In this video clip, I will describe the basic economics functions of any society: production and consumption, their inputs and their outputs. More specifically, I will introduce the definitions of concepts that we will be using in this course – concepts such as goods, products, wealth, and welfare. I will also refer to the ideal content of all products and their physical or material form. Finally, I will talk about natural resources or the natural environment.
Let us see what are the most essential processes in the life of any human society. In order for us to isolate these processes or functions, we need to use abstraction. We need to ignore the specific institutional configuration of a particular society and think of those functions without which that society would just not be workable. A good way to do this is to imagine that all individuals making up this society are pulling together, that there are no conflicts of interest among them, that they all help each other and share a common purpose. In fact, obviously, human societies as we can observe them are always more complex, and there are all sorts of conflicts going on among individuals. But at this point, let’s pretend society is like a big harmonious family. We will later on look at how conflicts of interest arise.Any human society, regardless of its specific institutional configuration, has to make things such as food, and – if it is a culturally developed society – many others things: clothes, shelter, etc. The making of these things we call production. And their use to meet human needs and wants, we call consumption. These two activities are the most basic economic activities any society has to perform if it is to survive and thrive. The boxes in this chart represent those two basic activities.Let us examine more carefully each of these activities in turn. In specifically human societies, making goods requires the utilization of certain inputs. In this chart, the inputs are indicated by arrows that point into the boxes. The most essential of all inputs of production is, of course, ourselves as the producers. We refer to this input as labor power (or, more commonly, as labor). It is better to use the term labor power, when we refer to the human capacity to work and hence to produce. Labor is human activity, and because it is human, it is a purposeful activity. Then labor (purposeful activity) regulates and guides the process of production, the process of making goods. And to use the term labor when we refer to the activity of working. This notion that humans engage the world purposefully is essential in economics. As we will see later, many of the usual assumptions that economists make when studying our economic behavior is simply an extension of this notion of labor – meaning purposeful human activity, activity oriented towards materializing an idea, towards implementing a purpose, a goal, a design, or an end. I will come back to this.Now producing, a process guided by labor, consists basically of taking nature or chunks of it and transforming them to make things that conform to our purpose, idea, or design. We make things conform to our designs so that those things are fit to satisfy our needs or wants. So, a second and also absolutely essential input of production, is nature or natural resources or the natural environment. The classical economists, the founders of economics, used the term land to refer to nature or the natural environment. Every now and then, I may use the term land. By that, you should understand pristine nature as a whole, the natural environment after we subtract human society.Specifically human societies utilize not only labor (our bear hands) and nature to make things that fit our needs. We also use the products of previous production processes as instruments, tools, or means of producing other things. For example, nowadays, we use flour to produce pizzas, and flour has to be produced from wheat, etc. We also use ovens to produce pizzas and ovens have to be manufactured. They do not fall from the sky. We use all sorts of machines and materials to produce cars, machines, materials, and computers. And we use computers to produce cars, machines, materials, and other computers. Etc. Those products of previous processes of production that we use as means of production of new products, we call them precisely means of production. In macroeconomics, you’ve probably encountered the distinction between means of production that are consumed within a given period of time (for instance, one year), and we call those means of production “intermediate goods”, items such as the flour that is used to produce bread, and means of production that are used over several periods of time (e.g. over several years), like the oven used to produce bread over many years, and these items are often called “capital goods”. Accountants may refer to them as “fixed assets”. In any case, these are means of production or – to be more precise – these are produced means of production. We call them produced means of production, because natural resources (land) are also means of production, but they are not products – they are not produced. They exist out there and all we need to do is appropriate them.I should say here that the natural environment (land) is absolutely essential for our survival as a species. We breath the oxygen in the air, drink the water available, use to a large extent the motive force, the energy that comes from the sun and that nature on earth has processed in many ways. We are a part of nature, but a part of nature with awareness, with consciousness, with the ability to self-reflect. We operate in and on nature as a natural force. Nature is even inside of ourselves, as there are biological processes that are essential for the physical structures that make up our bodies to exist. Let us now consider the outputs of production. We already mentioned that some of the things that we produce (we call them products) are means of producing other goods – means of production. But there is another very important output – we produce goods that are fit for use or consumption. We call them “consumption goods”. They are an output from production and an input to consumption. That’s what we consume or use to sustain our