No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seven: Production: Man at Work 155 Yet as complex as this task was, Solomon was not building a temple in the manner Robinson Crusoe would have—he didn’t start from scratch. He was able to rely on many institutions and resources that were previously available. Why was there a saw available to cut timber? Why were there boats available to ship the timber from Lebanon down to Israel? How did Hiram know the value of wheat against the timber he was asked to trade for? As we focus on the specific factors of production in this chapter, do not forget they are applied in a given institutional setting (legal framework, tax laws, morals, culture, norms/values, etc.) which will significantly alter how productive a given set of factors can be employed. For example, the former Soviet Union had land, labor, and capital, but its lack of entrepreneur-friendly institutions was a large contributor to its ultimate failure. Neither the institutions of market exchange nor the capital equipment of saws, hammers, and boats were initiated with any expectation of Solomon’s requirement to build a temple; yet they were there and indispensable to its creation. In the production process, we begin to see a whole hierarchy of production activities that support the ultimate consumer’s goods that you and I purchase and use. Consider the Temple as a final good, a good of the first order —something that is used for its own sake and not to produce something else. This is a consumer good; we use and buy them routinely. The house you live in, the car you drive or ride in, the iPhone you As we focus on the specific factors of production in this chapter, do not forget they are applied in a given institutional setting (legal framework, tax laws, morals, culture, norms/ values, etc.) which will significantly alter how productive a given set of factors can be employed. Good of the first order: a consumer good. The end goal of all production is for goods and services that serve immediate wants. Entrepreneurship + Land + Labor + Capital = Figure 7.2, Factors of Production in the Production Process. The production process—directed by an entrepreneur—will involve some combination of Land, Labor, and Capital to produce a given product. In our case, Solomon will apply entrepreneurial skills to produce the Temple. A modern attempt to recreate Solomon’s Temple is seen in the picture above, the “El Escorial” built in Spain for King Philip II in the 1500s.