20: Production and Consumption Synchronized by Rightly Apportioned Capital
Whenever there is a supply chain in which different parties create products that evolve toward a consumer good, capital and labor is expended at each step upon the way - to raise sheep, to card wool, to spin thread, to weave cloth, and to cut it into clothing. Each of these tasks must be performed before a consumable good is created - and so while it is said that the revenue provided by the consumer compensates the producer, the work of production is done in advance of the receipt of the funds. However, the flow of capital is more fluid - the first producer does not wait for the product to be sold to receive compensation for his part of the work, but is compensated when his product is sold to the next producer in the chain.
Consider the spinner who sells his thread to the weaver - he does not diminish his capital during production. He draws from his stock of wool to spin his thread, but when the thread is sold he replenishes his stock of wool. If his operation is coordinated to the point that wool enters one door of his shop at the exact same time that the thread leaves his shop through another, then the amount of wool (raw or spun) in his shop does not change at all during his operations. The same can be said of his money: if he receives payment for his thread, makes payment for his wool, pays the wages of his laborers, pays interest to his investors, and pays all other expenses of production within an hour, than the amount of money in his safe remains the same before and after that hour.
The only fluctuations in materials, money, or any other form of capital are temporary. Should the producer receive revenue before he pays his costs, then he appears to have increased his capital until his costs are paid. Should he incur costs before receiving revenue, he appears to have decreased his capital until the revenue is received. These fluctuations are normal, as it would be exceedingly difficult to orchestrate a production such that materials and money enters and exits the shop with perfect synchronicity. Aside of management issues, there is inconsistency of consumer demand, particularly for seasonal goods (few consumers purchase winter clothing in the spring).
Manufacturing generally follows the pattern of "work and wait" for payment until the finished goods are sold. There are few instances in which a customer must pay in advance for goods to be delivered later. In the services industries, labor is performed very close to the time that benefits are produced (the barber is paid as soon as he stops cutting). Nor does proximity of production and payment necessarily make production more efficient. Consider the restaurant industry - large amounts of materials are wasted because they are purchased in case they can be sold, and staff are paid to stand about in case they may be needed. But in general, effort must be expended before the benefit of that effort may be enjoyed.
There is a brief example that involves a man making a raft to cross a lake: he must expend the effort to build the raft before the will enjoy the benefit of reaching the distant shore. Before he may begin making the raft, he must cut down trees. And before cutting down trees, he must fashion a hatchet. It's conceded a man might find a way to fell trees without a hatchet, but the time invested in making a tool makes that task easier to perform (ideally).
The creation of tools gets a bit more attention. It is obvious, in the case of our woodsman and his raft, that "labor has done it all" because he began his task empty-handed in a wilderness, with the assistance of no-one else. But it is also true that in an advanced society, labor is the source of all benefits because the tools used to perform a task are the products of labor, the fruit of the land is cultivated and harvested by labor, and even money is earned by labor. So in that sense the division between labor and capital is a false one - those who consider themselves "labor" perform the most present tasks, but those who are categorized as capitalists have provided tools, equipment, materials, and money that were created by previous labor.
Then a further consideration of capital and wealth. Even in primitive societies, and even a savage alone in the wilderness, amasses capital. He makes a spear in order to hunt, but does not destroy his spear after the hunt - he maintains it as a tool for use in future hunting. When he has taken large game, there is more meat than he can presently consume. He does not leave it to rot, but smokes or salts it for future consumption, and in so doing he has created wealth. And if he exchanges some portion of his smoked meat with another savage for some berries or a scrap of cloth, he is participating in trade.
Money is different than capital goods - as a capital good represents the ability to create value in future (once some additional labor has been performed) whereas money represents the ability to command value immediately (by purchasing something that has value). A significant difference, often overlooked, is that production has the ability to create value that did not previously exist, whereas money merely has the ability to command ownership of value that has already been produced.
There is some talk of the synchronization of production and consumption. There are very few things that produce benefit the moment they have been created - perhaps one can say that an impromptu song creates pleasure the moment it is sung. For other things, there is a time interval of varying lengths - and these differ for production and consumption:
- The production interval lasts from the moment the labor to obtain raw materials commences to the moment a consumable good is completed
- (EN: Here there is likely an interval when a completed good is in the producer's inventory and has not yet been obtained by the consumer)
- The consumption interval lasts from the moment a consumable good is obtained to the moment it has been destroyed by consumption.
In the present age these intervals are far more substantial than in ages past. The savage's work to produce food is done in a day, even if he must fashion a spear. The agrarian farmer's work to produce food is done in a season. The industrial farmer's work begins long before he plants his field, as the tools of his profession are built - the moment the pick breaks off the first lump of ore that will become his plow, the work to produce food begins. Goods being more durable, the consumption effort is also much longer - that steel plow will be in use for decades before it is completely worn out.
There is also in the post-industrial world a great deal more capital and wealth. Very few jobs are done with bare hands, and most require tools and equipment, and fortunes are invested in a manufacturing operation. And as consumers, people have stores of the things they need to consume - they have wood for the winter, not for the evening; clothing that will last for years; several days or months' worth of food in the pantry; and no shortage of money in the bank. These reserves create greater stability in both productive and consumptive activities, and makes available whatever is needed at the time it is needed. The drawback to this, however, is waste. Goods are produced in the expectation that they will be consumed, and the greater the time between production and consumption, the greater the chance of error in estimation will cause there to be excess (or shortage, but most often estimates are generally padded to avoid shortages).
There's rather a long bit about the progression of raw materials to finished goods: sheep give wool, wool becomes thread, thread becomes cloth, cloth becomes clothing. The cost of labor (and additional material) adds to the value: the price of thread includes the cost of the wool, the cost of the labor to spin it, and the cost of the dye to color it. The price of cloth includes all of those costs, plus the cost to weave it. Because each producer pays for his materials upon delivery, the previous producer in the chain is compensated for his costs long before the final article is purchased by the consumer (who ultimately compensates them all).
There are some end-of-chapter notes that consider whether a partially finished good should be considered wealth, which largely depends on how "wealth" is defined. Raw wool is not capable of providing a benefit to the consumer until additional work is performed upon it, but it does have the potential to deliver benefits if further work is done upon it. However, even finished clothing may not deliver benefits if they are never purchased or transported to where they may be of use. So if one considers wealth to be the things that have the potential to render a benefit to consumers, then partially-completed goods fit within that definition just the same as completed goods that have not yet been purchased or consumed.