Thursday, June 25, 2009

Capitalism and the Value of Human Life

Gary North posted a brief article based on the following graph which sparked an interesting discussion on his website: This is a graph of Total Capacity Utilization, obtained from the FED's website, which is a description of the percentage of total possible output at which the economy is operating. Basically, if a factory is operating on all cylinders, cranking out as much product as it possibly can over a given time interval, capacity utilization is at 100%. If the factory is shut down, it is 0%. If only two of the three shifts are currently in operation, meaning that the factory is operating at full output 16 hours per day, and is idle 8 hours, capacity utilization is at 66.6%. Said another way, if the factory is capable of producing 100 widgets/day, but is only operating at 75 widgets/day, then capacity utilization is at 75%. Simple enough? Basically, the graph is a description of the employment of physical capital, the tools of production. It complements a description of unemployment, the employment of human capital, which looks like this: Obviously, the data here are plotted inversely, in that the first is a graph of employment and the second is unemployment, so you see spikes instead of dips during recessions (the areas highlighted with grey bars) in the second graph. But you are intelligent. You get the idea. During recessions capital is idled, leading to excess capacity and unemployment. During booms, capital is re-employed. By the way, unemployment of capital (and people) is the best way to judge recession. Next time the egg-heads are debating whether or not the country is in recession, check this graph. It's a no-brainer. What Gary North found interesting about this graph (and which I probably wouldn't have noticed) is that peak capacity utilization (the highest capacity utilization observed between recessions) is in a systematic, 40-year downtrend. The peaks get systematically lower and lower. This is to say that "excess capacity," i.e., the productive capacity still not being used at peak employment, is systematically increasing. There is increasing physical overcapacity for production in the United States. Why? Very interesting. Intrepid economical sleuth that I am, naturally I joined in. And I think I have the answer. I opined that this was the result of an ever increasing ratio of capital to labor. The perpetual accumulation of capital is a natural effect of the wealth building propensity of a capitalist system. Ever more and better tools of production are being placed at the hands of labor, increasing productive capacity. This is how capitalist nations become wealthier. A wonderful side effect of this phenomenon, however, is that as ever more capital is used to multiply the output of human effort, and the ratio of capital to humans increases, humans become relatively more valuable, both as a result of higher individual productivity and as the limiting agent in the productive process. As humans become more scarce in relation to capital, they become relatively more valuable. So, as the value of humans increases over time, it becomes increasingly preferrable for capital to sit idle than for humans to sit idle, or to become injured. What we are seeing in the graph is, I think, a reflection of human considerations taking priority over maximizing the output of physical capital as a simple result of humans being rendered more valuable by a capitalist system. For people who think much about economics, this is probably not an entirely unfamiliar phenomenon. We've all heard about the dreadful working conditions during the Industrial Revolution. Why were they so dreadful? Because industrializing economies were in the early stages of capital accumulation. Capital was scarce, labor plentiful, which meant that capital got priority. Machines and factories were kept in operation despite human costs that we would find unacceptable today. Did fingers get chewed off in the power looms? So what? Fingers were cheap. It was easy enough to just grab some other kid off the street and set him to work. But the loom had to stay in operation. It was expensive, and it was spinning money. A lot as changed for the better since then, and a lot of people, especially the unions, would like you to believe that it was government action and collective bargaining that improved conditions. Not true. Over time, as capital accumulates and becomes more plentiful, labor becomes increasingly limiting. Wages must increase as employers bid for workers. Entrepreneurship increases output through technological advancement as labor becomes limiting. Higher productivity allows workers to earn their subsistence more readily, further increasing their bargaining power (and leisure time!). In short, as capitalism got rolling, it made humans more valuable. And since one of the other great strengths of free-markets is the enforcement of accurate pricing, they were treated like it. The union's would have gotten nowhere if business didn't already know that they could still make a profit with higher salaries and better working conditions. Without that simple fact, higher wages and higher costs would have put them out of business. (Those annoying physical laws of the universe, always intruding...) Likewise today, most of this kind of labor is done in Asia. Why? Because in a macabre sort of calculation, Asian fingers are cheaper than Western fingers, Asian time cheaper than Western time, Asian sweat cheaper than Western sweat. Yes, yes, there is currency and market manipulation. I won't deny that; but even accounting for this there is still a vast differential in the capital to labor ratios which is responsible for a lot of what has happened. We can also actually see this in more everyday occurences, an excellent example of which was pointed out by another reader. He reports how, back in 1968, he and many other highly educated men made a living producing the punch-card programs for a university computer with less computing power than a modern desktop computer! The men, as in multiple people, were perpetually busy feeding programs into the computer to ensure that it was never idle! It was an expensive machine, after all! What a waste to leave a computer sitting idle! Today, of course, most computers spend most of their time sitting idle, waiting for a human to give them a command. Why? Because computers are cheap! Now computers are used to maximize the output of people, not the other way around. Even common secretaries almost universally have a computer at their own personal disposal nowadays. At a cost of only maybe ~$500/yr, it is a miniscule fraction of a secretary's personal salary of maybe ~$20k/yr. Why wouldn't you buy such a cheap tool to vastly increase a worker's output? You'd be insane not to. And why would you worry that such a tool spent some of its time idle? You'd worry more about the idle secretary who was costing you 40 times more money! This little metric is what makes the graph that puzzled Gary North so inspiring. Today, most factories and chemical plants (like the one I work at) still operate 24 hours a day. They are far more expensive than a computer, and too expensive to remain idle. Yet there is the graph, showing decreasing capacity utilization, probably not unlike what a graph of computer usage might have looked like had such data been recorded. How is it that entire factories and chemical plants experience such a phenomenon? One word: safety. Factories and chemical plants are dangerous places, and humans really have become that much more valuable than 40 years ago. I can vouch for it: my own plant is obsessed with safety. It costs too much for someone to get injured. The company would rather see somewhat lower overall productivity than time lost to injury and money lost to medical bills. I haven't been there that long, but the old timers inform me that it wasn't always that way. At one time, things were done a lot less carefully. Back then, an injury would get you taped up and sent back to work. Nowadays, it will get you fired. It is also obssessed with chemical spills. It would rather see lower efficiency than chemicals released into the environment or disruptive accidents. Again, human priorities taking precedence over maximizing output. I suppose a cynic could argue that this is just a matter of higher medical and litigation costs, environmentalism, regulations and the like, and isn't really something to be proud of. There probably is some of that. No doubt a fair amount of lost productivity can be attributed to frivolous concerns. But at the same time, the number one priority of an economy is supposed to be about serving human interest, e.g. satisfying consumer demand, and it also says a lot that we can afford such "indulgences." Indeed, it says a lot that we can afford to worry about things like safe working conditions and polluting our environment. A lot of places can't. We have come a long way, though some of us don't appreciate it much and don't want to admit it. We should also keep this effect in mind as we watch our government squander away our accumulated capital on its cursed "plans" and "initiatives." Especially as it is doing now, maximizing present consumption at the expense of accumulated capital. This is utterly foolish and self-destructive. We are consuming our own futures, as those of you who planned on retiring on your 401(k)'s have likely experienced more literally than you would like. The excesses of the past were just that -- excesses. They should be left behind, not preserved at all costs as we are doing now. The folks that should be most mindful of this (and are least likely to be) are those who think things like working conditions and environmental problems are important. As the capital melts away, I would expect at some point the effect to run in reverse. And one can expect that even legitimate human social concerns like these will eventually take a backseat to keeping one's belly full if this behavior continues. It may have already gone too far. I'd hate to think what it would be like to see that graph turn back upward. But on the basis of what is going on today, I have a feeling it will...

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