At 13:56 05/10/2010 -0700, Harry wrote:
Keith,
There seems to be an assumption on your part this year's thinking is
better than last year's thinking. Or, that 21st-century understanding is
greater than 19th century understanding.
If a high degree of interest in a particular subject is maintained from one
generation to the next and by individuals who, we must assume, are of
similar curiosity and intellectual ability, then in all other non-arts
disciplines I can think of, it is the general rule that there's better
understanding. Previous assumptions are dispensed with, or are simplified
or are extended. I don't see why economics should be the exception.
I wish that this was true, but the events of the last few years do not
support it.
You're only saying this because of your point of view and from your point
of view. When I argue that the classical economists' concept of "Labour" is
too vague and essnetially means "Energy" I do at least give a specific
example (an automated factory) which proves that the old troika of "Land,
Labour, Capital" is vague, inadequate and must be sharpened up. It doesn't
prove that I, or most modern text books, are completely and finally correct
when the troika is extended. Some of our assumptions, in turn, will
undoubtedly be found to be faulty and must be sharpened up by another
generation. It is just that the latest hypothesis in any subject is more
likely to be useful than previous ones.
(The tragedy, as Keynes himself pointed out, is that current governmental
policies are usually informed by ideas of a generation or two previously
and are inadequate to meet the present problem. If Keynes were looking down
on us from some ethereal Cambridge College, and watching the quantitative
easing antics of present governments then he would be shaking his head
sadly. By the time he realized that Hayek was more correct than he'd been
-- and said so -- he was too old to write another major book. A pity
because he was a brilliant mind in a brilliant tradition.)
Modern economists run around in circles advising that the interest rate
should go up or down, or that money should be inserted into the economy,
or not -- or that perhaps we should try this, or that to see what happens.
Brilliant though the classical economists were I am sure that they would be
as equally baffled and argumentative as to what exactly is going on at the
present time with growing complexities and calamities in bond markets,
interest rates, employment structures and indebtedness. Arrogant as I am,
frequently pouring scorn on some of the ideas of economists such as Paul
Krugman, I am of the view that modern economists are generally (including
Paul Krugman) of a very high intellectual calibre. None of them, including
Larry Summers or Ben Bernanke should be treated lightly. If, as a body,
economists can't decide on this issue or that, it means that it's a complex
issue. (Like the cause of global warming!)
The basic problem is seen in Futurework and elsewhere on the net, not to
mention every day in newspapers and magazines detailing the certainties of
politicians, pundits, and economists.
Most of them are trying to find jobs for people. One of their funniest
endeavors is to get the consumer to buy more -- to increase demand so
people will have to work to satisfy it. When nothing positive results,
they wring their hands, note how hard they are working on it, and get a
salary increase. (Perhaps a certain annoyance is creeping into my remarks.)
Let us look at production from the Classical point of view.
No. Sorry! Until you refute my arguments -- and that of most modern
economists -- that there is more to the production side of a modern economy
(or any economy of the past) than merely Land, Labour and Capital, then I'm
not willing to argue with what I consider to be blunt tools.
As it happens, and as you know, you and I largely agree on many economic
issues. However, if I were to read and argue along the lines of what you
have written below I would only have to forego my own assumptions that
Land, Energy, Capital & Innovation is a better set of tools (to analyse the
production side of economics) than Land, Labour & Capital. Until you refute
my refutation, then we will continue to argue forever.
And we might start calling each other horrible names. Having drunk a pint
or two together in the past, that would never do!
Keith
We have analyzed the Factors of Production, that is the troika Land,
Labor, and Capital, with the rewards that go to each for its
participation -- Rent, Wages, and Interest. Now let us look at why we
produce. Very simply, the reason for production is Wages. We do not like
exertion and try to limit it as much as we can as we pursue our desires.
The product of our exertion is Wages and that is why we work. (I will stop
capitalizing, but I am still using these terms rigorously.)
One might look at a giant company's such as GM and assume that without GM
and there would be no work for its employees. But if the workers at GM
walked out, there would be no GM. Of course they cannot walk out or they
would starve. Hence, the impression that GM and other major employers are
the important part of the modern economy, rather than people.
