Home > Regular Features > Sandpit

Sandpit

January 7th, 2013

A new sandpit for long side discussions, idees fixes and so on.

Categories: Regular Features Tags:
  1. Chris Warren
    January 8th, 2013 at 06:49 | #1

    Simple question:

    If we have a society of 10 people making widgets, 1 capitalist, 9 workers, and the capitalist pays each worker $100.

    How does the capitalist get their wage?

    How does the capitalist get their profit?

    Arrange things how you like, but these is no way a capitalist can survive without introducing some artiface that needs to compound, and when it does compound, leads to a GFC.

    FOR EXAMPLE:

    1 capitalist
    1 manager/sales
    3 production workers
    1 transport worker
    2 raw materials and energy
    1 research and development
    1 machinery supplier

    If all wages are $100, where is the logic for a capitalist profit?

  2. TerjeP
    January 8th, 2013 at 07:20 | #2

    What capital is involved?

  3. Chris Warren
    January 8th, 2013 at 08:01 | #3

    The machinery provider takes raw materials (iron, wood) and makes capital, which is handed to production workers and transport workers, so they can do their thing.

    The cost of capital is the wage of the raw materials worker + wage of the machinery supplier.

    Raw materials have no relevance unless they serve 100% as capital.

  4. TerjeP
    January 8th, 2013 at 09:29 | #4

    Well assuming the widget factory produces $1500 worth of goods then each worker gets $100 worth of goods and the capitalist gets a profit of $500 worth of goods.

    A simpler setup perhaps might entail the capitalist owning a grove of apple trees (capital) and the workers doing the apple picking and grove maintenance. Each worker gets 100 apples a week and the owner gets 500 apples a week. The owner can clearly afford to sustain a bigger family than ordinary workers can.

    Assuming there is some currency involved it just goes round and round. But given there is minimal trade involved (just labour for wages) then currency may not even be required. If it is required somebody can produce it. I hear gold coins work well.

  5. Ikonoclast
    January 8th, 2013 at 10:01 | #5

    @Chris Warren

    Chris, I don’t quite get what you are driving at. Can you lay out your worked example?

    I fully accept and hold that the capitalist does nothing for his/her income. The mere possession of pre-existing capital gives the capitalist no right to earn a share of income from the work of others. Such logic equates to “I inherited a lot of money or I acquired a lot somehow (not necessarily by hard work either) so this means you should give me even more money.”

    Let us look at two examples;

    (A) The capitalist has inherited a medium size factory from dad as a working enterprise. He is “the owner”. Never mind that workers built the factory in former days and workers now run it. The capitalist sits at home and draws a nice income dividend from the factory. A manager-bookeper runs the business for him. For the sake of simplicity let us assume 98 workers all on the same wages and the manager/bookeeper on a salary double that of the workers. All of the workers earn $50,000 a year and the manager/bookeeper $100,000 a year. This is 100 wage/salary units at $50,000 = annual wages bill of $5 million. Let us assume that the costs of raw materials, power, employment on-costs, depreciation of equipment,marketing etc. cost another $5 million.

    Total running costs per annum = $10 million. Let us assume that the factory makes 100,000 units for sale per annum and sells these units for $120 each. Gross income is $12 million. After taking out all costs, the capitalist gets $2 million dollars per annum. Were the factory a worker owned collective then each wage/salary unit would be $70,000 per annum. Thus we could say that the net productivity of the factory is $70,000 per worker (leaving aside the issue that the bookeeper/manager somehow equals 2 workers).

    It is clear that each worker with the assistance of the multiplier effect of working with others and with plant and machinery is creating $70,000 of net value per annum as assessed by the market. The workers are creating ALL the net value. Even in the other case, how could the capitalist create any value? He sits at home doing nothing.

    His possession of capital (or capital equipment) is inherited. He did nothing for it and has no moral right to 1 cent of it. Where did this capital or capital equipment orginate? It originated when previous workers made objects of value and part of this value was appropriated by the capitalist father and his contemporaries. How does a new entrepreneur become a capitalist? He comes up with a new idea which is work. He pushes the idea through which is work. He deserves pay for this work and this work alone. Then he progressively borrows and repays capital and becomes rich from the surplus value produced by the workers.

