Friday, August 13, 2010

Labor Vs. Capital

In economics, goods and services come into existence through the production function, that is, the combination of the various intermediate goods required to make things and do stuff.

The components of the production function are: raw materials, capital (machinery, etc), labor, land and the entrepreneur to put everything together.

The combination of these inputs change over time depending on market conditions. One of the most basic is the nature of capital vs. labor since they are somewhat interchangeable.

Technology allows us to produce more output with fewer labor inputs. There are no longer phone operators to place calls for example.

If labor is cheap, you can cut back on capital to increase your profits.

I remember reading something about farms in China paying people to water the crops by hand rather than installing sprinklers, since it was cheaper in the long run.

Here is an interesting paper on an unexpected labor vs. capital decision, one involving the use of the cat and mouse game of captcha's, those screens used to prevent automated machines from posting comments or accessing information indiscriminately.

The capital approach would be to program a computer to be able to circumvent these computer countermeasures, essentially a better mousetrap.

The labor approach would be to pay someone to get around these countermeasures.

The paper suggests that the labor approach is winning, since you can pay somebody in Bangladesh as little as $1 to do 1,000 captcha's. It is quite an intensive study examining the changing nature of prices of labor and capital.

The whole time I am reading it I can only help but think, that spam you get in your inbox is helping to pay the wages for some third world worker. As the world gets more complex it seems like the work people are paid to do gets more and more frivolous.

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