Factors of Production: Convertibility and Valuation

Factors of production are valued in accordance with their anticipated contribution in the eventual production of consumers’ goods. Factors, however, differ in the degree of their specifity, i.e., the variety of consumers’ goods in the production of which they can be of service. Certain goods are completely specific—are useful in producing only one consumers’ good. Thus, when, in past ages, extracts from the mandrake weed were considered useful in healing ills, the mandrake weed was a completely specific factor of production—it was useful purely for this purpose. When the ideas of people changed, and the mandrake was considered worthless, the weed lost its value completely. Other producers’ goods may be relatively nonspecific and capable of being used in a wide variety of employments. They could never be perfectly nonspecific—equally useful in all production of consumers’ goods—for in that case they would be general conditions of welfare available in unlimited abundance for all purposes. There would be no need to economize them. Scarce factors, however, including the relatively nonspecific ones, must be employed in their most urgent uses. Just as a supply of consumers’ goods will go first toward satisfying the most urgent wants, then to the next most urgent wants, etc., so a supply of factors will be allocated by actors first to the most urgent uses in producing consumers’ goods, then to the next most urgent uses, etc. The loss of a unit of a supply of a factor will entail the loss of the least urgent of the presently satisfied uses.