Adam Smith on Productive or Unproductive Labour

William Watson writs in the Financial Post
HERE

“Obama’s corporate-tax bias in favour of ­manufacturing is outdated”

“Obsessing over the trade deficit and trying to distinguish between productive and unproductive sectors of the economy have been blind alleys for economists since economics began. Early writers thought everything but agriculture was unproductive. Adam Smith improved marginally on that by arguing that what was unproductive is everything that didn’t produce physical output. Modern economists understand, finally, that, yes, even services are productive. Hence our resistance to policies that consciously favour one sector of an economy over another.”

Comment
Yes, modern economists are in a muddle about ‘productive’ and ‘service industries’ – remember the Selective Employment Tax of a past Labour Government, which taxed services more than manufacturing, pushed by Nicky Kaldor of Cambridge? It had disastrous consequences from muddle, especially under modern ideas of GNP.

But the mention of Adam Smith repeats a fairly well-known misunderstanding of his writings on productive and unproductive work.

The key difference was output that added to national revenue and what merely consumed it. Activity that produced a net revenue, over costs, was productive; the opposite was a version of prodigality, which may be necessary but not ‘productive’.

Smith’s expression was somewhat ‘slack’ in precision. For instance, expenditure on defence – the ‘first duty of government’ was classed as unproductive. Armies do not realize a revenue; they spend what they cost (and often more). However, there is quite a long supply chain involved and along that supply chain there is quite distinct productive expenditure and activity.

For example, commercial military supplies companies aim to make a profit; otherwise they would not be able to continue, and their costs would merely add to unproductive labour (reducing net growth). In so far as they make a profit from sales to the government, they add to the nation’s revenue and contribute to the ‘great wheel of circulation’ like any other commercial enterprises.

Similarly, expenditure on entertainment, hosteleries, brothels, restaurants, and their supply chains, also can be unproductive or productive according to whether they are commercial or non-commercial enterprises. The producers of wine in France were commercial enterprises that made profits, adding to national revenue; so were the shippers and the distributors.

Economists do not - or ought not to - 'favour one sector over another'. Whether we should build aircraft carriers or salable cars, or whether we should sell physical products or services, is likewise a choice necessity and of which adds more, or as much, to national revenue. Stopping defence expenditure could end all productive activity. These are political decisions, not economic ones.

Adam Smith on Unproductive Labour

Karl W. Eli (New York) writes to the Financial Times HERE

“‘Trivial’ professions – but necessary”

“Jagdish Bhagwati criticises Adam Smith for condemning the labours of “churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians etc”.

Comment
I am surprised that Jagdish Bahadwati may have slipped up here, as might Karl Eli).

Adam Smith did not condemn the “unproductive” sectors; he categorized them by whether they added to the annual revenue of a society or whether they spent resources without replacing them in the ‘great wheel of circulation’.

Admittedly, this was rather blunt designation, and much misunderstood, because, perhaps, it is mixed up with prodigality – spending your income with replacing it while en route to bankruptcy.

The army and Royal Navy were ‘unproductive’ – they consumed what was allocated to them. However, the commercial suppliers of victuals, weaponry, munitions, uniforms, and such like, were productive. They aimed to make a profit on their labours and such profits added to the country’s annual revenues.

Likewise necessary inputs into the legal professions (quills, gowns, wigs, fitted-out court rooms, books, uniforms, provisions, the services of inns, jails, and such like) when produced commercially, were productive. Similarly, theatre owners and their staff, artistes and playwrights, hotel owners and their servants, musicians and their instruments, printers of their posters and bills, their costumes, including for buffoons, even puppeteers and commercial makers of their dolls, were productive, as were those employed in providing wine (France), whisky (Scotland), gin, and beer (England) - when they produced profits - were productive.

In practice, the expense of Sovereigns and their Courts, invariably ran at a loss, but their bankers, lenders (risky if Jewish because regularly pillaged), producers of fine furniture, clothes, jewelry, plates, paintings, and so on, if they made a profit could be productive, and those of their suppliers in the supply chain, who managed to get profits from successful payment, also made a productive contribution to annual revenue.

There was no question of these groups being non-useful or unnecessary. Smith’s definition made it clear that it was their contribution or otherwise to society’s annual revenue that determined their productivity, not their social value.

Adam Smith’s comment was in fact even-handed, if we read his not very clearly expressed meaning.

Adam Smith on Prodigality

Someone on Grad Student Madness HERE writes:

“Aristotle and Prodigality

In fact, we’re often told that the overall economy cannot function if thrift is too widespread. This is not a recent argument. Adam Smith, in fact, says as much at one point: thrift is good for the individual, but it’s disastrous for the economy. A consumer economy needs consumers, not tightwads. A more recent argument has been that the economy will not return to full health until consumer spending returns to what it was before- that is spending into individual debt. Conversely, these record levels of debt will make a lot of us into swine herders.

All of this is to say that industrial consumer capitalism is only a few centuries old and thus at odds with many of the traditional values of western civilization. A system that requires spending instead of thrift in order to satisfy manufactured needs in perpetuity; and which makes those fleeting desires, and therefore the individual will, the sole measure of our behavior, will therefore always be somewhat at odds with traditional ethical systems, which generally seek to limit the behavior of the individual vis-à-vis the family, the community, or the godhead. Moderation is good for the individual, but of ambivalent, if not negative value for the economy.

Of course, Aristotle and Aquinas don’t want us to live as ascetics either. (At least, not Aristotle) It is theoretically possible to reconcile the view of prodigality as a sin and the consumer capitalist economy if we agree that liberality is a virtue. One could spend a reasonable amount of their income, and give a reasonable amount to others; and satisfy both Aristotle and the chamber of commerce. The problem is that if a great number of us did this, the economy would have to seriously shrink. And so, the key to getting the western economies out of recession is promoting prodigality in a time of thrift. That is, promoting vice in a time of increasing virtue. Strength through shopping.

If I have to choose though, I’m going with Aristotle over Adam Smith.”

Comment
I am trying to find where Adam Smith said this:

“Adam Smith, in fact, says as much at one point: thrift is good for the individual, but it’s disastrous for the economy.”

It may have something to do with Smith’s point that the purpose production is consumption, not the interests of producers. But that idea is tenuously linked to Smith’s explanation of the ‘Great Wheel of Circulation’, which depends on the supply of productive capital, which is undermined by prodigal spending.

Thrift, or frugality, supplies the savings that when combined with fixed capital and the expense of productive labour causes commodities to be sold to consumers, preferably for a profit. From the profit, the entrepreneurs or undertakers are able to hire new rounds of productive labour, which when combined with fixed capitals (which do not leave the possession of the undertakers), produce further supplies of consumables. These are the source of economic growth in Smith’s view.

The author of the ‘grad’ essay is aptly regarded as ‘mad’ for his attributions. On his mental state, I could not possibly comment. May be a very clever philosophy student. ‘Too clever by far’ is probably more appropriate.