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ECONOMICS HONOURS SEMINAR PAPER

PRODUCTIVE CONSUMPTION: CAPITAL GOODS AND PRODUCTIVE CAPACITIES

TEJASWINI KATE SYBA (A) ROLL NO.56

CONTENTS
Preface SECTION I: Productive Consumption an Overview 1. What is productive consumption? 2. An example from the Keynesian purview 3. How is it different from non-productive consumption? 3 4

SECTION II: Relevance of Productive Consumption 1. Intrinsic relation to labour economics & GDP accounting 2. Capital goods 3. Creation of productive capacities 4. Productive Chains

SECTION III: Conclusion Appendix: Synopsis

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SECTION IV: Bibliography

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PREFACE

Production and consumption are two inseparable aspects of the production and reproduction of human life, but in modern society these concepts have become separated. Production and consumption are identical in another way: production consumes labour-power and other products of labour, and is therefore equally consumption; production of labourpower entails consumption of food, education and so on and so forth, and is therefore equally consumption. Thus production of the means of production is impossible without production of the means life and vice versa, and the system of distribution and exchange must ensure the proper balance between the two. Thus the system of distribution and exchange, which mediates between productive consumption and consumption in production, is not just an entity external to production, but an integral part of the relations of production. The failure of the method of distribution and exchange to maintain proper coordination of consumption and production leads to crisis. Further, the system of distribution and exchange (commerce) is not only inseparable from production and consumption (labour) but the system of distribution and exchange is one of the forces of production, production is constituted the cooperation of labour and therefore potentially in the exchange of labour and thus the system of distribution and exchange necessarily penetrates the labour process and becomes a part of it.

SECTION I

What is productive consumption? Productive consumption adds to utility and income at the same time. The shadow price of a productive good is equal to its money price less its marginal product. As more of the good is consumed, its shadow price rises because of diminishing productivity, and the consumer's full income also rises because the marginal product is positive. Productive consumption enables the satisfaction of current needs and simultaneously increases the productive potential of labour. From the perspective of growth theory, the productive-consumption hypothesis is of fundamental interest because it modifies the harsh inter-temporal consumption trade-off traditionally assumed. Gersovitz (1988) distinguishes three forms of productive consumption: (A) Nutrition, (B) Health (C) Education All three forms serve the satisfaction of current needs, and, consequently, can be labelled as consumption expenditures; though occasionally this might be assessed differently in the case of education. Simultaneously, the efficiency of labour or depending on the interpretation the stock of human capital increases. From this point of view, the underlying consumption expenditures can be classified as productive. Gersovitz (1988) expresses this notion as follows: Health and nutrition expenditures share some attributes of educational ones; they affect welfare beyond the period when they are made. To a much greater extent than in the case of education, however, these expenditures also affect current well-being, and it would be impossible to devise a convincing allocation of these expenditures between current and future consumption. For instance, at low nutritional levels, food consumption has joint effects on current and future well-being and productivity.

Productive consumption, when employed as a technical term, is commonly defined as the use of wealth in the production of further wealth; and it should properly include not all the consumption of productive workers, but only that which is necessary for their efficiency. For consumption is the end of production; and all wholesome consumption is productive of benefits, many of the most worthy of which do not directly contribute to the production of material wealth. Productive Consumption increases human capacity; for example education provides a consumer good and simultaneously enhances an individuals productive capacity. Medical care, social services also fall under the same category. Productive consumption enables the satisfaction of current needs and, at the same time, increases the productive potential of labour. Theoretical as well as empirical evidence suggests that productive consumption is primarily relevant to low-income countries. From the perspective of growth theory, the productive consumption hypothesis is of fundamental interest because it modifies the "harsh" inter-temporal consumption trade-off traditionally assumed Productive consumption enables the satisfaction of current needs and, at the same time, increases the productive potential of labour. As a consequence, the potential for the satisfaction of future needs rises. Two interpretations of the productive effect of consumption can be distinguished: First, a rising level of per capita consumption can be considered to increase the efficiency of labour. Second, a rise in the level of per capital consumption can, on the other hand, be interpreted as increasing the stock of human capital [Blaug (1987)].

From the perspective of growth theory, the productive consumption hypothesis seems to be of fundamental interest because of two reasons: First, productive consumption essentially modifies, that is partially eliminates, the inter-temporal consumption trade-off. That is, as far as the possibility of productive consumption exists; the hypothesis of productive consumption does not assert that every consumption activity is productive. Second, theoretical as well as empirical evidence suggests a systematic, which is negative relationship between the level of per capita consumption and the marginal productive effect of consumption. Concentrating on the importance of productive consumption for economic growth does surely not intend to neglect the importance of other factors that undoubtedly influence growth and development,

e.g. the stability of the political system, the openness of the economy, or the development of the financial sector.

