The understructure of market production

ABSTRACT

This paper argues that the mainstream economics view of production based on the conventional factors of production is socially and empirically inaccurate, giving a distorted view of the nature of the production process and the agents responsible for it. Although the factors of production are essential, just as important are the various social, cultural, and political enabling conditions, or what is termed the ‘understructure’ of market production (the complex of infrastructures which underlie and enable market production). We gain an enriched understanding of what the economy truly is by studying the functioning of the understructure and the ancestral labour and care encompassed in it. If this revised view is correct, it has radical ethical implications. In particular, it implies that individuals do not morally deserve the bulk of the income (90% or more) that they receive in the market. High levels of redistributive taxation may therefore be legitimatea.

KEYWORDS:

• Economic production
• factors of production
• infrastructure
• desert
• meritocracy

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 It is immensely difficult to specify exactly what counts as ‘mainstream economics.’ Even the somewhat narrower tradition of ‘neoclassical’ economics has proven very difficult to pin down (Arnsperger & Varoufakis, 2006; Lawson, 2013). Clearly not all mainstream economists think about market production in exactly the same way. Nevertheless, it is reasonable to presume that there is a more-or-less standard way of approaching such issues – common vocabulary, models, and intellectual tools – which are at least reasonably consistent among many mainstream thinkers, and consistently different from socialist, feminist, and institutionalist traditions. For the purposes of this paper, I take ‘mainstream economics’ to refer to that loose tradition of canonical thinkers that stretches from Adam Smith to J.S. Mill to the major marginalists (such as John Bates Clark and Alfred Marshall), to Keynes, and to more recent luminaries such as Milton Friedman, Paul Samuelson, Kenneth Arrow, and Paul Krugman. I follow Paul Samuelson (2010) in viewing ‘modern mainstream economics’ as a synthesis of Keynes and the neoclassicals. One useful way to get some tangible grip on what constitutes ‘mainstream economics’ today is to consider the ideas and principles enshrined in the most prestigious and popular contemporary textbooks. I claim that we get an accurate (though by no means comprehensive) sense of the fundamental principles of mainstream economics by observing the common ground among the three major textbooks today: Nobel Prize winner and so-called ‘father of modern economics,’ Paul Samuelson's classic Economics (now co-written with William Nordhaus (2010)), Nobel Prize winner Paul Krugman and Robin Wells’s Economics (2015), and Greg Mankiw's Principles of Economics (2018). Mankiw's text is probably the most widely used economics textbook in the US today.

2 This result is a formalization of Adam Smith's earlier argument that ‘In every society the price of every commodity finally resolves itself into some one or other, or all of these three parts … . In the price of corn, for example, one part pays the rent of the landlord, another pays the wages or maintenance of the labourers and labouring cattle employed in producing it, and the third pays the profit of the farmer’ (1776/1979, p. 68).

3 For Schumpeter, the entrepreneur was a vital, even heroic figure – central and indispensable – leading the charge, and through their innovation, fueling the creative destruction which he saw as the engine of the market system as a whole (Schumpeter, 1934).

4 For instance, see, respectively, Marx (1933), Kropotkin ([1892] 2007), Polanyi, (2001), Simon (2000), Chang (2002), Gibson-Graham (2006), Folbre (2008), Fraser (2014), Kohn (2016).

5 The next few pages draw on Malleson (2023) where I first discussed the understructure (see also Malleson (2023b) for a non-academic précis). Here I deepen and extend that analysis, and also contrast it with the tradition of mainstream economics.

6 This is based on Roemer's back-of-the-envelope calculation of total financial wealth (stocks, bonds, pensions, life insurance, etc.) of $55.6 trillion, divided by the 127 million workers in private industry (Roemer, 2020, p. 27).

7 This is a rough calculation based on total financial wealth of $262.11 trillion rupees (Statista, 2020) divided by the non-state workforce of approximately 470 million, divided by the OECD's PPP ratio for India in 2019 of 18.381.

8 There has been much debate as to the precise value of public spending on infrastructure. For recent reviews of the evidence, see Bivens (2017) and Stupak (2018).

9 In Hobbes's words, without a state there is ‘no place for industry, because the fruit thereof is uncertain’ (Hobbes, 2002, XIII, 9). More recently Hall and Jones (1999) make the case that the root of much of a country's productivity can be traced back to the ‘social infrastructure’ of institutions and governmental policies.

10 One important example is the legal invention of limited liability, which allowed for the explosive growth of modern corporations, in turn fostering the second industrial revolution (Bowman, 1996).

