Say you and I start separate apple juice companies. You have a factory full of machines that compress 20 apples every five minutes. I just have my backyard, where I squeeze apples by hand, one by one. You also own a truck that allows you to transport hundreds of gallons of apple juice in a single trip. I just have a bike that can only carry two gallons at a time. To make a website to market your apple juice, you took fifty classes on codeacademy.com. I don’t even own a computer to know what a website is.
Who’s gonna be more successful in the apple juice industry? Who will make apple juice at the most efficient rate?
You are, because you have more capital.
Capital is any non-financial asset that helps you sell more of a good or service. The benefit of having more capital in a society is that it allows companies to produce more in a short amount of time. This means the company will make money at a faster rate and have the ability to pay their workers higher commensurate salaries. Countries with the most capital stock per worker tend to have the highest average incomes.
Capital improves labor productivity, and is central to deliberate economic growth.
Tired of making so little money with my company, I decide to work on research and development to improve my apple juice production process. I succeed, and end up inventing: “Apple Magic”. Apple Magic is a machine where you put in an apple seed, and it produces one cup of apple juice. I spend a few more years researching and developing to make my production process faster and more cost-effective than yours. Eventually Apple Magic, in any given day, can produce five times as much apple juice as you can, at half the price.
I hope you are economy-minded enough to ask now: “Yeah, this might help Zac Toa, but does it help society?” The answer is yes and no, depending on what you choose to narrowly look at.
Opponents of technological shocks will point out that my Apple Magic will run four apple juice companies (bless their souls) and you out of business. This, according to them, means Apple Magic is evil, and should be destroyed before it enters the apple juice industry.
On the flip side though: the only reason I can run you guys to the ground is because I have a more efficient production process that allows me to charge a lower price to customers. This means that consumers pay less for apple juice, and have extra money left to buy something they otherwise wouldn’tve bought. This extra spending money allows NEW businesses to be born.
In this way, new technology improves the production possibility for individuals AND for society.
It can hurt employment in an industry, but it’s often made up for through the birth of new industries elsewhere in the economy. This is why: despite the mass introductions of technologies since the industrial revolution, employment still exists.
One fair, moral argument against Capitalism is that it’s the exploitation of those who have capital on those who don’t.
To demonstrate this point, say you start a taxi company. Because you’re rich, you can buy ten taxicabs and hire ten drivers. Because the cabs are your capital, you can play video games at home all day, and still get half the fares that your drivers collect for you.
You greedy scumbag, that isn’t fair! But then again, capitalism isn’t fair. The system doesn’t reward people because they work hard; it rewards people because they produce.
Here are some arguments on why you being a selfish douchebag is justified:
-When you bought those taxicabs, you had no idea how well your business would do. You took a risk spending that money, so you deserve your reward.
A society needs businesses to be productive. All businesses start with risk. In Capitalism, profit is the incentive of entrepreneurs for taking that risk.
-Your drivers had the choice to work for you. The fact that they took the job means that what you pay them is beneficial enough for them to keep working. If you pay them less, they have the option to quit and do something else.
Free choice helps reduce exploitation in capitalism.
-Driving a car is a common skill. When something is common, it’s worth less. That’s why air is free.
I don’t want to denigrate low-skilled laborers; but let’s be real, that’s exactly how you, the greedy capitalist, see them. You want to get the most value for the least cost, and if you can find one guy out of a million people who would be willing to work for the least amount of money, why wouldn’t you hire him?
Businesses are willing to pay more for skills and expertise if they are rare. Capitalism rewards specialization.
My dad came to America without any skills, and without even a high school education. I think he summed up the plight of low-skilled laborers best when he told me: “Immigrants work hard! Who says Americans work hard? That’s boolshit!”
Imagine I became dictator. On the first day of my glorious rule, I revoke the driver’s license of everybody, except for ten select individuals. I obviously do this to spite you. Now all ten available drivers in the world demand at least one million dollars an hour to work for you.
Will you hire them?
You probably wouldn’t. As rare as these drivers are, how likely is it that any of them can make you a million and one dollars an hour? They’re not worth the price because they do not produce a return that exceeds their price.
So for a skill or expertise to be valuable, it’s not enough for it to be rare, it also has to make money. This explains why doctors, lawyers and engineers get paid a lot. They have skills and/or expertise that few people have and that make a lot of profit for their employers.
In this chapter on efficiency, I used a lot of storytelling to give you an intuitive understanding of Economics. In the next chapter, I will focus more on giving you analytical tools so you can use reason to understand economic situations on your own. There will be a lot of graphs and variables, but they will be fairly simple. If you can stomach them, you may end up with a lifelong appreciation of economics.
If you would like to learn about real examples of inefficiencies in our economy, I recommend reading “Economics In One Lesson” by Henry Hazlitt.
Note: For any book I recommend, all the arguments therein are that of the author’s. Just because I agree with the main argument of a book does not mean I agree with every “corollary”.
As always, thank you for reading,
Zac Toa