Murray Rothbard’s Myths (Part 5)

Murray Rothbard pounces of Adam Smith at the end of his article on the subject of the differences between ‘productive’ and ‘unproductive labour’ and completely misses the point, as have so many, including Karl Marx (now that is a strange combination – Rothbard sharing something in common with Karl Marx!).

Many people confuse ‘unproductive’ in Smith’s sense with ‘useless’ or ‘unimportant’ labour, when Smith’s distinction had nothing to do with the merits or utility of labour. That the Physiocrats had a similar nomenclature for labour depending on their ‘produit net’ is also not relevant. Smith used the distinction in a different sense.

Remember, Smith’s book was a report on his ‘Inquiry into the Nature and Causes of the Wealth of Nations’. It was not a general textbook on political economy. It was a report on the application of political economy, as it existed in the mid-18th century, plus whatever elements he added from his perspective of moral sentiments, jurisprudence, and history, to his evolutionary model of man in society. Its focus was on the wealth (the annual goods produced in a country) of nations, primarily Britain, and how each country grew its capacity to produce those goods, the real wealth of a nation and not the amount of gold, silver or paper money its citizens or its prince hoarded.

The idea of a country’s net product of goods being its growth one year with another was not Smith’s alone and he never claimed it was. It was not the same as the produit net of the French Physiocrats, who confined their meaning to products of agriculture from the fact that an amount of seed when planted resulted in a greater amount of seeds or food when grown to maturity. That this produit net was visible, obvious and beyond dispute (outside droughts) was too plain to be contested. An amount of raw material did not visibly produce a produit net in the same manner – seeds bore fruit – because the physical product of raw material was not visible in a larger amount of something tangible. The notion that labour added to raw material produced a value not a larger output required a different perspective, and if I may suggest, a higher level of conceptual insight, which some French economistes approached, but the majority of Physiocrats did not.

Tracing exegetically the origins of this higher level of conceptual insight, that is now commonplace, is not my purpose here. I shall confine my remarks to the distinction as understood by Adam Smith (but not, apparently, by Murray Rothbard).

Smith regarded labour that contributed to growth of the net product of wealth as productive. That was what he was interested in his report into the growth of wealth. It followed that labour that did not contribute to growth, inclusive of the labour that replaced itself in the same amount of wealth each year, was unproductive labour. That this is narrower definition than is common place nowadays, with the inclusion of labour producing intangible services sold in markets, is accepted.

Our understanding of productive labour has matured as the economy matured from Smith’s fairly simple commercial society of farmers, journeymen, tradesmen, merchants and manufacturers, producing food, clothing, shelter, household goods, implements and trinkets typical of 18th-century living standards and implements of the 18th century carrying trade and its wars. The mass consumer and service society of late capitalism and big government was far ahead of the conceptual horizons of Smith, his contemporaries and successors. Rothbard’s penetrating hindsight is a wonder to behold, but hardly relevant when judging what Smith should have known, anticipated or been aware of (e.g., the ‘industrial revolution’), but, like all his contemporaries, did not.

Smith was interested in what caused growth. His identification of productive labour as the cause growth, and unproductive labour as not causing growth, is a simplification that was not in error for its time. He saw the motivational causes of labour leading to growth as a result of the frugality of those (journeyman manufacturers working in small forges, blacksmith’s shops, saddlers yards and weaving sheds attached to the labourers’ houses, and such like) whose savings from their revenues (incomes from productive activities) were devoted to hiring productive labour to create tangible product sold in markets.

In contrast what he called ‘prodigals’ spent from their revenues to hire domestic hands who did not produce output that was sold to its recipients at a price covering any added value. Their output was consumed by the persons hiring their services in the form of domestic labour that produced a degree of comfort satisfying the hirers’ urge to indolence. That is all he meant by their labour being unproductive. It was a distinction with a difference within the terms that suited Smith’s purpose to inquire into the nature and causes of the wealth of nations.

Rothbard concludes from his misunderstanding:

“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.”

Again Rothbard misunderstands Smith’s approach. He did not write a manifesto; he did not advocate that everybody should cease to being prodigal and convert to being frugal, and certainly not that the state should enforce such a ludicrous proposition. He described what many people did and what a few did differently, and what the consequences were from their behaviours in terms of the effect of their actions on the growth in a nation’s wealth. What people did next, as a result of understanding the differences in the distinct behaviours, he left an open question for future behaviour to cope with the consequences. He certainly cautioned against ‘men of system’ and their fanaticism tolerating no exceptions (a mood or manner of behaviour, if I may say so, that would incorporate much of the writing style of Murray Rothbard based on the extract from his book).

Smith noted that the frugality of a few income earners in contemporary 18th- century Britain was sufficient to bring about a gradual, persistent and steady rate of economic growth in real output (and real wages for common labourers), sufficiently encouraging for him to believe it could offset the ‘wasteful’ expenditures (in terms of growth not civilised comforts) on the ‘dignity of the sovereign’ and the wars of governments. He did not advocate a kind of ‘Stalinist’ dash for growth in ‘heavy industry’ at the expense of consumption.

He was happy to leave to individuals the decision to spend all, or to save some, of their revenues; implicitly, he suggested the more that individuals chose to save out of their urge for frugality the relatively faster the nation’s growth rate would be, a true proposition not a falsehood. Contrary to Rothbard’s it’s either investment or consumption nightmare (not a choice in the 18th century), Smith considered that there was sufficient of each available type of labour to produce the desired outcome as a trend over time that would enrich the wealth of the nation.

To this extent, I believe Murray Rothbard’s critique of his version of Adam Smith’s myths is more a demonstration of Murray Rothbard’s Myths about Adam Smith.