19: Apportioning Labor and Capital Among Industrial Groups
On the level of a national economy, all capital and labor are apportioned among the different groups and sub-groups of producers. In a totalitarian state, production is directed by a central power, which determines how much of what goods will be produced for all of society, and assigns capital and labor accordingly. In a free market, there are other forces that direct the distribution of goods, of capital, of labor, and of wealth. In general, labor and capital both move freely, seeking the opportunities where it can produce the greatest return.
(EN: The pursuit of the greatest return is often presumed by economists, who believe that wealth-production is the primary motivation for workers and investors alike. But it is often found that there are psychological drives that cause workers and investors to direct themselves to an activity that produces the greatest pleasure, and wealth is only one factor. In the present day, it is often found that it is not the most influential factor - that people require enough wealth to meet their basic survival needs, but at that point there is no further incentive to make money, and so people choose occupations and investments that pay less but afford them greater pleasure.)
In a free market, customers determine what they consume - and their purchasing choices create wealth in specific industries. That is, the national demand for shoes is merely a reflection of the individual decisions of all consumers who decide to spend some of their income on shoes. There is no central authority that dictates how many pairs of shoes shall be produced and who shall have them. If customers, as a whole, offer sufficient reward for the creation of shoes, then the productive forces of society will be offered a financial incentive to create them.
By either system, the assignment of productive resources involves trade-offs among goods. Just as a consumer with a limited amount of money must choose to purchase shoes or a coat, so does a nation with a limited amount of capital and labor choose to assign it to the shoe and coat industries. Every worker or capital good that is assigned to the production of shoes is not available to produce coats (or other goods). And because of the marginal values of labor and capital, there comes a point at which producing one more pair of shoes is less profitable than diverting the same amount of productive resources to the production of coats. And so it is with all consumer goods, as the consumers offer sufficient reward to motivate producers to provide only so many of each kind of good.
The interaction of these influences is highly complex because different and seemingly unrelated industries are interdependent in very detailed and complex ways. The choice of one good requires the production of all the tools and materials necessary to make it, and it likewise diminishes the resources available to produce other goods, and the tools and materials necessary to make them. So while the basic relationship between demand and supply is simple to comprehend, the vast number of consumers and suppliers and goods creates a thoroughly opaque web of simple connections.
(EN: Another interjection for the sake of specificity: because goods are produced before they are brought to market, what moves the factors of production is the expectation of future demand as projected by industry. That is, the baker does not know how many loaves he will sell tomorrow when he makes his dough the day before, but invests capital and labor in production based on a guess - he may sell out, or he may be left with unsold inventory. The miller is further removed, as he doesn't know how much flour his customers will order next week. The farmer is further removed, as he doesn't know how much wheat his customers will order at the end of the season. And while free markets are often criticized for inefficiency, the same is true of controlled markets, as the central authority must also predict consumption to direct production and their inefficiency in doing so resulted in shortages and surpluses that were much worse than those seen in free markets.)
In the chain of production, capital and labor are moved backward from the future: the person who purchases an item for consumption determines the price he will pay for it. The last vendor who sells the item to the consumer determines how much he will pay his vendors. If he can make some component of his product more cheaply than he can purchase it from a vendor, he does so - hence the prices he is willing to pay his vendors are a discount from his own expenditures for components. The baker will grind his own flour if the miller cannot provide it more cheaply than the baker can grind it - and for that matter, the customer will bake his own bread if he can do so more cheaply than purchasing it from the baker.
On one hand, it is a common error to assume that labor and capital are perfectly mobile and can be moved to other industries with no loss in productivity, as laborers and machinery are adapted to a specific task. However, this does not mean they are incapable of other tasks and cannot be retooled or retrained. A talented musician may find it more profitable to become a carpenter's assistant or a field hand - even though this employment does not utilize his talent, it provides greater compensation when there is greater demand for unskilled labor in thise fields.
