Productive vs. unproductive labor

It’s the beginning of the semester and so, in Topics in Political Economy, we’re starting with Adam Smith’s Wealth of Nations.

One of the first topics of discussion was Smith’s distinction between productive and unproductive labor. On the very first page, he invokes the difference between the two forms of labor as one of the key factors determining the amount of wealth (what today we refer to as GDP per capita):

According therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniencies for which it has occasion.
But this proportion must in every nation be regulated by two different circumstances; first by the skill, dexterity, and judgment with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed. Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must, in that particular situation, depend upon those two circumstances.

Smith returns to the issue in Book 2:

There is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master’s profit. The labour of a menial servant, on the contrary, adds to the value of nothing.

As I explained to the students, Smith was worried about the extent to which national income, especially the surplus, was used to expand the number of productive laborers (the “labor of the manufacturer”) or, alternatively, consumed by wealthy individuals in the form of unproductive labor (“menial servants”). The former would increase the wealth of nations; the latter would not.* The contemporary example I used was the productive labor utilized in producing goods and services vs. luxury expenditures on art and real estate.**

The students (at least some of them) didn’t buy it.

I suspect at least part of their suspicion of the distinction was their prior training in neoclassical economics, in which the distinction between productive and unproductive labor was dissolved (and which, in recent years, finds neoclassical economists attempting to define the productiveness of the labor involved in FIRE—finance, insurance, and real estate).***

What Smith and contemporary neoclassical economists agree on is both a definition of and a focus on economic growth. It’s a key part of the legitimacy of the “pact with the devil” that is central to capitalism. Wealthy individuals (and the corporations they own and on whose boards of directors they sit) get control of the surplus but they have to use it to employ the population and provide for their “necessaries and conveniencies.” If they don’t, and use it instead to purchase art, real estate, and other luxury goods, they put into question the legitimacy of that pact.

In recent years, economic growth has been very slow. But 1-percent incomes and their luxury consumption are growing, while median household incomes and workers’ wages are stagnant.

That’s a situation that would have worried Smith.

*Marx took over the distinction between productive and unproductive labor from Smith but then transformed it. For him, labor was productive to the extent that it produced surplus-value; all other labor (e.g., the labor of corporate managers as well as that of personal servants) was unproductive labor.

**According to Laurence D. Fink, the chairman of BlackRock Inc. (the world’s largest asset manager),

“The two greatest stores of wealth internationally today is contemporary art….. and I don’t mean that as a joke, I mean that as a serious asset class,” said Fink. “And two, the other store of wealth today is apartments in Manhattan, apartments in Vancouver, in London.”

***Their suspicion might also be influenced by a belief in trickledown economics, that is, the idea that whatever investments and purchases wealthy individuals make will eventually trickle down to the mass of workers.