MIDTERMM

Chapter 1

Surplus Producing Economies

I. The economic imperative and political economy

If societies are to survive over time they must, at the very least, be capable of reproducing

themselves. The goods needed to keep the system going must be appropriated, produced, or

obtained in exchange, and then distributed in a fashion that insures the system’s continuation.

Humans must be fed and sheltered, buildings and roads kept in good repair, the young trained to

occupy positions vacated by the old, and the myths and ideologies used to provide meaning to it

all, sustained and passed on from generation to generation. Of course, there is no certainty to any

of this, nor is it necessarily the result of some conscious plan. Civilizations have withered away,

and others have been destroyed in wars. Yet, despite this, the fact remains that if societies are to

sustain themselves, they must be capable of reproducing the activities and things needed for their

perpetuation.

This process of social reproduction involves the interaction of a number of different

institutions and social processes. The combined interaction of these various processes provides

the texture of life characteristic of a society, its cultural achievements, political ideals, scientific

contributions, and material standards of living. But despite the multiplicity of elements involved

in this process, it can safely be said that economic processes and institutions are fundamental to

the reproduction of societies. They are fundamental in the sense that their function is to provide

the goods and services needed to carry on. This is not meant to imply that the various other

institutions and social processes are unimportant. Military crises do occur and can bring about

the downfall of a system. Likewise, new political regimes have energized decaying societies.

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Nevertheless, the efficacy of these other institutions and social processes is a moot question if the

economic institutions of a society are incapable of providing the food, shelter, clothing, tools,

transportation, and such, needed to carry on. It is in this sense that the economic component of

any society is fundamental.

The set of institutions through which society appropriates, produces, and distributes

goods and services constitutes what we call the economic system, or the economy. The economy

provisions society with the material requisites of life. It involves that aspect of social life through

which things are appropriated from nature, transformed into various goods, and distributed in

some fashion among the members of society.

Economic institutions evolved out of the need to obtain the requisites of life; they reflect

the history of humanity's efforts to provide for itself. This becomes self-evident if one keeps in

mind the ultimate purpose of economic institutions, namely, to provide a flow of goods to a

group of people. The fundamental reality is that humans must figure out a way of fending for

themselves, of appropriating or producing the things needed for survival. In a very primitive

setting this is quite obvious and is generally the context in which the survival imperative is

understood. One can envision a family of humans hunting for game with sticks and rocks in

response to the need for food. But even in a modern setting the survival imperative is the

fundamental reality undergirding the economic institutions of contemporary society.

This imperative to survive forces humans to figure out ways of providing for themselves.

Tools, or more broadly technologies, are developed to solve practical economic problems.

Methods of taming nature are invented and easier ways of producing and distributing goods are

devised. At the same time, economic institutions are created to provide a stable environment for

the production and distribution of goods. These institutions coordinate the interaction of human

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effort and technology to produce and distribute a myriad of goods. They represent the social

relations that evolved to solve the problem of sustenance. In their efforts to overcome the

vagaries of nature, humans create technological and institutional environments that ensure a

steady stream of the goods thought necessary or desirable.

As the technology and institutional structure of society evolves, so do the amount and

type of things thought necessary. The growing complexity and sophistication of society requires

the continued production and reproduction of a growing array of goods and skills just to keep the

system going. Each generation comes to view the existing technology and institutions, and the

amount and distribution of goods made possible by that structure, as the norm. This norm then

serves as the base from which new technologies and new institutions are invented.

Unlike other species, humans cheat nature by creating a social environment that provides

them with a certain, and preferably bountiful, flow of goods. In the process of creating these

social environments they transfer their need to survive from nature to these social structures. The

survival imperative comes to be viewed in terms of the existing institutional environment, and it

is survival within that environment, and not the "natural" one, that becomes the issue. Moreover,

from the perspective of society as a whole, and in particular from the perspective of the

beneficiaries of the existing institutions, it is the survival and perpetuation of these institutions

that comes to be viewed as imperative.

