Monday, February 4, 2013

THE STATIONARY ECONOMY - The Isolated Producer

Everybody tries to live. In order to live one has to consume goods. Goods for consumption are not generally obtainable without work. They are the products of labor. This holds true for individuals, for communities and for the whole of humanity.
When somebody produces consumption goods by his own work he exchanges, so to speak, work-hours, of which he has plenty but which he cannot consume directly, for goods which he can consume but which he lacks until they are produced. This is exchange in its simplest form. We have to understand it thoroughly in order to understand other forms of exchange which, though somewhat more complicated, are all based upon the same principle.
Our ability to exchange work for goods, to produce, rests upon the fundamental fact that nature offers the technical possibility of transforming work into goods—say of transforming one hour of work into ten apples. Given this technical possibility there arises the question of how many hours men will actually use to produce the apples they wish to consume. The answer is that each individual decides how many hours of leisure he is willing to sacrifice in order to satisfy his appetite for apples. It is up to each individual to decide when the point has come at which the disutility of work is no longer compensated by the utility gained by more apples.
If a man considered the utility of every additional apple, as compared with the disutility of every additional hour's work, to be the same as that of all previously acquired apples and previously worked hours, he would obviously work himself to death—provided he started out by wanting any apples at all. He would be killed by an insatiable appetite for apples and a flagrant disregard for his physical limitations. He would never stop working, and we could never know his relative valuation of apples and work-hours.
Fortunately this never happens. The famous law of diminishing marginal utility, or better, the law of diminishing valuation of additional quantities of goods, comes into play. The utility of each new apple which even the most passionate lover of apples acquires appears to him less than the utility of apples previously produced. On the one hand the need for apples becomes less pressing and is finally limited by the individual's consumption capacity. Even utmost greed is satisfied. On the other hand the remaining rest and play hours become fewer and therefore more urgently needed. The individual's valuation of leisure increases. This means that our man will demand an increasing amount of apples for each additional work-hour; or, looking at it from another angle, his supply price of work in terms of apples will be higher for every additional hour. If the working day is to lengthen, nature must pay him a higher price for each working hour. Inevitably the price at some point will be more than nature can pay.
Our man may be prepared to work one hour each day in return for only two apples. This one hour is needed neither for rest nor for play, whereas he values the apples highly because they are his first. He may be willing to work the following hour for a return of four apples, the next for six apples, and so on. The eighth hour, maybe, he will sell only for a return of say sixteen apples. He may not be prepared to work at all the ninth hour, even for much greater compensation, because his appetite for apples may be satiated by those already obtained and his desire for rest may have become very urgent.
It is usual to represent willingness to supply work by a graph in which the quantities offered are measured on the horizontal axis, and the price at which they are offered on the vertical line. The resulting supply curve then slopes upward from the left to the right.
The assumptions referred to above can thus be represented by the supply curve shown in Figure 1.
The supply curve slopes upward to the right up to the eighth hour. It shows how the hours of work offered increase with the price paid. From the eighth hour onward the curve rises vertically: the supply of work-hours no longer increases with rising prices. No matter how much the price is raised it no longer has the power to lengthen the working day.

Our assumption that until the eighth hour the supply of labor increases with the wage demanded is broadly in conformity with reality. According to the general law, the higher the price the greater the supply.
In the particular case of labor supply, however, we must note a peculiarity. A higher wage level, and the resulting higher living standard of the workers, may cause a change in their value judgments. The workers may prefer additional rest to additional consumption goods. We then speak of the supply curve of labor moving upward or to the left. This indicates that less work is now forthcoming at each of the various compensation levels. On the other hand when the wage level, and with it the living standard, falls the workers may prefer to have more consumption goods rather than more rest. The supply curve of labor then moves downward or to the right, indicating that more work is forthcoming at each of the various compensation levels. This renders the effect of wage changes somewhat unpredictable, especially in the long run. History shows that the higher wages resulting from the increased productivity of the economy have been used by labor partly to increase leisure and partly to buy more goods. In insisting on shorter working time labor went without a certain amount of consumption goods which it could otherwise have obtained. We shall, nevertheless, assume that in the general case higher wages lead to an increase in the supply of work-hours.
Let us return to our diagram. How many hours will our man actually work on the assumption underlying our curve? The answer obviously depends upon the price, in terms of apples, which the demand for labor is prepared to pay. In our simplified model it is nature herself who demands labor in exchange for apples. But nature, working neither at a profit nor at a loss, offers for a work-hour exactly what an hour's work produces. Suppose this is ten apples. Then nature offers ten apples as a reward for every hour of work. We represent this demand situation in our graph in the usual way by a horizontal line at the wage level of ten apples an hour. We immediately see that on the given assumptions our man will work five hours and produce fifty apples—not more and not less—because nature's offer of ten apples for an hour's work is exactly the compensation which our man demands for his fifth hour. In other words his work stops at the so-called marginal work-hour where the price, at which its supply is offered, is still just covered by the price which the demand is prepared to pay.

Common Sense Economics

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