Post-war Italian Socialists and Communists supported workers in their class struggle against capitalists. That’s why they wanted to call Italy a “democratic workers’ Republic”. They reckoned that, if for the time being Italy could not be a socialist country, it might at least have a socialist-sounding name. It was, after all, only a matter of time: socialism and communism were ineluctable and just. Ineluctable, for intricate reasons that Karl Marx and its disciples had figured out and that most supporters took for granted in good faith; and just, for a reason that everybody could understand: labour is the ultimate source of value.
Labour is everything. Capital is nothing but a tool of production created by past labour. This is the Labour Theory of Value: the economic value of a good equals the amount of labour required to produce it.
One didn’t need to be a Socialist to subscribe. Marx got the idea from Ricardo, but Abraham Lincoln, for one, also agreed:
Labor is the true standard of value.
Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.
And Keynes was not a closet socialist when he wrote:
I sympathise, therefore, with the pre-classical doctrine that everything is produced by labour, aided by what used to be called art and is now called technique, by natural resources which are free or cost a rent according to their scarcity or abundance, and by the results of past labour, embodied in assets, which also command a price according to their scarcity or abundance. It is preferable to regard labour, including, of course, the personal services of the entrepreneur and his assistants, as the sole factor of production, operating in a given environment of technique, natural resources, capital equipment and effective demand. (General Theory, Chapter 16, p. 213).
In a broad sense, the primacy of labour is trivially true: capital goods are ultimately made by people – who else? – and even natural resources need people to perform their economic function, through farming, mining etc. Without people’s labour there is no economic value – in fact there is no economy.
But, as Keynes observed, people need aid: from technique (today we would say technology or skills), capital equipment and natural resources. Labour may be seen as the sole – or rather the ultimate – factor of production. But nothing is produced by labour alone.
Take a simple example. Teachers produce teaching. At first sight, teaching is a service solely produced by teachers’ labour. But such a narrow perspective entirely misses the big picture. In order to teach, a teacher has to live. So he needs food, clothing, housing. To move around he needs transportation. To stay healthy he needs medical care. To enjoy life he needs restaurants, cinemas, sports. To teach he needs schools, books, pencils. And so on – you get the drift. The production of teaching requires a complex network of countless other goods, services and resources, ultimately produced by other people.
How does the teacher get all those things? Basically, in three ways. First and foremost he can buy or rent them. Second, he can get them from his properties: e.g. housing from his own house, transportation from his own car. Third, he can get them for free, i.e. without direct disbursement: e.g. a National Health Service, a road network on which to drive his car, a police service to keep him safe, a classroom from the school that hired him.
In one word, he gets them by drawing upon his capital.
‘Capital’ is an ancient word that in the old times had nothing to do with capitalism. At the dawn of civilisation, a man’s capital was the number of heads (caput in Latin) of livestock he owned: in fact, his cattle. Pecunia, Latin for money, derives from pecus, sheep. In ancient Rome, a proletarius was a man without capital, whose only property was his children (proles), who in due course would contribute to the family income and hopefully take care of parents in their old age.
Nowadays our capital is much better assorted. We have cash and other financial assets; real estate and other property; entitlements and other rights that come to us from being members of a community. Most forms of capital earn a return: as cows give milk, sheep give wool, and both give offspring, financial assets give interest and dividends. Real estate gives a rent or, if used by its owner, saves him from paying one. Entitlement capital earns health insurance, pensions and other benefits.
But, now as of yore, the largest part of most people’s capital – proletarians included – is their own caput: themselves. People earn a return by using or lending their labour services. For example, in return for his labour a teacher receives a salary. In this sense, we can say that labour income is the return of Human Capital.
Returns can be spent or saved to accumulate capital. Our teacher spends part of his salary to satisfy his needs and saves the rest to increase his capital. He does the same with the returns of his non-human capital: interest, dividends, rents etc. At the same time, capital increases or decreases, due to changes in its value.
The value of any form of capital is not the amount of labour required to produce it, but the discounted sum of its expected payoffs. This is clear for financial assets, but it is not different for human capital. So, for example, the value of a teacher’s human capital is the discounted sum of his expected salaries, from now until retirement. His salary will, by and large, depend on his technique, i.e. his knowledge and skills as well as any other quality that affects the demand for his services. An unexpected promotion will therefore increase the value of his human capital, and a firing will decrease it. Like any other asset, human capital has a trade-off between risk and return: at the same level of technique, the job of a tenured academic has a lower expected risk and a lower expected return than the job of an investment banker.
There is however a major difference: while financial assets, real estate and other property can be exchanged for cash at a price approximating their estimated value, human capital can’t. Since the end of slavery, one can rent people’s labour but cannot buy people! So, while salaries have a market value, human capital doesn’t. One can draw upon his non-human capital to satisfy his needs, but cannot sell himself (at least not in an economic sense). The only decision one can take is whether to offer his labour services in the job market or keep his energy and time for himself.
Most people don’t have that privilege: their non-human capital is not sufficient to satisfy their needs. They need to work. Of course, labour has its own virtues: in addition to a salary, a worker gets further education, increased skills, social recognition, personal satisfaction and other perks. But he doesn’t have a choice.
Only a few people have enough non-human capital to afford the choice. They may still decide to work – to reap labour’s virtues, or because they deem it necessary in order to preserve the value of their capital: the cattle would die without the farmer’s labour; and so would the firm without its owner’s guidance. Still, it is their choice: owners could rent other people’s labour to do the job.
This is, in effect, what shareholders do. The owner of a share of IBM does nothing to earn his return. Don’t be swayed by the incidental work that he may or may not do to decide to own the share. The dividend he gets is his return as a shareholder, i.e. as a supporter of the equity of an enterprise. Likewise, a bondholder return is the interest he gets from lending his capital; and a real estate owner return is the rent he gets in exchange for the housing service he supplies to the tenant.
Ownership of non-human capital may well have resulted from past accumulation of human capital returns. As our teacher saved part of his salary, he might have bought IBM shares. But ownership may also be inherited. True, going back in time we may well be able to ascribe all capital to someone’s past labour. In this sense, labour is, ultimately, everything: as Lincoln put it, capital is the fruit of labour and would not exist without it. However, this is a pleasing but irrelevant point. The relevant point is that current and future returns to non-human capital are not a reward to labour. They are a reward to risk bearing, to lending, to housing.
Keynes was right: there is only one factor of production. But it is not labour, it is capital – both human and non-human. Human capital is the inalienable property of individuals: the workers. Non-human capital can be owned and exchanged by individuals – directly or indirectly through companies and other forms of private association – or, to a larger or smaller extent, by the State. But whoever owns it, the supply of non-human capital is as important to the economy as the supply of labour services.
Italy is a democratic Republic founded on capital.
Nah, that wouldn’t have worked either. But it’s true. All countries are.