One of the many things conventional mainstream economists find annoying (i.e., incomprehensible) about Binary Economics is the idea of “productiveness.” In Binary Economics, productiveness is not a synonym for productivity. It is, rather, an acknowledgement that there is more than one factor of production and that each makes a definable and independent (although not autonomous when the factors are combined) contribution to production.
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| A Defunct Economist |
Last week we looked at the rather surreal, even bizarre claim mainstream economists reject Binary Economics because it is “heterodox and non-conventional,” as if (we noted) basing an economic paradigm on the mental meanderings of a defunct economist (John Maynard Keynes) who railed against defunct economists is somehow orthodox and conventional. This week, in response to the AI-generated reason mainstream economists reject Binary Economics, we are going to look at Number 3 on the list: why mainstream economists reject the concept of productiveness. As our AI commentator commented,
3. Criticism of Core Concepts, Particularly “Productiveness”:
- Kelso’s concept of “productiveness” is a cornerstone of Binary Economics, arguing that capital contributes a growing share of output relative to labor. For example, he suggested that a shovel’s invention reduces labor’s “productiveness” to 25% of output while attributing 75% to the shovel. Critics, such as Timothy Roth, argue this oversimplifies the role of human capital, noting that tools like shovels are themselves products of human innovation and cannot function independently.
- This concept is seen as flawed because it does not account for the interdependence of labor and capital or the role of technological progress driven by human ingenuity. Economists argue that Kelso’s framework misrepresents how production factors interact, undermining its theoretical validity.
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| Louis Kelso not in denial |
Now, one of the more interesting things about this criticism of the “core concepts” of Binary Economics is that it focuses on only one: productiveness . . . and doesn’t actually critique it. The so-called criticism consists of an assertion offered without support that shovels “are themselves products of human innovation and cannot function independently.”
First of course, Louis Kelso never denied the obvious, that human beings create shovels. The critics, however, ignore many things, such as the term “human capital” in Binary Economics is an oxymoron. One of the core concepts of Binary Economics ignored in this critique is that production is due to both non-human and human factors. The non-human factor is termed “capital,” while the human factor is termed “labor.”
From the standpoint of Binary Economics, then, “human capital” means the “human-non-human” factor of production, which violates the first principle of reason. This is the principle of identity: that which is true is as true and is true in the same way as everything else that is true. Labor, the human factor of production, is as human, and is human in the same way, as everything else that is human, while capital, the non-human factor of production, is as non-human, and is non-human in the same way, as everything else that is non-human.
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| Investing in human capital |
Nothing, therefore, whether human or capital, can be both human and capital at the same time and under the same conditions. Slavery, in which human beings are treated as things, is a separate case morally, but not economically, at least in Binary Economics. Slaves are human beings treated as if they were things, a legal fiction, and are not really things.
To say, then, that Binary Economics “oversimplifies” the role of something that does not even exist in Binary Economics is rather . . . weird, let us say. It’s a bit (although not much) like saying a zookeeper oversimplifies the role of hay when feeding the lions and tigers. One has nothing to do with the other; “human capital,” in fact, has even less to do with Binary Economics than hay has to do with feeding lions and tigers. At least the meat animals the zookeeper feeds to the lions and tigers eat hay, if the lions and tigers don’t, while “human capital” has nothing whatsoever to do with Binary Economics in general, or productiveness in particular.
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| Enhancing human capital |
Nevertheless, Binary Economics does deal with what mainstream economists call “human capital,” although not by that name, which is what may confuse mainstream economists who don’t bother to learn the principles or terminology of Binary Economics before they critique it; they don’t confuse themselves with the facts.
So, what is “human capital”? Most simply put (and by the mainstream economists themselves, so Binary Economists aren’t the ones doing the oversimplification, if any), “human capital” consists of “the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country.”
Under the principles of Binary Economics, then, what mainstream economists call “human capital,” Binary Economists call “labor.” A human being, even a highly trained or skilled human being is still a human being, as is a slave, emperor, or God-King-President. In Binary Economics, all that an unaided human being supplies to the production process in thought, word, or deed comes under the heading of labor. All that non-human things provide, whether natural or artificial, comes under the heading of capital.
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| Independent and autonomous capital |
And, yes, especially in this day and age when AI is doing so much and automated factories are not unheard of, tools can and often do function independently. To say that an automated factory is not functioning independently when all the laid-off workers will tell you otherwise, or that an elevator isn’t self-operating (or practically so when direct human input is limited to pushing a button) is simply delusional.
