CAPITAL AND TIME

No one has trouble seeing tha production of economic goods can result from use of such inputs as labor and land (including in the latter term natural resources generally). These are often called "primary factors of production," for the reason that neither land nor (these days) labor is regarded as a result of the economic process but instead exists by virtue of physical and biological rather than economic factors.

Capital, which is the word often used to refer to capital goods generally, is a rather different kind of production factor. A capital good differs from the primary factors in that it represents an input that is itself the output of the economy.

Capital goods, then, represent produced goods that can be used as factor inputs for further production, whereas labor and land are primary factor inputs not usefully thought of as being themselves produced by the economic system.

[Some qualifications will be evident. Land can sometimes be made by drainage or filling in; this is true of much of Chicago's lake front and Boston's Back Bay. Natural resources such as minerals are laid down by nature, but it may take much economic effort to locate, use, and process them. Therefore they come to have some of the properties of capital goods. Even if one abandons in the Western world a Malthusian theory of population, whereby people seem to be given a cost of production not unlike that of machines, one realizes that the process of education consists of investing in people, thereby making them more productive factors of production. When you see a medical school graduate, you are in a certain sense looking at a chunk of capital or an economic production factor that is partially capital.]

Just as wages and rent are the factor-prices of primary labor and land, the 4 or 6 or 10 per cent interest rate per annum can be usefully regarded as the factor-price that rewards and rations society's scarce supply of various capital goods and investment projects. In that an interest rate is a percentage per unit of time (per year or month or decade), it calls our attention to another way of looking at capital -a way that stresses the special relationship between capital and the passage of time.

Let us resurvey the important economic role of capital. If men had to work with their hands on barren soil, productivity and consumption would be very low indeed. But gradually over time our economic system has been able to amass a tremendous stock of instruments of production, factories and housing, goods in process, and drained and fertilized land.

Men learned very early that the simple, direct methods of production can be improved upon by using time-consuming indirect methods. We who are inside the economic system are not conscious of how roundabout productive processes have become. An outside observer would be struck with the fact that almost no one in our system seems to be producing finished goods. Almost everyone is seen to do work of a preparatory nature, with final consumption a distant future goal. The farmer spends his time in fattening hogs, the truck driver in carrying them toward the last stage of consumption. A steel worker prepares pig iron, part of which will become a hammer to build a house; another bit will become part of a pig-iron furnace, which in turn will prepare pig iron to be used in making further hammers and more pig-iron furnaces, and so forth.

Each person may be unaware of the roundabout character of production: all he has to do is to perform his own job and not worry himself as to where his output will ultimately go or whence come the raw materials to which his activity has added value. Once all the circular paths were established and activity became synchronized, even an outside observer of the system might not notice its complexity. In such a steady state each day might look like the previous one, and it might appear that the work of each day was producing the output of that same day.

Such a view is partially an optical illusion. Time was required to get the process going in the first place. Human and nonhuman resources had to be put to work for a long time before any output came from each new process. It is as of one had to charge a huge battery for some time to get the voltage up before a bulb could be lit. Gradually a steady state is reached when one is putting electricity in (charging) and receiving light in return. Finally, if one stopped the input of electrical charge, one might not incur the penalty of losing the light for some time until the battery has run down. Similarly, in the economic world, it is possible to stop replacing capital goods and loaf for a while and still hope to leave output undiminished for a spell while we "live off capital" or "milk capital".

The fact that it takes time to get things started and synchronized is important. It explains why society does not automatically replace all direct processes by more productive indirect ones, and all indirect processes by still more indirect processes. The advantage in doing so is balanced by the initial disadvantage of having to forego present consumption goods by directing resources from current production to uses that will bear fruit only after some time.

