by Mario Fabbri
And, with the advance of automation, the process carries unceasingly on.
It must be said that the boundaries between the imaginary economy and the real economy are blurred, and it is often impossible to classify this or that business, this or that worker as productive or unproductive.
Surely, even if it is impossible to calculate exact figures, ‘a certain number’ of indirect workers – supervisors, accountants, managers…– is indispensable to be able to run production.
And comparing services like healthcare to services like tax consultancy it is easy to lump the former in with the real economy and the latter with the imaginary economy, but even for healthcare there may be dubious cases.
But if we look at the economy as a whole no doubt is possible: given the powerful advances in manufacturing technologies, it is necessary for the greater part of the energy spent in the economy to be ‘unproductive’ in the normal meanings of the term.
This contrast between the real and the imaginary economy has a great deal in common with that once well-known contrast between a productive social sector, which generates the material goods to support itself as well as a surplus, and an unproductive sector which is maintained by that surplus.
In times when most human energies were directed at procuring food, it was even more natural to contrast a food-producing agricultural sector with a remaining part of society that was fed by it.
The techniques whereby the social unproductive sector gets its hands on the surplus may be many and varied, but apart from deception or violence, they are always grounded in morality or law: rents for the ‘owners’ of the land, toll rights, tributes to authorities, pious donations…
William Petty, the first, in about 1670, to speak clearly of the surplus conception, estimates optimistically that 1,800,000 productive “labormen” were sufficient to maintain a total English population of 6 million people.2
And in 1793 William Godwin, the founder of anarchism, reckoning that only one Englishman in twenty was a peasant, calculates that, had all worked in the same way, only half an hour’s work a day would have sufficed.3
But, among other things, he overlooks the contribution of the manufacturing sector to the high productivity of the countryside.
The surplus conception continued to be considered obvious by all economists, until the late 19th century, when non-Socialists abandoned it for its dangerous correspondence to the Marxist claim that the working class produces surplus value, which is then appropriated by idle capitalists. And they moved en masse to the new ‘marginalistic’ ideas.
And this change dictated by political reasons, apart from giving rise to elegantly unsubstantial mathematical ruminations, has greatly worsened the understanding of economic phenomena.
1 Source OECD, reported in Ip Greg, When Presidents Defy Economic Gravity, Gravity Usually Wins, in Wall Street Journal, 7 December 2016.
2 PETTY, The Petty Papers, vol. II, p. 238.
3 GODWIN, An Enquiry Concerning Political Justice, pp. 822-823.
16. The amazing capacity of the service sector to expand
The difference between the real and imaginary economy corresponds to a large extent to the difference between the work done by a blue-collar or farm worker and that done by a white-collar worker or manager.
Now, goals and results of the former can be understood and described in simple, clear words, which helps to make their work more efficient and productive and to reduce their numbers too. Instead for white-collars and managers longer and much more complex explanations are needed.
The fact is that farm and blue-collar workers have to deal with ‘things’, while white-collars and managers deal with men and institutions: a context in which problems can emerge that are much stranger and more complex than those ‘found in nature’.
But the fact that it is difficult to describe the function of these workers in simple words, and therefore also to accurately measure their productive contribution, makes the service sector a perfect breeding ground for the imaginary economy: a large sponge that can readily absorb huge masses of unproductive workers.
It is precisely because no one knows how to measure their ‘productive contribution’ that it becomes possible to pack the service sector with unproductive workers, without openly infringing the conception that a job is offered and paid only insofar as, directly or indirectly, it is useful for producing concrete goods or really useful services.
This has all become technically possible thanks to the new abundance of goods procured by technological advances, which make it possible to supply with paid jobs the many who want them, without their actually contributing further to production.
Indeed, if such jobs instead of producing goods were to consume them, paradoxically, up to a point, they would stimulate the economy!
It is a somewhat complicated, but all things considered effective, way of distributing a country’s global product to its population without upsetting traditional ideas on the way things are functioning.1
That is: the imaginary economy’s growth is the path of least moral–ideological resistance2 human culture has taken to deal with the over-fast expansion of technological productivity.
These developments are ‘conservative’: meaning that they keep the surface of reality, where the bulk of the population must continue working, as stable as possible, notwithstanding that the underlying logic of the economic system is radically changing.
And the complexity employees and managers have to deal with is an effective smokescreen that allows unproductive workers to remain proudly convinced that they are in some way productive.
Even if the most thoughtful among them might be disturbed by disquieting doubts on the matter: doubts which could never occur to farm or blue-collar workers who see the results of their work before their eyes.
