7. The Prices of Original Factors of Production in Capitalist Production

The theoretical determination of the wage rate on the free market follows without difficulty from the application of the general law of prices and the principle of marginal productivity. The price will form at the level at which the supply of laborers is equal to the entrepreneurs’ demand. Since an entrepreneur must shape his demand according to the size of the marginal product—he cannot offer more or he would suffer a loss in hiring labor, he also will not be able to hire the laborer more cheaply since he would be able to find employment elsewhere at a wage equal to the size of the marginal product—the price of labor will coincide with the price of the marginal product. If one considers the supply of laborers as stratified according to its urgency, then the wage will be equivalent to the supply of the “most expensive” (that is, the one coming onto the market with the highest supply) of those laborers who are still employed.³² Thus, we have determined the principle according to which the laborers’ share in the product. In the case of momentary production this suffices. However, when considering a time consuming roundabout structure of production a complication results, because the size of the wage sum is also determined by the amount of wage capital or that portion of free capital which is available for the payment of wages.

This is easy to see. Ignore the cooperating effect of the second originary factor of production of land and that part of human labor which is occupied exclusively with the immediate completion of consumer goods, so that the product can be completed without the laborer having to be paid a wage in advance.³³ It is clear that all other laborers produce something that can only be enjoyed much later as a consumer good. The laborers must have some means of support while the fruits of their labor are developing into a consumer good. The necessary subsistence fund must be made available lest roundabout production be impossible.³⁴ The function of whoever makes this fund available is that of the owner of capital; the one who makes present goods available in order to receive them back later.

It is important here to keep in mind the integration of this process of investing capital in the course of the entire economy. The entrepreneur who pays laborers a wage in production processes that precede the production of consumer goods immediately receives a return value in the form of a finished article whose value is increased through processing and—with a vertical structuring of production in individual firms—can be sold on the market. Upon sale of the capital good, the entrepreneur immediately receives something of equivalent value in return. An “advance” for labor appears to be necessary primarily for the time between the payment to the laborer and the sale of the product; in no case, however, is this necessary for the time between the payment for labor and the creation of a consumer good produced by means of a capital good—which can often only be expected after a great length of time. So this situation appears in the entrepreneur’s calculation: his free capital must make production possible from the introduction of labor until the sale of his product. He is not further interested in whether what he has produced is a finished consumer good or a capital good that will perhaps only result in a consumer good after a long period of time. In particular, the real goods perspective shows that a subsistence fund functioning as capital is the prerequisite for the adoption of a time-consuming roundabout method of production. Payment for the result of preceding production processes can only occur in the form of means of subsistence; and this is so because an entrepreneur carrying out preceding production processes can support those who produce a product that is not yet ready for consumption only by using means of subsistence. If a subsistence fund is employed in this way, it means that it is invested in production, that it is only employed to produce finished consumer goods at a later time. Capital invested in this way will only become available again when at the completion of the production process it is freed up. During this entire time it remains tied up and this time between investment and release must be bridged. We have already seen that synchronization does not change anything concerning this relationship.³⁵

Insofar, then, as labor is used in the roundabout method of production, its expenditure is dependent on the provision of a subsistence fund. We have already said that it would be a mistake to simply label the finished consumer goods available in the economy—and in considering a time period in which several synchronized production processes are completed, also the consumer goods maturing during this time—as a fund available for the support of laborers. These consumer goods are only capital insofar as their owners employ them in the function of capital, and as they are employed for the purpose of investment. We earlier used the phrase: for “reproductive consumption.”

If the payment for laborers employed in the roundabout method of production can only come from a subsistence fund functioning as capital, then from this follows a determination of the size of the wages. When we said that the laborers’ share in the product is determined by the size of the marginal product of labor, we stated that—in a certain sense—productivity of labor is the basis for determining the height of wages. We now see a very different determining cause for the labor wage: No more of the means of subsistence can be transferred over to laborers employed in a roundabout method of production than have been saved by the owners of capital and made available for the purpose of investing. The size of the sum of wages is hence identical to the size of the saved and invested share of the output of consumer goods.³⁶

The important question now is how what we have learned about the wage fund is compatible with what we have learned about the significance of marginal productivity in determining the wage height. An answer to this question can be found without difficulty if one makes the effort to draw the final consequences from the principle which gives rise to the problem of the wage fund. We must assume that we are speaking of a production process during which an “economically relevant” period of time passes between the employment of labor and the achievement of the finished product of consumer goods—a time period during which the support of the laborers requires provision. Furthermore, we must consider that within capitalist production a more or less wide expansion of roundabout methods of production is possible and that such an expansion would be in the interest of increasing returns, but that it finds its limits in the availability of support. The wage fund always serves to provide for the laborers during a specific time period. If in dividing the wage fund we consider as a variable the time for which it must prove sufficient, then the connection between the law of marginal productivity and the division of a wage fund becomes apparent.

