Tuesday, July 24, 2007

A Short Note on Productive and Unproductive Labour

Earlier today I was working on Smithian growth theory and thought a short piece on an aspect of it might be of interest. For simplicity sake, I have not developed the full Smithian growth process (fixed and circulating capital, etc.).

Adam Smith’s separation of productive and unproductive labour has caused much discussion in the distant past, but it is now ignored altogether in neoclassical economics. I think the problem is that people come at it from different perspectives. The most common description of the difference is that of between producing goods or producing services; the former produce tangible products that can be sold later to recover their costs plus a profit; the latter do not produce anything tangible and perish at the moment of their delivery.

This was not quite what Smith meant when providing a singular characteristic of service. True, a product is tangible and a service is not. Labour in both cases receives an income; if the labourer spends all his wages on consumption goods (subsistence wages), his wages become revenue for the producers, who receive their revenue (costs plus profit) from the producers’ productive labour. The suppliers save out of their revenue, which adds to net capital, adding to growth. He also replaces the wage and materials costs of the previous round, plus consumes (frugally or with prodigality?) the rest of his revenue as consumption.

Take a closer look at our author: Smith’s lectures in Edinburgh in 1748-51 paid him £100 a year, a handsome sum compared to his annual stipend of £40 as a Snell scholar at Oxford. (Corr. Letter No 25, 8 June 1758, p 24; Ross. I. S. 1995. The Life of Adam Smith, p 86) Presumably this amount covered his costs, leaving without doubt a sufficient sum to hire the lecture rooms for the next season, and a profit for the sponsors (Lord Kames and Gilbert Elliot).

The output of his Edinburgh lectures 'perished' at the instant he delivered them, but their delivery in the market for education paid him revenue, available for ‘immediate consumption’ and some of it for capital accumulation. Today, we would consider this activity to be productive, and so must Smith if his definition of productive labour is regarded as more important than his example of unproductive labour. For the ‘respectable auditory’ who listened to his lectures, they invested some proportion of the price of admission in their human capital, the benefits of which lasted beyond the lectures (Smith recognised human capital as part of the enhanced skills of labour) and the rest perished in an instant.

Prodigality denied the prodigal an opportunity to conserve and add to his net capital and earn future profits, for which ‘sin’ he was ‘perfectly crazy’. The receivers of his wild spending made their profits on top of their costs of supplying him with whatever he fancied. To the extent that they saved from these revenues they were productive. And so it was true for all suppliers who supply for acts of consumption.

Consider another unproductive set, famously referred to by Smith:

“The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers. They are the servants of the publick, and are maintained by a part of the annual produce of the industry of other people. Their service, how useful, or how necessary soever, produces nothing for which an equal quantity of service can afterwards be procured. The protection, security, and defence of the commonwealth, the effect of their labour this year, will not purchase its protection, security, and defence, for the year to come.” (WN II.iii.2: pp 330-1)

Again we should differentiate between government expenditure for preparedness for war, primarily on defence readiness, which provides costs plus profits for defence suppliers and therefore productive work for their employees, and which reproduces itself in each round in the economy, and government expenditure on the maintenance of soldiers and seamen, which is final consumption that does not reproduce itself. Government spending was paid for out of taxation, which reduced the revenues of the taxpayers, both for consumption and saving. To high the taxation levels and it means productive investment is limited, even reduced.

Smith’s concern with productive and unproductive labour was about the small proportion of the total capital available each year for net growth, because it was from this proportion that additional products of land and labour (the ‘necessities, conveniences, and amusements of life’) became available to society at all levels (unequally, of course), but it was the only way in which the lower orders, the labourers and their families, would raise their incomes above subsistence and bring more labourers into work.

His problem was that he had identified that while it was net revenue that drove growth, his definitions were primitive and not easy to identify in practice, and therefore difficult objectives for policy to affect. Exhortations for spendthrifts to be prudent, for people to be frugal, and for landlords and undertakers to save and invest, would have the usual moderate influence on behaviours. The 'urge to better themselves' may be dampened if rewards to risk and enterprise for profit seekers, and intenser working hours for labourers, were too low.


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