Beyond specialization, another major source of productivity is teamwork, in which people coordinate their specialized activities. The real question now is who gets the benefit from the social total gain of more output? One way to think about this is to use the marginal product of an input. This does not mean how much that input produces, rather, the change in the total output that results from having one more input. Since output takes many inputs, with teamwork it is meaningless to ask what has been produced by each input. Instead, we can ask what determines the payment (price) for services of an input.
Control, Property Rights, and Incentives
Imagine a crew on a boat. How many people will be allowed on the boat and who gets the output?
Scene 1: Share and Share Alike
In this first part, we will assume that the discoverer of the boat determines how many persons can be on board and all those on board will divide the total catch equally (per capita share). The discoverer has incentives to only let a few people on so each person will have more fish when divided up. This is a characteristic result for socialist firms, where the entry of a new person lowers the income of others and must be approved by the incumbents. It is also a trait of many labor unions of professions: electricians, musicians, doctors, and lawyers.
However, if the new member paid an entry fee this would alter the number of new members admitted since the payment would enable existing members to divide it among themselves. In general, the newcomer who can get a marginal catch bigger on the boat than on the shore would be willing to offer almost all that excess to the existing crew to be divided amongst themselves.
Scene 2: Private Property
Now, the boat is owned by the finder. Instead of having to share the catch, the owner seeks to maximize personal wealth (the number of fish kept). The owner hired a crew and keeps all the excess of wages. How much will they be paid? How many will be hired? How much will the owner gain?
Assuming their next best opportunity is catching 4 fish per day on shore, they must be paid more than this. Thus the boat owner will hire as many people as have a marginal catch on the boat that exceedes the wage that each must be paid. As the crew grows, MP declines, and at the fifth crew member the marginal product is down to almost 4 fish. Thus, the owner will hire between 4 and 5 members, which maximizes his gain and the social total (14 fish).
Scene 3: Boat Renting
Assume the boat owner retires, and now the ship is rented by the crew. How large is the crew and what rents are attained? Since we know the gain can be 14 fish, there will be competition amongst the fishermen to be in the crew. But again, the highest rent could be paid by only 4-5 people. Again, the owner's personal income has been maximized.
We can summarize the main lines of our analysis and their implications in the marginal productivity theory of demand for inputs: the demand for productive inputs depends on the marginal products; inputs will be demanded up to the amount at which their marginal product falls to equality with the wage or price of the input.
Employees or Renters?
If you consider carefully, there is no difference between cashiers hired as employees or the fishermen renters. In essence, the cashiers pay the owners of Macy's rent for its building, products and facilities out of the total daily sales, leaving the cashiers with some income. The only major significant difference is the difference in the incentives to shirk or be negligent.
Scene 4: Boat as Communal Property
Now, the boat owner has been expropriated. Anyone can get on the boat until the average catch matches that on shore -- so 8 people. But notice that each newcomer ignored the external harmful effect on other people. This number means the marginal product on board has been decreasing, causing social losses of fish. No one is better off than before the boat was found. This is an example of congestion-- when the absence of property rights means non-excludability.
Scene 5: Government Control
Finally, picture what happens if a government agent is told to maximize profit from renting the boat. It would seem that he could take the 14-fish profit and give it to the rulers to distribute it back, but that is assuming he only has the incentive to maximize wealth. With a government agent, there are many other factors at play (authority, popularity, etc). Furthermore, profit maximization is not usually a goal of the government-- it's usually maximizing public welfare which increases ambiguity.
Substitution, Complementarity, and the Demand for Inputs
An important principle illustrated in the above model of teamwork on the boat is that the greater the quantity of capital equipment or machinery available, the larger will be the total output (combined with labor). The more important yet subtle question is: "What does having more equipment do to the whole schedule of the marginal product of labor"?
For a constant amount of capital, the marginal products of labor eventually fall. However, with more capital the whole schedule of marginal products of labor might be shifted upward, causing the total product to be larger at each crew size and the marginal product of any additional labor to be bigger. However, it might also twist the demand schedule, making it more profitable to have less labor.
In one sense, capital is always a substitute for labor, since one could use few units of labor for the same total output if given more capital. If the price of one goes up, more will be used of the other. For example, consider what happened to the elevator-operators when there was a minimum wage of $2.40 imposed (above their usual $1 per hour). Now the cost of operating a manual elevator rose to $10,000 per year. The owners of the building then found it profitable to employ an automatic elevator costing $8,000 per year. When the elevator-operators were discharged after several months, they did not understand that it was due to the higher wage, rather, blamed it on automation.
Resource Substitution
We frequently hear that the suburbs are infringing upon farmland or celebrities urging us to consume less energy. All these examples reflect a basic misunderstanding of costs. What is the error?
- First, resources are used to serve people, not merely to be "saved." The question is "What is the best rate and way to use them?" NOT "What is the way to not use them?" If you remember capital value theory, you will recall that the values of future uses are included in the present prices of goods.
- Secondly, people forget that there are many ways to produce something. It is inefficient to use more of one input when more could have been saved by using another. Life is a choice between tradeoffs.
- Finally, technological efficiency is sometimes invoked as a necessity for policy. However the real efficiency that matters is economic-- whether we can substitute inputs that are less than the original cost.