    In a great many cases when the progress of entrepreneurial capitalism since about 1750 or 1800 is analysed, the ideas are stolen or they were traditional, folk or public domain ideas which someone then patents and appropriates. When the ideas are stolen the real inventor often gets nothing. He / she is sometimes even pushed away and subjected to a campaign to pillory and destroy reputation. This is all done to assert intellectual, business and legal ownership. Often enough early capital comes from extortion and crime and then families “go legit” and descendents become “respectable” and rich. Many legacy fotunes originated in empire, slavery, bequests of titles and estates to generals, agents and sycophants of monarchs and from other equally despicable practices. Not to mention that lands and even continents were stolen by force.

    This is what the wonderful possession of modern excsessive fortunes is mostly based on. Previous theft and disposession. That’s enough to go on with.

  6. Chris Warren
    January 8th, 2013 at 10:08 | #6

    Terje

    The factory may dream that their goods are worth $1,500 but when they sell them all they can get is $900. This is the only money in circulation and is entirely sufficient for the cycle of production to reproduce itself – forever.

    The extra $600 doesn’t exist and is not needed for all goods and services to be “finally” consumed.

  7. J-D
    January 8th, 2013 at 10:09 | #7

    @Chris Warren
    If you have a society of 10 people making widgets, 1 capitalist, 9 workers, and the capitalist pays each worker $100, where does the capitalist get the $900 to pay the workers and why does the capitalist then give that money to the workers?

  8. J-D
    January 8th, 2013 at 10:11 | #8

    @Ikonoclast
    If part of the process by which an entrepreneur becomes a capitalist, as you describe it, involves borrowing capital, from whom is that capital borrowed and why is it lent?

  9. J-D
    January 8th, 2013 at 10:16 | #9

    @Chris Warren
    If a factory produces goods that sell for $900 and if nine workers in that factory each receive wages of $100, then obviously, by definition, there is no profit for any capitalist. If the factory has to pay for any other costs in addition to the workers’ wages, there’ll have to be a capitalist making a loss.

  10. Jim Rose
    January 8th, 2013 at 10:18 | #10

    There is the
    • Misesian entrepreneur – bearer of Knightian uncertainty about future prices
    • Kirznerian entrepreneur – discovers previously unnoticed opportunities
    • Schumpeterian entrepreneur – innovator and harbinger of creative destruction
    • Baumol’s innovative entrepreneur comes up with new ideas and puts them into practice
    • Baumol’s replicative entrepreneur is anyone who launches a new business regardless of whether similar ventures already exist.

    The Misesian entrepreneur is he who bears the losses of an enterprise. Workers are included in this definition if they invest in firm-specific human capital. Cantillon identified a willingness to bear the losses of a business venture as the defining characteristic of an entrepreneur.

    Say’s and J.S. Mill’s entrepreneur created value by moving resources out of less productive into more productive ones.

    Kirzner’s entrepreneur owns no capital and bears no losses. He only profits from noticing previously unnoticed opportunities and moving the under-valued resources to high valued uses. He does not need to employ anyone.

    Accounting profit conflates short-term profit – the fleeting reward for bearing uncertainty about prices – with a long-term profit, which is the interest in capital – a payment for waiting. Workers who save earn interest too on capital by mediating their savings through banks and share markets to entrepreneurial investments.

    The minor post-Ricardian economist must have been aware of Mill’s and Say’s writings on entrepreneurship in the British library but he missed the boat on the driving force of capitalism – entrepreneurship.

  11. Chris Warren
    January 8th, 2013 at 10:22 | #11

    @Ikonoclast

    Inherited capital doesn’t help, because the logic of the system is that if it doesn’t work without inherited capital, it will not work with inherited capital.

    If people want to argue that inherited capital solves the problem, specifically what problem does it solve? It will not effect the wages of workers.

    If some workers want to demand more income because others have “inherited capital” (which they will not share) – then this is a political arrangement that distorts the economy and you need some form of State power to set this up.

