Most people that I know, that is, that I choose to spend time with are suspicious of capitalism. This suspicion is not unfounded and here’s a brief explanation of why.
It goes all the way back to the ancients 2500 years ago, specifically to Aristotle. While strolling through the market he noticed something that made no sense. It goes like this:
Someone (the capitalist) has money (M) and buys some goods or commodities (C); in this case we’ll say he’s bought some grain. The capitalist then pays someone a wage to produce bread from grain. Now, the baffling part is that when the capitalist sells his new bread he gets more money than he started with (M’). This occurs even after you factor out the wage he paid the worker and the money initially invested.
Mathematically: the capitalist starts with $100, he pays $90 for the grain, pays $10 for the labor, sells his bread and ends up with $110.
The money is turned into a commodity then turned back into money, more money.
M -> C -> M’
This seems perfectly normal to us, but Aristotle, being a rigid logician, realized that having more money at the end was impossible, YOU CAN’T MAKE SOMETHING FROM NOTHING! How could more money come out of the system than went in?
Nearly 2500 years later, Marx answers his question. Someone in the process is getting totally screwed over. It is either the laborer or the consumer, i.e. either the capitalist is underpaying the laborer for the value of his work or he’s charging the consumer more than the value of the product. There, are of course, a plethora of subtlety and nuance that I’m overlooking, but that’s the gist of it.
What’s most striking about this revelation is that this is the essence of capitalism. It’s not that capitalism is bad in the hands of bad men, but unfairness and exploitation are fundamental parts of what defines capitalism. Bottom line:
YOU CANNOT HAVE A JUST CAPITALISM!
If you did, it would be something other than capitalism. Now, the most common response I get to this line of reasoning is something like this:
“Well, the extra money (M’) comes from the premium of the division of labor.”
That is, we ought to pay more for the value of a commodity because we didn’t have to do it ourselves. If it weren’t for the capitalist and his initial investment then I’d have to make my own bread, does not the capitalist deserve a “bonus” for initiating this process?
This seems to make sense doesn’t it? Well, it doesn’t. The value of the division of labor is already present in the M -> C -> M’ equation in the form of the wages paid to the worker. The worker is the one who creates the value, converts grain to bread, and is paid for the value of his work, also, the actual commodity, itself, has a value attribute attached to its initial cost and then its price after conversion to bread.
QED. I could go and buy $90 worth of grain and turn it into bread myself or I could buy $100 dollars of bread made from the $90 worth of grain, I AM ALREADY PAYING THE PREMIUM FOR THE DIVISION OF LABOR. Paying $110 is pure exploitation of the consumer. Alternately, the capitalist could charge the consumer only $100 but only pay the worker $2, thereby skimming his profits from what the worker should rightfully have.
Again, the point is that a just capitalism is a paradox, much like a circle with four right angles, it can’t exist. So if you’ve always had a lingering suspicion of capitalism, you’ve been right.
Bravo Andy!
ReplyDeleteI read and understood the whole thing!
Xoxo
I concur, however, the argument of "a just capitalism" seems to take to the back burner rather quickly in many scenarios. Many capitalist benefactors would agree, perhaps not candidly, with your regard to its exploitative nature. When getting into a deeper argument, it can easily turn into a reflection of necessary evils.
ReplyDeleteI think you are overlooking the economic principle of voluntary exchange. In a free market two parties walk away from an exchange better off. There's no exploitation involved here. At no point was violent force used to secure any of those transactions (unless the laborers belonged to a union) and so everyone from the laborer, to the entrepreneur, to the consumer all walked away from their respective transactions better off than they had started.
ReplyDeleteFree markets are always just because of this simple principle. Marxism, conversely, is utterly unjust because you don't keep the fruits of your labor (in this instance, the wage you are paid by the entrepreneur) but are instead forced to hand them over for redistribution by a governing entity in whatever way THEY see fit, which is almost always in an inefficient way.
And people forget that the entrepreneur is the entity who is shouldering the risk. He is freely exchanging his money for labor in the hopes that what he is producing will earn him a profit. If he pays $90 in labor for that bread but consumers decide they don't want to pay more than $80 for that bread (perhaps because a competitor found a more efficient way to make bread and make his workers more productive and thus produces it at a lower cost), that entrepreneur loses $10 because he already paid for the agreed-to wages and now couldn't sell it for a profit.
The price you are paying of $110 instead of the actual cost of $90 means that the opportunity cost (that is, what you sacrifice to get something) is $20. If you're not a bread maker and lack the stock of capital to efficiently make the bread yourself, I imagine $20 is worth it if you lose more than $20 worth of your productive time trying make something you don't specialize in. Otherwise, you're essentially reverting to a barter system where every man, woman, and child is forced to be not only a blacksmith or a cobbler, but also a tailor, a baker, a farmer, and a lot of other things they probably aren't as good at.
