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%.
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| 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.
 |
| David Ricardo |
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.
 |
| Henry George |
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.
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