General Pricing of the Factors (continued)
Capitalization and Rent
The subject of “rent” is one of the most confused in the entire economic literature. We must, therefore, reiterate the meaning of rent as set forth above. We are using “rent” to mean the unit price of the services of any good. It is important to banish any preconceptions that apply the concept of rent to land only. Perhaps the best guide is to keep in mind the well-known practice of “renting out.” Rent, then, is the same as hire: it is the sale and purchase of the unit services of any good. It therefore applies as well to prices of labor services (called “wages”) as it does to land or to any other factor. The rent concept applies to all goods, whether durable or nondurable. In the case of a completely nondurable good, which vanishes fully when first used, its “unit” of service is simply identical in size with the “whole” good itself. In regard to a durable good, of course, the rent concept is more interesting, since the price of the unit service is distinguishable from the price of the “good as a whole.” So far, in this work, we have been assuming that no durable producers’ goods are ever bought outright, that only their unit services are exchanged on the market. Therefore, our entire discussion of pricing has dealt with rental pricing. It is obvious that the rents are the fundamental prices. The marginal utility analysis has taught us that men value goods in units and not as wholes; the unit price (or “rent”) is, then, the fundamental price on the market.
In chapter 4 we analyzed rental pricing and the price of the “good as a whole” for durable consumers’ goods. The principle is precisely the same for producers’ goods. The rental value of the unit service is the basic one, the one ultimately determined on the market by individual utility scales. The price of the “whole good,” also known as the capital value of the good, is equal to the sum of the expected future rents discounted by what we then vaguely called a time-preference factor and which we now know is the rate of interest. The capital value, or price of the good as a whole, then, is completely dependent on the rental prices of the good, its physical durability, and the rate of interest. Obviously, the concept of “capital value” of a good has meaning only when that good is durable and does not vanish instantly upon use. If it did vanish, then there would only be pure rent, without separate valuations for the good as a whole. When we use the term “good as a whole,” we are not referring to the aggregate supply of the whole good in the economy. We are referring, e.g., not to the total supply of housing of a certain type, but to one house, which can be rented out over a period of time. We are dealing with units of “whole goods,” and these units, being durable, are necessarily larger than their constituent unit services, which can be rented out over a period of time.
The principle of the determination of “capital values,” i.e., prices of “whole goods,” is known as capitalization, or the capitalizing of rents. This principle applies to all goods, not simply capital goods, and we must not be misled by similarity of terminology. Thus, capitalization applies to durable consumers’ goods, such as houses, TV sets, etc. It also applies to all factors of production, including basic land. The rental price, or rent, of a factor of production is equal, as we have seen, to its discounted marginal value product. The capital value of a “whole factor” will be equal to the sum of its future rents, or the sum of its DMVPs. This capital value will be the price for which the “whole good” will exchange on the market. It is at this capital value that a unit of a “whole good” such as a house, a piano, a machine, an acre of land, etc., will sell on the market. There is clearly no sense to capitalization if there is no market, or price, for the “whole good.” The capital value is the appraised value set by the market on the basis of rents, durability, and the interest rate.
The process of capitalization can encompass many units of a “whole good,” as well as one unit. Let us consider the example of chapter 4, section 7, and generalize from it to apply, not only to houses, but to all durable producers’ goods. The good is a 10-year good; expected future rents are 10 gold ounces per year (determined by consumer utilities for consumers’ goods, or by MVPs for producers’ goods). The rate of interest is 10 percent per annum. The present capital value of this good is 59.4 gold ounces. But this “whole good” is itself a unit of a larger supply; one of many houses, machines, plants, etc. At any rate, since all units of a good have equal value, the capital value of two such houses, or two such machines, etc., added together equals precisely twice the amount of one, or 118.8 ounces. Since we are adding rents or DMVPs in money terms, we may keep adding them to determine capital values of larger aggregates of durable goods. As a matter of fact, in adding capital values, we do not need to confine ourselves to the same good. All we need do is to add the capital values in whatever bundle of durable goods we are interested in appraising. Thus, suppose a firm, Jones Construction Company, wishes to sell all its assets on the market. These assets, necessarily durable, consist of the following:
But we must always remember, in adding capital values, that these are relevant only in so far as they are expressed in market price or potential market price. Many writers have fallen into the trap of assuming that they can, in a similar way, add up the entire capital value of the nation or world and arrive at a meaningful figure. Estimates of National Capital or World Capital, however, are completely meaningless. The world, or country, cannot sell all its capital on the market. Therefore, such statistical exercises are pointless. They are without possible reference to the very goal of capitalization: correct estimation of potential market price.
