Any part of the production process that has to do with people, save one which we’ll get to in a minute, falls under the heading of labor. Most people think of the physical aspect of building something as labor, and that way of thinking is correct but it does leave out a substantial, and an increasingly important, part of the human contribution to production called human capital. These non-physical facets, such as the thoughts you have about how to make your job more efficient, are also part of the labor input. Furthermore, human capital is also manifested in any experience you bring to the job, or the skills you contribute, or the wisdom you add, or the knowledge you possess. All of these things are vital parts of labor’s contribution to production. Employers want to hire folks who aren’t just book smart. Anyone can memorize a book, but value lies in what additional attributes a person brings to the table. If you can add human capital then you are more likely to be hired.
Of course, human capital can be built up over time. That is what your resume reflects. Your past work experience tells of your opportunities to increase your human capital. It’s like looking at the early years of a superhero. They are far more effective after learning how to harness their powers. Such development is often accomplished with the aid of a mentor. Whether it is Stick to Daredevil, the Ancient One to Doctor Strange, or Jonathan Kent to Superman, heroes are made better with the guidance of their Yoda. Put another way, gurus focus the abilities of heroes, which improves their human capital.
Entrepreneurship is also an aspect of human capital but it is separate because of its uniqueness. This input is difficult to teach but is of such vital importance that no matter how much of the other three inputs you have, if you don’t have entrepreneurship you probably have nothing. There is no commonly accepted definition of entrepreneurship or entrepreneurial ability. It can be considered jointly as risk-taking ability and competence at coordinating the other inputs. When you start a business there are risks involved, and the one upon whom those risks fall is the entrepreneur. If you hire employees, it means that you are likely going to have to make a payroll. If your workers don’t get paid, you don’t get paid. Failure is an option and that means your reputation is on the line. You are probably putting up your own money, perhaps even money you have saved for a while. It might be your retirement savings or you kids’ college fund. You take risks and your personal wealth is on the hook if you fail.
While that might sound terrifying, part of the reason for starting a business is because you think you can do something better than the way it is currently being done. Your ideas are worth taking a risk on because you have insight and skill and a willingness to chance it all that other people do not possess. One of the great problems facing former communist countries as they transition to market systems is that they don’t have entrepreneurs. For years, communist nations told their citizens what to produce and how to produce it. The government didn’t know the answers to these questions any better than anyone else, so not only were entrepreneurs shackled and their abilities squashed, but budding business owners had no good examples to follow. In the years succeeding the fall of the Iron Curtain and the Chinese tepid adoption of market reforms, advances were minimal. After decades of being strictly conditioned to follow the lead of the government, entrepreneurial aptitudes were nearly stamped out. Recently, especially in China, it seems that these necessary skills are being fostered and encouraged. But don’t be misled. Not everyone can be an entrepreneur. For many of us, being the boss isn’t something we can handle. The ulcers that come with the job are just too much.
The next input is land. This essentially consists of the natural elements that are used in the manufacture of goods. Another way of describing this would be to say that land includes anything that is not man-made. Anything you dig from the ground, anything you harvest, anything that exists without the plans of man is land. This includes any wind, water, air, or fire, and anything else born of mother nature.
Where Are Your Toys, Mr Terrific?
Land, labor, and entrepreneurship are all necessary for business, but what about squaring off against your nemeses? Heroes obviously possess significant quantities of human capital. Tony Stark, Ray Palmer (the Atom), and Michael Holt (Mr Terrific) are almost inhuman in their ability to apply complex theories of mathematics, engineering, and physics, in their heads no less, to create solutions to problems that stump your run-of-the-mill hero. Bruce Wayne has mastered chemistry and forensics, Barbara Gordon knows computers inside and out, and almost all of these characters have found time to develop their bodies with some form of martial art. Still, it is their application of the final type of input that really makes them interesting.
A science nerd might make a great hero, but if they were only solving equations for closing gateways to other dimensions or discovering the properties of an alien metal, they would likely get shunted to the status of role player on a team, called upon occasionally to provide some scientific insight. This is why, for as terrific as Mr Terrific is, you may have never heard of him. Contrary to Stark and Palmer, he doesn’t have a suit. Unlike Bruce Wayne or Barbara Gordon, Mr Terrific’s utility belt is empty. There is no Terrific-mobile, Terrific-cycle, or Terrific-cave that accompanies his character. He sits in the background being really, really smart, helping the Justice Society of America (a second-level superhero team) to solve problems. In effect, he’s relegated to the B-team. With Batman around, the Justice League (the premiere league superhero team) doesn’t really need him. What is Mr Terrific missing that might make him more valuable? Capital.3
One point about capital that needs to be firmly established before we move on is that capital is not necessarily money. Sure, firms need money to acquire inputs. Workers on the automobile assembly line, for instance, want to be paid in currency, not car parts. But capital isn’t money because money isn’t actually used to produce anything. It is a means by which you acquire the input needed. You can tear apart your car, leaving its individual components scattered on the garage floor, and other than the loose change you find—and that isn’t needed for the car to function, it fell out of your pocket—no where will you find a piece of currency or a coin executing a material function to ensure the car performs as expected. Currency isn’t strong enough to be built into the frame, nor is it fluid enough to be poured into the engine. You need steel and oil, and money can buy those for you, but it isn’t what makes up the physical car itself. Instead, capital is the man-made materials that are used in the production of a good or service. Typically, we think of capital as the tools and machinery employed in production. The robots used on the assembly line do not grow on trees and they are not human. That makes them capital.