While the survival imperative is the motive force propelling humans to create tools and

economic institutions, the specific manner in which these tools and institutions are used depends

on the values they express. In the process of manipulating and molding their environment,

humans are also assigning meaning to these activities and explaining why this and not that

should be done. The creative capacity of humans is expressed not only in their ability to invent

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the needed technology and institutions, but more importantly in their ability to create an

environment that expresses their vision of the way things should be. Humans create ideological

systems intended to explain who they are, their place in the universe, and how they should

govern themselves. They invent language as a medium to explain their vision of the world to

each other and their offspring. Social rituals are developed as expressions of their beliefs, and

governments are created to institutionalize their conceptions of the way things should be.

Thus, the quality of life that a society is capable of providing is not simply a matter of

logistics or engineering, it is also a function of the value system, the ideology, of that society. It

is dependent on the set of values that underlie the way in which the people in that system

perceive themselves, their relationship to each other, other societies, and their ecological

environment. It is dependent on the manner in which these values are expressed and

institutionalized in that system's political and economic structures.

At one level, the ideology of a society is nothing other than an expression of the broad

consensual values that are accepted as normal or natural by the members of society. It represents

the values that are interwoven into what is referred to as culture, providing a common language,

or paradigm, to society. This ideology is expressed in the myths and ideas that are taken for

granted and beyond dispute by the governed and the governors alike. At another level, the

ideology of a society is expressed through the set of beliefs and norms that are sustained and

enforced by its political system. The political system reflects the distribution of power in a

society; and the manner in which that power is used reflects the values which the power structure

views as legitimate and worth enforcing.

The political system is the arena of social life where values are debated and fought over,

laws are established, and penalties are imposed on transgressors. It is through this process that

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rules are devised to determine who has rightful access to the economy and to the goods made

possible by it, and where disputes over issues of ownership, production, and distribution are

resolved. The political system is the context through which rituals and ceremonies are created to

provide justification for, and acceptance of, the existing distribution of power and privilege.

Thus, what will be produced, how it will be produced, and who will get it, depends, in large part,

on the ideology that is expressed and enforced by the political system of a society.

Because of this, the term political economy is used to underscore the idea that the manner

in which a society goes about producing and distributing the requisites of life is intimately tied

into the value system of that society and the distribution of power that permits that value system

to remain in place. The political economic institutions of a society are structures of power that

coordinate the use of tools, nature, and labor for the purpose of generating and protecting a flow

of goods. The manner in which these goods are produced and distributed depends, given the

existing technology and resource base, on the values that are institutionalized in these structures

of power.

To be sure, during any one era, the technology and resource base available to a society

will impose a constraint on what its economy is capable of producing and how it will go about

producing it. But short of that constraint, it is the existing set of political economic institutions

that determines, through the values they express and support, what will be produced and who

will get it. It is this characteristic of political economic systems that explains why societies with

roughly similar technologies and resources may nevertheless have different standards of living.

Or, more dramatically, why a society endowed with meager natural resources is nevertheless

capable of delivering a higher level of material comfort than a society endowed with abundant

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natural resources. Over the long-term, it is the set of values institutionalized in the political

economy of a society that will determine the quality of life characteristic of that system.

II. Economic viability

A society is said to be economically viable if it is capable of generating, on a regular

basis, an aggregate of goods and services, a gross product, that is sufficient to maintain the

productive structure of the system in good repair plus provide for the usual needs of the

population. A society that is capable of achieving this will be able to reproduce itself over time.

While this seems obvious enough, the proposition needs to be examined in more detail in

order to fully understand its implications. First of all, there is the organizational, and thus

political, problem of insuring that the existing methods of production and distribution remain

relatively stable and secure. In all economic systems work has to be performed and the outcome

of that work distributed among the members of society. This process involves the development

of institutions that coordinate the process of work and determine who gets what and how much.

But, regardless of the specific fashion in which these issues are resolved, a political economic

regime will be relatively stable, and thus viable, if the system of distribution and work

coordination is viewed as legitimate by most of the people in that society. As long as most of the

people, most of the time, accept the existing rules of the game and view the outcomes as more or

less appropriate, the system will be relatively stable and thus viable.