1 These ideas are perfectly represented by the neoclassical economists’ unreal idea that the income of each one – wages, interest, rents, profits – is allocated to him by the market system precisely on the basis of the contribution he makes to production. But, in order to appear credible, this conception stands on the concept of ‘capital’, a metaphysical entity, whose size can only be established by the curious mathematical condition that it perfectly justifies the income obtained from its owner. Cf. Fabbrica delle illusioni, pp. 183-184 and 194.
Perceptive observers have, however, long recognised that other, quite different logic are often well visible, which refer to the rank differences in the social pyramid. An anonymous author in 1821: “Men of law, members of the clergy and doctors generally belong to families of landowners, or people of equal distinction. Their reward will be proportionate to the rank that they are deemed to hold in society.” RAVENSTONE, A Few Doubts on the Subjects of Population and Political Economy, p. 330, cf. Fabbrica delle illusioni, p. 148.
2 A similar logic of least effort is clearly visible even in the conceptual production of an era compared to the previous one. See Fabbrica delle illusioni, p. 45.
17. The imaginary economy distributes the products of the real economy in society
The difference between the imaginary economy and the real economy was already fairly well identified by Adam Smith, who designates as ‘productive’ only activities which create tangible goods1 and not services, thus making a distinction that roughly corresponds to our own.
From the chapter on Smith in Fabbrica delle illusioni:
Imagine a town whose economy depends exclusively on two large businesses: a manufacturing company and a large bank, each with its own universe of suppliers and customers.
According to Smith the manufacturing company belongs to the productive sector but not the bank, while his successors dropped this crucial distinction.
If, however, the manufacturing company were to close its doors, overcome by more able competitors in other regions, the town would see a drastic downturn in its fortunes, whereas i
f the bank were to close, the effect could be much less serious.
What is the reason for this difference?
To understand, we need to look at the town as at a small autonomous state and reflect on its balance of trade with the rest of the world.
The small state pays for its imports of agricultural produce with its exports of manufactured goods. The bank does not play an economic role toward the outside, but distributes wages or interest toward the inside with which inhabitants purchase the goods produced by the factory or the food that arrives from abroad.
Now, if the company were to close, the true source of the town’s wealth would vanish and the bank would also close, rendered unable to distribute income.
But if the bank were to find itself in trouble while the company continued to produce and sell, other possibilities could be found to keep things going, maybe more efficiently than before.
And the fact that the company produces tangible things is by no means irrelevant, because material goods, being physically transferable from one place to another, can obtain other goods in return, while the main effect of the production of services by the bank is the distribution of available goods among the town’s inhabitants.
So, ultimately, the population obtains all their consumer goods – whether local manufactures or imported food – precisely from those activities Smith calls “productive”.2
The difference between the factory and the bank corresponds closely to that between the real and the imaginary economy as, for the inhabitants of the city, they play very different roles: the first mostly creation and the second nearly only distribution of goods.
But this fundamental distinction was lost during the following century, when the industrial revolution set in motion the huge inflation of the services sector and the champions of the new developments immediately proceeded to correct the master.
Here is John McCulloch who, focusing on a borderline case, reassesses all the people employed in services as gloriously productive too:
To produce a fire, it is just as necessary that coals should be carried from the cellar to the grate, as that they should be carried from the bottom of the mine to the surface of the earth. And if it is said, that the miner is a productive labourer, must we not also say of the servant, who is employed to make and mend the fire?3
We, however, repeat that in awarding ‘merit’ for the production of tangible assets there is always an inescapable margin of ambiguity: the most simple and spontaneous way is to attribute it to whomever – say, the worker or peasant – has played the most direct part in their preparation, but numerous other people can claim a greater or lesser part of it.
In fact, the worker or the peasant manage to produce only because there is an adequate context around them. So in a factory maintenance personnel, supervisors, payroll officers… are also entitled to be called productive.
But that is not all: for everybody to be able to produce and even to have a reason to produce without being deprived of the fruits of their toil, there must be a sufficient degree of civil order.
Then whoever has contributed in any way to the maintenance of a peaceful environment can object that without his contribution production would have been, in principle, smaller.
So how can we deny that the work of a magistrate or a policeman4 is productive? And what about the upright individual who sets an example to others with his irreprehensible behaviour?
We will not dwell here on the tax system although it is one of the main channels fuelling the imaginary economy since the clarifications would require too much space because of the inherently contentious and manipulative nature of the subject.
But, although the presence of the imaginary economy complicates the circulation of incomes in society, the material burden of taxation is ultimately and necessarily borne by the real economy as the only social sector productive of material goods.
