A Criticism of Capital and Labor Usage


This is a closer look at capital and labor and how they are measured in economics. I have no real problem with the way they are used provided that there is a differentiation point within them. Specifically this would be prevelant in capital.

Capital now is accounted showing diminishing returns over time. It is accounted as the exponential opposite of labor but is this really the case or should it be accounted for in a different way.

Labor does indeed have dimishing returns over a time period. As I have worked I have seen instances of this over and again. The human body does tend to go slower the more effort and the more punishment it takes. This can even be seen putting an elderly gentlemen and a young man opposed in any kind of race. This is not to be debated...labor does indeed have diminishing returns.

More so on this point, labor (this is labor in manufacturing) varies in its productivity over shorter periods, say within a day itself. When labor is set on a constant schedule that is predictable, it tends to respond in kind. Productivity lessens in the hour leading up to a break, but minutes before the break can be the most productive time for labor. This variance alone can account for the diminishing returns on labor. Post-break, there is a warm up period and then labor meets its prior level of productivity. As the day winds down, the same problem presents itself.

As a society moves towards a service or white collar economy, the productivity "business cycles" or ebbs and flows would tend to level off. Being that they need more of a stable amount of energy, they would tend to ration that energy over the period equitously. The productivity of the United States for instance should be showing less variability now as opposed to when it was a more manufacturing based society. But I digress for now.

These all begin to show that labor does indeed show diminishing returns. What is the case with capital though and why is it treated as labor.

Capital, of course is machinery. Thinking of machinery for a minute now and like labor, it can vary but there is much more constants in machinery than humans. Capital should not show diminishing returns and the usage of capital as such is actually measuring something else in society.

To consider this point, one needs to consider say a conveyor belt in any kind of factory...it really does not matter. Say in a typical assembly line, the conveyor belt runs at the same speed all day. The conveyor belt does not slow down before a break nor does it slow down at the end of the day. In reality, machines run at the same rate they are told to run at until they are told to run at a different rate or they break down. This is the constancy of machines. So why are they represented with diminishing returns when they do not exhibit this behavior.

Any kind of welder in say a car production plant welds at the same pace every day...it would not in reality show any kind of diminishing returns at all. That machine is going to run at a constant rate no matter how long it is running. Therefore it would not show any kind of dimishing returns but rather it would show linear increasing returns. The only diminishing returns in capital would be capital that is run by humans who would show diminishing returns.

The capital presented in most ecnomics formulae is not "pure capital" but rather it is "hybrid capital". What is the difference between pure capital and hybrid capital?

When I sit down at my computer to put an album I bought onto my pc, the first step is to encode it from its .wav natural for into .mp3 condensed form to save space on my computer. This takes a lot of processing power so I am very glad I have a lot to use. When that processor is running, it is running at the same rate from beginning to end of that compression task. Again, production would show a linear rate. This is what "pure captial" is.

Hybrid capital was capital from the early days of computers when someone had to tell the computer how to encode the mp3 manually. If I were controlling the circuits inside the computer, opening and closing them, this would be hybrid capital. No longer would that capital be showing constant returns but since I am now running it, it would now be showing diminishing returns.

This should be difinitively noted in a society. A tractor that is run by a person of course increases productivity, but in reality since it is run by a person, it would show dimishing returns. If that tractor were able to run without, it would no longer show those diminishing returns.

Why is this important? It begins to explain exactly why to countries with the same amounts of capital both being created and existing would show differed productivities. Differing productivites in capital would be caused by the labor using the machines and not anything else. If capital is autonomous then it is either off or running and inbetween should be a linear measure of increasing productivity. The more autonomous the capital, the more productive it is and the more linear it would add to growth of the economy. Accounting for capital with a model of diminishing returns would be like double accounting for the productivity of labor or you would be counting "hybrid capital".

This is not saying that all models are wrong but more so criticizing the accounting measures we use for capital and labor.