Moreover, this principle holds true regardless of whether the existing regime is explicitly

based on democratic principles. The governance of political economic institutions is always

easier when the governed profess their allegiance to the system. While there are a number of

ways in which this might be secured, it is more readily attained when the governed view the

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existing structure of production and distribution as consistent with the satisfaction of their

material needs. Thus, the extent to which a viable institutional structure can be created and

maintained is dependent upon the extent to which that structure is viewed, by most of the people,

as capable of providing for their material needs.

An integral part of this political problem of economic viability involves the specification

of the political boundaries of the system. That is, who is viewed as a legitimate member of

society and who is not? Or, in the language of modern democracies, who is a citizen? The

viability of a political economic system is primarily, though not exclusively, dependent upon the

extent to which the "legitimate" members of society view that structure as appropriate. The

opinions of the non-citizens are less important, or irrelevant. The extreme example of this

involves the case of slave-based economies. As long as the slaves are maintained at a level that

allows them to perform their functions, the question of whether or not they are satisfied with

their material condition is irrelevant; they are not viewed as legitimate members of the system.

Instead, what matters is the creation of an institutional framework, namely a police force, that is

capable of keeping the slaves working. Of course, even here, the viability of slave-based

economies will be threatened if the costs associated with the military structures required of such

societies start to outweigh the ability of slaves to generate the gross product; or more

dramatically, if the slaves resist their condition, rebel against their masters, and destroy slave-

based institutions while creating a new, free and more sustainable, social system.

A second requirement of economic viability is that the production of the gross product be

compatible with the technology and resource base of the system. While no one would expect a

society to consciously set out to produce goods it is incapable of producing, it is the case that

societies have sometimes found themselves in such a situation. This dilemma is most frequently

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encountered when societies unexpectedly find themselves incapable of producing the same

goods because of a depletion in their resource base. Societies that, in some previous era, were

capable of meeting the usual needs of the population might find that, in a new era, they are

incapable of satisfying those needs with the same technology. On a grander scale, the viability of

all modern societies, and indeed the very existence of the human species, has come into question

as the reigning technologies continue to destroy the global ecology. The long-term economic

viability of a society thus requires that it use technologies consistent with the maintenance of its

ecological environment.

A third requirement of economic viability is that the system be capable, at the very least,

of growing at a rate that matches the rate of growth of the population. If the economy were only

capable of producing the same amount of goods and services each year, then, assuming a

growing population, the standard of living of the average person would soon deteriorate. A

growing number of people would have to compete for the same amount of gross product, and

this would bring about a decline in the material conditions of the average person. Therefore,

economic viability requires that, at a minimum, the economy be capable of generating a gross

product that keeps up with the rate of growth of the population.1

It should be noted that economic viability simply means that an economy is strong

enough to reproduce the material conditions perceived as normal by that society. It does not

guarantee that these "normal" conditions will be opulent. A society that generates no more than a

subsistence level of income may be economically viable, though, at the same time, quite poor.

Thus, if a society is to improve the material conditions of its population, its economy would have

to generate a gross product that is large enough to permit the average standard of living to grow

1. Of course, it is also possible to restrict the rate of growth of the population.

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over time. Each year the number of new goods and services generated by the economy would be

greater than the increase in population, ensuring a growing income, or product, per capita.

Political economic systems that can achieve this result will tend to be more stable, and thus

viable, than those that cannot.

III. Surplus production and economic growth

The production of an economy's annual gross product involves the transformation of

natural resources into the various goods and services making up the gross product. These goods

and services consist of two very broad categories, consumption goods and capital goods.