The price paid for the elements of production are subject to supply and demand. If there is a construction boom, a premium will be paid for masons and carpenters because of the high demand for their skills. If a large number of masons and carpenters are attracted to the area because of these high wages, there is a glut of supply that reduces their negotiating power and brings wages back down. If an insufficient number of workers are attracted by increased wages, there will continue to be high demand and wages will rise to attract more workers. These forces will counteract one another until prices paid for workers become normalized, given the amount consumers are willing to pay for their work product.
While it is attractive in theory to have exactly the right amount of capital and labor apportioned to every pursuit to ensure that exactly the right amount of consumer products are created to be sold at exactly the right price, the world is a messy place and it is impossible to achieve such precision. The free market is a constant work in progress, ever attempting to adjust toward perfection, and ever getting it wrong - producing too much or too little of something. While some suggest that controlled markets would be more perfect, no controlled market ever has made an improvement over the free market, and many have been far worse at prediction and adaptation. Planned economies that seek to control the means of production have created far more extreme shortages and surpluses than free markets.
And while labor and capital are interdependent, the motives of their movements are independent. Each worker and investor is motivated by his own self-interest, which may be collaborative or competitive with the self-interest of others. Ultimately, it is settled in the negotiation between the entrepreneur and his suppliers, just as the price of goods in the market are settled in the haggling between buyers and sellers.
The movement of a single laborer from one firm to another has multiple effects: it increases the labor of one firm (decreasing its demand for labor by one worker) and decreases the labor of another firm (increasing its demand for labor). The work done by the laborer at his new firm increases the supply of their good, but if that laborer is removed from productive activity it decreases the supply of the goods he previously made. If he has moved to pursue a higher wage, which is presumed, then the consumption of capital in the market has increased, decreasing the supply of capital in the same market - and of course when he spends his higher wage on more goods, it decreases their availability to the market. And each of these increases and decreases has an impact on the cost, hence the price.
Ultimately, capital and labor are motivated toward the employment in which they are the most productive - but the employment to which they are drawn may become less productive due to their addition, as their added production creates an additional amount of their product, the price of which is then decreased in the market due to the increase in its availability. This is where the supply and demand in the consumer market mitigates the demand in the industrial market: as it there is an ideal level at which the greatest profit is made, and beyond which making one more unit of product will make the profitability less due to the decrease in price. Because of this, the power of labor to create additional value is not infinite. When the amount of labor increases the supply of product beyond the point of equilibrium, adding more labor (or capital) becomes destructive of value.
Where the consumers in the market signal a desire for more or less of a given product, producers increase or decrease production accordingly and in some instances are motivated to enter or exit a given industry. The problem is that the prediction of producers can be inaccurate, so movements of this kind have the power to cause disproportionate shifts in labor and capital, causing too much or too little to be applied to the production of a given commodity - which results in a shortage or surplus that in some instances can become a "crisis" until the allocation is corrected. The high profit caused by shortages will attract new producers or motivate existing producers to supply more goods; the low profits caused by surpluses will create the opposite reaction.
He returns to the ripple effect in markets: when labor and capital is applied to the production of a good, it is removed from the production of other goods. This causes the supply to drop, hence prices and profits increase, signaling a need for these other goods to be produced - and high prices furnish the means an incentive for the producers of these goods to obtain the factors of production they need to meet consumer demand, if effect calling back labor and capital from an over-produced good. It is not necessarily from the industry that initially drew their labor and capital away, but from some industry that is currently overproducing.
An agent of production is rendered unprofitable by two factors: the agent itself has low capability to produce, or the price of the goods is too low to sustain production in a given quantity. The first condition (low productive capability) is a problem of management to make productive use of a given agent. The second condition is a problem of the market, that can only be rectified by collective action to bring supply and demand back into balance. Ultimately, when the price customers are willing to give to have a product is not sufficient to cover the cost of its production, then it is unprofitable to produce that product. Similarly, an agent of production is rendered exceptionally profitable by the agent's productive power or the high demand of the goods it produces.