As we have indicated, capitalization applies to all factors of production, or rather, to all factors where there are markets for the whole goods that embody them. We may call these markets capital markets. They are the markets for exchange of ownership, total or partial, of durable producers’ goods. Let us take the case of capital goods. The rent of a capital good is equal to its DMVP. The capitalized value of the capital good is the sum of the future DMVPs, or the discounted sum of the future MVPs. This is the present value of the good, and this is what the good will sell for on the capital market.
The process of capitalization, because it permeates all sectors of the economy, and because it is flexible enough to include different types of assets—such as the total capital assets of a firm—is a very important one in the economy. Prices of shares of the ownership of this capital will be set at their proportionate fraction of the total capital value of the assets. In this way, given the MVPs, durability, and the rate of interest, all the prices on the capital market are determined, and these will be the prices in the ERE. This is the way in which the prices of individual capital goods (machines, buildings, etc.) will be set on the market, and this is the way in which these values will be summed up to set the price of a bundle of capital assets, similar and dissimilar. Share prices on the stock market will be set according to the proportion that they bear to the capitalized value of the firm’s total assets.
We have stated that all factors that can be bought and sold as “whole goods” on the market are capitalized. This includes capital goods, ground land, and durable consumers’ goods. It is clear that capital goods and durable consumers’ goods can be and are capitalized. But what of ground land? How can this be capitalized?
We have seen in detail above that the ultimate earnings of factors go to the owners of labor and of ground land and, as interest, to capitalists. If land can be capitalized, does this not mean that land and capital goods are “really the same thing” after all? The answer to the latter question is No. It is still emphatically true that the earnings of basic land factors are ultimate and irreducible, as are labor earnings, while capital goods have to be constantly produced and reproduced, and therefore their earnings are always reducible to the earnings of ground land, labor, and time.
Basic land can be capitalized for one simple reason: it can be bought and sold “as a whole” on the market. (This cannot be done for labor, except under a system of slavery, which, of course, cannot occur on the purely free market.) Since this can be and is being done, the problem arises how the prices in these exchanges are determined. These prices are the capital values of ground land.
A major characteristic of land as compared to capital goods is that its series of future rents is generally infinite, since, whether as basic soil or site, it is physically indestructible. In the ERE, the series of future rents will, of course, always be the same. The very fact that any land is ever bought and sold, by the way, is a demonstration of the universality of time preference. If there were no time preference for the present, then an infinite series of future rents could never be capitalized. A piece of land would have to have an infinite present price and therefore could never be sold. The fact that lands do have prices is an indication that there is always a time preference and that future rents are discounted to reduce to a present value.
As in the case of any other good, the capital value of land is equal to the sum of its discounted future rents. For example, it can be demonstrated mathematically that if we have a constant rent expected to be earned in perpetuity, the capital value of the asset will equal the annual rent divided by the rate of interest. Now it is obvious that on such land, the investor annually obtains the market rate of interest. If, in other words, annual rents will be 50, and the rate of interest is 5 percent, the asset will sell for 50/.05, or 1,000. The investor who purchases the asset for 1,000 ounces will earn 50 ounces a year from it, or 5 percent, the market rate of interest.
