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 61 costs determine money prices. The consumer of a good does not care how much money a producer spent in its production; the price of a good is determined by its marginal utility to the consumer. If the utility of a certain consumer good is so low that a producer cannot afford to purchase the factors necessary for its construction, the producer will hire fewer of the factors and produce less of the good. This will tend to lower the rents (i.e., prices) earned by the factors, and the reduced supply of the good will raise its marginal utility to consumers. The process will continue until the sum total of factor payments (including interest) equals the sale price of the consumer good. This process explains the tendency that “price equals cost.” 9. Pricing and the Theory of Bargaining Because the analysis to this point has assumed completely specific factors of production, economics can say very little about the distribution of the income earned at each stage among the complementary factor owners. (We do know that the total income earned in a given stage must be discounted at the prevailing rate of interest.) Any voluntary agreement among the factor owners will leave them all better than if they did not produce at all, but we cannot predict what the actual agreement will be because of “zones of indeterminacy.” At the very end of the section Rothbard explicitly introduces the assumption that labor is scarcer than land. There are always uses to which labor may be devoted to increase human happiness—if only to be consumed as leisure by the laborer himself. In contrast, at any given time there are always “submarginal” plots of land and other natural resources. It simply does not pay to incorporate them into a production process. Note that this assumption is not an a priori truth, but an empirical observation.
62 Study Guide to Man, Economy, and State with Power and Market Notable Contributions • Mises’s notion of the “evenly rotating economy” is his own invention. Other economists dealt with a stationary state, but Mises uses the concept to clarify the difference between profit and interest. This focus on the relationship between uncertainty and profit is not unique to the Austrians (e.g., Frank Knight), but Mises’s attention to the merits and dangers of unrealistic constructions is quite rare. • As mentioned in chapter 1, the “structure of production” approach is fairly unique to the Austrians. It clarifies and underscores the role of time in production. • The Böhm-Bawerkian insight that capital goods earn no net return is an Austrian doctrine that most mainstream economists consider archaic. (Paul Samuelson ridiculed Joseph Schumpeter in this regard.) But it is a completely logical extension of the ERE analysis. • Rothbard’s piecemeal approach to the problem of factor payments—first assuming completely specific factors and joint ownership, then relaxing the assumption of joint ownership, and finally (in a later chapter) relaxing the assumption of complete specificity—is an extremely helpful innovation that is not present in Human Action. Moreover, his diagram illustrating the factor payments at various stages is another pedagogical device that clarifies the analysis of the ERE.
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Chapter 5: Production: The Structure 61<br />
costs determine money prices. The consumer of a good does<br />
not care how much money a producer spent in its production;<br />
the price of a good is determined by its marginal utility <strong>to</strong> the<br />
consumer. If the utility of a certain consumer good is so low that<br />
a producer cannot afford <strong>to</strong> purchase the fac<strong>to</strong>rs necessary for<br />
its construction, the producer will hire fewer of the fac<strong>to</strong>rs <strong>and</strong><br />
produce less of the good. This will tend <strong>to</strong> lower the rents (i.e.,<br />
prices) earned by the fac<strong>to</strong>rs, <strong>and</strong> the reduced supply of the<br />
good will raise its marginal utility <strong>to</strong> consumers. The process<br />
will continue until the sum <strong>to</strong>tal of fac<strong>to</strong>r payments (including<br />
interest) equals the sale price of the consumer good. This<br />
process explains the tendency that “price equals cost.”<br />
9. Pricing <strong>and</strong> the Theory of Bargaining<br />
Because the analysis <strong>to</strong> this point has assumed completely<br />
specific fac<strong>to</strong>rs of production, economics can say very little<br />
about the distribution of the income earned at each stage among<br />
the complementary fac<strong>to</strong>r owners. (We do know that the <strong>to</strong>tal<br />
income earned in a given stage must be discounted at the prevailing<br />
rate of interest.) Any voluntary agreement among the<br />
fac<strong>to</strong>r owners will leave them all better than if they did not produce<br />
at all, but we cannot predict what the actual agreement will<br />
be because of “zones of indeterminacy.”<br />
At the very end of the section Rothbard explicitly introduces<br />
the assumption that labor is scarcer than l<strong>and</strong>. There are always<br />
uses <strong>to</strong> which labor may be devoted <strong>to</strong> increase human happiness—if<br />
only <strong>to</strong> be consumed as leisure by the laborer himself.<br />
In contrast, at any given time there are always “submarginal”<br />
plots of l<strong>and</strong> <strong>and</strong> other natural resources. It simply does not pay<br />
<strong>to</strong> incorporate them in<strong>to</strong> a production process. Note that this<br />
assumption is not an a priori truth, but an empirical observation.