The situation recalls the French physiocrats who claimed that, since all the country’s “wealth” came from cultivating the land, only the net product of land should be the subject of taxation.
Collecting all taxes directly from agricultural produce, would also have eliminated the appearance of worthy sacrifice the non-agricultural sector was earning for just turning over to the State resources which, in the role, so to speak, of tax collector it had obtained from agriculture.
Even today, in the same way, taxes paid outside the real economy feed widespread, but superficial and unrealistic, beliefs on “Who really pays taxes?” For some clarifications see Story of the Ylati land, in the Appendix here.
1 Smith thought that only a physical object can accumulate the metaphysical entity ‘value’ which he considered generated by human labour: cf. Wealth of Nations, II.iii.1. In this way he remained aligned with the concepts of the previous “mercantilist” authors he attacked so harshly on other fronts. But they too focused only on material goods, because were concerned with the country’s commercial balance, namely the with the import-export of goods.
2 Fabbrica delle illusioni, pp. 90-91 with minor amendments.
3 MCCULLOCH, Principles of Political Economy, p. 407.
4 McCulloch follows this very line of thought, to classify as productive the judges and State officials which Smith had qualified as unproductive: McCulloch, Principles of Political Economy, p. 411 ff.
18. The unstoppable growth of excipient costs
Let us now examine some aspects of the imaginary economy: we will look at the overall logic without going into detail on specific areas, however interesting, such as – among those I have directly experienced – information systems and finance, the very sector whose primacy in the creation of complex and inconsistent fantasies must, in my opinion, be recognised due to the ease with which it extracts income from the economy for its ‘workers.
In this analysis I am supported by decades of personal observations first as an employee in a big company, and later as an entrepreneur in a small business, world pioneer of the online trading industry.
The following short story provides some elucidation on how complaisance fuels the imaginary economy:
An extremely parsimonious industrialist patents and builds a highly efficient mousetrap which costs him $2, including manufacturing, sales and shipment, but sells for $10.
If the industrialist in one year sells $1million worth of traps, his margin will be $800,000. After deducting $100,000 for expenses – say 20,000 to pay a part-time accountant and 80,000 for a few other overheads - he is left with a gross income of about $700,000 and, after paying 30% in taxes, with a profit of $500,000.
Now, suppose that there is an exorbitant growth in sales from $1 million to $1 billion! Economists say that profit should grow more than proportionally because of the famous “economies of scale”.
For example, administrative and accounting duties would cost far more than the $20,000 that they formerly did, but much less than the $20 million computed through linear extrapolation. So, can we presume that the profit would exceed $500 million?
Absolutely not; in the real world a small operator who earns 50% on turnover might escape public attention, but not a very large operator.
If a similar situation were to begin taking shape, the pressure from outside to obtain part of the income would immediately become very strong, and would even be helped by the fifth column in the form of the complaisance of company managers. A realistic scenario:
In addition to the many requests for philanthropic works and ventures that would really bring prestige to the company, sellers of goods and services turn up in throngs, keen to provide amazing improvements to working processes, and numerous tall, smiling candidates for managerial roles come forward eager to extend the glorious mousetrap revolution worldwide.
The old accountant is still on the job but is now called Controller, he has been given a massive rise in salary and fringe benefits, to match his much
greater responsibilities, and also a large staff to monitor compliance with fiscal and normative requirements. “Regulations on traps and rodents are in constant evolution and we certainly cannot be unprepared.”
It has also been necessary to hire managers for personnel and training functions, with adequate staff and budget, a legal department and a marketing division, as well as a public relations office. Even a studies office is now under consideration.
And nearly all the existing company’s departments are demanding new hires and more investments.
So, when office staff and managers become even more numerous, it will be time to open new, elegant headquarters.
And even if mousetrap production remained the same as before, how could the wage demands and working conditions of the blue-collars not take into account the fact that their interlocutor seems to be on his way to earning an absurd fifty percent on sales?
Even those who normally do not sympathise with Karl Marx would judge this a very clear case of exploitation.
Let’s ask ourselves a question… would a normal, tremendously profitable entrepreneur put up a staunch resistance to all the demands he receives?
Would he be able to reject the high social esteem that would accrue to him in his capacity as a great and beneficent employer?
It is very unlikely. In fact we can even calculate approximately how much a normal entrepreneur would increase his costs…
If revenues are $1 billion, then $300 million might be considered a socially acceptable profit before tax. More if the local culture is very individualistic.
Therefore, if the costs of a hypothetical absolutely efficient management were 250 million, to stave off the demands of society at large it will be necessary to procure about 450 million of excipient costs.