Man must rearrange various elements of his environment to eventually produce a desired end - a good. This is called production.
For example, man decides to satisfy the want for a ham sandwich, and proceeds to act upon his judgment of the methods by which a ham sandwich can be assembled. The consumers good is the ham sandwich when it is eaten. It is obvious that there is a scarcity of this consumers’ good as there is for all direct means (bread, ham, time, etc.); otherwise it would always be available, like air, and would not be the object of action.
Factors of Production
To produce a ham sandwich for the man in his armchair, it is necessary for his wife to expend energy in unwrapping the bread, slicing the ham, placing the ham between bread slices, and carrying it to Jones. All this work may be called the labor of the housewife. The co-operating factors that are directly necessary to arrive at the consumers’ good are, then: the housewife’s labor, bread in the kitchen, ham in the kitchen, and a knife to slice the ham. Also needed is the land on which to have room to live and carry on these activities. Furthermore, this process must, of course, take time, which is another indispensable co-operating factor. The above factors may be called first-order producers' goods, since, in this case, these co-operate in the production of the consumers' good. Many of the first-order producers’ goods, however, are also unavailable in nature and must be produced themselves, with the help of other producers' goods. Thus, bread in the kitchen must be produced with the co-operation of the following factors: bread-in-shop and housewife's labor in carrying it (plus the ever-present land-as-standing-room, and time). In this procedure, these factors are second-order producers' goods, since they co-operate in producing first-order goods. Higher-order factors are those co-operating in the production of factors of lower order.
Production may be therefore analyzed as occurring in different stages. In the earlier or "higher" stages, producers' goods must be produced that will later co-operate in producing other producers' goods that will finally co-operate in producing the desired consumers' good. In a developed economy, the structure of production of a given consumers' good might be very complex and involve numerous stages.
- each stage of production takes Time
- there are two classes of factors of production:
To improve production, time and capital must be spent, both of which cannot be spent to produce consumer goods. Production has to switch from one form to another.
At any given time, the individuals in society are engaged in production to meet some "level" of consumption needs. To enter more lengthy and more productive processes, some individuals must have refrained from consumption in the past so that other individuals can create this new structure, during which they cannot produce — and thus, not consume — consumption goods with the methods of the old structure.
Structure of production
An economic system can be analyzed with a horizontal or vertical cross-section through it. A horizontal cross-section would show different industry branches or lines, according to their final result, the consumption goods: the food industry, including agriculture, the clothing industry, the media industry, etc. Industries which produce producer's goods - say, iron and steel - belong simultaneously to different branches in this horizontal sense, because iron and steel are used in the production of many consumer's goods. It has been said, that a general overproduction is unthinkable, that we can never have too much of all goods, because human wants are insatiable, but that serious disruptions can develop in consequence of a partial overproduction. This statement relates to the horizontal structure of production, the appropriate proportion of productive resources devoted to different branches of industry has been disturbed. For example, the automobile industry is overdeveloped, that more capital and labor has been invested in this industry than is justified by the comparative demand for this product and for other industrial products.
A vertical cross-section can be made through an economic system, if we follow every finished good, ready for consumption, up through the different phases of production and note how many stages a particular good has to pass through before it reaches the final consumer. Take, for example a pair of shoes. The path leads from the retailer via the wholesale merchant to the shoe factory; and, taking up one of the different threads which come together at this point, say, a sewing machine used for the fabrication of shoes, we are led to the machine industry, the steel plant, and eventually to the coal and iron mine. If we follow another strand, it leads us to the farm which bred the cattle from which the leather was taken. And besides, there are many intermediate stages interpolated between these major phases of the productive process, namely, the various transportation services. Every good has to pass through many successive stages of preparation before the finishing touches are applied and it reaches the final consumer. It takes a considerable length of time to follow one particular piece through this whole process, from the source of this stream to the mouth where it flows out and disappears in the bottomless sea of consumption. But, when the whole process is completed and every one of the successive stages is properly equipped with fixed and circulating capital, we may expect a continuous flow of consumer's goods.
In these successive stages of production is the capital stock of a country, which has been accumulated during centuries. In a rich country the stream is very long, and goods have to pass through many stages before they reach the consumer. In a poor country this stream is much shorter, and the volume of output correspondingly smaller. If, during a time of economic progress, capital is accumulated and invested, new stages of production are added, or, in other words, the process of production is lengthened, it becomes more roundabout.
Production and Creation
Production is not an act of creation; it does not bring about something that did not exist before. It is a transformation of given elements through arrangement and combination. The producer is not a creator. Man is creative only in thinking and in the realm of imagination. In the world of external phenomena he is only a transformer. All that he can accomplish is to combine the means available in such a way that according to the laws of nature the result aimed at is bound to emerge.
Production is not something physical, material, and external; it is a spiritual and intellectual phenomenon. Its essential requisites are not human labor and external natural forces and things, but the decision of the mind to use these factors as means for the attainment of ends. What produces the product are not toil and trouble in themselves, but the fact that the toiling is guided by reason. The human mind alone has the power to remove uneasiness.
- Murray N. Rothbard. "Man, Economy and State, Further Implications: The Means, online edition, referenced 2009-05-13.
- Dan Mahoney. "Austrian Business Cycle Theory: A Brief Explanation" from Mises Daily, Monday, May 07, 2001, referenced 2009-10-28.
- Gottfried Haberler. "The Austrian Theory of the Trade Cycle and other essays", "Money and the Business Cycle", p.44-51, referenced 2009-10-28.
- Ludwig von Mises. "4. Production", Chapter VII. Action within the world, Human Action, online edition, referenced 2009-05-13.