Productive and unproductive labour
Encyclopedia
Productive and unproductive labour were concepts used in classical political economy
mainly in the 18th and 19th century, which survive today to some extent in modern management
discussions, economic sociology and Marxist or Marxian economic analysis. The concepts strongly influenced the construction of national accounts
in the Soviet Union
and other Soviet-type societies (see Material Product System
).
, Smith spoke of the "annual labour" and "the necessaries and conveniences" a nation "annually consumes" before explaining that one of the two steps to increase wealth is reducing the amount of "unproductive labour". "Annual" and "annually" refer to a cyclical reproduction process; "unproductive labour" are commodities and services which are not inputs to the next economic circle and are therefore lost to economic growth. In contrast, theories with no such time horizon tend to understand Smith's unproductive labour as referring to services, and productive labour as meaning vendible goods
.. Smith’s distinction between productive and unproductive labour corresponds to Sraffa’s (1960) distinction of basic and non-basic goods, as basic goods re-enter the productive process, whereas non-basic goods are destined for consumption, with no value for reproduction.
As Edwin Cannan
observes, Smith’s view of annual reproduction and as a consequence the distinction of productive and unproductive labour stems from his meeting, and the influence of, the French economists known as the Physiocrats. To the Physiocrats artisans and manufacturers are considered as "classe sterile" or unproductive labour because as a result of French income distribution they worked primarily for the nobles and the church. Before his visit to France in his Theory of Moral Sentiments
Adam Smith sees the gluttony of the landlords as an "invisible hand" which helps the poor to partake in the landlords wealth. In The Wealth of Nations it is seen as the consumption of unproductive labour, limiting the growth of wealth.
Smith's view that human labour – but not unproductive labour – is the source of wealth reflects the classical position that all commodities can be reduced to actual labour and produced inputs which in turn resolve into labour and former inputs. In competitive economies, i.e. in economies without "rents
" because of monopolies, the value of a commodity is determined by the amount of embodied labour: direct labour and "dated" labour, indicating the difficulties of production plus interest for past labour. This contrasts to neoclassical economics where the price is the addition of the productive contribution of various factors of production
.
Within an enterprise, for example, there were many tasks which had to be performed, such as cleaning, record and bookkeeping or repairs, which did not directly contribute to producing and increasing wealth in the sense of making a net addition to it - in other words, such tasks represented a net cost to the enterprise which had to be minimized.
There were also whole occupations such as domestic servants, soldiers, schoolteachers etc. which, although necessary, did not seem "productive" in the sense of increasing the material wealth of a society.
Part of the population consumed wealth but did not create it. To maximize economic growth
, therefore, "unproductive costs" which consumed part of the total national income rather than adding to it should be "minimized; productive labour had to be maximized.
The question was also looked at in terms of "earned" versus "unearned" income. In a market-based economy based on trade and exchange, people can obtain incomes from all manner of activities. Some of these incomes could be seen as making net additions to the national income, while others represented only a transfer of income. Some activities created new wealth, others only transferred wealth created somewhere else or appropriated wealth.
Many different economic and moral arguments were made to either justify or else criticise the incomes gained from different activities, on the ground that they were "productive" or "unproductive", "earned" or "unearned", "wealth-creating" or "wealth-consuming".
wrote:
"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. Though the manufacturer has his wages advanced to him by his master, he, in reality, costs him no expense, the value of those wages being generally restored, together with a profit, in the improved value of the subject upon which his labour is bestowed. But the maintenance of a menial servant never is restored. A man grows rich by employing a multitude of manufacturers; he grows poor by maintaining a multitude of menial servants. The labour of the latter, however, has its value, and deserves its reward as well" (Andrew Skinner edition 1974, p. 429-430).
, the distinction between productive and unproductive labour was however rejected as being largely arbitrary and irrelevant. All the factors of production
(land, labour and capital) create wealth and add value; they are all "productive".
If the value of a good is just what somebody is prepared to pay for it (or its marginal utility
), then regarding some activities as value-creating and others not is a purely subjective
matter; any activity which produces anything, or generates an income, could be considered production and productive, and the only question that remains is how productive it is.
This could be measured by striking a ratio between the monetary value of output produced, and the number of hours worked to produce it (or the number of workers who produce it). This is called a "output/labour ratio". The ratio "GDP per capita" is also used by some as an indicator of how productive a population is.
However, in calculating any output value, some concept of value is nevertheless required, because we cannot relate, group and aggregate prices (real or notional) at all without using a valuation principle. All accounting assumes a value theory, in this sense - we always need to distinguish conceptually the definition of value equivalence, comparable value, value transfer, loss of value, conservation of value and newly created value. For this purpose, a knowledge of prices is ultimately not sufficient, since the decision to group and categorize prices in a certain way involves criteria and valuations which themselves cannot be derived from prices.
A persisting management preoccupation, particularly in large corporations, also concerns the question of which activities of a business are value adding
. The reason is simply that value-adding activities boost gross income and profit margins (note that the "value-added" concept is a measure of the net output, or gross income, after deduction of materials costs from the total sales volume).
