[lbo-talk] "high value added labor"

SA s11131978 at gmail.com
Sat Nov 1 04:05:42 PDT 2008


Sean Andrews wrote:


> I'm trying to work out a few aspects of the phrase (and concept) "high
> value added labor" as it is use in mainstream, particularly
> international or transnational economics.

I actually think the term is pretty useful. You're right, it is a concept based on market prices. The basic idea is simple: If you live in a market economy, you would rather engage in activities that people are willing to pay more money for. In principle it applies to domestic transactions as much as to international trade: For example, as a consumer, you would probably be willing to pay more money for one hour of the labor of a highly skilled auto mechanic than for one hour of the labor of somebody to mow your lawn. Therefore, as a *producer*, you would probably rather *be* an auto mechanic than be a guy who mows lawns. Analogously, the Chinese would rather that their workers be the international equivalent of auto mechanics (e.g., designing circuit boards) than the equivalent of lawn-mowers (e.g., assembling circuit boards).

By definition, value added is (essentially) wages-plus-profits, so it applies equally to labor and capital. Or, put another way, value added equals the value added by labor plus the value added by capital. The equivalent of "skills" for capital is (essentially) "technological rents" - just as skilled workers earn more in part because their skills are scarce, capital invested in activities embodying technological rents earns a higher return because, by definition, "high technology" firms have less competition; relatively few firms/entrepreneurs have figured out how to carry out high-tech production processes. The equivalent of lawn-mowing for capital is what's called "commodity businesses": lines of production that are so easy to master, that embody so little scarce technological knowledge, that a very large number of producers are in the market, so many that there's essentially perfect competition and they're all price-takers. For example, you often hear that the manufacture of certain kinds of computer chips has "become a commodity business."

I think your example of branded goods, where the brand was built up over many years, is just a special case of high-value added capital. In this case the capital is the brand, it embodies rents, but they're not so much technological rents as monopoly rents from patents and trademarks. (Usually technological rents and patent rents are somewhat hard to disentangle since patents usually embody some "technology," loosely defined, that the patent-holder invented or discovered first.) But I don't think you should let that special case distract from the basic point that any country (or subnational region) operating in a market economy would normally want its workers to have scarce skills and its capitalists to command scarce technologies, so that both can generate rents. That means "moving up the value chain."

As for the origins of the term, the OED says "value added" was first used in 1935 in connection with the development of the concept of a value-added tax:


> 1935 Social Research II. 161 We may call the value added tax a
> ‘refined sales tax’. Ibid., A tax which chooses as its basis of
> assessment the sales after deduction of all expenses for raw material
> and for repair or replacement of equipment, that is, a tax on the
> ‘value added by manufacture’.

But the concept of value added is ancient, going back at least to the 17th century mercantilists, who were interested in precisely the international division of labor. Here's something I wrote a few years ago. Sorry for any formatting messiness:


> In England, the first major capitalist power, the nationalist view
> began to gain ground in economic thought and policy in the fourteenth
> century. Statesmen and economic writers rebelled against the pattern
> of trade that had prevailed in earlier centuries, when British exports
> were largely composed of raw materials, primarily wool, tin, corn and
> leather. An early example of the new line of thinking was the policy
> of Edward III (1327-77) to promote the development of a domestic
> wool-cloth manufacturing industry, in part through a ban on the import
> of cloth from the Low Countries, then the leading textile
> manufacturing region.^^[1] <#_ftn1>
>
> “From the fourteenth to the seventeenth century, English public
> opinion had progressively aligned itself in favor of a foreign-trade
> policy which discouraged the exportation of ‘unwrought’ commodities
> but sanctioned and encouraged the exportation of ‘wrought’ or
> fabricated goods.”^^[2] <#_ftn2> This intellectual trend reached full
> flowering with the mercantilist economic literature of the sixteenth
> and seventeenth centuries. Although mercantilism is often described
> simply as advocating an /overall /balance of trade surplus and the
> accumulation of precious metals, in fact the /composition /of trade
> had, by the seventeenth century, taken center stage in its economic
> analysis.
>
> An overwhelming preference for manufactured over unfinished
> commodities pervades the mercantilist literature. In his history of
> international trade theory, Douglas Irwin summarizes the trend this
> way: “Virtually all mercantilists would agree with the following
> proposition: exports of manufactured goods were beneficial and exports
> of raw materials (for use by foreign manufacturers abroad) were
> harmful; imports of raw materials were advantageous and imports of
> manufactured goods were damaging.”^^[3] <#_ftn3>
>
> The mercantilists were not, on the whole, sophisticated economic
> thinkers by the standards of later political economists. But in 1713,
> a heated debate over a proposed commercial agreement with France (part
> of the Treaty of Utrecht, ending the War of the Spanish Succession)
> forced them to make an attempt at injecting analytical substance into
> their account of why manufactures, and not raw materials, were
> superior exports. The controversy, which concerned proposals to
> abolish a series of protective duties on French goods that had been
> established at the turn of the century, played out in parliament and
> in the pages of two opposing political journals: the Tory-controlled
> /Mercator/, which hired Daniel Defoe to construct arguments defending
> the agreement; and the Whig-aligned /British Merchant/, funded by
> businessmen, which argued against the treaty.
>
> At the heart of the argument mustered by the mercantilist opponents
> was the novel concept of “foreign-paid incomes.” Although now largely
> forgotten, this theory is notable as one of the earliest arguments for
> the superiority of manufacturing over agriculture. According to the
> doctrine, when one country purchases a good from another, it is paying
> for the labor embodied in that good. The more labor embodied in the
> goods exported by a country, the more domestic employment is being
> supported by foreign consumers. The goal of trade policy should be to
> maximize the amount of domestic labor paid for by foreigners and
> minimize the amount of foreign labor paid by for by the home country.
> Since manufactured exports were believed to embody more labor than raw
> materials exports, the benefits of the former were taken to be
> evident. “The trade of that country which contributes most to the
> employment and subsistence of our people and to the improvement of our
> lands is the most valuable,” wrote Charles King, editor of the
> /British Merchant/.^^[4] <#_ftn4> Rather than try to maximize the
> overall balance of trade, therefore, a country ought to focus on the
> “balance of labor.”^^[5] <#_ftn5>
>
> Despite the lack of sophistication in their analysis, the
> balance-of-labor theorists were widely regarded as getting the better
> of the argument with the Tories. (“The level of argument on both sides
> was low,” in the judgment of the economic historian Jacob Viner.^^[6]
> <#_ftn6>) Moreover, in the years since the tariffs in question had
> first been established, new lines of British industry in silk, linen
> and white paper had sprung up, creating vested business interests in
> support of continued protection. These new interests, along with the
> mercantilists’ balance of labor doctrine, “may have exerted the
> decisive pressures that caused a House of Commons that was politically
> oriented towards making a long-term settlement with France to throw
> out these commercial clauses of the Treaty of Utrecht.”^^[7] <#_ftn7>
>
> The mercantilist view of the commodity composition of trade had
> triumphed so completely in British policy that by 1721 prime minister
> Robert Walpole, delivering the king‘s address to parliament, could
> declare: “It is evident that nothing so much contributes to promote
> the public well-being as the exportation of manufactured goods and the
> importation of foreign raw material.”^^[8] <#_ftn8>
>
>
>
> In 1787, a trade treaty with France, similar in intent to that which
> had been rejected in 1713, was shepherded through the House of Commons
> by Prime Minister William Pitt the younger. In parliament, Pitt
> conceded that the Whigs had probably been right to oppose the earlier
> agreement. But since that time “conditions had changed decisively,” as
> Semmel notes. Because of Britain’s rapid increase in manufacturing
> strength, it was now “in a position in which she had little to fear
> from a freer trade.” Indeed, “the manufacturers who had always fought
> to maintain trade restrictions…did not object to [Pitt’s] French
> proposals.”
>
> In arguing for the bill, Pitt informed the House that “it was in the
> nature and essence of an agreement between a manufacturing country and
> a country blessed with peculiar productions [raw materials] that the
> advantages must terminate in favor of the former.” Because “the
> excellence of our manufactures [is] unrivalled,” he continued, “the
> operation [of the treaty] must give the balance to England.”^^[9]
> <#_ftn9> Pitt’s economic views were taken largely from his political
> mentor Lord Shelburne who, in turn, had imbibed the ideas of the
> economic writer and clergyman Josiah Tucker, Dean of Gloucester. In
> 1774, Tucker had formulated what he described as a “law” governing the
> wealth of nations:
>
> “That /operose/, or /complicated Manufactures /are cheapest in rich
> Countries;--and /raw Materials /in poor ones: And therefore in
> Proportion as any Commodity approaches to one or another of these
> /Extremes/, in that Proportion it will be found to be cheaper, or
> dearer, in a rich, or poor Country.”^^[10] <#_ftn10>
>
> In other words, nations adept at producing complicated goods become
> rich, while countries abounding in simpler goods, including raw
> materials, remain poor.^^[11] <#_ftn11>
>
>
> ------------------------------------------------------------------------
>
> ^^[1] <#_ftnref1> Ha-Joon Chang, /Kicking Away the Ladder: development
> strategy in historical perspective/. (London: Anthem Press, 2002), 20.
>
> ^^[2] <#_ftnref2> E.A.J. Johnson, “British Mercantilist Doctrines
> Concerning the ‘Exportation of Work’ and ‘Foreign-Paid Incomes.’”
> /Journal of Political Economy /40 (1932), 751, 752.
>
> ^^[3] <#_ftnref3> Irwin, 38-39. For example, a 1695 pamphlet by John
> Cary asserted: “That trade is advantageous to the kingdom of England
> which exports our product and manufactures [and] which imports to us
> such [unfinished] commodities as may be manufactured here, or be used
> in making our manufactures…[I]t would be great wisdom of our
> government to regulate all foreign trades by such methods as may best
> make them useful in the promoting our manufactures.”
>
> ^^[4] <#_ftnref4> Irwin, 40.
>
> ^^[5] <#_ftnref5> This phrase was used by the mercantilist pamphleteer
> James Steuart. Johnson, 761.
>
> ^^[6] <#_ftnref6> Cited in Johnson, 768.
>
> ^^[7] <#_ftnref7> Ralph Davis, “The Rise of Protection in England,
> 1689-1786,” /Economic History Review/ 19 (1966), 309.
>
> ^^[8] <#_ftnref8> Chang, 21.
>
> ^^[9] <#_ftnref9> Semmel, 38-40.
>
> ^^[10] <#_ftnref10> Semmel, 16.
>
> ^^[11] <#_ftnref11> Semmel, 14-20, 206.
>



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