Capitalism is only a paradox to those who don't understand the fundamental principles of economics and instead would prefer to perpetuate class warfare through the manipulation of collective ignorance.
With the idea of the entrepeneur taking risks is it not then insentive for them to reap a higher benefit while the prolateriat continues to always stay behind in the profit structure; and if so, wouldn't that be perpetuating class warfare?
ReplyDeleteThe entrepreneurship, put simply, is the coordination of the factors of production: natural resources, labor, and capital. An entrepreneur comes up with the idea for a product, decides how to produce it, and raises the funds to bring it to the market. Everyone from Bill Gates to a couple of guys opening music store in Benson is an entrepreneur.
ReplyDeleteThe "profit structure" is something even the "proletariat" benefits from because he has agreed to work for the entrepreneur for a set wage in the hopes that his work will help the company make a profit. Entrepreneurs don't just unlock the door to a factory, flip and switch, herd the workers into a factory and then sit back and collect checks. Ask any business owner you know from a CEO all the way down to a guy who runs a landscape business and see how many hours they work, with no set compensation, per week. It takes a special kind of masochistic spirit to pursue that.
And how many workers do you know that are perfectly happy just punching a clock, doing a job, punching out and going home to enjoy their free time? A lot more.
The perpetuation of class warfare is a construct of a sector of the population who believe that it's somehow not fair for *any* person to live "better" than someone else in a country/world where we have so much wealth. But what many proponents of this kind of thinking often fail to see is that wealth all exists because the free market and the price system is the very thing that created it. So long as there are strong property rights in any given society, the incentive for people to create things that make the lives of people richer and easier will always be there, and the price system will always lead to an eventuality of that technology to eventually be accessible to a majority of the population. Without those fundamental market values, we'd still be toiling in agrarian societies, dying in our 30's, and living miserable lives.
Within a capitalist society, it makes sense that anything outside of a traditional wage system may seem like masochism. Workers are generally ok with their work, but majorily, they are only compensated enough to be complacent, nothing more, even if more is deserved.
ReplyDeletePerhaps the free market and the price system created wealth in a sense, but it also still creates oppression and class struggle. Many parts of our society are fueled by the lower class of other countries which are on a much lower level than the lower class in the U.S. When wealth for one side of a society grows, its goal isn't to additionally support the unwealthy, it is to support the furtherance or at the the least the maintenance of their wealth which has fueled totalitarian states and many other oppressive societies.
I wouldn't so easily claim that there cannot be innovation or advancements within a socialistic society. It is something that should be explored more, but when keeping capitalism in mind its nature seems to not look outside to find a light for ideas of social innovation. Maybe the free market led us to where we are now but just because it has led the past and contributed in ways doesn't mean it has to be the need for the furtherance of society.
Employee complacency is rooted in a culture of entitlement. I would challenge anyone to bring me a truly energetic and ambitious person who is simply being exploited below their worth. Those kinds of people don't settle for anything less than they're worth and exemplify the spirit of the free trade system. If anyone is working below their potential it is only because of frictional circumstances; they are not applying themselves to tasks at which they are most productive. In that sense, that's why "full employment" means that everyone is employed, because the system is constantly readjusting itself to make more effective use of its human capital. Consider that 10% of all American jobs are eliminated every year and replaced with new ones as old technologies become obsolete and people find ways to make themselves more productive. Only those who stand at the sidelines, lamenting their self-inflicted exclusion, suffer in this system truly.
ReplyDeleteTotalitarian states are never the product of a system of freedom, they are always the result of state power being seized at the expense of the individual. The furtherance of one's continued wealth in this regard is the product of opportunists taking advantage of a system of governance that puts a political infrastructure in place that leverages advantages to the wealthy. You can only be strapped to the yoke of a corporate entity if the government enforces those shackles in the first place.
Advancements in a socialistic society are few and far between. Even in a relaxed one like China (whose standard of living and growth is increased exponentially the more and more they allow capitalistic structures to thrive in their system) precious little is ever actually invented. In fact China's only advantages are its lax intellectual property laws allow capitalists to bypass patent laws to reverse engineer products within its borders to sell in foreign markets, helping to further erode creative destruction in those places where strong property rights are lacking.
To put it into perspective, one of my economics professors took a survey of the class. He asked us a show of hands that if he adopted a grading system where all the grades in the class were tallied up and the average given out as the grade for everyone in the class, who would drop the class? Myself and about four other people raised our hands. He stated that it would be safe to assume that the people who raised their hands were probably the students in the class that expected to get an A in the class. He pointed out that if those students were to drop the class to go to a different one where they would have incentive to work harder to achieve their grade that the class grade average would probably drop considerably. A redistribution of grades in a class would simply cause the best and brightest of the class to simply leave for greener pastures and the rest of the class would have poorer grades overall.
