Thursday, August 29, 2013

Capital As A Social Relationship

Home Depot Sells Consumer Goods
1.0 Introduction

The lumber in the above picture may look like an immense accumulation of capital goods, where capital goods are a type of commodity. But, I argue, these commodities should properly be thought of as consumer goods.

2.0 A Keynesian Perspective

John Maynard Keynes, in The General Theory of Employment, Interest and Money, was interested in the sources of aggregate demand. Aggregate demand is demand for commodities, and an increase in this demand leads to an increase in waged labor. So, for Keynes, capital goods are goods whose use would be accompanied by labor being paid wages.

Home Depot and Loewes market to the Do-It-Yourselfer. (I assume building contractors buy in bulk, and purchase most of their stuff elsewhere.) The purchaser of products from these commercial enterprises may intend to construct a deck, erect a shed in their backyard, or remodel a kitchen or bathroom. But the work in completing this products will not be paid a wage. That is, as far as aggregate demand in a capitalist economy goes, the lumber pictured acts like a consumer good, not a capital good.

3.0 A Classical Perspective

Classical economists, such as Adam Smith, distinguished between "productive" and "unproductive" labor. Unproductive labor is that labor which is paid for out of revenue, not out of a capital fund. Unproductive labor does not earn a profit, even tendentially:

"There is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour. Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit. The labour of a menial servant, on the contrary, adds to the value of nothing. Though the manufacturer has his wages advanced to him by his master, he, in reality, costs him no expence, the value of those wages being generally restored, together with a profit, in the improved value of the subject upon which his labour is bestowed. But the maintenance of a menial servant never is restored. A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of menial servants." -- Adam Smith, Wealth of Nations, Book II, Chapter 2.

I think of a typical example of unproductive labor as the work of a carpenter hired by a 18th or 19th century British aristocrat to build him a chest with wood that the aristocrat's estate provides. I guess such an estate would support all sorts of servants in the surrounding community. But profits would not be earned on their wages, either by these servants or by their employers.

So, even if the purchaser of the lumber products under consideration here hired some helpers or, perhaps, compensated some assistants with food or drink, these products would still not be capital goods.

4.0 A Neoclassical Perspective

A neoclassical might abstract from all these considerations of institutions, particularly for those that constitute capitalism. And the neoclassical economist might classify as capital those goods that last for many periods, providing a flow of services. (I think you can find this perspective in Leon Walras; he certainly distinguishes between a flow of services and the stock of goods.) At the highest level of abstraction, whether the owner of a capital good is a firm or a household is irrelevant. Furthermore, home improvements will increase the price that a house can fetch if you decide to sell it. If you rent it out, you will acquire what Alfred Marshall described as a quasi-rent from these home improvements.

Note, though, that this perspective abstracts from the distinction between goods, that once produced, are given in quantity at a point in time and, say, an annual cycle of (re)production of commodities needed to sustain a capitalist economy. As can be seen on the first page of the first chapter of David Ricardo's Principles of Political Economy and Taxation, classical economic theory focuses on the latter aspect.


Numeral said...

Contra Adam Smith. These days you can have businesses, "Flunkies'R'Us", who provides menial services to the rich. Productive labour. Those who employ servants directly should be investigated by the IRS. They are effectively running a business and should be taxed.

Unlearningecon said...

There is a book I have not yet read, which a commenter recommended to me, called 'capital as power', which takes issue with both marxist and neoclassical notions of capital. It seems like a similar idea to what you have in mind here:

Gavin Kennedy said...

I am in difficulty with the common interpretation of the ‘productive v unproductive’ distinction as one of “goods v services” (an error of Kaldor’s on the Selective Employment Tax). In Smith’s treatment there is, typically, some vagueness.
Take the case of defence expenditures, which are regarded as ‘unproductive’ because defence forces do not raise revenue from their activities. Clear enough. But businesses selling products and services to the defence sector are productive because the earn revenues that generate profits for the suppliers, normally amounting to serious revenues for the owners and for the skilled employees. The bulk of defence expenditures do require productive labour and capital on Smith’s definition.
So do professional singers, dancers, waiters, dealers managing card or dice games, other games of chance, and owners of the associated buildings (theatres, concert halls, opera houses, casino’s, brothels, opium dens and taxis drivers). They work as providers of services generating profits on the invested capital for the owners of the establishments and other purchasers of their inputs (all their supplies are from productive firms and employees). Their customers who pay the revenues they earn, which for them certainly are unproductive activities, but are not so for the suppliers of the necessary inputs for the services who are productive, including the lowly puppeteer performer charging pennies for the public’s enjoyment of “Punch and Judy” shows. If he makes a living out of his staged efforts in his booth he earns revenue to cover his own consumption plus the costs of his puppets and their effects and in booth, he is engaged in productive work.
Much the same is true of employees working in legal services, such as barristers, lawyers, clerks and their suppliers of the inputs they utilize in their productive activities on behalf of clients (paper, books, quill pens, court clothes and wigs, etc.,). Even Marx noted these distinctions in his otherwise misguided criticism of Smith.
It is true that hiring “a multitude of menial servants’ may make a “rich man” poorer because he consumes what productive suppliers of such “menial servants” from other “rich men” who grow richer upon on the basis that the hiring costs cover produce costs and marked-up wines and groceries, plus profits.
For these reasons I am wary of classifying the productive v unproductive distinction simply as one of goods v services
Gavin Kennedy

Magpie said...

"A neoclassical might abstract from all these considerations of institutions, particularly for those that constitute capitalism. And the neoclassical economist might classify as capital those goods that last for many periods, providing a flow of services."

Indeed. For neoclassical economics, the **operative** difference between capital and consumption goods is their durability (not who own them or what use is given to the goods): services are consumed in the act of purchase, consumer goods last on average less than one year, durable goods (cars, white goods, for instance) last more than one year but generally less than five; capital goods last more than five.

As you can see, that classification is essentially arbitrary; and it is reflected by the system of national accounts, where purchase of newly finished residential buildings is **arbitrarily** considered investment (i.e. an addition to the stock of capital), not durable goods consumption.

Incidentally, for this reason, a monetary rent is **imputed** to the owner of the household, when no similar rent is imputed to the buyer of a new car.

Robert Vienneau said...

Thanks for the comments. I see I was unclear.

Numeral only re-inforces my point with his second statement. If you employ an assistant through a company, that company advances wages, in some sense, out of their capital funds. And the company earns profits. An assistant doing the exact same task employed directly by the estate owner is not earning profits.

I have read Capital As Power, but did not get much out of it. As I recall, it is an attempt to combine Institutionalism with Marxism. But the institutionalist points I try to make in my post are already in Marx.

I think Gavin is going off on a different point. As I read him, Smith had two definitions of the distinction between productive and unproductive labor. I am drawing on the one about paying wages out of capital or revenue. This is a different distinction than the one about whether the result of labor is embodied in a physical good or not.

I think Magpie is talking about only one, of several, neoclassical perspective on capital.