Land, Labor and Capital
"Wicksell had already recognized serious problems with the marginalist approach to capital theory. Essentially, whereas labor and land can each be measured in terms of its own technical unit (man-hours, acres, et cetera) heterogeeous capital in the aggregate must instead be expressed in value terms -- how, otherwise, to sum a railroad and a sewing machine?" -- Goodspeed, Rethinking the Keynesian Revolution, p. 25
Assuming Goodspeed has Wicksell right here, Wicksell is mistaken. Of course, we can measure labor in man-hours and land in acres, and for some purposes those measures are useful... but not for economic analysis. In economical terms, land and labor should be "measured" exactly as capital is: by the discounted value of the future income streams they are expected to produce. An acre of land in Manhattan is in no economic sense the same as an acre in Antarctica, and a man-hour of Joe Blow's labor is not economically identical to an hour of Kobe Bryant's labor. We might just as well analyze capital in terms of kilograms as land in terms of acres or labor in terms of hours.
You can easily see this for yourself with the help of a thought experiment: Imagine I have a black box. I tell you that, if you give me a thousand dollars, I will disappear into the box, and I guarantee in a year I will return and hand you $1100. Will you take the deal? If you believe my guarantee, your only consideration will be what else you might do with the money. If you had planned to invest it for a year, then you will estimate what chance you have of earning a higher return elsewhere. So long as you believe my pledge, it won't matter to you if what I do in the box is work a lot, or sit back and let a machine or a plot of land earn me $100.
The valuation of capital goods is no more or less puzzling than the valuation of land and labor. Since land and labor also produce their yields only in the future, the prevailing interest rate is as much a part of their valuation as it is for capital goods. And, once again, this was worked out decades ago by Mises:
"Land and the services it renders are dealt with in the same way as other factors of production and their services. Control of a better tool yields 'rent' when compared with the returns of less suitable tools which must be utilized on account of the insufficient supply of more suitable ones. The abler and more zealous worker earns a 'rent' when compared with the wages earned by his less skillful and less industrious competitors...
"The modern theory of value and prices is not based on the classification of the factors of production as land, capital, and labor. Its fundamental distinction is between goods of higher and of lower orders, between producers' goods and consumers' goods... The law controlling the determination of the prices of the factors of production is the same with all classes and specimens of these factors." -- Human Action, pp. 631-632
UPDATE: And here is Mises making the point above on the relevance of interest to land and labor valuation:
"No less than in any other branch of production, the time factor enters also into the conduct of hunting, fishing, grazing, cattle breeding, plant growing, lumbering and water utilization. Here too man must choose between satisfaction in nearer and in more remote periods of the future. Here too the phenomenon of originary interest, entailed in every human action, plays its paramount role" (p. 635)
Assuming Goodspeed has Wicksell right here, Wicksell is mistaken. Of course, we can measure labor in man-hours and land in acres, and for some purposes those measures are useful... but not for economic analysis. In economical terms, land and labor should be "measured" exactly as capital is: by the discounted value of the future income streams they are expected to produce. An acre of land in Manhattan is in no economic sense the same as an acre in Antarctica, and a man-hour of Joe Blow's labor is not economically identical to an hour of Kobe Bryant's labor. We might just as well analyze capital in terms of kilograms as land in terms of acres or labor in terms of hours.
You can easily see this for yourself with the help of a thought experiment: Imagine I have a black box. I tell you that, if you give me a thousand dollars, I will disappear into the box, and I guarantee in a year I will return and hand you $1100. Will you take the deal? If you believe my guarantee, your only consideration will be what else you might do with the money. If you had planned to invest it for a year, then you will estimate what chance you have of earning a higher return elsewhere. So long as you believe my pledge, it won't matter to you if what I do in the box is work a lot, or sit back and let a machine or a plot of land earn me $100.
The valuation of capital goods is no more or less puzzling than the valuation of land and labor. Since land and labor also produce their yields only in the future, the prevailing interest rate is as much a part of their valuation as it is for capital goods. And, once again, this was worked out decades ago by Mises:
"Land and the services it renders are dealt with in the same way as other factors of production and their services. Control of a better tool yields 'rent' when compared with the returns of less suitable tools which must be utilized on account of the insufficient supply of more suitable ones. The abler and more zealous worker earns a 'rent' when compared with the wages earned by his less skillful and less industrious competitors...
"The modern theory of value and prices is not based on the classification of the factors of production as land, capital, and labor. Its fundamental distinction is between goods of higher and of lower orders, between producers' goods and consumers' goods... The law controlling the determination of the prices of the factors of production is the same with all classes and specimens of these factors." -- Human Action, pp. 631-632
UPDATE: And here is Mises making the point above on the relevance of interest to land and labor valuation:
"No less than in any other branch of production, the time factor enters also into the conduct of hunting, fishing, grazing, cattle breeding, plant growing, lumbering and water utilization. Here too man must choose between satisfaction in nearer and in more remote periods of the future. Here too the phenomenon of originary interest, entailed in every human action, plays its paramount role" (p. 635)
Dr. Callahan,
ReplyDeleteI was just wondering, do you think that either translation of Capital and Interest is fine or do you think that out of the Sennholz or William Smart translations one is better than the other? I ask because with Smart's translation you can get just the Positive Theory of Capital but with the Sennholz translation you have to get all three volumes of Capital and Interest. You seem to have an interest in translation and you are presently dealing with Bohm, so I thought I might see if you had an opinion. Thank you very much.
Senyor
Senyor, I don't know: I've never compared them.
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