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.
“Sir,
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.
http://www.econlib.org/library/Smith/smWN11.html#B.III,
%20Ch.3,%20Of%20the%20Rise%20and%20Progress%
20of%20Cities%20and%20Towns
%20Ch.3,%20Of%20the%20Rise%20and%20Progress%
20of%20Cities%20and%20Towns
"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".
Thanks
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
production.
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
Gavin
Comment
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.
Gavin
2 Comments:
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.
Will
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.
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