The Basics of Production
Consumption and Production
Suddenly Odysseus was caught in a huge wave which tumbled him head over heels. The next thing he knew, he found himself washed up on the shore of an island, planted face-first in beach sand. He could barely move. He lifted up his head up and saw the glowing sandaled feet of Athena.
“What is wrong now, Odysseus? What is your felt uneasiness?”
“So weak. So hungry.”
“Lift your head more.”
He saw a broken coconut shell with a little bit of meat just to the left of his face.
“What action are you considering?” Athena asked.
“Get back strength! Survive!”
“Well then, dig in!”
Crusoe planted his face into the coconut and gobbled up all the meat.
“How are you now?” Athena asked.
“Still hungry, still weak!”
“Look to the right.”
Odysseus turned his head and saw another coconut right there. But this one was whole and unbroken. He dropped his head onto the coconut, smashing his face against the shell. The impact rolled him over onto his back. He saw Athena standing over him, with the hot sun blazing behind her helmet.
“You are still recovering from your brain injury. Odysseus, the exposed coconut meat you ate before was useful for consumption, which means use for directly pursuing your ends. That means it was a special kind of a means called a consumption good; you were able to consume it. But you cannot eat an unbroken coconut. I’m sorry, but you cannot use an unbroken coconut to directly pursue your goals of regaining strength and not starving.”
“Then I’ll die!”
“No, you need not die. You many not now have a consumption good. But you can create one! Creating goods is called production. The unbroken coconut can still save you, because you can use it to produce exposed coconut meat. That way, you can use it to pursue your ends indirectly. That makes it a special kind of a means called a production good or a factor of production.”
“How do I use it to produce?”
“You need to combine it with another factor. One factor is never enough for production. What can you use to turn an unbroken coconut into a broken one?”
“Yes, the use of your hands, or any other part of your body or mind to produce is called work or labor. Labor is a very important factor of production. So go ahead: combine your labor with the unbroken coconut to create a broken coconut.”
Odysseus grabbed the coconut and tried desperately to tear it apart. But the shell was too tough.
“I cannot!” he cried, “I’m going to starve after all!”
“Not necessarily. You tried combining two factors to produce a coconut meal, and that failed. Maybe it will help if you add a third factor?”
“Like some kind of tool?” Odysseus looked around, found a rock and grabbed it.
“Yes,” said Athena, “maybe those three factors — your labor, the rock, and the unbroken coconut — combined together can produce your meal.”
Odysseus smashed the coconut over and over with the rock, but it simply wouldn’t bust open.
“It’s no use. Now, I’ll surely die!”
“Now just wait. There is still another production trick I have to show you. Maybe you need a better factor? Like a sharper rock?”
“But I don’t see any sharp rocks.”
“Yes, but you can make one. Production goods can themselves be produced too! Manmade production goods are called capital goods.”
“So using my body is a factor called labor. Factors that I make are called capital goods. What about factors that aren’t part of me, and that I didn’t make?”
“Those factors are called land. For example, the coconut is considered land, and the ground you are working on is land. Now quick, find three factors to produce a sharp rock.”
Odysseus found a clamshell (factor 1) used it and his labor (factor 2) to knock flakes off the dull rock (factor 3) to make a sharpened rock.
He held the sharpened rock aloft. “I did it! I produced.”
“Yes, and the thing that you produced is called your product. Now use it to produce again!”
Odysseus then used his sharpened rock (factor 1) and his labor (factor 2) to cut into the unbroken coconut (factor 3) to finally produce his coconut meal (product). He was then finally able to consume. He would live another day.
While he was eating, Athena taught him a little more. “The coconut meal you have in your hands can satisfy your ends in one step. What is that one step?”
“Just eating it.”
“Yes. Since it’s only one step away from your goal, it is called a first order good. How many steps away from consumption were the unbroken coconut, the sharpened rock, and your work chopping into the coconut?”
“Two steps. Chopping, then eating.”
“Then those are called second order goods.
“So second order goods produce first order goods?”
“Yes. What then were the third order goods?”
“The clamshell, the dull rock, and my sharpening labor. They were three steps way from lunch, so they’re third order. Third order makes second, second order makes first, and first order makes… nom!”
“Exactly. And second order is called a higher order of production than first, and third order is called a higher order than second, and so on.”
“Thanks, but all I care about is “nom” part right now,” Odysseus said, as he continued to chow down.
Saving and Investment
After his coconut meal, Odysseus fell into a long, deep sleep. When he awoke, he was ravenously hungry again. He looked around, grabbed the first coconut he saw, and cleaved it open with his sharp rock.
“Wait, Odyssues,” said Athena.
“Consider your options for economizing that coconut.”
“What else can I do with it besides eat it?”
“Look at the top of that tree.”
“If you throw the coconut in your hands at the top of the tree, you can knock down another coconut.”
“That sounds nice. But I want to eat it now! And if I throw it, I have to wait several seconds before it comes back down.”
