diff --git a/content/posts/factors-of-production.md b/content/posts/factors-of-production.md new file mode 100644 index 0000000..6d74c9f --- /dev/null +++ b/content/posts/factors-of-production.md @@ -0,0 +1,152 @@ + +--- +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.