Tuesday, February 5, 2013

THE STATIONARY ECONOMY - Some Preliminary Consequences

This is, of course, a very simplified model of what would happen in the real world even within an isolated economic unit. Yet for all its simplicity it shows quite clearly certain fundamental facts about the economic world which we will encounter again and again as we proceed to the examination of the more complicated real conditions:
(1) Production never expands beyond the point where the worker demands more for his work-hour than he produces during this work-hour. Any expansion of production depends upon the worker not demanding more in payment than he produces.
(2) At a given schedule of prices at which the worker offers various quantities of work-hours, that is at a given particular supply curve for labor, production can expand only if the productivity of labor increases. Higher productivity of labor enables nature to pay greater compensation, in terms of product units. The extra-marginal work-hours, which had so far been too expensive, can now be used.
In our model the work-hours were supplied by one single worker. If there are several workers it is now possible also to use work-hours of other workers, who had so far not been employed at all because even their first hour was too dear. Higher productivity, therefore, leads not only to longer working time for individual workers, but also to the employment of more workers.
(3) At given productivity of labor, and hence given demand for labor, production can expand only if the supply price of labor decreases. This will happen if the workers either value the utility of consumer goods more or the disutility of work less than they did in the past. Workers will then offer the same amount of work at lower prices, or more work at the same prices. Individual workers' hitherto idle hours or hitherto idle workers will be drawn into the productive process.
This means that a population can consume more if it is willing to work more and to rest less. This truth is often forgotten nowadays, although it is self-evident to common sense. The comparatively low living standards of tropical countries are admittedly at least partly due to their peoples' greater appreciation of rest and lesser appreciation of the comforts of life to be produced by work.
(4) The over-production problem, one of the major problems that has intrigued economists, does not exist in our simplified Robinson Crusoe world. So far as it occurs in reality, overproduction has its roots in conditions not present in the case of the isolated producer. Here there can never be separate decisions on consumption and production. Production and consumption are so closely linked that neither can ever exceed the other. Never can anything be produced that is not consumed. Jean-Baptiste Say's law, according to which any production creates a corresponding consumption, is unconditionally valid. As soon as the utility of consumption goods no longer compensates for the disutility of the work of producing, production stops.
(5) Our model also allows us to make certain preliminary remarks on the important subject of profits. Our man receives a uniform compensation of ten apples for his work-hours, although it is only for the fifth hour that he demanded this compensation. He demanded substantially less for the first, second, third and fourth hours. He receives in fact more than what he considered sufficient to compensate him for his work. This is his good fortune and results from the fact that nature, exercising demand for his labor, values one work-hour at ten apples. For this reason nature pays, for all hours, more than the minimum compensation which he required for his first intra-marginal work-hours. But this surplus is not a profit in the usual sense of the word.
A profit is a phenomenon of distribution. It is a surplus arising when part of the output is withheld from other production factors for special reasons. No such surplus exists in the case of an isolated producer. His own input (of work-hours) is always both necessary and sufficient to produce the whole output (of apples). The two are always equal, and neither can exceed the other. Even if more is produced through improved techniques, there will still be no surplus, A given input can always result only in the output corresponding to the technique employed. If our man were to save or hoard his output, the apples, he would indeed end up with a stock of apples. But this would be not because he had made a profit from his production but because he had saved or hoarded part of the output.
An isolated producer can never make a profit, nor as we shall see later (p. 16) can an economy as a whole. We shall have to keep this in mind in our later examination of the true nature and origin of profits.

Common Sense Economics

No comments:

Post a Comment

Your Comments