Economics Dictionary of ArgumentsHome
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| Factor Market: In economics, the factor market refers to the marketplace where factors of production (land, labor, capital, and entrepreneurship) are bought and sold. Businesses purchase these factors to produce goods and services, while households supply them. Factor markets determine the prices of inputs, such as wages for labor and interest rates for capital. See also Factors of production, Production theory, Production structure._____________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 Factor Market - Dictionary of Arguments
Rothbard III Factor Market/Rothbard: Every capitalist will attempt to employ a factor (or rather, the service of a factor) at the price that will be at least less than its discounted marginal value product. >Factors of production/Rothbard. The marginal value product is the monetary revenue that may be attributed, or “imputed,” to one service unit of the factor. >Marginal product/Rothbard. It is the “marginal” value product, because the supply of the factor is in discrete units. This MVP (marginal value product) is discounted by the social rate of time preference, i.e., by the going rate of interest. Suppose, for example, that a unit of a factor (say a day’s worth of a certain acre of land or a day’s worth of the effort of a certain laborer) will, imputably, produce for the firm a product one year from now that will be sold for 20 gold ounces. Marginal value product: The MVP of this factor is 20 ounces. But this is a future good. The present value of the future good, and it is this present value that is now being purchased, will be equal to the MVP discounted by the going rate of interest. If the rate of interest is 5 percent, then the discounted MVP will be equal to 19 ounces. To the employer (…) then, the maximum amount that the factor unit is now worth is 19 ounces. The capitalist will be willing to buy this factor at any price up to 19 ounces. Market: Now suppose that the capitalist owner or owners of one firm pay for this factor 15 ounces per unit. (…) this means that the capitalist earns a pure profit of four ounces per unit, since he reaps 19 ounces from the final sale. Rothbard III 457 (He obtains 20 ounces on final sale, but one ounce is the result of his time preference and waiting and is not pure profit; 19 ounces is the present value of his final sale.) But, seeing this happen, other entrepreneurs will leap into the breach to reap these profits. These capitalists will have to bid the factor away from the first capitalist and thus pay more than 15 ounces, say 17 ounces. Discounted marginal value product: This process continues until the factor earns its full DMVP (discounted marginal value product), and no pure profits remain. Evenly Rotating Economy: The result is that in the ERE every isolable factor will earn its DMVP, and this will be its price. >Evenly Rotating Economy. Pure profit: It is clear that if the marginal value of a specific unit of factor service can be isolated and determined, then the forces of competition on the market will result in making its price equal to its DMVP in the ERE. Any price higher than the discounted marginal value product of a factor service will not long be paid by a capitalist; any price lower will be raised by the competitive actions of entrepreneurs bidding away these factors through offers of higher prices. These actions will lead, in the former case to the disappearance of losses, in the latter, to the disappearance of pure profit, at which time the ERE is reached. Rothbard III 458 Factors: It is (…) the nonspecific factors that are directly isolable; a specific factor is isolable if it is the only specific factor in the combination, in which case its price is the difference between the price of the product and the sum of the prices of the nonspecific factors. But by what process does the market isolate and determine the share (the MVP of a certain unit of a factor) of income yielded from production? Let us refer back to the basic law of utility. >Utility/Rothbard. What will be the marginal value of a unit of any good? It will be equal to the individual’s valuation of the end that must remain unattained should this unit be removed. >Value/Rothbard. Rothbard III 463 Business: It is now clear why the temptation in factor-price analysis is for the firm to consider that factor prices are given externally to itself and that it simply varies its production in accordance with these prices. However, from an analytic standpoint, it should be evident that the array of MVPs as a whole is the determining factor, and the lowest-ranking process in terms of MVP will, through the medium of factor prices, transmit its message, so to speak, to the various firms, each of which will use the factor to such an extent that its DMVP will be brought into alignment with its price. But the ultimate determining factor is the DMVP schedule, not the factor price. In short, the prices of productive factors are determined as follows: Where a factor is isolable, its price will tend toward its discounted marginal value product and will equal its DMVP in the ERE. A factor will be isolable where it is nonspecific, i.e., is useful in more than one productive process, or where it is the only specific factor in a process. The nonspecific factor’s price will be set equal to its DMVP as determined by its general DMVP schedule: the full possible array of DMVPs, given various units of supply of the factor in the economy. >Marginal product/Rothbard, >Marginal utility/Rothbard. Rothbard III 560 Factor Market/Rothbard: What if the supply of capital remained the same, while the supply of labor or land factors changed? Thus, suppose that, with the same capital structure, population increases, thus expanding the total supply of labor factors. The result will be a general fall in the MVP (marginal value product) of labor and a rise in the MVP of land factors. This rise will cause formerly submarginal, no-rent lands to earn rent and to enter into cultivation by the new labor supply. Land/Ricardo: This is the process particularly emphasized by Ricardo: population pressing on the land supply. The tendency for the MVP of labor to drop, however, may well be offset by a rise in the MPP (marginal physical product) schedules of labor, since a rise in population will permit a greater utilization of the advantages of specialization and the division of labor. The constant supply of capital would have to be reoriented to the changed conditions, but the constant amount of money capital will then be more physically productive. Hence, there will be an offsetting tendency for the MVPs of labor to rise._____________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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