The fundamental problems with which economics is concerned can be summarized in two sets of questions. First, what goods and how many of them are produced; by what methods and by whom are they produced? And second, what goods and how many of them are consumed; by what methods and by whom are they consumed?
In a capitalist and competitive economy production and consumption are dependent on each other. Production creates income for the factors of production, and the spending of this income leads to consumption. The size and distribution of income of individuals as well as of whole groups depend on the size of total production, on what each contributes to production, and on the remuneration for this contribution. Consumption, in its turn, depends on the size and distribution of income from production. Production again depends on consumption, because the consumer by his demand determines what is to be produced. Production influences consumption, and consumption influences production.
The fact that the elements of the system are interdependent does not, however, make the system undetermined. Given certain supply schedules for the factors of production and certain demand schedules for finished products, the quantity and nature of the goods to be produced and consumed are perfectly determined. A logical chain leads from production to consumption and back. To determine the beginning of that chain is just as impossible as to establish the priority of the chicken or the egg. Every phase presupposes a preceding phase—which, however, can only be described subsequently. Since a beginning has to be made with some link of the chain, we shall for convenience sake begin by describing the production exchange. We shall inquire first what and how much is produced, by whom and by what methods production is carried on, and how the factors of production are remunerated.
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