Previously, in a production process, we described how labour applies a technique to transform existing inputs into new outputs.
The world economy is a large (and ever-changing) collection of production processes that link together to form a complete, integrated system. Here I want to consider how economies are productive in the narrow sense of producing a surplus, that is producing more output than what was used-up as input, i.e. more comes “out” than what’s put “in”.
We can understand this property even at small scales. Consider the following simple example of an integrated economy with three production processes that output corn, iron and labour.
Note that labour appears as one of the things produced by this economy. Are labour services really “produced”?
Not in any normal sense. In modern economies production occurs within the institutional framework of a firm. For example, iron and corn are often produced by large conglomerates. In contrast, the labouring population, and the services they supply, are reproduced within homes, schools and the other institutions of civil society.
Nevertheless, at any given time, the working population consumes a collection of commodities, and part of that consumption is a necessary condition for the reproduction of their capacities, including the capacity to supply labour services to the economy. Call the bundle of commodities that workers consume the real wage.
It does no harm to talk of the real wage as an input to a ‘production process’ (where workers consume their real wage) that outputs labour services. The ‘technique’ that produces labour is entirely conventional, and changes according to time and custom.
Also, we ignore individual workers and the variety of real wages they consume. Instead, we consider the aggregate population of workers. And, in this example, they consume corn (in the form of bread), which reproduces their capacity to work.
To illustrate the concept of a surplus we’ll begin with some input stocks:
Here, the working population is a little exhausted. They’ve already worked half a day. Time for lunch. Let’s ‘produce’ another half-day of labour capacity. The ‘technology’ to do this was defined in Figure 1. Here’s the relevant part of the production graph:
In other words, to produce 1 unit of labour services requires the consumption of 0.5 units of corn. After we’ve ‘produced’ 0.5 units of labour services the stocks are:
So the workers are fully refreshed, and ready for the second half of their day. But, of course, food has been consumed — we’ve used-up 0.25 units of the corn stock.
We should replace this corn, otherwise we’ll eventually run out of food. Again, the technology to do this is defined in Figure 1. Here’s the relevant part of the graph:
To produce corn we need some corn (in the form of seed), iron and labour. Let’s produce 0.5 units of corn (to replace the workers’ consumption and a bit more for good luck). The stocks are now:
Prior to producing new corn we had a stock of 9.75 units (Figure 3). We commanded the production of 0.5 corn. So we should now have a stock of 10.25 units. So why do we only have 10.09 units?
The reason is that to produce corn we need to use-up corn as input (in the form of seed). (You can see that in Figure 1: there’s a loop from corn to corn). In fact, to produce 1 unit of corn we need 0.32 units of corn as input. So producing 0.5 units of corn uses-up 0.5 * 0.32 = 0.16 units of seed. So the net output is only 0.34 units of corn.
Note also that we’ve used-up some labour services and iron to produce this net output of corn. Let’s, finally, reproduce the iron that’s been used-up. Again, the technology to do this is defined in Figure 1, and here’s the relevant part of the production graph:
We just need input stocks of labour and iron to produce iron. Let’s command the production of 0.5 units of iron. The final set of stocks are now:
Again, we don’t get the full 0.5 units of iron as net output, because some stock gets used-up as input.
Now let’s compare the initial stocks (before production took place) with the final stocks (after producing some labour, corn and iron):
Figure 6 shows the net production (in blue) by subtracting the initial stocks from the final stocks. We can immediately see that we’ve got more stocks of labour, corn and iron than we began with. We’ve produced a surplus.
In theory, not all economies produce a surplus. It depends very much on the technologies. Unproductive technologies use-up more inputs than they produce as net output. They will eventually exhaust all the stocks in the economy if repeatedly applied. This is not viable long-term. The economy cannot self-reproduce.
In contrast, a productive economy has the capacity to self-reproduce by continually replacing all the used-up inputs and producing surplus.
But wait. Isn’t there something wrong about this idea of a surplus? Doesn’t physics tell us we can never get something for nothing? We know that energy is merely transformed from one form to another, and usually inefficiently. Plus, what about the finite resources of the planet? Isn’t the fact that the global economy continually depletes the stocks of natural riches, without replacement, one of the major problems currently facing humanity ? Isn’t growth always at the expense of the environment?
We can resolve the apparent contradiction by merely noting that the concept of an economic surplus is relative to a set of real cost accounting practices. And what should, and should not, be counted as a real cost of production is ultimately a question of politics. For example, in modes of production with an intrinsic growth mechanic, such as capitalism, many of the natural riches of the planet are plundered without replacement, and not even represented as costs of production in our accounting practices. On the other hand, it seems hard to imagine any mode of production that would consider the energy supplied by the sun as anything but a free and practically inexhaustible source of energy. And it seems likely that humans can apply technologies that both produce an economic surplus and remain compatible with the carrying capacity of the planet.
The possibility of producing a surplus opens up new possibilities: we could expand the scale of production (by producing with increasingly greater quantities of input stocks in each time period), or focus on increasing consumption only (i.e. a bigger real wage), or work less hours and reproduce the economy at a steady, self-reproducing state with either less or zero surplus, or perhaps grab a large share of it for ourselves at the expense of others and accumulate material power. And so on. Later, we will discuss why some of these possibilities are actually realised while others are not.
Historically, the technological capability of producing a surplus, especially an agricultural surplus, has been the key driver of population growth. The neolithic revolution, which occurred approximately 12,500 years ago, provided the material basis for surplus labour time to devote to new and more rewarding activities, such as cultural and intellectual production. In a very profound sense, economic surplus is the material foundation of human culture.
For the next post I probably should turn to production repeated over time, and start to consider how final demand affects the organisation of production in different sectors of an economy.
For the impatient — yes I will introduce markets, money and dynamics. But not just yet!
(And for those interested in the mathematics of linear production processes, and how this relates to the economic theories you find in neoclassical textbooks, I can recommend Theory of Production: A Long Period Analysis by Heinz Kurz and Neri Salvadori.)