Part I · Chapter 2 · Machinery · lesson 5
The two inputs, and how their shares move
12 min
Builds on Assets, liabilities, and things that only look like assets
Part I · Chapter 2 · Machinery · lesson 5
12 min
Builds on Assets, liabilities, and things that only look like assets
A bakery takes 800,000 a year. Out of that: 340,000 to the people who work there, 90,000 in rent on the building, 120,000 for flour and power, 25,000 in interest on the loan that bought the ovens, and whatever is left belongs to whoever owns the place.
Two inputs produced that 800,000. Somebody's hours, and somebody's stuff. The argument that never ends is about how the 800,000 gets divided between them.
Output is produced by labour and by capital, and neither produces much alone. A baker with no oven bakes nothing; an oven with no baker bakes nothing.
Because the output is joint, there is no physical fact that says which portion of the bread was made by the hours and which by the oven. The split is not read off the machinery. It is settled by what each side's alternatives are worth, and that is a question about circumstances rather than about contribution.
Labour is paid for time, effort, skill and attention. It is paid first, usually monthly, and its claim is contractual: the wage is owed whether or not the bakery makes money.
Capital is the accumulated stuff — ovens, buildings, vehicles, software, the working balance that covers flour before the bread is sold. It is paid in two different ways depending on how the claim is written. Lend the money and you are paid interest: a fixed amount, senior, owed before profit exists. Own the place and you are paid the residual: whatever is left, which can be excellent and can be less than nothing.
That difference in seniority matters more than it sounds. In a bad year the wages and the interest still have to be paid, and the residual absorbs the whole shock. In a very good year the wages and the interest are unchanged, and the residual absorbs the whole gain.
Predict
Four things do most of the work, and none of them is anybody's opinion about what is deserved.
Substitutability. If a machine can do the task for less than the wage, the wage has a ceiling near the machine's cost. If it cannot, the ceiling is somewhere else entirely.
Scarcity of the alternative. A worker with three other employers competing for them holds a very different position from a worker with none, doing the identical job. The job did not change. The outside option did.
Who can wait. A negotiation is largely decided by which side can survive a month of no agreement. Capital can usually wait longer than a wage-earner can, and that asymmetry is present whether or not anyone mentions it.
Coordination. One worker negotiating alone and a thousand negotiating together are different counterparties, which is what a trade union is mechanically for. The same logic applies on the other side when there is one large employer in a town and nowhere else to work.
Two readings
The share going to labour moves because the relative cost of machines and people moved, and firms responded.
The share moves because the relative negotiating position of the two sides moved, with technology roughly held constant.
Both sides accept
Both accept that the output has to be divided somehow, that the division is not fixed by physics, and that substitution and bargaining are both real forces present in every wage. The disagreement is about which one accounts for most of the movement, and it is an empirical question that the available measurements do not cleanly settle.
Which is which? Put each one on a side.
A warehouse installs sorting machinery and employs a third fewer pickers at the same wage
Two of the three firms hiring a specialised skill in one region merge
A profession introduces a licence that takes four years to obtain
Two people can hold identical facts about a country's economy and disagree completely, and the disagreement usually sits in one of two places.
The first is the empirical question above: how much of the split is technology and how much is position. That one is in principle answerable and in practice hard.
The second is not empirical at all. It is a question about what division would be right, which no measurement can settle, because it is about what people are owed rather than about what they receive. Most public arguments about inequality run the two together and then behave as though the other side is being stupid about the facts.
Separating them does not resolve anything. It does tell you which argument you are actually having, which is more than most participants manage.
Check
Calling everything either labour or capital is a convenience that hides at least two things.
Land behaves like neither. It is not produced, so its supply does not respond to its price, and payments for it are not compensation for anything anybody did. Classical economists treated it as a third category for exactly this reason, and dropping it makes some arguments about housing considerably more confusing than they need to be.
Human capital sits across the line. Skill is accumulated by investment, which makes it capital-like, and it is inseparable from a person, which makes it labour-like. The entire next track is about the consequences of that, and about why the same hour of work is priced in wildly different ways depending on what is packed into it.