Thursday, August 16, 2012

An Exchange of Views on Productive and Unproductive Labour

Recently, I exchanged views on Adam Smith’s account of productive and unproductive labour: Lost Legacy. With permission of the correspondent, I reproduce the exchange (unedited) below.  It may interest readers as an example of exchanges scholars have in their common search for clarity.
I have started reading your blog, aside from the fact that I pretty much disagree with your views entirely in the blaring light of obvious world events (such as the beginning of the collapse of European Socialism and the academic notion of Managed Capitalism), I'm not really looking to throw darts, just correct things that are clearly wrong. Your blog is, I suppose, dedicated to refuting Adam Smith and his modern day Acolytes, at the very least you can be accurate. I hope you are not being dishonest for the sake of your ideology.
"Smith also was inconsistent and the margins were vague.  Government expenditure was not unproductive when it purchases goods and services from private enterprises.   Take defence expenditures (the first duty of government).  Defence suppliers receive revenues from the government, and reproduce the costs of their defence services – they also make a profit and pay their suppliers and the wages of their employees to stay in business.  The defence departments pay their soldiers and seamen, which is unproductive in Smith's sense as these forces do not generate a revenue to cover their costs and the costs of their materials used in defence, but they consume through markets, adding to local revenues.  Much has been written and studied on local defence-sourced multipliers.
Government expenditure, according to Smith (and consistent throughout his entire works) is always unproductive. Even though military expenditures "trickle down" (little Regan to give you some fist pumping rage for the day), the government must take the money from a productive source in order to give it to the military, which is unproductive, even though the pass through may end up in productive hands. The only thing this does is create market dislocation. Smith acknowledges this dislocation briefly when he speaks of the Italian states during the crusades.
"Likewise with his example of consumers spending money on wines and their dinners in restaurants, hotels and theatre goers, seeking legal advice, and such like.  Consumers of these services do not reproduce their expenditures – they consume them.  However the restaurants, hotels, theatres, puppeteers, lawyers – even Brothel keepers and the courtesans – are productive in Smith's sense.  They receive incomes that reproduce their costs plus profits."
This is simply wrong. Smith does not call any of those "productive". He clearly calls them "unproductive".
My reply:
“Hi Chris
Thanks for your interesting comments, which I appreciate, especially from one who clearly has read Adam Smith’s works. Lost Legacy always welcomes criticism.
First, let me say, I think you may have misunderstood what Lost Legacy is about.  You write:
“Your blog is, I suppose, dedicated to refuting Adam Smith and his modern day Acolytes, at the very least you can be accurate. I hope youare not being dishonest for the sake of your ideology.”
Lost Legacy is not about ‘refuting Adam Smith’ – quite the reverse! By its title ‘Adam Smith’s Lost Legacy’, also the title of my 2005 book on Adam Smith of the same name (Palgrave Macmillan).  Lost Legacy bemoans what posterity in modern economics had done to his legacy.
As for “his modern day Acolytes”, they are the worst offenders.  They dominate public discourse about Adam Smith, summed by the myths of the“invisible hand” and the “greed is good” school of Hollywood scriptwriters (Gordon Gekko, etc.,).
I am not dishonest in respect of Adam Smith – I may make occasional mistakes, which I correct when errors or ambiguities are drawn to my attention – nor do I peddle anything for the “sake” of my – or anybody else’s “ideology”.   I am a retired academic and I do not participate in public politics.  In fact, I often remind readers that I do not
comment on the politics or the debates about politics in any country other than the one I vote in; that is in Scotland about Scotland.
Now re-reading my Blog message, I see I did not explain my point well – neither, I may say did Adam Smith on the productive-unproductive distinction.  His main point about ‘productive’ and ‘unproductive’
labour was valid; I am not so sure that specific applications of the distinction is clear.
All consumer spending is essential for the working of markets.  The suppliers of marketable products are productive where they contribute to the flow of revenues above their costs, i.e., make profits.  Those who merely consume output and do not earn corresponding profitable revenues – their services are not sold in markets – are unproductive
in Smith’s sense.   A standing army comes into that category.   Its inputs from commercial enterprises that generate profits for their owners are productive.
This applies to commercial defence contractors, puppet shows, hotels, restaurants, and, yes, brothels.  That distinction is lost in WN, though as Smith points out how necessary is such activity, is worth identifying.  Where there are spill-over effects in high technology in defence procurement, R&D, World Wide Web, civilian aircraft and communications, etc., these spill-overs can become highly productive (in Smith’s sense) as they penetrate civilian spheres of profitable
Now this may not be an optimum way of developing civilian technology but it is contributory to general economic activity.
Smith’s account of the emergence of towns from the violent dislocations that ended the Roman Empire in the 5th century and turned Europe into a stagnating and warlord/feudal and war-fighting continent is excellent.  Within that dislocated territory, life was tenuous for most people, including those called rulers.  Yet within parts of it manufactures and luxuries began to recover, tempting the rulers to undo their own supremacy.  This had political consequences, noted too
by Adam Smith.
Liberty for the towns meant some security for the Kings, who found it expedient to promote, albeit unwillingly, a crude and rough law of liberty (King John and Magna Carta) that slowly flowered because England and Scotland, unlike continental Europe, were not easilyinvaded, whereas Italy, France, Spain, German and Holland were open to fiercer and more frequent invasive warfare and dynastic violence lasting centuries.
Opulence does not develop in a neat and straight line, as Smith noted in Book IV.   Not much ever does in history.
I shall take greater care in future to express my points of Smith’s productive/unproductive distinctions more clearly.    I thank you for drawing my attention to my careless expressions when elucidating Smith’s Legacy.  Consumers do not reproduce their revenues,  quite right, but profit-making suppliers of these services and goods to unproductive consumers like defence customers, even restaurants and puppet shows, do reproduce their revenues.
Best wishes and thank you
Should any reader wish to comment/criticize on anything posted on Lost Legacy you are invited to do so – no trolls please!  You may remain anonymous behind a user name for publishing purposes, if you wish.  I prefer you to disclose your first name to me.  I shall respect your privacy.  Write to gavink9aTgmaildOtcom.