Ground land, then, is “capitalized” just as are capital goods, shares in capital-owning firms, and durable consumers’ goods. All these owners will tend to receive the same rate of interest return, and all will receive the same rate of return in the ERE. In short, all owned assets will be capitalized. In the ERE, of course, the capital values of all assets will remain constant; they will also be equal to the discounted sum of the MVPs of their unit rents.
Above, we saw that a key distinction between land and capital goods is that the owners of the former sell future goods for present money, whereas the owners of the latter advance present money, buy future goods, and later sell their product when it is less distantly future. This is still true. But then we must ask the question: How does the landowner come to own this land? The answer is (excepting his or his ancestors’ finding unused land and putting it to use) that he must have bought it from someone else. If he did so, then, in the ERE, he must have bought it at its capitalized value. If he buys the piece of land at a price of 1,000 ounces, and receives 50 ounces per annum in rent, then he earns interest, and only interest. He sells future goods (land service) in the production process, but he too first bought the whole land with money. Therefore, he too is a “capitalist-investor” earning interest.
“Pure rent,” i.e., rent that is not simply a return on previous investment and is therefore not capitalized, seems, therefore, to be earned only by those who have found unused land themselves (or inherited it from the finders). But even they do not earn pure rent. Suppose that a man finds land, unowned and worth zero, and then fences it, etc., until it is now able to yield a perpetual rental of 50 ounces per annum. Could we not say that he earns pure rent, since he did not buy the land, capitalized, from someone else? But this would overlook one of the most important features of economic life: implicit earnings. Even if this man did not buy the land, the land is now worth a certain capital value, the one it could obtain on the market. This capital value is, say, 1,000. Therefore, the man could sell the land for 1,000 at any time. His forgone opportunity cost of owning the land and renting out its services is sale of the land for 1,000 ounces. It is true that he earns 50 ounces per year, but this is only at the sacrifice of not selling the whole land for 1,000 ounces. His land, therefore, is really as much capitalized as land that has been bought on the market.
We must therefore conclude that no one receives pure rent except laborers in the form of wages, that the only incomes in the productive ERE economy are wages (the term for the prices and incomes of labor factors) and interest. But there is still a crucial distinction between land and capital goods. For we see that a fundamental, irreducible element is the capital value of land. The capital value of capital goods still reduces to wages and the capital value of land. In a changing economy, there is another source of income: increases in the capital value of ground land. Typical was the man who found unused land and then sold its services. Originally, the capital value of the land was zero; it was worthless. Now the land has become valuable because it earns rents. As a result, the capital value has risen to 1,000 ounces. His income, or gain, consisted of the rise of 1,000 ounces in capital value. This, of course, cannot take place in the ERE. In the ERE, all capital values must remain constant; here, we see that a source of monetary gain is a rise in the capital value of land, a rise resulting from increases in expected rental yields of land. If the economy becomes an ERE after this particular change from zero to 1,000, then this income was a “one-shot” affair, rather than a continuing and recurring item. The capital value of the land rose from zero to 1,000, and the owner can reap this income at any time. However, after this has been reaped once, it is never reaped again. If he sells the land for 1,000, the next buyer receives no gain from the increase in capital value; he receives only market interest. Only interest and wages accrue continuously. As long as the ERE continues, there will be no further gains or losses in capital value.
One category has been purposely omitted so far from the discussion of land factors. At first, we defined land as the original, nature-given factor. Then we said that land which had been improved by human hands but which is now permanently given must also be considered as land. Land, then, became the catallactically permanent, nonreproducible resource, while capital goods are those that are nonpermanent and therefore must be produced again in order to be replaced. But there is one type of resource that is nonreplaceable but also nonpermanent: the natural resource that is being depleted, such as a copper or a diamond mine. Here the factor is definitely original and nature-given; it cannot be produced by man. On the other hand, it is not permanent, but subject to depletion because any use of it leaves an absolutely smaller amount for use in the future. It is original, but nonpermanent. Shall it be classed as land or as a capital good?