    In fact capital only enters the system to the extent it requires depreciation, or increases the physical output of all workers so all wages rise together.

    Inherited capital, shared or managed democratically, increases wealth for all,

  12. Chris Warren
    January 8th, 2013 at 10:30 | #12

    J-D :

    If you have a society of 10 people making widgets, 1 capitalist, 9 workers, and the capitalist pays each worker $100, where does the capitalist get the $900 to pay the workers and why does the capitalist then give that money to the workers?

    Previous sales will provide $900 easy, peasey. And this cycles sales will also provide $900 for the next cycle.

    If a factory produces goods that sell for $900 and if nine workers in that factory each receive wages of $100, then obviously, by definition, there is no profit for any capitalist. If the factory has to pay for any other costs in addition to the workers’ wages, there’ll have to be a capitalist making a loss.

    There are NO other necessary costs. You can only artificially create other costs by paying academics in universities to dream them up, politicians to kowtow, and accounting standards to impose them.

  13. J-D
    January 8th, 2013 at 10:30 | #13

    @Chris Warren
    I don’t think Ikonoclast suggested that inherited capital ‘solves the problem’ (whatever ‘the problem’ you’re referring to may be, a point on which I’m not clear). I understood Ikonoclast to be making the factual observation that a lot of capital is inherited.

  14. TerjeP
    January 8th, 2013 at 10:32 | #14

    Chris Warren :
    Terje
    The factory may dream that their goods are worth $1,500 but when they sell them all they can get is $900. This is the only money in circulation and is entirely sufficient for the cycle of production to reproduce itself – forever.
    The extra $600 doesn’t exist and is not needed for all goods and services to be “finally” consumed.

    Well if the factory only makes $900 worth of goods then either money must be borrowed, wages must be cut, workers must be sacked or the enterprise must cease.

    I really don’t understand what you are driving at.

  15. J-D
    January 8th, 2013 at 10:43 | #15

    @Chris Warren
    Your answer to my question is not as ‘easy-peasy’ as you suggest: it implies an infinite regress. If the $900 to pay the workers in each cycle comes from the sale of the widgets produced in the previous cycle, then every cycle must have been preceded by an earlier cycle, and there can never have been a first cycle, which is absurd.

    I did not suggest that a factory must necessarily have costs other than the wages paid to the factory workers. I referred to it as a possibility only. It’s possible that there are some factories which use only raw materials which are internally supplied, but there are certainly some factories which have to meet the costs of purchasing raw materials from outside. It’s possible that there are some factories which only use equipment which is internally supplied, but there are certainly some factories which have to meet the costs of purchasing equipment from outside. It’s possible that there are some factories which don’t require electricity from an external supplier, but there are certainly some factories which have to purchase externally supplied electricity.

    However, as I said, even if there are no costs apart from the workers’ wages, it is still the case that if a factory produces goods that sell for $900 and if nine workers in that factory each receive wages of $100, then obviously, by definition, there is no profit for any capitalist. That was your original question, where the capitalist gets profit from, and in the scenario described the answer is that no capitalist gets any profit from that scenario.

  16. Chris Warren
    January 8th, 2013 at 10:53 | #16

    @TerjeP

    Terje

    If the factory only makes $900 then no wages need to be cut, and no worekrs need to be sacked, because there is enough funds to pay all necessary workers for the next cycle of production and so on and on ….

    Only the capitalist disappears. He or she may not like this but they will need force to get any goods and services or money themselves.

  17. Chris Warren
    January 8th, 2013 at 11:00 | #17

    @J-D

    The first cycle was a pre-capitalist formation so no problem, and yes it does imply an infinite progess into the endless future.

    The is NO POSSIBILITY of other necessary costs. You can only artificially create the possibility of other costs by paying academics in universities to dream them up, politicians to kowtow, and accountant and lawyers to draft them.

    Adding in extra suppliers or raw materials from outside does not change things. You can just add a few zeros, to my 10. You can have as many enterprises as you like.

