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5. Production: The Structure

4. Joint Ownership of the Product by the Owners of the Factors

Let us first consider the case of joint ownership by the owners of all the final co-operating factors.8 It is clear that the 100 ounces of gold accrue to the owners jointly. Let us now be purely arbitrary and state that a total of 80 ounces accrues to the owners of capital goods and a total of 20 ounces to the owners of labor and nature-given factors. It is obvious that, whatever the allocation, it will be, on the unhampered market, in accordance with the voluntary contractual agreement of each and every factor-owner concerned. Now it is clear that there is an important difference between what happens to the monetary income of the laborer and the landowner, on the one hand, and of the owner of capital goods, on the other. For the capital goods must in turn be produced by labor, nature, and other capital goods. Therefore, while the contributor of personal “labor” energy (and this, of course, includes the energy of direction as well as what are called “laborers” in popular parlance) has earned a pure return, the owner of capital goods has previously spent some money for the production or the purchase of his owned factors.

Now it is clear that, since only factors of production may obtain income from the consumer, the price of the consumers’ good—i.e., the income from the consumers’ good, equals the sum of the prices accruing to the producing factors, i.e., the income accruing to the factors. In the case of joint ownership, this is a truism, since only a factor can receive income from the sale of a good. It is the same as saying that 100 ounces equals 100 ounces.

But what of the 80 ounces that we have arbitrarily allocated to the owners of capital goods? To whom do they finally accrue? Since we are assuming in this example of joint ownership that all products are owned by their factor-owners, it also follows that capital goods, which are also products, are themselves jointly owned by the factors on the second rank of production. Let us say that each of the three first-order capital goods was produced by five co-operating factors: two types of labor, one type of land, two types of capital goods. All these factor-owners jointly own the 80 ounces. Let us say that each of the first-order capital goods had obtained the following:

Capital good A: 30 ounces
Capital good B: 30 ounces
Capital good C: 20 ounces

The income to each capital good will then be owned by five factor-owners on the second rank of production.

It is clear that, conceptually, no one, in the last analysis, receives a return as the owner of a capital good. Since every capital good analytically resolves itself into original nature-given and labor factors, it is evident that no money could accrue to the owner of a capital good. All 100 ounces must eventually be allocated to labor and owners of nature-given factors exclusively. Thus, the 30 ounces accruing to the owners of capital good A will be allocated to the five factor-owners, while the, say, four ounces accruing to one of the capital goods of third rank helping to produce good A will, in turn, be allocated to land, labor, and capital-goods factors of the fourth rank, etc. Eventually, all the money is allocated to labor and nature-given factors only. The diagram in Figure 40 illustrates this process.

At the bottom of the diagram, we see that 100 ounces of gold are transferred from the consumers to the producers. Some of this money goes to owners of capital goods, some to landowners, some to owners of labor. (The proportion going to one group and the other is arbitrarily assumed in the example and is of no importance for this analysis.) The amount accruing to the capital-goods owners is included in the shaded portion of the diagram and the amount accruing both to labor and nature-owners is included in the clear portion of the diagram. In the lowest, the first block, the 20 ounces received by owners of land and of labor factors is marked with an upward arrow, followed by a similar upward arrow at the top of the diagram, the top line designating the money ultimately received by the owners of the various factors. The width of the top line (100 ounces) must be equal to the width of the bottom line (100 ounces), since the money ultimately received by the owners of the factors must equal the money spent by the consumers.

Moving up to line 2, we follow the fortunes of the 80 ounces which had accrued to the owners of capital goods of the first order. We assume that 60 ounces accrue to the owners of second-order capital goods and 20 ounces to second-order labor and nature-given factors. Once again, the 20 ounces’ clear area is marked with an upward arrow designating the ultimate receipt of money by the owners of the factors and is equally marked off on the top line of the diagram. The same process is repeated as we go further and further upward in the order of capital goods. At each point, of course, the amount obtained by owners of capital goods becomes smaller, because more and more has accrued to labor and nature owners. Finally, at the highest conceivable stage, all the remaining 20 ounces earned by the owners of capital goods accrue to land and labor factors only, since eventually we must come to the stage where no capital good has yet been produced and only labor and nature remain. The result is that the 100 ounces are all eventually allocated to the clear spaces, to the land and labor factors. The large upward arrow on the left signifies the general upward course of the monetary income.

To the truism that the income from sale of the consumers’ good equals the consumers’ expenditure on the good, we may add a corresponding truism for each stage of production, namely, that the income from sale of a capital good equals the income accruing to the factors of its production.

In the world that we have been examining, where all products, at whatever stage, are owned jointly by the owners of their factors, it is clear that first work is done on the highest stage. Owners of land and of labor invest their land and labor to produce the highest-order (in this case the fifth) capital good; then these owners turn the good over to the owners of labor and land at the next lower stage; these produce the fourth-order capital good, which in turn co-operates with labor and land factors on that stage to produce the lower-order good, etc. Finally, the lowest stage is reached, and the final factors co-operate to produce the consumers’ good. The consumers’ good is then sold to consumers.9

In the case of joint ownership, then, there does not arise any separate class of owners of capital goods. All the capital goods produced are jointly owned by the owners of the producing land and labor factors; the capital goods of the next lower order are owned by the owners of the land and labor factors at the next lower stage along with the previously co-operating owners, etc. In sum, the entire capital-goods structure engaged in any line of production is jointly owned by the owners of land and labor. And the income gained from the final sale of the product to the consumers accrues only to the owners of land and labor; there is no separate group of owners of capital goods to whom income accrues.10

It is obvious that the production process takes time, and the more complex the production process the more time must be taken. During this time, all the factors have had to work without earning any remuneration; they have had to work only in expectation of future income. Their income is received only at a much later date.

