2. The Supply of Factors of Production

Regarding the supply of factors of production, it must first be pointed out that it would be misguided to consider only the two originary factors of production, land and labor, and produced factors of production (capital goods), and to overlook the fact that in each of these three groups of factors of production very different supplies exist side by side. Even in considering the factor of labor, it is very clear that one should never speak of labor as such, but that labor services of varying quality exist. The same is true regarding nature. Here, land serves as the foremost aid in the production of agricultural products (as farmland), but also—particularly in considering urban development—as the standing room for residential housing and work places, and finally, as provider of all raw materials, natural sources of energy and transportation, etc. Since the problem of employing land and the formation of prices for its use does not interest us as a special problem, in the following discussion for the sake of simplicity we are only considering the employment of land as it is used agriculturally. However, even regarding land used for farming there is a great difference in quality. Finally, with respect to capital it is clear that in addition to the subsistence fund which can be viewed as free capital, there is a supply of very different kinds of produced factors of production; we will speak of this supply in particular later.

Here it is necessary to point out this generally known fact in order to first show that along with the question of the formation of the prices of factors of production there also arises the question of a variety of other prices. In some cases, different kinds of factors of production can be substituted for others without complications because a quantity of one equals a quantity of another in terms of productive services. In many cases, however, this substitution will take place with greater or lesser difficulties. Such a substitution—and it is important that one recognizes this from the very beginning—will also be possible between factors of production of different kinds, as the most simple example of substituting machines for human labor illustrates. For now, however, we will prefer to consider the supply of different kinds of factors of production in complete “isolation.” We will thus arrive at a large number of supply curves, each of which will be relatively restricted.

Regarding all of these supply curves, we will start with the assumption that each has the shape which we already chose as our point of departure in explaining the general law of prices, i.e., that the supply will be greater the higher the price is that can be obtained in the market. Naturally, it is of no importance here whether only a great increase in price effects an increase in supply, or whether this is already accomplished with a slight increase in price. Thus, the supply curve in the usual graphic presentation can approach a vertical as well as a horizontal shape. It is only a prerequisite that an increase in price cannot lead to a decrease in supply. We will have more to say about the justification for this assumption later.

As far as the supply of land is concerned, there are no difficulties. The supply curve will run horizontally, or almost horizontally with only a weak upward slope. The latter is the case insofar as individual land owners do not make their land available for production because prices are too low, and they instead prefer to hold their land in reserve. In contrast, as far as the supply of labor is concerned, under certain circumstances a falling supply curve is conceivable. It is possible, for example, that with increasing wages, laborers who have already reached their desired standard of living, or laborers who share in another’s income (housewives), refrain from additional work despite higher wages. For similar reasons—and this is perhaps even more important in practice—the labor supply can increase with falling wages: the laborers work more to maintain their previous standard of living; despite falling wages, laborers’ wives go to work if the family’s standard of living has become too low because of the husband’s reduced earnings. Such possibilities shall first be excluded from consideration. We will only later be able to see that in such cases there is always a situation which lies outside the scope of the static economy considered here. Let it, however, be pointed out that important social forces will tend to stratify the supply of individual labor so as to take on the form of an upward sloping supply curve. This can be understood easily if one considers the meaning of the individual units which compose the aggregate labor supply. Indeed, this supply curve is supposed to display the lowest wage that an individual laborer is prepared to accept as compensation for his work. When the laborer enters the labor market in order to sell his labor services, he wants to find the greatest possible return. Because the individual desperately needs such returns in order to support himself, in extreme cases a large majority of laborers will be prepared to go to work for very low wages. Yet, there will also be a number of laborers for whom this social pressure will be somewhat lower and who hence will only be prepared to take on the strain (“disutility”) of work for higher wages. This stratification of social pressure burdening individual workers to different degrees will apparently be highly varied. Let it be noted, for instance, that the head of the family will generally be under greater pressure and hence, will be prepared in the most extreme case to go to work for an even lower wage than the youth or independent laborer who can find support among relatives or who can find employment (at least occasionally) outside of the normal labor market. All sorts of motivations will play a role in shaping the supply of labor. Thus, occasionally the laborer who has some reserves will withhold his supply if the pressure on wages is increased. On the other hand, the laborer who desires to increase his savings will accept even drastically reduced wages to avoid drawing down his reserves. Yet even among individual laborers, the desire to maintain a traditional minimum wage will assume different importance, and in particular—again depending on the degree of social pressure borne by each individual—an acceptance of lowered wages will occur sooner or later for different individuals. The argument we have presented here which shows a “stratification” of the labor supply shall be the center of the following “static analysis” of the labor supply. The great social significance of such stratification for those providing labor services is clear. With sinking wages, those laborers will first give up work for whom supplying labor is least “urgent,” who are only prepared to work for a higher wage, while he who is subject to more severe social pressure and hence is willing to work for a lower wage will remain employed. On the other hand, with an increased demand for labor, the necessity of attracting workers who were only prepared to work for a higher wage will also raise the wage for the other suppliers of labor. This all holds true for each individual group of laborers. However, insofar as a sharp increase in demand also requires the attraction of laborers from different groups and thus must take account of entirely different supply curves, in this case, too, an expansion of the supply of labor will only be possible by increasing wages. This applies to attracting laborers from different occupations and geographically separated labor markets, insofar as in both cases there was previously no smooth communication. Generally, it can probably be assumed that in practice the supply curve of labor is shaped such that after an increase from a very low level over a relatively long period, it runs almost horizontally in order to then slope upwards steeply. We will base our considerations initially on the assumption that the supply curve of labor has this form.

Regarding the supply of capital, let nothing further be said here. It is clear that with respect to the supply of capital goods, the issue of the supply of products as an already “derived” supply will have to be taken into consideration.