The issue Kelso addressed with his concept of productiveness was the relative contribution of each of the factors of production. His illustration of a shovel was, perhaps, poorly chosen, but he did it by way of example, claiming IF an unaided human being can dig one hole an hour, AND a human being with a shovel can dig hour holes in an hour, THEN what is logically the contribution of each? Or (as Kelso put it) what is the relative productiveness of each of the factors of production?
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| David Ricardo |
A mainstream economist will insist that all production is due to labor and that capital only enhances or provides the environment within which labor can become productive. Capital is not, therefore, a true factor of production, and all production is therefore measured in terms of output per labor hour. To verify that, you don’t have to go to Ricardo’s Principles of Political Economy and Taxation (1817) in which he laid out the fundamental principles of the labor theory of value:
Commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them. . . . If the quantity of labour realized in commodities regulate their exchangeable value, every increase of the quantity of labour must augment the value of that commodity on which it is exercised, as every diminution must lower it. (David Ricardo, The Principles of Political Economy and Taxation. London: J.M. Dent and Sons, Ltd., 1973, 5-7.)
No, it is only necessary to go to the website of the Bureau of Labor Statistics or the daily newspaper and see how output is measured. It is always in terms of output per labor hour, and “does not account for the interdependence of labor and capital.”
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| That's one way to do it. |
In Kelso’s example (never intended to be realistic, by the way, it was by way of being an example . . . which is why it’s called an example), the mainstream economist would say labor’s productivity increased 400%. A Binary Economist would say yes, production increased by 400% . . . of which a quarter was provided by labor, and three quarters provided by capital, the productiveness of labor not falling, but measured as 25% of the whole, with that of capital being 75% of the whole.
That being said, we are now going to say Kelso was wrong. Not in the concept of productiveness. That remains valid. It’s in how he illustrated the relative productiveness of labor and capital. You see, a human being digging a hole without using any tools at all is doing a different type of work than a human being using a shovel. Digging with your hands and digging with a shovel are two different tasks, as any child could tell you, and they cannot truly be compared. With the same effort (but different techniques and the use of capital) a human being can dig more holes with a shovel than without a shovel . . . but wielding a shovel is not the same as digging with your hands alone.
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| Another way — and a different job |
Attempts to measure the physical inputs of labor and capital combined and thereby determine the productiveness of each are, frankly, impossible. It’s “adding apples and oranges.” You might measure the amount of “work” in physical terms, but not the technique of the shovel user and his or her efficiency in the use of his or her tools.
So, how can it be done? By using Adam Smith’s output theory of value rather than David Ricardo’s input theory of value.
Mainstream economists’ concept of labor productivity is an attempt to determine value by measuring the value of the inputs, which according to Ricardo and all economists of his school and their descendants (such as John Maynard Keynes) is labor, so all production must be due to labor. That’s an economic dogma, an article of faith not to be questioned. Given, therefore, that labor is the only real input to production, then capital necessarily contributes nothing, at least, nothing that can be measured in objective value.
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| And another way — and another job |
Except that it can . . . if (as Adam Smith did) you assume something is worth what a willing and informed buyer will pay for it. Thus, how much would a contractor have to pay a worker to dig four holes that are worth $400 to the contractor? If the contractor can hire someone to dig four holes for $100 that the contractor values at $400, then the productiveness of the worker is 25% compared to the 75% for the shovel or whatever else the worker uses to dig the holes.
In the unlikely event the worker digs four holes for $100 with his or her bare hands that the contractor values at $400, it doesn’t change the scenario very much. The productiveness of the worker remains at 25%, while the productiveness of the contractor in the form of the contractor’s labor (entrepreneurship is a human factor of production and therefore labor) is 75%. Unfair? Not if you value the opportunity and planning provided by the contractor. Yes, the contractor’s productiveness is in the form of labor, but it isn’t the worker’s labor, which remains at 25% of the value of the output. This scenario simply substitutes the contractor’s productiveness for that of the capital, both being external to the worker.
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| Direct human input = 0 |
But what about the claim, “[Productiveness] is seen as flawed because it does not account for the interdependence of labor and capital or the role of technological progress driven by human ingenuity. Economists argue that Kelso’s framework misrepresents how production factors interact, undermining its theoretical validity.”
. . . except we have just seen that is precisely what Kelso’s concept of productiveness does. Once mainstream economists realize human beings producing with technology are doing different jobs than human beings producing without technology, and the value of production should be measured by what it is worth to the consumer (output) and not to the producer (input), then Kelso’s concept of productiveness becomes obvious.
Next week we will take a look at something even less plausible: the rejection of Binary Economics by mainstream economists because other mainstream economists have said mean things about Binary Economics and they don’t want to be attacked for daring to contradict economic dogma.
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