The income that would be earned by the factors, in a world of purely specific factors, depends entirely on consumer demand for the particular final product. If consumers spend 100 ounces on the good, then the factors will jointly earn 100 ounces. If they spend 500 ounces, the factors will earn that amount. If they spend nothing on the product, and the producers have made the enormous entrepreneurial error of working on a product that the consumers do not buy, the factors earn precisely zero. The joint monetary income earned by the owners of the factors fluctuates pari passu with consumer demand for the product.

At this point, a question naturally arises: What happens to owners of factors who earn a zero return? Must they “starve”? Fundamentally, we cannot answer this question for concrete individual persons, since economics demonstrates truths about “functional” earnings in production, and not about the entire earnings of a given person. A particular person, in other words, may experience a zero return on this good, while at the same time earning a substantial return on ownership of another piece of land. In cases where there is no such ownership in another area, the individual may pursue isolated production that does not yield a monetary return, or, if he has an accumulated monetary cash balance, he may purchase goods by reducing the balance. Furthermore, if he has such a balance, he may invest in land or capital goods or in a production organization owning them, in some other line of production. His labor, on our assumptions, may be a specific factor, but his money is usable in every line of production.

Suppose we assume the worst possible case—a man with no cash balance, with no assets of capital, and whose labor is a specific factor the product of which has little or no consumer demand.11 Is he not truly an example of an individual led astray by the existence of the market and the specialization prevalent on it? By subjecting himself to the consumer has he not placed his happiness and existence in jeopardy? Even granting that people chose a market, could not the choice turn out to be tragic for many people?

The answer is that there is no basis whatever for such strictures on the market process. For even in this impossible case, the individual is no worse off than he would have been in isolation or barter. He can always revert to isolation if he finds he cannot attain his ends via the market process. The very fact that we consider such a possibility ludicrous is evidence of the enormous advantages that the market confers upon everyone. Indeed, empirically, we can certainly state that, without the modern, developed market, and thrown back into isolation, the overwhelming majority of individuals could not obtain enough exchangeable goods to exist at all. Yet this choice always remains open to anyone who, for any reason, voluntarily prefers isolation to the vast benefits obtainable from the market system. Certainly, therefore, complaints against the market system by disgruntled persons are misplaced and erroneous. Any person or group, on the unhampered market, is free to abandon the social market at any time and to withdraw into any other desired form of co-operative arrangement. People may withdraw into individual isolation or establish some sort of group isolation or start from the beginning to re-create their own market. In any case, on the free market, their choice is entirely their own, and they decide according to their preferences unhampered by the use or threat of violence.12

Our example of the “worst possible case” enables us to analyze one of the most popular objections to the free society: that “it leaves people free to starve.” First, from the fact that this objection is so widespread, we can easily conclude that there will be enough charitable people in the society to present these unfortunates with gifts. There is, however, a more fundamental refutation. It is that the “freedom-to-starve” argument rests on a basic confusion of “freedom” with “abundance of exchangeable goods.” The two must be kept conceptually distinct. Freedom is meaningfully definable only as absence of interpersonal restrictions. Robinson Crusoe on the desert island is absolutely free, since there is no other person to hinder him. But he is not necessarily living an abundant life; indeed, he is likely to be constantly on the verge of starvation. Whether or not man lives at the level of poverty or abundance depends upon the success that he and his ancestors have had in grappling with nature and in transforming naturally given resources into capital goods and consumers’ goods. The two problems, therefore, are logically separate. Crusoe is absolutely free, yet starving, while it is certainly possible, though not likely, for a given person at a given instant to be a slave while being kept in riches by his master. Yet there is an important connection between the two, for we have seen that a free market tends to lead to abundance for all of its participants, and we shall see below that violent intervention in the market and a hegemonic society tend to lead to general poverty. That a person is “free to starve” is therefore not a condemnation of the free market, but a simple fact of nature: every child comes into the world without capital or resources of his own. On the contrary, as we shall see further below, it is the free market in a free society that furnishes the only instrument to reduce or eliminate poverty and provide abundance.

  • 8. It must be understood that “factors of production” include every service that advances the product toward the stage of consumption. Thus, such services as “marketing costs,” advertising, etc., are just as legitimately productive services as any other factors. The fallacy in the spurious distinction between “production costs” and “selling costs” has been definitely demonstrated by Mises, Human Action, p. 319.
  • 9. On the structure of production, see Wieser, Social Economics, pp. 47ff.
  • 10. In practice, one or more persons can be the owners of any of the factors. Thus, the original factors might also be jointly owned by several persons. This would not affect our analysis. The only change would be that the joint owners of a factor would have to allocate the factor's income according to voluntary contract. But the type of allocation would remain the same.
  • 11. Actually, this case cannot occur, since labor, as we shall see below, is always a nonspecific factor.
  • 12. It is therefore our contention that the term “consumers’ sovereignty” is highly inapt and that “individual sovereignty” would be a more appropriate term for describing the free market system. For an analysis of the concept of “consumers’ sovereignty,” see chapter 10 below.