In a comic book sense, the accoutrements used by heroes, powered or not, are capital. Every gadget or gizmo in your utility belt, the suits you invented and don to fight off the forces of evil, the cars, planes, boats, motorcycles, bows and arrows, computer systems, you name it, that aren’t part of your human capabilities and do not appear in nature, are all forms of capital. If you don’t have superpowers, using capital is what you rely on to fight the bad guys. In other cases, such as in Wakanda and Astrocity, it is that capital that sets your world apart from everyone else. While capital can be used to make individuals super, it can also be integrated with other inputs to increase overall efficiency.
Production Function—Just a Little Bit of Math
The transformation of inputs into outputs is a very microeconomic idea. Microeconomists study the smaller units of decision-making. By smaller we certainly don’t mean insignificant. It is the individual choices that make up the aggregated whole. You may decide to sleep in today, which means you are late for work, which means a report isn’t completed on time, which means information that is vital to the decision-makers at the Central Bank isn’t received, which means the policy-makers have poor data, which means their decision to raise interest rates is the wrong one, which means collective investment gets more expensive, and the economy slows. The lack of information ste
mming from your lassitude has macro consequences, but it was the micro decision to hit the snooze bar that started the chain of events. Micro decisions are thus very important. They are considered micro because of who is making the decision. It isn’t a group of people or the leader of a country who, when they make pronouncements, have the ability to shake markets worldwide, rather micro decisions come from a smaller economic unit such as an individual or a firm. Call it ripples in the pond, the butterfly effect, chaos theory, a sheep sneezing in the desert, whatever you like, the micro choices we make can have significant macro implications.
Take, for instance, the determinations firms make every day about how to produce things. One of the more important aspects of these decisions is how to combine resources to generate output. In a mathematical sense, this choice is illustrated in what economists call a production function. This is an equation that says outputs, the stuff that gets sold, results from putting your inputs, the things used to make the outputs, together in a particular way.
One of the most basic forms of this relationship is referred to as the classical production function. It involves only two inputs for simplicity’s sake and reflects a view from the industrial revolution that if you have labor and capital you can produce just about anything. The function looks like this:
The equation says that output, which is represented by the letter Y, is a function of the combination of labor, L, and capital, K. How much output you get depends on two things. First, how much of the inputs you actually have, and second, how you combine them. From a crime-fighting perspective, this means that the number of crimes you stop (the output) depends on how much labor (and remember that this means actual number of workers and the human capital they possess) and capital each hero has. Batman isn’t more renowned than Mr Terrific because he has been around longer (although he is technically three years older).4 It could be that Batman has had better writers over the years, but more importantly those writers provided the Caped Crusader with access to capital. Assuming that Batman and Mr Terrific are equally gifted intellectually (which is probably giving Batman too much credit as Mr Terrific has 14 Ph.D.s), and assuming they are equally skilled fighters (which probably gives Mr Terrific too much credit as, even though he is a world class decathlete, he never trained with Ra’s al Ghul and the League of Assassins), Mr Terrific is woefully lacking on the capital side of things. Take a stroll through the Batcave one day, or visit Batman’s tech gurus, variously himself, Lucius Fox, and Harold Allnut, who provide such a veritable cornucopia of gadgets, gizmos, vehicles, and weapons that he can practically fall out of bed and be more productive than Mr.Terrific. Put in terms of the production function above, if L is the same for both heroes, but K is far greater for one than the other, the hero with the largest K will be the most productive.
Using Your Toys to Get the Bad Guys
Now, let’s take this knowledge and expand upon it. Firms are in business to make profits, and economists have fallen back on the position that firms are interested in maximizing those profits, though there is certainly debate about how assiduously they pursue this objective. Many firms give dump trucks full of money away, which might engender good will with the community, but it does hurt the bottom line. In other firms, executives fritter money away on parties and junkets that makes one wonder if the objective of running a business isn’t just to impress your friends. Still others use corporate resources to buy private jets and limo services, which may make their lives better and make them slightly more productive (after all you can’t easily discuss business if you’re sitting in the middle seat in coach), however, those amenities reserved for the executives are awfully expensive. Nevertheless, and especially for publicly traded firms, profits still seem to drive the bus. If you aren’t profitable, the executive might find herself in the unemployment line. A warning to investors that a company is going to miss profit projections is a real kick in the teeth for shareholders. Profits are, if nothing else, the safe bet for the objective of the firm. To ensure those profits persist, a business needs to produce things consumers want in a way that is cost effective. Production functions help firms identify the most efficient way of combining their inputs to achieve the objective of profit maximization. However, because firms often have the ability to produce different goods in various amounts, it would behoove us to return to a tool we have discussed previously to make sure our heroes are allocating their scarce resources appropriately.
