In the previous posting on this subject, we looked at the necessity for everyone who participates in economic life — as everyone must do in some manner or material wants and needs will go unfilled — to be able to employ both labor and capital to become a productive and contributing member of society.
As we noted in the previous posting, binary economics acknowledges two factors of production, human labor and technology. Today we will look at the true interaction of the two factors, something that more traditional economics either acknowledges only in part — the schools of economics descended from Smithian classical economics — or not at all, as in the schools descended from Ricardian classical economics.
To explain, to Adam Smith, there are three factors of production (labor, land and capital) — input — and the same three factors of distribution, usually called wages, rent and interest. It must be noted that much confusion has been caused over the centuries by the fact that Smithian and Ricardian economics have been egregiously confused, and that the meanings of Smith’s terms have been changed from the way he meant them. This is because David Ricardo recognized only one factor of production: labor. Thus,
· Wages. To Smith, all income resulting from ownership of labor is “wages.” Period. It doesn’t matter if someone is employed by another or not. “Wages” are what labor receives as the result of production. To Ricardo and latter economists, “wages” means only what workers receive from an employer.
· Rent. To Smith, all income resulting from ownership of land is “rent.”* Period. It doesn’t matter if someone uses someone else’s land for a fee — rent — or uses his or her own land. That proportion of income due to the use of land is “rent.” To Ricardo — sometimes** — “rent” means only the fee extracted from a tenant for the use of land owned by the landlord, not any profit from the use of land per se.
· Interest. To Smith, all income resulting from ownership of anything other than labor or land used in production — “capital” — is “interest.” Period. If someone owns the capital outright, all the interest or profit attributed to the capital accrues to the owner. If someone lends his or her existing savings*** for use in a capital project (investment), the lender is due a pro rata share of the profits determined by the ratio that the money contribution bears to all other contributions.
* In Scholastic philosophy, “rent” is the fee charged by the owner for any productive asset that is not “consumed by its use.” Thus, land or a tool, even clothing, can be rented for a fee, but food or money, which are not productive in and of themselves, cannot. This is why usury is defined in Scholastic philosophy as taking a profit where no profit is due: no profit is due on something that has been consumed instead of being put to productive use.
** By attributing all value to labor, Ricardo created a paradox — “Ricardo’s Detour” — that he never resolved, but required in order to make his theories work. Because land could clearly produce marketable goods without any human labor at all except for the trouble of gathering them (e.g., nuts and wild fruit, fish and seaweed), Ricardo termed land a “cost-free factor of production” when he was forced to acknowledge natural produce, but also not a factor at all when asserting that only human labor is productive.
*** Lending existing savings for a productive project entitles the owner to a fair share of the profits (“interest”) made, the value of which — “the interest rate” — should be set by the market, not by the government or a central bank. When people or a bank create money for a productive project (using “future savings”), a fee for the service can be charged, but not interest, although the “discount rate” for such a service is often incorrectly referred to as an interest rate today. Like actual interest rates, however, discount rates should be market-determined.
The bottom line here is that if we assume that more than labor is productive, we will come to dramatically different conclusions than if we simply accept Ricardo’s somewhat dubious and paradoxical claim. And Louis Kelso assumed that more than labor is productive.
Heavily influenced by Ricardo instead of Smith, modern economics defines productivity as the rate per unit of labor at which goods and services having exchange value are brought forth or produced. Some definitions will say either labor, land, capital, or some other factor such as entrepreneurship, but it always ends up being a single factor calculation, and it always seems to end up being production per human labor hour, anyway.
In contrast, binary economics attributes most increases in production to advancing technology — capital — not to labor. Smith acknowledged that land and labor contributed, but thought that the proportions were fixed, so that increases Kelso assumed are due to capital should be divided equitably among the owners of all three factors Smith recognized.
Thus, where the standard productivity analysis uses output per labor hour, the Kelsonian productiveness analysis improves on Smith and would attribute output to the combined factors according to their relative inputs.
For example, if 100 units of output are produced in an hour, and labor contributes 10% and capital 90%, traditional productivity would still be 100 units per hour. In contrast, the Kelsonian productiveness would be 90 units per hour for capital, and 10 for labor.
|Labor and Captial|
The total is still 100 units per hour, but the breakdown is more realistic in terms of reality and thus for analytical and planning purposes. The human person is still the producer, as human persons own both labor and capital (or should), but it adds to planning accuracy to identify how human persons are being productive, not just that they are being productive.
Thus, where productivity measures rates of production by looking at one factor (labor), binary productiveness measures rates of production by looking at two factors (labor and capital) and the relationship between them.
Yes, it is possible within the two basic categories of labor and capital to break down productiveness by the type of labor and capital, but that is a refinement that we needn’t go into at this point.