Harry,
As someone who tends to write longish postings myself, I appreciate that
you have spent a great deal of time in replying so I appreciate it.
Unfortunately, what you haven't yet grasped is that all thinkers are
products of their time and culture. Those thinkers who look back on
previous times add new insights as to what was really relevant, but
overlooked, by previous thinkers.
So I'm a bit dismayed that you cannot see that the classical economists
were dreadfully short of many insights which are obvious to us now. I'm not
talking of sophisticated insights that are now being contributed by the
more recent sciences (which have yet to find their true balance in the
overall economic scheme of things) but of very large economic factors which
became increasingly obvious in the course of the industrial revolution, of
which Say, Smith, Malthus, Ricardo, Marx and others of their time saw only
the opening scenes. In particular, the factor that none of them ever
thought about or mentioned specifically is that of energy.
Today there are factories in which there is scarcely any labour at all. We
see glimpses of those repeatedly on TV. If Adam Smith could see one of
these he would go into a state of shock, I'm sure. It's still pretty scarey
for us. He could only imagine that there must be a genius somewhere on the
premises who had made the machinery, rather like a clock-maker. What he saw
in the factories of his day was little more than a lot of workers applying
muscular efforts at this or that. Indeed -- as identified by one of his own
major insights -- a successful factory would be adding more and more
workers all the time as each stage of manufacture was broken down into yet
a greater number of simpler and more routinised tasks (and the owner's
profits growing in leaps and bounds!).
The more that labour-tasks divide, the more that the muscular energy of the
workers is applied more efficiently. Adam Smith could clearly see that
broken-down tasks were being carried out more efficiently than previously
but he nowhere mentions what exactly was being used more efficiently. He
would have been aware of the personal energy expended by a worker, or the
personal energy of an entrepreneur in expanding his business, but not of
energy itself.
In his day there was no concept whatsoever of energy. The whole science of
heat and energy -- thermodynamics -- didn't start to be developed until
almost a century later. When Adam Smith saw energy in motion, he saw a
worker carrying out a particular job. He naturally thought that the worker
himself was important -- that Labour was an important factor of production.
But it wasn't. The modern fully-automated factory of today (or which we
will soon have) proves that the worker himself is not important. The
factory worker of Smith's day was just the medium through which energy
flowed while it transformed material in one state into another state.
I've visited the sort of pin factory (now a museum*) that Adam Smith used
as an example in his Wealth of Nations and very interesting it was, too.
This would have been a later and more refined version than those of Smith's
day because it had at least 20 (perhaps 30) work stations. It was actually
a pin and needle factory, and the muscular energy of workers at some
stations was aided by an overhead belt system driven in turn by a water
wheel driven by the flow of a river. (If you like, it was solar energy at
about five stages removed!)
So we have to change:
Land (plus resources, of course)
Labour
Capital
into
Land (plus resources)
Energy
Capital
. . . but hold on! I've only proved the above switch by instancing a
fully-automated factory. But those three are plainly insufficient. What
about all the machinery? Well, that has only come about through innovation,
so we must extend the three factors to four.
Land (plus resources)
Energy
Capital
Innovation
As another correspondent has reminded me, most modern economics text books
talk of four factors of production, the fourth sometimes being
Entrepreneur, sometimes Organisation. Well, I wouldn't quarrel with those.
Innovation, entrepreneur and organisation are such close cousins that any
one of them would do. Perhaps "Process" would be the best term, but that's
a little too abstract perhaps.
Keith
(*The factory is in Redditch, Worcestershire. 150 years ago the town of
Redditch was full of pins and needles factories, all lined up alongside the
River Arrow. [Exploited by all the water mills, the river must have been
flowing very slowly by the time it left Redditch!]. The variety of pins
and needles made in the museum-factory I visited was immense. Equally
fascinating was the evidence of a globalized world in the "inner" museum
where cabinet after cabinet of prize-winning pins and needles were shown,
as displayed at the "Great Exhibitions" that were fashionable all round the
world in the 1850s and 60s-- London, Paris, Berlin, New York, Philadelphia,
Buenos Aires, etc. Exporting would have been easy from Redditch -- down the
River Arrow to the Severn and then to Bristol, the largest seaport in
England at that time. It had become large because of the triangular trade
-- pots and pans to Africa, slaves to America and the West Indies, sugar
and tobacco to the UK. In the 1850s it was soon to be overtaken by
Liverpool and London with much larger berths available for the new
steamships -- something else that Adam Smith could never have envisaged!)