The crucial test of our classificatory procedure is to ask: Must labor and land factors work in order to reproduce the good? In the case of permanent factors this is not necessary, since they do not wear out. But in this case, we must answer in the negative also, for these goods, though nonpermanent, cannot be reproduced by man despite their depletion. Therefore, the natural resource comes as a special division under the “land” category.
Table 15, adapted from one by Professor Hayek, reveals our classification of various resources as either land or capital goods.
Hayek criticizes the criterion of reproducibility for classifying a capital good. He declares: “The point that is relevant . . . is not that certain existing resources can be replaced by others which are in some technological sense similar to them, but that they have to be replaced by something, whether similar or not, if the income stream is not to decline.” But this is confusing value with physical considerations. We are attempting to classify physical goods here, not to discuss their possible values, which will fluctuate continually. The point is that the resources subject to depletion cannot be replaced, much as the owner would like to do so. They therefore earn a net rent. Hayek also raises the question whether a stream is “land” if a new stream can be created by collecting rain water. Here again, Hayek misconceives the issue as one of maintaining a “constant income stream” instead of classifying a physical concrete good. The stream is land because it does not need to be physically replaced. It is obvious that Hayek’s criticism is valid against Kaldor’s definition. Kaldor defined capital as a reproducible resource which it is economically profitable to produce. In that case, obsolete machines would no longer be capital goods. (Would they be “land”?) The definition should be: physically reproducible resources. Hayek’s criticism that then the possibility of growing artificial fruit, etc., would make all land “capital” again misconceives the problem, which is one of the physical need and possibility of reproducing the agent. Since the basic land—not its fruit—needs no reproduction, it is excluded from the capital-good category.
The fact that the natural resources cannot be reproduced means that they earn a net rent and that their rent is not absorbed by land and labor factors that go into their production. Of course, from the net rents they earn the usual interest rate of the society for their owners, interest earnings being related to their capital value. Increases in capital values of natural resources go ultimately to the resource-owner himself and are not absorbed in gains by other land and labor factors.
There is no problem in capitalizing a resource that is subject to depletion, since, as we have seen, capitalization can take place for either a finite or an infinite series of future rental incomes.
There is, however, one striking problem that pervades any analysis of the resource subject to depletion and that distinguishes it from all other types of goods. This is the fact that there can be no use for such a resource in an evenly rotating economy. For the basis of the ERE is that all economic quantities continue indefinitely in an endless round. But this cannot happen in the case of a resource that is subject to depletion, for whenever it is used, the total stock of that good in the economy decreases. The situation at the next moment, then, cannot be the same as before. This is but one example of the insuperable difficulties encountered whenever the ERE is used, not as an auxiliary construction in analysis, but as some sort of ideal that the free economy must be forced to emulate.
There can be a reserve demand for a depletable resource, just as there is speculative reserve demand for any other stock of goods on the market. This speculation is not simple wickedness, however; it has a definite function, namely, that of allocating the scarce depletable resource to those uses at those times when consumer demand for them will be greatest. The speculator, waiting to use the resources until a future date, benefits consumers by shifting their use to a time when they will be more in demand than at present. As in the case of ground land, the permanent resource belongs to the first finder and first user, and often some of these initial capital gains are absorbed by interest on the capital originally invested in the business of resource-finding. The absorption can take place only in so far as the finding of new resources is a regular, continuing business. But this business, which by definition could not exist in the ERE, can never be completely regularized.
Minerals such as coal and oil are clearly prime examples of depletable resources. What about such natural resources as forests? A forest, although growing by natural processes, can be “produced” by man if measures are taken to maintain and grow more trees, etc. Therefore, forests would have to be classified as capital goods rather than depletable resources.
