The Mystique of Labor

The first sentence of Smith’s classic The Wealth of Nations says: “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consists always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.” By the late nineteenth century, however, economists had given up the notion that it is primarily labor which determines the value of goods, since capital, management and natural resources all contribute to output and must be paid for from the price of that output. More fundamentally, labor, like all other sources of production costs, was no longer seen as a source of value. On the contrary, it was the value of the goods to the consumers which made it worthwhile to produce those goods—provided that the consumer was willing to pay enough to cover their production costs. This new understanding marked a revolution in the development of economics. If labor were in fact the crucial source of output and prosperity, then we should expect to see countries where great masses of people toil long hours richer than countries where most people work shorter hours, in a more leisurely fashion, and under more pleasant conditions, often including air-conditioning, for example. In reality, we find just the opposite. Third World farmers may toil away under a hot sun and in difficult conditions that were once common in Western nations which have long since gotten soft and prosperous under industrial capitalism. Put differently, the growth and development of such non-labor inputs as science, engineering and sophisticated investment and management policies, as well as the institutional benefits of a price-coordinated economy, have made the difference and given hundreds of millions of people higher standards of living. Official government statistics are still cast in such terms as “unearned income” and “productivity” is defined as output divided by the labor that went into it. In reality, high-wage countries have been competing successfully with low-wage countries for centuries, precisely because of advantages in capital, technology and organization. What can be seen physically is always more vivid than what cannot be. Those who watch a factory in operation can see the workers creating a product before their eyes. They cannot see the investment that made that factory possible in the first place, much less the thinking that went into assessing whether the market for the product was sufficient to justify the expense, or the thinking and trial-and-error experience that made possible the technology with which the workers are working or the massive amounts of knowledge required to deal with ever-changing markets in an ever-changing economy and society. Even among those who are conventionally called workers or laborers, much of what they contribute to the economy is not labor but capital—“human capital,” as economists call it. It is not so much physical exertion as job skills that constitute the contribution of a machinist, or entertainer. Most American workers today do not contribute merely work but skills, which is why their incomes increase substantially over their lifetimes. If it were their physical exertions that matter, their capabilities would be greatest in their youth and so would their incomes. But, where it is human capital that is being rewarded, then it is this is far more consistent with their incomes rising with age. As their human capital grows, the profit they receive on that capital grows, even though it is called wages.