7.04. Land and Capital Goods

0:004. Land and Capital Goods The price of the unit service of every factor, then, is equal to its discounted marginal value product. This is true of all factors, whether they be original, land and labor, or produced capital goods. However, as we have seen, there is no net income to the owners of Capital Goods, since their prices contain the prices of the various factors that cooperate in their production. Essentially, then, net income accrues only to owners of land and labor factors, and to capitalists for their time services.

0:48It is still true, however, that the pricing principle, equality to discounted MVP, applies whatever the factor, whether capital good or any other. Let us assume for simplicity that we are dealing with one unit of one consumer's good, which sells for 100 ounces, and that one unit of each particular factor enters into its production. Purchase 1, purchase 1 capital good for 80 ounces and, we assume, 1 labor factor for 8 ounces and 1 land factor for 7 ounces. The joint MVP for the 3 factors is 100, yet their total price is 95 ounces.

1:38The remainder is the discount accruing to the capitalists because of the time element. The sum of the discounted MVPs, then, is 95 ounces, and this is precisely what the owners of three factors received in total. The discounted MVP of the Labor Factors Service was 8, the DMVP of the Land Service was 7, the DMVP of the Capital Goods Service was 80, thus each factor obtains its DMVP as its In the case of the capital good, it has been sold for 80, but it has had to be produced, and this production cost money to pay the income of the various factors.

2:29The price of the capital good then is reduced to, say, another land factor paid 8 ounces, Another labor factor paid 8 ounces, and a capital goods factor paid 60 ounces. The prices and therefore the incomes of all these factors are discounted again to account for the time, and this discount is earned by capitalists too. The sum of these factor incomes is 76, and once again each factor service earns its DMVP. Each capital goods factor must be produced and must continue to be produced in the ERE.

3:16Since this is so, we see that the capital goods factor, though obtaining its DMVP, does does not earn it net, for its owner in turn must pay money to the factors that produce it. Ultimately, only land, labor and time factors earn net incomes. This type of analysis has been severely criticized on the following grounds. This Austrian method of tracing everything back to land and labor and time may be an Interesting Historical Exercise, and we may grant that if we trace back production and investment far enough, we shall ultimately reach the world of primitive men who began to produce capital with their bare hands.

4:07But of what relevance is this for the modern complex world around us, a world in which a huge amount of capital already exists and can be worked with? In the modern world, there is no production without the aid of capital, and therefore the whole Austrian capital analysis is valueless for the modern economy. There is no question about the fact that we are not interested in historical analysis, but rather in an economic analysis of the complex economy. In particular, acting man has no interest in the historical origin of his resources. He is acting in the present on behalf of a goal to be achieved in the future.

4:55Praxeological analysis recognizes this and deals with the individual acting at present to satisfy ends of varying degrees of futurity, from instantaneous to remote. It is true, too, that the presentation by the master of capital and production theory, Byrne Boehm-Bawerk sowed confusion by giving an historical interpretation to the structure of production. This is particularly true of his concept of the average period of production, which attempted to establish an average length of production processes operating at present, but stretching back to the beginning of time.

5:41In one of the weakest parts of his theory, Boehm-Bawerk conceded that the boy who cuts a stick with his knife is, strictly speaking, only continuing the work of the miner, who, centuries ago, thrust the first spade into the ground to sink the shaft from which the ore was brought to make the blade. He then tried to salvage the relevance of the production structure by averaging periods Mises has succeeded, however, in refining the Austrian production theory so as to eliminate reliance on an almost infinitely high production structure and on the mythical concept of an As Mises states, acting man does not look at his condition with the eyes of an historian.

6:48He is not concerned with how the present situation originated. His only concern is to make the best use of the means available today for the best possible removal of future uneasiness. He has at his disposal a definite quantity of material factors of production. He does not ask whether these factors are nature given or the product of production processes accomplished in the past. It does not matter for him how great a quantity of nature given, that is, original material factors of production and labor, was expended in their production, and how much time these These processes of production have absorbed. He values the available means exclusively from the aspect of the services they can render him in his endeavors to make future conditions more satisfactory.