Blogger Will said...

I'm confused. I don't have Wealth of Nations in front of me, but I clearly recall Smith saying that "the noblest professions," medicine and law, are "unproductive." By your logic, this should not be so, as long as the doctors and lawyers are taking in income in excess of their costs. Yet Smith clearly counts them as unproductive, since they don't leave a capital good in place of what they consume. Is this not correct?

Incidentally, I find it interesting that you consider the distinction valid (it strikes me as persuasive too). My edition of WN has a forward by Edward Canaan, in which he dismisses that aspect, and this dismissal is echoed by most mainstream economists.

2:25 am  
Blogger Gavin Kennedy said...

Yes, indeed, Smith called the “doctors and lawyers” the “noblest professions” and quite right too! Medicine cured ailments – not as well as today – and lawyers were key elements of the justice system.
However, as both worked on a fee basis and had to eat, etc., they had no choice. In so far, as they earned above basic subsistence, they had to spend on consumption, which made their profit-seeking businesses borderline ‘productive’/‘unproductive’.
If they consumed all of their income, and saved/invested nothing, they could be considered unproductive on Smith’s distinction – like prodigals spending their inheritance or rent incomes. However, if they saved and invested in businesses – were frugal – by adding to the “great wheel of circulation”, they were productive on Smith’s distinction of capital stock formation.
Doctors hired assistants, bought medical instruments, drugs and
Appurtenances, indirectly employing productive labour; lawyers, hired assistants too (writers, bag carriers, messengers), and bought paper stocks and books (wroteor edited them – e.g., Edward Christian, Fletcher’s brother), adding to productive employment. To the extent they merely consumed, but never saved to add to the capital stock, they were unproductive.
The issue is whether they produced a “vendible product” that could be sold. Some did, others did not, which makes Smith’s distinction so unclear. Long since Smith, many of these old professions have become remarkably vendible – records, tapes, videos, and such like turn the ‘instant’ product into permanent replicable products earning their producers their costs plus profits.
I don’t think Smith was as clear as he could have been with this distinction but his overall purpose was very important. Growing economies need to continually replace the capital stock that was used up and earn sufficient to meet its wage bill for the next period, plus add an element for hiring more workers, and/or affording efficient machines to grow.
In short, the relatively balance between activity that merely used up the last period’s revenues would determine whether the economy would only replace past requirements or add to what it required to repeat the past period plus additional revenues for a larger next period. If replacement funds were less than sufficient, the economy would contract, not just stand still. That additional amount constituted its growth fund; it was crucial in Smith’s view. It need not be a large proportion – though the larger the growth proportion each period (year), generally the better. Small compound growth rates would work powerfully (not that Smith expressed this later idea).

That “Edward Canaan … dismiss[ed] that aspect”, which is “echoed by most mainstream economists” is true, though Canaan wrote a hundred years later than Smith about incomparably larger economies and our methods of calculating GDP/GNP data use a different analysis that lumps all economic activity together. Smith’s point in the 18th century was that Mercantile governments and their many wars in the 17th-18th century were an expensive way to grow an economy. His productive/unproductive distinction was aimed at criticising existing political policies of Empire and “Jealousy of Trade”.

“Mainstream economists” ought perhaps to think about that.

7:01 pm  

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