Productive vs. non-productive consumption: While productive consumption is an agent of economic growth, non-productive consumption leads to economic impoverishment. Hence, while productive consumption sustains wealth generators and promotes the expansion of real wealth, non-productive consumption only leads to economic impoverishment. Productive consumption is a production process in which the means of production (for example, the instruments of labour and raw and processed materials) and human labour power (physical and intellectual strength) are consumed. In nonproductive consumption, which takes place outside of production, the objects of consumption are used or finally consumed. Thus, products are created in productive consumption and disposed of in non-productive consumption. Printing money by the central bank produces exactly the same damaging effect as the counterfeit money does. Likewise the creation of money through fractional-reserve banking produces the same damaging effect. The expansion of money sets the platform for nonproductive consumption an agent of economic destruction. In the Keynesian framework, during a recession when consumers tend to lower their outlays, it is the duty of the government to step in and boost its expenditure. For instance, the government could employ various unemployed individuals to dig holes in the ground. The money that the government pays these workers will boost their consumption, and this in turn will lift the overall income in the economy. According to this framework, it doesn't really matter whether holes in the ground contribute to individuals' well-being; what matters is that people are getting paid and then using the money to boost consumption. Government doesn't earn money as such. It is not a wealth generator. So how then does it pay various individuals who are employed in non-wealth-generating projects? It secures the money through taxation, by asking the central bank to print money, or by borrowing. If we ignore overseas borrowings, it basically amounts to the diversion of wealth from wealth

generators to government activities. This is the same outcome achieved by printing money: it sets in motion non - productive consumption. Example of productive consumption: A baker exchanges his ten saved loaves of bread for ten potatoes. The potatoes are now sustaining or funding the baker while he is engaged in the baking of bread. Likewise the bread sustains the potato farmer while he is engaged in the production of potatoes. The respective production of the baker and of the potato farmer enables them to secure goods for consumption. What makes the consumption productive in this example is the fact that both the baker and the potato farmer consume in order to be able to produce. The consumption of both the baker and the potato farmer maintains their lives and wellbeing. This is the only reason for production. The introduction of money doesn't change what was said so far. For instance the baker can exchange his ten loaves of bread for Rs.10 he then uses money to secure ten potatoes. Likewise the potato farmer can now exchange his ten dollars for ten loaves of bread. Observe that, apart from fulfilling the role of the medium of exchange, money has contributed absolutely nothing to the production of bread and potatoes. Example of non-productive consumption: So far we have seen that to secure potatoes, the baker had to exchange bread for money and then employed money to secure potatoes. Something was exchanged for money, which in turn was exchanged for something else or something for something is exchanged with the help of money. Trouble erupts when money is created "out of thin air." Such money gives rise to consumption, which is not backed by any production. It leads to an exchange of nothing for something. For instance, a counterfeiter has printed a perfect Rs.20 note. Since he secured this money by means other than the production of some useful goods or services, the counterfeiter has therefore obtained the Rs.20 by exchanging nothing for it. The counterfeiter uses the Rs.20 to buy ten loaves of bread. What we have here is the diversion of real funding ten loaves of bread from a potato farmer towards the counterfeiter. Note that the diversion takes place by the counterfeiter paying a higher price

for bread he pays two rupees per loaf. Previously the price stood at one rupee per loaf. Also note that since the counterfeiter doesn't produce anything useful he is engaged in nonproductive consumption. The potato farmer is now denied the bread that he must have to sustain himself while he is producing potatoes. Obviously this will impair the production of potatoes. As a result, fewer potatoes will become available, which in turn will undermine the consumption of the baker, thereby impairing his ability to produce. Thus, we can see that, while productive consumption sustains wealth generators and promotes the expansion of real wealth, non-productive consumption only leads to economic impoverishment. SECTION II: Intrinsic relation to labour economics & GDP accounting: The only productive consumers are productive labourers, but not all consumption by productive labourers is productive consumption: that alone is productive consumption, which goes to maintain and increase the productive powers of the community. This idea goes back to the physiocrats: it is a notion that a certain quantity of consumer goods produced in the economy, namely wage goods must be fed back into the production of manpower itself in the household sector. Productive Consumption is simple an input to maintain human capital intact. If wages are at subsistence, the whole of the wages bill is required for productive consumption. However, workers do consume a certain quantity of luxuries, and in that sense the wages are consumed unproductively. The fact remains that consistent classical income accounting implies deducting all productive consumption from the gross national product to arrive at the true net national product, which consists simple of profits plus rent; the net product is entirely created by productive labour and is spent entirely on investment goods and true consumption goods i.e. non -wage goods. The point is however that only a society bent on maximising capital accumulation would want to adopt this kind of accounting, a major drawback being the segregation of wages into productive and unproductive parts.

