Are There Laws of Production? Introduction

In 1948, an article was printed in the American Economic Review entitled Are There Laws of Production? The author of the article Paul H. Douglas, who was well-known for jointly proposing, together with C. W. Cobb, the use of a production function such as P = bLkC1~k, presented the results of his many years of research of the manufacturing industry in a number of countries. The main aim was to establish values for the coefficients k and 1-k. Functions such as the Cobb-Douglas function are interesting because the exponents reflect the share of the factor of production in the manufactured product and, therefore, the work was to determine the share of labour and capital in the manufacturing industries. After a number of critical observations it was decided upon to substitute the coefficient 1-k for the coefficient j, which would be determined independently of k. Indeed, if the sum of the coefficients equals one, this signifies a constant return of factors inputted into production and this still needed to be proven. If the sum of the exponents is greater or lower than one, this will demonstrate whether production is developing faster or slower than the speed of the involvement of additional production factors in the economy. Looking ahead, we would like to note that this approach did not change much: the sum of the exponents in all the studies was close to one.
It must be said that matters regarding the measurement of the share of labour and capital in a final product have never been of special interest to anybody. There has been, of course, active discussion of issues associated with the following questions: which other factors, aside from labour and capital, take part in the production process, whether they should include the services of a manager or owner of an enterprise, whether to include rent or interest in the final product cost? There has been interest in discussing such events as the falling, rising, or constant yield from the scale of production or a dependency of expanding the production of goods on the involvement of particular additional factors in various sectors of the economy. However, there has never been any kind of significant research into the percentage relation between labour and capital. Douglas’ work was, without doubt, a highly significant event, but it must be admitted that this spark never did kindle a flame. I will give my personal opinion on this situation. Firstly, towards the beginning of the last century, Marx’s labour theory of value and its predecessor, Ricardo’s theory of value, which many people rightly call the 93% labour theory of value, firmly won their places under the sun. Despite criticism from prominent economists, these theories acquired numerous followers throughout the world. Ricardo and Marx justifiably considered capital to be an intermediate good, the value of which is determined by labour costs on its production. For this reason labour is a primary and deciding factor. Furthermore, it is exclusive, based on Marx’s premises, or it should be considered that it determines 93% of the cost of a final product if following Ricardo. Therefore, insufficient attention towards the study of capital or, in other words, the intermediate good, is completely understandable. Secondly, it was clear that nobody was in any doubt whatsoever that the amount of capital per worker constantly increases. This is why the ratio between capital and labour changes over time. Also, in various industries this ratio has always been and remains different, which, incidentally, created an impassable barrier for Marx’s theory of exploitation. The lack of a stable dependency between labour and capital did not encourage a rise in interest in the analysis and explanation of available statistics. This gap was partially closed by production functions that appeared in economical science and that were intended to somehow explain the process of converting capital and labour into the manufacture of the final product. (Walters, 1963). We must note that the lack of a defined dependency between the amount of capital and the amount of labour participating in the production process is far from obvious. Of course, it is rather problematic to look for a relationship between items, meters and kilograms. It is strange to look for a relationship between the amount of labour and the amount of capital, despite their extremely bold use in production functions. An attempt to establish a relationship between labour and capital expressed in cost units would be much more justifiable. This approach enables us to immediately make some interesting observations. The price of capital sometimes increases, but decreases much more frequently.