On Longer Production Processes

Economics Economics Questions
1

Can somebody explain to me why longer processes tend to be more productive? Is it simply because, all things being equal, it is more costly due to interest payments than an equivalent shorter process, and if that longer process was selected, it must have been because it was foreseen to be particularly profitable and therefore productive?

Here are some thoughts on this matter. First, suppose Crusoe uses sticks to collect berries and replaces his stick once it wears out, a process which takes him 1 day. But then he finds a cache of sticks on a steep hill, such that to go there, grab a stick, and come back takes 1 hour. Unfortunately, climbing the hill is too much for Crusoe. So, we see that not all shorter processes are in use.

Second, isn’t it often possible to initiate a more productive and at the same time shorter process with the help of new technology? What if it’s the same process yet the costs of, say, labor have gone down (e.g., Crusoe gets healthier due to all the manual work he had to do and capable of climbing the hill readily)? Won’t it be more productive yet take the same amount of time?

Third, time is just one factor of production. Why not say that if a particular process has expensive labor, it will be undertaken only if it is sufficiently productive to offset the extra costs? What’s so special about time? Why do we not say: “more labor-costly processes tend to be more productive”? Or: “processes which use more and more expensive natural resources tend to be more productive”? Or don’t we?

Fourth, is the idea that you can do more work in more time, and therefore, given more time, a product further away from the final consumer good than any other can be advanced to that final stage?

Fifth, do we mean that in order to get a society more amply supplied with consumer goods it is generally necessary to lengthen the production structure? But, again, why?

Sixth, suppose process A takes 1 week to produce its consumer goods. Process B is just like A but is preceded by a 3 week diversion of digging ditches and filling them back up. Surely, B is less productive than A, and yet it is longer. What’s going on here?

Gene Callahan writes that “It is not always true that the only available method of increasing production is to adopt more roundabout methods. Perhaps a shorter route to some goal just has not been imagined yet. … But historically, the constant agitation of humans to improve their circumstances is such that most of the opportunities to increase productivity lie in the adoption of more roundabout processes. Humans are adept at spotting the direct route to a goal in the first place.” (Economics for Real People, 134) But I’m not sure that his brief explanation is all that helpful.

2

When you say longer, I believe you mean more factors of productions, meaning there are larger numbers of capital goods being used between the transformation of nature into a consumer’s good. In your above example, you have not really changed the number of factors of production. You have simply changed the naturally provided goods. If nature is better suited toward creating capital goods than nature plus labor, there is no sense to disregarding naturally provided goods and instead using labor to produce the same thing.

In your example, however, the already good sticks are not part of nature for Crusoe, because he does not have access to them. Now, if he created a hiking stick or special shoes or whatever he needed to reach them, then we could say he has increased his production, but through this process, he has increased his factors of production as well.

But even considering nature provides good sticks 1 hour away and raw sticks immediately. If Crusoe can develop capital goods to transform the raw sticks into good sticks in less than 1 hour, he increases production, although the breadth of the capital goods required to do so is immense. Thus, the time preference would probably be too great to overcome. Crusoe will most likely choose to remain decently fed with current levels of production, then to go hungry for 30 years building a stick widdling factory, after which he can eat only slightly more fully.

Is this technology being created directly from land and labor? If there are capital goods going into making that technology, then the factors of production for the consumer goods that that technology produces also includes the capital goods that were required to make it.

There is a huge difference between the price of a product and production. Productivity is measured based upon how successfully and quickly we make goods that others desire. Following the laws of supply and demand, profit is maximized through pricing. Profit is the attempt to measure efficiency of the production process. It compares the cost of factors of production to the total cost to consumers. Overproducing will end up spending more on labor than is necessary to maximize profit. Thus, productivity is determined by efficiency. I’m not sure what your point is about time…

I’m not exactly sure what you are saying again…but given two firms that produce the same amount and quality of the same goods, the firm that produces it most quickly will succeed over the other. We could consider it more productive. But generally, more production factors ensure lower production times, in going from completely raw materials provided by nature to consumer goods. This requires time preference for building those extra capital goods however.

Consider a factory; it may take 30 times as long to build than to build the good it will produce by hand. However, once built, the factory produces that good at 60 times the rate, ensuring longer productivity over time.

3

No, by a “longer” process I mean one that takes more time to complete from start to finish, including the time it took to build the capital goods used in that process.

