factors of production

content/posts/factors-of-production.md

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+---
+title: "Reconsidering the Factors of Production"
+date: 2021-07-18
+draft: false
+---
+
+The great tragedy of mainstream, neoclassical economics is that, 
+in trying to transform the Classical political-economy of the 19th century 
+into a more mathematical science of economics, it butchered its political and moral foundation. 
+
+It all started with a good idea - from Menger, Jevons, and Walras - 
+of the subjective nature of value and the marginal utility of goods.
+The "marginal revolution", as we know it today, enabled supply and demand to be
+treated analytically with the tools of calculus, and for equations to be solved
+that maximize utility and minimize costs. This seemed to work well in 
+isolated, simple circumstances, say the market for a particular commodity.
+But the techniques were rapidly applied to model more complex chains of
+production, and even entire economies. In doing so, the field got carried away in 
+grossly insufficient, if not negligent, mathematical representations of the
+structures of production, and of the human and natural worlds that support them.
+
+The insufficiency, and moral dereliction, of modern neoclassical economics is
+widely known and understood. Hence the growing prominence of so-called
+heterodox schools: Austrian, Ecological, Feminist, Georgist, Institutional,
+Post-Keynesian, etc. There are certainly truths in each of these. Perhaps we
+should be seeking a kind of heterodox synthesis.
+
+## The Factors of Production
+
+It seems to me, at least, that a great part of the trouble with economics 
+lies in its conception of the factors of production themselves (land, labour, capital, etc.).
+We seem to be suffering from a largely incomplete social theory of these factors
+and their relationships to each other.
+Neoclassical economics has dramatically, if not immorally, oversimplified 
+in its treatment of the factors.
+
+Each heterodox school is in some sense associated with a critique of one or another factor
+(of course this is itself a simplification, each school surely having much to
+say about all the factors):
+the Georgists with Land, the Feminists and Institutionalists with Labour,
+the Austrians and Post-Keynesians with Capital (and also with Money)
+and the Ecological economists with Energy. 
+Even the central bankers are calling bullshit on the neoclassical 
+descriptions of money!
+
+The factors of Land and Labour, the very substance of natural and
+human life, have been reduced to mere commodity - 
+*fictitious commodities*, as Polanyi so aptly called them.
+We've known since the time of David Ricardo, and certainly since Henry George,
+that private property in Land is highly questionable, if not outright immoral. 
+Indeed, private property in Land can only emerge through a kind of theft, if not worse, an outright
+ethnic cleansing or genocide. It was theft of Land that ravaged Europe during the
+enclosure movement, giving rise to a new class of "poor". 
+And it was a veritable genocide of the Indigenous people that made the societies
+of Canada and the U.S. possible. This we must never forget. 
+As for Labour, the ongoing pandemic has made apparent just how poorly our economic
+system values so-called "essential work". And the overwhelming Labour
+that sustains households barely even enters the economic discourse.
+It is indeed worth asking, [Who cooked Adam Smith's
+Dinner?](https://www.goodreads.com/book/show/23206098-who-cooked-adam-smith-s-dinner-a-story-about-women-and-economics).
+We can hardly begin to formulate a sound political-economy if we remain in denial of these truths. 
+
+Then there's the factor of Capital, which has been woefully misunderstood,
+and its theory stunted, at least since the Cambridge Capital Controversy died in
+the 1960s, if not since Hayek stopped working on it in 1940. The factor of
+Energy is largely excluded all together, or else included without any regard for the
+laws of thermodynamics. And the factor of Money, if it is not confused up with
+that of Capital, is hardly even considered a factor at all. No wonder mainstream
+economics has been so blind to the perils of climate change and to the risks
+inherent in the financial system!
+
+Of course, the factors of production are themselves an abstraction, invented in
+the course of that throbbing historical revolution which wrestled
+markets from their underlying social fabric and subjugated society to economy, 
+giving birth to The Market and Capitalism proper. But are we forever
+doomed to the lifeless treatment of these factors, which we have inherited over
+the decades and centuries? I surely hope not.
