Monday, May 30, 2016

On unproductive labor

Today I read an article on shortages and economic collapse in Venezuela. The reason why there are huge lines in front of the stores was the same known to any student of socialist economies: state stores sell heavily subsidized goods and the demand for such goods exceeds their supply. Then, many people buy much more than they need and engage in selling the goods at higher prices to those who are either sufficiently rich to pay higher prices or who have been unlucky that the supply ended before their turn came.

The buyers and resellers of such goods in Venezuela are called, according to the New York Times, bachaqueros.  Ricardo Hausmann, from the Kennedy School at Harvard who was Venezuela’s planning minister in the 1990 was then quoted by the New York Times as saying: “This is the crazy thing about the system. A lot of people are putting in effort [to buy the goods and resell them], and none of that increases the supply of anything. This is perfectly unproductive labor”.

That statement made me stop. “Perfectly unproductive labor”? But that “unproductive labor”, as every economist knows, improves the allocation of goods. The goods flow toward those who have greater ability to pay and since we tend to associate greater ability to pay with greater utility, the goods, thanks to bachaqueros’ activities, are better allocated. If one argues that bachaqueros activity is unproductive because it “does not increase the supply of anything” then one should argue that the activity of any trade or intermediation is unproductive because it does not produce new goods, but simple reallocates. The same argument could be used for the entire financial sector, starting with Wall Street. The entire activity of Wall Street has not produced a single pound of flour, a single loaf of bread or a single sofa. But why we believe that financial intermediation is productive is that it allows money to flow from the places where it would be less efficiently used to the places where it would be used more efficiently. Or for that matter from the consumers who cannot pay much to the consumers who can. Exactly the activity done by bachaqueros.

Hausmann’s view is identical to the (falsely) Marxist view of productive and unproductive activities reflected in socialist countries’ national accounts, called Material Net Product. Socialist countries’ approach was that all services (including health, education and government administration) were unproductive because they did not produce new physical goods. Obviously, speculators like bachaqueros were the very epitome of unproductive, and even (it was held) “socially noxious” or “abhorrent” labor. This view had practical consequences for the calculation of national income because the level of national income in socialist countries was underestimated, compared to what it would be according to the UN’s System of National Accounts, but the rate of growth was overestimated because productivity increases were generally greater in production of goods than in services.

Marx had a distinction between productive and unproductive labor which was more sophisticated. Productive was all labor that resulted in the production of the surplus value. Thus, Marx in a well-known example, shows that a singer (a prototype of activity that does not produce anything tangible) is engaged in productive labor so long as he is hired by a company or an individual and creates profit for his employer. In Marx’s view productive-unproductive dichotomy was not given forever but changed depending on socio-economic formation. The problem with socialist governments in Eastern Europe was that they had trouble deciding what should be productive and unproductive according to Marx in a socialist society and took the easy road to declare unproductive whatever activity did not produce tangible physical goods.

There was also a  categorization introduced by Ann Krueger in the 1970s who defined the so-called “directly unproductive activities” or “rent-seeking activities”. The idea was to classify under such heading all activities whose objective is to extract some government concession that would result in higher incomes  for those successful in lobbying. Pharmaceutical and IT companies that pay hundreds of K Street lobbyists in Washington today would fall under that category—even if Krueger’s classification was originally intended mostly to push developing countries’ governments to be less interventionist (was directed especially against “India’s Licence Raj”;  see Bhagwati here). Lobbying was, it was argued, unproductive because it led to the creation of rents. And rent is, of course, an income that can be taken away without affecting the supply and allocation of goods.

Finally, it leads us to the topic of theft. It is not easy to put theft in its right place in economics. Theft for private use can be justified by arguing that the bread stolen by a poor person from a rich one is almost certain  to increase the amount of “social happiness”. (I have often thought of that in New York where that the old-fashioned idea that one should keep $20 in his/her wallet to give it to a mugger certainly made sense in helping "the greatest happiness for the greatest numbers"). The issue is more complicated when we come to theft for resale: burglary of a jewelry store and resale of the jewels might increase overall welfare if burglars are very poor and jewelry owner very rich but it cannot be defended on better allocation grounds because the jewels could have been equally accessible to those who wanted to buy them whether they are sold by the owner or by thieves.

The issue of preventing theft leads us to yet another category of labor that can also be considered unproductive: security personnel or what is  called the “guard labor”.  Their salaries are paid in order to prevent theft. They clearly do not increase the supply of goods, nor do they improve goods’ allocation.  The only defense that their labor does produce something is in the argument that prevention of theft improves protection of property which makes for more investments and increases long-term growth. But this is,  as can be seen, a rather more convoluted justification, which by the way, can be also used to argue why theft, even if it might improve short-term welfare, is likely to be pernicious in the longer-term, a point of view that goes back to Adam Smith.

Deciding for a capitalist economy what is productive and what is unproductive labor is not always easy. How much more difficult if we study economic history: how to classify monks and priests when they are paid by legally compulsory tithes; Robin Hood could be defended on the maximization of utility principle but criticized as inimical to long-term growth; Francis Drake stole goods owned by the Spaniards who extracted them by using forced labor…

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