Are There Laws of Production? Where does Capital Come from?

Let us return to our small country where there is one owner of a firm and 10 workers. After unsuccessful attempts to earn profit by reducing wages, the owner very quickly finds another and the only acceptable opportunity of increasing their wealth. In order to do so the owner needs to turn from being an unsuccessful exploiter to an innovator. By introducing new technological solutions into the production process and improving management the owner will be able to increase the productivity of labour. Now 9 people will be able to produce as many products as used to be produced by 10. The entrepreneur will continue to pay the workers 100 currency units so that earnings do not decrease. However, the owner sends one worker to manufacture a new and improved oven to bake bread for instance. As the cost of one worker is 100 units a month, over this period of time the owner will receive capital of 100 units. This capital will be the owner’s materialized profit. Whilst the cost of labour of a worker producing capital goods will be nothing more than savings and investments. The company rejected an immediate increase in consumption in favour of a greater increase in consumption in the future. The production of consumer goods could be immediately increased if the worker worked at their usual place because the productivity of labour is greater. However, the production of additional capital is a more favourable alternative. After putting the new oven into operation, the owner of the enterprise and the company receive double the benefits: production increases due to the fact that the worker has returned to their usual place of work and also because a new oven has been put into operation.

The company puts off increasing consumption today and the saved labour resources go towards creating additional capital, which will help to significantly increase consumption in the future. The people save and invest. In this example the entrepreneur could have not hired a worker to create capital, but have left them to do their usual task – produce consumer goods. As a result of the increased productivity of labour, there will be more goods on the market and they will become less expensive. Therefore, workers may temporarily leave the consumption of goods at a fixed level and save some money. This money may be offered to the entrepreneur as a form of credit. Aware of the fact that with the credit the entrepreneur will pay for labour to create capital, which will bring profits, the workers agree to provide the money with a certain rate of interest. In a developing economy this is how or nearly how savings, investments, profits and interest occur, which are impossible in a steady state economy. They are only possible under conditions of economic growth. Equation will undoubtedly be true in a developing economy, but it must be understood that wages paid at a certain moment in time go towards purchasing goods manufactured in the previous period. At the same time it is also payment for future labour. And if future labour becomes more productive, this is when the opportunity will arise to receive profit and create capital. But when production increases, the workers will inevitably receive the full cost of their labour. Is this exploitation? No. The increase in the productivity of labour is undoubtedly the merit of the person managing the production process. Additional capital is the entrepreneur’s merit for effective use of existing resources. The workers receive everything in full, with their salaries they buy all of the consumer products, their real salaries rise steadily. Where is the exploitation in this and what is the entrepreneur stealing from the worker? Nothing. The entrepreneur is accumulating capital which will bring benefits to all: additional capital increases the productivity of labour, remuneration for labour inevitably rises. It rises to such a degree that it is able to fully cover all of the manufactured consumer products. Consumer products are fully covered by wages.
Let us make our small country a little more realistic. There are now two firm owners. They both use the same technology and exactly the same number of workers are employed at their firms. Due, however, to the fact that the personal consumption of one of the entrepreneurs is slightly higher, the salaries at this firm are inevitably slightly less. The owner cannot really pay more because this will incur losses. A situation such as this cannot carry on for long. The other entrepreneur has a perfect opportunity to conquer the market and drive out the competitor. To do this the owner may slightly lower salaries and set them at a level slightly higher than the competitor and with the money saved hire an additional worker. This procedure can be continued for a relatively long time. After each worker leaves, the earnings at the first entrepreneur will go steadily down and in order to maintain consumption the owner will be forced to constantly lower salaries. Furthermore the second entrepreneur may use credit and he or she will be given it with pleasure because things are going very well at the company: production is constantly increasing. We notice that the productivity of labour at the enterprise of the first entrepreneur will be inevitably lower because the greater personal expenses on consumption do not allow capital to be increased at the same rate as with the competitor. In any case the outcome of the struggle is predetermined. By reducing investments and increasing personal consumption the entrepreneur is taking a fatal risk. Money spent on luxury items may be spent on expanding capital and increasing the productivity of labour, which would weigh heavily in a future competitive struggle.
Let us leave our small country and finally return to the discussion of the share of labour and capital in the end product.