David R. Henderson  

What about Capital?

Where Worker Productivity Real... What empirical evidence should...


In his post this morning, co-blogger Bryan Caplan attributes increased worker productivity to two factors:
1. Practice.
2. Management.

I think he's right that these are quite important, but I think he's left out a more-important factor: the growth of capital per worker.

Give workers more capital to work with and they will typically be more productive. It's true that they need to learn how to operate the capital, but even a worker who does a mediocre job of working with, say, a tractor, will be able to plow more ground than a very practiced worker working with a team of oxen.

Once that mediocre worker gets practice, chances are that he will graduate to being a good worker. Once the farm owner coordinates the worker's efforts with those of others, chances are that the worker will become even more productive. So give practice and management their due. But give capital its due also.

Here's a conceptual experiment: Take the worker who has a lot of skill dealing with tractors and the farm manager who has a lot of skill dealing with such workers and move them to India, giving them no tractors to work with. Their productivity will likely be a small fraction of what it is on a farm in capital-intensive United States. That implies that capital is a HUGE factor in productivity.

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CATEGORIES: Productivity

COMMENTS (7 to date)
Fred Foldvary writes:

Land can also matter. A better location makes some workers more productive, and optimizing the spatial size can also contribute. A farmer with a tractor on a tiny plot may be less productive per hour than one on a bigger plot, and a location with better climate and closer to transit will also increase productivity.

MikeP writes:

I thought it was well established that the greatest driver of productivity is intangible capital.

...the World Bank finds, "Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries."

Once one takes into account all of the world's natural resources and produced capital, 80% of the wealth of rich countries and 60% of the wealth of poor countries is of this intangible type. The bottom line: "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity."

Go ahead and give the above experiment in India a tractor. If the only way they can get their crops to market is to use the tractor to haul what little it can carry over bad roads a hundred miles to the nearest train station, it doesn't matter how many acres they can sow and harvest. They should grow only what they can get to market and take the rest of their time off.

MikeP points in the correct direction.

It seems to me that both Bryan Caplan and David Henderson fumble in the dark somewhat in trying to explain increases in worker productivity. This is understandable because mainstream economic models assume away the difficulty of what we must learn to produce on Earth. I lay down a better fundamental model for social science, the Resource-Patterns Model of Life (RPM), in this paper, Cooperation Encouraged by Resource Patterns, in the book I am writing, and in other papers which may be discovered by following links.

For a terse summary of RPM, here is one paragraph:

We humans (and other living things) live in a universe in which the resources we need to survive are distributed in patterns — with some patterns being large or intricate so that we can exploit the patterns only through cooperation. Rules which enable such resource-pattern-dictated cooperation may be difficult to discover, and may be "discovered" spontaneously without anyone being conscious of the resource pattern being exploited. Resource patterns which may enable expansion of human life in centuries ahead may lie beyond the present range of human perception, as the resource patterns which enable the present level of human life were unknown in the 18th century. When cooperation succeeds and becomes a regular thing, the cooperating organizations become, in degrees, larger forms of life — as is commonly accepted by life-scientists. But the implications of RPM for social science remain largely unknown. These implications pertain to economics and psychology, affecting both individuals and groups. If we assume Darwinian survival has influenced our dispositions for both individual and group thinking, these dispositions derive in large part from necessity to discover resource patterns. We find explanation for group biases.

IronSig writes:

@Richard Ober Hammer

So you combine Heckscher-Ohlin with good old Hayekian spontaneous order?


Certainly I have been inspired by Hayek, more so than by models of general equilibrium. But the Resource-Patterns Model of Life (RPM) builds from a lower level of assumptions, from the level of physical biology which rewards symbiosis. Life rewards cooperation is some instances. RPM starts there – prior to trade, money, or markets.

I should tell more about increase in worker productivity, since that is the subject of the posts on which I have commented. Workers can be productive only when they labor in a manner which contributes to exploitation of a resource. Education or capital can help but only if and to the extent that it increases productivity of resource-guided labor.

I challenge the idea of spontaneous order in this way. Before life as we understand it can be possible, the universe must contain order in the distribution of resources. Life succeeds, after all, by feeding from those resources. Feeding can succeed only to the extent it discovers and conforms to those resources. Perception and knowledge of the resources can grow only as life grows to exploit the resources. So we living things observe what in our view is spontaneous order, but that is only because we didn’t know about the order (patterns of resources) until we developed computational ability to perceive and exploit the resources. The order was there. Life is limited to conformity with that physical order.

JK Brown writes:

I think first that we should acknowledge that capital is nothing more than old labor, that was saved rather than consumed.

Capital is nothing but old labor. Capital is nothing but the fruits of the earth which have been already gathered, preserved, or transformed; that is, manufactured by past labor. --Socialism; a speech delivered in Faneuil hall, February 7th, 1903, by Frederic J. Stimson

So, yes, having a stock of capital does help the worker be more productive. But also, the worker must know how to use that capital, e.g., tools, for more than consumption. Remove the tool and the worker must rebuild that capital through labor, assuming they have the skills, which as 'I, pencil' illustrates no one person really does. Conversely, if you dropped a bunch of previously unknown tools on a farm, in say India, productivity would only increase as the skills of the workers to use the tools increased, with a likely decrease in productivity in the beginning as learning took away time previously applied to production.

In the light of this analysis Carlyle's rhapsody on tools becomes a prosaic fact, and his conclusion—that man without tools is nothing, with tools all—points the way to the discovery of the philosopher's stone in education. For if man without tools is nothing, to be unable to use tools is to be destitute of power; and if with tools he is all, to be able to use tools is to be all-powerful. And this power in the concrete, the power to do some useful thing for man—this is the last analysis of educational truth.
—Charles H. Ham, Mind and Hand: manual training, the chief factor in education (1900)

Blissex writes:
«Take the worker who has a lot of skill dealing with tractors and the farm manager who has a lot of skill dealing with such workers and move them to India, giving them no tractors to work with. Their productivity will likely be a small fraction of what it is on a farm in capital-intensive United States.»
But the same “small fraction” will be achieved in the USA if you give the worker and farm manager just the tractor and no fuel. Without fuel the tractor is useless. What gives all that productivity is that oil-based fuels are much cheaper and more energy dense than anything else. If you had to feed the tractor hay, an ox would be more productive. A tractor is just a mechanical ox that eats the "food" produced by the oilfields of "farms" in the deserts of Texas and Arabia. The productivity of the tractor or ox is in essence the result of how much work in how much time it can do per unit cost of its fuel. Coal fuelled tractors are a lot less productive than oil fuelled ones, wood fuelled ones even less so.

Without cheap high density fuel a tractor is a nearly worthless piece of capital, scrap in effect.

The above is not claiming that capital is worthless, obviously a man digging with his hands is far less productive than one with a shovel.
But I suspect that the great increase in productivity of the last two centuries is 90% due to first the diffusion of coal fuelled machines, and then of oil fuelled one, rather than better education or science or management or capital.

The oilfields of the deserts of Arabia and Texas are the most fertile "farms" ever discovered, producing very cheap and powerful "food" for exceptionally strong and fast mechanical "domestic animals".


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