Consumption goods refer to the food, clothing, shelter, and such, produced for purposes of final

use, while capital goods refer to all of the machines, tools, factories, and the like, used by

laborers in the production of these same consumer or capital goods.2

If we visualize the economy reproducing itself through time, then we can imagine the

following process taking place on an annual basis: a portion of the newly produced capital goods

is used to replace the capital goods that have fallen into disrepair; at the same time a portion of

the newly produced consumer goods is used by the workers to sustain themselves while

producing another round of goods. If the laborers, machines, and land are maintained and

replenished by consumer and capital goods, and the laborers continue working at the same level

of intensity, then the economy should be capable of reproducing the same volume of gross

product. The system would be viable.

2. Later on, we’ll see that the distinction between consumer and capital goods is not as clear cut as this paragraph suggests. There are numerous cases where a good might be an item of consumption under one set of conditions, but a capital good under another set of conditions. But, on the whole the above distinction is good enough to understand the logic of economic reproduction.

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The portion of the gross product that is used to replenish the economic system is called

the necessary product. It represents the sum of the capital goods used for purposes of capital

replacement and the consumer goods used to sustain the workers. The replenishment of capital

goods is referred to as depreciation, while the amount needed to sustain the workers is referred to

as socially necessary consumption. There is no one specific term commonly used to refer to the

replenishment of land; but since, like capital goods maintenance, it involves the upkeep of the

means used by labor to produce the gross product, it too will be referred to as depreciation. The

context of the discussion should make clear whether the term “depreciation” is being used to

refer to capital goods maintenance, land replenishment, or both.

The replenishment of the workers is referred to as socially necessary consumption. It is

determined by technology and social and cultural factors. For any one era, or society, the socially

necessary standard of living represents the minimal amount of goods needed to participate in the

political economic system. It includes, in addition to the goods that existing workers must

consume so as to participate in the system, the goods that must be used to provide the training,

education, and skills expected of the young. In the short-term, in the context of a given

technology and culture, this socially necessary level of consumption tends to remain relatively

stable. But, over the long-term, the socially necessary standard will change as technologies and

social traditions change. Thus, the socially necessary level of consumption varies from one

society to another, and within any one society from one era to another.

The portion of the gross product that exceeds the necessary product is called the surplus

product. It can be used to sustain classes of people who are not engaged in the production of the

gross product and/or to increase the consumption standards of workers or other classes of people.

It can also be used to increase the amount and quality of tools and machines (capital goods)

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and/or to increase the training and education of the labor force. These latter two uses of the

surplus (increasing the amount and quality of tools and machines and/or increasing the education

of workers) are referred to as net investment. This latter use of the surplus product is particularly

important since it increases the system’s productive capacity and, as a result, the amount of gross

product which can be generated.

Because the production of the gross product involves the payment of income, it’s

common to refer to a society’s gross product as its gross income. Likewise, the necessary

product can also be referred to as necessary income, while the surplus product can be referred to

as surplus income. When viewed from this perspective, the process of producing and distributing

the gross product can be seen as the counterpart to the process of receiving and spending income.

As already mentioned, the necessary product represents the amount of gross product that

must be used to provide for the socially necessary consumption of the workers plus the

maintenance of the system's productive capacity (depreciation). It represents the minimal amount

of gross income that must be generated to keep the system viable. Economies that can only

produce this minimal amount, or worse, fall short of this minimal amount, are always in danger

of becoming nonviable. On the other hand, economies that can generate a level of gross income

that exceeds this amount (i.e., can generate a surplus income) will have greater discretion in the

kind of material life they can provide. Depending on how decisions over the allocation and use

of income are made, any surplus income that an economy might generate can be used to improve

the quality of life of some or all members of society.

In the short run, a society can improve the material conditions of its members by having

its surplus income used for consumption purposes. This can involve providing for the

consumption of classes of people not engaged in work or for the increased consumption of some

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or all of the workers. But in the context of a growing population, using surplus income

exclusively for consumption purposes will eventually lead to a decline in the average standard of

living. If the entire surplus is always consumed, there is, by default, nothing left over to improve

the productive capacity of the system. And if productive capacity remains unchanged the

maximum amount that workers can produce will also remain unchanged; leading to a decline in

per capita income as population grows.

