One of the physiocrats’ more dubious contributions to economic thought was their view that only agriculture was productive, that only agriculture contributed a surplus, a produit net, to the economy. Smith, heavily influenced by the physiocrats, retained the unfortunate concept of ‘productive’ labour, but expanded it from agriculture to material goods in general. For Smith, then, labour on material objects was ‘productive’; but labour on, say, consumer services, on immaterial production, was ‘unproductive’.
Smith's bias in favour of material objects amounted to a bias in favour of investment in capital goods, since a stock of capital goods by definition has to be embodied in material objects. Consumer goods, on the other hand, either consist of immaterial services, or they get used up – consumed – in the process of consumption. Smith's imprimatur on material production, therefore, was an indirect way of advocating investment in an accumulation of capital goods as against the very goal of producing capital goods: increased consumption. When discussing exports and imports, Smith realized full well that there was no point to amassing intermediate objects except that they eventually be consumed – that the only goal of production is consumption. But as Professor Roger Garrison has pointed out, and as we shall see further on the question of usury laws, Adam Smith's Presbyterian conscience led him to value the expenditure of labour per se, for its own sake, and led him to balk at free market time-preferences between consumption and saving. Clearly, Smith wanted far more investment towards future production and less present consumption than the market was willing to choose. One of the contradictions of this position, of course, is that accumulating more capital goods at the expense of present consumption will eventually result in a higher standard of living – unless Smith prepared to counsel a perpetual and accelerated shift toward more and more never-to-be-consumed means of production.
In Book II of the Wealth of Nations, Smith opines that labour on material objects is productive, while other labour is not because it does not ‘fix or realize itself in any particular subject... which endures after that labour is past and for which an equal quantity of labour could afterward be purchased’. Included in immaterial and hence unproductive labour are servants, ‘churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc’ To Smith the important point was that the ‘work of all’ unproductive labourers ‘perishes in the very instant of its production’. Or, as he put it, ‘Like the declamation of the actor, the harangue of the orator, or the tune of the musician, the work of all of them perishes in the very instant of its production’. Smith also writes that ‘productive’ labour ‘adds to the value of the subject on which it is bestowed’, whereas ‘unproductive labour does not’ – another way of putting the fact that labour on services is not embodied in ‘any particular subject’. ‘Productive’ labour, moreover, allegedly creates a ‘surplus’ for profit in manufacturing. Adam Smith's lingering physiocratic bias was also shown in his preposterous assertion that agriculture is a far more productive industry than manufacturing, because in agriculture nature works alongside man and provides extra rent for landlords as well as profit for capitalists. In addition to other fallacies, Smith here failed to realize that nature in the form of ground land collaborates in all activities of man, not just agriculture, and that all activities, including manufacturing, will therefore yield ground rent to landowners. In his thorough and searching critique of Adam Smith, Edwin Cannan speculated that Smith, if pressed, ‘would probably have admitted... that the declamation, harangues, and tunes, have a value’. Smith oddly identified the build-up of material capital goods with annual production. On the latter, as Cannan points out, ‘the durability of the things produced by labour is in reality of no significance. The declamations, harangues, and tunes are just as much a part of the annual produce as champagne or boots...’. Yet Smith, in Book II, excludes all production of immaterial services from the annual product, which is allegedly produced entirely by the ‘productive labourers’, who in turn ‘maintain’ not only themselves but all the unproductive classes of labour as well.
In a witty and charming passage, Cannan then comments:
People have always been rather apt to imagine that the class which they happen to think the most important ‘maintains’ all the other classes with which it exchanges commodities. The landowner, for instance, considers, or used to consider, his tenants as his ‘dependants’. All consumers easily fall into the idea that they are doing a charitable act in maintaining a multitude of shopkeepers. Employers of all kinds everywhere believe that the employed ought to be grateful for their wages, while the employed firmly hold that the employer is maintained entirely at their expense. So the physiocrats alleged that the husbandman maintained himself and all other classes; and Adam Smith alleged that the husbandman, the manufacturer, and the merchant maintained themselves and all other classes. The physiocrats did not see that the husbandman was maintained by the manufacturing industries of thrashing, milling, and baking, just as much as the millers or the tailors are maintained by the agricultural industries of ploughing and reaping. Adam Smith did not see that the manufacturer and merchant are maintained by the menial services of cooking and washing just as much as the cooks and laundresses are maintained by the manufacturer of bonnets and the import of tea.
It is not just durable objects, however, that Adam Smith was interested in; it was durable capital goods. Durable consumer goods, like houses, were again, for Smith, ‘unproductive’, although he grudgingly conceded that a house ‘is no doubt extremely useful’ to the person who lives in it. But it is not ‘productive’, wrote Smith, because ‘If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock [capital], or land’. Again, Cannan provides the proper riposte: ‘It did not occur to Adam Smith to reflect that if a plough is let for rent, as a plough itself can produce nothing the tenant must always pay the rent out of some other revenue’.
