Appendix: Professor Rolph and the Discounted Marginal Productivity Theory

0:00Appendix, Professor Rolfe and the Discounted Marginal Productivity Theory Of current schools of economic thought, the most fashionable have been the econometric, the Keynesian, the institutionalist and the neoclassic. The neoclassic refers to the pattern set by the major economists of the late 19th century. The dominant neo-classical strain at present is to be found in the system of Professor Frank Knight, of which the most characteristic feature is an attack on the whole concept of time preference. Denying time preference and basing interest return solely on an alleged productivity of capital, The Niteans attack the doctrine of the discounted MVP and instead advocate a pure MVP theory.

0:56The clearest exposition of this approach is to be found in an article by a follower of Nites, Professor Earl Rolfe. Rolfe defines product as any immediate results of present valuable activities. These include work on goods that will be consumed only in the future. Thus, workmen and equipment beginning the construction of a building may have only a few stakes in the ground to show for their work the first day, but this, and not the completed structure, is their immediate product. Thus the doctrine that a factor receives the value of its marginal product refers to this immediate product. The simultaneity of production and product does not require any simplifying assumptions.

1:47It is a direct appeal to the obvious. Every activity has its immediate results. Obviously no one denies that people work on goods and move capital a little further along. But is the immediate result of this a product in any meaningful sense? It should be clear that the product is the end product, the goods sold to the consumer. The whole purpose of the production system is to lead to final consumption. All the intermediate purchases are based on the expectation of final purchase by the consumer and would not take place otherwise. Every activity may have its immediate results, but they are not results that would command and any monetary income from anyone if the owners of the factors themselves were joint owners of all they produced until the final consumption stage.

2:47In that case it would be obvious that they do not get paid immediately, hence their product is not immediate. The only reason that they are paid immediately, and even here there is not strict immediacy on the Market is that capitalists advance present goods in exchange for those future goods for which they expect a premium or interest return. Thus the owners of the factors are paid the discounted value of their marginal product. The Knight-Rolfe approach in addition is a retreat to a Real Cost Theory of Value, it assumes that present efforts will somehow always bring present results. But when? In present valuable activities. But how do these activities become valuable? Only if their future product is sold as expected to consumers.

3:49Suppose, however, that people work for years on a certain good and are paid by capitalists and then the final product is not bought by consumers. The capitalists absorb monetary losses. Where was the immediate payment according to marginal product? The payment was only an investment in future goods by capitalists. Roth then turns to another allegedly heinous error of the discount approach, namely the doctrine of non-coordination of factors. This means that some factors in their payment receive the discounted value of their product and some do not.

4:35Roth, however, is laboring under a misapprehension. There is no assumption of non-coordination in any sound discounting theory. As we have stated, all factors, labor, land and capital goods, receive their discounted marginal value product. The difference in regard to the owners of capital goods is that in the ultimate analysis, They do not receive any independent payment, since capital goods are resolved into the factors that produce them, ultimately land and labor factors, and to interest for the time involved in the advance of payment by the capitalists. Roth ascribes this error to Newt Wicksell, but such a confusion is not attributable to Wixcell, who engages in a brilliant discussion of capital and the production structure and the role of time in production.

5:34Wixcell demonstrates correctly that labor and land are the only ultimate factors, and that therefore the marginal productivity of capital goods is reducible to the marginal productivity of labor and land factors, so that money capital earns the interest or discount differential. Mixcel's discussion of these and related issues is of basic importance. He recognized, for example, that capital goods are fully and basically coordinate with land and labor factors only from the point of view of the individual firm, but not when we consider the total market in all of its interrelations. Current economic theorizing is, to its detriment, even more preoccupied than writers of his Today, with the study of an isolated firm instead of the interrelated market.

6:32Rolfe believes that non-coordination is involved because owners of land and labour factors receive a discounted share and capital receives an undiscounted share. But this is a faulty way of stating the conclusion. Owners of land and labor factors receive a discounted share, but owners of capital, money capital, receive the discount. The remainder of Rolfe's article is largely devoted to an attempt to prove that no time lag is involved in payments to owners of factors. Rolfe assumes the existence of production centers within every firm, which, broken down This tortured and unreal construction misses the entire point.

7:31Even if there were atomized production centers, the point is that some person or persons will have to make advances of present money along the route, in whatever order, until the final Let Rolfe picture a production system, atomized or integrated as the case may be, with no one making the advances of present goods, money capital, that he denies exist. And as the laborers and landowners work on the intermediate products for years without pay, until the finished product is ready for the consumer, Let Rolfe exhort them not to worry, since they have been implicitly paid simultaneously as they worked, for this is the logical implication of the Knight-Rolfe position.

8:25Rolfe ends his article consistently with a dismissal of any time preference influences on interest, which he explains in Knightian vein by the cost of producing new capital goods.