Adam Smith’s Fallacy of Productive Labor
By Peter Clark
Adam Smith was the brilliant moral philosopher who dispelled us of the persistent myths of mercantilism. However, as prescient as Smith was, he was far from being above reproach. One example was his inability to solve the Diamond-Water Paradox. Smith being unable to explain the Diamond-Water Paradox was not his only shortcoming. In his economic treatise, The Wealth of Nations (Book II, Chapter III) (1776), Smith surmises that any work that does not result in producing tangible goods is unproductive labor.
Smith writes: “...The labor of some of the most respectable orders in society…unproductive of any value.. does not realize itself in any…vendible commodity..”(p.423). Smith was even bold enough to add lawyers and physicians to the list of unproductive contributors in the workforce. This mistake is a corollary of the labor theory of value, the same principle that hindered his ability to address the value paradox. The value of a product or service is not determined by the amount of labor required to produce it but by whether consumers value it. If consumers values an intangible service and firms can provide such services and yield profits, then whether the enterprise creates tangible goods is immaterial.