lives.Finally, there is a third output of production: waste, refuse, garbage, pollution, chemicals that we can’t use any longer and dump in the natural environment, heat from our activity that dissipates into the atmosphere, etc. Let’s move on now to the consumption box. Consumption, again, is using or consuming the goods – the process of meeting our individual needs or wants. So the input of consumption is, as I already said, the consumption goods that we produce. So, we take those goods made in the production box and we consume them here. What are the outputs? Well, for one thing, when we consume, when we eat, rest, etc., we are producing ourselves as producers. Our ability to work, our labor power, resides in our bodies and our bodies need to be fed, etc. Our ability to work, our labor power is not only physical capacities, but also mental abilities. So we need to read books, go to school, feed our brains, so to speak. That process of consumption is production of us as individual producers, as workers. But is that really it? Are we just working machines endowed with awareness? Is there anything else we pursue? I don’t think I can answer that question confidently, but I’ve added here the term welfare to refer to that, whatever goal may be, that us as a society may pursue. Please note that this is a simplification. It may entirely be the case that, as a society, all we want is to be more powerful and effective producers. So, in that case, welfare means producing ourselves as better workers, as better producers. So, the whole point is consuming to produce more and better labor power. The welfare arrow and the labor power arrow are then the same. But since I don’t know, I’m leaving that as an open question and using two arrows instead. What specifically do we mean by welfare? Well, economists do not really have anything specific to say about it. Welfare is some sense or measure of wellbeing. For the sake of simplification, we may call it happiness, or satisfaction, or even pleasure. Clearly, when people are happy, they are satisfied, and they experience pleasure. Now, some psychologists will be more carefully than me and distinguish between pleasure, which is a momentary feeling almost directly related to some bodily function; and satisfaction, which is a pleasurable feeling that results after a certain exertion, like when a football player escapes the grip of his adversaries and scores a touch down; and happiness, which is a prolonged sense of satisfaction resulting from a conduct that is ethical, that results from doing the right thing more or less consistently. Economists leave those distinctions to other specialists.To finish with consumption, let me say that a final output here is waste, garbage, pollution. Clearly, when we travel for pleasure, we go on a vacation, take a cruise to the Bahamas, etc., we are consuming, replenishing our energy, recharging our batteries, etc. But we are also polluting, generating garbage, etc. Note also that waste bites us back. It becomes an input of both production and consumption. That is the case when toxic substances make it into our products, either accidentally or as a result of some business people deliberately cutting corners at the expense of consumers. And clearly, when we take a walk in the park, we suffer the pollution in the air, etc. So, waste sneaks back into our basic processes as an undesirable but present nonetheless input to production and consumption.I should say, before I move to the next slide, that this diagram is an extreme simplification, and that some things could have been arranged differently. But I also believe this is a good description of these basic functions or processes in the life of a society.
Let’s rivet a few definitions here:Production is making goods. Consuming is using those goods. What are goods then? Well, this is a very loose definition. Goods are whatever we humans may regard as good, whatever enhances our welfare. Consequently, bads (negative goods) are those items that reduce our welfare.The stock of goods that exist at a given point in time, we call wealth. We have to distinguish between the goods that we produce over a period of time and the wealth that exists at a point in time. For a clarification of the distinction between stocks and flows, see the corresponding video clip.Finally, welfare is human wellbeing.
To recap:The inputs of production are natural resources (T for Terrum, land in Latin), produced means of production (K), both capital and intermediate goods, and labor power (L). And, of course, waste.The outputs of production are our products: consumption goods (CG), produced means of production (K), and waste.
The inputs of consumption are consumption goods and, unfortunately, waste.The outputs of consumption are ourselves, individual human beings (our labor power and, if we are to keep these things separate, our welfare). Another output of consumption is, of course, waste.
We should distinguish between goods and products. Products are the outputs of production. We produce the products. We produce some goods. Those goods that we produce are, therefore, both goods and products. A computer that we use for work or entertainment is a good and it’s a product. Computers don’t fall from the sky. But there are also some goods that we don’t produce. For example, the oxygen in the air. Pristine water in the Alaskan wilderness, the stars in the sky, natural resources in general. They are goods, yet they are not products. Now, some of our products are bads. They are, for the most part, unintended products. But they are our products. For example, we produce garbage, which is a bad.Our diagram simplifies matters. In reality, in some cases, production and consumption coincide in time. For example, when people are transported, when we get haircuts, etc. The production of the haircut or the production of the mechanical transportation of a person coincides with the process of individual consumption. In that case, the production and consumption boxes would overlap.In the other slide, we have the natural resources arrow plugged to the production box. But we also use natural resources in individual consumption. So we could have added an arrow from natural resources (T) to the consumption box.