If the aim is to realise maximum shareholder value, two important valuation problems occur. Firstly, productive assets being used in production have no actual market price, being withdrawn from the market and not offered for sale. They have at best an historic cost, but this cost does not apply to inventories of new output produced. The current value of productive assets can therefore be estimated only according to a probable price that they would have, if they were sold, or if they were replaced. Secondly, there is the problem of what exactly the increases or decreases in the value of productive assets being held can be attributed to.
In what has become popularly known as "value-based management", these problems are pragmatically tackled with the accounting concepts of market-value added (MVA) and economic value-added (EVA). This style of management focuses very closely on how assets and activities contribute to maximum profit income.
and social accounting theory the concepts of productive and unproductive labour do survive to some extent.
A large amount of work done in society is not captured in national accounts, because it is unpaid voluntary labour or unpaid household labour. The monetary value of this work can be estimated only from time use survey
s. Thus, national accounting definitions of "production" are strongly biased towards activities which yield a money-income.
Both in Das Kapital
and in Theories of Surplus-Value, Marx devoted a considerable amount of attention to the concept of "productive and unproductive labour". He sought to establish what economic and commercial ideas about productive labour would mean for the lives of the working class
, and he wanted to criticise apologetic ideas about the "productive" nature of particular activities. This was part of an argument about the source of surplus value
in unpaid surplus labour
. His view can be summarised in the following 10 points.
Marx accordingly made, explicitly or implicitly 10 distinctions relevant to defining productive labour in a capitalist mode of production
:
In most cases, using these distinctions, it would be obvious whether the labour was capitalistically productive or not, but in a minority of cases it would be not altogether clear or controversial. In part, that is because the division of labour is not static but constantly evolving. The general criterion which Marx suggests is that:
"If we have a function which, although in and for itself unproductive, is nevertheless a necessary moment of [economic] reproduction, then when this is transformed, through a division of labour, from the secondary activity of many into the exclusive activity of a few, into their special business, this does not change the character of the function itself" (Capital Vol. 2, Penguin ed., p. 209).
Obviously, functions falling outside capitalist production altogether would not be capitalistically productive.
Generally, Marx seems to have regarded labour as mainly unproductive from the point of view of capitalist society as a whole, if it involved functions which have to do purely with:
Such activities were an inevitable cost to capitalist society which had to be met from reserves and from current income. This didn't necessarily mean that unproductive functions are not socially useful or economically useful in some sense; they might well be, but they normally did not directly add net new value to the total social product, that was the point, they were a (necessary) financial cost to society, paid for by a transfer of value created by the productive sector. Thus, they represented an appropriation or deduction from the surplus product, and not a net addition to it. Obviously, unproductive activities could stimulate productive activities however (for example, the production of security installations).
In the division of labour of modern advanced societies, unproductive functions in this Marxian sense occupy a very large part of the labour force; the wealthier a society is, the more "unproductive" functions it can afford. In the USA for example, one can calculate from labour force data that facilitating exchange processes and processing financial claims alone is the main activity of more than 20 million workers. Legal staff, police, security personnel and military employees number almost 5 million workers.
The idea here seems to be that being capitalistically "productive" effectively means "being exploited
," or, at least, being employed to do work under the authority of someone else. Marx never finalised his concept of capitalistically productive labour, but clearly it involved both a technical relation (between work and its useful effect) and a social relation (the economic framework within which it was performed).
The Marxian view is also dismissed by ecologists, because it argues only human labour-time is the substance and source of economic value in capitalist society. Again, it is argued a very restricted idea of economic value is being operated with by Marxists. In part, this misses Marx's own point, namely that it was not him, but the growth of commercial trade which made labour-exploitation the fulcrum of wealth creation. Nevertheless, the ecological argument is that for the sake of a healthy future and a sustainable biosphere
, a new valuation scheme for people and resources needs to be adopted.
The core of this critique is clearly an ethical one: all the existing economic theories provide no healthy norms that would ensure correct stewardship for the environment in which all people have to live. Markets provide no moral norms of their own apart from the law of contract. To develop a better concept of "productiveness" would require a new morality, a new view of human beings and the environment in which they live, so that harmful economic activity can be outlawed, and healthy alternatives promoted.
Ecologists typically distinguish between "good" and "bad" market trade and production. Some believe capitalism
can "go green" (producing in an environmentally friendly way), and that capitalism is "cleaner" than Soviet-type socialism
. Others think that capitalism cannot "go green" because of the nature of the beast; so long as human accounting is done in terms of private costs and private profits, many "external effects" (externalities) will be disregarded, and at most legal restrictions and taxation can limit the environmental damage somewhat.
and later other socialist countries in Eastern Europe
, China
and Cuba
, a system of social accounts was created based around the notion of the "material product" (Material Product System
, or MPS). This was an alternative to GDP based accounts.
This system was, paradoxically, strongly influenced by Marx's critique of wealth creation in capitalist society, and his distinction between capitalistically productive and unproductive labour. The "material product" represented, in price terms, the net new value created annually by the production of tangible material goods. Many service industries were excluded from the material product; a rigorous statistical attempt was made to separate out a productive sector and an unproductive sector. Enterprise managers could be punished by law if they failed to provide accurate information.
