Production & the Market Process

Robert P. MurphyMises AcademyAugust 31, 2011

Lecture 7: 1st Half of Chapter 9 of Man, Economy, and State

1st Half ofChapter 9 of MES

I. Review of Sustainable Expansion

1.Capital Goods Earn No Net Rent in ERE

2.Labor

IV. Land

V. Economics of Population Growth

I. Review Sustainable Expansion

� Want More?!

OPTIONAL reading for super geeks:

“The Reswitching Question” at:http://mises.org/daily/1148

(Especially the Samuelson paper cited.)

II. Capital Goods EarnNo Net Rent in ERE

Rothbard: A laborer or landowner can earn net rents in the ERE. But a capital good must be first produced, and once you take into account the rents paid for land and labor inputs, as well as the interest involved because of time-delay in production, then gross rents of capital goods are fully absorbed, leaving no net rents.

� Inconsistency?

Q: Didn’t Rothbard earlier say that in ERE, only two “ultimate” income sources were interest and wages? So if we explain away all of a capital good’s gross rents as due to factor payments and interest, then can’t we do the same for a piece of land’s gross rent (i.e. all due to interest)?A: Yes, so either slip on his part before (i.e. he meant to include land too), or he is here thinking of people who homestead virgin land.

III. Labor

� Its rental or hire price is called the wage.

● Its rents cannot be capitalized into a purchase price on the free market, for this would be slavery.

● In our world, an empirical fact is that labor is more scarce than land. There is a lot of “submarginal” land, but hardly any “submarginal” labor.

� Labor vs. Management?

IV. Land

●Its hire price is called “rent,” though remember that rent is a broad economic concept including the hire price of any productive factor. (Capital goods and workers earn rents too, but for workers we call it “wages” more specifically.)

●Supramarginal land earns positive rents, submarginal land earns no rents, and marginal land earns barely positive rents.

A. Supply Curvesfor Land

B. Land Speculation

●Unlike capital or consumer goods, little worry that speculation will keep land “idle” for long stretches. Yet even if this happens, it’s a good thing (assuming speculators are right).

● If a parcel is earning no rent but has positive capital value (i.e. purchase price), it’s because people anticipate (possible) future rents. (Easy example: Possible change in zoning laws.)

V. Economics of Population Growth

A. Effect on Land

As population rises, the MVP of land rises too. This raises the (potential) gross rents of all parcels of land. Those that were originally supramarginal earn even higher rents, and some that were submarginal are now bumped above the zero-line and are brought into cultivation.

B. Effect on Labor

Other things equal, higher population (with constant stock of capital goods, technological knowledge, etc.) would mean lower wages.

HOWEVER, this tendency may be partially or even fully offset by increased physical productivity of labor due to enhanced division of labor. (E.g. if nuclear holocaust wipes out most people, band of survivors would be overjoyed to find others, even for purely material reasons.)

C. “Optimum” Population

For given state of capital stocks, technology, natural resources, etc., there is an “optimum” population size that maximizes per capita productivity.

If population is currently below this level, then pop. growth increases standard of living.

Economic science does NOT say this level should be the goal of humans.