11 Krugman and Wells (2015) talk repeatedly of ‘government interference,’ using the phrase 65 times, implying that non-interference is a conceivable possibility; they likewise use the phrase ‘free market’ three times. Mankiw (2018) refers to ‘government intervention’ nine times. For instance, claiming that ‘In the absence of government intervention [!], the price adjusts to balance the supply and demand’ (p. 192). He uses the (nonsensical) phrase ‘free market’ eleven times, for example, in the declaration that Adam Smith's invisible hand of the marketplace is ‘why economists so often advocate free markets [!] as the best way to organize economic activity’ (p. 146). This is a remarkably frequent discussion of unicorns for a text that pretends to be scientific. Samuleson and Nordhaus's (2010) text is the most realistic of the three. Though they too refer to the unicorn-like entity ‘free markets’ ten times, they are the most forthright in cautioning against interpreting such things literally: ‘No government anywhere in the world, at any time, no matter how conservative it claims to be, keeps its hands off the economy’ (p. 35). Though even this is a faulty description, implying as it does that the economy really is ‘out there’, apart from the state, which the state may or may not interfere with.

12 The language of the state as a ‘silent partner’ comes from Edmund James (Fried, 1995).

13 This is of course not the only important factor. For other perspectives on the ‘great divergence’ debate see Pomeranz (2000) and Parthasarathi (2011).

14 This view is not unanimous. For example, Jorgenson et al. (2014) recently argued that the bulk of economic growth is due not to knowledge innovation, but to the replication of established technologies through the growth of labor and capital inputs. Regardless, these authors would not likely dissent from the view that knowledge accumulation is a major source of economic growth.

15 Indeed, it's important to recall that much of the knowledge and technology which we depend on today stems from the public investments of the state. As Mazzucato puts it, ‘most of the radical, revolutionary innovations that have fuelled the dynamics of capitalism – from railroads to the Internet, to modern-day nanotechnology and pharmaceuticals – trace the most courageous, early and capital-intensive ‘entrepreneurial’ investments back to the State’ (2013, p. 3). She points out that 77 out of the 88 most important innovations that happened between 1971 and 2006 (according to R&D Magazine's annual awards) or 88%, were fully dependent on federal research support (p. 63).

16 In a related vein, Nina Banks (2020) describes the care infrastructure of nonmarket (unpaid) collective work that has often been performed by Black women in their communities.

17 Krugman and Wells do not mention ‘reproductive labor’ or ‘caregiving’ a single time in their 1172 pages. Mankiw makes no mention of either term; neither does Samuelson. The silences here speak volumes; for mainstream economics, the labor of half the human race merits practically no attention. Moreover, each of the authors still, incredibly, depict ‘leisure’ as time not spent doing formal market-based labor (Krugman & Wells, 2015, p. 564; Mankiw, 2018, p. 368; Samuelson & Nordhaus, 2010, p. 88).

18 Krugman and Wells (2015) mention Adam Smith five times (including on the second page on the introduction), Mankiw (2018) mentions him twenty-six times, and Samuelson and Nordhaus (2010) mention him twenty-four times, whereas none of these authors mention Mary Douglas, or her extensive contributions to Smith's output, a single time. To say that the two were partners is, of course, not to say that they were identical, or had identical skills, but rather that the works which they produced were only able to come to be because of their joint labor.

19 This figure is calculated from the OECD’s 2017 calculation of the Indian to US PPP of 17.813, and a figure of average monthly farming income of Rs 6,223 (Raghavan, 2017). These figures are not meant to be exact, but to give a sense of the relative orders of magnitude.

20 The 1775 figure comes from Hulten who provides the number of $765 (in 1992 dollars) (2001, p. 1), which I adjusted for inflation. The 2020 figure comes from the OECD (2020). For an interesting discussion of the evolution of economic growth over the 20th century, see DeLong (2000).

21 Likewise, while knowledge, culture, and physical capital are direct inputs, the historical accumulation of the stocks of knowledge, cultural, and physical capital, are clearly not. To return to the above example, while a tractor is a factor of production, the opportunity to work in a society where tractors are readily available is not. Such things are not inputs per se, they are better thought of as enabling conditions because what is important about them is that they provide opportunities for specific types of production to occur.

22 Prominent works include Arnold, 1987; Heath, 2018; Kershnar, 2005; Mankiw, 2013; Miller, 1999; Moriarty, 2005; Olsaretti, 2004, 2003; Pojman & McLeod, 1999; Rawls, 1971; Roemer, 1998; Scheffler, 2000.

23 For a critical response, see my ‘Offending the One Percent’ (Malleson, 2016).

24 Although Mankiw and Miller both defend distributive desert, there are important differences in their views. Miller is a market socialist, and so believes in significant redistribution of resources in order to enact relatively equal starting points (Miller, 1996). Miller is also skeptical of marginal productivity as a way of calculating individual desert (e.g. Miller, 1999, p. 313 note 14). For discussion of Miller's views, see Bell and de-Shalit (2003) and Malleson (2023, chapter 4).