Dissident socialists objected to this approach, because they felt that in a socialist society, "productive" labour should really be defined by such things as:
Since the end of communist rule in the USSR and Eastern Europe, however, the material product system has been abandoned, and new GDP-based accounts have been implemented following international standards recommended by the International Monetary Fund
, the World Bank
and the United Nations System of National Accounts
(UNSNA). The advantage of this change is that economic activity is more comprehensively valued and visible in monetary terms; a possible disadvantage is that no national accounting is done anymore of physical product units (e.g., x tons of steel produced, or y number of tractors assembled).
As regards world trade, trading volumes have grown much faster each year than GDP. As a result, the value of exports and imports as a percentage of GDP has also increased. But this begins to undermine the GDP concept of "value added" from production, because if (for example) 10,000 pairs of slippers bought in Thailand or China for 50 cents each are resold by a distribution company in the USA for $10 each, a whole lot of "new value" suddenly appears out of nowhere.
The new value is attributed in accounts to American companies selling the slippers, but really the slippers were made overseas. In this way, it becomes increasingly more difficult to see who contributes what to the national product, or who creates new value rather than transferring it. A good percentage of the "national product" or "domestic product" might be just an appropriation of value from somewhere else, although this is difficult to identify or prove.
As regards speculative activity, this includes (for example) currency speculation, stock market speculation, trade in financial securities and real estate speculation. This results in capital gains, but typically the value of those capital gains (which can rise to between 10% and 20% of the national income, if unrealised capital gains are included) is not included in GDP. In addition, the contribution of the financial sector to GDP has grown strongly, with the effect that the "output" of financial services can reach a quarter or a third of GDP
In that case, the GDP concept of the value adding
process not only fails to capture the net increase in wealth accurately anymore, as originally intended, but also cannot be regarded anymore as a very reliable measure of national income.
For an example, in the USA, realised capital gains for tax purposes amounted an income of about 6.5% of GDP in 2000 (at the peak of the boom), more than twice the amount of the annual increase in GDP. But if capital gains that were not cashed in or taxed are also included, the total would be much higher.
The effect of speculative activity is that assets seem to rise and fall in value, without there being any clear connection to productive activity at all anymore. In turn, this leads to a redefinition of wealth-creation: producing anything becomes less important than trading in assets as a source of wealth.
Because the trading circuits can become very complex (for example, a good may be exported, traded and re-exported while speculators stake futures on it, stockjobber
s gamble stocks in the company, and currencies fluctuate) the ultimate sources of new wealth become increasingly more difficult to identify.
In that case, the notion of "productive labour" or indeed productive activity as such seems to become increasingly irrelevant from an economic point of view, because all that really matters is whether a net income can be extracted from an activity or an asset, in whatever form. If a net income has been so extracted, then one's activity has been "productive". For the rest, what the costs and benefits of an activity are, might be interpreted in all sorts of ways.
As regards the grey economy, this means that an increasing portion of wealth is produced and distributed in illegal, informal or semi-legal circuits which fail to be captured in official economic data. The techniques used here may include creative accounting
, money laundering
, abusive trust arrangements obscuring real ownership, tax dodging and under-reporting which exploit legal loopholes, setting up company headquarters in a foreign country to dodge taxes, "cross sharing" (setting up licensing authorities abroad), transfer pricing
, and numerous other practices.
But most often, assets and profits are shifted between separate legal territories to avoid and evade taxation and scrutiny. In that case again, the source of new wealth becomes obscured, and it is difficult to link productive activity anymore to the value or income it creates.
In the case of services, it often becomes difficult to know - even for a statistician - what the real cost of a service is, and what the real "product" or commodity is, that is being purchased. Particularly in the case of newly emerging services, it may also take quite some time before realistic "market rates" are established.
Operating a commercial transaction or acting as intermediary may be a service, but how that service "adds value", or what its real economic role is, may not be very clear. Often in this area of economic activity a lot depends on having access to specialised information, skills and knowledge; if restrictions to access apply (for example through laws and regulations, licensing, patent
s, and copyright
s), a much higher fee can be charged.
On the other hand, if items of information and knowledge become widely known, or other items displace them, their economic value may quickly and suddenly fall. Thus, much may depend on the clever marketing of an idea, and guarding the conditions of access to it.
The overall effect again tends to be one of obscuring the real relationship between a product, the labour that produces it, and the income that it generates.
Even if old notions of "productive labour" are regarded as outdated or impossible to operationalise, however, the classical question of the justification of different forms of wealth creation, distribution and ownership - and the division of labour which they imply - remains. Quite possibly the economics of the future will focus much more on the social goals which different economic arrangements serve to realise. Certainly, surveys suggest that, at least in richer countries, people are much more concerned with social issues than about economic fundamentals - arguably a mixed blessing, since it obviously takes economics to deliver goods and services they want.
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
mainly in the 18th and 19th century, which survive today to some extent in modern management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
discussions, economic sociology and Marxist or Marxian economic analysis. The concepts strongly influenced the construction of national accounts
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
in the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
and other Soviet-type societies (see Material Product System
Material Product System
Material Product System refers to the system of national accounts used in the former Soviet Union and the Eastern Bloc countries, as well as in China until 1993 introduced the Western SNA system and GDP to China,...
).
Classical political economy
The classical political economists, such as Adam Smith and David Ricardo raised the economic question of which kinds of labour contributed to increasing society's wealth, as against activities which do not increase wealth. In the Introduction to The Wealth of NationsThe Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...