“My dear Odysseus, your brain is still injured. Remember, every action with has a cost: a sacrifice you make for something more important. Yes, if you throw it, you do give up the chance to eat it sooner. But you gain the chance to eat twice as much later.”
“And what do I give up if I eat it now?”
“If you eat the meat of the coconut, it will be too light to use to knock down other coconuts.”
Odysseus, painfully struggling to think clearly, grabs his head. “I still don’t understand.”
“You have a choice. You can consume the coconut now, or you can choose not to consume it, and instead use it for something else. Whenever you don’t consume something that you could consume, that is called saving. You could save the coconut.”
“Save it for what?”
“Save it for production. Instead of using the coconut as a consumption good, you could use it as a factor. By throwing it at the tree, you can produce one more coconut. Whenever you dedicate something toward production, that is called investment. If you save the coconut from consumption, you can invest it in production.”
“Save, so I can invest…”
“And invest, so you can produce.”
“And produce, so I can consume more!”
“Yes, more, but later. You will have to wait. That is your sacrifice.”
“One coconut now, or two coconuts later?”
Keep in mind, with two coconuts, you might have enough food to last you until you find another source. With only one coconut, you might starve.”
“Well that makes it an easy choice!” Odysseus cries. He then hurls the coconut at the tree, knocking down another coconut.
He quickly eats the coconut that had already opened and thrown. Before he can eat the other one, Athena warns him, “Don’t forget about the future.”
“Oh right,” Odysseus said. He lifted up the coconut, and took aim at tree again.
“Wait Odysseus. You are still being too short-sighted.”
“How can that be? I’m saving and investing!”
“Yes, but if you sacrifice even more, you will gain even more, and make your future even more secure.”
“What do you mean?”
“Try to peel the shell off that coconut.”
He did, and to his amazement, the layers of the shell started to peel off in long, tough strings.
“These must be some kind of magic coconuts!”
“They are, actually. If you pull off a few layers of the shell, you can create another capital good: a sling. And you can use the sling to throw the coconut with much more force than with your bare hands, and knock down ten coconuts.
“But the sling will take ten minutes of labor to make, and then one minute to use.”
“Waiting a few seconds was one thing. But now I have to go hungry for eleven minutes?!”
“Yes, that will be your cost, your sacrifice.”
“Well, it’s not worth it. I can already produce two coconuts for every one minute of labor, just by throwing with my bare hands. In ten minutes, even without the sling, I could produce 22 coconuts, which is more than ten.”
“Yes, but once the sling is made, you can use it over and over again. It will take 11 minutes to get your first batch of coconuts. But then after that, you will be able to produce one hundred coconuts after only ten minutes of labor.”
“Wow, that’s fast!”
“It’s not just “fast,” it’s more productive. When you get more for what you give, that means higher productivity.”
“So using a sling is more productive than using my bare hands.”
“Exactly. With the sling, your productivity is ten coconuts per minute of labor. With your bare hands, your productivity is only two coconuts per minute of labor.”
“That sounds great!” So Odysseus produced the sling, and went to work knocking down coconuts from all the trees on the beach, taking a break to eat one once in a while.
Soon, he was sitting on the sand, surrounded by a thousand coconuts.
“I feel… so different.”
“How is that?”
"I was so scared before. I'm still worried about running out of food. But it's not as bad anymore. I know at least I’ll survive a while longer.”
“You are feeling what is called prosperity. You are able to achieve more of your ends, including especially the goal of security. And that is because you have more wealth: goods that you can use to achieve those ends. How did you achieve that wealth?”
“By increasing my productivity.”
“How did you do that?”
“By creating a capital good.”
“How did you do that?”
“By investing: dedicating my coconut to production.”
“And what allowed you to do that?”
“Saving: not consuming as many coconuts as I could have until later.”
“From saving to investing to capital to productivity to wealth to prosperity.”
“That’s a great path; a great line.”
“Oh, but it’s not just a line. It’s a circle.”
“What do you mean?”
“The end connects to the beginning. From great wealth can come great savings. Look around you. What can you do with all these coconuts? You could have a massive feast with some of them.”
“Well I couldn’t eat them all.”
“Yes, but there are other kinds of consumption: any kind of enjoyment that uses up resources is consumption. You could smash some with a stick, just for kicks, and see how far into the ocean you can throw them. If you used up most of your coconuts doing that kind of thing, then you’d have to keep using your sling to keep from starving. But if you don’t use them up in consumption when you could have, that is still saving.”
“What would I be saving them for?”
“To eat later. With a thousand coconuts, you could take a long break from using your sling and still not starve. During that time, you could be working on other projects instead. You could increase your coconut productivity even further by building even better coconut launchers. Or you can develop other sources of food, like farming. Or you can pursue entirely different goals, like making clothes, building a house: maybe even building another boat to sail home. As long as you’re careful to always save some of what you produce, and to invest it in more production, you can accomplish more and more of your goals, and be further and further away from disaster.”
“Yes, this is all making sense now.”
“You still have much to learn.”
“Is my brain still injured?”
“No, you have completely recovered. But there are some lessons that even the sanest and wisest of humans have not learned.”
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