17: The Efficiency of Final Increments of Producers' Wealth
In the autistic economy, each consumer products for his own consumption, and is motivated to produce the manner and quality of good that satisfies his desire, to the extent that he is willing to undertake the inconvenience of achieving satisfaction. When production and consumption are separated, then the producer merely seeks to produce "wealth" that he will use to purchase other things. If the producer is sensible, he produces as much as he needs to make enough revenue to cover his consumption - when the tailor has sewn clothing enough to sell to make the money he needs, he stops making clothing
The earning power of capital is not homogenous, uniform, or permanent. Two different machines will have different returns on their capital. A single machine will offer different returns depending on volume of production - and the optimum productivity is usually much less than maximum capacity. And a single machine will wear out over time and have less productivity as it ages - maintenance slows this (at a cost) but does not eliminate it.
It's noted that capital investment has broad impacts. Any improvement in the efficiency of the creation of raw materials is shared with any good made of those materials. And in general, the more we invest in capital the more we get for the investment - when many engines are being built, the engines we build become better. For a time, an investment pays a premium to the investor, who can pocket the benefits of efficiency - but as his competitors make the same investment, then compete to underprice one another, this premium diminishes.
In some instances, an investment cannot be fully exploited on its own. The author gives the example of an improved rail cargo car that is capable of carrying significantly more weight: it cannot be used to its best potential until the rails, bridges, engines, connectors on existing cars, and other factors are improved as well.
Another consideration is that capital, at any given moment, is available in fixed amounts. To invest in one thing is to choose not to invest in another, and this can be inhibitive. Going with the railroad example, a company may have increased demand for both cargo and passengers, but not the means to invest in more capacity for both. It will choose one, knowing that it will forego the other, because it is the most profitable use of its capital.
Also, complex economies have many interconnecting parts, and can often stymie themselves. Back to the railroad example, a company may not wish to invest in the improved car until engines are improved enough to pull more weight. And at the same time, they may be reluctant to invest in the engine that would pull the cars because they do not have enough capital to purchase the cars as well, hence the engine will be wasted until the whole train can be improved. And even if that capital is available, it may not we worth investing in engine and cars if the rails and bridges cannot support the train. And the government may not wish to invest in improving the railway infrastructure because it is sufficient to current technology and it is doubtful railroad operators will upgrade their trains.
He returns to the unscientific nature of business decisions, because they must be practical a businessman should not experiment with his company. No firm should risk its sustainability by experimenting with investments unless they are certain it will be profitable, nor participate in a collective in which different firms try different things to discover what is the best course for all. Such things are considered theoretically until there is sufficient confidence and certainty of the outcome - and even then, it is easier and less risky to be conservative and continue with business as usual. That is not to say that no experimentation is ever done, but that it is not done with wild abandon. The student of business must instead employ ethnography - to observe multiple businesses in the same industry, note the differences in their operations, and correlate his observations to their performance. Studies can also be done when a company makes a change to its operations, considering performance before and after the change. But even then, there are many uncontrolled variables.
Consider investments and interest: it is asserted that interest is fixed by the earning power of the final unit of capital. However, it would be more accurate to state that interest is determined by the amount of earning power that the next unit of capital is believed to be capable of producing. So whereas the first unit of capital that begins a business will create enough revenue to return 10%, the next unit will create less revenue and earn only 8%, and the next unit may earn only 6%. The market does not offer the contributor of the last unit of capital the same rate of return as the first, but only that which is earned by the investment of the capital he will provide, which has decreasing marginal utility.
And in reality, capital an labor are not homogeneous. It is assumed that all else remains constant when additional units of either kind are added: a crew of eight lumberjacks with eight axes will benefit from the addition of four men and four axes at once. It will not benefit incrementally from having more men without axes or more axes without men. This is one of the fundamental problems with the "scientific" approach to optimizing business performance.
Another fundamental problem is the consideration of capital as if it were a uniform thing, capable of changing into whatever is needed to accomplish a task. The smelter's capital is his furnace and the weaver's capital is his loom - and one cannot move a furnace to a cotton mill and expect it to increase productivity there. Only money has the ability to "become" other things, and it may only be changed once. Arguably, it is possible to change things back into money, but always at a significant loss in value: one must sell a furnace and use the money to buy a loom, but the furnace will not sell for what it originally cost. The same can be said of labor, as a man trained and experienced in one form of work cannot be moved to another form of work with equal productivity.
Another problem is that which capital can be monetized, things are not as easily divided as money. A merchant ship is a piece of capital, but one cannot sell half or ten percent of the ship, nor can one sell the sails and the anchor and expect the rest of the ship to remain productive. This constrains the manager's ability to manage his capital once it has been invested in things.
Therefore, both capital and labor must exist in the manner and form that are useful to the entrepreneur - and if they do not exist, they must be brought into existence. And while money can purchase any thing that exists, the thing must exist to be purchased. The productivity of the smeltery cannot be improved by the addition of a furnace when no furnace is available to be purchased. And the belief that money can conjure things into existence is nonsense, along the lines of superstition, religion, and the belief in magic. Capital in the form of money has the ability to appropriate resources that already exist. Where the furniture-maker and the shipwright both want for lumber, the one that is willing to pay the most gains possession of the resource. Where the demand for lumber is such that many are offering a high price, labor is devoted to wood-cutting - labor is not conjured from thin air, but men leave other occupations for one that has become more lucrative.
Theoretical experiments aside, industries are driven by the desire of producers to increase their wealth. To do so, they must first gauge demand in the market to determine what they can sell and at what price. They must then determine what combination of labor and capital must be engaged to produce it. They must then determine how to raise the funds to engage those resources in production. And finally, they must consider the amount of cost they must incur to generate a given amount of revenue - and where revenue exceeds cost by a sufficient amount to make the enterprise appealing, only then do they proceed. Much of this is done by guesswork rather than scientific analysis.
It must also be considered that few entrepreneurs are so enamored of a single product as to exclude all other choices: an entrepreneur sees many needs and seeks to apply himself to the one that gains him the most profit. When he has time, effort, and capital to invest, he considers whether to increase production at his existing mill, open a second one, or invest in a new venture in a different industry.
There's a brief consideration of three "zones" - of attraction, repulsion, and indifference - that are applied to both capital and labor. Any opportunity to apply capital and labor in a way that generates more profit than its current use (even if that is idleness) is considered attractive; an opportunity that is less profitable is repulsive; and an opportunity that is roughly equal results in indifference. (EN: Though it should be added that risk estimation may cause a person to choose a less profitable employment when it is considered to be more certain.)