I concluded my previous post on Chapter 3, Book II of The Wealth of Nations by asking, Does Adam Smith’s distinction between so-called productive and unproductive labour — i.e. between the production of goods and the provision of services — still make sense today? The answer is a qualified yes!

Why “qualified”? Because Smith equates economic development with the production and accumulation of physical assets like crops, cattle, and machines, but today — 250 years after the publication of The Wealth of Nations — the provision of intangible services is just as essential to economic growth as the production of physical goods. By way of example, consider caregivers like housewives and nurses, or educators like college professors and elementary school teachers, or tech bros like software engineers and web page designers. They may not grow crops, rear cattle, or manufacture finished goods, but no one doubts whether health care, education, and the Internet contribute to GDP (either in total or at the margin).

But that said, Smith’s distinction between goods and services nevertheless makes perfect sense in an 18th-century or historical setting, especially if what you’re trying to do is explain why commercial societies like Britain and Holland are becoming wealthy and prosperous while feudal societies like Poland and Russia aren’t, which is precisely what Adam Smith is trying to do in The Wealth of Nations. Remember, when Smith uses the terms productive and unproductive he does not mean useful and useless. What he really means is this: “Does X or Y form of labour create new capital or make better use of existing capital?” Labour is thus either productive or unproductive in the Smithian sense depending on whether it creates new capital assets or enhances the use of existing capital.

Today, however, the concept of “capital” is no longer limited to the production of physical assets or tangible goods (as it was in Smith’s day). Today, capital includes intangible assets like trade secrets, brands, and algorithms as well as human capital (skills, know-how, etc.). But once we expand the concept of capital to include intangibles, Smith’s distinction between productive and unproductive dissolves. So, why is Smith’s distinction still relevant? Because however the concept of capital is defined, Adam Smith is making a fundamental and timeless point that remains just as relevant today as when he was writing his magnum opus: not all economic activities contribute to economic growth and development! Some activities are zero-sum or rent-seeking: they merely redistribute existing wealth rather than create new forms of wealth.

In other words, once we take a step back and probe the inner logic of Smith’s distinction, we see a fundamental qualitative difference between value-creating activities (i.e. productive labour) versus value-extracting activities (unproductive labour), between zero-sum rent-seeking and positive-sum trade and wealth creation. And this is yet another reason why Adam Smith’s magnum opus is a timeless classic that is still worth reading today! Nota bene: I will resume my survey of Book II of The Wealth of Nations on Monday (2 February) and then push into Book III by the end of next week.