Economics Dictionary of ArgumentsHome
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| Business: In economics, a business is an organization engaged in producing goods or providing services to generate profit. It operates within markets, utilizing resources like labor, capital, and technology, and can take various forms, such as sole proprietorships, partnerships, or corporations. Businesses drive economic activity, innovation, and job creation. See also Entrepreneurship, Economy._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Business - Dictionary of Arguments
Rothbard III 426 Business/Rothbard: In a jointly owned firm, instead of each individual capitalist’s making his own investments and making all his own investment and production decisions, various individuals pool their money capital in one organization, or business firm, and jointly make decisions on the investment of their joint savings. >Saving, >Investments, >Production/Rothbard, >Production structure/Rothbard. The firm then purchases the land, labor, and capital-goods factors, and later sells the product to consumers or to lower-order capitalists. >Market/Rothbard, >Factors of production/Rothbard, >Capital goods/Rothbard. Thus, the firm is the joint owner of the factor services and particularly of the product as it is produced and becomes ready for sale. The firm is the product-owner until the product is sold for money. Rothbard III 427 The individuals who contributed their saved capital to the firm are the joint owners, successively, of: (a) the initial money capital – the pooled savings, (b) the services of the factors, (c) the product of the factors, and (d) the money obtained from the sale of the product. Evenly Rotating Economy: In the evenly rotating economy, their ownership of assets follows this same step-by-step pattern, period after period, without change. In a jointly owned firm, in actual practice, the variety of productive assets owned by the firm is large. >Capital structure/Rothbard, >Evenly Rotating Economy/Rothbard. Production: Any one firm is usually engaged in various production processes, each one involving a different period of time, and is likely to be engaged in different stages of each process at any one particular time. A firm is likely to be producing so that ist output is continuous and so that it makes sales of new units of the product every day. It is obvious, then, that if the firm keeps continually in business, its operations at any one time will be a mixture of investment and sale of product. Its assets at any one time will be a mixture of cash about to be invested, factors just bought, hardly begun products, and money just received from the sale of products. The result is that, to the superficial, it looks as if the firm is an automatically continuing thing and as if the production is somehow timeless and instantaneous, ensuing immediately after the factor input. RothbardVs: Actually, of course, this idea is completely unfounded. There is no automatic continuity of investment and production. Production is continued because the owners are continually making decisions to proceed; if they did not think it profitable to do so, they could and do at any point alter, curtail, or totally cease operations and investments. And production takes time from initial investment to final product. >Time/Rothbard. Types of assets owned by any firm: Rothbard III 428 A. Money B. Productive Assets (Melange of factors, such as land and capital goods, embodying future services (…); various stages of product; the completed product.) On this entire package of assets, a monetary evaluation is placed by the market. Owners: On what principle do the individual owners mutually apportion their shares of the assets? It will almost always be the case that every individual is vitally interested in knowing his share of the joint assets, and consequently firms are established in such a way that the principle of apportionment is known to all the owners. Problem: (…) [here] there [is] no principle whereby any man’s share of ownership could be distinguished from that of anyone else. A whole group of people worked, contributed their land, etc., to the production process, and there [is] no way except simple bargaining by which the income from the sale of the product could be apportioned among them. >Loans/Rothbard, >Credit/Rothbard, >Interest rates/Rothbard. Rothbard III 601 Business/business income/Rothbard: (…) is there a function which owning businessmen perform, (…) beyond the advancing of capital or possible managerial work? The answer is that they do execute another function for which they cannot hire other factors. It goes beyond the simple capital-advancing function, (…). For want of a better term, it may be called the decision-makingfunction, or the ownership function. The decision-making factor is necessarily specific to each firm. We cannot call what it earns a wage because it can never be hired, and thus it does not earn an implicit wage. We may therefore call the income of this factor, the "rent of decision-making ability.