, Smith spoke of the "annual labour" and "the necessaries and conveniences" a nation "annually consumes" before explaining that one of the two steps to increase wealth is reducing the amount of "unproductive labour". "Annual" and "annually" refer to a cyclical reproduction process; "unproductive labour" are commodities and services which are not inputs to the next economic circle and are therefore lost to economic growth. In contrast, theories with no such time horizon tend to understand Smith's unproductive labour as referring to services, and productive labour as meaning vendible goods
Commodity production
Commodity production is the production of wares for sale. It is a type of production in which products are produced not for direct consumption by the producers, as in subsistence production, but are surplus to their own requirements and are produced instead specifically with the intention of sale...
.. Smith’s distinction between productive and unproductive labour corresponds to Sraffa’s (1960) distinction of basic and non-basic goods, as basic goods re-enter the productive process, whereas non-basic goods are destined for consumption, with no value for reproduction.
As Edwin Cannan
Edwin Cannan
Edwin Cannan was a British economist and historian of economic thought. He was a professor at the London School of Economics from 1895 to 1926....
observes, Smith’s view of annual reproduction and as a consequence the distinction of productive and unproductive labour stems from his meeting, and the influence of, the French economists known as the Physiocrats. To the Physiocrats artisans and manufacturers are considered as "classe sterile" or unproductive labour because as a result of French income distribution they worked primarily for the nobles and the church. Before his visit to France in his Theory of Moral Sentiments
The Theory of Moral Sentiments
The Theory of Moral Sentiments was written by Adam Smith in 1759. It provided the ethical, philosophical, psychological, and methodological underpinnings to Smith's later works, including The Wealth of Nations , A Treatise on Public Opulence , Essays on Philosophical Subjects , and Lectures on...
Adam Smith sees the gluttony of the landlords as an "invisible hand" which helps the poor to partake in the landlords wealth. In The Wealth of Nations it is seen as the consumption of unproductive labour, limiting the growth of wealth.
Smith's view that human labour – but not unproductive labour – is the source of wealth reflects the classical position that all commodities can be reduced to actual labour and produced inputs which in turn resolve into labour and former inputs. In competitive economies, i.e. in economies without "rents
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
" because of monopolies, the value of a commodity is determined by the amount of embodied labour: direct labour and "dated" labour, indicating the difficulties of production plus interest for past labour. This contrasts to neoclassical economics where the price is the addition of the productive contribution of various factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
.
Within an enterprise, for example, there were many tasks which had to be performed, such as cleaning, record and bookkeeping or repairs, which did not directly contribute to producing and increasing wealth in the sense of making a net addition to it - in other words, such tasks represented a net cost to the enterprise which had to be minimized.
There were also whole occupations such as domestic servants, soldiers, schoolteachers etc. which, although necessary, did not seem "productive" in the sense of increasing the material wealth of a society.
Part of the population consumed wealth but did not create it. To maximize economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, therefore, "unproductive costs" which consumed part of the total national income rather than adding to it should be "minimized; productive labour had to be maximized.
The question was also looked at in terms of "earned" versus "unearned" income. In a market-based economy based on trade and exchange, people can obtain incomes from all manner of activities. Some of these incomes could be seen as making net additions to the national income, while others represented only a transfer of income. Some activities created new wealth, others only transferred wealth created somewhere else or appropriated wealth.
Many different economic and moral arguments were made to either justify or else criticise the incomes gained from different activities, on the ground that they were "productive" or "unproductive", "earned" or "unearned", "wealth-creating" or "wealth-consuming".
A quote from Adam Smith
In Book 2, Chapter 3 of The Wealth of Nations, Adam SmithAdam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
wrote:
"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. Though the manufacturer has his wages advanced to him by his master, he, in reality, costs him no expense, the value of those wages being generally restored, together with a profit, in the improved value of the subject upon which his labour is bestowed. But the maintenance of a menial servant never is restored. A man grows rich by employing a multitude of manufacturers; he grows poor by maintaining a multitude of menial servants. The labour of the latter, however, has its value, and deserves its reward as well" (Andrew Skinner edition 1974, p. 429-430).
Neoclassical economics
In neoclassical economicsNeoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
, the distinction between productive and unproductive labour was however rejected as being largely arbitrary and irrelevant. All the factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
(land, labour and capital) create wealth and add value; they are all "productive".
If the value of a good is just what somebody is prepared to pay for it (or its marginal utility
Marginal utility
In economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...
), then regarding some activities as value-creating and others not is a purely subjective
Subjective theory of value
The subjective theory of value is an economic theory of value that identifies worth as being based on the wants and needs of the members of a society, as opposed to value being inherent to an object....
matter; any activity which produces anything, or generates an income, could be considered production and productive, and the only question that remains is how productive it is.
This could be measured by striking a ratio between the monetary value of output produced, and the number of hours worked to produce it (or the number of workers who produce it). This is called a "output/labour ratio". The ratio "GDP per capita" is also used by some as an indicator of how productive a population is.