7:45The period of production and the duration of serviceableness are for him categories in planning future action, not concepts of academic retrospection. They play a role insofar as the actor has to choose between periods of production of different length. Boehm-Bawerk was not fully aware of the fact that the period of production is a praxeological category and that the role it plays in action consists entirely in the choices acting man makes between periods of production of different length. The length of time expended in the past for the production of capital goods available today does not count at all.

8:34But if the past is not taken into account, how can we use the production structure analysis? How can it apply to an ERE if the structure would have to go back almost endlessly in time? If we base our approach on the present, must we not follow the Niteans in scrapping the production structure analysis? A particular point of contention is the dividing line between land and capital goods. The Niteans, in scoffing at the idea of tracing periods of production back through the centuries, wrap the land concept altogether, and include land as simply a part of capital goods. This change, of course, completely alters production theory.

9:24The Nightians point correctly, for example, to the fact that present-day land has many varieties and amounts of past labor mixed with it. Canals have been dug, forests cleared, basic improvements have been made in the soil, etc. They assert that practically nothing is pure land anymore, and therefore that the concept has become an empty one. As Mises has shown, however, we can revise Boehm-Bawerk's theory and still retain the vital distinction between land and capital goods. We do not have to throw out, as do the Niteans, the land baby with the average period of production bathwater.

10:11With Water, we can instead reformulate the concept of land. Up to this point we have simply assumed land to be the original nature given factors. Now we must modify this, in keeping with our focus on the present and the future rather than the past. Whether or not a piece of land is originally pure land is in fact economically immaterial, so long as whatever alterations have been made are permanent, or rather, so long as these alterations do not have to be reproduced or replaced, non-replaceable as a criterion for land, in contrast to capital goods, is not equivalent to permanent.

11:01Permanent is a subdivision of non-replaceable. It is clear that permanent improvements do not have to be replaced, however, depletable natural resources, such as coal, ores, etc., are not permanent, but are also non-replaceable. The key question is whether a resource has to be produced, in which case it earns only gross rents. If it does not or cannot, it earns net rents as well. Things that are being depleted obviously cannot be replaced and are therefore land, not capital goods. Land that has been irrigated by canals or altered through the chopping down of forests has become a present, permanent given.

11:53Because it is a present given, not worn out in the process of production and not needing In the ERE this factor will continue to give forth its natural powers unstinted and without further investment. It is therefore land in our analysis. Once this occurs and the permanent are separated from the non-permanent alterations, we see that the structure of production no longer stretches back infinitely in time, but comes to a close within a relatively brief span of time. We may use permanent and non-permanent in this section because resources that are being depleted obviously cannot be included in any evenly rotating equilibrium.

12:50With depletable resources left aside, permanent becomes identical with non-reproducible. The capital goods are those which are continually wearing out in the process of production, and which labor and land factors must work to replace. When we consider physical wearing out and replacement, then it becomes evident that it would not take many years for the whole capital goods structure to collapse if no No work were done on maintenance and replacement, and this is true even in the modern highly capitalistic economy. Of course, the higher the degree of capitalist development and the more stages in production, the longer will it take for all the capital goods to wear out.

13:43The permanence with which we are dealing refers, of course, to the physical permanence of the and not to the permanence of their value. The latter depends on the shifting desires of consumers and never could be called permanent. Thus there might be a land factor uniquely and permanently suitable as a vineyard. It is land and remains so therefore indefinitely. If at some time the consumers should completely lose their taste for wine and the land becomes valueless and no longer It is still a permanent factor, and therefore is land, although now sub-marginal. It should be noted that the permanence is relevant to present considerations of human action.