Over the long run, the only way an economy can provide for a growing level of per capita

income, and thus per capita consumption, is to refrain from consuming all of its surplus and

allocate a portion of it to net investment; that is, creating new productive capacity. A society

wishing to provide a growing level of per capita income will need to have its gross product grow

at a faster pace than its population. One of the more secure methods of ensuring this is to

increase the amount and quality of capital goods available to the work force. More and better

machines increase the productivity of labor and thus the level of per capita output. But, in

addition, a better educated workforce increases the development and adaptation of new and

better technologies, increasing the productive capacity of the system, and thus the level of per

capita income. As long as a portion of surplus income is continually set aside for more tools,

better technologies, and an increasingly educated workforce, the productivity of labor will grow

and so too will the level of output.

Attention must also be paid to the quality of economic growth and to the manner in which

it is distributed. After all, an increase in per capita output does not necessarily mean that real

consumption standards, either quantitatively or qualitatively, will be greater for most of the

people. The increased output made possible by net investment may consist of goods, such as

military hardware, that do not directly improve the real consumption standards of people.

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Likewise, even if net investment did increase the output of consumer goods, these goods might

be distributed so unevenly that most people are unable to partake in their consumption. In short,

even if per capita output is increased through net investment, the composition of that output

might be inappropriate to the needs of the people and/or the output might be distributed in a

highly unequal fashion.

Finally, the quality of life depends on much more than whether a society can provide a

growing, and equitably distributed, level of per capita consumption. It also depends on the kinds

of freedoms that it guarantees, the respect which it displays towards its ecological environment,

the extent to which the individual is empowered to realize his/her potentialities, and the extent to

which it cultivates the aesthetic and spiritual dimensions of the human experience. A society that

worships mammon at the expense of these other virtues is a very poor, if not retrogressive,

environment for the development of the human character. Nevertheless, unless a society

satisfactorily resolves such fundamental issues as how to feed, cloth, and provide for its

members, the above virtues will always remain a distant concern or the avocation of a privileged,

sufficiently well fed, minority.

IV. The means of production

The inputs that go into the production of the gross product of any economy can be

grouped into two very broad categories: the means of production and labor. The means of

production represents the land and the capital goods used by the laborers, while labor represents

the physical and mental efforts that are expended in the creation of the gross product. We will

now examine these fundamental inputs. This section will outline the principle characteristics of

land and capital, while the next section will examine labor.

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In addition to the surface upon which buildings are located, land represents all of the

various gases and minerals, the water, oil, animals, sunlight, heat, trees, and so on, provided by

nature. The resources that fall into this category are, in general, non-reproducible, and if used in

an immoderate fashion can seriously impair the ecological environment, and thus the quality of

life that a society might be able to provide.

Economists have traditionally thought of land as the ultimate constraint to the amount of

output that can be generated by an economy. One of the fundamental principles of economic

theory, the law of diminishing returns, expresses this idea by claiming that, with a given

technology and a given amount of land, the extraction of greater amounts of output from nature

will eventually reach an upper limit. For example, in the cultivation of wheat one would expect

farmers to start out by using the most fertile plots of land. As the demand for wheat increases,

farmers will increase production by extending the area of cultivation. But since the most fertile

plots are already being used, this will force farmers to cultivate wheat on less fertile plots of

land. If the inputs of labor and capital are the same on both the fertile and less fertile plots of

land, then output from the less fertile plots of land is bound to be less than what’s generated from

the more fertile plots of land. That is, total output of wheat will indeed grow as the area of

cultivation is extended. But it will be growing at a diminishing rate as a result of having to use

increasingly less fertile plots of land. Another way of saying the same thing is that the

productivity of labor will be gradually declining as a result of having to interact with

increasingly less fertile land. Or a third way of saying the same thing is that the amount of labor

and capital needed to extract an extra unit of output from land will increase at an increasing rate

as the area of cultivation is extended.

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In short, land imposes a limit to the rate at which goods can be extracted from nature.

