Monday, September 1, 2014

Happy Capital Day!, I: The Theories of Labor

We’re anticipating a little, but we think that today should be celebrated as “Capital Day,” or (if you prefer) as “Widespread Direct Ownership of Capital Day” (“WDOOCD”), which just rolls off the tongue.  The only question in the minds of our millions of viewers is . . . why?

Simple.  Most people recognize human labor as a factor of production.  That’s a somewhat dehumanizing way of putting it, and tends to lead to the categorization of human beings as “homo œconomicus,” or a mere cog in the economic process, but we know what people are trying to say.

Nineteenth Century Labor Parade
Labor Day is supposed to be a recognition of the fact that labor has a special dignity simply because it is inextricably linked to the human person.  That’s true, it does.

Recognizing that the human person who supplies labor for production has a special dignity, however, does not mean that human labor, one, is the sole factor of production, or, two, that the products of human labor and non-human capital are inherently different.  Assuming so is one of those seemingly small errors that can lead to big errors.

The Labor Theory of Value

Take, for example, the labor theory of value.  First, of course, we have to say what we mean by that term.  Do we mean what Adam Smith meant, or what David Ricardo meant?

Adam Smith
Adam Smith’s “labor theory of value” assumes that a thing is valued in terms of its utility to the consumer, and that the consumer measures utility of a thing in terms of the “labor” (Smith actually meant something more like “effort” or “trouble”) it cost the consumer to obtain whatever it is the consumer trades for the thing the consumer consumes.

Thus, if it cost the consumer a great deal of “labor” to obtain the penny (1d) the consumer pays for a loaf of bread, the utility of the bread to the consumer must be at least as equally high, measured against the “labor” expended to obtain the 1d.  Otherwise the consumer will keep the 1d, and the baker will keep the bread.

David Ricardo’s “labor theory of value” is different.  Ricardo believed he was correcting Smith’s error by claiming that a thing is valued not for its utility to the consumer measured in terms of the consumer’s “labor,” but for the amount of human labor required to produce the thing.  Thus, if it cost a human laborer £1,000 to produce a loaf of bread, the value of a loaf of bread — and thus the price — is £1,000.  If it cost the owner of a bread-making machine a farthing (¼d) to produce the same loaf of bread, the value/price of a loaf of bread is ¼d.

What if the consumer pays 1d for both loaves?  According to Karl Marx, in the first case the consumer is stealing surplus value in the amount of £999 19/ 11d from the human laborer, and in the second case the capitalist (the owner of the bread-making machine) is stealing surplus value from the consumer in the amount of ¾d.  If the capitalist pays a worker ¼d per loaf to operate the bread-making machine and charges the consumer 1d per loaf, the capitalist has stolen ¼d worth of surplus value from the consumer, and ¼d worth of surplus value from the human laborer.

The Factors of Production

Obviously we in the Just Third Way go with Smith’s “labor theory of value.”  What it cost to produce a thing is irrelevant to the consumer.  All the consumer cares about is whether the thing’s utility is at least as great as the effort it takes for the consumer to obtain it.

This also applies to how a thing is produced.  Everything else being equal, it doesn’t matter to the consumer whether a machine produced a good or service, or a human being produced it.  The consumer will select whatever product best serves his or her needs, i.e., whatever is most useful in terms of the effort expended to obtain it.

David Ricardo
To Ricardo, it was not a question whether a human being or a machine produced a good or service.  Human labor is the only factor of production.  Technology — capital — is only accumulated or congealed human labor.  Land (assuming we accept Ricardo’s somewhat baffling theory of rent) is a “cost free” factor of production, and therefore does not contribute to the value of a good or service.  (To Henry George, amending Ricardo’s theory, labor is the only factor of production.  Land is not only “cost free,” it is “input free.”  Progress and Poverty, 333-346.)

Thus, to Smith, both capital (including land) and labor produce marketable goods and services and, as far as the market is concerned, do so in the same way, or at least in a way to which the consumer is indifferent, everything else being equal.  To Ricardo, only human labor produces marketable goods and services.

Thus, we have two schools of thought in classical economics, the “Smithian School” and the “Ricardian School,” although many people think they are the same.  Not surprisingly, Smith and Ricardo also disagreed on money and credit — but that’s another, if related issue.

The question we need to look at is how we deal with a situation in which labor and capital both seem to have legitimate claims to the same thing.  We’ll look at that in tomorrow’s posting.


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