In 1931, the second year of the Great Depression and which saw the issuance of Quadragesimo Anno, a teenager by the name of Louis Orth Kelso (1913-1991) noticed something that belied the characterization of the United States as the Land of Opportunity. Able-bodied men were hopping freight trains to somewhere, anywhere, they thought they might find work and not finding it. By 1933, the official unemployment rate was 24.75%.
|Louis O. Kelso|
It was inconceivable to Kelso that this situation could exist when there were excess productive capacity, unmet consumer demand, and people willing to work. Although he was not yet eighteen years old, he decided to find his own answers to the question that baffled everyone from Keynes to the Kingfish.
Graduating from college with a degree in Business Administration and Finance, Kelso attended law school, joined a Denver law firm, and taught Constitutional Law. Entering the U.S. Navy in World War II, Kelso used his spare time preparing a study on “the fallacy of full employment.”
At the heart of Kelso’s thought was the realization that capital — which he defined as all non-human factors of production — does not simply enhance human labor but is itself independently productive. Classical economists up until David Ricardo (1772-1823) acknowledged that capital somehow contributes to production but were vague about details.
This lack of specificity allowed Ricardo and his followers (including Karl Marx, 1818-1883) to declare that capital per se contributes nothing to production, that everything is due exclusively to human labor, which therefore gives value to everything. Technology is simply accumulated or “congealed” labor.
Land presented a problem for Ricardo and subsequent adherents of his “labor theory of value.” It clearly had not been created by human labor but was just as clearly a factor of production.
Ricardo avoided the issue by means of his notorious “detour.” He explained that land is both a “cost-free factor of production” and at the same time not a factor of production at all!
According to Ricardo, the price of what is grown on land is the cost of producing it. Since land itself cost nothing to produce, it is not a factor in determining the price of what is produced on the land and is therefore a “cost-free factor of production.”
At the same time, according to Ricardo, land produces nothing unless human labor is added. Land is therefore not a factor of production. “Rent” is the payment to the landlord for the use of the land and is the difference between the price of what is produced and the cost of producing it.
Rent is therefore unearned income because land produces nothing and the landlord expends no labor or effort. See “Ricardian Theory of Rent: Meaning, Assumptions, Statement and Features,” http://www.economicsdiscussion.net/theory-of-rent/ricardian-theory-of-rent-meaning-assumptions-statement-and-features/7454, accessed October 10, 2018.
For his part, Henry George declared that since human beings had not created land, they could not own it. As far as he was concerned, people only have the right to own what they create with their own labor. This begged the question as to whether human beings could own livestock, rendering meaningless the “three acres and a cow” slogan of the English Liberal Party under William Ewert Gladstone (1809-1898).
Whether advocates of the democratic religion of socialism influenced Ricardo or vice versa is not important in this discussion. What is important is that the “labor theory of value” became accepted as unquestioned capitalist and socialist dogma. A thing is only worth the labor that went into producing it.
Logically, Ricardo’s concept renders private property in capital irrelevant. Irrelevant, that is, except as a means whereby owners of land or technology can use their monopoly position to extort surplus value from workers and consumers. Consequently, every form of socialism embodies some variant of “property is theft” (The dictum of anarcho-socialist Pierre-Joseph Proudhon, 1809-1865) as a necessary corollary to the labor theory of value.
|William Hurrell Mallock|
Rejecting Ricardo’s confusing assertion and the idea that capital merely enhances labor, Kelso realized that as technology improves, the proportion of production attributable to labor decreases, while that attributable to technology increases. At the same time, he observed that the amount of income distributed to owners of labor was increasing relative to its contribution, while that going to owners of capital was decreasing.
The socialist solution to this paradox is to claim either all production is due to labor, or the bulk of it except for what is due to owners of capital in compensation for their labor. The capitalist solution is either to claim correctly but heartlessly that private property entitles them to everything produced by their capital, or to assert incorrectly but just as heartlessly a high value for the special kind of labor used by entrepreneurs and owners — Mallock’s “capitalist superior brains.” Where that leads we shall see in the next posting on this subject.