Now let me make some notes here.Welfare and labor power results from consumption – but also from production (or, if you prefer, only from consumption, but including the consumption that coincides in time with production). I could add here that there’s a fourth output of production. You see, when the human producer gets into the production box, that is a different human being than when she emerges out of that box. Many things happen as humans produce. They learn how to produce, for one. They also get tired, exhausted, perhaps even psychologically depressed. It all depends on the conditions in the workplace, etc. Maybe that is a human being who has befriended her coworkers and emerges out of that box an enriched and empowered human being. Or maybe it’s a lousy workplace with a despotic boss and grumpy coworkers, and she emerges out of that box depressed and with suicidal tendencies. So, although I’m getting ahead of myself here, I’ll say that I could have added an arrow stemming from production labeled “welfare” (which can be positive welfare or negative welfare). Furthermore, I could have added another arrow and connected it to the line on top – labor power, since, again, it is entirely possible that as we produce, we learn how to produce more and better, and so we become better producers, our labor power is thus produced, by producing! But I decided that I didn’t want to do that, because (and this is just a convention I’m introducing here) I decided that when people produce and learn and get happy or grumpy, they are in fact consuming. So that should go more into the consumption box.A sustainable interaction with the rest of nature is increasingly a necessary product we need to produce. In the last few decades, it’s become increasingly clear that human activities disrupt the natural cycles in our planet, including the climate. Our relationship with the rest of nature is a very complex process. We cannot easily regulate or control the overall impact of our social life in the rest of nature. So we have to be particularly careful, because the forces that we unleash can backfire on us. We are all familiar with the changes in the planet’s climate, with global warming, which is attributed to certain gases that we emit into the atmosphere that creates a greenhouse effect on the planet and trap the heat, which then disrupts our weather patterns. This phenomenon has the potential to cause great damage to human societies, especially those that do not have the resources and technology to face these weather disruptions. That is why I say that, increasingly, more by omission than by action, but we need to deliberately produce a sustainable relationship with the rest of nature. That has to be a purpose and we then have to produce it, just like we develop blueprints to build houses and then we go ahead and build houses in accordance with those blueprints.Finally, you will read in economics textbooks, your textbook included, that economics exists because goods, resources, labor, etc. are scarce. In terms of the diagram and the discussion we’ve had here, “scarcity” (of goods, resources, etc.) simply means that our productive power is finite, that we do not have an infinite productivity. And indeed, because we don’t have infinite productivity, then we must make choices and take actions under the constraint imposed by such finite productivity.
I will finish this video clip with two very general definitions a propos of what I just mentioned: The concept of productivity, a measure of how effective we are in using the inputs of production. It is measured as the ratio of the amount of output produced per unit of input utilized. For example, labor productivity is equal to the goods produced (the product) divided by the amount of labor power utilized (which can be used in hours of labor time, number of workers, etc.).A related concept, in fact the reciprocal of productivity is cost, which is the ratio of the amount of input utilized to the amount of output produced. It tells you how many units of input we need to use to produce one unit of output. For example: If we use two workers over a two hour period to produce a clean kitchen, then the productivity is 1 kitchen/4 labor hours = ¼ of a kitchen per hour of labor. The cost of producing one clean kitchen is 4 labor hours/1 kitchen = 4 hours of labor per kitchen.
Basic economic functions or activities of any human society
Topics<br />Basic economic functions of a human society<br />Production and consumption; their inputs and outputs<br />Goods (bads), products, wealth, and welfare<br />Ideal content (technology) and physical form of all products<br />The natural environment (natural resources)<br />
Definitions<br />Production: making of goods<br />Consumption: use of goods<br />Goods: Whatever humans regard as good, whatever enhances welfare<br />Products: The outputs of production (good or bad)<br />Bads: Negative goods<br />Wealth: stock of goods at a point in time<br />Output: flow of products over a period of time<br />Welfare: human wellbeing<br />
Definitions<br />Inputs of production: <br />Natural resources (T)<br />Produced means of production (K)<br />Capital goods<br />Intermediate goods<br />Labor power (L)<br />Waste<br />Outputs of production:<br />Consumption goods (CG)<br />Produced means of production (K)<br />Waste<br />
Definitions<br />Inputs of consumption: <br />Consumption goods<br />Waste<br />Outputs of consumption: <br />Individual human beings<br />Labor power (L)<br />Welfare<br />Waste<br />
Notes<br />Not all goods are products (e.g. natural resources are goods, but not products)<br />Not all products are goods (e.g. waste is a product and bad)<br />In some cases, production and consumption coincide in time (e.g. transportation, haircuts, etc.)<br />T is an input of consumption as well<br />All products are ideal in content and material (or physical) in form<br />The ideal content of goods is called technology<br />Technologyis like a cooking recipe: lists of ingredients (i.e. inputs: T, K, L) and describes how to mix them up to produce a given product<br />
Notes<br />Welfare and labor power results from consumption – but also from production (or, if you prefer, only from consumption, but including the consumption that coincides in time with production)<br />A sustainable interaction with the rest of nature is increasingly a necessary product we need to produce<br />“Scarcity” (of goods, resources, etc.) means simply that our productive power is finite<br />
Productivity and cost<br />Productivity = output/input<br />Cost = input/output<br />Example: 2 workers x 2 hours of labor to produce 1 clean kitchen<br />Productivity = ¼ kitchen/hour of labor<br />Cost = 4 hours of labor/kitchen<br />