Reisman, Mises on Costs of Production

August 25, 2006 5:54 AM (Archive)

When Professor Reisman reveals, in his latest blog entry, that Mises told him that the value of a (specific?) produced means of production is set by its costs, was this any more than a shorthand way of warning against a adopting an overly simple, one-stage act of discounting backwards when the calculation actually rests within a much more highly complex process?

For example, the hammer and chisel with which I am to make a sculpture for sale to a wealthy patron certainly have value to me, but – supposing my work to be rare and specialist – only the upper bound of this is set directly by my discounting the selling price of my masterpiece back at my own personal time preference rate of discount. The lower – and more effective - bound is set by the fact I only have to bid one hammer away from many hundreds of men banging nails into roof tiles on a building site, men whose marginal product is naturally much lower than mine and whose valuation of their implements is also therefore a lesser one.

Herein lie my hopes of earning, an additional component of entrepreneurial profit.

Now these men – my immediate competitors – have suppliers who, in turn, have to bid the metal and wood which make up their tools away from some other would-be users and so on down the line.

It is true that one natural constraint on lowered costs exists, namely, the level of the hammer’s price whereat the makers of, for example, the highly specific machine which produces these tools from less finished components are no longer incentivised to produce it since the realized selling price has become too low in relation to factor and capital costs for the makers to make the effort to do so.

Leaving aside questions of the machine makers’ own ideas of what constitutes a ‘worthwhile’ return on their labour, we must recognize, however, that their own costs are similarly set by the matrix of alternative uses for the materials which comprise their plant and equipment, their labour, land and the fuel which comprise their running costs, but where are these set in their turn?

Surely, by a consideration of how consumers value some other final good to which such materials could have been devoted, as expressed in the market by the price at which that good sells now – or that at which it is entrepreneurially expected to sell in the near future, if it is a wholly new product.

Thus, we come back to another imputation, only one now running down a different, parallel chain of valuation (possibly a ‘virtual’ or counterfactual one).
Indeed, this is what the entrepreneurial process of discovery is all about, is it not – the teasing out and exploitation of an alternative network of inputs, intermediate products, and final goods which is forecast to render more reward to those who divert existing means to this other end?

What we are doing, then, when we value something, is not simply running unidirectionally from one finished good to some particular intermediate stage in its creation (‘back in time’, from its final sale, we might say) and stopping there, but rather we are moving down, across, up, down, across, up and so on through a multitude of imputational iterations which are effectively being performed, at each and every stage of the productive sequence, by those in the market on not just one, but simultaneously on the whole series of both complementary and competitive chains of production.

A (very) loose analogy here might be with the quantum physical ‘Many Worlds’ hypothesis of a perpetually branching ‘multiverse’ in which each observation (each purchase?) ‘decides’ between an infinity of separate realities, the sum of these potential futures being reflected back in the mathematical probability (the price?) of finding a given quantum entity (a good?) in a certain state or location (bearing a certain value?).

This degree of complexity is, of course, yet more proof of the folly of collectivist planning and yet another argument for facilitating the work of those agents of evolution and discovery, the entrepreneurs as they continually improve the material quality of our lives through their incessant, profit-seeking attempts at identifying more remunerative combinations of goods and services from among the myriad possibilities on offer.

Thus, what we have is not a cost floor as such, but rather a ‘solution’ to (really, a best entrepreneurial guess at solving) a series of profusely-branching imputations from all the other consumer goods to whose production some of the inputs of the good in question could have contributed.