25 Beliefs about distributive desert remain widespread and powerful. For instance, a 2017 survey from Pew Research Center found that 56 percent of Republicans think that poor people are poor because of ‘lack of effort,’ while 66 percent think the rich are rich because they ‘worked harder,’ not due to other advantages in life (Smith, 2017). A recent study from YouGov (Orth, 2022) finds that 48 percent of Americans believe that ‘most billionaires deserve the money they have’; only 36 percent disagree.

26 One rebuttal is that contemporary societies – in particular the US – have nothing like a level playing field, which means that people's performance reflects their privilege and other arbitrary advantages rather than genuine desert (Piketty, 2020). Another common critique is that income often reflects power, monopoly, and rent-seeking behaviour more than individual productivity (Reich, 2015; Stiglitz, 2012). A further critique is that the market is often a very unreliable indicator of individual productivity, since market prices – which impact wages and profits – often fluctuate wildly for reasons that have very little to do with one's behaviour (Hayek, 1960; Olsaretti, 2004).

27 This discussion proceeds on the standard assumption that individuals can be said to morally deserve things on the basis of their efforts and talents. This is a very common view amongst the mainstream public, though it is more controversial in philosophical circles, particularly among moral responsibility skeptics (compare, for instance Miller [1996]) with Malleson (2023). There is also an important distinction in the literature between desert based on contribution (in the sense of output) and desert based on effort (in the sense of input) (Olsaretti, 2004). The discussion here is mainly about the former. Defenders of the effort-based view include Roemer (1998), Olsaretti (2004), and Moriarty (2005). For a critical response to such views see Malleson (2023) and Malleson (forthcoming).

28 This example comes from Malleson (2023).

29 See footnote 19.

30 See footnote 20.

31 The median income comes from the US Census Bureau (Table P-7. Region–All People (Both Sexes Combined) by Median and Mean Income: 1974 to 2020). Average household income of the top 1% comes from Khimm (2011). To convert household income into individual income I apply the ratio of individual to household income ($26,588 : $50,045 or 1: 1.88) that existed in 2011 according to the US Census Bureau.

32 The argument here first appeared in Malleson (2023b). Relating to this theme, over the years a number of theorists have attempted to justify income deserts on the basis of the contribution of the entrepreneur (Arnold, 1987; Knight, 1921). The understructure metaphor makes it clear why these arguments fail. Entrepreneurs do do valuable things, but their talents and efforts represent only the miniscule tip of the gigantic social and historical iceberg of accumulated labor.

33 The reader will note that this is essentially a generalization of Henry George's (George, 1970) famous argument regarding land value tax, expanding the reach of his argument from land to the much broader understructure.

34 Now one might object that people in different countries (e.g. the US and India) operate within different market systems (I consider this kind of objection in more detail in Malleson [2023]). So perhaps we can charitably interpret Mankiw to be arguing that it only makes sense to talk about the economic contributions of Americans in the US and Indians in India – it does not make sense, in other words, to compare deserts across countries. One response is that even within a single country like the US, the playing field is still dramatically unlevel (for the evidence, see Stiglitz [2012], Reich [2015], Piketty [2020]). More importantly, it is deeply problematic to simply ignore the differences in understructures between different countries. That is to simply assume that some people have a right to immense and unearned privilege, while others are rightly highly disadvantaged. I see no ethical justification for global disparity of that sort. In addition, it is simply empirically false to see one's income as a straightforwardly national thing. Across the OECD, international trade of imports and exports accounts for an average of 41 percent of domestic GDP (OECD, 2011). That makes it incoherent for an American to say, ‘the income that I have earned through exchange with Indians is deserved; nevertheless, my desert remains incomparable and incommensurable with their desert.’

35 Rich people do react to increased taxes – but mainly in terms of avoidance measures. They do not actually work less. There is more evidence that the rich react to higher taxes by investing less; but though this may indeed have real economic costs, it's important to remember that if the government spends the taxes in productive ways, the net impact on economic growth may still be positive. The crucial thing to remember is that taxes aren't costs, they are transfers (they transfer control over resources from private hands to public ones) (Shaxson & Christensen, 2016). This can have either good or bad results in terms of economic growth – the details matter.

36 William Waller, taking his cue from David Hamilton, argues that ‘the real purpose of the factors of production is to provide a framework for justifying the distribution of income shares in capitalism’ (qtd in Hamilton, 1955/2009, p. 37).

Additional information

Notes on contributors

Tom Malleson

Tom Malleson is Associate Professor of Social Justice & Peace Studies at King's University College at Western University, Canada. They are also the Coordinator of the Real Utopias Project. Their latest books include Against Inequality: The Practical and Ethical Case for Abolishing the Superrich and Part-Time for All: A Care Manifesto (with Jennifer Nedelsky).