Capital Labor And Efficiency

While everything requires some labor for its production, practically nothing can be produced by labor alone. Farmers need land, taxi drivers need cars, artists need something to draw on and something to draw with. Even a stand-up comedian needs an inventory of jokes, which is his capital, as much as hydroelectric dams are the capital of companies that produce electricity.

Capital complements labor in the production process, but it also competes with labor for employment. In other words, many goods and services can be produced either with much labor and little capital or much capital and little labor. When transit workers' unions force bus drivers' pay rates much above what they would be in a competitive labor market, transit companies tend to add more capital, in order to save on the use of the more expensive labor. Busses grow longer, sometimes becoming essentially two busses with a flexible connection between them, so that one driver is using twice as much capital as before and is capable of moving twice as many passengers.

Some may think that this is more "efficient" but efficiency is not so easily defined. If we arbitrarily define efficiency as output per unit of labor, as the U.S. Department of Labor sometimes does, then it is merely circular reasoning to say that having one bus driver moving more passengers is more efficient. It may in fact cost more money per passenger to move them, as a result of the additional capital needed for the expanded busses and the more expensive labor of the drivers.

If bus drivers were not unionized and were paid no more than was necessary to attract qualified people, then undoubtedly their wage rates would be lower and it would then be profitable for the transit companies to hire more of them and use shorter busses. This would in turn mean that passengers would have less time to wait at bus stops because of the shorter and more numerous busses. This is not a small concern to people waiting on street corners on cold winter days or in high-crime neighborhoods at night.

"Efficiency" cannot be meaningfully defined without regard to human desires and preferences. Even the efficiency of an automobile engine is not simply a matter of physics. All the energy generated by the engine will be used in some way-either in moving the car forward, overcoming friction among the moving parts, or shaking the automobile body in various ways. It is only when we define our goal-moving the car forward-that we can regard the percentage of the engine's power that is used for that task as indicating its efficiency and the other power dissipated in various other ways as being "wasted." Europeans long regarded American agriculture as "inefficient" because output per acre was much lower in the United States than in much of Europe. On the other hand, output per agricultural worker was much higher in the United States than in Europe. The reason was that land was far more plentiful in the U.S. and labor was more scarce. An American farmer would spread himself thinner over far more land and would have correspondingly less time to devote to each acre. In Europe, where land was more scarce, and therefore more expensive because of supply and demand, the European farmer concentrated on the more intensive cultivation of what land he could get, spending more time clearing away weeds and rocks, or otherwise devoting more attention to ensuring the maximum output per acre.

Similarly, Third World countries often get more use out of given capital equipment than do wealthier and more industrialized countries. Such tools as hammers and screw-drivers may be plentiful enough for each worker in an American factory or shop to have his own, but that is much less likely to be the case in a much poorer country, where such tools are more likely to be shared, or shared more widely, than among Americans making the same products. Looked at from another angle, each hammer in a poor country is likely to drive more nails per year, since it is shared among more people and has less idle time. That does not make the poorer country more "efficient." It is just that the relative scarcities are different. Capital tends to be scarcer and more expensive in poorer countries, while labor is more abundant and cheaper. Such countries tend to economize on the more expensive factor, just as richer countries economize on a different factor that is more expensive and scarce there, namely labor. It is just that, in richer countries, capital is more plentiful and cheaper, while labor is more scarce and more expensive.

When a freight train comes into a railroad yard or onto a siding, workers are needed to unload it. When a freight train arrives in the middle of the night, it can either be unloaded then and there, so that the train can proceed on its way, or the boxcars can be left on a siding until the workers come to work the next morning. In a country where such capital as railroad box cars are very scarce and labor is plentiful, it makes sense to have the workers available around the clock, so that they can immediately unload box cars and this very scarce resource does not remain idle. But, in a country that is rich in capital, it may often be better to let box cars sit idle on a siding, waiting to be unloaded, rather than to have expensive workers sitting around idle waiting for the next train to arrive.

It is not j ust a question about these particular workers' paychecks or this particular railroad company's monetary expenses. From the standpoint of the economy as a whole, the more fundamental question is: What are the alternative uses of these workers' time and the alternative uses of the railroad boxcars? In other words, it is not just a question of money. The money only reflects underlying realities that would be the same in a socialist, feudal or other non-market economy. Whether it makes sense to leave the boxcars idle waiting for the workers to arrive or to leave the workers idle waiting for trains to arrive depends on the relative scarcities of labor and capital and their relative productivity in alternative uses.

During the era of the Soviet Union and Cold War competition, the Soviets used to boast of the fact that an average Soviet box car moved more freight per year than an average American box car. But, far from indicating that their economy was more efficient, this showed that Soviet railroads lacked the abundant capital of the American railroad industry, and that Soviet labor had less valuable alternative uses of its time than did American labor. Similarly, a study of West African economies in the mid-twentieth century noted that trucks there "are in service twenty-four hours a day for seven days a week and are generally tightly packed with passengers and freight." For similar reasons, automobiles tend to have longer lives in poor countries than in richer countries. Remember that economics is the study of scarce resources which have alternative uses. The alternative uses of American labor are too valuable for it to be used keeping ten-year-old cars repaired-except for those Americans wealthy enough to be able to indulge a hobby of collecting vintage automobiles or those poor enough that the alternative uses of their time are not very remunerative and they are unable to afford a new car.

By and large, it pays Americans to junk their cars, refrigerators, and other capital equipment in a shorter time than it would pay people in poorer countries to do so. Nor is this a matter of being able to afford "waste." It would be a waste to keep repairing this equipment, when the same efforts elsewhere in the American economy would produce more than enough wealth to buy replacements. But it would not make sense for poorer countries, whose alternative uses of time are not as productive, to junk their equipment at the same times when American junk theirs. Accordingly, many older American cars, planes, and sewing machines may be bought second-hand and then used for years longer in Third World countries after they have been junked in the United States. This can be an efficient way of handling the situation for both kinds of countries.

A book by two Soviet economists pointed out that in the U.S.S.R. "equipment is endlessly repaired and patched up," so that the "average life of capital stock in the U.S.S.R. is forty-seven years, as against seventeen in the United States. They were not bragging. They were complaining.

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