14:34A piece of land might give forth a permanent marginal physical product without necessity of maintenance,

15:12Permanence or Non-Permanence and the Cosmological Question of the Permanence of Matter and Energy George Stigler charges that the various distinctions between land and capital goods based on permanence or origin, such as are discussed herein, are physical rather than economic. These strictures miss the point. No one denies that these homogeneous factors can change greatly in value over time, but whether or not a given factor is original or improved or permanent or needing to be maintained is a physical question and one that is very relevant to economic analysis.

15:59Certainly the Nightian argument that all land is capital goods because no land is original is also an argument in the physical realm. The concept of land as used throughout this book, then, is entirely different from the popular concept of land. Let us in this section distinguish between the two by calling the former economic land and the latter geographic land. The economic concept includes all nature-given sources of value, what is usually known as natural resources, land, water and air, in so far as they are not free goods. On the other hand, a large part of the value of what is generally considered land, that is, that part that has to be maintained with the use of labor, is really a capital good.

16:57That agricultural land is an example of the latter may surprise the reader, who is likely to think of it as permanently productive. This is completely wrong. The marginal physical productivity of geographic land varies greatly in accordance with the amount of labor that is devoted to maintaining or improving the soil, as against such use The basic soil, and here we are referring to the soil that would remain now if maintenance were suspended, not to the soil as it was in the dim past before cultivation, is the land element, while the final product, which is popularly known as agricultural land, is is usually a capital good containing this land element.

17:55As Vansickel and Rogge say about the soil, land, as the top 12 to 18 inches from which grains, vegetables, grasses and trees draw almost their entire nourishment, is highly destructible. Topsoil can be washed or blown away, eroded, or its organic and mineral content can be be dissolved and drawn down out of reach of plant life, leached in a relatively few years, unless great care is exercised in its use. It can also be rebuilt by careful husbandry. Hence, it can be said of all soils that their maintenance requires saving. The indestructibility of land is much more clearly exemplified in what is commonly called Urban Land For land in urban areas, and this includes suburban land, land for factories, etc., clearly evinces one of its most fundamentally indestructible features, its physical space, its part of the surface of the earth.

19:05For the surface area of the earth is, except in rare cases, eternally fixed, as is the The Geographic Position of Each Piece of Geographic Land on the Surface This eternally fixed, permanent, positional aspect of geographic land is called the site aspect of the land, or as Mises aptly puts it, the land as standing room. Since it is permanent and non-reproducible, it very clearly comes under the category of economic land. The permanence once again refers to its physical spatial aspect. Its site values, of course, are always subject to change.

19:52But while the position is permanent, even the land itself was necessarily altered by man to prepare it for urban use. Midtown Manhattan is on the same site, the same geographical location now as it was in in the 1600s, although the monetary values accruing to it have changed. Suppose that a piece of currently unused land can be used for various agricultural purposes or for urban purposes. In that case, a choice will be made according to its alternative values as non-replaceable Economic Land between its discounted MVP as a result of the fertility of its basic soil and its discounted MVP as an urban site.

20:44And if a decision must be made whether land now used in agriculture and being maintained for that purpose should remain in agriculture or be used as a site for building, the principles of choice are the same. The marginal value return to the agricultural or urban land is broken down by the owner of the land, the landlord, into the interest return on the capital maintenance and improvement and the discounted marginal value return to the basic economic land. Basic land or ground land in this treatise refers to the soil without maintenance in The Basic Land, therefore, whether it be soil or site, earns for its owner an ultimate unit price, or rent, equaling its DMVP.

21:51Working on this Basic Land, labor and investment create a finished capital good. This capital good, like all capital goods, also earns unit rents equal to its DMVP. However, this earning is broken down, and relevantly so in the current market, not as an historical exercise, into basic land rent and interest return on the capital invested. As well, of course, as returns to labor that works on the basic land, that is, labor's wage or rent price equaling its DMVP. This capital good land we have variously termed geographic land, land in the popular sense, final land, finished land.

22:44When we speak simply of land on the other hand we shall always be referring to the true Economic Land, The Currently Nature-Given Factor.