We introduced the production possibilities curve (referred to as the PPC from here on) in Chapter 3. As a reminder, the PPC shows a series of options a person, company, or country has in terms of production. In that discussion, we laid out the constraints of the PPC. For our purposes here, recall that only two goods can be produced. As an example, many older college text books used guns and butter to indicate military and civilian goods. Students might consider how their resource of time can be split between studying and partying, or those out of school might think about the trade-off between work and leisure. The point of this assumption is to simplify the analysis in order to place it in a two-dimensional space, as shown in Figure 8.1. With one option on each of the axes, you can plot points that represent potential production amounts of both goods.
Figure 8.1. Batgirl’s Production Possibilities Curve.
Let’s say we are examining the activities of Barbara “Babs” Gordon. In her dual roles of Batgirl and Oracle she can fight crime in two ways. Batgirl is on the street pounding the pavement. Oracle is in front of multiple computer screens tracking and hacking her way through mounds of data, camera footage, and firewalls. Limiting her to busting crime on the street and taking down criminals in cyber space means she is using her talents in only two ways. We can label the x-axis of the graph as hacks and the y-axis as street busting.5 Figure 8.1 shows what Babs’ production possibility curve might look like.
That brings us to the second assumption. Babs would like to be as productive as possible but she is faced with the harsh reality that she can only do so much in the course of a day. The limits that are placed on her—limited time and human capital—prevent her from being as productive as she would like to be. Additionally, she starts out her crime-fighting career with a specific quantity and quality of physical capital and technology and, for now, she is stuck with what she’s got. You might not remember the days of the Apple IIe, or the Commodore 64 computers, but the superior computing power of today’s desktops, not to mention laptops and tablets, so vastly outpaces the early days it is as if the Guardians of the Universe looked down with pity upon Earth and said “we can’t have a so-called advanced race of sentient beings using such primitive equipment” and thus bestowed upon us a microgram of their advanced technology.6 Using the Apple IIe would be like arming your police force with clubs and asking them to battle Kingpin. They wouldn’t last ten seconds. For now, though, Babs is going to have to deal with whatever is at hand. The quantity and quality of her tech and capital are fixed, as is the quantity and quality of her human capital.
Again, this might sound like a rehash of Chapter 3, but there is one significant difference. The curve itself is not a straight line. This is contrary to the PPCs we saw in Chapter 3, which were, admittedly, rather simplified. Because of the limitations she faces, she must give up some of one activity to get more of the other. However, this situation is more realistic than Chapter 3’s portrayal because we now presume that the crime-fighting techniques are not perfectly interchangeable. If they were, Batgirl would face a constant trade-off of hacking for busting. It might be that she can hack one criminal syndicate for every two street criminals taken down. If that were always the case, the slope of the line would be constant, not curved, and the line itself would be straight, not bowed. To say this more precisely, the trade-offs Babs makes as she moves from one type of crime-fighting to another get progressively more expensive in terms of what she has to give up. Let’s take a look at Table 8.1 below, from which Figure 8.1 was built.
Table 8.1. Batgirl’s Production
Possibilities Data
Option Hacks Street Busts
A 14 0
B 12 6
C 9 10
D 6 13
E 3 15
F 0 16
If Babs is acting as Oracle and is just hacking then she can break into fourteen bad guys’ computer systems. At that time, however, she is not busting anyone on the street. If she wants to move to the streets to fight criminals the old-fashioned way she can reduce her hacking activity by two in order to bust six crimes (option B). The trade-off in terms of what she gives up relative to what she gets is two hacks to six busts, or 0.33 hacks to one bust.7 If that doesn’t sate her taste for being where the action is then she can move to the next option (option C), which would be nine hacks and ten street busts. Notice how the trade-off she faces changes. She is now giving up three hacks, moving from twelve to nine, but she only gets four busts in return. That means she must give up 0.75 hacks to get one bust. Busting street crimes is now more expensive as it costs more hacks for each bust she gets in return (0.75 > 0.33). If she continues to decrease her hacking, going from nine to six (option D), she conducts three more busts, moving from ten to thirteen, meaning her trade-off costs her one hack per bust. Street fighting is now three times as expensive as it was when she began. Looking forward, if she gives up being Oracle altogether and engages in no hacking activity she only gains one bust (the difference between fifteen and sixteen at option F) but gives up her remaining three hacks, making the cost three hacks for only one bust in return. While each option in the table means Batgirl must give up the opportunity to hack, the return for doing so gets smaller and smaller so the comparison of costs to benefits gets higher and higher.
Why Superman Doesn't Take Over the World Page 19