What’s more, while our example assumed an extension of cultivation, the same result would

occur if instead of extending cultivation, the farmers decided to cultivate their existing plots

more intensively. In both cases, output would eventually start growing at a diminishing rate

while the productivity of labor declines and unit cost increases. This principle is said to apply to

any productive process that relies directly on nature, such as agriculture, mining, forestry,

fishing, and so on. But, it’s important to note that this principle assumes that the technology of

production remains unchanged. That is, so long as technology remains unchanged, then applying

greater amounts of labor and capital to land will eventually result in diminishing returns.

Luckily, improvements in technology can increase the amount of output that might be

extracted from any one plot of land, thus counteracting the negative implications of the law of

diminishing returns. New technologies can be devised that replenish nature's ability to continue

providing the basic ingredients of production and consumption. Additionally, political economic

systems can be created that manage economic growth in a fashion that is consistent with the

maintenance of the biosphere. Economic growth can be managed, despite the law of diminishing

returns, through improvements in technology and political economic institutions.

Capital goods refer to the various tools, such as machines, factories, trucks, fertilizers,

dyes, computers, and so on, used by laborers in the process of production.3 They differ from land

in that they can be produced in varying amounts and quality, and as such cannot be viewed, over

the long-term, as a fundamental constraint to production. Unlike land, they are reproducible

inputs. The economic history of humanity can be viewed as a prolonged attempt to overcome the

constraint imposed by nature by creating tools that allow for a greater amount and variety of

3. Capital goods also include the inventory of goods completed or in various stages of completion, that have not been used in the current time period, but might be used at some future date..

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goods than could ever be provided freely by nature. Of course, in the short run the amount and

composition of capital goods cannot be changed with enough speed to alter the amount and

composition of the gross product. But, over the long term the only real constraint to the creation

of more and better tools is the ingenuity of humans, the capacity of humans to generate better

technologies.

Technology represents the application of knowledge to the resolution of practical

problems of production and distribution. The productivity of labor, the amount of product that

laborers generate on average, is dependent on the nature of the tools available to them and, of

necessity, the level of knowledge necessary to produce and operate the tools. During any one

period of time, the level and kind of technology available to a society will constrain the kind of

capital goods it can create, and thus the productivity of its labor force. However, over the long

term, as the technology of a society improves so too will the quality of its capital goods, the

knowledge and productivity of the labor force, and the amount and variety of goods it can

produce.

V. Labor

Labor represents the human effort that sets into motion the capital and land used in the

process of production. It involves not simply the muscular and mental effort expended in directly

producing a good, but the effort expended in maintaining the institutional and technological

context of production.

When viewed from this perspective, the labor exerted in the production of the gross

product can be broken down into two very broad categories: direct labor, and overhead labor.

Direct labor represents the efforts of that category of workers who are directly engaged in the

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production and delivery of the gross product. These are the people who work with the means of

production to generate and distribute the product, such as assembly line workers, truck drivers,

farmers, and so on. Increases in the amount of direct work has the effect of increasing the

amount of gross output, while decreases in such work reduces the amount of gross output. In the

short run, when the technological and institutional environment of the system is unchanged, the

only way an economy can generate more output is to increase the number of direct workers, or

their intensity of work.

In contrast, overhead labor represents the efforts of a category of workers whose

activities primarily involve the maintenance, oversight, or improvement, of the productive

structure of the economy. These are the managers, accountants, teachers, scientists, and so on, of

society. Overhead laborers, while engaged in work, are not directly producing or delivering the

gross product. Instead, they attend to the context within which others directly produce the output.

Their labor is indirectly responsible for the gross product. Moreover, in the short run, increasing

or decreasing the number of overhead workers, or the intensity of their work, will not directly

alter the amount of gross output the system can generate.4

Societies intending to provide a growing level of per capita income will have to allocate a

portion of their labor to the investigation and creation of new technologies, to researching and

developing new ways of producing and distributing goods. Labor of this sort is a form of

overhead and, as such, is not contributing to the production of current output. Nevertheless, it is

contributing to future levels of gross production and to the composition of such future output.