One of the frequent attacks on the behavior of the free market is based on the Georgist bugbear of natural resources held off the market for speculative purposes. We have dealt with this alleged problem above. Another, and diametrically opposite, attack is the common one that the free market wastes resources, especially depletable resources. Future generations are allegedly robbed by the greed of the present. Such reasoning would lead to the paradoxical conclusion that none of the resource be consumed at all. For whenever, at any time, a man consumes a depletable resource (here we use “consumes” in a broader sense to include “uses up” in production), he is leaving less of a stock for himself or his descendants to draw upon. It is a fact of life that whenever any amount of a depletable resource is used up, less is left for the future, and therefore any such consumption could just as well be called “robbery of the future,” if one chooses to define robbery in such unusual terms. Once we grant any amount of use to the depletable resource, we have to discard the robbery-of-the-future argument and accept the individual preferences of the market. There is then no more reason to assume that the market will use the resources too fast than to assume the opposite. The market will tend to use resources at precisely the rate that the consumers desire.
Having developed, in Volume I, our basic analysis of the economics of the isolated individual, barter, and indirect exchange, we shall now proceed, in Volume II, to develop the analysis further by dealing with “dynamic” problems of a changing economy, particular types of factors, money and its value, and monopoly and competition, and discussing, in necessarily more summary fashion, the consequences of violent intervention in the free market.
For purposes of simplification, we have described marginal value product (MVP) as equal to marginal physical product (MPP) times price. Since we have seen that a factor must be used in the region of declining MPP, and since an increased supply of a factor leads to a fall in price, the conclusion of the analysis was that every factor works in an area where increased supply leads to a decline in MVP, and hence in DMVP. The assumption made in the first sentence, however, is not strictly correct.
Let us, then, find out what is the multiple of MPP that will yield an MVP. MVP is equal to an increase in revenue acquired from the addition of a unit, or lost from the loss of a unit, of a factor. MVP will then equal the difference in revenue from one position to another, i.e., the change in position resulting from an increase or decrease of a unit of a factor. Then, MVP equals R2 – R1, where R is the gross revenue from the sale of a product, and a higher subscript signifies that more of a factor has been used in production. The MPP of this increase in a factor is P2 – P1, where P is the quantity of product produced, a higher subscript again meaning that more of a factor has been used.
So: MVP = R2
– R1 by definition.
MPP = P2 – P1 by definition.
Revenue is acquired by sale of the product; therefore, for any given point on the demand curve, total revenue equals the quantity produced and sold, multiplied by the price of the product.
Therefore, R = P . p, where p is the price of the product.
Now, since the factors are economic goods, any increase in the use of a factor, other factors remaining constant, must increase the quantity produced. It would obviously be pointless for an entrepreneur to employ more factors which would not increase the product. Therefore, P2 > P1.
On the other hand, the price of the product falls as the supply increases, so that:
p2 < p1
Now, we are trying to find out what multiplied by MPP yields MVP. This unknown will be equal to:
This may be called the marginal revenue, which is the change in revenue divided by the change in output.
It is obvious that this figure. which we may call MR, will not equal either p2 or p1, or any average of the two. Simple multiplication of the denominator by either of the p’s or both will reveal that this does not amount to the numerator. What is the relation between MR and price?
A price is the average revenue, i.e., it equals the total revenue divided by the quantity produced and sold. In short,
But above, in the discussion of marginal and average product, we saw the mathematical relationship between “average” and “marginal,” and this holds for revenue as well as for productivity: namely, that in the range where the average is increasing, marginal is greater than average; in the range where average is decreasing, marginal is less than average. But we have established early in this book that the demand curve—i.e., the price, or average revenue curve—is always falling as the quantity increases. Therefore, the marginal revenue curve is falling also and is always below average revenue, or price. Let us, however, cement the proof by demonstrating that, for any two positions, p2 is greater than MR. Since p2 is smaller than p1, as price falls when supply increases, the proposition that MR is less than both prices will be proved.
