Economics Dictionary of ArgumentsHome
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| Marginal product: In economics, marginal product refers to the additional output produced by adding one more unit of a specific input (e.g., labor or capital) while keeping other inputs constant. It helps assess the efficiency of resource use and is key in understanding diminishing returns, where each additional input contributes less to total output. See also Returns to scale, Input-Output Analysis._____________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 Marginal Product - Dictionary of Arguments
Rothbard III 453 Marginal Product/factors of production/Rothbard: The currently fashionable account of this subject hinges on the fixity or variability in the proportions of the combined factors used per unit of product. >Factors of production/Rothbard. Rothbard: If the factors can be combined only in certain fixed proportions to produce a given quantity of product, it is alleged, then there can be no determinate price; if the proportions of the factors can be varied to produce a given result, then the pricing of each factor can be isolated and determined. Let us examine this contention. Suppose that a product worth 20 gold ounces is produced by three factors, each one purely specific to this production. Suppose that the proportions are variable, so that a product worth 20 gold ounces can be produced either by four units of factor A, five units of factor B, and three units of factor C, or by six units of A, four units of B, and two units of C. How will this help the economist to say anything more about the pricing of these factors than that it will be determined by bargaining? The prices will still be determined by bargaining, and it is obvious that the variability in the proportions of the factors does not aid us in any determination of the specific value or share of each particular product. Since each factor is purely specific, there is no way we can analytically ascertain how a price for a factor is obtained. RothbardVs: The fallacious emphasis on variability of proportion as the basis for factor pricing in the current literature is a result of the prevailing method of analysis. A typical single firm is considered, with its selling prices and prices of factors given. Then, the proportions of the factors are assumed to be variable. Rothbard III 454 It can be shown, accordingly, that if the price of factor A increases compared to B, the firm will use less of A and more of B in producing its product. From this, demand curves for each factor are deduced, and the pricing of each factor established. The fallacies of this approach are numerous. The chief error is that of basing a causal explanation of factor pricing on the assumption of given factor prices. On the contrary, we cannot explain factor prices while assuming them as given from the very beginning of the analysis.(1) Solution/Rothbard: The one technological conclusion that we know purely from praxeology is the law of returns, (…). According to the law of returns, there is an optimum of proportions of factors, given other factors, in the production of any given product. This optimum may be the only proportion at which the good can be produced, or it may be one of many proportions. The former is the case of fixed proportions, the latter of variable proportions. >Praxeology. Rothbard III 456 The key question, in fact, is not variability, but specificity of factors.(2) >Factor Market/Rothbard. Rothbard III 466 Marginal value product: What, (…) determines the position and shape of the MVP (marginal value product) schedule? What is the marginal value product? It is the amount of revenue intake attributable to a unit of a factor. >Factor market/Rothbard, >Marginal product/Rothbard. And this revenue depends on two elements: (1) the physical product produced and (2) the price of that product. If one hour of factor X is estimated by the market to produce a value of 20 gold ounces, this might be because one hour produces 20 units of the physical product, which are sold at a price of one gold ounce per unit. Or the same MVP might result from the production of 10 units of the product, sold at two gold ounces per unit, etc. In short, the marginal value product of a factor service unit is equal to its marginal physical product times the price of that product.(3) Marginal physical product (MPP): (…) [what are] the determinants of the marginal physical product (MPP). In the first place, there can be no general schedule for the MPP as there is for the MVP, for the simple reason that physical units of various goods are not comparable. How can a dozen eggs, a pound of butter, and a house be compared in physical terms? Yet the same factor might be useful in the production of any of these goods. There can be an MPP schedule, therefore, only in particular terms, i.e., in terms of each particular production process in which the factor can be engaged. For each production process there will be for the factor a marginal physical production schedule of a certain shape. The MPP for a supply in that process is the amount of the physical product imputable to one unit of that factor, i.e., the amount of the product that will be lost if one unit of the factor is removed. Rothbard III 467 If the supply of the factor in the process is increased by one unit, other factors remaining the same, then the MPP of the supply becomes the additional physical product that can be gained from the addition of the unit. The supply of the factor that is relevant for the MPP schedules is not the total supply in the society, but the supply in each process, since the MPP schedules are established for each process separately. >Returns to scale/Rothbard. Rothbard III 468 APP: = average physical product. What is the relationship between the APP and MPP? The MPP is the amount of physical product that will be produced with the addition of one unit of a factor, other factors being given. The APP is the ratio of the total product to the total quantity of the variable factor, other factors being given. Rothbard III 474 Factors of production: A factor will always be employed in a production process in such a way that it is in a region of declining APP and declining but positive MPP. >Factor market/Rothbard. Rothbard III 475 Discounted marginal value product/DMVP/Rothbard: The price of a unit of any factor will (… ) be established in the market as equal to its discounted marginal value product. This will be the DMVP as determined by the general schedule including all the various uses to which it can be put. Now the producers will employ the factor in such a way that its DMVP will be equalized among all the uses. If the DMVP in one use is greater than in another, then employers in the former line of production will be in a position to bid more for the factor and will use more of it until (according to the principle of diminishing MVP) the DMVP of the expanding use diminishes to the point at which it equals the increasing DMVP in the contracting use. The price of the factor will be set as equal to the general DMVP (…). 1. The mathematical bent toward replacing the concepts of cause and effect by mutual determination has contributed to the willingness to engage in circular reasoning. See Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” p. 236; and Kauder, “Intellectual and Political Roots of the Older Austrian School.” 2. This justifies the conclusion of Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. p. 336, as compared, for example, with the analysis in George J. Stigler’s Production and Distribution Theories. Mises adds the important proviso that if the factors have the same fixed proportions in all the processes for which they are nonspecific, then here too only bargaining can determine their prices. 3. This is not strictly true, but the technical error in the statement does not affect the causal analysis in the text. In fact, this argument is strengthened, for MVP actually equals MPP (marginal physical product) x "marginal revenue", and marginal revenue is always less than, or equal to, price._____________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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