And the same is what happens when you do this with wealth. You drive away or suppress the best and brightest of your society because you remove the incentive for them to excel and be productive. Without anyone creating wealth, the rest of the nation becomes poorer overall.
Economic systems don't evolve in the same way other social or political systems do. The fundamentals of economics has been the same ever since man figured out how to use a resource (like flint and firewood) to create something else more useful. As long as there is an incentive for people to improve things and a system in place to protect their rights to their physical and intellectual property, society will continue to thrive and grow.
Many corporations boom because it needs people that are willing to take a very low wage. These wages may not even be enough to live on. This is what fuels the lower class. Having people that are so disadvantaged that they are unable to have the same opportunities as many in the middle class, and assuredly not the wealthy elite, is a fundamental ethical flaw that I see in this economic structure.
ReplyDeleteSay we have a capitalist free market without intervention. You still end up with a very high, wealthy class that forms out of it. This wealth is nurtured by the expense of the lower classes. Having this advantage is the means by which "opportunists" can create a government system for social control. Having the wealth (power, capital, etc) is still a tool used to create a system involving corrupt structures. And while the mentality of capitalism is centered more on individualism rather than mutualism, it seems rather likely that the honor code isn’t going to have much sway.
Regarding China’s growth, its government impedes on how its social economy runs. With its control structures in place, perhaps its social structure isn’t given the freedom to prosper.
To your example about class grades, why does the incentive have to be a simple aspect of personal wealth? In this example it makes sense because certain people have the time/energy to do better and to get more knowledge out of the situation. When there are real innovations and advancements in our society, it doesn’t have to be sparked through an incentive of wealth. Did Darwin, Newton or Einstein research their theories because they were looking for wealth?
Economic systems can evolve and have evolved. There would not be such a plethora of social paradigms if it hadn’t. People have made changes that changed the world forever. Incentives are not always so introverted and moving past the intense individualism of our current system may move things forward illustriously.
Well let's use Hong-Kong as an example of free market system because their system after WWII was the closest example we have to an Austrian free market system and what is does in a society.
ReplyDeleteHong Kong's laws were cut-and-dry for enforcing property rights and they had no minimum wage, capital controls, tariffs, or complicated tax systems of any kind. Public debt was nil.
Their real wages doubled in 20 years, GDP rose steadily and quickly, standard of living across all classes improved, and all this growth occurred independent of any global recessions. They didn't have huge boom periods that would create conditions for plunging market corrections, and that's the way it should work in a free market.
See the rich can't get richer if the poor become poorer in a free market system because the marginal propensity to consume is higher the lower down the social scale you go. If push the classes too far apart, greed becomes its own worse enemy because if a company isn't paying it's laborers a living wage it won't make any profit because no one is making enough money to consume the goods being offer.
This illustrates the principle of the wage-price spiral: if wages go up, prices go up and if wages go down prices go down. This is a mathematical certainly so long as no government system tinkers with the formula. You create poverty through overtaxation or fiscal and monetary policies.
But, let's say, we remove government out of the picture completely. If we do, are we not operating in a free market system anyway? Well, no and I'll tell you why: Market Failures.
Market failures consist of four different things: pollution (when a single entity reaps all the profit but shares the cost), Public Goods (when a single entity shoulders all the cost but everyone shares the profit), Asymmetrical Information (when only one party in a voluntary exchange has access to the information the goods being exchanges) and Asymmetrical Competition (essentially when only one entity produces a given good or service and prevents competition in the production of that good or service.)
In all those cases the system crumbles. Only in this instance, along with the enforcement of property rights, is a governing body useful in protecting its citizens and keeping the market from grinding to a halt. In a total anarchy, free markets still exist but they are woefully hamstringed, and human development screeches to a halt, decreasing the standard of living for everyone.
Another thing about this statement:
ReplyDelete"And while the mentality of capitalism is centered more on individualism rather than mutualism, it seems rather likely that the honor code isn’t going to have much sway."
An anarchist system, even anarcho-syndicalism, the individualism will eventually hold sway because the more a population grows in a society (even an anarchist one), the less people start to care about the society as a whole because autonomy erodes away true collectivism. This is why we feel that social contracts need to be enforced by a governing body because principally we know that all rational beings operate in their own self-interest. Where we hit the stumbling block is we also realize that governing bodies are ALSO comprised of individuals operating in their own self-interest but ultimately wield more power to do so.