In this video, we're gonna be focusing on resources and
technology as determinants of production capacity.
Recall from the previous video that we identified three types of
factors determining the production capacity: resources,
technology, and institutional capabilities.
In this video, we're gonna focus on the first two.
The third to the factors, institutional capabilities,
is the topic of the next video.
Now, the role of resources in determining production capacity.
Resources consist of human capabilities – effort, time,
energy – as well as physical capital and natural resources – land, energy, minerals.
Having more resources allows the economy to produce more.
For example, physical capital enables workers to
produce more and to use technologies that become available.
Human capital plays a central role in production capacity because
people bring together other resources and put them to use.
It's very tempting to think that if we work harder,
put in more hours,
use more capital, we're gonna continue growing.
But that's not actually the case.
We do produce more output with more work,
with more effort, with more capital,
but the rate at which the economy grows is gonna be declining as
the level of income rises, with increased resources.
So while having limited access to resources constrains an economy's growth,
having access to a lot of resources means
increased output but not necessarily continued growth.
The reason is that resources have diminishing returns.
Think about the amount of capital that you can use.
Think about the following example.
Suppose you have no computers at your work,
and you get one – that increases your productivity.
Then, you get a second computer,
let's say a laptop you can take home or take to other places,
and that also increases your productivity.
So the increase in productivity may not be as
high as was the case with the first computer.
Now if you get a third computer,
that also might be helpful in some situations,
but it's gonna be more marginal.
The fourth and fifth computers might be pretty useless and may actually take
your time with updating, with replacement, etc.
So there's diminishing returns to resources per person.
And, what is more is that when you have more resources,
then you have to deal with more depreciation,
and that takes some of your time and energy and
savings to replace the depreciated capital.
As a result, when the resources at your disposal increase,
your output increases at a diminishing rate while
the depreciation cost increases linearly, and at some point,
depreciation catches up with the increase in
production and it becomes more costly to maintain the level of output,
and at that point, output starts stagnating.
So having more capital,
working more hours increases output per capita,
but eventually the growth rate comes to a halt because
depreciation cancels the gains in output.
The notion that capital accumulation can bring about
long-term growth and prosperity used to be quite popular.
In fact, the policymakers in most developing countries used to think in those terms.
One good example of this is the Soviet Union after the Bolshevik Revolution.
Leaders of the country wanted to show that socialism works better than capitalism,
and their idea of how to show this was to
increase production by investing more and increasing the capital stock.
They did that but the capital stock started depreciating and they needed to replace it,
so a large part of the savings of people in
the Soviet Union went towards maintaining the capital stock.
Although in the 1930s,
Soviet Union was growing very fast,
by 1950s, it slowed down,
and after the 1960s,
there was not a whole lot of growth,
and that may have been one of the factors that led to the demise of Soviet Union.
Paying attention to the fact that
more resources are helpful but they have diminishing returns is
very central to understanding economic growth and designing policies for long-run growth.
Ultimately, per capita income grows when
people produce more with the same amount of resources.
That's known as technological change.
It's discovery, innovation, invention,
those kinds of things that enable people to produce more, produce new goods,
satisfy needs in ways that are less costly,
and as a result,
producing more without working much harder and
without setting aside a lot of production of the economy rather than consuming it,
putting it into investment in order to produce more,
because that kind of strategy has a lot of diminishing returns.
Human capital, physical capital are very good,
very helpful, but they are worthwhile when there's new technology to be implemented.
Before moving to the next topic,
on the role of technology,
let me emphasize that resource development,
whether it's capital accumulation, education,
human-capital building, development of natural resources,
is a long-run process.
It's not something that can be changed in short order.
Occasionally, there are disasters that destroy physical capital or human capital,
but most of the time,
building capacity in terms of resources takes time, and therefore,
that should be taken into account in any analysis
of the movement of the economy from the short run to the long run.
Any policy that helps resources to develop may have
long-run benefits but not necessarily short-run gains.
The other thing to emphasize is that fluctuations in resources
does not explain a whole lot of changes in year-to-year GDP fluctuations.
Now let's focus on the role of technology.
First, let me define technology.
Technology is the knowledge about the ways of combining resources to
produce goods and services that we need and satisfy our needs.
Better technology enables the economy to produce more output with the same resources,
and that's why we say that technology increases production capacity.
Very much like resource development,
technology also develops over the long period of time.
It's not something that can be changed very quickly.
The cell phone that you use, for example,
is the result of years, decades,
and even centuries of developments in scientific knowledge,
in innovation, and production technology.