It seems that the answer is that more time devoted to setting up a production process allows you to build more sophisticated capital goods, such as machines, which increase the efficiency of your business and more than offset the interest you pay or more than compensate having to postpone present consumption. Although it is possible that a short process will be discovered of building some capital good and raising productivity, as Callahan writes, that would be a rare occurrence.

Of course, having more time does not entail using is wisely. Hence, the solution to “sixth.”

The question is whether the same reasoning works with other factors. Add relatively more productive labor input into your process, and perhaps you can also increase efficiency, despite the extra costs. After all, all the production processes that use more primitive labor skillsets have been discovered. Of course, labor’s productivity is mostly determined by the quality and amount of capital invested, not the other way around. And so does land’s productivity; how well it is exploited depends on the tools used in that process.

So, maybe time is unique in this way.

4

I don’t think “roundabout” means “requiring more time” but rather “requiring more capital and intermediate steps before final production”. Adam Smith’s pin factory churning out pins is using a more “roundabout” method than a single pinmaker slaving away, but can produce quite a few more pins in the same (or even less) time.

5

According to Callahan, at least, “Eugen von Böhm-Bawerk… attributed the bulk of increases in productivity to the adoption of more time-consuming, or roundabout, methods of production.” (131ff) And Mises: “As acting man prefers those processes which, other things being equal, produce the products in the shortest time, only such processes are left for further action which consume more time. People embark upon these more time-consuming processes because they value the increment in satisfaction expected more highly than the disadvantage of waiting longer for their fruits.” (Human Action, 481) No, it is time that costs money, along with labor and land; the actual number of intermediate steps is next to irrelevant. If it takes 10 years to transform good A 10 times down to the final consumer good, and it takes 1 year similarly to transform good B 100 times, then the process involving A is more roundabout than the process involving B. “Roundabout” may be synonymous with “circuitous,” but I think it does mean “requiring more time.”

As for your example, we have to take into account the time it took to build the pin factory. As de Soto writes, “So although when we visit the factory we see a finished vehicle emerge every minute, we must not deceive ourselves by thinking the production process of each car lasts one minute. Instead we should be aware that each car calls for a process of production lasting several years, a process comprised of numerous stages, beginning when the model is conceived and designed and ending when the car is presented to its proud owner as a consumer good.” (Money, Bank Credit, and Economic Cycles, 278) The illusion arises because “There are two ways to consider the stages in our outline: we can regard them as consecutive, as the set of productive stages which must be gone through before arriving at the final consumer good after five years (the diachronic point of view); or can we view them as simultaneous, as a ‘photograph’ of the stages taking place at one time in the same financial year (the synchronic point of view).” (294)

6

Perhaps it’s not that longer processes tend to be more productive, but that more productive processes tend to take longer? For the former I think we can come up with lots of examples against (for example by adding a “dig ditch” step and a “refill ditch” step to all production processes). The latter seems to be a more accurate formulation, given Mises’ observation that human’s default preference is for the shortest process. It’s also difficult (at least for me) to think of many examples against it, i.e. instances in which a more productive process takes a shorter amount of time than the human default process (especially factoring in the time required to build the capital goods required for any intermediate steps).

7

Both seem to be true.

  1. Longer processes tend to be more productive, if we assume that entrepreneurs tend to profit despite higher interest outlays. Again, mixing labor with natural resources or higher-order capital goods in order to advance them down to the final consumer goods or having the goods mature on their own (e.g., wine) takes time. The more time you have, (1) the more labor productivity-increasing these goods must needs be; and (2) the greater the amount of labor that can be mixed in a step-by-step fashion which makes it possible to produce such goods (which will probably be more complex purely from the engineering perspective). Otherwise, no entrepreneur will bother investing. Profits due to higher productivity of labor have to outweigh the extra interest payments (in terms of money; or, in Crusoe’s case, the psychic profit of more berries a week from now and for as long as the stick lasts have to outweigh the psychic cost of lessening present consumption while the stick is being built.) It is true that digging and refilling ditches will make a process longer, but that’s why we say that longer processes tend to be more productive, given the human desire to not waste production time.

To put it simply, longer processes are more expensive to set up. Hence they had better be more productive. That’s why I wondered why the same thing can’t be said about labor: a process requiring more labor or land is more expensive, so had it, analogously, better be more productive?