Since it is undertaken for the purpose of improving future material conditions, this type of

activity is a form of investment. Societies that allocate a significant fraction of their labor to such

4 There are, however, indirect effects in the form of consumption.

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investment activities will tend to generate technologies at a faster pace, and attain higher per

capita incomes, than those that do not. We will refer to this type of overhead work as investment

activity or investment work, the workers engaged in this activity will be referred to as investment

workers.

Now, the only way an economy can allocate portions of its labor force to investment

activity is to have the direct workers generate enough output to sustain themselves, the

investment workers, and the productive capacity of the system. In the short run, when productive

capacity is given, investment workers are sustained by the productivity of the direct workers.

Over the long-term, however, when that environment is improved through the efforts of

investment workers, it is this type of overhead labor that provides the extra output. Thus, when

taking a long-term view of the system, both direct labor and overhead, investment, labor is

productive.

The distinction between direct and overhead labor should not be confused with a long-

standing and controversial distinction that economists have often made between productive and

unproductive labor. Productive labor is thought of as work that is necessary to the production of

the gross product, it can be of the direct or overhead variety, while unproductive labor is thought

of as work that is not necessary to the production of gross output.

Perhaps the easiest way to think of this distinction is to imagine that society consists of

two components: the economy, and everything else. The activities within the economy are

considered productive because they sustain and/or improve the material conditions of society.

The activities outside of the economy are unproductive because they do not alter the material

conditions of society. The workers within the economy are productive because they generate an

output that is used by those who work within the economy as well as by everyone else; they

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generate the surplus that permits the rest of society to carry on. In contrast, those who work

outside the economy are unproductive because they do not generate an output that can be used to

produce the gross product.

For example, imagine a hypothetical economy producing capital goods, K, consumer

goods, C, and luxury goods, LX. The workers use K and consume C in the production of K, C,

and LX. The ruling class is the sole consumer of LX. Moreover, this class does not directly or

indirectly contribute to production. Instead, the management and oversight of production is

carried out by the supervisors, governors, or managers, chosen by members of the ruling class.

The productive structure of this economy can be depicted in the following terms:

𝐾 + 𝐶 => 𝐶 𝐾 + 𝐶 => 𝐾 𝐾 + 𝐶 => 𝐿!

During each cycle, the workers consume C while using K in the production of C, K, and LX.

Note that while K and C are needed in the production of everything in this economy, LX is not. In

fact, the gross output of this economy can be thought of as consisting exclusively of C and K; the

amounts of C and K directly produced during the productive cycle, plus the amounts of C and K

implicit in the amount of LX produced during that same cycle.

The workers in industries C and K would be viewed as productive because they generate

a surplus that is used by the rest of society. The workers in industry LX would be viewed as

unproductive because their output is not used, either directly as a capital good or indirectly as a

consumer good, in the production of the economy's gross product. The unproductive workers do

not generate a surplus, instead they alter the composition of the surplus already generated by the

productive workers. They transform the surplus amount of K and C produced by productive

workers into a product, LX, that remains within the system's surplus product.

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In general, though not always, unproductive labor is thought of as involving activities

that maintain, or improve, the position and privilege of those who control the political economic

institutions of society. In virtually all societies there are groups of people whose primary task is

to defend, justify, or aggrandize the privileges of those who govern, and/or benefit from, the

existing set of political economic institutions. The priestly classes of ancient empires, court

jesters, sycophants, the police and military, government lobbyists, corporate lawyers, financiers,

marketing specialists, and portions of government, are the classic examples. These workers

divert surplus income to themselves and/or their masters without contributing to the production

of the gross product.

While unproductive labor has some superficial similarities to theft and fraud in that, in

both instances, the net effect is to divert surplus income toward those engaged in these activities,

the work of the unproductive laborer is generally viewed as socially appropriate. The efforts of

unproductive workers are seldom viewed as illegitimate or illegal. In fact, some of the more

highly rewarded workers are often unproductive. After all, unlike the cheat, the unproductive

worker does generate an output even though it is usually in the form of a service. Moreover, this

output is often viewed as necessary by the beneficiaries of the existing political economic

structure, in particular the ruling class.