Capital Goods and creation of productive capacities: The nature of productive consumption has been explained above. The value absorbed by it is what has been called Capital. The trader, manufacturer, and cultivator, purchase the raw material (The raw materials of manufacture and commerce are, the products bought with a view to the communication to them of further value. Calicoes are raw material to the calicoprinter, and printed calicoes to the dealer who buys them for re-sale or export. In commerce, every act of purchase is an act of consumption; and every act of re-sale, an act of production.) And productive agency, which they consume in the preparation of new products; and the immediate effect, is precisely the same as that of unproductive consumption, namely, to create a demand for the objects of their consumption, which operates upon their price, and upon their production; and to cause a destruction of value. But the ultimate effect is different; there is no satisfaction of a human want and no resulting gratification, except that accruing to the individual from the possession of the fresh product the value which replaces that of the products consumed, and commonly affords him a profit into the bargain. To this position, that productive consumption does not immediately satisfy any human want, a cursory observer may possibly object, that the wages of labour, though a productive outlay, go to satisfy the wants of the labourer, in food and raiment. But, in this operation, there is a double consumption, one of the capital consumed productively in the purchase of productive agency, wherefrom results no human gratification: Secondly of the daily or weekly revenue of the labourer, i.e. of his productive agency, the recompense for which is consumed unproductively by him and his family, in like manner as the rent of the manufactory, which forms the revenue of the landlord, is by him consumed unproductively. This does not imply the consumption of the same value twice over, first productively, and afterwards unproductively; for the values consumed are two distinct values resting on bases altogether different. The first, the productive agency of the labourer, is the effect of his muscular power and skill, which is itself a positive product, bearing value like any other. The second is a portion of capital, given by the adventurer in exchange for that productive agency. After the act of exchange is once completed, the consumption of the value given on either
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side is contemporaneous, but with a different object in view; the one being intended to create a new product, the other to satisfy the wants of the productive agent. Thus, the object, expended and consumed by the individual, is the equivalent he receives for his capital; and that, consumed unproductively by the labourer, is the equivalent for his revenue. The interchange of these two values by no means makes them one and the same. So likewise, the intellectual industry of superintendence is reproductively consumed in the concern; and the profits, accruing to the adventurer as its recompense, are consumed unproductively by himself and his family. In short, this double consumption is precisely analogous to that of the raw material used in the concern. The clothier presents himself to the wool-dealer, with Rs.1000 in his hand; there are, at this moment, two values in existence, on the one side, that of the Rs.1000, which is the result of previous production, and now forms a part of the capital of the clothier; on the other, the wool constituting a part of the annual product of a grazing farm. These products are interchanged, and each is separately consumed: the capital converted into wool, in a way to produce cloth; the product of the farm, converted into crown-pieces, in the satisfaction of the wants of the farmer, or his landlord. Since everything consumed is so much lost, the gain of reproductive consumption is equal, whether proceeding from reduced consumption, or from enlarged production. In China, they make a great saving, in the consumption of seed-corn, by following the drilling in lieu of the broad-cast, method. The effect of this saving is precisely the same, as if the land were, in China, proportionately more productive than in Europe. In manufacture, when the raw material used is of no value whatever, it is not to be reckoned as forming any part of the requisite consumption of the concern; thus, the stone used by the lime-burner, and the sand employed by the glass-blower, are no part of their respective consumption, whenever they have cost them nothing. A saving of productive agency, whether of industry, of land, or of capital, is equally real and effectual, as a saving of raw material; and it is practicable in two ways; either by making the same productive means yields more agency; or by obtaining, the same result from a smaller quantity of productive means.

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Such savings generally operate in a very short time to the benefit of the community at large; they reduce the charges of production; and in proportion as the economical process become better understood, and more generally practised, the competition of producers brings the price of the product gradually to a level with the charges of production. But for this very reason, all, who do not learn to economise like their neighbours, must necessarily lose, while others are gaining. Manufacturers have been ruined by hundreds, because they would go to work in a grand style with too costly and complex an apparatus, provided of course at an excessive expense of capital. There is almost insuperable difficulty in estimating with precision the consumption and production of value; and individuals have no other means of knowing, whether their fortune be increased or diminished, except by keeping regular accounts of their receipt and expenditure; indeed, all prudent persons are careful to do so, and it is a duty imposed by law in the case of traders.

