From My Notebook no. 20

Smith on “Productive and Unproductive Labour” (aka: LTV = Labour Theory of Value in Wealth Of Nations)

LTV and productive work, this has moved on a lot since Smith, mainly into obscurity.   Much has been made of this little problem in the literature.   It is quite simple, or simpler, than is made out.

Smith regarded productive labour as the kind that produced a “revenue”, to cover costs, and a portion to provided that part of that could be invested.  Unproductive labour did not produce a revenue beyond what it cost.

Take defence.  That product did not produce a revenue for the buyer - it was not sold on mainly (if sold it was still unproductive for the buyer and seldom was sold for a profit.   It was paid for by the government by taxation receipts.  Defence goods - ships, artillery, weapons and ammunition, subsistence for soldiers, seamen and administrators - do not earn revenue from selling their services.  These are unproductive for government buyers.

However, labour used by the suppliers of defence goods to the government is productive.  They earn revenue from sales of defence goods, including subsistence goods, to governments.  The revenue earned by defence suppliers to the government, covers the suppliers' costs and their profits, which can be invested for further rounds of production, therefore their labour is productive.

The distinction is important.  Foreign wars do not destroy domestic infrastructure like wars fought on their own territories. The costs of replacement of domestic assets fall on foreign countries whose territories are invaded, not on the domestic economy of the invaders.  (England benefitted from wars on foreign soil; it 'lost' its domestic resources in colonial wars).  The 7-Years War cost the UK £100 million, which reduced domestic capital by that much plus possible future profits from alternative domestic uses of the capital raised by taxation/borrowing to fight those wars.

However, Smith's focus was on the productive/unproductive distinction, though some of his examples were obscure and incorrect.  Household wine consumption was unproductive - the costs of such products did not produce for the household a revenue - the wine was drunk and could only be replaced by more taxation and borrowing.  However, the wine suppliers earned their revenue from selling wines, etc., to households, which produced a income for the suppliers, covering their costs and a profit. The wine trade was productive for producers and for sellers but unproductive for consumers. 

Interestingly, purveyors of wine products to hotels, inns, and restaurants, were productive when they covered their costs and made investable profits frm their sales to consumers.  

Customers of brothels spent their services unproductively while owners of the brothels who supplied of such services were productive - they earned incomes above their costs and could invest them in other activities. (This may not apply to the female sex labourers quite so distinctly, though I know of one female graduate who later worked at the top-end of this profession and made a small fortune before retiring).  Marx made this point in his criticism of Smith; so were lawyers and scriveners, etc., who sold their services to customers and made a revenue plus a profit.

Judges, court officials, prisons, etc. were unproductive and were supported by taxation and fines, and personal litigation costs.   As were beach puppet show owners - they earned profit from the adults and children who paid their pennies to watch the shows.  Such puppeteers earned income and after the costs of their booth, and public fees.  After they paid their costs and made a profit to invest in further rounds they were productive. 

Smith's somewhat confusing presentation focused too narrowly at the transaction from one side (the customers) and did not make clear his definitions and the distinctions associated with each side of the transactions that were necessarily involved.