Thursday, February 23, 2012

Adam Smith on Productive or Unproductive Labour

William Watson writs in the Financial Post

“Obama’s corporate-tax bias in favour of ­manufacturing is outdated”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

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.



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