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Ludwig Von Mises

Factors of production

With these definitions and the previous lessons we can now fully determine the necessary elements that must be present for manufacturing to occur. They are:

  1. Physical or natural means (e.g. raw materials)
  2. Labour (human energy)
  3. Time (used in the manufacturing process)

Note: for simplicity's sake we are using the terms production and manufacturing interchangeably from now on unless otherwise stated.

The Structure of Production

Production does not happen magically and spontaneously. Production does not just appear out of nowhere. Production occurs when natural means are transformed by labour through time in goods and services. As such, production is a step-by-step process which can be exceedingly simply to very complex.

Let's retake John' s example. When John goes hunting his structure of production is simple because his hunting is only one step removed from eating. The problem is that his rate of success hunting pigs is low. Some days he comes back to his camp empty handed. Let's say that on average John catches one pig every 3 days. Because of this reason John decides to capture and farm pigs. If he can do this, his rate of success will be as high as the breeding rate of pigs dictates, but it won't be limited by John's hunting abilities any longer. Basically, if John can breed pigs, he can eat pig every day. Let's also say that John decides that he wants to farm pigs. For that he calculates that the process of developing the fence and necessary tools will take him 20 days. This means that John won't hunt for 20 days but he still needs to eat for 20 days. John has two options. He can either hunt, eat less and dry meat until he has enough for 20 days or he can hunt less frequently (let's say every second day) and use the extra time to build. In either case John is saving, this is to consume less now in order to consume more in the future. John's dry meat and/or John's less time spent hunting represents his capital as either meat or time.

Now that John has sufficient capital, he begins to work. He gathers vines which he then transforms into rope which he then ties to trees creating a fence. Using these same vines, he creates finer rope which he then transforms into a net and with it, he creates a trap to catch pigs which will be placed in cages (also built using ropes and branches) and brought back to his fenced place.

Every step of John's production creates intermediate goods that will be used to create more goods until the final one, pigs in the fenced area, are only one step removed from consumption.

There is a relation between production rate and production complexity. The more complex a productive system, the faster its rate of production. In other words, the lengthier the structure of production the higher the rate of production.

This insight has yet another consequence which will become important later on. Production has a structure in terms of physical organization and time. Which means that in order to produce goods or services that will satisfy our needs, physical elements and the time used must be organized in a specific manner for it to work harmoniously in order to produce. In John's case, he would not have been successful if he would have gone out and capture pigs before the fence was completed. What we do with our capital goods and how we utilize our time matters.

Capital and time

The more capital a person has, the closer this person is to be able to enjoy consumer goods hence satisfying their needs. Initially John is spending a great deal of time hunting. However, once the farm is operational, John can eat plentiful of meat and have a great deal more of free time that can be used to satisfy other needs. John could, for example, work on smoke signals to be rescued or build a boat to leave the island. Through his farm John is now only one step removed from satisfying his need for meat. His time to achieve satisfaction has shortened significantly.

Standards of living

None of this would have been possible without savings, which is in essence accumulation of capital. Our standards of living are so high today because in the past our ancestors decided to forego immediate consumption and satisfaction of their needs for savings hence enabling production. In time this production created more capital which was further saved hence enabling new production. It is this cycle that allows larger structures of production to be possible hence increasing the rate of production at every time. But this increased rate of production is designed to produce goods and services that satisfy our needs, this is, that increases our standards of living.

Many people do not understand this process and they believe that technology is what allows the increase of standards of living. This is not so. Technology is simply the recipe as to how to manufacture new goods and services, but technology in and by itself -without savings, without capital- cannot produce anything. Returning to our example, John may have the knowledge to build a boat and leave the island but if he does not save and build a farm first, this knowledge will be useless because he won't ever have the time to build the boat.  

Government action

This is the reason why savings are so important. When we speak about governments diminishing or slowing your standards of living through taxation, we are referring to the fact that they are forcefully converting your savings (i.e. capital) into consumption goods hence destroying capital. Without capital further increases in the rate of production are not possible, thus your standards of living either stagnate or drop. This is not a theoretical point, this is as practical and real as it gets.

Socialists believe that they can destroy large amounts of capital in a futile search for equality and that they can do so without consequences. They are utterly deluded. The only amount of capital that can be forcefully destroyed without affecting our standards of living is exactly ZERO.

Furthermore, as we explained in our previous lesson about time, there is such thing as time preference. What this means is that everything being equal we prefer to satisfy our needs now and not later. However, in order to have savings, we must voluntarily suspend this preference and save in order to satisfy our needs later. There is yet another way to look at the destructiveness of Governments and politicians. They reverse society's efforts against time preference. While society chooses not to consume now and save so that production may increase, governments are reversing this choice by forcing consumption now instead of savings hence production decreases. They do so by robbing you through taxes and spending them. The ultimate consequence of this process is the decrease in our levels of civilization which depends upon our rates of production! So much for "the greater good".

Note: please see the Glossary if you are unfamiliar with certain words.

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