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Conventional economics’ treatment of labour is among its many weaknesses.
As has been explained elsewhere in Economics2030, economics is even worse at dealing with the concept of capital. This, of course, hasn’t prevented conventional economists loading their models with variables representing capital.
The problem becomes intolerable where intangible commodity production is dominant and ideas and knowledge are the main factors of production.
How can capital be separated from labour when that capital is mainly or wholly embedded in people’s brains? Perhaps the answer for those seeking to understand how value is created and distributed in service economies is to assume that capital as something that can be detached from people doesn’t exist.
Does that solve economics’ problem with service economies?
It doesn’t. We need to revert to first principles to understand why.
In Economics by Richard Lipsey and Alec Chrystal, a textbook that is recommended reading for many British A Level students and economics undergraduates, labour is defined as:
“All human resources, mental and physical, both inherent and acquired…” (11th edition, page 4).
This definition is complete but so vague as to be pointless. In effect, Economics, is saying labour is labour. The elision allows the conventional economist to get where he or she wants to be. This is a model where labour — whatever that is — can be included as a variable.
In the real world, there is no such thing as labour. Government and business employ people with different skills and competences. They may be required to do the same thing: for example, working on a production line and identically repeating particular physical activities which may or may not require identical mental activity.
For conventional economic models, most of which are inspired by physics, it’s important for labour to be seen as homogenous and fungible so it can treated as if it comprised identical molecules of the same atoms; like water, naphtha or steel.
This will allow the model to be manipulated on the basis of marginal increments.
It’s frustrating to have to deal with a factor of production that can’t be used in fractions or particles.
The solution is to turn labour into labour time, which can at least be divided into seconds. Unfortunately, human beings don’t operate in second, minute or evenly hourly units. They are governed by their need for rest, food and repose. This need varies from person to person.
The model assumes that each unit of labour, which can only be a whole person, can be managed in such a way that its actions are homogenous. Whether the person employed is tall or short, 16 or 60, clever or not is irrelevant to the models. Once he or she is involved in the production process, his or her actions can be standardised to the extent that they can be considered from the point of view of an economist as being identical.
And then it assumes that people’s mental and physical condition remains the same during each period of work. So they are as sharp at 2pm after lunch and four hours’ work as they were at 9am. And they are as ready to work on Friday afternoon with the weekend beckoning as they are at 9am on Monday.
Conventional economics, consequently, deals with increased productivity in a very peculiar way. This is not deemed to come about as a result of an unstable process in which an individual acquires competence and skill over time. For conventional economists, it happens as the result of a change in technology — either in the form of something embedded in the machines they use or as a result of a one-off and externally-applied injection of knowledge.
The impact on the productivity of labour of better management (whatever that may be) or the influence of a better working environment or, even, of the effect on people’s morale when their football team is doing well leaves economics floundering.
But, for the sake of argument, let us set these issues aside.
In these circumstances, it’s possible to believe that economic models depicting individual units of labour combining with individual units of capital within a given technological context represent reality — but only if the other inputs and all outputs are tangible.
With that assumption, you can conclude that higher wages will stimulate an increased supply of units of labour and encourage the application of labour saving techniques (embodied in machinery and disembodied). Increased volumes of labour units applied to a fixed capital stock will eventually lead to diminishing returns to labour. And so on.
But what happens when this theoretical model is applied to intangibles?
In many service industries there are no tangible inputs. A teacher starts each lesson with nothing but what is in his or her head supplemented by a few notes, now often in an electronic form.
There are no tangible outputs. The teacher may spend an hour teaching, but how much learning has been done? That depends upon the attitude of the students being taught as much as the knowledge and energy of the teacher. It’s an unstable interaction that can’t be quantified, only intuitively perceived.
In services, time spent on creating a service is a very bad indicator of how much value is being created.
This is disastrous for conventional models of the role of labour in production and of how markets and economies work in general. They collapse when inputs and outputs are intangible.
Economics2030 argues that in services, value is exclusively the result of constructive interaction at the level of the individual, even if groups of individuals are involved. Value is intangible and can’t be measured. And it’s only intuitively perceptible.
For example, a teacher might think that he or she has taught brilliantly. It’s entirely possible for his or her students to take the opposite view, though their minds might change with time. And they may all be both right both wrong.
But it’s not just conventional economists that have a problem.
Radical economists have dealt with labour in the same way as their conventional antagonists.
Karl Marx devised the concept of labour power as a commodity and tended to treat it as if it was like units of steel or electricity. But labour power is an intangible, only subjectively perceptible and, consequently, impossible to measure.
He dealt with differences in skills by defining labour power as the average in a particular economy at a specific time. This involves a degree of abstraction that leaves adherents to this line of thinking struggling to sound relevant in an era when cognitive skills are the biggest source of wage and income differentials.
The concept of the labour as an aggregate has always been a problem for economists.
For conventional economics, it is a classification that is irrelevant and impossible to incorporate in their models. Labour — like capital – is seen as entering and leaving the market in individual units, not in combination, in response to price signals. Class is viewed as a sociological concept shaped by psychological and cultural factors about which conventional economics has almost nothing to say.
For radical economists, the working class is normally deemed to be people that work for a wage or salary. But this could encompass senior managers, even massively-paid chief executives, who are employees.
The decline of manufacturing and commodity farm production is a further and apparently insuperable problem. Radical economists tend to view an economy as driven by the relationship between workers and the owners of the means of production. In services, the means of production other than the knowledge in a worker’s brain doesn’t exist. That means that owners of the means of production other than the person whose body in which the brain resides can’t exist either.
Does that that mean that labour, as accepted by conventional economists, and the working class, as understood by radical economists, cease to exist in service economies?
And if it doesn’t, how can it be defined?
By wage and salary levels? This would mean someone who is seen as working class could stop being so as a result of a small pay rise.
It would also entail comparatively highly-paid service workers, like senior teachers, being treated as being outside the working class when they might insist they work very hard indeed.
Should supervisory workers be excluded too?
It seems all established economic theories about labour are in trouble once the implications of the fact that more than 80 per cent of the labour force works in services is properly addressed.
Economics2030 perhaps can help.
It presents value as being solely the result of constructive interactive at the level of the individual. Anyone who can say he or she is creating value is consequently productive. In contrast, someone making a living out of an interaction where no value is created is exploitative.
This concept of value deals with the challenge presented by value creators whose services are untraded such as homeworkers, family carers and friends.
Just because they’re not paid doesn’t mean they aren’t productive. The fact that all measures of GDP used by all economists exclude these activities is just one of many reasons why economics has become so discredited.
The rise of services forces economists to face up to a critical deficiency in the way they understand the role of people and the language they use to describe it.
In a world increasingly dominated by intangible services, the critical distinction is not between capital and labour or between the working class and employees.
It’s between exploiters, on the one hand, who add nothing and creators, on the other.
Because in the age of intangibility, the creators are the only real workers.
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