Are There Laws of Production? Labour and Capital

Are There Laws of Production? Labour and CapitalAs follows from equation, the increase in production of a single enterprise will be: d(pq) = d(wl) + d(rk)
The entrepreneur finds a way of increasing the productivity of labour by introducing new technologies into production for instance. Let us stipulate in advance that a unit of cost will be the cost of one unit of the end product. A unit of cost must be chosen because in an economy it is relative prices that are important not absolute prices. Naturally, at the beginning of a production cycle the entrepreneur pays the same wages as before the new technology was introduced. There should not be any objections to this, the workers still receive everything in full, they buy up all the products and equation is satisfied. After the completion of the production cycle and the sale of the manufactured goods, the entrepreneur receives a profit, since the workers produced more than in the previous cycle. The profit d(pq) will equal the growth in the productivity of labour d(wl): d(pq) = d(wl)
With their profit in their hands the entrepreneur makes a decision on where to put it. There are three options: to use the profit to acquire capital, to increase workers’ salary, or to spend all additional funds on personal consumption. Acquiring additional capital the entrepreneur puts profit towards paying for the salaries of workers producing capital goods. Equation is satisfied. And since all the profit is invested in additional capital the increase in production of consumer goods for the whole period will be d(wl) = d(rk), then the increase in the production of consumer goods for the whole period will be d(pq) = d(wl) + d(rk) = 2d(wl)
An excellent result. An increase in consumption two times greater than the initial investment in capital. The increase in real salaries is two times greater than the volume of investments. It is for this reason that in a closed economic system the cost of the workforce is twice as great as the cost of capital. It is for this reason that the cost of consumer goods and services produced is twice as high as the volume of investment and the share of consumption is 2/3 of the country’s GDP. It is obvious that the shares of the cost of labour and capital at the level of an individual enterprise can in no way be considered a closed economic system. Capital goods are usually acquired by a company from other manufacturers. However the shares of labour and capital in a single country must be close to 2/3 and 1/3 respectively, if the country’s economy is sufficiently closed. Obviously active foreign trading has become the main reason for discrepancies in the figures that Douglas received for the exponents of labour and capital for different countries. The economies of Canada, New Zealand, South Africa and Australia were dependent on imports from England and actively exported their goods there and, therefore, they can in no way be considered closed. Consequently there are laws of production, there is a mechanism which forces enterprises to spend twice as much on employee wages than on investments. Let us discuss two other methods of an entrepreneur using profit, but looking ahead we would like to note that they bring us to the same results. The second option for an entrepreneur is to pay all of the profits to the workers. The increased wage allows workers to keep consumption unchanged and make savings which go to other entrepreneurs (or to the same entrepreneur) in the form of credit and are allocated for investments. If workers decide not to save and increase consumption then manufacturers of the consumed goods receive the additional income. Their profit goes towards expanding investments. For this reason the result of the method being discussed of using profit is similar to the conclusions presented above. Finally, if an entrepreneur places all profits on their personal consumption they increase the incomes of other producers of goods and services. The additional profit received will go towards investments. Therefore, the relationship between labour and capital will not be affected. The second and third options of using profits seem less logical than the first. Why? The entrepreneur understands perfectly that having received a profit as a result of increased productivity of labour they may receive even more by investing additional funds in the purchase of capital. They receive double the benefits: production at their enterprise increases due both to an increase in the productivity of labour as well as additional capital. In all of the cases presented profit turns to investment in the end. However, this kind of development of events does not happen all the time.