“(1) Rothbard III 602 Granting that the "supramarginal" (i.e., the Iower-cost) firms in an industry are earning rents of decision-making ability for their owners, what of the "marginal" firms in the industry, the "high-cost" firms just barely in business? Are their owners earning rents of decision-making ability? Many economists have believed that these marginal firms earn no such income, just as they have believed that the marginal land earns zero rent. We have seen, however, that the marginal land earns some rent, even if "close to" zero. Similarly, the marginal firm earns some rent of decision-making ability. We can never say quantitatively how much it will be, only that it will be less than the corresponding "decision rents" of the supramarginal firms. Rothbard III 603 The belief that marginal firms earn no decision rents whatever seems to stem from two errors: (1) the assumption of mathematical continuity, so that successive points blend together; and (2) the assumption that "rent" is basically differential and therefore that the most inferior working land or firm must earn zero to establish the differential. We have seen, however, that rents are "absolute" - the earnings and marginal value products of factors. >Rent/Rothbard. There is no necessity, therefore, for the poorest factor to earn zero, as we can see when we realize that wages are a subdivision of rents and that there is clearly no one making a zero wage. And so neither does the marginal firm earn a decision rent of zero. Rothbard III 609 Vertical integration: Vertical integration occurs when a firm produces not only at one stage of production, but over two or more stages. For example, a firm becomes so large that it buys labor, land, and capital goods of the fifth order, then works on these capital goods, producing other capital goods of the fourth order. In another plant, it then works on the fourth-order capital goods until they become third-order capital goods. It then sells the third-order product. Vertical integration, of course, lengthens the production period for any firm, i.e., it lengthens the time before the firm can recoup its investment in the production process. The interest return then covers the time fort wo or more stages rather than one.(2) Rothbard III 612 External market: if there were no market for a product, and all of its exchanges were internal, there would be no way for a firm or for anyone else to determine a price for the good. A firm can estimate an implicit price when an external market exists; but when a market is absent, the good can have no price, whether implicit or explicit. Any figure could be only an arbitrary symbol. Not being able to calculate a price, the firm could not rationally allocate factors and resources from one stage to another. (…) complete vertical integration for a capital-good product can never be established on the free market (above the primitive level). For every capital good, there must be a definite market in which firms buy and sell that good. It is obvious that this economic law sets a definite maximum to the relative size of any particular firm on the free market.(3) >Coase theorem, >Free market/Rothbard. Because of this law, firms cannot merge or cartelize for complete vertical integration of stages or products. Because of this law, there can never be One Big Cartel over the whole economy or mergers until One Big Firm owns all the productive assets in the economy. The force of this law multiplies as the area of the economy increases and as islands of noncalculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc., become greater. Under one owner or one cartel for the whole productive system, there would be no possible areas of calculation at all, and therefore complete economic chaos would prevail.(4) Rothbard III 644 Business/size/Rothbard: We do not know, and economics cannot tell us, the optimum size of a firm in any given industry. The optimum size depends on the concrete technological conditions of each situation, as well as on the state of consumer demand in relation to the given supply ofvarious factors in this and in other industries. >Economy/Rothbard. Rothbard III 645 The large firm will be able to purchase heavily capitalized machinery and to finance better organized marketing and distributing outlets. All this is quite clear when thousands of individuals pool their capital into the establishment of a steel firm. But why may it not be equally true when several small steel firms merge into one large company? It might be replied that in the latter merger, particularly in the case of a cartel, joint action is taken, not to increase efficiency, but solely to increase income by restricting sales. Yet there is no way that an outside observer can distinguish between a “restrictive” and an efficiency-increasing operation. >Mergers/Rothbard, >Cartels/Rothbard. Rothbard III 646 Technology/investments: (…) technological factors in production can never be considered in a vacuum. Technological knowledge tells us of a whole host of alternatives that are open to us. But the crucial questions - in what to invest? how much? what production method to choose? - can be answered only by economic, i.e., by financial considerations. >Observation/Rothbard. 1. For an interesting contribution to the theory of business income, though not coinciding with the one presented here, see Harrod, “Theory of Profit” in Economic Essays, pp. 190–95. Also see Friedman, “Survey of the Empirical Evidence on Economies of Scale: Comment.” 2. Vertical integration, we might note, tends to reduce the demand for money (to “turn over” at various stages) and thereby to lower the purchasing power of the monetary unit. For the effect of vertical integration on the analysis of investment and the production structure, see Hayek, Prices and Production, 2nd ed. London: Routledge and Kegan Paul, 1935. Reprinted by Augustus M. Kelley, 1967. pp. 62–68. 3. On the size of a firm, see the challenging article by R.H. Coase, “The Nature of the Firm” in George J. Stigler and Kenneth E. Boulding, eds., Readings in Price Theory (Chicago: Richard D. Irwin, 1952), pp. 331–51. In an illuminating passage Coase pointed out that State “planning is imposed on industry, while firms arise voluntarily because they represent a more efficient method of organizing production. In a competitive system there is an ‘optimum’ amount of planning.” Ibid., p. 335 n. 4. Capital goods are stressed here because they are the product for which the calculability problem becomes important. Consumers’ goods per se are no problem, since there are always many consumers buying goods, and therefore consumers’ goods will always have a market._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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