However, in calculating any output value, some concept of value is nevertheless required, because we cannot relate, group and aggregate prices (real or notional) at all without using a valuation principle. All accounting assumes a value theory, in this sense - we always need to distinguish conceptually the definition of value equivalence, comparable value, value transfer, loss of value, conservation of value and newly created value. For this purpose, a knowledge of prices is ultimately not sufficient, since the decision to group and categorize prices in a certain way involves criteria and valuations which themselves cannot be derived from prices.
A persisting management preoccupation, particularly in large corporations, also concerns the question of which activities of a business are value adding
Value added
In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
. The reason is simply that value-adding activities boost gross income and profit margins (note that the "value-added" concept is a measure of the net output, or gross income, after deduction of materials costs from the total sales volume).
If the aim is to realise maximum shareholder value, two important valuation problems occur. Firstly, productive assets being used in production have no actual market price, being withdrawn from the market and not offered for sale. They have at best an historic cost, but this cost does not apply to inventories of new output produced. The current value of productive assets can therefore be estimated only according to a probable price that they would have, if they were sold, or if they were replaced. Secondly, there is the problem of what exactly the increases or decreases in the value of productive assets being held can be attributed to.
In what has become popularly known as "value-based management", these problems are pragmatically tackled with the accounting concepts of market-value added (MVA) and economic value-added (EVA). This style of management focuses very closely on how assets and activities contribute to maximum profit income.
National accounts
In national accountsNational accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
and social accounting theory the concepts of productive and unproductive labour do survive to some extent.
- The first reason is that if we want to estimate and account for the value of the net new output created by a country in a year, we must be able to distinguish between sources of new value addedValue addedIn economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
and conserved or transferred value. In other words, we need a value-theoretic principle which guides us in relating, grouping and computing price-aggregates. It is obvious that if products or incomes are merely exchanged or transferred between A and B, then the total product value, or total income, does not increase; all that has happened here is, that they have been shifted around, and redistributed. Total wealth has not increased, no new value was added. By implication, some activities add new value, others do not.
- Secondly, it is necessary to create an operational statistical coverage of productionProduction, costs, and pricingThe following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
itself, which can be used to allocate incomes, activities and transactions in the economy as either belonging to "production", or falling outside "production". Thus, some work produces something in the economic sense, other work does not. In general, national accounts adopt a very wide definition of production; it is defined as any activity of resident "institutional units" (enterprises, public services, households) combining the factors of productionFactors of productionIn economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
(land, labour and capital) to transform inputs into outputs. This includes both market production as well as non-market production, if it recognisably generates an income. The advantage of the wide definition is, that practically all flows of production-related income can be captured (but at the same time a large amount of unpaid work -housework and voluntary work - is not accounted for). Nevertheless, some incomes are ruled out of production and regarded as transfers of wealth. A transfer is defined basically as a payment made or income received without providing any good, service or asset in return, for example: government benefits. Some forms of interest on loans, some property rents, and most capital gains on financial assets and property are also excluded, they are effectively transfers (flows of income and expenditure which are regarded as unrelated to productionProduction, costs, and pricingThe following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
and to the value of new output) or intermediate expenditureIntermediate consumptionIntermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
.
- Thirdly, national accounts will show the contribution of different economic sectors to the total national product or national income. These sectors are mainly output-defined (e.g. agriculture, manufacturing, business services, government administration). It is therefore possible to distinguish to some extent between "productive" activities producing some tangible product or service, and other commercial or government activities which do not (yet generate incomes).
A large amount of work done in society is not captured in national accounts, because it is unpaid voluntary labour or unpaid household labour. The monetary value of this work can be estimated only from time use survey
Time use survey
A Time Use Survey is a statistical survey which aims to report data on how, on average, people spend their time.- Objectives :The objective is to identify, classify and quantify the main types of activity that people engage in during a definitive time period, e.g...
s. Thus, national accounting definitions of "production" are strongly biased towards activities which yield a money-income.
Marx's critique
Karl Marx regarded land and labour as the source of all wealth, and distinguished between material wealth and human wealth. Human wealth was a wealth in social relations, and the expansion of market trade created ever more of those. However, wealth and economic value were not the same thing in his view; value was a purely social category, a social attribution.Both in Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
and in Theories of Surplus-Value, Marx devoted a considerable amount of attention to the concept of "productive and unproductive labour". He sought to establish what economic and commercial ideas about productive labour would mean for the lives of the working class
Working class
Working class is a term used in the social sciences and in ordinary conversation to describe those employed in lower tier jobs , often extending to those in unemployment or otherwise possessing below-average incomes...
, and he wanted to criticise apologetic ideas about the "productive" nature of particular activities. This was part of an argument about the source of surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
in unpaid surplus labour
Surplus labour
Surplus labour is a concept used by Karl Marx in his critique of political economy. It means labour performed in excess of the labour necessary to produce the means of livelihood of the worker . According to Marxian economics, surplus labour is usually "unpaid labour"...
. His view can be summarised in the following 10 points.
- work is not "naturally productive", both in the sense that it takes work to make work productive, and that productive work depends on tools and techniques to be productive.
- generally speaking, a worker is economically productive and a source of additional wealth to the extent that s/he can produce more than is required for his/her own subsistence (i.e., is capable of performing surplus-labour) and adding to a surplus productSurplus productSurplus product is a concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy...
.