  1. More productive processes (producing either much more of the same thing or things that were completely impossible to produce in shorter time intervals) tend to take longer, because there is an incentive to utilize all the feasible shorter processes first, other things being equal: this way the waiting time will be as low as possible. I add “feasible,” because there can always be a short process that, for example, is hugely expensive in terms of the original factors, such as labor (e.g., Crusoe’s climbing a hill), and for that reason is eliminated from consideration.

Again, simply put, there is a desire to get results as soon as possible, so it is likely that all the shorter processes have been perfected, and any increase in business efficiency must therefore require more time-consuming (and therefore more productive for reasons outlined in (1)) production processes. Of course, that’s not the only way of boosting efficiency but one such way.

8

In other words, we have to see why time is a factor of production. There is a general relation that the more labor-saving you want your machine to be, the more time you have to spend constructing it. There is, of course, no precise equation connecting physical productivity of a machine and the time invested into building it, but a general proportion still holds. Otherwise there is no explanation for our phenomenon.

Final thought for tonight: Finding an equally good shorter process will mean disinvestment with the same revenues and therefore greater profit. The problem arises if no way of profitably disinvesting can be found. Then only longer processes remain to be considered. Q.E.D.?

9

I read over the section of Human Action that you quoted, and I found a potential answer to your original question (i.e. “Can somebody explain to me why longer processes tend to be more productive?”) on p. 481-2:

“Bohm-Bawerk speaks of the higher productivity of roundabout ways of production requiring more time. It is more appropriate to speak of the higher physical productivity of production processes requiring more time.The higher productivity of these processes does not always consist in the fact that they produce–with the same quantity of factors of production expended–a greater quantity of products. More often it consists in the fact that they produce products which could not be produced at all in shorter periods of production.”

10

I think Mises addresses this question (why time is a factor of production) in Human Action p. 514:

“The higher productivity of more time-consuming roundabout methods of production which is referred to by Bohm-Bawerk and by some later economists in the explanation of interest, does not explain the phenomenon [of originary interest]. It is, on the contrary, the phenomenon of originary interest that explains why less time-consuming methods of production are resorted to in spite of the fact that more time-consuming methods would render a higher output per unit of input.”

11

It’s a result of the division of labour.

When is the caveman better of, if he tries to hunt with teeth and nails or diverts some time away from hunting to manufacture a stone axe or a bow? Now, if we agree that he is better off with a bow, what happens whe we are talking about many cavemen and some bowmakers who make bows 10 hours a day (division of labour!), when are they better off, if they try to make bows without any help or is it a better idea if they divert some of their time away from bowmaking to making some useful tools? And if it’s a better idea to make some tools, when we are talking about toolmakers who make tools 10 hours a day… you get the idea, I think :slight_smile:

12

If every laborer added the same additional amount of production, we will quickly find a cut-off point for labor. Employers will always hire at the lowest wage for some quality of labor first, simply because he chooses in order the least costly means to acheive his wants. Naturally, each additional laborer will be more expensive per unit of output than the one before him. At some point, each additional laborer will decrease profits, which is how I believe we should be measuring productivity. Otherwise, we are consuming resources that society values to produce things that society values less. In other words, “over-production” in one area of the economy forces “under-production” in another. When resources are balanced to maximize profits throughout society, productivity is maximized throughout society.

Rather, longer processes that exist tend to reduce overall labor and land costs. For example, let’s say a primitive silver mint wastes .3% of the silver for every coin that is made. Creating better capital goods to waste only .1% of the silver may require more labor but ultimately less land, which may prove more profitable in the long-run. Likewise, labor costs going towards capital goods that reduce future labor costs tend to be longer, while reducing overall labor costs.

This all assumes that time preference allows reduced present consumption for increased future consumption. If this does not exist in the first place, nothing would happen. If it is revealed that the process will not allow increase future consumption, it will be abandoned.

13

Longer processes need not be more productive. For example, you can obtain longer processes by wasting time doing nothing.

But waiting is a cost, so a longer process which is less productive than, or even as productive as, a shorter process is a praxeological non-sense. Someone would wait more to achieve the same thing he had achieved sooner by other means.

It is theoretically possible that people enjoying a particular process or wanting to waste time do choose a less productive longer process, but in this case they are getting a psychic revenue from other sources, i.e., subjective preferences not linked to the production structure. I.e., they are playing. That’s nothing wrong with it, but most of the time on the market you won’t see this behaviour.