One of the implications of this distinction is that unproductive laborers are not necessary

to the reproduction of the gross product. While they may be necessary in some other political,

cultural, or social sense, they are not necessary in a strictly economic, productive, sense. Their

output is not used, either directly or indirectly, to maintain the socially necessary consumption of

productive workers or to maintain the system's productive capacity. Their output is not a part of

the system's necessary product and is, therefore, not necessary to the continued reproduction of

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the gross product. As a result, the efforts of unproductive workers can be reduced or eliminated

without affecting the volume of gross output. What would be affected instead is the composition

of the surplus and the use to which it would be put.

The inverse of this proposition is that increasing the activities of, or numbers of,

unproductive workers, will (other things equal) bring about a decline in the economy's rate of

growth. As the proportion of unproductive workers is increased the fraction of the surplus they

use as inputs or for consumption also increases. This causes the amount available for net

investment to fall and consequently the rate of economic growth to decline.

The productive/unproductive distinction makes the most sense when the gross product is

viewed in terms of the strictly technical relations that must exist for its reproduction to take

place. In the example above, it is obvious that good LX is not used either directly or indirectly in

the production of the gross product. As a result, the workers engaged in its production can be

defined as unproductive. But while these workers may not be necessary to the reproduction of

the gross product, they very well may be necessary to the reproduction of the institutional and

cultural context of society at large.

If the gross product is defined to include not only the material goods generated by human

effort and used to sustain or reproduce the material conditions of society, but in addition all of

the amorphous and intangible goods that make up what is commonly referred to as culture, then

the productive/unproductive distinction becomes more difficult to sustain. If what is being

reproduced is an entire style of life, a culture, then all of the human activities that are

characteristic of such a culture, including its military, priests and ministers, legal workers and

financiers, are necessary to its reproduction. We could, of course, argue over the relative merits

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of this or that type of culture, but we could not claim that the activities typical of a specific

culture are unnecessary to the reproduction of that culture.

In terms of the above hypothetical example, if good LX represents the legal effort

involved in the resolution of disputes over property, and the structure of property rights is an

integral component of the institutional setting in which production takes place, then the workers

generating LX are not necessarily unproductive. They could instead be thought of as a type of

overhead, productive labor that attends to the institutional setting within which production takes

place. While the output from these lawyers is not used for production, it is used in the resolution

of claims to the gross product. To the extent that claims to property affect production levels, the

efforts of legal workers would have to be viewed as productive.

The point is that the productive/unproductive distinction must be used with considerable

care. In fact, because of the difficulties that can be encountered in its use, it is frequently

avoided. Nevertheless, this distinction does have the virtue of drawing attention to the fact that

certain types of work are more important to the reproduction of the gross product than others.

Indeed, the productive/unproductive distinction is frequently employed in the context of a

discussion over the viability of economic systems. The implicit argument in such discussions is

that the declining material condition of a society is the result of an overreliance upon

unproductive workers. The idea here is that unproductive work, because of its essentially

parasitical nature, is feeding off the productive capacity of the system, chewing into portions of

the surplus that could be used for investment, thus causing the material conditions of society to

decline.

Before closing, it must be noted that if the productive/unproductive distinction is to be

used, then the meaning of socially necessary consumption has to be altered. From this

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perspective, it is not the consumption of all workers that is at issue, but rather the consumption of

only those workers that are essential to the reproduction of the material conditions of society,

namely the productive workers. Thus, socially necessary consumption would have to be

redefined to refer exclusively to the socially determined minimal amount of consumption

required of productive workers. The consumption of unproductive workers, regardless of

whether it happens to be at, below, or above the socially necessary level is irrelevant. By

definition, their consumption is a component part of the system's surplus. Given this, the

necessary product would thus be defined as the sum of the socially necessary consumption of

productive workers plus depreciation. The surplus product would then consist of the remainder

of the gross product; namely the consumption of all unproductive workers, the surplus

consumption of productive workers, the consumption of non-workers, and net investment.