All labor activity has an outcome, but not all labor outcomes are outputs. Thus, while the activities of production labor result in new products, those of non-production labor result in other socially mandated outcomes such as the distribution of goods, services, and money (either directly or indirectly when mediated by exchange), gen- eral administrative activities in both the private and public sectors, and various other social activities such as police, fire, military, and private guard labor. All labor draws its consumption requirements from present or past production. But only production labor simultaneously adds to the total product.
Consider the difference between production and personal consumption. Produc- tion uses up wealth to create new wealth (i.e., to achieve a production outcome). Personal consumption uses up wealth to maintain and reproduce the individual (a non-production outcome). Military, police, administrative, and trading activities also use up wealth in protection, distribution, and administration (also non-production outcomes). In this regard, non-production labor is a form of social consumption, not production. The issue is not one of necessity, because all such activities are necessary, in some form or the other, for social reproduction (Beckerman 1968, 27–28). Rather, the issue concerns the nature of the outcome.
The distinction is between production and non-production activities, not between goods and services. It is true that Adam Smith restricts the definition of production labor to that leading to physical goods and that Malthus and Ricardo support this on “practical grounds” (Shaikh and Tonak 1994, 21). However, Marx insists that services can also be production activities. Consider a concert. The musicians and the stage crew collaborate to produce the show, which is the use value of concern to the con- certgoers. But a concert may also require a certain number of people to maintain order and ensure safety (ushers), and if it is staged for money, a certain number of people (cashiers and guards) to ensure that the product is only available to those who pay. The musicians and stage crew constitute production labor, while the ushers, cashiers, and guards constitute non-production labors. Yet all of them perform services. It is the outcomes of their activities which differ, not the form.
10 The distinction between circulating and fixed investment appears in Quesnay, Smith, Ricardo, Marx, Keynes, Kalecki, Harrod, Hicks, and Robinson (Shaikh 1991, 325). It plays a central role in the Classical and Marxian traditions, in input–output economics, and, of course, in Sraffian econom- ics. In a stationary model, circulating investment is zero because there is no growth. In a steady-state growth model, both types of investment must grow at the same rate so their proportion remains con- stant (Harrod 1939, 47–48; Hicks 1985, 108–112, 118–119). In either case, circulating investment tends to disappear from view.
The classical approach stems from the works of Smith, Ricardo, Malthus, Mill, Marx, Sismondi, Baudrillart, and Chalmers, among others (Studenski 1958, 20). Although its presentation was incomplete and occasionally inconsistent, it was nonetheless part of “the mainstream of economic thought” for almost a century (Kendrick 1970, 288). Only when neoclassical economics rose to the fore was the clas- sical distinction between production and non-production activities displaced by the notion that all socially necessary activities, other than personal consumption, resulted in a product (Bach 1966, 45). In the neoclassical tradition, an activity is considered a production activity if it is deemed socially necessary. This in turn rests on the conclu- sion that at least someone would be willing to pay for it directly (Bach 1966). Hence, within neoclassical economics, all potentially marketable activities are considered to be production activities.11This is embodied in conventional national accounts. Ac- cording to the Bureau of Economic Analysis (BEA 1970, 9), “the basic criterion used for distinguishing an activity as economic production is whether it is reflected in the sales and purchase transactions of a market economy” (cited in Eisner 1988, 1612). Despite its other breaks with neoclassical theory, Keynesian economics has done little oppose this neoclassical convention.12
Even though the very concept of non-production market activities has been abol- ished from the theoretical lexicon of orthodox economics, the notion continues to thrive in practical discourse. In the 1980s, the Prime Minister of Japan was quoted as arguing that American resources were “squandered” on financial and trading activities (Sanger 1992). One can only imagine what he would say in the face of the present economic debacle. Fortune magazine says that “representatives of the manufacturing sector indict the legal and financial sectors as highly unproductive” (Farnham 1989, 16, 65; Chernomas 2011, 68, emphasis added). Business economists Summers and Summers (1989, 270, cited in Chernomas 2011, 69, emphasis added) report that “the most frequent complaint about current trends in financial markets is that so much tal- ented human capital is devoted to trading paper assets rather than to actually creating wealth.” In like vein, Thurow (1980, 88, emphasis added) has argued that while “secu- rity guards protect old goods, [they] do not produce new goods since they add nothing to output,” and that military activities are “a form of public consumption” which “use up a lot of human and economic resources” (Thurow 1992, 20). The New York Times has expressed the same sentiment, noting that “security people—or guard labor, as some
11In standard theory, an activity is “production” if someone would be willing to pay for it—that is, if it is potentially marketable (Bach 1966, 45). Since all market activities satisfy this test, only those non-market activities that are judged to fail the marketability test, such as some government activities, could be deemed unproductive. Official accounts sidestep this thorny issue by treating all government activities as potentially marketable at a zero profit and hence a form of “production” labor.
12In his monumental work on the history of national accounts, Studenski has labeled the above transition as the switch from the “restricted production” definition of the classicals to the “compre- hensive production” definition of the neoclassical (Studenski 1958, 12). But from a classical point of view, this change is really a retreat from their “comprehensive consumption” approach (which treat many activities as forms of social consumption, not production) to the “restricted consump- tion” definitions of the neoclassicals (which restricts the definition of social consumption to personal consumption alone).
economists call them—are proliferating . . . [in] a nation trying to protect itself from crime and violence.” It goes on to quote Harvard University economist Richard Free- man to the effect that if “you go to a sneaker outlet in a not-so-poor neighborhood in Boston, there will be three private guards. . . . We are employing many people who are essentially not producing anything” (Uchitelle 1989, emphasis added). In a world characterized by endemic growth in the military, the bureaucracy, and in financial and trading activities, the issue of non-production labor refuses to remain buried.
The distinction between production and non-production labor has important im- plications for national accounts. At a practical level, a substantial portion of service activities would continue to be classified as production (transportation, lodging, en- tertainment, repairs, etc.), but others would be listed as non-production activities (wholesale/retail, financial services, legal services, advertising, military, civil service, etc.). This in turn affects basic measures such as final product and total profit.
As shown in Shaikh and Tonak (1994, 100–106, table 105.104, figs. 105.103– 105.104), the money value of the classical Gross Final Product (GFP∗) is about 5% smaller than conventional GNP. It also rises a bit more slowly than GNP, so that the ratio (GFP∗/GNP) falls modestly from 95% in 1948 to about 84% in 1989, which amounts to about one-quarter of 1% per year (0.27% per year) A far greater difference exists between the size of the money value of the classical Surplus Product (SP∗=∗) and conventional Net Operating Surplus (NOS). Because non-production activities do not add to the surplus product, their expenses must be defrayed from the latter. The same applies to profit taxes and indirect business taxes. Hence, the conventional measure of operating surplus is the amount left over from the overall surplus product after deductions for business taxes and the operating costs (materials and wages) of non-production activities. Thus, NOS is a fraction of SP∗: 44% in 1948 and falling to 35% by 1989 (Shaikh and Tonak 1994, 217–219, table 217.211). As a corollary, the conventional rate of profit is a similar fraction of the classical rate. Both of the conven- tional profitability measures fall about one-fifth of 1% per year relative to their classical counterparts.
It is beyond the scope of the present work to pursue the issue any further. Those interested in a full discussion of these issues and their implications might consult Shaikh and Tonak (1994) and Mohun (2005). The focus of the present book is on the regulating role of actual profitability, and the stability of the ratios of the conven- tional measures to their classical counterparts provides some reassurance that causal sequences in the latter carry over to the former.
III. PRODUCTION RELATIONS VERSUS PRODUCTION