Adam Smith's bias against consumption and in favour of saving and investment is summed up in Professor Rima's analysis:
It is clear from his third chapter in Book II, ‘On the Accumulation of Capital or of Productive and Unproductive Labour’, that he is concerned with the effect of using savings to satisfy the desire for luxuries by those who are prodigal instead of channelling them into uses that will enhance the supply of fixed or circulating capital. He is, in effect, arguing that savings should be used in such a way that they will create a flow of income and new equipment, and that failure to use savings in this manner is an impediment to economic growth.
Perhaps – but it also means that Smith was not content to abide by free market choices between growth on the one hand, and consumption on the other.
Professor Edwin West, a modern admirer of Smith who generally portrays the Scotsman as an advocate of laissez-faire, admits Smith's bias: ‘Yet Smith, like a prudent steward of a Scottish aristocrat's estate, could hardly disguise a strong personal preference for much private frugality, and therefore for “productive labor”, in the interests of the nation's future accumulation’. He then proceeds to concede implicitly Professor Garrison's insight that Smith exhorted us to negative or at least zero time-preference. Citing Smith's Theory of Moral Sentiments, West notes that the virtue of frugality ‘commands the esteem’ of Smith's alter ego, man's innate moral sense, the ‘impartial spectator’. Quoting from Smith: ‘The spectator does not feel the solicitations of our present appetites. To him the pleasure which we are to enjoy a week hence, or a year hence, is just as interesting as that which we are to enjoy this moment’.
We might note that the lofty refusal to discount future satisfactions in favour of the present, i.e. the rejection of positive time-preference, is all too easy of any ‘impartial spectator’. But is the impartial spectator truly human, or is he simply a floating wraith, who does not participate in the human condition and therefore whose insight can be brusquely dismissed?
Adam Smith's Calvinistic scorn of consumption can be seen in his attack on dancing as ‘primitive and rude’. As we shall see, in his ‘paradox of value’ Smith dismissed diamonds in an excessive way as having ‘scarce any value in use’. He also puritanically denounced luxury as being biologically harmful, reducing the birth rate of the upper classes: ‘Luxury in the fair sex, while it inflames perhaps the passion for enjoyment, seems always to weaken, and frequently to destroy altogether the powers of generation’.
Smith, furthermore, favoured low and criticized high profits, because high profits induce capitalists to engage in excessive consumption. And since large capitalists set an influential example for others in society, it is all the more important for them to keep to the path of thrift and industry. Thus:
besides all the bad effects to the country in general, which have already been mentioned as necessarily resulting from a high rate of profit; there is one more fatal, perhaps, than all these put together, but which, if we may judge from experience, is inseparably connected with it. The high rate of profit seems everywhere to destroy that parsimony which in other circumstances is natural to the character of the merchant. When profits are high, that sober virtue seems to be superfluous, and expensive luxury to suit better the affluence of his situation.
Because of the influence of the example of the higher orders, Smith adds,
If his employer is attentive and parsimonious, the workman is very likely to be so too; but if the master is dissolute and disorderly, the servant who shapes his work according to the pattern which his master prescribes to him, will shape his life according to the example which he sets him. Accumulation is thus prevented in the hands of all those who are naturally the most disposed to accumulate.... The capital of the country, instead of increasing, gradually dwindles away....
But if Adam Smith was excessively in favour of capital investment as against consumption, he at least was sound in realizing that capital investment was important in economic development and that saving was the necessary and sufficient condition of such investment. The only way to increase capital, then, is by private savings or thrift. Thus, Smith wrote, ‘Whoever saves money, as the phrase is, adds proportionately to the general mass of capital.... The world can augment its capital only in one way, by parsimony’. Savings, and not labour, is the cause of accumulation of capital, and such savings promptly ‘puts into motion an additional quantity of industry [labour]’. The saver, then, spends as readily as the spendthrift, except that he does so to increase capital and eventually benefit the consumption of all; hence ‘every frugal man is a public benefactor’. All this was a pale shadow of the scintillating and creative work of Turgot, with his emphasis on time, the structure of production, and time-preference. And it was probably cribbed from Turgot to boot. But at least it was sound, and it stamped its imprint indelibly on classical economics. As Schumpeter put it, in discussing what he calls ‘the Turgot-Smith theory of saving and investment’: ‘Turgot, then, must be held responsible for the first serious analysis of these matters, as A. Smith must (at the least) with having it inculcated into the minds of economists’
Finally, apart from the Marxists, even the abject Smithians of today reject or at least dismiss the Master's productive vs unproductive labour distinction. Characteristically, however, Smith was not even clear and consistent in his fallacies. His presentation in Book I of the Wealth of Nations contradicts Book II. In Book I, he properly states that ‘Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life’, a phrase almost directly lifted from Cantillon. But in that case, of course, there is no difference in productivity between material objects and immaterial services, all of which contribute to such ‘necessaries, conveniences, and amusements’, and indeed Smith's discussion of wages proceeds in Book I as if there were no distinction between productive and unproductive work.