Jonathan Schlefer has an interesting HBR post about income inequality and the rewards to factors of production. He has a book out that looks interesting – [amazon_link id=”0674052269″ target=”_blank” ]Assumptions Economists Make[/amazon_link]. He discusses the question of the substitutability of capital and labour, and consequently rewards to labour, in the context of an automobile production line. The line of argument is that neoclassical economics wrongly assumes ease of substitutability, and that if labour gets too expensive, firms will bring in more robots. It doesn’t happen like this – apart from anything else, as he implies, there is a lot of tacit knowledge in workers’ heads and muscles that machines can’t replace. In the auto context see, for example, Ben Hamper’s brilliant book [amazon_link id=”0446394009″ target=”_blank” ]Rivethead: Tales from the Assembly Line[/amazon_link].

[amazon_image id=”0446394009″ link=”true” target=”_blank” size=”medium” ]Rivethead[/amazon_image]

However, Prof Schlefer overdoes his argument in one way. The cost of labour can increase enough to trigger a move to more capital-intensive methods. Just think of all those new machines in the supermarkets that make you do your own check-out: “There is an unexpected item in the bagging area.” It’s a lumpy switch rather than continuous adjustment.

On the other hand, I think he under-does the argument in other contexts. There are many organisations in modern economies where almost all activity depends heavily on tacit knowledge, and cannot be monitored easily. Creating a new computer system. Answering calls in a call centre. Many more are the product of team efforts, with individual contributions impossible to evaluate and monitor. Boris Groysberg’s book [amazon_link id=”0691154511″ target=”_blank” ]Chasing Stars: The Myth of Talent and the Portability of Performance[/amazon_link] demonstrates the importance of teams and institutional context, rather than individuals, in the finance sector.

Either way, Prof Schlefer is right to challenge the simplistic neoclassical labour market thinking that manifests itself in some public policy discussion (although, ironically, the good labour market economists have long since stopped thinking like the textbook mode the HBR blog post condemns).

[amazon_image id=”0674052269″ link=”true” target=”_blank” size=”medium” ]Assumptions Economists Make[/amazon_image]