Human Action: A Treatise on Economics

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Human Action: A Treatise on Economics Page 71

by Ludwig VonMises


  The second seeming exception is presented by the case of perishable goods. They may be available in abundance in one season of the year and may be scarce in other seasons. However, the difference between ice in winter and ice in summer is not that between a present good and a future good. It is the difference between a good that loses its specific usefulness even if not consumed and another good which requires a different process of production. Ice available in winter can only be used in summer when subjected to a special process of conservation. It is, in respect to ice utilizable in summer, at best one of the complementary factors required for production. It is impossible to increase the quantity of ice available in summer simply by restricting the consumption of ice in winter. The two things are for all practical purposes different commodities.

  The case of the miser does not contradict the universal validity of time preference. The miser too, in spending some of his means for a scanty livelihood, prefers some amount of satisfaction in the nearer future to that in the remoter future. Extreme instances in which the miser denies himself even the indispensable minimum of food represent a pathological withering away of vital energy, as is the case with the man who abstains from eating out of fear of morbific germs, the man who commits suicide rather than meet a dangerous situation, and the man who cannot sleep because he is afraid of undetermined accidents which could befall him while asleep.

  3. Capital Goods

  As soon as those present wants are sated the satisfaction of which is considered more urgent than any provision for the morrow, people begin to save a part of the available supply of consumers’ goods for later use. This postponement of consumption makes it possible to direct action toward temporally remoter ends. It is now feasible to aim at goals which could not be thought of before on account of the length of the period of production required. It is furthermore feasible to choose methods of production in which the output of products is greater per unit of input than in other methods requiring a shorter period of production. The sine qua non of any lengthening of the processes of production adopted is saving, i.e., an excess of current production over current consumption. Saving is the first step on the way toward improvement of material wellbeing and toward every further progress on this way.

  The postponement of consumption and the accumulation of stocks of consumers’ goods destined for later consumption would be practiced even in the absence of the stimulus offered by the technological superiority of processes with a longer period of production. The higher productivity of such processes consuming more time strengthens considerably the propensity to save. The sacrifice made by restricting consumption in nearer periods of the future is henceforth not only counterbalanced by the expectation of consuming the saved goods in remoter periods; it also opens the way to a more ample supply in the remoter future and to the attainment of goods which could not be procured at all without this sacrifice. If acting man, other conditions being equal, were not to prefer, without exception, consumption in the nearer future to that in the remoter future, he would always save, never consume. What restricts the amount of saving and investment is time preference.

  People eager to embark upon processes with a longer period of production must first accumulate, by means of saving, that quantity of consumers’ goods which is needed to satisfy, during the waiting time, all those wants the satisfaction of which they consider more urgent than the increment in wellbeing expected from the more timeconsuming process. Accumulation of capital begins with the formation of stocks of consumers’ goods the consumption of which is postponed for later days. If these surpluses are merely stored and kept for later consumption, they are simply wealth or, more precisely, a reserve for rainy days and emergencies. They remain outside the orbit of production. They become integrated—economically, not physically—into production activities only when employed as means of subsistence of workers engaged in more timeconsuming processes. If expended in this way, they are physically consumed. But economically they do not disappear. They are replaced first by the intermediary products of a process with a longer period of production and then later by the consumers’ goods which are the final product of these processes.

  All these ventures and processes are intellectually controlled by capital accounting, the acme of economic calculation in monetary terms. Without the aid of monetary calculation men could not even learn whether—apart from the length of the period of production—a definite process promises a higher productivity than another. The expenditures required by various processes cannot be weighed against one another without the aid of monetary terms. Capital accounting starts with the market prices of the capital goods available for further production, the sum of which it calls capital. It records every expenditure from this fund and the price of all incoming items induced by such expenditure. It establishes finally the ultimate outcome of all these transformations in the composition of the capital and thereby the success or the failure of the whole process. It shows not only the final result; it mirrors also every one of its intermediary stages. It produces interim balances for every day such a balance may be required and statements of profit and loss for every part or stage of the process. It is the indispensable compass of production in the market economy.

  In the market economy production is a continuous, never-ending pursuit split up into an immense variety of partial processes. Innumerable processes of production with different periods of production are in progress simultaneously. They complement one another and at the same time are in rivalry with one another in competing for scarce factors of production. Continuously either new capital is accumulated by saving or previously accumulated capital is eaten up by overconsumption. Production is distributed among numerous individual plants, farms, workshops, and enterprises each of which serves only limited purposes. The intermediary products or capital goods, the produced factors of further production, change hands in the course of events; they pass from one plant to another until finally the consumers’ goods reach those who use and enjoy them. The social process of production never stops. At each instant numberless processes are in progress some of which are nearer to, some remoter from, the achievement of their special tasks.

