Funds, Flows and Time Pere Mir-Artigues Josep Gonzalez-Calvet Funds, Flows and Time An Alternative Approach to the Microeconomic Analysis of Productive Activities With 73 Figures and 8 Tables Sprin ger Dr. Pere Mir-Artigues Department of Applied Economics University of Lleida Jaume II, 73 25001 Lleida Spain [email protected] Dr Josep Gonzalez-Calvet Department of Economic Theory University of Barcelona Av. Diagonal, 690 08028 Barcelona Spain [email protected] Library of Congress Control Number: 2007925053 ISBN 978-3-540-71290-9 Springer Berlin Heidelberg New York This worl^ is subject to copyriglit. All rights are reserved, whether the whole or part of the material is concerned, specif ically the rights of translation, reprinting, reuse of illustrations, recitation, broad casting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9,1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. Springer is a part of Springer Science+Business Media springer.com © Springer-Verlag Berlin Heidelberg 2007 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Production: LE-TgX Jelonek, Schmidt & Vockler GbR, Leipzig Cover-design: WMX Design GmbH, Heidelberg SPIN 12018529 42/3100YL-5 43 2 1 o Printed on acid-free paper Foreword The subject of this book is production, which is an important and extensive field in economic science. In fact, production, distribution and consump tion were long considered the three federated kingdoms which together formed the great empire of the economy. According to other slightly dif ferent traditions, production also held pride of place, specifically as a basic link in the long chain of social reproduction. Today, whatever the theoreti cal approach, production is a fundamental requirement for human survival. This was not, however, always the case. For much of the history of man kind hominids were hunter, scavenger and gatherers, with very little con trol over their environment, and extremely little in the way of artefacts with which to work. However, since the Neolithic revolution, productive processes have constituted an essential mechanism, providing human soci ety with goods and services to satisfy its needs and cravings. A simple, yet pertinent, characterisation of the production process con ceives it as the transformation of a conglomerate of factors into a given number of products within a specific period of time. Refining this defini tion a little further, the said factors may be broken down into different categories: natural resources, means of production (covering two species: working capital and fixed assets) and the different forms of specific work. To the above, we must then add a minimal economic environment consist ing of suppliers, clients and a legal and social framework. All of these elements act upon each other, are directed by intentional or routine behav iour, and are sustained by organisational structures which, to a greater or lesser extent, combine principles of co-operation and hierarchy. The paradigmatic notion with which this metamorphosis is generally de scribed is what is commonly known as the production function. This term may be used to refer to two objects of very different dimensions and clearly distinct transforming connections. On the one hand, we have mi- croeconomic production functions with, at least in principle, perfectly well identified points of reference and clearly defined relationships. On the other, we have aggregate (or macroeconomic) production functions which link virtual amounts of capital and work to a specific amount of aggregate production by way of an ethereal and purely formal connection. In this re spect it should be emphasised that microeconomic production functions are VI Foreword irreproachable theoretical constructs with a clearly defined correlation, while the presumed functions of macroeconomic production are a very dif ferent matter altogether. The latter lack any real counterpart and thus ap pear to be eternally condemned to explicatory and analytical opacity. It is not feasible to quantify their value independently, nor do they appear to contain any underlying aspects or mechanisms that are waiting to be re vealed by theoretical or practical advances in scientific research (as oc curred with genes, atoms or the subconscious mind). In short, as they lack explicatory force they may only give rise to spurious correlations, with a predictive capacity which goes no further than any astutely constructed econometric extrapolation. This book by Professor Pere Mir-Artigues and Professor Josep Gon- zalez-Calvet exclusively addresses this hard core of microeconomic pro duction functions. In my opinion, the main merit of the book lies in its painstaking theoretical work, which has been built to embed, within this conceptual artefact, certain basic aspects related to time, a dimension that it is not at all easy to represented. For example, in few fields relating to the economy is time so vital as in the area of production. It is therefore not un usual for production functions to be presented as analytical schemes bereft of this very crucial dimension. Another unforgivable way of overcoming such obstacles is to postulate instant production functions, thus directly opposing the basic laws of physics. I maintain that one must distinguish between simplification and idealisation on the one hand and absurdities on the other. The boundary between the two is somewhat difficult to establish but, in general, the specific cases dealt with by economists clearly pertain to one or the other of the above categories. Let it therefore be accepted that, while it may seem perfectly licit to assume that two subjects have the same tastes, or that two production processes take the same time, it does not seem acceptable to postulate that people are immortal, that agents are omniscient, or that production processes are instantaneous. In short, such outlandish postulation is not acceptable, unless