Chapter 33 Chapter IV Investment and Distribution of Funds

The first section determines the motives for investing in the case where someone produces for himself and uses for himself.Balance between future gratification and present gratification. The first difficulty which must be elucidated in our study of normal value concerns the nature of the motives governing investments for future returns.Let us first observe the conduct of a man who neither buys what he needs nor sells what he produces, but only labors for himself; On the other hand is the satisfaction which he can expect from these labors and sacrifices, without any participation in monetary rewards.

Let us, then, take this example: A man builds a house for himself, using land and building materials which nature has bestowed upon him; when he starts work, he makes his own tools, and the labor of making the tools is counted as the cost of building the house. part of labor.He is bound to calculate the labor required to build according to a given plan; and almost instinctively add a geometrically proportional (a kind of compound interest) increase in the time elapsed from various labors to the completion of the house.When completed, its usefulness to him will not only compensate him for his various labors, but also for his waiting.

If the two motives (the one of dread and the other of impatience) seem to be evenly matched, then he is in a state of indecision.In some parts of the house his benefit may be much greater than the "real" cost of his employment.But as he turns more and more to larger projects, he finds at last that the benefits of any enlargement are outweighed by the toil and sacrifice it requires; and that enlargement is at the outer limit of his investment. , or its margin of profit. There may be several ways of constructing the various parts of the house; for example, some parts may be made of both wood and stone, with nearly equal masses.Investing in the various parts of the house according to various designs is to be compared with the advantages it affords, and each investment is pushed down to its outer limits or margins of advantage.Thus, there may be many favorable margins: each of which is consistent with providing various designs of houses.

The second section is the accumulation of past income and expenditure and the discount of future income and expenditure.Difficulty distinguishing between current and capital expenditures. The foregoing illustrations may teach us that the labor and sacrifice which are the real cost of production of something are the basis of those expenses which are its money cost.But, as has been said, the modern entrepreneur generally pays in money, whether for wages or raw materials; it is never questioned how exactly these money payments are the measure of labor and sacrifice.His funds are generally spent bit by bit.The longer the benefit of any expenditure is expected, the greater will be the benefit to compensate him.And the expected profit may not be guaranteed; in this case, he must also consider the risk of loss.After discretion, the income from this expenditure must exceed the expenditure itself, and the excess amount will not be transferred from his own compensation, but will increase according to the proportion of compound interest and the time he waits.To this heading must be added the enormous direct and indirect costs which each enterprise must incur in establishing its commercial relations.

For simplicity, we may call any element of expenditure (including the entrepreneur's own remuneration) plus compound interest the cumulative element.Just as we use the term discount to express the present value of future satisfaction.Therefore, various elements of expenditure must be accumulated during the period from when it is used to when it earns income.The total of these cumulative factors is the total expenditure of the enterprise.Labors of all kinds and the satisfactions they produce may be settled to any day we see fit.But no matter which day is chosen, a simple rule must be followed: every element, whether labor or satisfaction, from before that day must have the compound interest of this period added to it.And every element from that day forward must have compound interest from that element during this period.If that is the day before the business opens, the various elements must be discounted to present value.But if that day, as is often the case on these occasions, is the day when the labor is finished and the house is finished, the labor must have compound interest up to that day, and the satisfaction must all be reduced to that day's present value.

Waiting is an element of cost as real as labor is, and when accumulated it is included in cost: it is therefore of course not counted separately.Likewise, conversely, the proceeds of money or disposition of satisfaction at any period are an integral part of the period's income: if that period is before the settlement date, it must be accumulated to that date; day later, it must be discounted to the present value of that day.If it is not used for immediate enjoyment, but is saved for future income, this income can never be regarded as additional return on investment. If, for example, the enterprise undertakes the project of excavating a dock, it pays for it as soon as it is completed; The total expenditure accumulated up to the payment period is exactly equal to this amount, and the enterprise is just capitalized.

But sales proceeds come in gradually as usual; we have to draw up a forward-looking balance sheet.Looking backwards, we should add up the various net expenditures and add in the cumulative compounding of the various elements of expenditure.Going forward, we should add up the various net incomes and subtract its deferred compounding from each value.The total net income converted in this way must be equal to the total accumulated expenditure; if the two are exactly equal, the enterprise just has enough capital.When calculating expenditure, the person in charge of the enterprise must take into account the value of his own labor.

Section 3 The margin of advantage on which the principle of substitution operates is not a point on any route, but a line tangent to all routes. At the beginning of his undertaking, and at all subsequent stages, the astute entrepreneur seeks to modify his plan in order to obtain a greater result with a certain outlay, or an equal result with a lesser outlay.In other words, in order to increase his profit, he is constantly employing the principle of substitution; and in so doing, he always increases the overall efficiency of his work, and increases man's ability to control nature by organization and knowledge.

