Is Public-Sector Labor ‘Productive’ in a State Money System?

An issue that troubles me in relating Marx to Modern Monetary Theory (MMT) is whether to apply the ‘productive/unproductive labor’ distinction to production that is monetized in a state money. Although I am not especially enamored of the distinction in general, it is particularly its application to public-sector activity in a state money system that strikes me as problematic. I ask the reader to countenance two propositions:

Proposition 1. All public-sector labor in a state money system is productive.

Proposition 2. Proposition 1, if true, would alter none of Marx’s central theoretical conclusions.

If the following argument is mistaken, maybe someone can set me straight, and it will then be clearer how to proceed in future.

As is well known, Marx’s analysis of capitalism distinguishes between ‘productive’ and ‘unproductive’ labor. Only productive labor is said to create surplus value within a capitalist economy. Unproductive labor is taken to be labor that: (i) does not directly create surplus value; and (ii) is not exchanged with capital.

Regarding (ii), unproductive labor is said to be exchanged with ‘revenue’ (i.e. income) rather than capital. Revenue comprises wages and profit, including shares that come out of profit in the form of interest and rent.

As Marx put it:

This … establishes absolutely what unproductive labour is. It is labour which is not exchanged with capital, but directly with revenue, that is wages or profits (including of course the various categories of those who share as co-partners in the capitalist profit, such as interest and rent). (Marx, 1969, Theories of Surplus Value, Part 1, Progress Publishers, Moscow, p. 157)

‘Revenue’ is also often regarded as including the wages paid to public-sector workers, which are said to come out of private-sector profit or wages or both. When government spending is thought to be financed (meaning initially financed) by tax revenue, the inclination will be to consider public-sector activity as “exchanged with revenue” and so unproductive in Marx’s sense. Ian Gough, for instance, writes:

The former labour is productive, the latter unproductive. Included in the latter are all state employees, whose services are purchased with revenue whether the original taxes are paid out of wages or out of the various categories of surplus-value. (Gough, 1972, ‘Marx’s Theory of Productive and Unproductive Labour’, New Left Review, p. 51)

Not all Marxists hold to the productive/unproductive distinction. Of those who do, public-sector activity is not always considered entirely unproductive. Some consider public-sector activity to be productive if conducted for profit.

Marx’s definition of unproductive labor suggests that there are two aspects to consider when classifying public-sector labor. First, is the labor “exchanged with capital”? Second, does the labor directly create surplus value?

Is public-sector labor exchanged with capital?

Capital, in the first instance, is ‘money’ used to acquire means of production and labor power. Here, we can take ‘money’ to refer to cash and commercial bank deposits. In a state money system, the ultimate source of this money is government. The immediate source for private-sector capitalists is private credit creation by commercial banks.

Banks create deposits (money) when they extend loans. But, in a state money system, these deposits are a bank’s promise to supply ‘government money’ in the form of cash and reserves either on demand or after some duration of time. A deposit holder can demand cash and also requires the bank to obtain reserves as necessary to ensure final settlement of purchases made from the account.

In short, if the money that becomes capital can be created by commercial banks, then it can certainly be created by a currency-issuing government, since government is the monopoly provider of all cash and reserves. When government spends on wages and investment goods (by crediting reserve accounts, and therefore creating government money in the form of reserves), the government money it creates is being used to purchase means of production and labor power, and so would seem to fulfill the functions of money capital.

The tendency not to classify as money capital government advances for labor power and means of production may have its origins in a misapplication of gold standard logic to a state money system. There has been a popular notion that a currency-issuing government’s initial finance comes from taxes or bond issues, whereas in actuality – and to a degree greater than with any other entity (in fact, infinitely so) – such a government has no need of income prior to spending. Since taxes and bonds do not (and logically cannot) provide the initial finance for a currency-issuing government’s spending, public-sector labor is not exchanged against ‘revenue’. From inception, government issues the currency when it spends, which then makes the payment of taxes and purchase of government bonds possible. (For a scholarly treatment of this point, see Stephanie Kelton (Bell), ‘Can Taxes and Bonds Finance Government Spending?’, Journal of Economic Issues, 2000, vol. 34, pp. 603-20.)

Inside resource limits, government subtracts nothing from economic activity when it creates money through spending to initiate production, just as, again inside resource limits, a commercial bank and investing private firm subtract nothing from economic activity when a deposit is created and the funds used to purchase means of production and labor power. In both cases, production is initiated, rather than anything being drained from the economy.

The government does, of course, subtract from economic activity when tax payments are accepted. So, too, do commercial banks when private firms make loan repayments.

Since, in practice, government generally allows tax revenue to fall short of its spending, it typically subtracts less from the economy than it injects, which leaves more income and profit to be realized within the non-government sector.

Does public-sector labor create surplus value?

Compare two hypothetical scenarios. Both scenarios involve the public sector producing exactly the same goods and services, and in the same quantities. Both scenarios entail the same monetary costs of production, amounting in aggregate to government expenditure G. And both scenarios result in the same tax revenue T. The government is assumed to be a currency issuer, implying that the labor it employs is not exchanged against revenue.

Scenario 1. All publicly produced goods and services are produced as commodities and priced individually to return to government the average rate of profit. A set of tax-transfer measures are applied to market incomes to generate personal income distribution PD*.