one wishes to entertain oneself with academic games or formal virtuosity, rather than face the real ity of the world. Notwithstanding, there are forms of idealisation, or borderline cases, which may prove illustrative. An example of these is the stationary state device, which permits the presence of change and time, but minimises the farrago of complications that surround such aspects. Apropos of which, I wish to state that it is a (frequently made) mistake to consider the terms static and stationary state to be synonyms. To set the record straight, it is sufficient to realise that with the term static, time does not exist (if any thing, there is just calendar time, but there is never any idea of duration) while, on the other hand, time is present in the ideal trajectory of a station- Foreword VII ary state. But then time flows without modifying structure, so the core variables have constant values given that any potential changes have been sterilised and reduced to a minimum. Let me clarify this with a simple il lustration: a snapshot (a typically static form of representation) of a person does not, in general, provide information on what the individual had for lunch that day. However, if we were to imagine that his/her weight has stayed the same over the last month, then it is logical to infer that from day to day, in terms of calorie intake, his/her diet could be defined with preci sion. Apart from the aspect of time, it should be stressed that relationships be tween the factors and product, and between the factors themselves, are more varied than the format customarily applied to the production function would tend to suggest. To be more specific, standard economic theory em phasises the interchangeability of factors and the impact that marginal variations in each factor may have on total product volume. Both attributes are often baseless assumptions. In fact, there is little room for manoeuvre once the production plan has been designed and the pertinent machinery installed. Moreover, there is no lack of discontinuity or indivisibility, and very often complementarity prevails over interchangeability. In pedagogi cal terms, greater emphasis should be placed firstly on treating the factors of production as discrete variables, secondly on lineal programming as a very valuable technological tool then, finally, on the analytical treatment of the different temporariness involved in production processes. Of course we must rejoice in the tremendous advances made over recent years in terms of transaction costs and information, but nonetheless a systematic general effort should be made to reveal the basic mechanisms at work, bearing in mind the real physical, chemical, biological, engineering and organisational characteristics underlying the different production proc esses. It is not the aim of the authors to cover such broad terrain. Their goal is, however, to provide precise, accurate results with respect to the treatment of time, funds and flows. The book is complex and yet simple. It makes an outstanding contribution to the analysis of production processes from an original and potent perspective. The authors have exhaustively combined two highly valuable aspects, neither of which would normally be expected in a study of economic theory: representational realism and practical appli cability. Their specific object is to elucidate how, in terms of time, the dif ferent factors of production are articulated. In other words, it examines the services of human labour and the two main groups into which the means of production are divided: the means of production that operate as working capital (flows) and those that operate as fixed assets (funds). The book ex amines this without any collateral inquiry. It might well seem that eco- VIII Foreword nomic processes are merely conditioned by inherited technology, while the social structure, legal and political framework, financial institutions, habi tat, climate, gender relations and type of market in which suppliers and cli ents negotiate are unimportant. There is no doubt that the authors are well aware of the fact that no social relationship is completely alien to the con text that surrounds and shapes it, but it is always recommendable to make reference to this. The authors approach their subject matter following the directives pro posed by Nicholas Georgescu-Roegen (1906-1994), a heterodox guiding light of 20th century economic thought. He stands out for his ecological sensibility, his criticism of the utility function and production function, his ceaseless work on analysing formal fundamentals and tools, and his con stant exactingness and realism. The approach adopted by Mir-Artigues and Gonzalez-Calvet is built around two pivotal points: on the one hand, the explicit, deliberate consideration of the dimension of time, which is an es sential, unavoidable, feature of all and any production process and, on the other, their aspiration to reconcile representational realism and practical applicability. Nonetheless, it is not always easy to surmount such obstacles while also avoiding invalid parallelisms. For example: if a sow has 10 pig lets every 10 months it is not the same as if she had one piglet every month for 10 months. It is not the same in real or economic terms, and, if it were said to be the same, solid proof of this would need to be presented. There should be no need for such caution but in reality, it is better to be safe than sorry, so this is not a wasted exercise. In a different light, it should be noted that the subject of production is, in general, presented with an ambiguous epistemological statute and straddles the disciplines of science and technology. Of course there are, have been, and always will be great fertile bonds between the corresponding branches of pure and applied science in any discipline. But it is not a good idea to blend or blur the boundaries between the two (or