  Every single performance in this ceaseless pursuit of wealth production is based upon the saving and the preparatory work of earlier generations. We are the lucky heirs of our fathers and forefathers whose saving has accumulated the capital goods with the aid of which we are working today. We favorite children of the age of electricity still derive advantage from the original saving of the primitive fishermen who, in producing the first nets and canoes, devoted a part of their working time to provision for a remoter future. If the sons of these legendary fishermen had worn out these intermediary products—nets and canoes—without replacing them by new ones, they would have consumed capital and the process of saving and capital accumulation would have had to start afresh. We are better off than earlier generations because we are equipped with the capital goods they have accumulated for us.7

  The businessman, the acting man, is entirely absorbed in one task only: to take best advantage of all the means available for the improvement of future conditions. He does not look at the present state of affairs with the aim of analyzing and comprehending it. In classifying the means for further production and appraising their importance he adopts superficial rules of thumb. He distinguishes three classes of factors of production: the nature-given material factors, the human factor—labor, and capital goods—the intermediary factors produced in the past. He does not analyze the nature of the capital goods. They are in his eyes means of increasing the productivity of labor. Quite naively he ascribes to them productive power of their own. He does not trace their instrumentality back to nature and labor. He does not ask how they came into existence. They count only as far as they may contribute to the success of his efforts.

  This mode of reasoning is all right for the businessman. But it was a serious mistake for the economists to agree with the businessman’s superficial view. They erred in
classifying “capital” as an independent factor of production along with the nature-given material resources and labor. The capital goods—the factors of further production produced in the past—are not an independent factor. They are the joint products of the cooperation of the two original factors—nature and labor—expended in the past. They have no productive power of their own.

  Neither is it correct to call the capital goods labor and nature stored up. They are rather labor, nature, and time stored up. The difference between production without the aid of capital goods and that assisted by the employment of capital goods consists in time. Capital goods are intermediary stations on the way leading from the very beginning of production to its final goal, the turning out of consumers’ goods. He who produces with the aid of capital goods enjoys one great advantage over the man who starts without capital goods; he is nearer in time to the ultimate goal of his endeavors.

  There is no question of an alleged productivity of capital goods. The difference between the price of a capital good, e.g., a machine, and the sum of the prices of the complementary original factors of production required for its reproduction is entirely due to the time difference. He who employs the machine is nearer the goal of production. The period of production is shorter for him than for a competitor who must start from the beginning. In buying a machine he buys the original factors of production to be expended in its reproduction plus time, i.e., the time by which his period of production is shortened.

  The value of time, i.e., time preference or the higher valuation of want-satisfaction in nearer periods of the future as against that in remoter periods, is an essential element in human action. It determines every choice and every action. There is no man for whom the difference between sooner and later does not count. The time element is instrumental in the formation of all prices of all commodities and services.

  4. Period of Production, Waiting Time, and Period of Provision

  If one were to measure the length of the period of production spent in the fabrication of the various goods available now, one would have to trace back their history to the point at which the first expenditure of original factors of production took place. One would have to establish when natural resources and labor were first employed for processes which—besides contributing to the production of other goods—also contributed ultimately to the production of the good in question. The solution of this problem would require the solubility of the problem of physical imputation. It would be necessary to establish in quantitative terms to what extent tools, raw materials, and labor which directly or indirectly were used in the production of the good concerned contributed to the result. One would have to go back in these inquiries to the very origins of capital accumulation by saving on the part of people who previously lived from hand to mouth. It is not only practical difficulties which prevent such historical studies. The very insolubility of the problem of physical imputation stops us at the first step of such ventures.

  Neither acting man himself nor economic theory needs a measurement of the time expended in the past for the production of goods available today. They would have no use for such data even if they knew them. Acting man is faced with the problem of how to take best advantage of the available supply of goods. He makes his choices in employing each part of this supply in such a way as to satisfy the most urgent of the not yet satisfied wants. For the achievement of this task he must know the length of the waiting time which separates him from the attainment of the various goals among which he has to choose. As has been pointed out and must be emphasized again, there is no need for him to look backward to the history of the various capital goods available. Acting man counts waiting time and the period of production always from today on. In the same way in which there is no need to know whether more or less labor and material factors of production have been expended in the production of the products available now, there is no need to know whether their production has absorbed more or less time. Things are valued exclusively from the point of view of the services they can render for the satisfaction of future wants. The actual sacrifices made and the time absorbed in their production are beside the point. These things belong to the dead past.