    As you note – the capitalist gets no profit, and they really have to make themselves useful and “Get-a-job”.

  18. J-D
    January 8th, 2013 at 11:20 | #18

    @Chris Warren
    You began this discussion by asking a question about where capitalists get profits from in a scenario which you described, although not in much detail. I was trying to explore possible answers to that question, which (it seemed to me) depended on details of the scenario which you hadn’t filled in.

    Now it seems that you’re not really interested in answering questions or exploring scenarios at all, only in stating your view that there are no circumstances in which capitalists deserve to get profits and that capitalists shouldn’t even exist. I’m sure you’re aware that this is not an original position. I would be surprised if anybody reading this blog had not encountered it before.

  19. Chris Warren
    January 8th, 2013 at 11:30 | #19

    In my scenario – there are no details to fill in.

    The lack of any role for capitalism is entirely encompassed within.

    I would hope that most people reading this blog have already encountered this position.

    However once it is clear that there is no role for capitalism in economics, then it is interesting to explore what happens when capitalists do impose themselves. But this is jumping the gun.

    When capitalist do enter the scene (by fair means or foul) – everything changes.

    And it is interesting to look at how capitalists have swarmed in onto society.

    But we must start with no-capitalists, and a proof that we need no capitalists.

  20. J-D
    January 8th, 2013 at 11:51 | #20

    @Chris Warren
    If you’re seriously looking for a proof that we need no capitalists, the first thing you need to work out is who you’re trying to prove it to.

  21. Chris Warren
    January 8th, 2013 at 12:25 | #21

    J-D :
    @Chris Warren
    If you’re seriously looking for a proof that we need no capitalists, the first thing you need to work out is who you’re trying to prove it to.

    Anyone who thinks we need capitalists, or anyone scratching their heads over the GFC.

    presumably the understanding of a GFC, and proposals for solving a GFC are different if you insist on capitalism, than if you insist on co-operatives.

  22. BilB
    January 8th, 2013 at 12:47 | #22

    Chris Warren,

    You really do have a problem with the capitalist concept.

    To understand the notion take a few pages from the recent publication about the aborigines who occupied the land between Port Jackson and Pittwater as reported by Captain Cook.

    These peoples had an idyllic life style in an area of abundance. Cook reported that these people needed just 3 hours per day gathering food. The rest of their day was spent in family matters and tribal ritual.

    There you have a fully functional community operating in harmony and with more than adequate recreation time.

    Now to turn this into a capitalist society all you need do is apply a layer of specialisation, and a monetary system of sorts. Lets use Cowry shellsat 1 Cowry per hour as they are beautiful and not common to that area. As every adult in this community is a specialist each person earns as much as they spend. The cash flow is in balance. But each person can cut into their family or ritual time to earn a several more shells per week or day. This extra work is stored in the form of produce or product (dried fish, woven baskets) until there is an opportunity to trade or sell, possibly with another community.

    Now here is a new concept for you. Profit equals choice.

    Each person in our community can earn as many as 5 Cowry shells per day with which to buy items from other communities. The Cowry medium allows the people to buy items that cannot be obtained in their area such as Opals from western tribes, Cedar dugouts from central coast tribes, or better stone tools from southern tribes.

    From there it is not much of a step to where the tribal elder employs the young uninitiated teenagers to gather fish and lay them out for drying so that the elder, who does not normally work can have an income as well. And there you have the fully functioning capitalist society.

    The main enabling ingredient is an abundance of what nature provides for free.

  23. Ikonoclast
    January 8th, 2013 at 12:54 | #23

    Yes, I am not sure I get Chris Warren’s technical point. This is even though Chris and I agree that the capitalist has as it were no primary “moral right” to take profits. The capitalist might have a legal right but sometimes legal rights are just secular legalism; legal but not necessarily right in any equitable sense.

