Are There Laws of Production? The Laws of Production

Causes may be an inadequate investment climate or a lack of profitable projects during a period of economic downturn, when real profits of manufacturers are significantly reduced. Profits go towards increasing salaries or they become the income of the owner of the enterprise. In this case profit goes towards purchasing consumer goods and services. The lack of investment does not allow production to be expanded actively because taking into consideration equation, the situation leads to an increase in prices for goods and services. It is possible that this may be the explanation for high inflation in countries where market freedom is restricted by high administrative barriers. An increase in prices is also observed during a period of economic downturn when the opportunities for profitable investment disappear.
In discussing with colleagues the possible connection between labour and capital, the greatest level of interest is always raised by the search for a method, using which entrepreneurs can invest profit that would contradict all of the conclusions drawn above. Invariably, however, it turned out that an initial increase in the productivity of labour in all cases we examined leads to an exactly twofold increase in nominal or real consumption. The greatest difficulty was caused only by the case of investing profit obtained into the recruitment of an additional worker. Let us therefore briefly address this. My opponents thought it fundamentally significant that, in this case, there are two possibilities: the transfer of the worker from another industry and the hiring of an unemployed free labour agent. They believe that the transfer of a worker to a sector for the production of final products fundamentally alters the relationship between the cost of labour and the cost of capital. Of course, such transitions of workers are possible. But it must be taken into consideration that the transition from one sector to another and back are two very equally probable events. The salaries in different sectors are equal, in any case they tend to equalize. If there is an increase in productivity in the consumer goods production sector, then the resultant profits become a source of investments in the capital goods production sector. Salaries increase in all sectors. With an increase of one of the terms in the right-hand side of the equation the second term also increases momentarily. The left-hand side, which represents consumption, becomes twice as large as the initial increase. A free worker can gain employment in any industry of the economy. Equality of salaries in industries does not enable the relationship between labour and capital to be altered. We can look at things slightly differently. An increase in productivity and salaries in one of the industries will attract an additional workforce. The amount of capital per worker decreases, which leads to the cessation of the growth of labour productivity. The increasing competition sets the salaries in that particular industry at the same level as the average salary in the whole economy. Salaries and productivity in all industries inevitably equalize. In the end it must be said that dividing the economy into sectors of final products and capital goods has a rather arbitrary nature. A car and a computer can be both capital goods and consumer goods. A single building or premises can be used as a place of residence and as an office or a production facility. It was Marx who taught us to place excessive importance upon the intermediate goods production industry. This is what his theory of exploitation demanded. It was because of Marx that many people began to name the system of private ownership and free entrepreneurship as capitalism. We have always regarded and continue to regard investments exclusively as a deposit of funds for the acquisition or improvement of capital goods. However, everything is gradually changing. Today we have the opportunity not only to invest in the construction of a plant or the purchase of machinery, but also to invest funds into human capital. This is all that I would like to say.