Chapter 7—Production: General Pricing of the
Factors (continued)
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Chapter 7—Production:
General Pricing of the Factors (continued)
5.
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.
6.
The Depletion of Natural Resources
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.
APPENDIX A
MARGINAL PHYSICAL AND MARGINAL VALUE PRODUCT
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.
APPENDIX B
PROFESSOR ROLPH AND THE
DISCOUNTED MARGINAL PRODUCTIVITY THEORY
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.
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