A. Costs to the Firm

We have seen the basis on which the prices of the factors of production and the interest rate are determined. Looked at from the point of view of an individual entrepreneur, payments to factors are money costs. It is clear that we cannot simply rest on the old classical law that prices of products tend, in the long run, to be equal to their costs of production. Costs are not fixed by some Invisible Hand, but are determined precisely by the total force of entrepreneurial demand for factors of production.

Intervention in One Lesson

Google’s antitrust woes are only the most recent example of private firms using government power to stifle their competition. This story is as old as governments and commerce, but even though the details change, the basic narrative stays the same. With that in mind, why not save some writing time by distilling intervention down to its basic elements? I propose a simple form commentary for discussing these kinds of interventions:

3. Entrepreneurship and Income

D. Supply of Labor

In the case of a labor factor, the particular demand curve for its use will slope downward, and the particular supply curve of a labor factor for a specific use will slope upward to the right. In fact, since labor is the relatively nonspecific factor, the particular supply curve of a labor factor is likely to be flatter than the supply curve of the (usually more specific) land factor. Thus, the particular supply and demand curves for a labor factor may be as represented in Figure 63.

E. Productivity and Marginal Productivity

Great care must be taken in dealing with the productivity concept. In particular, there is danger in using a term such as “productivity of labor.” Suppose, for example, we state that “the productivity of labor has advanced in the last century.” The implication is that the cause of this increase came from within labor itself, i.e., because current labor is more energetic or personally skillful than previous labor. This, however, is not the case.

F. A Note on Overt and Total Wage Rates

It is “total wage rates” that are determined on the market. They tend to be equalized on the market and to be set at the DMVP of the worker. Total wage rates are the money paid out by the employer for labor services. They do not necessarily correspond to the “take-home pay” of the worker. The latter may be called the “overt wage rates.” Thus, suppose that there are two competing employers bidding for the same type of labor. One employer, Mr. A, pays out a certain amount of money, not in direct wages, but in pension funds or other “welfare” benefits.

G. The “Problem” of Unemployment

An economic bugbear of our times is “unemployment.” Not only is this considered the pre-eminent problem of the “depression” in the “business cycle”; it is also generally considered the primary “problem” of the “capitalist system,” i.e., of the developed free-market economy. “Well, at least socialism solves the unemployment problem,” is supposed to be the most persuasive argument for socialism.

The “Living Wage” Mistake

Much of the push to raise minimum wages centers on the assumption that each individual worker should be paid an amount that allows the worker to purchase food, health care, transportation, and housing based on that one wage alone. In many cases, the living wage claims extend to the claim that each worker — or two adult workers, in some cases — should be able to support a family of four or more.

C. Supply of Land

We have seen throughout that the processes of price determination for the unit services of land and labor are exactly the same. Both sets of factors tend to earn their MVP; both receive advances of present money from capitalist-entrepreneurs; etc. The analysis of the pricing of unit services of original or “permanent” factors applies equally to each. There are three basic differences between the conditions of land and those of labor, however, that make separation of the two important.

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