of final sale (from the consumer) ultimately flows to the owners of the original factors, land and labor. 5. Cost The marginal cost of an action is the value placed on the next-best alternative. This is clearly a subjective concept, since value is subjective. No outside observer can determine the cost of someone’s decision. Moreover, cost is “ephemeral” in the sense that, once a man acts, the best alternative course is immediately rendered unattainable. (If it were not, then its value would not really be a cost of the original action. One cannot undo an action, he can at best perform another action.) Because action is forward-looking, the costs of production have no bearing on the sale price of a good. Notice that in the special case of completely specific factors, there is no cost to production. If a factor is suitable for the production of only one type of good, then its use for this end entails no foregone alternative. Where this is obviously not the case— such as a wooded area being inherently beautiful if not used for erecting a shopping mall, or labor hours being used for leisure if not devoted to a productive end—simply proves that in the real world, factors of production are not completely specific; they must be allocated among competing ends.
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Chapter 5: Production: The Structure 57<br />
Chapter Outline<br />
1. Some Fundamental Principles of Action<br />
A review of concepts discussed earlier.<br />
2. The Evenly Rotating <strong>Economy</strong><br />
The evenly rotating economy (ERE) is a fictitious mental<br />
construction in which all economic activities repeat themselves<br />
in a perfectly predictable manner. The ERE is the final end<br />
state <strong>to</strong>ward which the market would tend if all disturbing<br />
influences were held at bay.<br />
There is no uncertainty in the ERE. The ERE allows the<br />
conceptual distinction between profit <strong>and</strong> interest: Because there<br />
is certainty, there can be no profits or losses in the ERE. However,<br />
there is still time preference, <strong>and</strong> hence interest.<br />
3. The Structure of Production: A World of Specific<br />
Fac<strong>to</strong>rs<br />
This section analyzes a hypothetical world in which each<br />
good is produced by several completely specific fac<strong>to</strong>rs; i.e., each<br />
fac<strong>to</strong>r of production is suited <strong>to</strong> produce only one good. There<br />
is thus no “economic problem” in deciding on the allocation of<br />
fac<strong>to</strong>rs: Once consumers decide upon which goods they desire,<br />
it is a simple matter <strong>to</strong> employ the fac<strong>to</strong>rs in the proper fashion.<br />
It is clear that the <strong>to</strong>tal revenue obtained from consumers for<br />
a given good must be the <strong>to</strong>tal incomes paid <strong>to</strong> the fac<strong>to</strong>rs used<br />
in its production. To analyze the distribution of this <strong>to</strong>tal<br />
income among the various complementary fac<strong>to</strong>rs, Rothbard<br />
deals <strong>with</strong> two possible cases: joint ownership versus ownership<br />
by the capitalists (sections 4 <strong>and</strong> 6 below, respectively).