The Core Falsehood of Capitalist Economics

Production and Profit

In my book Adam Smith: Wealth Without Nations, I explained how Smith laid the foundations for many heartless systems, down to and including our current New Right Doctrine. Smith says:

“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. The labour of the latter, however, has its value, and deserves its reward as well as that of the former. But the labour of the manufacturer fixes and realizes itself in some particular subject or vendible commodity, which lasts for some time at least after that labour is past. It is, as it were, a certain quantity of labour stocked and stored up to be employed, if necessary, upon some other occasion. That subject, or what is the same thing, the price of that subject, can afterwards, if necessary, put into motion a quantity of labour equal to that which had originally produced it. The labour of the menial servant, on the contrary, does not fix or realize itself in any particular subject or vendible commodity. His services generally perish in the very instant of their performance, and seldom leave any trace or value behind them, for which an equal quantity of service could afterwards be procured.

“The labour of some of the most respectable orders in the society is, like that of menial servants, unproductive of any value, and does not fix or realize itself in any permanent subject, or vendible commodity, which endures after that labour is past, and for which an equal quantity of labour could afterwards be procured. The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers. They are the servants of the public, and are maintained by a part of the annual produce of the industry of other people. Their service, how honourable, how useful,1 or how necessary soever, produces nothing for which an equal quantity of service can afterwards be procured.” (The Wealth Of Nations, Book II, Chapter iii, paragraphs 1 and 2)

Smith is in fact doubly confused. He confuses labour that produces goods for sale with labour that is performed without anything being sold. And he confuses labour which produces a tangible item with labour with other sorts of labour. This is nowadays an unimportant and forgotten error, an increasingly high proportion of goods produced are not actually tangible and these are no more or less likely to be useless than goods that exist in some tangible form. (Full details are set out in my book Wealth Without Nations, which was published in the year 2000 and was completely ignored by all of those who could have learned something useful from it.)

Some of Smith’s errors are forgotten: others are treated as the height of economic wisdom. Particularly the notion that labour is only productive if it results in goods sold in a market. Smith is the agreed source for this doctrine, so it’s worth examining the topic more closely.

Supposing a gentleman of Smith’s day orders his cook to prepare a dozen large pies that he intends to serve at a meal for some visitors. But then half of them get delayed, so he orders another servant to sell half of them at the local market. The cook is presumably a productive labourer for those pies that get sold and an unproductive labourer for the pies that are eaten by the gentleman and his guests. Maybe one of the purchased pies is forgotten until it is uneatable and then gets thrown away. It is wasted, but the labour of producing it is productive because it was sold, and would have been unproductive if it had been eaten at home.

Smith ‘proves’ that production depends on markets and money, by insisting that labour is not productive unless it produces something that enters into the cycle of markets and money. By the same logic, I could prove that all Tories are cannibals. I merely define ‘cannibal’ as meaning ‘member of the British Conservative Party’, ignoring the more normal definition as ‘person who consumes human flesh’.

Smith uses misleading names. Clearly a profit is made on the six pies sold, assuming the sale price covers materials and the cook’s labour, plus cost of selling. But to call the split ‘profitable’ and ‘unprofitable’ would leave open the question of the overall usefulness.

The actual material life of the society is badly reflected by profit and loss, regardless of whether the market is efficient or not. And ‘Productive’ cannot be defined without some subjective choices.

Wealth is deemed to be produced by capital accumulation, because that is how Smith chooses to define wealth. Beyond that, one finds nothing. I’ve read absolutely everything that Smith published, as well as the stuff published after his death. And there is no real explanation for his doctrine. Nor do his disciples fill in the gap: they seem not to notice it.

Smith deems wealth to come from capitalism, just as a lawyer deems his client to be innocent, however guilty they seem to be. Evidence does not come into it. Smith’s apparently simple remarks about productive labour and wealth smuggle in a whole range of concepts that would have aroused many questions and disputes if introduced in some more open fashion.

Smith makes no distinction between different sorts of value, the distinct though overlapping ideas of use-value and exchange value that Marx identified. A well of pure water has great use-value or usefulness to those who need to drink from it. The usefulness is hardly increased if someone starts charging for the water, giving it an exchange value.

If some benevolent local gentlemen has a servant look after the well, along with other helpful tasks for the needy traveller, this is ‘unproductive work’ by Smith’s definition. If the well is fenced off and denied to those who cannot pay, only then is the work productive.

Smith is saying that labour is only productive if it is directed towards producing a cash income for the rich. Wealth that is not also a contribution to the wealth of rich individuals is deemed not to be wealth at all, even if those ignorant of economics might suppose that it was. Smith anticipated and helped to promote the general destruction of all non-capitalist social forms that had begun in his day, and which intensified greatly in the 19th century.

In the 18th century there was a huge range of endeavours directed, not towards the market, but directly for consumption. Much cloth was homespun, beer and cider produced at home from basic ingredients. ‘Housecraft’ was a complex affair in which each household provided for much of its own consumption.

Entertainment, too, was normally a non-market activity. People might have a very good way of life without much cash, satisfying their own wants without making a profit for others. Smith does not venture to directly condemn such a way of living. It was not even static or incapable of change, there was much technical progress by people who were outside of the market. Indeed the whole of science has continued to be organised this way, with commercial interests having just a secondary role in adapting pure science to their own particular needs.   But the slur of ‘unproductive’ remains, whereas to call it non-market or non-profit-making would have been much more accurate.

Accuracy in describing the non-market sectors of the economy would have weakened the case for replacing them with the cash nexus. This area of life has been carefully written out of history, with all progress ascribed to market forces. Even Marx gives mixed messages, recognising that these forms existed, but accepting without question that they were obstacles to progress.

Smith and his successors ignore all the use-values which serve to make life comfortable without providing a profit. There are no real economic measures that can tell you the benefit of a health service, the positive influence of good public leisure facilities and the usefulness to society of a competent state infrastructure.

If a health service is operated ‘rationally’ as a source of exchange values, it would pay to give patients treatments they do not really need, and to always go for the most expensive options. It isn’t just outsiders who see the US medical system as having just those faults; US culture makes the same judgement. And this despite all of the dedicated idealists who try to make it a service for health rather than money. It remains twice as expensive for each member of the society as the British NHS, while giving a rather worse service to the society as a whole.

Economic comparisons look at profit-making commodities and ignore non-market social benefits. Outside of the cash nexus, there is supposed to be nothing. Nothing except perhaps God or ‘spiritual values’, and God and ‘spirituality’ are never allowed to get in the way of market forces.

Commerce favours a gelded god and empty spiritual values. Not all religions in the USA are like that, but a great many of them are, including the Southern Baptists and other right-wing Christian traditions, which are Christian in the same sense that tigers are fishes. Tigers and all other mammals have remote ancestors that were indeed fish, but the link is obscure and remote, as is that between the anti-commercial and non-violent teachings of Jesus and the rubbish that currently passes itself off as ‘fundamentalism’ within the Christian religion.

This is an extract from a 2005 article, Gentlemen Prefer Capitalists.
My book Adam Smith: Wealth Without Nations is shown as ‘unavailable’ by Amazon Books, but is actually available from