3. The Structure of Production: A World of Specific Factors

Crucial to understanding the process of production is the question of the specificity of factors, a problem we touched on in chapter 1. A specific factor is one suitable to the production of only one product. A purely nonspecific factor would be one equally suited to the production of all possible products. It is clear that not all factors could be purely nonspecific, for in that case all factors would be purely interchangeable, i.e., there would be need for only one factor. But we have seen that human action implies more than one existing factor. Even the existence of one purely nonspecific factor is inconceivable if we properly consider “suitability in production” in value terms rather than in technological terms.6 In fact, if we analyze the concept, we find that there is no sense in saying that a factor is “equally suitable” in purely technological terms, since there is no way of comparing the physical quantities of one product with those of another. If X can help to produce three units of A or two units of B, there is no way by which we can compare these units. Only the valuation of consumers establishes a hierarchy of valued goods, their interaction setting the prices of the consumers’ goods. (Relatively) nonspecific factors, then, are allocated to those products that the consumers have valued most highly. It is difficult to conceive of any good that would be purely nonspecific and equally valuable in all processes of production. Our major distinction, then, is between the specific factor, which can be used in only one line of production, and the nonspecific factor (of varying degrees of convertibility), which can be used in more than one production process.

Now let us for a time consider a world where every good is produced only by several specific factors. In this world, a world that is conceivable, though highly unlikely, every person, every piece of land, every capital good, would necessarily be irrevocably committed to the production of one particular product. There would be no alternative uses of any good from one line of production to another. In the entire world of production, then, there would be little or no “economic problem,” i.e., no problem of allocating scarce means to alternative ends. Certainly, the consumers would still have to allocate their scarce monetary resources to be most preferred consumers’ goods. In the nonmarket sphere, everyone—again as a consumer—would have to allocate his time and energies to the enjoyment of various consumers’ goods. There would still, in the sphere of production of exchangeable goods, be one allocation that every man would make: how much time to devote to labor and how much to leisure. But there would be no problem of which field to labor in, no problem of what to do with any piece of land, no problem of how to allocate capital goods. The employment of the factors would all depend on the consumers’ demand for the final product.

The structure of production in such a world of purely specific factors would be somewhat as in Figure 39. In this diagram, we see two typical consumers’ goods, A and B. Each, depicted as a solid rectangle at the bottom of the diagram, is produced by cooperating factors of the next higher rank, designated P1, or the first order of producers’ goods. The capital goods of the first rank are, in turn, produced with the help of co-operating factors, these being of the second-rank, and so on upward.

The process logically continues upward until capital goods are produced completely by land and labor factors, although this stage is not depicted on the diagram. Lines connect the dots to designate the causal pattern of the factors. In the diagram, all factors are purely specific, since no good is used at different stages of the process or for different goods. The center arrows indicate the causal direction of effort downward, from the highest ranked producers’ goods through the intermediate ranks, finally concluding in consumers’ goods. At each stage, labor uses nature-given factors to produce capital goods, and the capital goods are again combined with labor and nature-given factors, transformed into lower and lower orders of capital goods, until consumers’ goods are reached.

Now that we have traced the direction of productive effort, we must trace the direction of monetary income. This is a reverse one, from the consumers back to the producers. The consumers purchase the stock of a consumers’ good at a price determined on the market, yielding the producers a certain income. Two of the crucial problems of production theory are the method by which the monetary income is allocated and the corollary problem of the pricing of the factors of production. First, let us consider only the “lowest” stage of production, the stage that brings about the final product. In that stage, numerous factors, all now assumed to be specific, co-operate in producing the consumers’ good. There are three types of such factors: labor, original nature, and produced capital goods.7 Let us assume that on a certain day, consumers purchase a certain quantity of a good X for, say, 100 ounces of gold. Given the quantity of the good sold, the price of the total quantity is equal to the (gross) income obtained from the sale of the good. How will these 100 ounces be allocated to the producing factors?

In the first place, we must make an assumption about the ownership of the consumers’ good just before it is sold. It is obvious that this owner or these owners will be the immediate recipients of the 100 ounces of gold income. Let us say that, in the final stage, there have been seven factors participating in the production: two types of labor, two types of land, and three types of capital goods. There are two alternatives in regard to the final ownership of the product (before it is sold to the consumer): (a) all the owners of these factors jointly own the final product; or (b) the owner of each of the factors sells the services of his factor to someone else, and the latter (who may himself contribute a factor) sells the good at a later date to the consumer. Although the latter is the nearly universal condition, it will be convenient to begin by analyzing the first alternative.

Those who own the final product, whatever the alternative adopted, are “capitalists,” since they are the owners of capital goods. It is better, however, to confine the term “capitalists” to those who have saved money capital with which to buy factors. This, by definition, does not occur under the first alternative, where owners of factors are joint owners of the products. The term “product-owner” suffices for designating the owner of the capital assets, whatever the alternative adopted. Product-owners are also “entrepreneurs,” since they assume the major entrepreneurial burden of adjusting to uncertain future conditions. To call them “entrepreneurs” alone, however, is to run the danger of forgetting that they are also capitalists or product-owners and that they would continue to perform that function in an evenly rotating economy.

• 6The literature in economics hason been immeasurably confused by writers on production theory who deal with problems in terms of technology rather than valuation. For an excellent article on this problem, cf. Lionel Robbins, “Remarks upon Certain Aspects of the Theory of Costs,” Economic Journal, March, 1934, pp. 1–18.
• 7We must hasten to add that this does not signify adoption of the old classical fallacy that treated each of these groups of factors as homogeneous. Clearly, they are heterogeneous and for pricing purposes and in human action are treated as such. Only the same good, homogeneous for human valuation, is treated as a common “factor,” and all factors are treated alike—for their contribution to revenue—by producers. The categories “land, labor, and capital goods” are essential, however, for a deeper analysis of production problems, in particular the analysis of various income returns and of the relation of time to production.