Scenario 2. All publicly produced goods and services are provided at zero price, with general taxation in place such as to deliver personal income distribution PD*.

The first scenario is a strict application of user pays. The second is at the opposite end of the spectrum.

As already noted, some adherents to the productive/unproductive dichotomy agree that public-sector activity is productive when conducted as commodity production. It seems clear that this is the case in the first scenario. All public-sector employment would be productive, on this basis, when conducted within the context of strict user pays and market provision.

Although the second scenario may appear superficially different, it implies exactly the same aggregate impacts. The same amount G is incurred as costs in production and spent into the economy. The same amount T is generated through taxes and withdrawn from the economy. There is the same personal income distribution PD*. The same goods and services are produced and consumed. The same employment of society’s labor force is involved.

In the first scenario, the labor is deemed productive and, in the second, perhaps, unproductive. If so, total value for the economy as a whole will supposedly be higher in the first scenario than in the second, with presumably different implications for the behavior and viability of capitalism.

But I think it is clear that there is no substantive difference between the two scenarios when it comes to the implications for capitalism or private-sector value creation.

A way to reconcile the two scenarios might be to think of scenario 2 as one in which government supplies a basket of goods and services as a ‘composite commodity’ for which it incurs a cost G and imposes a single price in the form of an annual tax bill on each household. This is somewhat akin to a private corporation that sells a bundle of products for a single price to each customer (for instance, a pay TV company) and in which price discrimination is employed, with different prices charged to different customers (as might occur in a cinema). Just as a cinema charges different prices for adults, pensioners, children and so on, government imposes different taxes according to income and other personal or household characteristics.

Suppose now that, rather than returning to itself the average rate of profit, government instead sets T < G. Clearly, in this case, government will not realize any surplus value, and in fact will incur a net “loss”. This will be true under either of the two scenarios.

But this is only a micro outcome. If the labor in either scenario is deemed productive, then at the macro level any surplus value (and other value) created in the public sector that is not realized in that sector will instead either be realized by firms operating in other parts of the economy or go unrealized (due to private saving). In aggregate, total produced profit, which for Marx must match total produced surplus value, will equal the sum of capitalist private consumption expenditure, private investment, the fiscal deficit and net exports, plus any build up of inventories not realized in exchange. This is Kalecki’s profit equation interpreted as applying to produced profit.

In the intermediate case where T = G, government will recover its outlays of constant and variable capital but no surplus value. Surplus value created in the public sector will be competed over by the rest of the economy.

Marx’s key theoretical conclusions

Doing away with the productive/unproductive distinction for public-sector production would not seem to affect the status of Marx’s aggregate equalities. Under single-system interpretations, in which the aggregate equalities all hold, it would still be the case that total price equals total value, total surplus value equals total profit, and the average value rate of profit equals the average price rate of profit. The only change is that public-sector employment would contribute to the aggregates involved.

It might appear that Marx’s ‘law of the tendential fall in the rate of profit’ could be jeopardized. But, as far as I can see, the status of this ‘law’ would be unaffected. It would remain valid, as now, under the temporal single-system interpretation (TSSI) of Marx’s theory. This law relates to the composition of capital, not to the composition of output or the sectoral composition of production.

Stated briefly, the law suggests that, over an expansionary phase of capitalist accumulation, there will be a tendency for the technical and organic compositions of capital to rise. This will increase the value composition of capital unless the prices of the elements of constant capital fall sufficiently to offset the effect. Unless the change in the technical and organic compositions of capital is offset by a rise in the rate of surplus value or a reduction in input prices, or some combination of the two, the result will be a lower rate of profit.

If the value composition of capital does rise, a greater proportion of the initial capital outlay will go to constant capital, which creates no new value, and a lesser proportion will go to variable capital, which is the source of new value, causing the ratio of employment to total capital to shrink. For a given rate of surplus value, the rate of profit will fall.

Including government production, in itself, does not affect the status of this law. It is true that if government production, on average, happens to be more labor-intensive than private-sector production, then there will be a one-off reduction in the measure of the composition of capital, which, all else equal, will imply a higher average rate of profit. But this is just a one-off effect.

It is also true that government, as currency issuer, can prop up private-sector profitability by intentionally utilizing more labor-intensive production methods in the public sector and, over time, employing an ever-growing proportion of the workforce in the public sector. But government can prop up private-sector profitability whether or not we apply the productive/unproductive distinction because it has the capacity, even if public-sector activity is deemed to be unproductive, to subsidize the private-sector adoption of labor-intensive techniques.

More to the point, this possibility would not alter the status of Marx’s profit-rate law. What is being described in such a scenario is a gradual failure of capitalism. It would be clear evidence that the maintenance of private profitability requires (i) a deliberate denial of society’s technical capabilities (since superior techniques of production would be avoided to maintain profitability) and (ii) a continual shift in employment from the private to public sector (or else subsidies for backward production techniques within the private sector). The only ways out, for capitalism, are for government either to allow a collapse in capital values or to engineer a continual increase in the rate of surplus value. But this is precisely what Marx’s law suggests.

One way or the other, if Marx’s law is true, it will make itself felt.