In our last exciting episode, we looked at a list of reasons the AI engine “Claude” gave to explain why economists reject Louis Kelso’s Binary Economics. We didn’t think the critiques were very good (or we wouldn’t be writing this blog, obviously) and they are very easily refuted. This week we take the first group on the list, the “Theoretical Critiques”:
Louis Kelso
· The Two-Factor Production Framework Is Oversimplified. Kelso’s core claim — that capital (not labor) generates the overwhelming majority of economic output — is rejected by most economists as empirically unfounded. Neoclassical production theory treats capital and labor as continuously substitutable inputs, and total factor productivity research attributes substantial output to human skill, knowledge, and organizational capacity. Critics argue Kelso draws an artificial, almost metaphysical line between “human” and “non-human” productive contributions.
· Misreading of Capital’s Role. Mainstream economists argue Kelso conflates the ownership of capital with the productive contribution of capital. A machine’s output doesn’t accrue to the machine — it accrues to the production process as a whole. The fact that capitalists receive income from capital doesn’t mean capital generates it independently of the labor organizing and operating it.
· Wage-Fund Fallacy Concerns Some critics argue Kelso implicitly revives something like the old wage-fund doctrine — the idea that there is a fixed pool of purchasing power, so capital owners gaining more necessarily means workers getting less. Modern economists generally reject this zero-sum framing of income distribution.
Let’s take these one by one. First, consider the claim that Kelso’s division of the factors of production into “human” and “non-human” is “oversimplified.” It is hard to answer this . . . especially coming from economists ensconced in a framework that views human labor as the sole factor of production. That is not merely oversimplified, it is simplistic to the point of meaninglessness.
Nevertheless, it is only recently that so-called mainstream economists have begun to recognize that more than human labor is productive. As a case in point, let’s see what AI has to say about “productivity.” According to Google,
Productivity is measured as the ratio of output (goods/services produced) to input (resources used, such as labor hours or capital). The core formula is OUTPUT/INPUT. It is analyzed by comparing output per worker or hour over time, often adjusting for quality, using methods like labor productivity, multi-factor productivity (MFP), and tracking percent changes. Labor Productivity [is] the most common measure, calculating output per hour worked or per worker.
Do you see the partial contradiction? It used to be a total contradiction, but reality caught up with it. It’s in the statement that “Labor Productivity [is] the most common measure.” It used to be the only measure, but that claim went halfway out the window as automation — and now AI — became too pervasive to ignore.
Even now, some hardliners continue to insist labor is the only factor of production . . . except when they are critiquing Kelso’s claim that the universe is divided into 1) human and 2) non-human. In other words, pure logic, as the first principle of reason is the “law” or “principle” of (non) contradiction: “Nothing can both ‘be’ and ‘not be’ at the same time under the same conditions.”
The law of contradiction (to give it its short name) is considered by many people to be the basis of human thought; it is certainly the basis of artificial intelligence. Surely you have seen the sign often posted around people working as programmers: “There are 10 kinds of people in the world: Those who understand binary code and those who don’t.” If you can break something down far enough, some authorities believe everything either is, or it isn’t. All Kelso did was apply this basic principle of logic to economics — and apparently caused screams of anguish to echo through the Halls of . . . is “Economeme” a word?
Thus — in Kelso’s analysis — something is either human or non-human. That being the case, the only factors of production are necessarily either human or non-human. Kelso labeled the human factor of production “labor” and the non-human factor of production “capital.” (The term “human capital” is, in Kelsonian terms, an oxymoron.) Anything resulting directly from purely human effort is produced by — and due to — labor, while anything resulting directly from purely non-human effort is produced by — and due to — capital.
But (you quite reasonably ask) very few things are produced exclusively by purely human effort. There are not too many unaided people engaged in productive activity, or in any activity, for that matter. Unaided technology is another matter, but the question remains: what about production resulting from direct combined efforts of both human beings and capital?
This brings in Kelso’s concept of “productiveness.” Note that this is Kelso’s use of the term, not someone else’s. In Binary Economics, productiveness means the pro rata contribution of an economic factor to production, as measured by the free market-determined value each factor contributes to the overall production process.
For example, suppose a worker could be hired for $10 an hour to operate a machine without any minimum wage laws or collective bargaining or anything else, and the machine produced 100 units an hour at a cost of $0.90 per unit, without factoring in the labor cost. The market value of each unit is $10 each. Kelso would say in this case the productiveness of labor is .1, while the productiveness of capital is .9 —labor costing $10 per hour compared with capital costing $90 per hour, for a total unit cost of $1.
This, of course, flatly contradicts the labor alone school, but agrees completely with the new “multifactor” school, even as they deny it. Most business leaders, however, will use Kelso’s productiveness concept when making business decisions, absent tax laws, subsidies, or what have you, even unconsciously. Unless he or she is worried about the cost of a particular resource, it is all grouped under either labor or capital, and that’s it. If labor is cheaper than capital, use labor. If capital is cheaper than labor, use capital. Do anything else in a free market and you will go broke.
This brings in the second theoretical critique: misreading capital’s role; “Mainstream economists argue Kelso conflates the ownership of capital with the productive contribution of capital. A machine’s output doesn’t accrue to the machine — it accrues to the production process as a whole.”
This critique raises the possibility that mainstream economists don’t understand the concept of private property. Property is not the thing owned, but the absolute natural right each person has to be an owner and the limited and socially determined bundle of rights that accompany ownership, most importantly control of what is owned and the right to receive the fruits of ownership, i.e., what is produced by what is owned.
The critique, however, insists that “A machine’s output doesn’t accrue to the machine — it accrues to the production process as a whole.” But — but — but!!!! That is precisely the opposite of private property!!!! If you own your body (that is, you are not a slave), then you own what you produce with your body, what your labor produces.
Similarly, if you own an apple tree, you own the apples that grow on the tree. If you own the cow, you own the calf and the milk, as well as the steaks, hide, hooves, and horns. It requires very little imagination or even much of a stretch of logic to insist if you own a machine, you own what the machine produces . . . yet the economists contradict this when they insist “A machine’s output doesn’t accrue to the machine”!
Yes, in many cases (although growing fewer every day — and then it’s going in favor of the capital), human labor and capital alone produce little or nothing. The combination is what is productive, but that still leaves the question of how much each produces — which Kelso answered, respecting both economic reality and the natural law concept of private property.
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| Nassau Senior, the Wage Fund Doctrine |
Most easily answered is the idea that Kelso “implicitly revives something like the old wage-fund doctrine — the idea that there is a fixed pool of purchasing power, so capital owners gaining more necessarily means workers getting less. Modern economists generally reject this zero-sum framing of income distribution.”
Really? The short answer here is that Kelso said no such thing. He said the cost of labor and the cost of capital added up to the total cost of production, not that there was only a fixed amount to spend on either labor or capital. This is the “production possibilities curve” — the purported “guns or butter” dilemma Kelso explicitly rejected!
It is the modern economists who insist a modern version of the wage fund doctrine is an iron rule of economics, not Kelso. A quick look at Kelso’s monetary theory reveals that, so long as a marketable good or service can be produced, it can be financed regardless of the available financial capital. It is only necessary to use the commercial and central banking system to monetize future increases in production (“future savings”), and any amount of labor can be hired and capital formed at market prices without any limit other than the feasibility of the production itself.
Frankly, if the job is so lousy, dirty, and disgusting that no one will do it for $10 an hour regardless how much is due to capital, then employers will have to keep raising the amount they pay for labor the more capital they use, not less. That, however, is another story.
This segues into the critique of Kelso’s monetary and credit theories, but we will look at that next week.
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