K
At 14:25 04/10/2010 -0700, Harry wrote:
Keith,
Properly defined concepts are the basis of any science. The science of
economics has not done a very good job in this respect. A number of its
concepts have been somewhat wooly, which have accounted for many
amendments. They define a concept which is then found to be inadequate, so
they add changes or new defined concepts - to draw in notions the first
concept missed. The monetary M's are perhaps a case in point.
The basic classical concepts are excellent, covering every aspect of
production while showing the distribution of production to the functions
that produced it. Lets address your points. You said:
"What's wrong -- or, rather, incomplete -- about your troika is that
there is, apparently, no room within it for energy. The classic economists
didn't consciously appreciate the importance of energy as we do (that is,
in terms of horse-power, kilowatt-hours, etc) but unconsciously it was
what they meant by Labour."
Wealth to the classical political economists meant the material product of
human exertion having exchange value. This last point was intended to
avoid unimportant production. You walk across a meadow and produce crushed
grass, or build a sand castle on the beach. As they do not have an
exchange value, they are not part of political economy. The full
definition of Wealth also includes "for the satisfaction of human desires"
but perhaps "the exchange value" mostly takes that into account.
The classically defined concept that is given the label Labor is "human
exertion, mental and physical, used in the production Wealth". Thus, human
exertion that doesnt produce Wealth (see definition) is not Labor.
One of Henry George's insights was to put management and workers in the
same category of Labor, yet they seem to spend much of their time fighting
each other.
So, Labor does not include 'animal power' or just 'muscle power'. The
label Labor is the whole package and covers skills, knowledge, innovative
ability, industry -- everything that comprises the person who is engaged
in production.
"Having exchange value" implies trade and time. In other words, there is
an period between the beginning of production and its end, which is will
occur when the material product is in the hands of the consumer. While the
product is in the process of production its value is increasing (or Labor
would not waste exertion on it). When it reaches the consumer, its value
decreases -- perhaps suddenly when you consume a pork chop, or over time
as with your home. One of the peculiar ideas of the neo-Classicals is that
as homes last a long time they become capital.
How long? One prominent and first class economist suggested to me that a
year implies durabilityand therefore makes the home capital. But, why not
choose a durability of 6 months, or 5 years? The period seems to be
plucked out of thin air.
So, lets look at the Classical notion of Capital.
To the Classicals, products part of the production process, rather than in
the hands of the consumer, are Capital. Thus, as well as the products in
the course of production, all products part of production such as tools
and buildings, machines and lighting that use energy, in other words
"machine power", are part of the production process and are therefore Capital.
I suggest that your linking together of 'muscle power' (Labor) and
'machine power' (Capital) combines two entirely different concepts,
something that will come back to bite you as you pursue your thinking.
Meantime, innovation is part of Labor -- what else? As I said, one can
certainly analyze the characteristics of Labor and spend a lot of time on
industry, skills, knowledge, inventive and innovative abilities, but this
then becomes a different science, which is all right, for it is can be
interesting and useful but it is quite unnecessary to basic Political Economy.
However, if you pursue that path, you are likely to miss the simple
relationships between Land, Labor, and Capital that makes Classical
Political Economy so easy to understand. Worse, you may miss discussion of
the returns to these three Functions of Production -- Rent, Wages, and
Interest. When we examine these returns a significant difference is seen.
Wages and Interest are controlled by the market price mechanism. When
Wages and Interest rise from their equilibrium in response to increased
demand, Labor and Capital are drawn to the market. Their entry satisfies
demand and prices drop back to equilibrium. This happens continually with
prices hunting around the equilibrium. What fixes the equilibrium can be
taken up at a later time.
Land value attaches to specific locations. Demand for locations is
constant as nothing can be done without land. However, locations cannot be
produced and cannot be moved. When a central location is attractive in the
marketplace many want it, which translates into a rising rent or price.
Locations cannot be moved in to compete and return rent or price to
equilibrium, so under the pressure of demand, rents and prices mount.