- the definition of productive and unproductive labour is specific to each specific type of society (for example, feudal society, capitalist society, socialist society etc.) and depends on the given relations of productionRelations of productionRelations of production is a concept frequently used by Karl Marx and Friedrich Engels in their theory of historical materialism, and in Das Kapital...
.
- there exists no neutralObjectivity (philosophy)Objectivity is a central philosophical concept which has been variously defined by sources. A proposition is generally considered to be objectively true when its truth conditions are met and are "mind-independent"—that is, not met by the judgment of a conscious entity or subject.- Objectivism...
definition of productive and unproductive labour; what is productive from the point of view of one social classSocial classSocial classes are economic or cultural arrangements of groups in society. Class is an essential object of analysis for sociologists, political scientists, economists, anthropologists and social historians. In the social sciences, social class is often discussed in terms of 'social stratification'...
may not be productive from the point of view of another.
- the only objectiveObjectivity (science)Objectivity in science is a value that informs how science is practiced and how scientific truths are created. It is the idea that scientists, in attempting to uncover truths about the natural world, must aspire to eliminate personal biases, a priori commitments, emotional involvement, etc...
definition of productive labour is in terms of what is as a matter of fact productive within the conditions of a given mode of productionMode of productionIn the writings of Karl Marx and the Marxist theory of historical materialism, a mode of production is a specific combination of:...
.
- from the point of view of the capitalistCapitalismCapitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
class, labour is productive, if it increases the value of (private) capitalCapital (economics)In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
or results in (private) capital accumulationCapital accumulationThe accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
.
- Capitalistically productive labour is therefore labour which adds to the mass of surplus valueSurplus valueSurplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
, primarily through profitably producing goods and services for market sale.
- no new value is created through acts of exchange only; therefore, although labour which just facilitates exchange is "productive" from the employer's point of view (because he derives profit from it), it is unproductive from the social point of view because it accomplishes only a transfer of wealth. This "unproductive" labour is accepted however because it reduces the costs of capital accumulationCapital accumulationThe accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
, or facilitates it, or secures it.
- the definition of productive and unproductive labour is not static, but evolving; in the course of capitalist development, the division of labourDivision of labourDivision of labour is the specialisation of cooperative labour in specific, circumscribed tasks and likeroles. Historically an increasingly complex division of labour is closely associated with the growth of total output and trade, the rise of capitalism, and of the complexity of industrialisation...
is increasingly modified, to make more and more labour productive in the capitalistic sense, for example through marketisation and privatisation, value-based management, and Taylorism.
- whether work has been productive can really be known only "after the fact" in capitalist society, because commodity-producing living labour is in most cases definitely valued by the market only after it has been performed, when its product (a good or service) is exchanged and paid for.
Marx accordingly made, explicitly or implicitly 10 distinctions relevant to defining productive labour in a capitalist mode of production
Capitalist mode of production
In Marx's critique of political economy, the capitalist mode of production is the production system of capitalist societies, which began in Europe in the 16th century, grew rapidly in Western Europe from the end of the 18th century, and later extended to most of the world...
:
- commodityCommodityIn economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
production, versus other production - capitalist production versus non-capitalist production
- production versus circulation (exchange)
- production for profitProfit (economics)In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
, versus non-profit production - productive consumption versus unproductive consumption
- material (tangible) production, versus non-material production
- production of use valueUse valueUse value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...
s, versus production of exchange-values - production of value, versus appropriation of revenue
- production of income, versus distribution of income
- production versus destruction
In most cases, using these distinctions, it would be obvious whether the labour was capitalistically productive or not, but in a minority of cases it would be not altogether clear or controversial. In part, that is because the division of labour is not static but constantly evolving. The general criterion which Marx suggests is that:
"If we have a function which, although in and for itself unproductive, is nevertheless a necessary moment of [economic] reproduction, then when this is transformed, through a division of labour, from the secondary activity of many into the exclusive activity of a few, into their special business, this does not change the character of the function itself" (Capital Vol. 2, Penguin ed., p. 209).
Obviously, functions falling outside capitalist production altogether would not be capitalistically productive.
Generally, Marx seems to have regarded labour as mainly unproductive from the point of view of capitalist society as a whole, if it involved functions which have to do purely with:
- the maintenance of a class-based social order as such (legal system, police, military, government administration).
- the maintenance and securing of private property relations (police, security, legal system, banking, accounting, licensing authorities etc.).
- operating financial transactions (in banking, financing, commercial trade, financial administration)
- insurance and safety.
- criminal activity.
Such activities were an inevitable cost to capitalist society which had to be met from reserves and from current income. This didn't necessarily mean that unproductive functions are not socially useful or economically useful in some sense; they might well be, but they normally did not directly add net new value to the total social product, that was the point, they were a (necessary) financial cost to society, paid for by a transfer of value created by the productive sector. Thus, they represented an appropriation or deduction from the surplus product, and not a net addition to it. Obviously, unproductive activities could stimulate productive activities however (for example, the production of security installations).
In the division of labour of modern advanced societies, unproductive functions in this Marxian sense occupy a very large part of the labour force; the wealthier a society is, the more "unproductive" functions it can afford. In the USA for example, one can calculate from labour force data that facilitating exchange processes and processing financial claims alone is the main activity of more than 20 million workers. Legal staff, police, security personnel and military employees number almost 5 million workers.
