11: The Quantitative Relation between Labor and Capital
Some economists regard capital as a permanent thing that merely changes its manifestation. Money becomes materials, materials become finished goods, finished goods are sold for a bill, and the bill is repaid in money again. Hence the conclusion that Capital is permanent but merely assumes different forms during the journey of production and trade. Only the loss of the manifestation (the warehouse burns down) can cause the loss of the value of productive capital. By the same sophistry, it can be said that labor is also a permanent thing, birthed from the mind and muscles of a man. Labor becomes a wage, a wage becomes food, food is consumed to produce mental and physical effort, and the energy is spent in labor.
The investor may decide into what goods his capital will be converted by choosing his investment in a certain kind of enterprise, and the laborer may decide into what goods his labor will be converted by choosing to enter a given profession. Both may predict their future earnings according to their assumptions about the revenue they will receive in future from their choices - provided that things go as expected. But, of course, thigns never go as expected - there are often complications and obstacles, and the progress of time. The labor necessary to a hunter-gatherer tribe is different to that of an agrarian, which is different to that of a factory worker. The same kinds of labor in the year 1900 are different to those that were needed and value in 1800. Even in the author's time, it seemed a foolish notion for a young man to train in his father's trade, as it may no longer be needed by the time he has mastered it.
Production has throughout history been a combination of labor and capital, and generally progressing to require less labor and more capital: to plant a field with a shovel, with a plow, and with a tractor require increasing capital and decreasing labor. It is doubtful that, as some panic-mongers suggest, the need for labor will ever be eliminated entirely, but it will simply be directed to the production of other things. As fewer hands are needed to raise the food society needs, labor is diverted to clothing, to furniture, to the arts, and so on and society enjoys the benefit of more and better things.
He also mentions the error of looking only at "the last unit of labor." We look to the farmer on his tractor and see how much is accomplished by one man, rather than teams of workers with manual tools. But we must also consider the labor it required to assemble the tractor, to make all of the parts from which it was assembled, to harvest the raw materials to make each of those parts, to maintain and fuel it, and so on, then we recognize that the apparent diminution of labor of the Industrial Era is not as pronounced as some would suggest.
There is a brief consideration of the different values of labor. In part, it is because of individual productivity: a smith who can forge a hundred nails an hour is worth more than one who can forge only fifty (if quality is equal). Another part is due to the value that the work is perceived to create: the smith that crafts the goods is believed to create more value than the boy who tends his fire. And then, there is a matter of skill, as it takes more skill to forge a nail than feed a fire, hence workers who have this skill are more scarce and more must be offered to gain their assistance.
He also mentions location, particularly in terms of population and the ratio of workers to jobs. One reason that wages cannot be fixed on a large scale, such as a nation, is the ratio is different in different places. There is also the ratio of goods to customers, as any worker is also a customer - so where goods are scarce and prices are high, men must demand higher wages to procure what they need or desire, and if employers fail to offer it then workers will leave the area. The demand for an equal monetary amount results in great inequalities of the quality of life of workers in different locations.
He returns to the idea of the marginal value of labor - how each added worker creates less value and, in time, more workers damage productivity. This assumption holds true where capital is fixed - two men cannot work one hammer, but purchase a second hammer and a second man can be productively employed. In some instances, the availability of capital influences the value of labor: when there are fewer than sailors, the pay of a sailor must be high - but add more ships to the point that there are more ships than sailors, and the pay of a sailor diminishes. And then to the diminishing marginal utility: two men working a field produce more than one, but not twice as much. A third man adds marginally less, and so on, until the addition of men crowds the field and it begins to be less productive to have more hands.
Because a productive enterprise is an ongoing financial concern, business managers do not approach the task scientifically: they do not start one man to working and leave him for a month, then add a second man and wait another month, etc. But they do adjust their workforce by observation and intuition, toward the same end. It's also noted that the workplace is in a constant state of change - by adding new materials and tools or changing the process of work, the per-capita productivity is changed as is the optimal number of workers. And there is also diminishing return on increasing production, as every additional item made must be sold, and the creation of more decreases its scarcity, hence producing the most items possible may interfere with the goal of making the most profit possible.
It's been said that the profit attributed to the last man added fixes the pay of all the men. If we were to be fair, each man is compensated according to the profit he produces - hence each additional man will be paid less because his contribution adds a decreasing margin of profit. But workers demand equal pay for equal work, regardless of the outcome - so the employer must calculate the value of labor in aggregate and pay the same wage to all his workers.
He then goes on another tare about fixing wages. Because wages are determined by many other things (the price at which products are sold, the cost of supplies, the availability of workers, and so on) it would be necessary for all the world to stand perfectly still in order for wages to remain at the same level: the population of consumers must be the same, they must consume the same products in the same amounts, suppliers must furnish the same materials in the same amounts at the same prices, there can be no variance in crop yields or the output of mines, equipment must never break down, no more efficient process may be discovered, etc. Thus considered, it is a nonsensical fantasy to insist the world never deviate or change.
Regarding capital: we acknowledge that some of productivity results from labor and some from capital, but to precisely define their proportions becomes an exercise in futility. There is a hypothesis that suggests the value of capital is the increment in production above bare-handed labor. It is impossible to smelt metal or mine ore with nothing but bare hands - so this makes it seem that capital merits 100% of the credit. However, if the hypothesis were inverted, we would find that the smelting forge and pickaxe create no product without labor, which means that labor merits 100% of the value. So this hypothesis, or any derivation of it, must be discarded.