Lesson 6 of 8
The machine that does one thing
Hayek splits producers' goods into those usable at many stages and those usable at one. The split decides who is hurt when a structure has to shorten.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Hayek divides producers' goods into non-specific, usable at many stages, and specific, usable at one or a few.
- The split is relative, not absolute. The useful question is whether one good is more specific than another, not which category it belongs to.
- Specific goods are what fall in price when a structure has to shorten, because there is nowhere else for them to go.
Adapting a term from Wieser, Hayek makes a distinction in his third lecture that decides most of what happens in a bust. It is one sentence long and it does a great deal of work.
The same question asked about four things
Usable almost anywhere
- Labour, general · movable between stages at some retraining cost4040%
- Common raw materials · steel, energy, ordinary components3030%
- General tools · knives, hammers, tongs, in Hayek's own list2020%
- A purpose-built plant · usable only in the process it was designed for1010%
Usable in one process only
Total100
Hayek's split
Producers' goods that can be used in all, or at least many, stages of production are non-specific. That class includes almost all original means of production and most raw materials, and Hayek adds a great many implements of a not very specialised kind, naming knives, hammers and tongs.
Producers' goods usable in one stage, or at most a few, are specific. Most highly specialised machinery belongs here, along with complete manufacturing establishments and semi-finished goods that can only become finished goods by passing a definite number of further stages.
He then adds the qualification that keeps the distinction usable. It is not absolute. We are not always able to say whether a given good is specific, but we can usually say whether it is more or less specific than another.
Why the split decides the bust
Because non-specific goods leave. When the pattern of demand changes, labour and common materials are bid away by whoever now wants them, and they go.
The specific goods that were relying on them cannot follow. Hayek's account of the crisis runs through exactly this: producers' goods of a more specific character become relatively abundant once the complementary non-specific goods are withdrawn, their prices fall, and their production stops.
That is the sequence. Not a general collapse, but a withdrawal of the movable things and a collapse in the price of the immovable things left behind.
Reading it in a company
This is one of the few places where the theory touches a filing directly. A company whose assets are mostly general purpose has options in a downturn. A company whose assets were built for one customer, one product or one process has fewer.
The disclosure is not a single line. It is in what the property and equipment note says the assets are, in what the segment disclosure says they serve, and in the customer concentration disclosure.
The cost of finding out
Nobody knows in advance how specific an asset really is. The test is a bid from somebody else, and that bid only arrives when the asset is already in trouble.
Lachmann's point from the previous lesson applies here in its sharpest form: the second-best use is discovered, not looked up, and the discovery is expensive.
Check yourself
What makes a producers' good specific in Hayek's sense?
- That it is expensive
- That it can be used in only one stage of production, or at most a few
- That it was bought recently
Show the answer
Answer: B.
He puts highly specialised machinery, complete manufacturing establishments and certain semi-finished goods in this class, and general labour, raw materials and simple tools in the other.What does Hayek say about the sharpness of the distinction?
- That it is exact and can always be applied
- That it is not absolute, and the usable question is whether one good is more specific than another
- That it applies only to machinery
Show the answer
Answer: B.
He states that we are not always in a position to say whether a certain good is specific, but should be able to rank any two against each other.Why do specific goods fall in price in a bust?
- Because they wear out faster
- Because the complementary non-specific goods are withdrawn and bid away elsewhere, leaving the specific ones with nothing to work with and nowhere to go
- Because their owners panic
Show the answer
Answer: B.
Hayek describes them becoming relatively abundant once the mobile goods leave, then falling in price, at which point their production is discontinued.Sources
- Hayek, Prices and Production, first published 1931, second revised edition 1935, lecture III, section 2, for the distinction between specific and non-specific producers' goods, the examples of knives, hammers and tongs, the inclusion of complete manufacturing establishments among specific goods, the attribution of the term to Wieser, and the statement that the distinction is relative rather than absolute.
- Hayek, Prices and Production, lecture III, section 8, for the fall in the price of specific goods once complementary non-specific goods are withdrawn.
- Lachmann, Capital and Its Structure, 1956, chapter 1, for multiple specificity and for the discovery of second-best uses.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The two plants and the 50m are invented figures chosen to show two outcomes from one balance-sheet line. No company is described, and the ordering in the figure is illustrative rather than measured.
- No filing reports specificity. Everything a reader can do here is inference from disclosures written for other purposes, and that inference can be wrong.