Pay phones, as seen through the balance of capital and labor

Several years ago, I took an introductory economics class from John Mutti. One of the basic principles that was discussed frequently, but often hard to illustrate in a concrete way, is that the relative abundance of capital and labor influences the mix of the two factors that will be used in any business.

I’m in China right now, where labor is relatively more abundant than in the United States. An economist would predict that businesses would use more labor and less capital, and you do get hints of that in the amount of labor used by hotels and restaurants. (I once ate at a restaurant in Jinan with a colleague, and the two of us were served by six staff members.)

Walking around yesterday, though, I saw the best example yet: pay phones. I’m used to pay phones being things you put coins in to get a dial tone. They’re sturdy, well-built devices that have to stand up to the abuse of patrons. As a result, they’re quite expensive ( will sell you one for $489, as I write this). Pay phones, as I understand them from my experiences in the developed world, are capital.

Not so in China. Here on the street, there are “public telephone” booths, which combine both traditional coin-operated phones and a table with several regular phones overseen by an agent. If you want to make a call, you pay the person inside the booth, and you get to use the phone. Here’s an image from the street yesterday. A woman is paying for the call she just made, and I believe the woman in the white hat is zipping up her wallet as she walks away after a call of her own. It’s exactly the sort of thing that an economist would predict. When labor is more abundant, it can substitute for capital. In this case, the labor of the person inside the booth is substituting for the capital equipment to collect coins.

Staffed pay phone in China

(Some of the booths even have signs that read “public telephone,” but sadly, not this one.)

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