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1. Production & the
Market Process
Robert P. Murphy
Mises Academy
August 31, 2011
Lecture 7: 1st
Half of Chapter 9 of
Man, Economy, and State

2. 1st
Half of
Chapter 9 of MES
I. Review of Sustainable
Expansion
1.Capital Goods Earn
No Net Rent in ERE
2.Labor
IV. Land
V. Economics of
Population Growth

3. I. Review Sustainable Expansion

4. Want More?!
OPTIONAL reading for super geeks:
“The Reswitching Question” at:
http://mises.org/daily/1148
(Especially the Samuelson paper cited.)

5. II. Capital Goods Earn
No Net Rent in ERE
Rothbard: A laborer or landowner
can earn net rents in the ERE. But
a capital good must be first
produced, and once you take into
account the rents paid for land and
labor inputs, as well as the interest
involved because of time-delay in
production, then gross rents of
capital goods are fully absorbed,
leaving no net rents.

6. Inconsistency?
Q: Didn’t Rothbard earlier say that in ERE,
only two “ultimate” income sources were
interest and wages? So if we explain away all
of a capital good’s gross rents as due to factor
payments and interest, then can’t we do the
same for a piece of land’s gross rent (i.e. all
due to interest)?
A: Yes, so either slip on his part before (i.e. he
meant to include land too), or he is here
thinking of people who homestead virgin land.

7. III. Labor
Its rental or hire price is called the wage.
●Its rents cannot be capitalized into a
purchase price on the free market, for this
would be slavery.
●In our world, an empirical fact is that labor is
more scarce than land. There is a lot of
“submarginal” land, but hardly any
“submarginal” labor.

8. Labor vs. Management?

9. IV. Land
●Its hire price is called “rent,” though
remember that rent is a broad economic
concept including the hire price of any
productive factor. (Capital goods and
workers earn rents too, but for workers we
call it “wages” more specifically.)
●Supramarginal land earns positive rents,
submarginal land earns no rents, and
marginal land earns barely positive rents.

10. A. Supply Curves
for Land

11. B. Land Speculation
●Unlike capital or consumer goods, little worry
that speculation will keep land “idle” for long
stretches. Yet even if this happens, it’s a
good thing (assuming speculators are right).
●If a parcel is earning no rent but has positive
capital value (i.e. purchase price), it’s
because people anticipate (possible) future
rents. (Easy example: Possible change in
zoning laws.)

12. V. Economics of Population
Growth

13. A. Effect on Land
As population rises, the MVP of land rises too.
This raises the (potential) gross rents of all
parcels of land. Those that were originally
supramarginal earn even higher rents, and
some that were submarginal are now bumped
above the zero-line and are brought into
cultivation.

14. B. Effect on Labor
Other things equal, higher population (with
constant stock of capital goods, technological
knowledge, etc.) would mean lower wages.
HOWEVER, this tendency may be partially or
even fully offset by increased physical
productivity of labor due to enhanced division
of labor. (E.g. if nuclear holocaust wipes out
most people, band of survivors would be
overjoyed to find others, even for purely
material reasons.)

15. C. “Optimum” Population
For given state of capital stocks, technology,
natural resources, etc., there is an “optimum”
population size that maximizes per capita
productivity.
If population is currently below this level, then
pop. growth increases standard of living.
Economic science does NOT say this level
should be the goal of humans.