+
+## A Reconsideration
+
+It is high time for a reconsideration of the factors of production
+as a basis for a more sound political-economy.
+Such a reconsideration ought to be truer to the character of each factor, 
+and to the relationships between them. No longer may the factors be taken to be mere commodities,
+simple inputs to a production function. Each factor is deserving of its own
+dedicated social theory, the foundation for which has been laid by the many
+heterodox schools. And surely, we cannot possibly hope to capture the
+complexities and impacts of our socioeconomies without including Energy and Money
+among the primary factors. 
+
+Notice that the factors appear to emerge phylogenetically out of each other, in order,
+beginning with Land, and proceeding with Labour, Capital, Energy, and Money. 
+Higher order factors, in turn, feedback on lower-order ones, thereby
+transforming them. Labour transforms Land by way of hunting, agriculture, mining, etc. 
+Capital, in its turn, transforms Labour, enabling it to employ tools and machinery, 
+and thus to further transform the Land. Energy transforms Capital, from
+human-powered to fuel-powered and beyond, and thus further transforms the nature
+of Labour. And so on.
+
+Each factor might be said to expand the scope of activity possible on Land in
+a new dimension by augmenting the prior factors. Land is itself the *material* basis of all. 
+Labour enables refined mobility in *space*. Capital 
+enables Labour to make trade-offs in *time*. Energy enables Capital to increase
+the scale of *energy* utilized. And Money, as we conceive it here (not just gold coins but 
+a full blown modern banking system), enables *maturity transformation*, 
+which facilitates the development of high energy capital. It is questionable
+whether it would even be possible to finance our high energy industry on savings
+alone were it not for maturity transformation. In this sense, we might consider
+Money to be the shadow cast by Capital under the light of Energy. We might also
+consider Money to have a similar relationship to Energy as Capital
+does to Labour - a kind of augmentation in *time*.
+
+It is common in economics to state that the share of income is distributed
+across the factors, with rent to Land, wages to Labour, and interest to Capital.
+If Energy and Money are to be included, then, what is their share? 
+First, in the tradition of Wicksell (on whose work both the Austrians and
+Keynesians have drawn heavily), it is helpful to distinguish between a capital-rate of
+interest (what Wicksell called the "natural" rate), and the money-rate of interest. 
+The former being the rate of interest paid on capital lent in kind, the latter being the money interest we
+are used to. In practice, of course, it is money that is lent, and not capital,
+but the distinction will likely be paramount to a proper understanding, lest we
+lose sight of the meaning of interest itself. The base money-rate of interest may
+indeed be a simple policy variable (as the MMT crowd claims), but the 
+capital-rate of interest is most certainly not. A modern theory coherently relating the two
+appears to remain an open problem.
+
+And what about Energy? It is difficult to see a distinct share of income due to
+Energy in the manner of rent, wages, and interest.
+But what if instead of thinking of these as shares of income, we
+consider them as *costs*? Rent as the cost of employing Land, wages the cost of Labour, etc. 
+The use of Energy surely has a cost - what might be called *entropy*. 
+It is borne by all, earned by none. Ignorance of this cost lies at the heart of
+much of the world's unsustainable practices.
+
+This conception is summarized in the table below:
+
+| Factor    |   Dimension               |   Cost    |   Heterodox School |
+|-----------|---------------------------|-----------|--------------------|
+| Land      |   Matter                  | Rent             | Georgist
+| Labour    |   Space                   | Wages            | Feminist, Institutionalist
+| Capital   |   Time                    | Capital-interest | Austrian, Post-Keynesian
+| Energy    |   Energy                  | Entropy          | Ecological
+| Money     |   Maturity Transformation | Money-interest   | Austrian, Post-Keynesian
+
+There is much more to be said about all of this - about the social theories
+proffered by each school, about the ways in which the factors transform
+each other (for instance, the way in which high Energy Capital interferes with
+the ability of Labour to provide for itself, a misery that plays out in the
+medium of Money), about the implications for a more grounded form of market
+society (for instance, perhaps we should be using a variety of Moneys, each
+tuned to the scale of Energy being employed), etc. But further analysis will be left to future writings.