Productive labour as misfortune?
In the first volume of Das Kapital, Marx suggests that productive labour may be a misfortune:The idea here seems to be that being capitalistically "productive" effectively means "being exploited
Exploitation
This article discusses the term exploitation in the meaning of using something in an unjust or cruel manner.- As unjust benefit :In political economy, economics, and sociology, exploitation involves a persistent social relationship in which certain persons are being mistreated or unfairly used for...
," or, at least, being employed to do work under the authority of someone else. Marx never finalised his concept of capitalistically productive labour, but clearly it involved both a technical relation (between work and its useful effect) and a social relation (the economic framework within which it was performed).
Ecological critique
The ecological critique focuses on mindless "production for production's sake", attacking both the neoclassical notion and the Marxist concept of "productiveness". It is argued noeclassical economics can understand the value of anything (and therefore the costs and benefits of an activity) only if it has a price, real or imputed. However, physical and human resources may have a value which cannot be expressed in price terms, and to turn them into an object of trade via some legal specification of property rights may be harmful to human life on earth. Activities may have non-priced costs and benefits which never feature on the balance sheet, at most in propaganda and advertising.The Marxian view is also dismissed by ecologists, because it argues only human labour-time is the substance and source of economic value in capitalist society. Again, it is argued a very restricted idea of economic value is being operated with by Marxists. In part, this misses Marx's own point, namely that it was not him, but the growth of commercial trade which made labour-exploitation the fulcrum of wealth creation. Nevertheless, the ecological argument is that for the sake of a healthy future and a sustainable biosphere
Biosphere
The biosphere is the global sum of all ecosystems. It can also be called the zone of life on Earth, a closed and self-regulating system...
, a new valuation scheme for people and resources needs to be adopted.
The core of this critique is clearly an ethical one: all the existing economic theories provide no healthy norms that would ensure correct stewardship for the environment in which all people have to live. Markets provide no moral norms of their own apart from the law of contract. To develop a better concept of "productiveness" would require a new morality, a new view of human beings and the environment in which they live, so that harmful economic activity can be outlawed, and healthy alternatives promoted.
Ecologists typically distinguish between "good" and "bad" market trade and production. Some believe capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
can "go green" (producing in an environmentally friendly way), and that capitalism is "cleaner" than Soviet-type socialism
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
. Others think that capitalism cannot "go green" because of the nature of the beast; so long as human accounting is done in terms of private costs and private profits, many "external effects" (externalities) will be disregarded, and at most legal restrictions and taxation can limit the environmental damage somewhat.
Material product accounts in Soviet-type societies
In the Soviet UnionSoviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
and later other socialist countries in Eastern Europe
Eastern Europe
Eastern Europe is the eastern part of Europe. The term has widely disparate geopolitical, geographical, cultural and socioeconomic readings, which makes it highly context-dependent and even volatile, and there are "almost as many definitions of Eastern Europe as there are scholars of the region"...
, China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
and Cuba
Cuba
The Republic of Cuba is an island nation in the Caribbean. The nation of Cuba consists of the main island of Cuba, the Isla de la Juventud, and several archipelagos. Havana is the largest city in Cuba and the country's capital. Santiago de Cuba is the second largest city...
, a system of social accounts was created based around the notion of the "material product" (Material Product System
Material Product System
Material Product System refers to the system of national accounts used in the former Soviet Union and the Eastern Bloc countries, as well as in China until 1993 introduced the Western SNA system and GDP to China,...
, or MPS). This was an alternative to GDP based accounts.
This system was, paradoxically, strongly influenced by Marx's critique of wealth creation in capitalist society, and his distinction between capitalistically productive and unproductive labour. The "material product" represented, in price terms, the net new value created annually by the production of tangible material goods. Many service industries were excluded from the material product; a rigorous statistical attempt was made to separate out a productive sector and an unproductive sector. Enterprise managers could be punished by law if they failed to provide accurate information.
Dissident socialists objected to this approach, because they felt that in a socialist society, "productive" labour should really be defined by such things as:
- whether the labour increases tangible wealth
- whether it is socially useful
- whether it is ecologically responsible
- whether it promotes human satisfaction
- whether it promotes human development
- whether it promotes human health and wellbeing
Since the end of communist rule in the USSR and Eastern Europe, however, the material product system has been abandoned, and new GDP-based accounts have been implemented following international standards recommended by the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
, the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
and the United Nations System of National Accounts
United Nations System of National Accounts
The United Nations System of National Accounts is an international standard system of national accounts, the first international standard being published in 1953...
(UNSNA). The advantage of this change is that economic activity is more comprehensively valued and visible in monetary terms; a possible disadvantage is that no national accounting is done anymore of physical product units (e.g., x tons of steel produced, or y number of tractors assembled).
New mysteries of wealth creation and the modern mercantilism
Four important overall results of neo-liberal economic reforms since 1980 and of globalisation have been- a strong increase in the volume of world trade ,
- a gigantic increase in speculationSpeculationIn finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
, - a strong increase in the grey economy ,
- a strong increase in the services economy, especially financial services of all kinds (business services, banking, real estate, insurance, consultancy etc.) .