The wage fund must be sufficient to pay the laborers’ wages for the duration of the roundabout method of production. If it is not sufficient for this, then this is an indication that too lengthy roundabout production processes have been chosen. The insufficient supply of free capital must drive up the interest rate and thereby force a shortening of the roundabout production processes. Since a shortened roundabout production process is equivalent to a lower marginal product of labor, wages must fall. Simultaneously, the number of employed will go down (with a corresponding shape of the labor supply). Thus, we see that with an insufficient supply of wage funds the length of the roundabout production process goes down, wages drop and the number of laborers will become smaller. An adjustment of demand to the size of the wage fund is thereby brought about. One must keep in mind that this adjustment is required by the interest rate. We see the reverse case when the wage fund is greater than the demand arising from the given production structure. A lowering of the interest rate will lead to a lengthening of the roundabout production process, to a rise in wages and under certain circumstances to an increase in the number of employed persons. In both cases, a structure of production results in which the wage fund suffices to pay all employed persons according to the size of the marginal product of labor for the duration of the roundabout method of production.³⁷

In the framework of the doctrine of the roundabout methods of production, attention must be paid to two important principles regarding the relationships between wage and capital. On the one hand, there is the principle of the complementarity of labor and wage fund, i.e., the rule that labor can only be employed in a roundabout production process if a wage fund is available as a complementary good. On the other hand, there is the principle that the virulence of capital—its ability to make more or less lengthy roundabout production processes possible—is dependent on the wage rate. There is still more to be said here regarding these two statements.

Labor can also be employed other than in a roundabout method of production. If a laborer picks berries, no expenditure of capital is necessary—the laborer will live off the daily output of his labor or, respectively, from its revenue. In this way only a limited number of laborers will earn a very minimal living. Further, it will be difficult to find many other examples of this kind today which shows how far removed we presently are from the conditions of momentary production. The use of a subsistence fund as a complementary good to labor is furthermore not necessary where we are concerned with the last stage of a roundabout method of production in which the duration of production is so short that an “advance” for labor is not necessary. We have already presented the example of a baker. Let us make only one more point in this connection. The more plentiful the supply of capital in an economy, the more significance labor will lose in the last stage of production as compared to labor employed in preceding production stages. In a modern bread factory, the number of laborers directly producing the bread will be significantly lower in relation to the total output than under conditions of primitive hand work. In the first case, a greater amount of capital made the adoption of a longer roundabout production process possible, and the essence of lengthening the roundabout method of production is that in the course of the entire production process the expenditure of labor is moved back in time into production processes that precede those of consumer goods production. It has already been explained in detail that in the process of lengthening the roundabout method of production, the formation of durable capital investments is only one particularly important occurrence. However, the more that labor is shifted into earlier stages in the course of production, the greater will be that sector of labor which can only be employed by drawing on a complementary wage fund.

Now, for the length of possible roundabout production processes it is not only the size of the wage fund as such that is decisive, but also the size of the rations distributed to the laborers. The smaller the ration, the larger will be the productive power of the wage fund, the longer will be the roundabout production processes which can be begun, and the larger will also be the return of production. Hence, temporarily low wages would be in the interest of an increase in production which in turn would make higher wages possible. This, however, is so given the essential condition that the greater output of production serves to expand the supply of capital, i.e., that there are savings. With the formation of wage prices, as theoretically follows from the interaction of supply and demand under the condition of a free, competitive market, the level of wages and thus the productive power of available capital is determined clearly. The laborer cannot receive less than his marginal product. Regulating the length of the roundabout method of production by means of the interest rate will cause the wage fund to suffice as the wage sum. It can be of interest here, however, if we consider the case in which the conditions of the labor market are such that not all laborers who are prepared to work can also be employed. The problem of unemployment caused by friction in the market does not interest us here. We will not speak of unemployment in a technical sense if all laborers willing to work for the going wage prices find work, and if in addition there are still laborers who do not find employment because they are only prepared to work for higher wages.

There are two cases, however, in which it is possible that at a given wage price the supply of laborers is greater than the demand for them. First, the wage price is fixed above the free-market price by wage decrees from outside the market economy. And second, the supply of laborers is such that at the wages formed on the free market a greater number of laborers are willing to work than the demand can assume.³⁸ Let us initially consider the first of these two cases.

When wages are artificially maintained, the process of adjusting the number of laborers, the wage height, and the length, of the roundabout production processes (which we mentioned when presenting the wage fund equation) cannot take its course unhampered, because the wage height is a fixed quantity. Clearly, the rigidity of this magnitude must result in even stronger movements in the other two magnitudes. Under otherwise equal conditions, a rise in wages would reduce the number of laborers and shorten the length of the roundabout production process. The movement of these two magnitudes could adjust the product of the three magnitudes on the right side of the wage fund equation to the size of the wage fund even if the wage rate remains rigid.