First, we know that p2 < p1, which means that
Now, we may take point one as the starting point and then consider the change to point two, so that:
thus translating into the same symbols we used in the productivity proof above. Now this means that
Hence, when we consider that, strictly, MR, and not price, should be multiplied by MPP to arrive at MVP, we find that our conclusion—that production always takes place in the zone of a falling MVP curve—is strengthened rather than weakened. MVP falls even more rapidly in relation to MPP than we had been supposing. Furthermore, our analysis is not greatly modified, because no new basic determinants—beyond MPP and prices set by the consumer demand curve—have been introduced in our corrective analysis. In view of all this, we may continue to treat MVP as equaling MPP times price as a legitimate, simplified approximation to the actual result.
Of current schools of economic thought, the most fashionable have been the Econometric, the Keynesian, the Institutionalist, and the Neo-Classic. “Neo-Classic” refers to the pattern set by the major economists of the late nineteenth century. The dominant neoclassical strain at present is to be found in the system of Professor Frank Knight, of which the most characteristic feature is an attack on the whole concept of time preference. Denying time preference, and basing interest return solely on an alleged “productivity” of capital, the Knightians attack the doctrine of the discounted MVP and instead advocate a pure MVP theory. The clearest exposition of this approach is to be found in an article by a follower of Knight’s, Professor Earl Rolph.
Rolph defines “product” as any immediate results of “present valuable activities.” These include work on goods that will be consumed only in the future. Thus,
workmen and equipment beginning the construction of a building may have only a few stakes in the ground to show for their work the first day, but this and not the completed structure is their immediate product. Thus, the doctrine that a factor receives the value of its marginal product refers to this immediate product. The simultaneity of production and product does not require any simplifying assumptions. It is a direct appeal to the obvious. Every activity has its immediate results.
Obviously, no one denies that people work on goods and move capital a little further along. But is the immediate result of this a product in any meaningful sense? It should be clear that the product is the end product—the good sold to the consumer. The whole purpose of the production system is to lead to final consumption. All the intermediate purchases are based on the expectation of final purchase by the consumer and would not take place otherwise. Every activity may have its immediate “results,” but they are not results that would command any monetary income from anyone if the owners of the factors themselves were joint owners of all they produced until the final consumption stage. In that case, it would be obvious that they do not get paid immediately; hence, their product is not immediate. The only reason that they are paid immediately (and even here there is not strict immediacy) on the market is that capitalists advance present goods in exchange for those future goods for which they expect a premium, or interest return. Thus, the owners of the factors are paid the discounted value of their marginal product.
The Knight-Rolph approach, in addition, is a retreat to a real-cost theory of value. It assumes that present efforts will somehow always bring present results. But when? In “present valuable activities.” But how do these activities become valuable? Only if their future product is sold, as expected, to consumers. Suppose, however, that people work for years on a certain good and are paid by capitalists, and then the final product is not bought by consumers. The capitalists absorb monetary losses. Where was the immediate payment according to marginal product? The payment was only an investment in future goods by capitalists.
Rolph then turns to another allegedly heinous error of the discount approach, namely, the “doctrine of nonco-ordination of factors.” This means that some factors, in their payment, receive the discounted value of their product and some do not. Rolph, however, is laboring under a misapprehension; there is no assumption of nonco-ordination in any sound discounting theory. As we have stated above, all factors—labor, land, and capital goods—receive their discounted marginal value product. The difference in regard to the owners of capital goods is that, in the ultimate analysis, they do not receive any independent payment, since capital goods are resolved into the factors that produced them, ultimately land and labor factors, and to interest for the time involved in the advance of payment by the capitalists. Rolph believes that nonco-ordination is involved because owners of land and labor factors “receive a discounted share,” and capital “receives an undiscounted share.” But this is a faulty way of stating the conclusion. Owners of land and labor factors receive a discounted share, but owners of capital (money capital) receive the discount.
