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

Chapter Seven: Production: Man at Work 156 listen to, the TV you watch—these are all goods of the first order, or consumer goods. They are goods used in immediate satisfaction of human wants. All of these first order goods are dependent upon higher order goods that are used to produce them. For instance, most of our houses have a refrigerator. All of our refrigerators have compressors. All of our compressors have a metal case. All the metal cases were fashioned from some metal ore product. The entire metal ore product was mined. All the mines used tractors. All the tractors had tires…etc. Obviously this process goes on and on and on. There are whole series of spider web relationships and interdependencies between various products and goods. I recently took up the hobby of metalwork and welding. I have a welder, but it is a higher order good; I don’t value the welder for the welder’s sake, but rather the products that I can produce with it. Further, I value the welder not only according to the value of the finished product, but also complementary goods that are necessary to produce the final product. Were the price of steel to astronomically skyrocket, the value I would place on the welder would go down, since I would not have anything on which to weld. Figure 7.3 and Figure 7.4 provide two different ways to think about the structure of production in practice. In Figure 7.3 , we see that consumer goods are the lowest order good, with capital goods as increasingly higher order goods the further they are from the final consumer good production. For each final consumer good (goods of the first order) there are multiple capital goods at each stage of production. In our example of Solomon’s Temple, we see that the 2 nd stage of production requires both finished timbers Higher order goods: goods that are used to produce consumption goods. Numerically, the higher the order of a good, the further it is removed from actual consumption. Goods of the 1st Order Goods of the 2nd Order Goods of the 4th Order Goods of the 3rd Order Figure 7.3, Structure of Production in the Production Process. To produce any final consumer good, there are higher order capital goods that are required, ultimately heading back to basic products such as trees (not shown) that labor can transform. The higher order the good, the further away in time the good is from the final consumer good. Land, Labor, Capital, and Entrepreneurship are all necessary to produce each stage of the production process.