Where do we define the boundaries of productive activity in the economy? As Mariana Mazzucato argues in The Value of Everything, the ‘production boundary’ has changed over time throughout the history of economic thought until the present, in which mainstream neoclassical economics considers anything priced by the market to be a source of value, amended by the possible presence of market imperfections. She wants to rekindle the debate on the sources of value in economics, with the state as a potential co-creator of markets and innovative activity and, hence, economic value.
I have already posted on Mazzucato’s book here, so here is Michael Hudson’s take on the issue, from his J is for Junk Economics (p.182-3):
“Productive vs. Unproductive Labor: Defining productivity is fairly easy when the measure of output consists of uniform commodities: steel, crops or automobiles produced per man-year. But today’s National Income and Product Accounts (NIPA) define the productivity of labor by Gross Domestic Product (GDP) per work-year, regardless of whether it produces commodities, financial “services” or simply makes money by zero-sum speculation.
Goldman Sachs’s Lloyd Blankfein has bragged that his firm’s partners are the economy’s most productive individuals, as measured by the huge amounts of money they make. This reasoning is circular: it claims that people are paid according to their productivity as measured by their wages, salaries and/or bonuses – which are assumed to be paid in proportion to their productivity!
But what about economic activity that is merely extractive and predatory? Value-free economics abandons the classical definition of productive labor or investment as that which produces profit on “real” production. At issue is what is real and what is mere overhead.
Adam Smith and his followers defined labor as productive only if it produced commodities for sale. That was in an epoch when most services were performed by servants (maids, butlers, coachmen and other employees of the wealthy) as consumption expenses. This personal employment was deemed to be part of the rentier class’s overhead. Church officials, government workers, the army, tutors and teachers or other professionals in what today is called the non-profit sector also were deemed unproductive.
To Karl Marx, labor under industrial capitalism was productive to the extent that it produced a profit for its employer. He pointed out that even prostitutes were productive – of a profit, if employed by their madams, just as steel workers were productive of a profit to mill owners. His 3-volume Theories of Surplus Value reviewed the classical discussion of productive labor, value and price.
From the classical vantage point, rent extraction, debt leveraging and related financial overhead is not part of the economy’s necessary core, and thus would be viewed as a subtrahend from “real” output and productivity. Post-classical economists stopped distinguishing between intrinsic value and market price so as to avoid the critique of land rent, monopoly rent, and financial and other rentier charges as undesirable overhead.
After Russia’s 1917 revolution, Soviet statisticians reverted to Adam Smith’s definition of physical productivity: material output per worker. Their non-capitalist society had no rentier class, and the state did not charge interest or rent, so no implicit rent-of-location or cost of capital was measured in their national income statistics. These exclusions left Russia somewhat naïve when it opened its economy to the West in 1991, not realizing that the main aim of neoliberal investment was rent extraction from natural resources, land and monopolies.
The postindustrial epoch in the West itself has seen industry turned into a vehicle to extract economic rent and interest, and to make “capital” gains from asset-price inflation as a “total return” on equity. From the classical vantage point of the industrial economy at large, this is an overgrowth of unproductive investment. The quick collapse of Russian manufacturing after 1991 is an object lesson in the effect of replacing industrial productivity with rentier asset stripping.”