The accumulation of capital and the division of labor are what Adam Smith believed to be the driving forces of economic growth in any nation. Smith found that when the division of labor had broken down the production of almost any commodity into a series of simple operations it was more natural for tools and machinery to be invented that replace hand labor and expedite the entire production process, thereby increasing worker productivity. This increased productivity combines with the growing capital stock to increse national output which enables society enjoy higher levels of consumption, constituting a genuine rise in the wealth of the nation according to Smith.
Smiths theory of economic growth can be formulated in a simple algerbraic equation. Where G equals the growth rate, K equals the ratio of productive to unproductive labor, P equals the productivity rate and W equals the real wage:
From this equation it becomes clear that for growth to occur, the product of the ratio of productive to unproductive labor and the productivity rate must increase more than the real wage. It would seem obvious that an easy way to do this would be to avoid any increase in the real wage, and indeed this view was accepted by many later classical economists who assumed that the nation had nothing to gain from an increase in wages. This was not Smiths view at all. If an increase in capital enlarges the wages fund from which workers workers are paid, and if this increase is greater than the increase in the number of laborers, than it is only natural for the real wage to increase. On top of that Smith was a believer in what modern economists call the efficiency wage theories which hold that higher wages both enhance the vitality of the workers and reduce employee slacking and labor turnover, the latter two of which lower productivity and profitability.
In the equation above it the product of K and P that is responsible for economic growth. It would appear then that K, the ratio of productive to unproductive labor, and P, the productivity rate are equally important factors in this determinance. However, Smith says that this is not so. The ratio of productive to unproductive labor does not change much over time, says Smith. The productivity rate is therefore almost entirely accountable for changes in a nations economic well being. The division of labor is the central factor in Smiths theory of economic growth and it is this development which leads to an increase in productivity and spurs the entire growth cicle. With this being the case and with K being more or less a constant, one wonders why Smith chose to include the ratio of productive to unproductive labor in this equation if not why he chose to make a distinction in productive and unproductive labor at all.
The distinction between productive and unproductive labor is not a distinction that Adam Smith was the first to make. Smith was an admirer of the Physiocratic school of thought. He said of Physiocracy that, “with all its imperfections,” it was, “the nearest approximation to the truth that has yet been published upon the subject of political economy.” There were many representatives of the Physiocratic school of thought but the most modern of them all was surely Anne Robert Jaques Turgot. In chapter 8 of his great work, Reflections, Turgot too makes a distinction between laborers when he writes, “Here then we have the whole society dividedinto two classes, both which are occupied in work. But one of these, through its labour, produces or rather extracts from the land wealth which is continually renascentThe other, engaged in preparing the produced materials, sells its labor to the first and recieves its subsistence in exchange.” In other words one class of workers actually produces something and another class provides services for those products as well as for the producers themselves. Smiths distinction is very similar. It lies in the theory that productive labor stores its product in a tangible commodity with inherant market value. On the other hand, unproductive labor merely offers a service and does not result in the tangibility of any good.
The distinction between productive and unproductive labor is of no relevance in society today. If it were than the vast majority of society would have to be considered unproductive because the industries of “artificers, manufactures and merchants,” which Smith proclaimed to be the only productive laborers, are so heavily machinated that only a small protion of the population is needed to be employed in them. Todays affluent western societies are heavily dependent on services and certainly could not exist without them. But Smith did not deny the usefullness of the service sector he simply gave “productive labor” greater weight in factoring the economic growth of a society. Yet, by the modern meaning of the term “productive” Smiths Physiocratic distinction is in error. Value is the only factor that counts in modern economics and both kinds of labor produce valuable quantities.
1. Heilbroner, Robert, Teachings From The Worldly philosophy, 1st ed. (Norton, 1997)