Distinguishing incomes from capital and labor
When I recently received my copy-edited chapter dealing with Adam Smith (from my forthcoming book “Visions of Inequality”), I noticed that in several instances the editor changed my “the rate of profit on capital” to the “rate of profit on investment” or “profits on invested capital”. I changed it back to the original, but I thought that the edits summarize well very different visions of capitalism. Or how capitalism, in the eyes of many, has changed from its 19th century variety of industrial capitalism to the 21st century version where we often think of capitalism as financial, and of “capital” as “free” money in search of best placement. (Of course, capitalism is still industrial—somebody has to produce physical cars, smart phones and T-shirts—but that industrial aspect is concealed under the overwhelming financialization.)
Thus to the editor, who has a background in business, a capitalist is naturally an investor; to Smith, Ricardo and Marx, though, the capitalist was (preponderantly) somebody who used his own money to start the process of production, hire labor, advance wages, buy the machines, decide what to produce. As the business grew, the capitalist would hire others to do some of these tasks, but he would remain dedicated to, and in charge of, his business. This is still the role of capitalists/entrepreneurs in many advanced economies, and even more so in the less financialized economies, but, in common parlance a capitalist has become somebody who has enough money to “place” (‘invest”) in individual stocks, government paper, mutual funds or other financial instruments.
This has led to the introduction of the misleading term “investor” that nowadays masquerades as an occupation. A number of times I have met people describing themselves as “investors” in a way that somebody would describe himself as a shoemaker, medical doctor, cashier, IT developer etc. The appellation which is misleading (except in cases which I describe below) is not only the product of financial capitalism as such but of deliberate attempts to “equalize” the two factors of production, capital and labor, Thus, you may be working ten hours a day in a warehouse, and I may working ten hours looking for the best investment opportunity for my money, and we are equal: we both work ten hours per day, and I am as much of a worker as you. You are just called a warehouse worker, and I am called “investor.”
Why is it misleading? Not that somebody cannot spend ten hours every day on his computer “investing”, but that the real earning from his work is only the additional income that he may make on top of what he would have earned if he did nothing but simply invested that money once (and let it “work”) or gave it to a mutual fund to invest. Thus if in ten hours of work, he earns $100 from his investment, and if with zero hours of work he would earn $90 with that same money, the labor earning for ten hours of work is $10. He needs to decide whether it makes sense for him to continue spending ten hours of work for $10. But this is entirely different from a worker’s situation: if our warehouse worker does not show up at the Amazon warehouse, his pay is zero. Consequently,—and this is key—zero hours of work in one case gives you $90 and in the other case $0. “Investor” is not just another laborer like a warehouse worker.
(When I hear somebody describe themselves as “investor” I am reminded of people who define their profession as “philanthropist”, literally, a “lover of mankind”—a weird profession indeed. In both cases, they are rich people, who earn money for no work, but feel bad acknowledging it and thus when asked “what do you do?” they do not say, “well, I do nothing, I just live on money I own/inherited”, but rather “I am a lover of mankind” or “I am an investor”.)
However, the term investor is not misleading as a profession in the case of individuals who are hired workers working within the investment banks and paid to find the best ways to maximize return to the rich people who entrusted them with their money. Their income is indeed a wage income—even when they are paid exorbitant bonuses. In income distribution studies, we have this problem: how do we treat a CEO of an investment company who earns a wage of $1 million, and a bonus (in the form of shares) of $2 million? The answer simply is that we treat all of that income ($3 million) as labor income. If the CEO decides to go off to the Bahamas, and never shows up for work, his earnings would be zero. So for him, like for the Amazon warehouse worker, presence at his job (virtual or in-person) is indispensable to earn an income. Hence that income is a wage.
Some people are confused by that classification because for them a trader for an investment company or its CEO are not workers since their income depends on the performance of stocks and their salaries are too high. But the amount of earnings does not determine whether it is labor or capital income. Capital income can be one dollar and labor income a million, but they are still labor income, and capital income. Neither does the payment in stocks, nor whether that income is linked with the performance of the stock market matter. Note that payments in stocks are done for ordinary workers too. When such a payment is made, it is always a wage. Only later, if the worker or the CEO decides to keep the stock, the return on that stock becomes capital income.
Now, what is the difference, somebody may ask, between our individual “investor” whom we saw spending ten hours a day on his computer, and the trader in a wealth management company that also spends ten hours per day investing? The difference is that in the first case, a person’s labor earning (wage) is only the incremental amount of money made compared to what he would have earned with zero work: $10 in our example. In the second case, the trader is a hired worker and his income is entirely the result of his labor. Marx would have said that such a trader is no different from our Amazon warehouse worker. Both are working within companies they do not own, both are producing surplus value for the owners (Amazon and the wealth find) and both are hired workers.
When in a recent paper, authors claimed that the decrease in the US labor share was overestimated because up to a third of that decrease was due to the misclassification, that is to the failure to account for the specific labor inputs (including entrepreneurship) of individuals owning S-corporations, their point was accurate. That part which is linked to specific labor input cannot be ascribed to capital, but to labor and entrepreneurship.
The Neoclassical Synthesis -- which is known as “Mainstream Economics” nowadays -- doesn't have a concept of profit, as their fundamental principle is that capitalism is a natural system, therefore always in equilibrium or tending to equilibrium. Therefore, no wonder their confusion with Adam Smith, who was a classical economist.
