Capital Equipment - Obson/MicroSim-GUI GitHub Wiki

If a business wishes to expand (because, for example, it has funds to spare) the obvious way to do it is to hire more employees—and for Obson this is the default procedure. However, when there is full employment this may no longer be possible. In this case, unless the business wishes to maintain a cash surplus, it may distribute the funds as bonuses or dividends. If it still wishes to expand there are a few ways it could do so, which we will see are related.

The first is to purchase capital equipment. By doing so it will hope to make its employees more productive—let's say 10% more productive. In which case its output will increase by 10% and this should be reflected in a 10% increase in the wages it pays.

The second is to approach the labour market with an increased wage offer. Ignoring subjective factors (and contractual limitations) an employee currently being paid £100 will be willing to change jobs if offered, say, £110. Suppose now that the business had 10 employees each paid £100 (£1000 total) and then took on (i.e. 'poached') an extra employee at £210. The business would then have 11 employees at a total cost of £1210 (110% of £1100)—an increase of 10% per employee, and an increase in 10% in the amount of work done and therefore in the wages it can afford to pay.

The comparison between the two approaches isn't exact, however, since in the first case every employee could be seen as entitled to a 10% increase in wages, while in the second only the additional employee would benefit. Further in the second case the business ends up with 11 employees instead of 10, and no new capital equipment.

We were constrained in this example by the need to keep the numbers simple. Nevertheless it seems reasonably clear that once full employment has been reached we can still invest and in doing so change both the cost of labour and the returns to the business from selling its output.

A third approach is to purchase advertising. This is almost indistinguishable from purchasing capital equipment, but it has the additional effect of making a business's products more attractive. Since this strategy, if successful, will increase demand, it will only make sense when there are unemployed workers that can be hired, or combined with capital expenditure. We will explore this in more detail later.

Productivity

For the sake of simplicity we will assume—initially at least—that companies can always invest in capital equipment and by doing so increase the value of their output and their wages, and we use the term productivity to mean the ratio of the new value to the old.

In our models, as currently constructed, the strongest motivation for investing in this way arises at or near full employment since recruiting becomes difficult or impossible (this is modelled by using a decreasing probability function) so that there will be excess funds to invest. However, even assuming recruitment to be successful and after distribution of bonuses there will often be a small excess—depending on how the parameters are set up —and whenever this happens we use it (notionally) to invest in capital equipment, resulting in an increase in productivity.

When interpreting the results it should of course be borne in mind that the stated productivity is theoretical. If productivity is, say, 150%, this means that the expected output from each worker is 50% more than it would have been had the capital investment not been made. In the real world an investment might be a good or a bad investment, in which case productivity will be increased by more or less than 50%. In future this may be modelled by applying a random factor.