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Tuesday, September 4, 2012

The Essence of Production

Of the many heads under which we can classify goods, there is one which takes precedence over all others. The essential note of an economic good is its scarcity in the sense with which we have now become familiar. For certain goods, this scarcity is immediately given, viz., for those goods which cannot be increased by production. Such are the paintings of the old masters or rare vintage wines. The true significance of this category of scarce goods will become clear to us when we consider that it includes such important and irreplaceable goods as land (though pedants might insist that land can be increased in quantity by building dikes to wrest it from the sea). And then there is the most important and productive good of all-human labor power. Certainly, it cannot be “produced” in the ordinary sense of the word. In contradistinction to these goods whose scarcity is immediately and unalterably given, there is the great mass of goods which can be increased by production, a circumstance which, as we have seen, does not preclude their possessing the quality of scarceness, but is of sufficient importance to merit our close study.
If the concept “good” must be understood in a very broad sense, so also must the concept production. This point must be particularly insisted upon since the layman is always quick to classify as unproductive every activity which does not immediately serve for the production of material goods, especially trade and transportation. To make this point unambiguously clear, let us consider the following: production is never a new creation of matter, but only the creation of a “good,” just as consumption is never the annihilation of matter but only the annihilation of a “good.” Production cannot add a single atom to the existing quantity of matter but only transforms matter in such wise that it is capable of satisfying a given want. Hence, all production is really only the transformation, the refinement, and the combining of matter, and this applies not only to so-called primary production (agriculture, fishing, forestry, mining, etc.) but also to commercial-industrial production. What is after all the purpose of mining if not to transport to a suitable place material found in an unsuitable place—in other words, to change its location? Hence production is, broadly interpreted, the process of making economic goods available; its quiddity is economic, not technical. The railroad “produces” as does also the merchant, the hotel-keeper, the clerk, the actor. Even a speculator is a producer insofar as he fulfills an economically useful function, and is not to be confused with the unproductive individual who merely exploits the available opportunities for reaping unearned profit.2
These considerations are illustrated in the following example. We have seen that the production of coal is nothing else, at bottom, than a change in its location. Coal is of no use to the inhabitants of West Virginia so long as it has not been brought to the surface. Nor is West Virginian coal which has been brought to the surface of any use to the inhabitants of Pittsburgh until it has been transported to that city. What mysterious difference is there between the vertical and the horizontal movement of coal? To satisfy a want, a good must not only exist as such, but it must be in the place where it is demanded. Moreover, it must be in that place at the time when it is demanded. And there are a number of other requirements which we as consumers ordinarily expect “goods” to meet: we prefer goods to be available in a wide range of choices; we expect not to have to become connoisseurs in order to be able to rely on the quality of the goods we buy; and we attached increasing value to customer conveniences, to elegant shops, courteous service, attractive packaging, home deliveries, and many other things. All these things, of course, the manufacturer can undertake to do and, in fact, often does (shoe shops run by shoe manufacturers). Nevertheless, in these instances as elsewhere, the principle of the division of labor has proved its worth: most such accessory operations are better performed by enterprises specialized for the purpose. Trade, transportation, and speculation fulfill these intermediate “service” functions. Their apparently autonomous character should not be permitted to obscure the fact that they are really “producing” utilities and services without which the material goods would have for us little or no value. Such enterprises are, indeed, no less “productive” than those concerned with producing material goods. To wax indignant over the difference between the factory price and the retail price (“retail markup”) is no more rational than to complain of a “manufacturing markup,” i.e., of the increase in the value of the product added within the factory. This does not exclude the possibility that in both cases avoidable costs and wasteful practices will be present, but these are defects which can be most effectively eliminated by competition of greater or lesser degree. If, in recent years, the retail markup has noticeably increased in many sectors of the economy, this merely expresses the fact that we attach increasing value to such ancillary activities.
Much confusion is generated on the above point by continually contrasting the distribution function of trade with production per se. The distinction is certainly not fallacious but it must not be forgotten that the distribution of goods appertains equally to production, since it represents a function which is distinct and separate from others and is compensated as such. Unfortunately, the word distribution is also used in quite another sense, namely, in the sense of a distribution of income, i.e., the distribution of individual claims on the social product by way of the formation of income. The distribution of goods by trade is a part of production, but, in consequence of the income which he acquires thanks to his distribution function, the merchant, as all other producers, participates in the process of income formation and income distribution. Since we are here dealing with two entirely different things, it would seem preferable to employ different expressions for them and to find some other word for the less abstract concept of goods distribution.

Economics of the Free Society

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