Praxeology - Episode 13
Translations of this material:
- into Russian: Праксиология Эпизод 13 — Капитал. Translated in draft, editing and proof-reading required.
Submitted for translation by IrinaChernykh 18.06.2015
How do we create wealth? Should we only live in the present moment or think about the future?
Hi guys, Praxgirl here.
In our last lesson we covered the universal laws of human labor. We learned that labor has an attached disutility to an actor, which, depending on his subjective goals, will determine how often and how long he inputs his physical energy into satisfying his desires. We also learned that technology doesn’t destroy jobs, but redirects labor to new desires previously left unfulfilled. And finally we saw our first example of how Praxeology can be used to interpret history.
We now understand that land (nature-given means) and labor have limitations in their productive output. Therefore, if man wants to increase his rate of production of consumers goods, he must engage in a process that awards him with more time. This involves producing and saving goods that will not be used for consumption in the present, but at some later time. This accumulation of time is called Capital and the goods that store the time are called capital goods.
Capital or Time (which as we will see can be used interchangeably), is the third and final element of the 3 main factors of production. For the production of any good, 3 factors must be mixed together:
1. Land (the nature-given means)
2. Labor (the element of human energy)
3. Time (the time involved in production)
In this lesson we will cover how capital is formed and what it's importance is to understanding how man raises his standard of living.
THE STRUCTURE OF PRODUCTION
In our previous lessons we have covered how Praxeology logically categorizes and derives universal laws from man’s application of his labor and land to achieve his desire. We can begin to see that there is a process involving “stages” in the production of goods that will ultimately be consumed by individuals. These stages are called The Structure of Production.
To briefly illustrate, let’s consider the stages involved in the construction of a fishing net:
First, you have to cut down tree branches. Then you need to separate fibers from the branches. Then, you lace and braid the fibers together to create ropes. One you’ve created enough ropes, you need to tie them together in such a way that they will hold and maintain the net.
As you can see, every stage involves using the not-directly consumed factors (capital goods) like the tree branches or the fibers in the earlier stages, transforming them over time and through labor into the factors of later stages of production to ultimately produce a good ready for consumption, the consumer good, which is the final stage.
THE LENGTH OF PRODUCTION
Each structure of production will vary in the length of time the process will take. A shorter structure of production will take less time to produce the desired consumer good, but will have a lesser rate of production than a lengthier structure.
To illustrate, let us imagine Robinson Crusoe stranded on a desert island. His immediate desire is to feed himself. He looks around and he finds fish in a fresh water pond in the middle of the island. So, he jumps into the water and starts catching the fish by hand. This structure of production is almost instantaneous because his fishing is only one stage removed from his eating fish. His rate of catching fish however, is really slow.
If Crusoe decides to engage in the process of building a net his rate of fishing will increase tremendously. But this also means that he will have to engage in a longer structure of production before he can begin to eat fish at all. A net will take him ten days to construct, during which he won’t be able to be catch fish to feed himself.
Whether or not a man will invest his time and energy into longer structures of production depends solely on his time preference, that is whether he prefers things sooner or later. Crusoe will have to decide whether engaging in 10 days of labor which not immediately feed him will be worth the final product, which is increased rate of fish production.
THE FORMATION OF CAPITAL
Supposing Crusoe is determined to better his situation, and he feels that a fishing net could really help him catch more fish, the question is: how will Crusoe achieve the feat of building a net without starving to death?
What Crusoe needs is time. If he has been spending his entire day catching 10 fish by hand, then building a net will mean that he needs to have 100 fish saved to feed himself during the production process. Crusoe therefore has two possible ways of saving:
1. He could save some fish every day until he acquires 100 fish at which point he can now engage in the process of building the net. Or
2. He can catch less fish a day and spend the saved time building the net little by little.
In both cases he is engaging in fundamentally the same process: in saving. Crusoe is choosing to reduce his present consumption in order to consume more in the future. His saved fish represent his capital.
Capital is stored up land, labor and time. At every step, more capital puts us closer to our enjoyment of consumer goods.
He who possesses capital is that much closer in time to achieve his desired good.
Once Crusoe no longer has to spend his entire day fishing, he can dedicate more time to achieve other ends. He can read, write or leisure. He can spend time building a house, or preparing clothes for the winter. Saving is the fundamental action which is necessary for the improvement of our situations.
If I had to choose the most important implication from the fact that humans act, it would be the importance of Capital. The concept of capital is the answer to the how and why we live in such a productive and complex modern society. We are all today living off of the fruits of the labor of previous generations. What this really means is that we are all living in a world that is the result of men before us saving. Instead of consuming everything they had produced, our ancestors accumulated capital beginning with small steps like the saving of fish, then producing tools such as nets and so on into larger and larger structures of production.
We live in a very complex society where the consumer goods we enjoy aren’t merely the result of technological progress. Technology is merely a recipe on how to achieve our ends. Even if Crusoe knows how to build a boat to get out of the island, he has to satisfy his most urgent ends first which are to feed himself and to survive through his situation. We cannot embark onto a new technology without having the savings to facilitate this sideways production.
I’ll see you guys in the next lesson.