Economics of the Free Society by Wilhelm Röpke

Author:Wilhelm Röpke [Wilhelm Röpke]
Language: eng
Format: epub
ISBN: 978-1-61016-127-5
Publisher: Henry Regnery Company
Published: 1963-11-06T16:00:00+00:00

5. The Combination of the Factors of Production

Under present conditions, it is usual to find the three factors of production combined with one another in every type of production. What is of especial significance in this connection is the fact that it is possible, in considerable degree, to substitute one factor of production for another (substitution of the factors of production). Agriculture, for example, can be carried on by combining a given area of land with little labor and capital (extensive agriculture) or with much labor and capital (intensive agriculture). Labor and capital, in turn, may be substituted for one another; there are many tasks which we may choose to entrust either to manual labor or to the machine. Every housewife who buys a washing machine substitutes capital for labor. Careful reflection on her part is required before deciding whether she should or should not make such a purchase. Two motives can influence her decision, one of which has already engaged our attention. We found that the purchase of a machine is warranted only insofar as there exist sufficient opportunities for its use. In calculating whether her laundry is regularly of a sufficient quantity to require the full use of a washing machine, the housewife is unconsciously employing a general principle of great significance designated commonly as the law of mass production. Using our household laundry as example we may explain this law as follows. The costs of using a washing machine fall into two large groups: the costs which increase or diminish with the amount of laundry (electricity, water, attention required, soap) and those which are given once for all as a fixed amount (interest and amortization on the washing machine). The more clothes there are to wash (the mass or amount of production) the smaller will be the costs of laundering per piece of laundry since the fixed costs are distributed over a greater number of production units.12 The last piece of laundry is thus the cheapest to do as the last passenger to board a train is, from the point of view of the railroad, the cheapest to transport. Hence the dominant consideration in purchasing a washing machine is that the household regularly furnish a sufficient amount of soiled laundry. To artificially soil the laundry for this purpose, as a kind of harmless family sport, would hardly be the ideal of good housekeeping. It would be well if this point could be driven home to those numerous individuals who strive by equally artificial means to extend the system of mass production throughout the economy.

In deciding whether to buy a washing machine, our housewife will be guided by still another consideration—the relation between the prices of the two factors of production. Where labor is less costly as compared to capital (i.e., where wages are low and interest rates high), the washing machine would prove uneconomical. Where these conditions are reversed, it will pay to use such a machine. This explains why in America many more machines are used—in

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