The concept of labor is very simple and easy to understand. Labor is everything that produces value, directly or indirectly.
Long story short, there are two types of labor: productive and unproductive. Productive is every labor that indeed produces value, fits the aforementioned definition of labor. Unproductive is every labor from commerce, i.e. commercial capital.
The reason commerce is the exception to the rule is that they deal exclusively with the circulation of commodities, not its production: conceptually, they are nothing more, nothing less than the specialization of the warehouses of industrial capital. They're merely an extension, a long arm, of industry.
To identify unproductive labor is very simple: one just has to prolong the unproductive worker's journey of labor. If such extension increases value in the same proportion as the old journey, it is productive labor; if not, it is unproductive. For example: a worker in a given industry produces 1,000 pieces per 8-hour journey; if you extend his journey to a 16-hour one, he will produce 2,000 -- he is a productive worker, he produces value.
Now take a balcony vendor from a gas station store: if you extend his journey to a 16-hour one, that won't imply double the clients will magically appear, let alone that they will spend exactly the same amount of money than the first half did. He is an unproductive worker, merely a conduit of the circuit of the industrial capital that produced the totality of the commodities present in that store.
Note that it doesn't mean unproductive labor is unnecessary, let alone parasitic: Marx was very clear it was absolutely necessary, since, without circulation, production would not result in the reproduction of capital. Circulation is a conditio sine qua non for the very existence of capital, in whatever imaginable form. Unproductive workers can, indirectly, rise the profit rate by reducing the time of circulation: the faster the circulation, the more a capital can rotate in a single given period of time, and lesser the waste (destruction of commodity capital, destruction of value).
Besides the workers (laborers, productive and unproductive) there are the capitalists and the managers (middle class). They are not workers in any sense of the word.
Capitalists are the personification of capital. Their only function is to represent capital, i.e. the means of production applied to capital reproduction. If a capitalist dies, his capital will go on, through some kind of inheritance. Wealth has an existence, a life on its own in capitalism, because of fetishism of the commodity and alienation of labor: the capitalist is merely the human representative of capital in the human world, its agent in human society.
If a capitalist has a capital so small he himself has to work in some daily functions -- the petty bourgeoisie, the so-called “small and middle business owners” -- then Marx has a very simple and elegant solution: he works for himself, he is, at the same time, capitalist and worker; but his dominant societal function is that of a capitalist because he will benefit from the accumulation of wealth of his own work. He is a capitalist who has as one of his employees himself (usually in a very comfortable role, such as accountant or cashier). Such work is, nowadays, paid under the cute term “pro labore”, i.e. the self-congratulation of the petty bourgeois for being a big boy.
From the concept of petty bourgeois it is easy to understand the role of the managerial class/middle class. When a capital is too big, its organizational structure becomes so large and so complex that it transcends the intellectual and physical capacity of the capitalist, he has to hire “long arms” to do the administration and supervision for him. These are the “bosses”, the “executive class”. They are not workers, but merely the eyes of the capitalist: their function are exclusively coercive, and they are strictly parasitic in nature, their “wages” are literally a subtraction of the surplus value extracted. That means their payment are directly related to the results of their capitals (companies, corporations, the denomination doesn't matter), so it is very easy to identify them: if their payment is related to the end of the year result of their capitals, and/or if their payment are directly tied to “company goals”, then he is a middle class/manager.
Another easy metaphor that can be used to identify a middle class member/manager is the guy who whipped the slaves in the South of the USA. The manager/middle class member is the whip of the capitalist, the enforcer of capitalist discipline over the worker.
From the middle class concept we can add the element of financial capital, which, in Marx's scientific denomination, is called fictitious capital (capital that is only capital by determination of Law, Law in the sense of the will of the State as the Leviathan; capital as a purely juridical entity; capital that emanates from the Free Market as an institution, i.e. from the institutionalization of the Free Market).
Well, the element of fictitious capital only prolongs, but does not change, the process of capital. If a financial institution lends money to some productive capitalist (“real economy” in modern terminology), then, in fact, this productive capitalist is the employee or vassal of the financial capitalist. The financial capitalist expects from the productive capitalist a return of that amount of money + a profit rate which is historically called interest or interest rate. The productive capitalist then has to subtract from his profit rate the interest rate. The remaining amount of profit is called profit of enterprise by Marx.
From the profit of enterprise, we can deduce the existence of the managerial class/middle class again: if all of the productive capital becomes dependent on the fictitious capital to do their business, then, on a social level, the productive sector capitalists are the de facto employees of the fictitious sector capitalists: the former are the “impresarios” of the latter, their de facto “CEOs”, their “long arms”. The difference here is that fictitious capital, at the end of the day, is just that: fictitious; so the absolute subjugation of the former by the latter will never happen: they are both from the capitalist class and will remain so until the end of capitalism (which may or may not be the end of time for humanity -- but that's another theoretical problem).
"This has led to the introduction of the misleading term “investor” that nowadays masquerades as an occupation."
I am so glad to read this. I always thought that it is wrong to call buying stocks (and the like) "investment", exactly for the reason you are describing. But what word would you suggest? Speculation sounds right to me, but I fear would be considered not acceptable in todays world.