This is an online conversation I had with the editor at the Liberty Fund that helped me clarify even in my own mind some of the concepts that had remained free floating and had not been nailed down.

Q: Steve, let me ask you something. I’ve never been clear on the classical distinction between productive and unproductive labor. If a menial servant (in a free market) doesn’t add value to something, why is he paid? Did Menger, Bohm-Bawerk, or Mises reject the Smithian distinction? Maybe this would be good to address in a comment. . . . Why doesn’t the menial servant add value?

A: What do you think of this which is the point I think Smith and Mill were trying to make?

“It might be argued that economists are productive. But the reality is that if we heard that entrepreneurially-driven construction activity with no government subsidy was to double over the next ten years we would all agree that the economy would be bigger and stronger at the end of that time, more jobs would be created and real incomes would rise.

“But suppose, instead, we heard that over the next ten years there would be twice as many meetings of the Economic Society and that the number of journal articles would double. What then would be the effect on output and employment, do you think?”

I do think I contribute in a longish-term sort of way to productivity by building the human capital in my students. But it is not what makes the economy stronger, but in fact, the incomes of menials and others draws down on the productivity of the existing capital structure. If that doesn’t work for you, I will think about it some more. But the stimulus drew down without building back up which is why things are falling apart in so many ways.

Q:It still seems that everyone earning an income must therefore be productive.

A: Many earning an income are subsidised by the state, which the stimulus entirely consisted of just about everywhere. But even going past that, every private sector job will hold its place in that its production costs are met in full, but only some forms of economic activity allow real incomes to expand over time. Someone who carries someone else’s bag adds value and can be paid out of existing productivity which is the income of the owner of the bag being carried. But the economy does not become larger as a result. Only activities that add to a nation’s capital, including human capital, can do that. That is the distinction that they were trying to make. They would never have thought that the effects of C, I and G had identical effects on an economy which is what we now do.

Q: Does someone making consumer goods “allow real incomes to expand over time”?

A: I don’t see how incomes can expand unless there is some kind of capital expansion under way somewhere.

Q: In other words, isn’t someone who makes a car more like a valet than like someone who makes capital goods?

A: Mill’s not trying to be judgemental. He is only pointing out that some of the productive effort going on adds nothing to future growth while some does. And he is pointing out that all activity, both productive and unproductive, drains productivity which must be replaced. A machine breaks and so maintenance must take place just to stay where you were. Without some part of the economic structure first maintaining and then adding to the economy’s capacity to produce, the economy goes backwards. Those parts of the economy that are working to increase future productivity he describes as productive employment. I think the inferred insult is what must have annoyed so many. A Supreme Court judge might not like to think of himself as unproductive labour, but in Mill’s sense, unless his work makes the economy more capable of producing goods and services in the future, that is what he is. I have tried to replace the concept with the term value added, but I am beginning to think that I have overloaded this one poor word with two aspects of the issue under discussion.

I can also see that I didn’t explain completely why I had chosen the bag carrier as an example. I chose it because there is no capital required for someone to lift a bag and carry it somewhere else. But that is beside the point anyway. I can see that an enterprise earning profits above the level required to maintain the business’s capital structure also contributes to the flow of saving in a very minor way, if the owner reinvests those profits into productive forms of output. Nevertheless, most of the saving that matters is in the form of the accumulated capital that has been built up through economic activity over the past. It is not the flow of newly-produced capital that constitutes saving but the stock of assets that have been built up over the past.