Equality for the labour market: An appreciation of WH Hutt

Throughout his entire professional life, W. H. Hutt attacked conventional wisdom. In his first professional article (Hutt, 1926), he defended the British factory system of the early nineteenth century against the muckraking attacks of socialists, journalists and politicians. According to Hutt, that system did not exploit workers, it gradually liberated them from the “abject poverty” to which the working classes had long been consigned. Moreover, he continued, the legislation passed by Parliament supposedly to ameliorate the excesses of the system, were actually passed at the behest of elite interests whose status was threatened by the entrepreneurship driving the factory system. As we would say today, the British Factory Acts were egregious examples of rent-seeking at the expense of the general welfare...

Hutt’s labour marketprocess theory

Hutt clearly recognised the centrality of entrepreneurship in the labour market process:

“The most vital economic decisions are ‘entrepreneurial’ decisions: They are made within an institutional framework of custom, law and knowledge.... These decisions which are being continuously made, are in every case concerned with retaining, replacing, accumulating, or decumulating the physical resources employed in various possible combinations, in certain specific activities, together with the retraining, recruiting or displacing of labour in accordance with this process. Now, the use of capital equipment, materials and labour in any activity will not occur unless some entrepreneurial remuneration is deemed possible for every increment of resources invested in that activity (STS, pp. 3-4).”

He also recognised the importance of alertness and uncertainty to entrepreneurship:

“[I]t is realistic to regard entrepreneurs ascontinuously vigilant ... in their efforts to observe and interpret the facts about current changes in the composition of consumer preferences and the availability of different kinds of means for their satisfaction. These facts, which are the data of business prediction, are frequently in the form of probabilities. They are used to determine both the prospective profitable prices for outputs and the costs which it is prospectively profitable to incur (STS, p. 127, emphasis added).”

Like Kirzner, he thought of entrepreneurship as the ultimate source of all productivity. In a section entitled “‘Labour productivity’ is often a misnomer,” in the second edition of TCB, he wrote:

“Excluding managerial ingenuity and acumen, it is doubtful whether human skills relevant to the goods and services which contribute to the well-being of mankind have improved one iota since the beginning of the industrial age (TCB, p. 91).”

Hutt categorised the economic agents in his labour market process theory in Chapter 15 of STS, where he discussed the impossibility of “bringing the categories and concepts which economists have found useful into close correspondence with the cruder categories and concepts with which the statistician must be content” (STS, p. 218). His concern here and in the next chapter was to explain the determinants of labour’s absolute and relative shares of national income. Empirical studies done over many years, by many economists, many of whom would have dearly loved to demonstrate that unions have raised both labour’s absolute and relative shares, uniformly have shown that labour’s relative share has remained almost constant for the last 150 years or more. While labour’s absolute income has increased, so too have the incomes of all economic agents, and there is no empirical proof that unions are responsible for any of it (Chapter 16).

Hutt agreed with “earlier economists” who classified ‘agents of production’ as ‘land, labour, capital and enterprise’” (STS, p. 219). He used “enterprise” and “entrepreneurship” as synonyms. He then said that contemporary economists, in trying to measure returns to the various agents of production, put land together with capital and treat the return to enterprise as part of the return to capital. This is all right, he said , because “asset owners” (owners of land and capital) are usually the entrepreneurial risk bearers because, unlike workers, they are better able to diversify risks. He went on to say:

“But properly visualised, entrepreneurial remuneration is neither remuneration of capital nor remuneration of labour. It may accrue to either (positively as profits or negatively as losses) according to which assumes the risk of the entrepreneurial decision turning out to have been wise or lucky (or unwise or unlucky). Those earlier economists showed real insight who classified entrepreneurship separately, as ‘enterprise,’ an agent of production distinct from the other three agents – land, labour, and capital. For the yield to ‘enterprise,’ namely ‘profit,’ is payment by results [the residual claim] for the most important function that is performed on behalf of the community – prediction and responsible action to determine the composition of the stock of assets and/or valuable skills. Through this function, entrepreneurs determine the form of economic activity (STS, p. 219).”

It is the entrepreneur – whether capitalist, landowner or worker – who directs the deployment of resources in accordance with profit opportunities arising from perceived consumer demands. Kirzner would say that the entrepreneur is “alert” to those profit opportunities, but it is the same idea. Kirzner would also say that entrepreneurship cannot be an agent (factor) of production in the same sense as land, labour and capital are because it is impossible to hire more or less entrepreneurship. In this respect Hutt treated entrepreneurship like T. W. Schultz does (Schultz, 1975). Kirzner was very critical of Schultz on this point (Kirzner, 1985, Chapter 1), but it is not crucial for my thesis. What is important is that Hutt clearly saw the profit-seeking, loss avoiding activities of entrepreneurs as the spark plugs that make the market process work.

SOURCE: This policy bulletin is an extract from FMF Monograph written by Charles W Baird and may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

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