    To discuss this whole issue we need to define and understand “money” and “capital”. I think all here would agree that non-metal money has no intrinsic value. It is just a representation of value. Or perhaps an abstract representation of “stored value” or “due value”. If I do work or sell an object I created (say a house if I was a builder) then the money I receive is equal to the market value assigned at the time to the work or the sold item. The societal and institutional convention is that I get a book-keeping entry (that’s all it is when in the bank) that says essentially I have in store so many chits which entitle me (make due to me) goods to that chit value at market prices at the time I use the chits (money).

    What is capital in the sense we are using it here? If we exclude physical assets and maybe some other classes of capital then capital is crudely speaking “a lot of money” which is a big number in a ledger or in binary code in a computer. See above for the definition of money. Somehow real goods and assets of large market value have come into the possession of persons or businesses or corporations or been made by them or services have been delivered and have consequently been traded for these chits or “electronic bits”.

    Capital can be accumulated in a few other ways e.g. by forging money. Money forgery is usually negligable except when states do it or maybe computer masterminds do it. Napoleon did it to other countries (usually unleashing it with his invasion force). North Korea have done it. You can bet China and the USA are ready to attempt to do it to each other via cyber war.

    Capital can be accumulated by winning money by trading and speculating on the forex (is that the term?) or currency markets, by the currency carry trade and so on. Presumably that is in the long term a zero sum game in terms of abstract “money wealth” excluding stochastic variations if the exhxnage markets are working “properly”. I am kinda guessing at that claim.

    Finally, capital can be created by fiat by governments (“printing money”) which is not forgery. All extant legal non-metal currency and currency including that rolled into assets like bonds must have been created by fiat at some point.

    So, to J-D’s question. Where does (modern fiat) capital come from?

    1. A sovereign government creates it by fiat ex nihilo (by decree out of nothing).
    2. This is still done with theory and discipline (except in Zimbabwe for example).
    3. The theory relates to the need for liquidity (money supply) in the system.
    4. Broadly speaking, the money supply representing value should grow at about the same pace as the real value of goods and services grows in the real economy.
    5. How do you figure this out ahead of time? And what is real value anyway?
    6. You don’t and you can’t and real value is whatever the market says it is.
    7. You make a very educated guess each year as you bring down the national budget.
    8. You follow up and check the key macro indicators like inflation/deflation and unemployment.
    9. You keep tweaking and making adjustments year after year.

    As Paul McCartney once said: “When I was a kid I thought adults knew everything. Now I realise they do the best they can and life just sputters along.”

    So capital today comes from fiat creation and initially passes into the hands of workers and businesses who supply goods and services to (federal) government or it is given ex gratia to recipients of welfare, aid, subsidies, federal business grants, federal export grants etc. etc. From there it circulates in the many you all know and I won’t bore you with the elucidation.

    However, in addition to fiat money creation there is also debt money creation, the other legal form of money creation performed by licenced private banks. However, debt money creation, whilst putting more money into circulation also creates an equal debit on the bank ledger. The extant circulating debt money has to be repaid and destroed again as some point. So some argue formally that there is no net money creation and no net effect on money supply. However, there is new net high velocity money put into circulation in the interim and this interim can be a very long interim as more is loaned than paid off for extended periods and these periods can persist for a generation or more.

    So where does all this money (capital) come from? Governments make it, recirculate it and destroy it by deficits, taxes and surpluses respectively. (Well surpluses may or may not immediately destroy it depending of what governments do with the surpluses.) Banks make it (as debt money) and have to destroy it later when it is repaid but only the capital not the interest. The interest they keep. The burgeoning interest can only come from new government fiat money creation or from the banks lending ever more than is being repaid (an upward spiral) thus their interest monies can come from their own and other banks debt monies without extra foat money creation. But this process cannot continue indefinitely as people taking on new debt and the poulation as a whole eventually reach the limits of their ability to service debt from income. Income remains fundamentally tied to real output. Then the GFC happens for example and de-leveraging starts.

    I don’t see how you can “blame” actual individual capitalist ownership for this part of the equation. A society of all worker cooperative businesses all competing in a free market and with otherwise the same insitutional and banking rules would result in the same processes. A deeper look at institutional and banking rules is indicated plus a look at the concepts and functioning of fiat money/debt money capital. Debt money bubbles can last a long time on average before the bubble (and much debt money) are destroyed again in a collapse. The collapse can virtually force the hand of the govt of the day. They now are forced to replace the vanished impetus of burgeoning debt money creation with fiat money creation unless they want a depression.

