Home › Forums › Discuss Austrian Economics, Step by Step › MES Questions
- This topic has 3 replies, 3 voices, and was last updated 9 years, 5 months ago by murphy560.
December 8, 2013 at 12:53 am #18137murphy560Member
Professor Herbener, I am currently rereading Rothbard’s “Man, Economy, and State” and I have two questions I was hoping you could shed some light on:
1.) In Rothbard’s analysis of the structure of production he shows that, at the highest levels of production, there are capitalists whose payments are made only to owners of original factors and not to capital goods. In the real world, I can’t imagine who these producers would be. Even high order production like mining, fishing, and farming use mining machinery, boats, and harvesters respectively. Is Rothbard’s analysis an oversimplification or am I missing something?
2.) Rothbard states that increased savings/investment always leads to a lengthening of the structure of production. If new savings become available and certain firms invest these funds in new factories or purchasing more of the same capital goods to increase production (i.e. Apple opening new factories and buying more circuit board presses to increase their iphone output) how is this “lengthening” the structure of production? It seems, for lack of a better phrase, to “fatten” the pre-existing structure of production.December 8, 2013 at 4:01 pm #18138jmherbenerParticipant
On your first question, it’s not an oversimplification but a stipulation made in the concept of the production structure for analytical purposes. If one did not make such a stipulation, then the capital structure would encompass all acts of production since the beginning of human history. Then the highest stage of production, i.e., the first stage of production, would involve only labor and natural resources. But we wish to use the production structure to analyze the existing processes of production. So we stipulate that the highest stage of production is the extraction of natural resources even though it involves the use of prior produced capital goods and not just labor and natural resources themselves.
On your second question, the length of the production structure is the time it takes to perform all the stages of production from the highest to the lowest. Additional saving and investing adds stages to the production structure and thereby lengthens it out in time. For example, let’s say additional saving-investing will be directed by entrepreneurs into new factories to produce consumer goods. In order to increase their production, natural resources must be diverted to producing factories instead of moving down the existing production structure to produce consumer goods. To extract raw material and use them to first produce factories and then extract more raw materials and use them to produce consumer goods with the new factories takes more time. There may, in fact, be more factories built in the various stages throughout the production structure, but the overall structure must be lengthened by additional saving-investing.
A clarifying note: in Rothbard’s trapezoid diagrams illustrating this process, each stage represents the monetary value of all expenditures in that stage. Therefore, even though the monetary expenditures shrink in the lower stages to make room for additional higher stages, the physical amount of goods produced in each stage can be increasing. The entire purpose of saving-investing and lengthening the production structure is to produce more consumer goods in the future even though the total expenditure on consumers goods declines. This is made possible by falling prices for consumer goods. The same processes can occur at other stages as well, e.g., more factories to produce consumer goods even though the total expenditures on factories declines. (Rothbard is stipulating that the additional saving-investing is taking place without any change in the total demand for or the total stock of money, i.e, total spending on all goods stays the same. Therefore more spending on higher stage capital goods necessitates less spending on lower stage capital goods and consumers goods.)December 9, 2013 at 2:32 pm #18139gpm2313Member
To add to what Professor Herbener has said in answer to your questions:
It is vital to keep in mind that the entire production structure/ stages of production construct employed by Rothbard is essentially prospective or forward looking in nature. It is an analytical tool to emphasize and analyze the fact that the available stocks of the factors of production (higher order goods) can be allocated in different temporal patterns, i.e., they can be allocated to produce a stream of consumer goods in the near future (say, two years hence) or they can be allocated to yield such a stream of consumer goods in the remoter future (say, six years later).
In Rothbard’s use of it in MES he makes the simplifying assumption that the factors available for allocation consist only of stocks of “original factors,” i.e., land and labor. This pool of factors is allocated in a certain temporal pattern, producing capital goods along the way, to finally yield a stream of consumer goods. It therefore follows that the highest stage involves the use of only land and labor and the payment of only wages and rent.
In the real world, as you correctly note, the available pool of factors includes not only land and labor but also durable capital goods produced in the past. Not only the available labor and land but also the available durable capital goods “carried over” from production activities in the past are allocated in a certain temporal pattern by the decisions of the various entrepreneurs. It thus follows that in this real world the highest stages of production would involve the use of such factors as well. Making this change to the analysis, however, does not invalidate any of the conclusions derived by Rothbard. His assumption is merely a simplifying one that keeps the analysis tractable.
This question could be best answered by considering the imaginary case of Robinson Crusoe, who finds himself shipwrecked on an island. He needs food and therefore decides to fish. The shortest/ quickest way for him to acquire fish would be to fish with his bare hands. Constructing a raft and a net and thereby increasing his productivity in catching fish involves an inter-temporal trade off – he needs to give up fish in the present (or nearer future) so as to obtain fish in the future (or remoter future). To avail of this productivity increase he needs to overcome his time preference and save and invest. Let’s assume he does that, so that he now has a raft and a net to fish. Now the shortest way to acquire fish is to use the raft and the net, given that these capital goods have been produced in the past and are available.
Now assume that Robinson decides to produce another raft and another net; he wants to ensure that he has these goods to fish when his current raft and net become unusable due to the inevitable depreciation that they will undergo. The production of this new raft and net represents that same inter-temporal choice that the production of he first set involved. Robinson now has to allocate some of his labor time that he could have used to fish with the raft and the net that he already owns (or that he could have enjoyed in the form of leisure) to the production of a raft and a net that will be available for use only in the remoter future.
The case in an economy practicing the division of labor is similar. If one firm in the fishing industry is using a raft and a net whereas the other fishermen are fishing with their bare hands, the use of resources to produce more rafts and nets involves a lengthening of the existing production structure.December 9, 2013 at 10:28 pm #18140murphy560Member
Thanks guys, as always your responses are incredibly thorough and helpful.
- You must be logged in to reply to this topic.