The theory of unproductive labour originates with the philosopher Adam Smith, who was very critical of the old feudal order in Scotland. One of the disadvantages of this order was the way, he claimed, that a large part of the population were employed as the servants or retainers of the aristocracy.

In the feudal times, he said, very little was reinvested and the resulting level of economic development was low:

But anciently, during the prevalency of the feudal government, a very small portion of the produce was sufficient to replace the capital employed in cultivation. It consisted commonly in a few wretched cattle, maintained altogether by the spontaneous produce of uncultivated land, and which might, therefore, be considered as a part of that spontaneous produce. It generally, too, belonged to the landlord, and was by him advanced to the occupiers of the land. All the rest of the produce properly belonged to him too, either as rent for his land, or as profit upon this paltry capital. The occupiers of land were generally bondmen, whose persons
and effects were equally his property.

Smith alternates in his argument between an individualistic and a social approach to the question. From the standpoint of the individual rich man he says that spending on servants depletes his capital whereas spending on productive workers returns the capital with a profit. He also looks at the effect that this has on the over all division of labour. In progressive bourgeois states like England and Holland the cities were manufacturing ones, whereas under the ancien regime at Rome or Versailles they were full of idle dissolute and poor servants of the court.
So his basic argument was that under feudalism the surplus product was overwhelming spent unproductively, whereas in the modern (18th century) countries, the part of the product not necessary to the immediate support of the workers went, in large measure, to replace or enhance the capital stock necessary for production.

Were the unproductive population – personal servants, opera singers, priests etc diverted into producing commodities, not only would the mass of commodities produced undergo an immediate increase but a portion of this would be available for accumulation. His two criteria for labour to be productive were:

  1. The labour must be employed out of capital not revenue.
  2. The labour must result in a persistent vendible product, something that lasts beyond the moment in which the labour is produced.

For Smith, both these had to be true for work to be productive. In his notes on Smith in Theories of Surplus Value, Marx weakened the definition so that only the first criterion was needed. Any work that was employed out of capital should, he said, be counted as productive. However, he later seemed to have realised the inadequacy of this simple criterion, when he argued that labour employed by merchants could not count as productive, since buying and selling was not itself a productive activity (Capital III, Chapter XVII). In effect, he shifted back to accepting Smith’s rule that to count as productive labour had to be both physically productive and employed out of capital. This extension is generally accepted by subsequent Marxist economists who treat finance, for example, as an unproductive activity.

In effect, there is an unacknowledged convergence on the Smithian emphasis on employment out of capital not revenue plus the need for a material product.

The question is sometimes confused by the notion that productive labourers are those who produce surplus value. Why should this confuse the matter?

If confuses it if you think that all wage labourers in the private sector must, ipso facto, produce surplus value, irrespective of what they are doing.

In some cases, it is pretty clear that you can be a waged employee and not produce surplus value. Bank employees do not produce value because the revenue source of the banks is not the sale of commodities, but the charging of interest on loans. The interest is a deduction from the revenues of either industrial capitalists for business loans, or workers for home loans. So the entire FIRE sector is employed, in Smith’s terms, out of revenue not capital. The employment is indirect, but it is nonetheless clear that it originates in revenue.

A useful way to understand which employees can really produce surplus value is to use the reproduction schemes that Marx develops in Volume II of Capital.

There he divides the whole economy into three sectors. Sector I produces means of production – that is to say machinery, industrial fuel and raw materials. Sector II produces actual consumer goods. He further breaks down Sector II into IIa which produces goods consumed by the working class, and sector IIb which meets the consumption needs of the capitalist class. He then constructs what amount to notional Tables of national accounts based on these sectors.

Table 1

Sector c v s living labour total output value
I 100 50 50 100 200
IIa 50 100 100 200 250
IIb 50 100 100 200 250
Total used 200 250 250 500
Wage rate 0.5
Rate of sv 1

We can assume these numbers are £billion per year.

The important thing is that the output of sector I has to equal the total constant capital (c) used in all sectors, the output of sector IIa has to equal the total wages (v) used in all sectors, and the output of sector IIb has to equal the total profits (s) over all three sectors.

Marx assumes a steady state or simply reproducing economy, so that there is no surplus being accumulated.

His theory of relative surplus value is that a larger share of surplus value can only come about by reducing the labour time required to reproduce the real wage. Now assume that there is an improvement in labour productivity in sector IIa so that the same physical output can be produced with half the living labour. Real wages do not decline, but they fall in value. Let us assume that the redundant workers emigrate and wages for them no longer appear in the accounts. We then arrive at a second table.

Table 2

Sector c v s living labour total output value
I 100 33.3 66.7 100 200
IIa 33.3 33.3 66.7 100 133.3
IIb 66.7 66.7 133.3 200 266.7
Total used 200 133.3 266.7 400
Wage rate 0.333
Rate of sv 2

I have calculated it by putting into a spreadsheet the consistency constraints that Marx assumes for his reproduction tables, and then changing the amount of living labour. If you set the spreadsheet to derive an iterative solution you get the result above.

The effect of the change in the amount of living labour in sector IIa is that the rate of surplus value doubles, so clearly sector IIa can produce relative surplus value.

Now suppose we do the same experiment with sector IIb and reduce the amount of living labour required to produce its output by half. we now get the table as follows.

Table 3

Sector c v s living labour total output value
I 100 66.7 33.3 100 200
IIa 66.7 133.3 66.7 200 266.7
IIb 33.3 66.7 33.3 100 133.3
Total used 200 266.7 133.3 400
Wage rate 0.66
Rate of sv 0.5

The effect of this is to actually lower the rate of surplus value to half. It is relatively easy to see why, since a saving in labour in dept IIb means that less labour is being spent to support the upper classes, so both the total mass of surplus value and the rate of surplus value fall. Sector IIb includes luxury goods production, advertising, commercial law, armaments production, banking etc.

Suppose for all these activities the amount of living labour used fell by half,  this is what would happen. The rate of surplus value would have to be lower since less social labour was now being expended on the consumption of the upper classes.

Consequently, the effect of improvements in labour productivity in sector IIb is to reduce the rate of surplus value, hence no relative surplus value can be produced here, the whole sector is unproductive. Changes in labour productivity in this sector have the opposite effect to changes in sector IIa.

You can not tell whether a given group of employees are productive just by looking at the formal legal contract of employment they have with their employers. It depends on their position within the structure of social reproduction. The production of relative surplus value, the characteristic surplus under capitalism, is a process that takes place at the level of social reproduction as a whole.

Modern capitalism with its huge unproductive sectors looks more and more like the feudalism that Smith critiqued.