Complements and Not So Much Substitutes

by Don Boudreaux on November 20, 2013

in Complexity & Emergence, Immigration, Myths and Fallacies, Seen and Unseen, Work

Here’s a conversation that I just overheard while working on my book in the Panera Bread in Warrenton, Virginia.

Middle-age man: There are lots more immigrants now in Virginia than when I was a boy.

Man’s wife: I know it.  Can’t be good for the economy.

Middle-age man: Wouldn’t think so.  More workers can’t help but push wages down.

Man’s wife: Of course they do.

I’m frantically working to finish my manuscript, so I’ve not much time to blog today.  I can’t resist, though, asking the following question: If more workers necessarily push wages ever-lower, why doesn’t more capital necessarily push profits ever-lower?

Ignore here the fact that history is wholly unfriendly to the claim that the larger the number of workers, the lower is the average worker pay.  Doug Irwin, in his superb book Free Trade Under Fire, has a graph showing that in 1950 the U.S. workforce was 60 million; today – a mere 63 years later – that workforce is about (in October 2013) roughly 155 million.  Yet average worker pay today is much higher than it was in 1950.

Concerns about increasing numbers of workers on wage rates are common.  Concerns about increasing amounts of capital on profits are less so.  People seem to understand - in this context, at least – that capital is not homogeneous.  New investments are often quite different from older investments.  The Panera Bread that I’m now sitting in is not a clone of a 1970s-era bakery or of the Starbucks just down the street.  The worker training offered by Amazon.com in 2013 would not be much of a substitute for the worker training offered in 1913 by Sears, Roebuck & Co. or even for the worker training offered today by Panera Bread and Apple.  A new factory created to build MP3 players is a poor substitute – that is, it does not compete very effectively against – a factory that is outfitted to produce flour or bleach or paper plates.

That is, people seem to ‘get’ – again, in this context – that capital is heterogeneous.  People understand that any randomly chosen ‘piece’ of capital is at least as likely to be complementary to other pieces of capital as it is to substitute for other pieces of capital.  No one – at least no one who is not self-consciously doing macroeconomic theorizing – worries that an increased desire to invest means that more capital only of the sort that already exists will be created.

More market-driven capital investment means ever-more-different types of specific capital created to be part of the processes of production.  Machines that do what no machine has done before; buildings configured in new ways to allow new manners of residential living or new kinds of productive workplace activities; new businesses offering new and innovate goods and services never before available.

When it comes to workers, though, people tend to assume that each additional worker is simply a near-perfect substitute for countless other workers.  Little consideration is given to the ability of workers – by themselves or their employers investing in workers’ human capital – to differentiate themselves sufficiently from other workers, thus allowing these ‘new’ workers to produce services very different from any services ever before produced by human workers.

In a dynamic, entrepreneurial, and bourgeois-dignified market economy, additional workers are no more likely to be chiefly substitutes for other workers than is new investments in such an economy likely to be chiefly substitutes for previous investments.

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