Central control over economics is proposed to avoid crises of this nature, but ultimately they exacerbate it. The problem is that future demand cannot be perfectly predicted so that supply may be adjusted accurately. If one were to haphazardly apportion labor and capital among different industries, there would immediately be shortages and surpluses of goods - and left alone, labor and capital would flow to the places they were most needed to meet consumer demands. Prevented from doing so, the shortages and surpluses would perpetuate. In the free market, entrepreneurs manage the movement of capital and labor among industries. Each risks his own personal fortune in doing so. His wisdom is his own profit and his foolishness is the ruin of his own personal fortune - and only his own personal fortune.
It is also erroneous to assume that competition within an industry is the primary force that moves markets. Consumer demand is the primary force, as customers determine what goods will be purchased. Within an industry, individual firms compete to satisfy the demand (by customers) to have a product at a given price - so the competition between companies is secondary. The customer determines what will be produced, firms struggle to determine who shall produce it for them.
Wages and interest are determined by their respective productive power. In an operation where labor produces more profit than capital, the greater sum of the revenue is apportioned to wages; where capital is more productive than labor, the greater share is apportioned to interest. The productive power of labor is determined not by the employer, but the employee - what skills he brings to bear and the earnestness with which he will set to his work. Some employees are more productive than others, and ought to be apportioned a greater wage for their contribution - these are the employees who are most sought-after, and the ones for which employers must bid the most to win their service in the labor market.
However, this is mitigated by the productive power of labor and capital in the market as a whole - as both are subject to the forces of supply and demand. Where there is a surplus of laborers who have a given skill set, then they will receive lower wages even if the productive power of their labor is significant. The same can be seen when there is a surplus of capital: interest rates are lower, even if the capital is highly productive.
Where production is segmented into different firms, the problems of estimation are compounded. The weaver who produces cloth must predict how much cloth his customers will buy to make clothing, so his sales depend on theirs. However, because he makes his decision further in advance, he is subject to less risk: because the tailor must buy cloth to make clothing (whether he sells the clothing or nor), the weaver is protected from this market risk. The further the material is from "ripening" into a consumer good, the greater the protection against market risk. And where goods are perishable, the risk is greater because unused inventory cannot be stored for later sale.
However, this is not always the case, particularly for slow-ripening goods. Consider lumber: it may take ten or more years for trees planted today to mature to the point where they can be cut. This places more of the risk of estimation on the tree-farmer than on his customers. Meanwhile, the miner (with an established mine) hires labor based on his predictions of demand the following week or month, so he is at less risk of producing ore that will not be sold for a long period of time and can adjust production more rapidly.
There is a bit of fussiness about the availability of raw material versus machinery and tools. A loom can be productive only if there is thread to be woven, and if a factory of a hundred looms can buy thread only for forty, it is only as productive as those forty looms. It is all too common for those who manage such operations to focus on the equipment and ignore the material. As a rule, the availability of material to be worked is more influential on productive capability than the number of tools and machines available to work it.
He turns to the topic of land since, thanks to Malthus, it is of exaggerated concern: there being a fixed number of acres and no more being made. Whether a farm is used to grow wheat or cotton depends on the price that those crops are expected to fetch at harvest - so in this way land, like capital, is apportioned according to the most pressing needs of the consumers. So in theory, land is put to its most profitable use - while in practice, this is not germane until every available plot of land is already in use. And, of course, there is the matter of suitability: some land is naturally capable of being more productive with some crops than others. The farmer's decision is based on his total return, and there are instances in which growing less of one crop is more profitable than more of another, the land is unsuitable for the most profitable option, etc.
Returning to the basics: the demand of consumers determines how productive factors (capital and labor) in a society are apportioned to productive uses. The whole amount of productive factors in a market is apportioned to the industries that provide what consumers value most. The amount of productive factors within an industry is divided among companies that provide what consumers value most. Where more or less factors are assigned to a given product, there is a shortage or surplus that creates incentive for the factors to be re-assigned toward the optimal allocation - which is one in which the suppliers in the market are providing exactly the amounts that consumers desire and are willing to pay to have.