This a further sketch towards a longer piece I'm writing. It's taking time as I'm still developing the ideas. Comments welcome, but I'm having technical difficulty responding.
Before goods and services can be exchanged in an economy they must first be produced. It is the act of production which adds to our wealth and well-being. The narrative of a market economy distracts attention from production and wealth creation to focus on buying and selling. In changing the story, we need to put back the idea of production. Britain was once described as a nation of shopkeepers. The market narrative portrays Britons as a nation of shoppers; we need to recognise ourselves as a nation of makers.
I use the term production to include all activities which add
value in the economy. It is not limited to manufacturing or industrial
production. Services too are produced and it is not uncommon to hear service
companies refer to “products” when they mean the services they offer. For
example, a bank might describe its variety of current accounts, savings
accounts and credit cards as its product range.
It was perhaps easier to understand the production economy
when more output was classified as industrial. The image that came to mind in
the past would have been men going to factories, shipyards, building sites. Now
when services dominate the economy, the image of women and men going to
offices, retail parks and call centres doesn’t connect so easily to the idea of
production.
A major difference between industrial production and services is that the output of a service is often consumed at the time of production. For example, a visit to the dentist, a car repair, a flight, a hotel stay, a restaurant meal, a business consultancy, a training course are all are largely produced in the delivery. Nevertheless, all involve the combination of labour and capital to provide a desirable output.
Since the time of Adam Smith, economists have identified
three “factors of production” – labour, land and capital, although today we
tend to see land as a form of capital. Production begins with labour acting on
natural resources; shaping, moulding, transforming raw materials into useful and
necessary stuff. Tools can enhance the output of each worker and so with more
and better tools labour becomes more productive. The modern firm needs workspace like a factory
or office, stocks of raw materials, equipment including computers and software
and the means to fund production until the goods or services are sold. This makes
up its capital. This gives us the basic model of production: labour and capital
combining to create desirable outputs. Neo-classical economists talk of a
production function (f) where output of a firm (O) is a function of capital (K)
and labour(L):
O = f (K, L)
This model assumes a given level of technology. The firm can
increase its output through the introduction of new techniques and better technology.
In addition, raising the skill level of labour raises output which is sometimes
referred to as human capital. In summary, a firm’s output is a function of the
amount of labour employed, the quantity of capital invested in the firm, the
level of technology and the skills of the workforce.
Without tools a worker’s output is limited. With more
capital invested in production the output rises. The story of labour
productivity is not, as sometimes suggested, a matter of working harder but of
increasing output through capital investment and exploitation of better
techniques.
Shifting the narrative from markets to production helps to
humanise our understanding of the economy. In place of the hidden hand of the
market we have human agency in the form of people at work to create wealth using
the equipment and machinery in which people have invested. We are transformed
for passive consumers to active producers. Most people spend more time working
than shopping. The production story connects to people’s experience of the
economy in the workplace. Women and men lend their time, their effort and their
skills to create the stuff that a society needs. For many of us a job is more
than a way to earn money; it provides a sense of who we are and dignifies the
contribution we make to the community.
The production story can also help to illuminate policy
choices. Take the problem of plastic pollution. The market story encourages us
to think of reducing consumer demand for plastic. Experience tells us that the
market will respond to consumer pressure, as it did to the demand for less
damaging agriculture, by providing alternatives and charging a premium to
environmentally conscious customers. The production story suggests a different
approach, that of acting directly to limit plastic production.
A shift to a production narrative will help to combat the
myth that only the market sector counts in the economy. Production of publicly
funded services are often discussed as if they are a cost to rather than a part
of the economy. Yet the production of healthcare, education, environmental and
many other services are contributions to the national income, not subtractions
from it. According to the available statistics, the mostly government funded
sectors - public administration, defence, education, human health and social
work activities - add around 17% to GDP.[i]
So in the production story, teachers, doctors, first responders and other public employees are all workers contributing to the production of necessary and desirable services as part of the economy.
Updated 10/1/21: to expand the concluding section.
[i] National accounts aggregates by industry (up to NACE A*64) [NAMA_10_A64], Eurostat.
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