Productive Chains: In boosting solidarity in productive chains, the organization of final and productive consumption is fundamental. The activity of consumer cooperatives and other organized consumer groups proves that by organizing themselves, consumers are able to increase their purchasing power and improve their quality of life, while at the same time -if they belong to solidarity-based networks- making it possible to commercialize the goods produced by solidarity-based ventures. Thus the novelty of this system is that productive chains can be boosted through a solidarity approach starting from the final and productive consumption, insofar as supply undertakings are selected according to technical, environmental and social considerations. That selection is based on the notion that the price paid by consumers for the final product not only spurs the production of the enterprises that sell the final product, but also indirectly spurs the production of the different operators that supply an input incorporated in the final product consumed or any other element used in the process of production of that good or service. Thus, the consumption of the final product is what enables companies

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Whose products are sold at one end of the chain to earn and reckon the profits corresponding to that part of the product consumed. Meanwhile, as the solidarity-based network boosts the productive chain, creating supply ventures, the profit that was previously accumulated in those segments of the productive chain becomes, thus, a surplus that goes back to feed the expansion of the network. In this way, a network that organizes ventures capable of generating a certain amount of surplus can grow by collectively reinvesting such surpluses, engaging in new ventures and boosting the productive chain of the final product itself. So, by selling the same amount of the final product, there can be a substantial increase in the number of workers in the network, the number of solidarity-based productive ventures, the volume of income distributed in the network as wages, the surplus generated in the network and its assets.
With the aim of promoting the correction of value flows, ensuring the well-being of consumers and increasing the possibilities of sustainable ventures, the proposal is to diversify the final product offering, allowing for base ventures to be simultaneously integrated into several solidarity-based productive chains. As a result of such multiple connections and network flows, these ventures become sustainable by receiving a significant volume of steady demand. In this way it is possible to generate the conditions necessary to progressively replace the relations of capitalist accumulation and to expand production and consumption relations based on solidarity, sharing the surplus generated, creating new jobs, increasing consumption among participants and developing a great diversity of products and services that ensure the well-being of all those involved in solidarity-based labour and consumption.

SECTION III CONCLUSION: Empirical evidence clearly indicates that productive inputs are not exclusively accumulated as a result of the renunciation of consumption. Especially at early stages of economic
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development, consumption can in a specific sense be regarded as a source of the accumulation of a productive input (human capital) and thus output growth.

In the end, the growth of capital and production can only be for the purpose of consumption. The growth of capital, or at least stock, driven by saving behaviour and expresses in the proportion between societys productive labour and its unproductive labour, is the prerequisite for expanding division of labour, increasing productive consumption and production.

APPENDIX SYNOPSIS: All the members of the community are not labourers but all are consumers and consume productively and unproductively.Whoever contributes nothing directly or indirectly to production is an unproductive consumer. What they consume in keeping up or improving
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their health,strength and capacities of work , or in rearing other productive labourers to succeed them is called Productive Consumption. This paper attempts to throw light on this phenomenon of Productive Consumption that has been cause for a lot of debate among economists as early as the 18th century. Through the paper the various facets of this angle of consumption is showcased. Numerous topics such as the, true meaning of the term, comparison with non productive or unproductive consumption, implications with respect to capital goods and creation of productive capacities, its relation to labour economics importance in productive chains are highlighted.

The research process would entail a thourough reading of various books, articles, research papers resulting in a complete secondary analysis of the topic in concern. The paper also seeks to question the basis of establishment of the theortical aspects of this fundamental idea and also aspires to explain its intricacies through various examples and diverse situations. Through the secondary research the paper attempts to delve into the various nuances of the the term- Productive Consumption by analysisng the various research papers, and attempting to compare and critique them so as to gain greater insight to this aspect of the consumptionproduction connundrum. The paper also attempts to trace the history of productive consumption through the ages and through pertinent, relevant, modern examples hopes to explain the term in the simplest and most uncomplicated manner as possible. The paper further hopes to enlighten the reader about this relatively unknown economic phenomenon and explain its relevance in the real world.

BIBLIOGRAPHY
1. Ackerman Frank, Human Well-Being and economic goals, Program for the Study of Sustainable Change and Development (Tufts University. Global Development and Environment Institute)

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2. Aspromourgos Tony, The science of wealth: Adam Smith and the framing of political economy.

3. August Hayek Friedrich, McCloughry Roy ,Money, capital & fluctuations: early essays, London School of Economics and Political Science 4. Blaug Mark, Economic theory in retrospect 5. Gupta Manash Ranjan, (2002) Productive consumption and endogenous growth: a theoretical analysis, Economic Research Unit, Indian statistical institute Calcutta, India. 6. Mance Euclides Andr ,( 2002) Solidarity-Based Productive Chains, IFiL, Curitiba,

7. Say, Jean-Baptist (1855), A Treatise on Political Economy, Philadelphia: Lippincott, Grambo & Co. 8. Steger ,Thomas,( 1997),Productive Consumption and Growth in Developing Countries 9. Gersovitz, Mark (1988), Saving and Development, Handbook of Development Economics, Volume I, H. Chenery and T.N. Srinivasan (eds.) Elsevier Science Publishers, 382-424.

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