Why workers are so weak is where attention should be focused -- but, of
course, it isnt.
Instead, there is a tendency in this modern era of "major insights" to
concentrate attention on large corporations, along with everybody's
contemporary first love -- small business -- in the effort to find jobs
for people -- any jobs -- or more properly these days, any work. Yet,
people do not want jobs, rather they "seek to satisfy their desires with
the least exertion." You will note the amazing insight of modern
economists who tell us that the longer unemployment pay is awarded, the
greater the time needed by people to find jobs.
If there is a shortage of labor, the higher wages will be, and the more
likely result be that workers would simply walk out of General Motors if
they didn't like conditions. So the obvious direction of economics -- if
it is science -- is to find out why there is not a shortage of labor.
As said Henry George:
"Why are people looking for jobs? Why are not jobs looking for people?"
Modern economists/politicians don't answer that question. In fact, they
don't ask it! What they try to do is to sop up excess labor. So, they keep
kids in school for many years to keep them from entering the labor market.
They force early retirement on workers to open up jobs for younger people.
They enlarge the military to remove workers from the labor force. They
bloat governmental workforces -- a major problem now in every country
(perhaps particularly in Britain). You will have noticed that it makes
little difference in the scheme of things.
There is still unemployment -- even in normal times, whatever they are.
There is also poverty and deprivation as a normal part of the modern
economy. "Ah!" a modern politician or economist might say, "the modern
welfare state takes care of poverty and deprivation." But, is not the
modern welfare state evidence that poverty and deprivation exist? Take
away the umpteen subsidies to the poor, the old, and the deprived, and how
would the economy look then?
I am often amazed at the complicated web that is Britain's welfare state.
I am discomfited when the government announces in Parliament that old age
pensioners are getting a few shillings more, hopefully to avoid freezing
to death in the next Global Warming winter.
I would say there is little basic difference between the pin factory and
General Motors. In each of them labors brain and brawn work with machines
and buildings (capital) to produce wealth (a material product in the hands
of the consumer).
The energy back then was produced by a water wheel, now perhaps by a grid.
In both cases, this is capital and does not need another Function --
energy. It is already covered.
Your comment on the labor-less factory reminded me of Karel Èapek's
R.U.R., where the automatic factory -- without workers -- produced without
stopping until it had buried itself in its products. Even when a factory
is fully automated, the goods still have to be taken to many points where
they are distributed to consumers. Transport and selling are part of
production and perhaps do not lend themselves to automation.
With regard to your change of the three Functions to Land (the Classical
name for Natural Resources), Energy, and Capital -- where is Labor? You
suggest Innovation, but then where do we find the truck driver, or the
machinist, or even the checker at the supermarket? All are labor in the
Classical lexicon. There again, if innovation is divorced from Labor,
shouldnt invention, industry, education and other traits be separated? My
golly, we would have a lot of Functions to complicate matters. Yet, they
are all within the single Function -- Labor.
To adopt such a bunch of Functions would have William of Ockham spinning
in his grave!
It is interesting to note that Georgist economists saw the coming of the
present Great Recession.
Fred Harrison
<http://www.amazon.co.uk/Boom-Bust-Prices-Banking-Depression/dp/0856831891/ref=sr_1_1?ie=UTF8&s=books&qid=1209291222&sr=8-1>Boom
Bust: House Prices, Banking and the Depression of 2010- London:
Shepheard-Walwyn in 2005 (second edition in 2007)
Fred Foldvary The Depression of 2008- Berkeley CA: The Gutenberg Press in
2007.
On the other hand, Henry George set out the reason for periodic crashes
back in 1879. Nothing has changed since. We have been confirming his
analysis on a regular basis ever since.
Harry
From: Keith Hudson [mailto:[email protected]]
Sent: Tuesday, October 05, 2010 1:09 AM
To: RE-DESIGNING WORK, INCOME DISTRIBUTION, , EDUCATION; Harry Pollard
Subject: Pins and needles, etc -- was RE: The fourth factor of production
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]>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
Keith Hudson, Saltford, England
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