Each place has its own peculiarities, and these influence in different ways the method of organization of the various kinds of commerce carried on there: The methods will not be identical either.The tendency to difference is a major cause of progress; and the more able the entrepreneur in any industry, the stronger this tendency will be.In certain trades, such as the spinning of cotton, the possible differences are confined to a very narrow range; and no man can gain a foothold without the use of machinery, and machinery of nearly the latest type, in each part of his work.But in some sectors of other industries such as lumber and hardware, and agriculture and retailing, there are big differences.For example, among two firms operating in the same industry, one firm may pay more wage bills, while the other firm pays more for machinery; among two retailers, one retailer is overstocked The capital of one retailer is larger, while the other retailer spends more money on advertising and the immaterial capital of establishing a profitable business relationship.As for the differences in details, there are countless.

Each man's actions are influenced as much by his character and associations as by his particular opportunities and funds; So far, he thinks, as if the outer limit or margin of profit had been reached; that is, until there was no good reason in his opinion to believe that the benefits of further investment in that particular line would justify his expenditure.The margin of profit, even for the same branch or branch of industry, is not to be regarded as the only point on any fixed line of possible investments; boundaries. The fourth section compares resource allocation in family economy and enterprise economy.

This principle of substitution is intimately connected with, and indeed in part is based on, the tendency, according to common experience, of diminishing returns from the excessive use of resources or energy in some direction.It is thus connected with the general tendency in classical economics of diminishing returns from increasing investment in the land of earlier developed countries, which plays an important role.The principle of substitution is so similar to the principle of diminishing marginal utility generally caused by increased expenditure that some applications of the two principles are almost identical.As has already been said, new methods of production create new commodities, or lower the prices of old commodities, so that a larger number of consumers can afford them.On the other hand, changes in the method and quantity of consumption bring about new developments in production and new distributions of production funds.Production and consumption are closely related, though some of the methods of consumption which are most conducive to the noble life of man contribute little, if any, to the production of material wealth.But what we have to consider now is how the distribution of the funds of production among the various branches of industry reflects the distribution of consumer purchases among the various kinds of goods. Let us take another look at the primitive housewife, who "has a limited amount of wool from the wool sheared this year, and she considers the various needs of the family in terms of clothing, and tries to distribute the wool among these needs." to contribute as much as possible to the happiness of the family. If, after the division, she had reason to regret that she had not used more wool for socks and less wool for waistcoats, she would have considered her a failure. But on the contrary, If she uses it well, she makes just so many socks and waistcoats that she gets an equal profit from the last strand of yarn for the socks and for the waistcoat."If there are two ways of making a waistcoat, both of which are equally satisfactory as far as the result is concerned, but one of which uses a little more wool than the other, and causes trouble less; then her problems would become a model for those of the larger corporate world.These questions involve three kinds of decisions: first, decisions about the relative importance of different ends; second, decisions about the relative advantages of the various means to achieve each end; Fundamental, the marginal decision by which she can best use the various means for the various ends. Entrepreneurs must make these three types of decisions on a larger scale, and before making each decision, he has to repeatedly weigh and adjust in many ways.Take the construction industry as an example.Let us look at the work of the "speculative builder" properly understood: that is to say, he is a man who, in anticipation of general demand, engages in the construction of real houses; If his judgment is correct, he benefits as well as society.Suppose he is considering whether to build a dwelling, or a warehouse, factory, or store.He was able to give both a good opinion of the method of work most suitable for each type of building, and a rough estimate of its cost.He estimates the cost of the various foundations suitable for each class of building: and he counts as part of his capital expenditure the price which he must pay for any foundation, just as he includes the cost of laying foundations, etc. among them.He compares this cost estimate with an estimate of the price he can get for the building and its foundations.If he finds no occasion in which the demanded price exceeds his outlay sufficiently to afford him a reasonable profit, compensating the risk, he may not proceed to work.Or, in order to retain his most dependable workmen, and to keep his plant and helpers employed, he may perhaps start building at some risk: but this will be discussed more later on. Suppose he now decides that a certain type of villa built on a piece of land he can buy will afford him a reasonable profit.Having thus decided the end to be chiefly sought, he begins to study carefully the means by which it may be attained, while considering possible modifications in the details of his design. Having ascertained the general nature of the house to be built, he will have to consider the proportions in which the various materials of construction, brick, stone, steel, cement, mortar, and timber, etc., will be employed in order to receive a return commensurate with its cost. The ratio best enhances the efficiency of the home in satisfying the artistic taste of the buyer and their comfort.In thus determining the best distribution of his means among the various commodities, he is dealing with essentially the same problem as that of the primitive housewife, who must consider the most economical distribution of her wool among the various commodities. Various needs of the whole family. Like her, he had to think that the benefits accruing from any particular use were relatively large up to a certain point, and then gradually diminished.Like her, he must allocate his funds so that their various uses have the same marginal utility: he must compare the loss of a little cut here with the benefit of a little more there.In fact they followed the same lines as those which direct the farmer, in ordering him to invest his capital and labor in the land without restricting it to that extra cultivation which would