Sunday, April 20, 2008

Adam Smith's Distinction Between Productive and Unproductive Labour was About Economic Growth and Not Between Producers of Goods and Services

Scott H Young, ‘get more from life’ (HERE) writes on: "Adam Smith’s Definition of Productivity" (17 April):

I recently finished reading Adam Smith’s landmark book, The Wealth of Nations. It was written in 1776 and is widely considered to be the basis of the study of economics. One of the few interesting points I grabbed from the book was how Adam Smith defined productivity.

Smith divided up labor into two broad categories, productive and unproductive labor. Productive labor, according to Smith, was any work which fixed itself in a tangible object. Unproductive labor, was any work where the value was consumed as soon as it was created. Smith contrasted the role of laborers in a manufacturing plant (productive work) with the tasks of a servant (unproductive work).

I hadn’t seen productivity defined this way before, and it struck me as an interesting idea. The idea that unless your efforts fasten themselves in some investment, the work is unproductive

Scott H Young, by no means the first nor the last, has got hold of an idea from Adam Smith and arrived at the wrong conclusions. You can read what he does with it by following the link.

However, it is a useful hook upon which to account for what Adam Smith was talking about in respect of the categories of productive and unproductive labour, which is relevant for his understanding of how economies work.

Productive labor, according to Smith, was any work which fixed itself in a tangible object. Unproductive labor, was any work where the value was consumed as soon as it was created. Smith contrasted the role of laborers in a manufacturing plant (productive work) with the tasks of a servant (unproductive work).”

This is about where most people stop thinking and impute conclusions misleading distinctions.

What was Adam Smith getting at?

The distinction between productive and unproductive labour is a means to an end, specifically to Adam Smith’s explanation for economic growth in a commercial society. Bear in mind the Physiocratic belief that all wealth came from agriculture – you plant seeds and they produce many times more seeds than you plant, and commerce was ‘sterile’ – it only replaced the agricultural output it consumed.

Smith never accepted this view. He showed that commercial labour reproduced itself (wages), the rent of landlords, and the capital stock advanced by ‘merchants and manufacturers’, plus – and this is absolutely crucial – a profit over and above the costs of the vendible product. When labour did so, this was productive labour.

Unproductive labour did not reproduce its costs. The productive/unproductive distinction had nothing to do with the usefulness of what they produced, or their significance, or their necessity even. It was about whether their output was vendible or not.

Soldiers and seamen produced an absolutely essential product (defence for deterrence; or protective fighting capability in wars – the first duty of government), but they were not productive because their output was not sold as a vendible product. They were paid for from taxation and government borrowing.
Adam Smith’s distinction in the case of a “menial servant’s labour” serving food and drink in the household is unproductive, which sometimes leads people to draw the distinction between tangible products and services, but this can be misleading, if drawn too narrowly. It is the vendibility of the service that decides its productivity and not the fact that it is a service as such.

An Inn keeper’s staff, serving food and drink to paying guests, employs productive labour; a lawyer’s clerks producing legal documents paid for by clients are productive; even a brothel keeper’s employment of prostitutes who sells their services employs productive labour. In all such cases, no tangible product is produced – their output vanishes in its delivery – but they are all vendible, they reproduce their costs plus a profit to the Inn keeper, the Lawyer, and the Brothel keeper, which enables them to continue in business.

Smith noted that in reproducing their costs plus a profit, the Master who had outlaid the costs was able to assemble further rounds of production from his revenue, and, with the profits, he could choose to enhance his own consumption and make additional outlays to hire more labour, to augment labour, to purchase more materials, and thereby increase his total output of ‘necessaries, conveniences, and amusements of life’ in successive rounds to suit his ambitions.
To the extent that he chose to hire more domestic servants, engaged in consumption such as bigger or better houses, longer sojourns, indulge in gambling, better ‘equipage’ for his carriages, keep more horses, and such like, including going to theatres, puppet shows, spectacles and events, he would not add to his capital, but reduce it.

However, and note, the suppliers of ‘bigger or better houses’ were engaged in productive activity, unlike the purchasers. They combined the factors of production (land, labour, and capital) to recover their costs plus a profit. So in fact were the profitable gambling houses, keepers of stables, makers of equipage, owners of theatres, puppeteers, presenters of spectacles and events. Disregarding the productivity of the labour they used in these circumstances misses Adam Smith’s point.

In defence too, soldiers and sailors may be unproductive but the ship builders, foundries, forges, sail makers, gun smiths, sword smiths, suppliers of victuals, canvass, masts, flag poles, packing cases, blacksmiths, and the host of others supplying the unproductive defence forces, are most productive in the commercial economy. The growth of a commercial economy all turns – the ‘great wheel of circulation’ – on whether these suppliers make a profit, and what proportion of their profits above their costs they employ in adding to productive labour (frugality) or to unproductive labour (prodigality).

Smith was very clear about the importance of these individual choices. He thought it more likely that independent suppliers of goods and services would choose to contribute through their frugality (relative of course) to the continual expansion of national wealth (the annual production of the ‘necessaries, conveniences, and amusements of life’).

Increased annual output led to increased wealth and the slow and gradual spread of opulence. It didn’t need government intervention to ensure such a virtuous ‘wheel of circulation’ because people’s preferences for self-betterment would be strong enough for this to happen over long enough cycles.

If governments refrained from wasting taxation and curbed their borrowing they would assist this process; if they indulged in wasteful prodigality, especially when misled by mercantile political economy that induced negative growth policies such as tariff protection for some producers, allowed some of them legal monopolies, curbed the free movement of labour, and engaged in hostile jealousies of trade and wars with potential trading partners, they would worsen the reproductive advantages of commerce.

At stake was the spread of opulence, especially to the majority of poor labourers, as Adam Smith continually reminded his readers.


Blogger David Wootton said...

But surely that is not what Snith says -- lawyers and physicians, he says, are unproductive, even though their services are vendible.

6:56 pm  

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