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the classical economists shared two basic ideas: that value derived from the costs of production, principally labour; and that therefore activity subsequent to value created by labour, such as finance, did not in itself create value. Marx, we will see, was more subtle in his understanding of this distinction.
Smith believed that there were three kinds of income: wages for labour in capitalist enterprises; profits for capitalists who owned the means of production; and rents from ownership of land.
Ricardo did not write about that part of government expenditure which creates the conditions for productivity in the first place: infrastructure (bridges, roads, ports and so on), national defence and the rule of law. By omitting to discuss the role of government in productivity, he paved the way for generations of economists to be equally oblivious–with hugely significant consequences that we will look at in
Keynes’s book How to Pay for the War, published in 1940, introduced the idea of recording national income in a set of accounts and completely changed the way in which governments used that data.
makes no sense to say that teachers, nurses, policewomen, firefighters and so on destroy value in the economy. Clearly, a different measurement is needed.
ways. In the Netherlands, where prostitution is legal and regulated, the tax authorities have asked sex workers to declare their earnings, which count towards national income.
it would be extremely difficult comprehensively to cost such externalities–negative or positive ‘side effects’ of production–which are not priced. All of which just highlights the difficulties of being consistent and drawing a clear production boundary.
The way we define and measure growth is of course affected by our theory of value. And the resulting growth figures may guide the activities that are deemed important. And in the process possibly distort the economy.
from others rather than creating it themselves. Indeed today, if we use the value-added formula (wages plus profits), we find that the financial sector, far from contributing 7.2 per cent of GDP to the UK economy and 7.3 per cent to the US (as the 2016 national accounts showed), in fact makes a contribution to output that is zero, or even negative. By this yardstick it is profoundly, fundamentally unproductive to society.