To the extent that people are willing to save -to abstain from present consumption and wait for future consumption- to that extent society can devote resources to new capital formation. [We shall later see that, sometimes in our modern monetary economy, the more people try to save, the less capital goods are produced; and paradoxically, that the more people spend on consumption, the greater the incentive for businessmen to build new factories and equipment.] And to the extent that people are unconcerned as to the future, they may at any time try to "dissave" -to snatch present pleasures at the expense of the future. How? By diverting resources away from the endless task of replacing and maintaining capital and to the job of producing extra present-day consumption goods. There is an old Chinese proverb:

"He who cannot see beyond the dawn will have much good wine to drink at noon, much green wine to cure his headache at dusk, and only rain water to drink for the rest of his days."

We may summarize as follows: Economic activity is future-oriented. By the same token, current economic consumption is largely the consequence of past efforts. Current productive efforts, so to speak, produce for the future, in order to repay the past for present consumption. Also, in progressive societies some fraction of current productive efforts is devoted to the new or net capital formation, whereby current consumption is sacrificed to increase future production.

THE SOVIET ECONOMY 1

So much for history. How does the Soviet Union get the three basic problems of every economy decided: What shall be produced. How, and For Whom?

In broad outline, the picture is this. The state owns almost all factors of production: factories, mines, and land. Workers generally earn their living by wages; they do have some limited choice of occupation, but a Soviet citizen does not have the right to seek employment in any region and industry that happens to capture his fancy.

What. A political decision is made that defense and capital formation are to be pushed hard; what is left over permitted to go to consumer's goods. While a Russian can indicate his preferences among different goods by the way he spends his income, any resulting shortages or gluts do not generally result in the bidding up or down of consumer-goods prices, thereby automatically producing the positive or negative returns that will serve to rechannel resources. So long as goods were very scarce, central planners could decide that people would want so much of food, so much of shoes, and so much of various other necessities of life. Any and all of these were eagerly bought as they became available: if the local store or commisary had shoes not exactly your size, you were glad to take them a little large rather than do without. Now that some of the comforts -and even luxuries- of life are beginning to become available, it is no longer enough to think of giving people what they need, and planning has become a little more difficult. These days certain goods do not get bought at all, and the planners gradually realize that they ought to cut back on them. It is harder to learn what people do want than what they do not want, and marketing surveys are still in their infancy. The Soviet Commisars are not so skilled in determining what people would want most if they had the choice; but they do find it useful to watch what Americans and others abroad like to consume and then belatedly introduce such products: thus that rare comrade who gets a car -and he is very rare indeed- will find it resembling our cars of the past; and experts tell us this imitative pattern, which is not all irrational, since it assumes that what one human being will like will also be sought by another, is becoming more common.

With respect to capital goods and military expenditure, direct state decisions are made. Industrialization is pushed hard: electrification, transportation, mining development, collectivization of agriculture and crop patterns -the emphasis on all such matters is determined in broad outline by conscious political decision.

How. Private enterprise is negligible in importance. Instead the typical Soviet factory will be a state-owned enterprise: just as the president of General Motors owns little of its total stock, the manager or head of this state-owned enterprise has no ownership of its capital; but he does get better than average pay for his work, plus various travel expenses, auto transport, and other special privileges. He may even get bonuses, and his chance of promotion to a bigger entreprise will depend upon how well his enterprose meets its quota. He gives orders much like any boss and expects his subordinates to obey them, just as he obeys orders from above. (To avoid penalties for failing to meet his quota, he may hoard steel and other materials rather than give them to some other enterprise; and many cases have been observed where bureaucrats will contrive to make it appear that their plant has been very productive, even if that means they must conceal its true potential efficiency.

Examples:

Entreprises may malinger so as to get a low quota that can be easily achieved or surpassed; stories have been well told where, for example, a transportation entreprise would move carloads of water back and forth in order to be able to say it had accomplished the target of so many ton-miles.)

The decision of how to combine various productive factors -land and labor, degree of mechanization- appears to depend on a mixture of purely technical considerations and adaptations to the scarcities of various economic resources. A continual process of trial and error goes on. The observer finds operations curiously uneven: on the one hand, he may see a military ballistic plant which has achieved a precision of ball bearings and gyroscopes rivaling the best in the world ; on the other hand, he may find things being done in an almost unbelievably primitive way, with the quality of output practically worthless.