21st Century Production Functions and Implications for the Labor Force, Employment, Unemployment and the General Population

I have been thinking a lot about economic models ever since I studied economics, but I have been thinking about them a lot more since the financial crisis.

One point that has been a part of my thinking for a long time is what is known as the “production function”:


In neoclassical economics, there are generally assumed to be three inputs (“factors of production”): land, labor and capital. The most striking thing about this short list is how outdated it is. Today, so-called “input-output” models use hundreds of factors. Two quite blatant omissions from the ancient model of the production function are energy and information. Usually, each of the factors can be substituted for other factors (for example more information might reduce the amount of energy required to produce a certain level of output).

Another thing that is often overlooked is that many different technologies can coexist at one and the same time, so in a high-wage markets, technologies which are “labor-saving” are preferred (i.e., in “advanced” economies like Germany or the United States, it is quite common to employ very large amounts of energy and machinery, yet relatively small amounts of labor — compared to, say, China).

Finally, there is no obvious reason why all of the available factors need to be employed. For example: It’s entirely possible to produce products and services without using the entire population to do so — the people who are not required would simply be unemployed (and here I simply mean they would not be “employed” by the production function / technology — and therefore they would be free to do something else). Likewise, it is not necessary to use up all of the natural resources available. Each community can decide what level of resources of each factor to employ.

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