The Unlimited Capital Growth Model

 Is there any enough for the capital investment? Many tend to assume there is a cap on the economic development when the capital quantity exceeds a certain proportion to the labour quantity because it simply becomes too much for the scale of this economy. The problem is that this assumption is often used as an excuse for government and banks for neglecting their responsibility of slowing the economy. It is important to evaluate whether there is a certain limit of economic development or there is an unlimited potential for economic development.

As a matter of fact, the developing countries have succeeded in emerging with a remarkably high production growth significantly faster than the developed countries. It is ostensible that these developing countries lack the physical capital required for improving their living standard which is visible to decide where the future capital investment is necessary. Therefore, there is always a motivation for citizens and foreign asset management firms to expect a high growth potential to invest there. 

By contrast, the developed countries look already sufficient with the physical capital. The recession is often understood as the sign of excess supply of the production compared to its demand and the maximum capacity of the economic development. Therefore, it is often judged as a good opportunity to cut down the unnecessary capital invested to economy even through individual citizens suffer from the depression caused by their income growth stagnation and job loss. 

There are three macroeconomic theories of the productivity growth model, the Neoclassical economic exogenous growth model based on the fixed production of physical capital and labour, the endogenous growth model based on the human capital development, and the growth model of the New Economic Geography (NEG) economics. There is an innovative model combining the exogenous growth model and the endogenous growth model together as shown in the graph. The NEG economic growth model involves the demand side effect on the top of the supply-side effect explained in this article so that it is complex enough to need another separate article to explain. (Please kindly read already posted articles in this blog)

The productivity growth based on the labour and the physical capital is dependent on the exogenous factor such as the technological growth and the outside investments. The government do not need a complex analysis of finding their need of expenditure for the public work projects because their lack of physical stuff is visible. The private banks tend to be willing to voluntarily invest there because their investment return for the filling physical capital shortage. The productivity growth speed is faster at the low capital ratio to the human labour counterpart while it gradually diminishes as it is reaching towards the certain optimum proportion of the physical capital investment required for the human habitant population.

By contrast, the human individuals are not the mere labouring workforce working with the fixed manual for operating the physical capital such as machineries, auto-mobiles, and offices. These human labour workforces are actually the human capital contributing to the furthermore productivity growth on the top of the physical capital. Economy is composed of not only physical goods produced by the hardware i.e. the physical capital but also the complex value-added goods and various services provided by humans such as catering, computer engineering, consulting, and sales. Knowledge and experience are strongly tied up with their productivity levels and contingent to the other human workers to copy. Moreover, the combination of existing products to invest a new product is infinite. 

In particular nowadays, the ability level of taking an advantage of the information technology (IT) is a notably significant factor for improving the productivity level. For example, the IT service products such as the software and the cloud services are made of the computer programming codes. Their production efficiency cannot be measured by the classical economic model because it is highly dependent on a human individual's skill and experience. Furthermore, the manufacturing businesses are shifting towards the internet of things (IoT) so that the IT becomes the key of optimising the production processes with the programmed automation and the production flow optimisation. Therefore, knowledge and experience of each human individual has become the critical factor of the production growth.

With comparison to the emerging phase of the economic growth backed up by the physical capital growth, the productivity growth based on the human capital growth is slow. On the other hand, the counterpart with a certain limit to the productivity growth. The key factor of accelerating the human capital growth model is the education level because human individuals need a certain level of intelligence and adaptability to obtain new knowledge and experience. 

The return from investing to education takes long to capture while there is little or no short-term financial gain. This is why private banks are reluctant to invest there. This is why it requires the public sector investment to stimulate the educational development. Furthermore, adult individuals had better have the access to the safety net while leaving a job for joining the future education or a job training for a certain period. Otherwise, the currently ongoing socioeconomic problem will be considerably challenging. 

Employers should not underestimate the contribution potential of employees. Many employers still tend to treat their employees as expendable and replaceable as the simple labour force by ignoring their potential to become the human capital. Their knowledge and skills gained through their job experience are precious enough to be a long-term asset of this firm. Their human resource management should consider their payment for their employees as not only the wage cost but also the investment to the human capital.

In conclusion, considering the unlimited productivity growth potential, there needs to be a continuous stimulus to an economy to solve the socioeconomic problem. The income stagnation as well as the employment issues including both unemployment and misemployment because of the perpetuated economic growth stagnation in many developed countries. Hence, individual citizens should not be fooled by the excuse of their negligence perpetuating the socioeconomic problems.