Evolution of Production & Organization in the Plant Economy: From Handicraft to Financial Instruments

1. The Evolution of Production & Its Organization Plant Economy Ownership/Control Purpose/End Scope Handicraft (hand tools) Money Proprietor/Partner Production for use Regional Factory (machines) Money > Credit P/P Manager > joint stock Production for sale Regional/National Industrial Credit Stockholder -- Absentee Owner Capital gains National/International (Machine Process) Managerial Capital gains

2. Real Sector Firms Financial Sector Firms Going Concern Going Concern Going Plant Going Plant • Transactions • Bargaining • Managerial • Rationing Going Business Going Business Machine Process Engineering Purchase & Sale Finance Machine Process Financial Instruments Purchase & Sale Finance Industrial Employments Pecuniary Employments Pecuniary Employments Technical Pecuniary Employments Technological Efficiency Financial Efficacy Financial Reputation Distributional Management Make Goods– Consumers– Serviceability Make Money– Producers– Vendibility Invent/Refine Financial Instruments No Consumers Make Money– Producers– Vendibility 2nd degree of separation 1st degree of separation

3. Financial and Industrial Instability • Veblen’s Q (quotient or ratio) • Ratio of Market value to Book value • If MV > BV then speculation, Q > 1 • If MV < BV then liquidation, Q < 1 • Financial Instability • Stability breeds instability – • Stability leads to comfort and belief that risk is less (example US housing market 1975- 1995) • Expected future income of firm (example , expected 6% average annual increase in US housing prices) • Actual income of firm – realized vs speculative • Leads to other problems – institutionalization of intangible property strengthens instability of financial systems offsetting in part some of the gains of previous institutional changes. • A look at instability

4. Veblen Financial Instability – Credit Cycle • H ( Handicraft/livelihood) Trading (Market /goods prices) • MP ( machine process) BC (Business Capital) • IP (Intangible property) • GW (Goodwill) -- Reputation basis for credit • FC Financial Capital -- expected profits • C (Credit) – first in has differential advantage which spurs others to • S (Speculation in BC ) • Cs (Additional Credit) /business capital prices • The path is: • (H T)  • (MP BC)  • 1st degree of separation • (IP/GW)  • (FC  C S)  Cs • Second Degree of Separation • Purchase and sale of securities based on expected future earnings • No end consumer of security – buy and resell to someone who will resell – tends to drive up prices and speculation • Increased Production drives down prices of goods and eventually actual profit • High prices indicate good times – so this is a sign of hard times - recession • S  Cs plus new machines lead to Output Prices  And eventually Aπ < Eπ

5. The result then is Liquidation of BC - and unused industrial capacity Refinance and reorganization with more control in hands of financial managers

6. New Theories • Berle and Means –Modern Corporation and Private Property • Notice changed nature of property • Separation of Ownership from Management • Means -- Administered Prices • Robinson-Chamberlain • Imperfect Competition • Monopolistic Competition • Keynes -- Macro demand management – fallacy of composition • Schumpeter -- Dynamic Competition • Nature of the Firm as change agent – entrepreneurial • Creative Destruction • Galbraith -- • Countervailing Power • Market Sector & Planning Sector • The above theories dealing with changed nature of relationship of Producers and Markets • New Institutional Economics • Coase – Nature of Firm • Transactions Costs • Substitution at the Margin – labor/capital production function