more) planes. Such am bivalence occurs in the area of production given that economic theory most particularly concerns itself with suggesting and illuminating forms of ac tion for the economic agents and with far less interest in how the world really works. Such ambivalence is also present in this book given that the schemes proposed simultaneously attempt to satisfy both a representational and a pragmatic aim: they are both legitimate goals, but objectives requir ing clear delimitation Alfons Barcelo University of Barcelona February 2007 Preface and acknowledgements This book deals with many questions concerning production economics us ing the fund-flow model of Nicholas Georgescu-Roegen as a basic refer ence. Despite the fact that this proposal is currently considered rather het erodox, there is no difficulty in structuring the text along the lines of most other manuals of microeconomic production theory. However, there are some important differences to be taken into consideration. We start by outlining the basic concepts which the model is built around, i.e., the notion of fiinds and flows and, in particular, that of the elementary process. These tools enable a highly detailed representation of productive operations to be developed that is open to partial modification when applied. Furthermore, the seminal concepts proposed by Georgescu- Roegen make it possible to shed new light on certain long-established con cepts of microeconomic production theory as well as to open the way to wards an original analysis of the organization of productive processes. The first chapter also deals with certain assumptions that limit the ana lytical scope of the model presented. These are problems that tend to be shared with all other forms of partial interdependence or equilibrium ap proaches. These limits do not suppose a complete loss of relevance by the model, but simply call for due care with respect to its analytical scope. Three templates for the organisation of production are explained. These represent the generic ways in which it is possible to manufacture one unit of output after another for an unspecified period of time. At this point, the book follows the triple classification proposed by Georgescu-Roegen, add ing only a few minor refinements which stem from the work of other au thors interested in his analytical-descriptive approach, along with some of the results obtained in the process of using the strategic manufacturing theory. In doing so, Georgescu-Roegen's proposals could be linked to some of the fundamental results of management science. An extensive chapter analyses the peculiarities of the production in line. This central form of productive organization is dealt with by using the model in a very detailed manner, which -in turn- leads on to an exhaustive discussion of process timing optimisation. As we know, operational re search has developed many practical tools in its pursuit of the elusive goal of timing optimisation. A link could therefore be established between the X Preface and acknowledgements fund-flow model and research into optimisation. This is perhaps the main difference between this book and most other texts on Microeconomics. Analysing all the aspects of the process in line also implies a reinterpre- tation of the well-known concepts of scale and indivisibility. The fiinds and flows model takes a new look at these concepts and seeks to redefine and highlight new aspects of them. Although the fund-flow model was developed to represent production processes with tangible outputs, there is nothing to prevent an attempt to extend its application to other forms of activity. An entire chapter has therefore been dedicated to a preliminary investigation of the application of Georgescu-Roegen's ideas to what are known as service activities, mak ing special reference to transport operations and the development of in formation assets. However, since tertiary activities constitute a highly di verse and ever-changing phenomenon, attempting to cover all the idiosyncrasies therein in any depth would require a study that goes far be yond the scope of this book. As the reader might expect, the book finishes with the topic of costs. Economists are currently concerned with the way in which costs react to changes in the level of production. Here, however, the analysis is some what different: it is a question of ascertaining the behaviour of costs over time, and particularly of analysing their behaviour in the light of the de ployment of productive activity. This inclusion of the time factor in pro duction cost analysis sheds new light on issues such as the impact on costs of changing the length of the working day, whether by means of extra hours or extra shifts. Of course, it is also only natural to take any associ ated costs relating to transport services and software products into consid eration. Although this study might be used as a textbook, particularly for ad vanced courses, it must be acknowledged that this book is no more than an introduction to the subject dealt with. Indeed, the aim of the following pages is to establish certain fundamental concepts of microeconomic pro duction theory (such as scale, indivisibility, or flexibility), working with the analytical fecundity of the ideas proposed by Georgescu-Roegen. It in cludes concepts that, despite having mainly been presented for the first time in the 1960s and 1970s, have yet to receive all the attention that they deserve. Since the following pages only offer a sample of the different ana lytical developments that may arise from the application of a funds and flows approach, readers are invited to further develop the model in ques tion themselves, albeit empirically, or just for the pure academic delight of doing so. It must be said that with respect to the microeconomic analysis of production, the richest fruit from the seeds first planted by Georgescu- Roegen have yet to be harvested.