As regards world trade, trading volumes have grown much faster each year than GDP. As a result, the value of exports and imports as a percentage of GDP has also increased. But this begins to undermine the GDP concept of "value added" from production, because if (for example) 10,000 pairs of slippers bought in Thailand or China for 50 cents each are resold by a distribution company in the USA for $10 each, a whole lot of "new value" suddenly appears out of nowhere.
The new value is attributed in accounts to American companies selling the slippers, but really the slippers were made overseas. In this way, it becomes increasingly more difficult to see who contributes what to the national product, or who creates new value rather than transferring it. A good percentage of the "national product" or "domestic product" might be just an appropriation of value from somewhere else, although this is difficult to identify or prove.
As regards speculative activity, this includes (for example) currency speculation, stock market speculation, trade in financial securities and real estate speculation. This results in capital gains, but typically the value of those capital gains (which can rise to between 10% and 20% of the national income, if unrealised capital gains are included) is not included in GDP. In addition, the contribution of the financial sector to GDP has grown strongly, with the effect that the "output" of financial services can reach a quarter or a third of GDP
In that case, the GDP concept of the value adding
Value added
In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
process not only fails to capture the net increase in wealth accurately anymore, as originally intended, but also cannot be regarded anymore as a very reliable measure of national income.
For an example, in the USA, realised capital gains for tax purposes amounted an income of about 6.5% of GDP in 2000 (at the peak of the boom), more than twice the amount of the annual increase in GDP. But if capital gains that were not cashed in or taxed are also included, the total would be much higher.
The effect of speculative activity is that assets seem to rise and fall in value, without there being any clear connection to productive activity at all anymore. In turn, this leads to a redefinition of wealth-creation: producing anything becomes less important than trading in assets as a source of wealth.
Because the trading circuits can become very complex (for example, a good may be exported, traded and re-exported while speculators stake futures on it, stockjobber
Stockjobber
Stockjobbers were institutions that acted as market makers in the London Stock Exchange. Prior to "Big Bang" in 1986, every stock traded on the Exchange passed through a jobber's book, where they acted as intermediaries between stockbrokers, who were in turn not permitted to be market makers...
s gamble stocks in the company, and currencies fluctuate) the ultimate sources of new wealth become increasingly more difficult to identify.
In that case, the notion of "productive labour" or indeed productive activity as such seems to become increasingly irrelevant from an economic point of view, because all that really matters is whether a net income can be extracted from an activity or an asset, in whatever form. If a net income has been so extracted, then one's activity has been "productive". For the rest, what the costs and benefits of an activity are, might be interpreted in all sorts of ways.
As regards the grey economy, this means that an increasing portion of wealth is produced and distributed in illegal, informal or semi-legal circuits which fail to be captured in official economic data. The techniques used here may include creative accounting
Creative accounting
Creative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules...
, money laundering
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
, abusive trust arrangements obscuring real ownership, tax dodging and under-reporting which exploit legal loopholes, setting up company headquarters in a foreign country to dodge taxes, "cross sharing" (setting up licensing authorities abroad), transfer pricing
Transfer pricing
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property . Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other...
, and numerous other practices.
But most often, assets and profits are shifted between separate legal territories to avoid and evade taxation and scrutiny. In that case again, the source of new wealth becomes obscured, and it is difficult to link productive activity anymore to the value or income it creates.
In the case of services, it often becomes difficult to know - even for a statistician - what the real cost of a service is, and what the real "product" or commodity is, that is being purchased. Particularly in the case of newly emerging services, it may also take quite some time before realistic "market rates" are established.
Operating a commercial transaction or acting as intermediary may be a service, but how that service "adds value", or what its real economic role is, may not be very clear. Often in this area of economic activity a lot depends on having access to specialised information, skills and knowledge; if restrictions to access apply (for example through laws and regulations, licensing, patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
s, and copyright
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...
s), a much higher fee can be charged.
On the other hand, if items of information and knowledge become widely known, or other items displace them, their economic value may quickly and suddenly fall. Thus, much may depend on the clever marketing of an idea, and guarding the conditions of access to it.
The overall effect again tends to be one of obscuring the real relationship between a product, the labour that produces it, and the income that it generates.
Even if old notions of "productive labour" are regarded as outdated or impossible to operationalise, however, the classical question of the justification of different forms of wealth creation, distribution and ownership - and the division of labour which they imply - remains. Quite possibly the economics of the future will focus much more on the social goals which different economic arrangements serve to realise. Certainly, surveys suggest that, at least in richer countries, people are much more concerned with social issues than about economic fundamentals - arguably a mixed blessing, since it obviously takes economics to deliver goods and services they want.
See also
- value addedValue addedIn economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
- national accountsNational accountsNational accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
- surplus valueSurplus valueSurplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
- labour theory of value
- Division of labourDivision of labourDivision of labour is the specialisation of cooperative labour in specific, circumscribed tasks and likeroles. Historically an increasingly complex division of labour is closely associated with the growth of total output and trade, the rise of capitalism, and of the complexity of industrialisation...
- Unproductive labour in economic theoryUnproductive labour in economic theoryUnproductive labour is labour which does not further the end of the system. Therefore this concept has sense only with reference to a determined system. In classical economics the end is growth and development, in Marxian economics the end is capitalistic profit and in business the end is to place...