  It is necessary to realize that all economic categories are related to human action and have nothing at all to do directly with the physical properties of things. Economics is not about goods and services; it is about human choice and action. The praxeological concept of time is not the concept of physics or biology. It refers to the sooner or the later as operative in the actors’ judgments of value. The distinction between capital goods and consumers’ goods is not a rigid distinction based on the physical and physiological properties of the goods concerned. It depends on the position of the actors and the choices they have to make. The same goods can be looked upon as capital goods and as consumers’ goods. A supply of goods ready for immediate enjoyment is capital goods from the point of view of a man who looks upon it as a means for his own sustenance and that of hired workers during a waiting time.

  An increase in the quantity of capital goods available is a necessary condition for the adoption of processes in which the period of production and therefore waiting time are longer. If one wants to attain ends which are temporally farther away, one must resort to a longer period of production because it is impossible to attain the end sought in a shorter period of production. If one wants to resort to methods of production with which the quantity of output is higher per unit of input expended, one must lengthen the period of production. For the processes with which output is smaller per unit of input have been chosen only on account of the shorter period of production they require. But on the other hand, not every employment chosen for the utilization of capital goods accumulated by means of additional saving requires a process of production in which the period of production from today on to the maturing of the product is longer than with all processes already adopted previously. It may be that people, having satisfied their more urgent needs, now want goods which can be produced within a comparatively short period. The reason why these goods have not been produced previously was not that the period of production required for them alone was deemed too long, but that there was a more urgent employment open for the factors required.

  If one chooses to assert that every increase in the supply of capital goods available results in a lengthening of the period of production and of waiting time, one reasons in the following way: If a are the goods already previously produced and b the goods produced in the new processes started with the aid of the increase in capital goods, it is obvious that people had to wait longer for a and b than they had to wait for a alone. In order to produce a and b it was not only necessary to acquire the capital goods required for the production of a, but also those required for the production of b. If one had expended for an increase of immediate consumption the means of sustenance saved to make workers available for the production of b, one would have attained the satisfaction of some wants sooner.

  The treatment of the capital problem customary with those economists who are opposed to the socalled “Austrian” view assumes that the technique employed in production is unalterably determined by the given state of technological knowledge. The “Austrian” economists, on the other hand, show that it is the supply of capital goods available at each moment that determines which of the many known technological methods of production will be employed.8 The correctness of the “Austrian” point of view can easily be demonstrated by a scrutiny of the problem of scarcity of capital.

  Let us look at the condition of a country suffering from scarcity of capital. Take, for instance, the state of affairs in Rumania about i860. What was lacking was certainly not technological knowledge. There was no secrecy concerning the technological methods practiced by the advanced nations of the West. They were described in innumerable books and taught at many schools. The elite of Rumanian youth had received full information about them at the technological universities of Austria, Switzerland, and France. Hundreds of foreign
experts were ready to apply their knowledge and skill in Rumania. What was wanting was the capital goods needed for a transformation of the backward Rumanian apparatus of production, transportation, and communication according to Western patterns. If the aid granted to the Rumanians on the part of the advanced foreign nations had consisted merely in providing them with technological knowledge, they would have had to realize that it would take a very long time until they caught up with the West. The first thing for them to have done would have been to save in order to make workers and material factors of production available for the performance of more timeconsuming processes. Only then could they successively produce the tools required for the construction of those plants which in the further course were to produce the equipment needed for the construction and operation of modern plants, farms, mines, railroads, telegraph lines, and buildings. Scores of decades would have passed until they had made up for the time lost. There would not have been any means of accelerating this process than by restricting current consumption as far as physiologically possible for the intermediary period.

  However, things developed in a different way. The capitalist West lent to the backward countries the capital goods needed for an instantaneous transformation of a great part of their methods of production. It saved them time and made it possible for them to multiply very soon the productivity of their labor. The effect for the Rumanians was that they could immediately enjoy the advantages derived from the modern technological procedures. It was as if they had started at a much earlier date to save and to accumulate capital goods.

  Shortage of capital means that one is further away from the attainment of a goal sought than if one had started to aim at it at an earlier date. Because one neglected to do this in the past, the intermediary products are wanting, although the nature-given factors from which they are to be produced are available. Capital shortage is dearth of time. It is the effect of the fact that one was late in beginning the march toward the aim concerned. It is impossible to describe the advantages derived from capital goods available and the disadvantages resulting from the paucity of capital goods without resorting to the time element of sooner and later.9

 

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