Economics Lesson from a Little House Book

From “Farmer Boy”, the second of the Little House books by Laura Ingles Wilder:

“Almonzo, do you know what this is?”
“Half a dollar,” Almanso answered.
“Yes, but do you know what half a dollar is?”
Almonzo didn’t know it was anything but half a dollar.
“It’s work, son,” Father said. “That’s what money is; it’s hard work.”
Mr. Paddock chuckled. “The boy’s too young, Wilder,” he said. “You can’t make a youngster understand that.”
“Almanzo’s smarter than you think,” said Father.
Almanzo didn’t understand at all. He wished he could get away. But Mr. Paddock was looking at Father just as Frank looked at Almanzo when he double-dared him, and Father had said taht Almanzo was smart, so Almanzo tried to look like a smart boy.
Father asked, “You know how to raize potatoes, Almanzo?”
“Say you have a seed potatoe in the spring, what do you do with it?”
“You cut it up,” Almanzo said.
“Go on, son.”
“Then you harrow–first you manure the field, and plow it. Then you harrow, and mark the ground. And plant the potatoes, and plow them, and hoe them. You plow and hoe them twice.”
“That’s right, son. And then?”
“Then you dig them and put them down cellar.”
“Yes. Then you pick them over all winter; you throw out all the little ones and the rotten ones. Come spring, you load them up and haul them here to Malone, and you sell them. And if you get a good price, son, how much do you get to show for all that work? How much do you get for half a bushel of potatoes?”
“Half a dollar,” Almanzo said.
“Yes,” said Father. “That’s what’s in this half-dollar, Almanzo. The work that raised half a bushel of potatoes is in it.”
Almanzo looked at the round piece of money that Father held up. It looked small, compared with all that work.

Farmer Boy, by Laura Ingles Wilder

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Of course there’s more than just the work in that round half-dollar. There’s the equipment used to do the plowing and harrowing and hoeing. There’s the cellar itself where the potatoes are stored and the land where they’re grown. There’s the knowledge of how do do the tasks, of when to plant, when to hoe, when to dig up. There’s the wagon used to get them to the market. And all of that goes into producing that round half dollar. And better equipment, allowing one to produce more potatoes with less work? Well, then that equipment means that one can produce that half dollar’s worth of potatoes for less work. (Note that more potatoes for less work probably means the price of potatoes comes down as well, but the general principle still applies.)

And that equipment, that capital, is it’s own value. Earlier in the book the author describes a threshing machine. The owners of the machine brought it around to farms for various farmers to thresh their grain more quickly and easily (not to mention more cleanly) than by having cows tread on them. The owners of the machine were paid for the use of it, generally with a portion of the threshed grain. The farmers benefit from being able to produce more grain with less effort. The owners of the machine (capital equipment) benefit from a return on their capital investment (the machine did not come free).

The same principle applies in modern businesses. The owners provide capital equipment. The workers bring skills and labor. That the owners of the equipment deserve compensation for providing it is the same whether they are dragging the equipment from farm to farm to farm, or have it in one place and have people come to work for them.