JDN 2457308 EDT 15:31

Robert Reich has an interesting proposal to change the way we think about labor and capital:
“First, are workers assets to be developed or are they costs to be cut?” “Employers treat replaceable workers as costs to be cut, not as assets to be developed.”

This ultimately comes down to a fundamental question of how our accounting rules work: Workers are not considered assets, but wages are considered liabilities.

I don’t want to bore you with the details of accounting (accounting is often thought of as similar to economics, but really it’s the opposite of economics: Whereas economics is empirical, interesting, and fundamentally nonzero-sum, accounting is arbitrary, tedious, and zero-sum by construction), but I think it’s worth discussing the difference between how capital and labor are accounted.

By construction, every credit must come with a debit, no matter how arbitrary this may seem.

We start with an equation:

Assets + Expenses = Equity + Liabilities + Income

When purchasing a piece of capital, you credit the equity account with the capital you just bought, increasing it, then debit the expense account, increasing it as well. Because the capital is valued at the price at which you bought it, the increase in equity exactly balances the increase in expenses, and your assets, liabilities, and income do not change.

But when hiring a worker, you still debit the expense account, but now you credit the liabilities account, increasing it as well. So instead of increasing your equity, which is a good thing, you increase your liabilities, which is a bad thing.

This is why corporate executives are always on the lookout for ways to “cut labor costs”; they conceive of wages as simply outgoing money that doesn’t do anything useful, and therefore something to cut in order to increase profits.

Reich is basically suggesting that we start treating workers as equity, the same as we do with capital; and then corporate executives would be thinking in terms of making a “capital gain” by investing in their workers to increase their “value”.

The problem with this scheme is that it would really only make sense if corporations owned their workers—and I think we all know why that is not a good idea. The reason capital can be counted in the equity account is that capital can be sold off as a source of income; you don’t need to think of yourself as making a sort of “capital gain”; you can make, you know, actual capital gains.

I think actually the deeper problem here is that there is something wrong with accounting in general.

By its very nature, accounting is zero-sum. At best, this allows an error-checking mechanism wherein we can see if the two sides of the equation balance. But at worst, it makes us forget the point of economics.

While an individual may buy a capital asset on speculation, hoping to sell it for a higher price later, that isn’t what capital is for. At an aggregate level, speculation and arbitrage cannot increase real wealth; all they can do is move it around.

The reason we want to have capital is that it makes things—that the value of goods produced by a machine can far exceed the cost to produce that machine. It is in this way that capital—and indeed capitalism—creates real wealth.

Likewise, that is why we use labor—to make things. Labor is worthwhile because—and insofar as—the cost of the effort is less than the benefit of the outcome. Whether you are a baker, an author, a neurosurgeon, or an auto worker, the reason your job is worth doing is that the harm to you from doing it is smaller than the benefit to others from having it done. Indeed, the market mechanism is supposed to be structured so that by transferring wealth to you (i.e., paying you money), we make it so that both you and the people who buy your services are better off.

But accounting methods as we know them make no allowance for this; no matter what you do, the figures always balance. If you end up with more, someone else ends up with less. Since a worker is better off with a wage than they were before, we infer that a corporation must be worse off because it paid that wage. Since a corporation makes a profit selling a good, we infer that a consumer must be worse off because they paid for that purchase. We track the price of everything and understand the value of nothing.

There are two ways of pricing a capital asset: The cost to make it, or the value you get from it. Those two prices are only equal if markets are perfectly efficient, and even then they are only equal at the margin—the last factory built is worth what it can make, but every other factory built before that is worth more. It is that difference which creates real wealth—so assuming that they are the same basically defeats the purpose.

I don’t think we can do away with accounting; we need some way to keep track of where money goes, and we want that system to have built-in mechanisms to reduce rates of error and fraud. Double-entry bookkeeping certainly doesn’t make error and fraud disappear, but it at least does provide some protection against them, which we would lose if we removed the requirement that accounts must balance.

But somehow we need to restructure our metrics so that they give some sense of what economics is really about—not moving around a fixed amount of wealth, but making more wealth. Accounting for employees as assets wouldn’t solve that problem—but it might be a start, I guess?