In the ERE, therefore, every good sold to consumers will sell at a certain “final equilibrium” price and at certain total sales. These receipts will accrue in part to capitalists in the form of interest income, and the remainder to owners of land and labor. The payments of income to the producers have also been popularly termed “costs.” These are clearly money costs, or money expenses, and obviously are not the same thing as “costs” in the psychic sense of subjective opportunity forgone.

We have seen that, for all goods, total receipts to sellers will tend to equal total payments to factors, and this equality will be established in the evenly rotating economy. In the ERE, interest income will be earned at the same uniform rate by capitalists throughout the economy. The remainder of income from production and sale to consumers will be earned by the owners of the original factors: land and labor.

THE ANALYSIS OF PRODUCTION ACTIVITIES—the actions that eventually result in the attainment of consumers’ goods—is a highly intricate one for a complex, monetary market economy. It is best, therefore, to summarize now some of the most applicable of the fundamental principles formulated in chapter 1. In that chapter we applied those principles to a Crusoe economy only. Actually, however, they are applicable to any type of economy and are the indispensable keys to the analysis of the complex modern economy. Some of these fundamental principles are:

Analysis of the activities of production in a monetary market economy is a highly complex matter. An explanation of these activities, in particular the determination of prices and therefore the return to factors, the allocation of factors, and the formation of capital, can be developed only if we use the mental construction of the evenly rotating economy.

Crucial to understanding the process of production is the question of the specificity of factors, a problem we touched on in chapter 1. A specific factor is one suitable to the production of only one product. A purely nonspecific factor would be one equally suited to the production of all possible products. It is clear that not all factors could be purely nonspecific, for in that case all factors would be purely interchangeable, i.e., there would be need for only one factor. But we have seen that human action implies more than one existing factor.

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.

As in the case considered in chapter 2, the sellers who are included in the sale at the equilibrium price are those whose value scales make them the most capable, the most eager, sellers. Similarly, it will be the most capable, or most eager, buyers who will purchase the good at the equilibrium price. With a price of two and a half grains of gold per pound of butter, the sellers will be those for whom two and a half grains of gold is worth more than one pound of butter; the buyers will be those for whom the reverse valuation holds.

Thus, at any given point in time, the consumer is confronted with the previously existing money prices of the various consumers’ goods on the market. On the basis of his utility scale, he determines his rankings of various units of the several goods and of money, and these rankings determine how much money he will spend on each of the various goods.