The remainder of Rolph’s article is largely devoted to an attempt to prove that no time lag is involved in payments to owners of factors. Rolph assumes the existence of “production centers” within every firm, which, broken down into virtually instantaneous steps, produce and then implicitly receive payment instantaneously. This tortured and unreal construction misses the entire point. Even if there were atomized “production centers,” the point is that some person or persons will have to make advances of present money along the route, in whatever order, until the final product is sold to the consumers. Let Rolph picture a production system, atomized or integrated as the case may be, with no one making the advances of present goods (money capital) that he denies exist. And as the laborers and landowners work on the intermediate products for years without pay, until the finished product is ready for the consumer, let Rolph exhort them not to worry, since they have been implicitly paid simultaneously as they worked. For this is the logical implication of the Knight-Rolph position.
This concept of rent is based on the original contribution of Frank A. Fetter. Cf. Fetter, Economic Principles, pp. 143–70. Fetter’s conception has, unfortunately, had little influence on economic thought. It is not only in accord with common usage; it provides a unifying principle, enabling a coherent explanation of the price determination of unit services and of the whole goods that embody them. Without the rental-price concept, it is difficult to distinguish between the pricing of unit services and of whole goods.
Fetter used the rental concept to apply only to the services of durable goods, but it is clear that it can be extended to cover cases of nondurable goods where the unit service is the whole good.
See chapter 4 above. On capitalization, see Fetter, Economic Principles, pp. 262–84, 308–13; and Böhm-Bawerk, Positive Theory of Capital, pp. 339–57.
It is often more convenient to define rent as equal to the MVP, rather than the DMVP. In that case, the capital value of the whole factor is equal to the discounted sum of its future rents.
Fetter’s main error in capital theory was his belief that capitalization meant the scrapping of any distinction between capital goods and land.
Cf. Boulding, Economic Analysis, pp. 711–12.
In the long run, increases in the capital value of capital goods are unimportant, since they resolve into increases in wages and increases in the capital value of ground land.
The problem of gains from changes in capital values will be treated further below.
Cf. Fred R. Fairchild, Edgar S. Furniss, and Norman S. Buck, Elementary Economics (New York: Macmillan & Co., 1926), II, 147.
Hayek, Pure Theory of Capital, p. 58 n.
Ibid., p. 92.
Unusual terms because robbery has been distinctively defined as seizure of someone else’s property without his consent, not the use of one’s own property.
As Stigler says in discussing the charge of “wasted” resources on the market, “It is an interesting problem to define ‘wasteful’ sensibly without making the word synonymous with ‘unprofitable.’” Stigler, Theory of Price, p. 332 n. For a discussion of natural resources and a critique of the doctrines of “conservation,” see Anthony Scott, Natural Resources: The Economics of Conservation (Toronto: University of Toronto Press, 1955).
A curious notion has arisen that considering MR, instead of price, as the multiplier somehow vitiates the optimum satisfaction of consumer desires on the market. There is no genuine warrant for such an assumption.
Earl Rolph, “The Discounted Marginal Productivity Doctrine” in W. Fellner and B.F. Haley, eds., Readings in Theory of Income Distribution (Philadelphia: Blakiston, 1946), pp. 278–93.
 Rolph ascribes this error to Knut Wicksell, but such a confusion is not attributable to Wicksell, who engages in a brilliant discussion of capital and the production structure and the role of time in production. Wicksell demonstrates correctly that labor and land are the only ultimate factors, and that therefore the marginal productivity of capital goods is reducible to the marginal productivity of labor and land factors, so that money capital earns the interest (or discount) differential.
Wicksell’s discussion of these and related issues is of basic importance. He recognized, for example, that capital goods are fully and basically co-ordinate with land and labor factors only from the point of view of the individual firm, but not when we consider the total market in all of its interrelations. Current economic theorizing is, to its detriment, even more preoccupied than writers of his day with the study of an isolated firm instead of the interrelated market. Wicksell, Lectures on Political Economy, I, 148–54, 185–95.
Rolph ends his article, consistently, with a dismissal of any time-preference influences on interest, which he explains in Knightian vein by the “cost” of producing new capital goods.