afford a rich return, or without Danger of strong effects in agriculture of trends of diminishing returns due to overinvestment. Thus, as said above, it is the astute entrepreneur who "invests his capital in every line of his enterprise until, in his opinion, the outer limit or margin of profit appears to be reached; that is, until it appears to him until there is no good reason to believe that the benefits of further investment in that particular line would justify his expenditure".He never believed that a roundabout approach was ultimately beneficial.But he is always on the lookout for some roundabout method that will produce a greater (relative to its cost) effect than the direct method.He employs the best of them, if he can. Section V. The distinction between direct and supplementary costs varies according to the length of the enterprise in question: this difference is the main reason why we have difficulty in studying the relationship between marginal cost and value. There are a few terms about cost that can be discussed here.When an entrepreneur invests in a business of some kind, he expects to be compensated in the prices of the various products of the business; he expects to charge a sufficient price for each of these products under normal circumstances. ; that is to say, this price will not only compensate special, direct, or principal costs, but will also share its share of the general expenses of the industry; and these expenses we may call its general or supplementary costs. .The primary and supplementary costs are combined to form its total cost. The use of the term prime cost in businesses is highly inconsistent, but it is used in a narrow sense here.Supplementary costs include the maintenance of those machinery plants into which the capital of the business has been invested, and the salaries of the officers.Because this kind of salary expenditure of enterprises generally cannot quickly adapt to changes in their workload.In addition, only the (money) cost of the raw materials used in the production of the commodity and the hourly or piece-rate wages for that part of the labor used and the (money) cost of the additional wear and tear of the machinery and equipment remain.This is a special cost which the manufacturer takes into account when he calculates the minimum price when his factory is partially in operation and when business is light; this minimum price makes him feel worth accepting a certain order, regardless of the damage his action may do to the market for future orders. any impact that may occur.But in fact he must generally take account of this effect; for the price which makes him think it worthwhile to produce, even when commerce is light, is in fact generally much higher than this principal cost, as we shall see hereafter. like that. The sixth section continues. In the short run, supplementary costs generally have to be covered to a large extent by the selling price.And in the long run the full compensation must be made; for otherwise production would be reduced.Supplementary costs are of many different kinds, some of which differ from primary costs only in degree.For example, if a machine shop is hesitating whether to make a locomotive at a rather low price, the absolute principal costs include the value of the raw materials and the wages of the mechanics and workmen who make the locomotive.But there are no clear guidelines for salaried employees.Because if the work is not busy, they may have some spare time; so their salary is usually included in the general or supplementary costs.But the boundaries are often blurred.Foremen and reliable mechanics, for example, are not often dismissed simply because work is temporarily out of stock.Therefore, even if the price of an occasional order does not compensate their wages, it will be accepted in order to keep them occupied.That said, they cannot be considered major costs in this case.However, the staff in the office can of course be adjusted to a certain extent with the changes in the work of the factory. The method is not to increase the number of people when the production tasks are not busy, or even reduce some incompetent people; or entrust part of the work to others. If we move from these tasks to larger and more time-consuming tasks such as the fulfillment of a contract for the gradual delivery of many locomotives over a period of several years, then most of the administrative work associated with the order must be regarded as its own peculiar work: For if the order had not been taken and no other order had taken its place, there would have been almost a corresponding reduction in this charge under the salaries of the administrative staff. The above illustrations stand out when we consider a fairly stable market for any major manufactured product over a long period of time.For in that case the expenditure required for the provision of specialized skills and organization, as well as for the permanent administrative staff and the permanent equipment of the workshop, may be regarded as a necessary part of the cost of the production process.That expenditure will be increased up to a certain margin at which this branch of industry seems in danger of growing too fast for its market. The next chapter will continue to discuss the arguments in Chapter 3 and this chapter.It will be shown in more detail how those costs which most affect supply, and hence price, are confined in narrow and arbitrary spheres in the case of a locomotive; , they are much wider in scope and more consistent with the general characteristics of industrial economies: the effect of production costs on values ​​is not appreciable except over a relatively long period of time; Calculated with respect to a particular locomotive or a particular group of cargo.As to the nature of those principal and supplementary costs which consist of interest (or profit) on investments in the means of production, which vary according to the length of the market period in question, a similar study will be made in Chapters VIII to X. At the same time it may be pointed out that the distinction between primary and supplementary costs exists in every stage of civilization, although it probably does not attract widespread attention except in the capitalist stage.Robinson Crusoe is concerned only with real costs and real gratifications: in much the same way the buy-and-sell old-fashioned farmer employs present "work and wait" for future gains.But if they are both wondering whether it is worthwhile to use a ladder when going out to pick wild berries, then only the main costs and the expected benefits are to be compared.It will not be manufactured unless the service it is expected to render in the sum of many small works is sufficient to cover the cost of its production.In the long run it must cover its total costs, primary and supplementary. Even the modern employer must first regard his own labor as a real cost.Although he thinks that some kind of enterprise can probably provide a surplus of monetary income over monetary expenditure (after appropriate allowance for risk and discounting for future surprises); The monetary equivalent of the labor employed, and on such occasions he would shun the enterprise.