It is normal for anyone with an asset to rent or sell to hold out for the
highest price. As the economy advances, so do the costs of locations rise
in tandem. In fact, if the net rise in land value exceeds the current
interest in return, a landholder would be silly to sell. Further, tax
treatment of capital gains is much more attractive than tax treatment of
income -- further incentive not to sell.
Parenthetically, I should mention that a capital gains tax does not fall
on capital, but on land. This is another discussion that is interesting as
capital gains taxation is a continuing issue in Congress. Land speculation
is encouraged by the tax system.
This is something that von Mises just did not understand. He assumed that
a rise in price would lead towards a sale. This is simply not true with
regard to land. This is opposite to goods such as bread, tables, car, etc.
The object with them is throughput, getting them to market so more can be
produced. Von Mises missed the peculiar characteristics of land.
A consequence of this are cities with vacant lots, along with underused
areas which become slums. Also, an increase in a particularly American
reaction -- the taxpayer. If rising property taxes, or other costs, make
holding valuable land out of use less profitable, instead of releasing it
to builders perhaps to erect a hundred story skyscraper, it is blacktopped
at little cost and turned into a parking lot. This brings in enough money
to pay the property tax while allowing the landholder to continue his
speculative activities. My favorite example is a five acre vacant lot in
the middle of Los Angelesfinancial district. It was there for many decades
before becoming a parking lot a decade or two ago.
Petrol stations are another useful taxpayer. They earn a return until the
site is sold, whereupon the pumps are removed, the tanks hauled out of the
ground and the high-rise built.
Of course, these inefficient uses lead to sprawling cities and eventually
a policy of "infilling". Government money is used to buy sites too
expensive for private investors. The sites are then turned over to
contractors who can now do their jobs.
A major problem with neo-Classical economics is that they have included
land within their definition of capital. This is why we have a "housing
crisis" is rather than what it really is -- a land problem.
Again, sorry this is another long one, but you do stimulate the debate.
Harry
From: Keith Hudson [mailto:[email protected]]
Sent: Monday, September 27, 2010 11:12 PM
To: Keith Hudson
Subject: The fourth factor of production
I am having a discussion with a friend who maintains that the three
factors of production, as used by the classical economists, still applies.
So I'll copy my last reply to him here in case anybody else would like to
chip in.
<<<<
You say the main factors of production are Land, Labour, Capital, whereas
I say you should add a fourth, Innovation. This difference may seem
academic but it isn't really.
What's wrong -- or, rather, incomplete -- about your troika is that there
is, apparently, no room within it for energy. The classic economists
didn't consciously appreciate the importance of energy as we do (that is,
in terms of horse-power, kilowatt-hours, etc) but unconsciously it was
what they meant by Labour. Up until the industrial revolution was well on
its way, what Labour strictly meant in terms of economics was muscle-power
(plus some animal-power, of course). It's now become machine-power.
Labour, in terms of people, can be assumed as a given in all three factors
-- Land, Labour, Capital. Land is occupied by people, Labour is expressed
by people, Capital is acquired by people. None of them would exist without
people.
So, to state the three classical factors of production more specifically
we should have:
1. Land
2. Energy (Muscle-power + machine-power)
3. Capital
But, by now, we really ought to add computer-power to the second factor.
But this (apart from computers needing electrical power to run them) is
little to do with the use of energy as such. Without Innovation at the
dawn of the industrial revolution, or Innovation at the dawn of
agriculture (10,000BC), or Innovation at a curious stage at around
40,000BC (when a whole new bunch of innovative products quite quickly
appeared) then we'd still be roaming the African savanna with the same
four crude tools (pounders, flesh-scrapers, thruster-spears, axes) that
we, and our predecessors had been using for millions of years beforehand.
Without innovation we can have unlimited quantities of the other factors
and still be grubbing around like many other prairie species. But, with
the ability to innovate, man could start to use Land, Energy and Capital
in quite new ways. Hunting gave way to Farming which gave way to Manufacturing.
I believe that there are now so many constraints building up against the
continuation of the present era that a further major bout of innovation is
required. And, as happened in the two eras before our present one,
innovation will transform what we mean by, and how we use, Labour, Energy,
Capital.
Keith
Keith Hudson, Saltford, England
Keith Hudson, Saltford, England
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