Productivity & Investment: Technology, Human & Physical Capital

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  • 0:01 Increasing Production
  • 0:52 Human Capital
  • 2:23 Physical Capital
  • 3:44 Technology
  • 4:52 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

How can one factory produce as much as four did a generation ago? Sure, technology plays a part, but it's not the only way that productivity can be increased. This lesson explains how.

Increasing Production

Let's say you owned a factory that produced TVs. In the past, you had relatively little in the way of demand, as people typically owned one TV and that TV was not replaced very frequently. However, in the last 20 years, there has been considerable growth in the TV industry. That means that your company has had to keep up with demand, yet you still have just one factory. How is that possible?

Let's take a look at how the changes in TVs have affected your company, ranging from how TVs are made to who makes them. On the whole, these are examples of innovations, or changes that permit increased production or lower resource costs. One thing we will not be focused on is the changing demand for TVs - that would be a demand-side issue and therefore out of the realm of this supply-side lesson.

Human Capital

At the annual holiday party, you notice a group of people who worked for the company until their retirement some years ago. You can't help but overhear younger employees trying to talk to them, but it seems they are speaking completely different languages. The older guys talk about the electrician classes they took in preparation for working on the TVs, while your current employees talk about installing the latest image of the interactive TV OS on the latest models. But remember, these people work at the same factory!

This eavesdropped conversation demonstrates the ever-changing role that technology has had on TVs. A generation ago, a TV was top-notch if it was attached to a satellite that got more than a handful of channels. Today, TVs project images in 3D, stream live Internet feeds, and are capable of video chat. Tomorrow's TVs could very well be able to look at the state of your living room and offer to schedule a cleaning service.

Needless to say, the expertise to put together such electronics has changed dramatically. In the past, a strong back was needed to hoist the picture tubes into place. Today, a sharp mind is needed to troubleshoot the latest version of an operating system. Both represent the investments that needed to be made in human capital, or the investments made in the workers themselves. In years past, a former football player would be a better hire than a mathlete. Now, the opposite is true.

Physical Capital

Still listening in on that holiday conversation, you hear the two sets of workers comparing the tools they used in their line of work. Some of the older retirees say that they actually worked at another factory before coming to the TV plant and that many of the tools were relatively similar. This revelation seems to stun the younger employees, who cannot imagine using any sort of background other than the skills they gained while studying programming and networking.

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