One must, however, be aware of one point here. Maintaining a wage at this height has the result that firms can only employ laborers insofar as the marginal product of labor is raised. If we ignore entirely the possibility of varying the length of the roundabout production process, this can only occur if there are “more favorable” production possibilities, while one would have to abstain from less favorable ones. Thus, the direction of the adjustment will be towards limiting production which for technical reasons (such as an unfavorable location) is more expensive. Furthermore, there will be an adjustment towards abstaining from all production processes which can only achieve a lower revenue for their product. Hence, the movement tends in the direction of eliminating the least productive laborers with the goal of raising the marginal product. In addition, a tendency towards shortening the length of the roundabout production processes, which leads to a reduction in the size of the marginal product, would work against the first tendency. Clearly, this conflict can only be solved such that a tendency towards reducing the number of laborers is markedly more effective than the tendency towards shortening the roundabout methods of production. For it is obvious that the more the number of employees drops, the less likely will the increase in rations into which the wage fund is divided cause a shortening of the roundabout method of production.

In the second instance of unemployment of which we have spoken, the wage is a free-market price, although the supply of laborers is larger than the demand. This case is nonetheless analogous to the first case insofar as the height of wages is rigid; however, this is only so because of the particular form of the supply. Adjusting the number of employed to the length of the roundabout method of production does not cause further theoretical difficulties in this case.

Here one must briefly point out how these instances of unemployment must be classified in the historical process of economic development. An “artificial” wage increase will lead to problems of adjustment which under all circumstances will probably lead to the consumption of capital. This is so because the amount of capital already invested, i.e., the supply of capital goods—in particular of fixed capital—must be adjusted to new conditions. Practically speaking, this means that the capital invested cannot be freed up entirely without losses. Ignoring this transitional time period, too high a wage must be incorporated into the course of a static economic system.³⁹ Naturally, the consequence of this will be the nonemployment of laborers. Doing away with unemployment will only be possible in two ways: Either the economic conditions will change in the direction of making production possibilities more favorable,⁴⁰ or, and this is the only other possibility to eliminate unemployment, the level of wages will be reduced. Assuming that before, wages have been artificially raised, this can only happen if wage determination that takes place outside the free market adjusts to free-market pricing. However, where the structure of the supply of labor also leads to unemployment on the free market, a reduction in wages will only occur when increased social pressure brought about by persistent unemployment leads to a change in the structure of the supply of labor, to a reduction in the “aspirations” of the laborers.

In addition to labor, the second originary factor of production must be discussed. We have always equated the performance of land and soil with that of labor. Hence, we assume here that we have an originary factor of production whose cooperation in production brings about an output only later, while the payment for this achievement must be made today. The free capital, or the subsistence fund which functions as free capital, is not merely the fund out of which wages are paid, but the fund out of which wages and annuities are paid. Let us try to justify this view.

The need to find special justification results from the fact that the advance for the owner of land—his payment before the finished product is produced—is not necessary in the same sense as the advanced payment for labor. The laborer cannot work and under certain circumstances must wait years for his wages, whereas the productivity of land in no way becomes worse, even if the owner of the soil himself dies of starvation. Consider the following scenario: The owner of land makes his soil available for production and only later receives his (soil’s) share of the product, while in the meantime he lives from other means—perhaps as a laborer or an owner of capital. Clearly, however, this is a combination of different functions within one person, and in order to present the formations of supply and demand in a pure form, we have always assumed a complete personal separation of these functions. However, if we consider the owner of land as an economic subject who exclusively controls the production factor of land, then the following picture results: The owner of land sells the productive contribution of his soil on the market in successive steps, just as the laborer his labor. The finished product as an “economic successor” of the productive achievement of land only comes about later, just as is the case regarding labor. And finally, it is without a doubt, that, as is the case with respect to labor, the prior expenditure of land leads to an increase in output. Thus, the contributions of land and soil are fully integrated, in the same way as are those of labor, into the analysis of the roundabout method of production.

This has nothing to do with the social organization of an economy, especially with the existence of private property of land. For here it is no matter of concern who can consume an output, but only how a factor of production is employed in roundabout production. If the state were the owner of all land, it could turn over the return from the land to whomever it pleased. A specific use of land and soil would not depend on a corresponding prior compensation out of free capital; that is, out of the wage and annuities fund. It is also conceivable that that share of free capital which from an economic point of view is an annuities fund will be used to pay laborers employed in roundabout methods of production, either as an additional wage, or in order to lengthen the roundabout methods of production. It is clear how this situation would have to be integrated in our analysis: The state employs the “income” from the land rent, not as remuneration for providing the “productive service” of land, but instead it invests it in an extension of the roundabout method of production. This will not change the fact, however, that land functions as an originary factor of production in roundabout methods of production, and that the way in which it is employed, particularly the earlier or later incorporation of the productive services of land, is a determination of the size of the output.