For lecture videos, readings, and other class materials, you can sign up for this independent study course at academy.mises.org

1. Production & the
Market Process
Robert P. Murphy
Mises Academy
August 17, 2011
Lecture 5: 1st
Half of Chapter 8 of
Man, Economy, and State

2. 1st
Half of
Chapter 8 of MESI. Sources of Income
1. So Close, Yet So Far Away
2. Opportunity Cost
3. Role of Risk?
V. What’s in a Name?
VI. “Paradox” of Saving

3. I. Sources of Income
Rothbard says: In ERE, there are only two
“ultimate” sources of income, interest and
wages. But in real world, there is a third
source: entrepreneurial profit.
What about rent from land factors (i.e. natural
resources)?! Is Rothbard saying that’s not
income?!

4. A. Rent IS Interest
Suppose a man (in the ERE) has $1 million
and continually rolls it over in bonds yielding
5%. How do we classify the perpetual stream
of $50,000 annual payments?
Suppose instead man (in the ERE) uses $1
million to buy a plot of land, which he rents to
sharecroppers for $50,000 per year. How do
we classify that source of income?

5. B. Now It’s Time for Change
Now, suppose man (outside ERE) uses $1
million to buy plot, which “the market” initially
expects he can rent to sharecroppers for
$50,000 per year.
Land is unexpectedly fertile, and he can rent to
sharecroppers for $75,000 per year. How
classify?
A one-time capital gain / profit (which is
income) of $500k, when market price of land

6. C. Are Wages Interest?

7. II. So Close, Yet So Far Away
In real world, “capitalist-entrepreneurs” tend to
whittle away pure profit opportunities, moving
factor prices toward their ERE configuration.
Yet things always change, creating a new
“target” to which the economy tends.

8. A. Arbitrage
Pure profits (and losses) due to mispriced
factors of production. Successful
entrepreneurs spot underpriced factors;
unsuccessful ones don’t realize they are
buying overpriced factors (compared to the
uses to which they put them).

9. B. Rothbard vs. Kirzner

10. C. Giving Back to the Community
Profitable entrepreneurs adjust resources to
better satisfy the desires of consumers. (This is
what Mises [perhaps unfortunately] called
“consumer sovereignty.”)
High price of a particular resource is a signal
saying, “Use with care!” to all the
entrepreneurs.

11. III. Opportunity Cost
Suppose entrepreneur invests $1,000 in
factors of production, and sells the output one
year later for $1,020. Going rate of interest is
5%. Has he made a profit or loss?

12. IV. Role of Risk?

13. V. What’s in a Name?
Hayek in Prices and Production:
“The continuance of the existing degree of
capitalistic organization depends,
accordingly, on the prices paid and obtained
for the product of each stage of production,
and these prices are, therefore, a very real
and important factor in determining the
direction of production.”

14. VI. “Paradox” of Saving
Term Hayek gave for the apparent fact that
increased saving leads to lower expenditures
on consumer goods, which apparently makes it
impossible to support higher investment
expenditures—though we know saving is
necessary for capital accumulation.
(Note not same thing as typical statement of
Keynesian “paradox of thrift,” though very
similar.)

15. A. Illustration

16. B. Solution to “Paradox”