  24. Chris Warren
    January 8th, 2013 at 13:03 | #24

    @BilB

    Yes, I have a HUGE problem with the capitalist concept. And in fact, in order to resolve climate change, GFC, and third world development, this has to be clarified.

    The cowry shells scenario is interesting. I will have a close look at it.

  25. Chris Warren
    January 8th, 2013 at 13:14 | #25

    J-D :

    If you’re seriously looking for a proof that we need no capitalists, the first thing you need to work out is who you’re trying to prove it to.

    Anyone who thinks we need capitalists, or anyone scratching their heads over the GFC.
    presumably the understanding of a GFC, and proposals for solving a GFC are different if you insist on capitalism, than if you insist on co-operatives.

  26. J-D
    January 8th, 2013 at 13:17 | #26

    @Ikonoclast
    You write ‘So, to J-D’s question. Where does (modern fiat) capital come from?’

    That’s not my question. I didn’t ask where capital comes from.

    I think the question you are discussing would be better expressed as ‘Where does money come from?’ I think most people have a clearer idea of what they mean by ‘money’ than they do of what they mean by ‘capital’, and that there is less disagreement between people about the meaning of ‘money’ than there is of ‘capital’, so I can’t see any good reason to use the word ‘capital’ where the word ‘money’ will do, and it seems to me that ‘money’ describes the phenomenon you’re discussing at least as well as ‘capital’ does.

    But I wouldn’t ask the question ‘Where does money come from?’, because I think I already have a sufficient grip on the answer.

    You say ‘What is capital in the sense we are using it here? If we exclude physical assets and maybe some other classes of capital then capital is …’ But why do you exclude physical assets ‘and maybe some other classes of capital’ (so what are these other classes? and why ‘maybe’? are you excluding them or aren’t you? or are you yourself not confident that you’re clear on the subject?)? Of course you do need to exclude physical assets (at least) from your definition of ‘capital’ in order to make it just a synonym for ‘money’, but why would you want to do that? Aren’t physical assets important? Maybe the sense that excludes physical assets is the sense in which you are using the word ‘capital’ here, but how confident can you be that it is the same sense that other people are using it in? If people use the word ‘capital’ in different senses, communication is hindered.

    Likewise if people use the word ‘capitalist’ in different senses, communication is hindered. So if Chris Warren (or anybody else) wants to construct a proof that we need no capitalists, the choice lies between addressing the proof only to those people who already use the word ‘capitalist’ in the same way and beginning the proof by defining clearly what is meant by ‘capitalist’, something Chris Warren has not so far done.

  27. J-D
    January 8th, 2013 at 13:20 | #27

    @Chris Warren
    As I just observed at he end of a long response to Ikonoclast, which perhaps won’t interest you, if you want to prove to a general audience that we don’t need capitalists, the first thing you’ll have to do is make clear which sense of the word ‘capitalist’ you have in mind, because it’s a safe bet that your audience will include people who are accustomed to its being used in different senses.

  28. Chris Warren
    January 8th, 2013 at 13:38 | #28

    @J-D

    Useful point.

    However it is pretty well known that a capitalist invests money to purchase means of production, to sell for more money. Who hasn’t heard of this?

    There is an extremely well known formula, which I am sure you have heard about.

    M – C – M’

    Which is basic, basic, basic Marxist terminology. M’ is larger than M.

    M and C are ‘real’ values, so any confusion due to inflation is excluded.

  29. Ikonoclast
    January 8th, 2013 at 14:20 | #29

    @J-D

    You asked the question (of me);

    “If part of the process by which an entrepreneur becomes a capitalist, as you describe it, involves borrowing capital, from whom is that capital borrowed and why is it lent?”

    Normally when one refers to borrowing capital, one is referring to money capital. That is why I discussed money capital. One does not normally borrow earth moving plant to set up a computer company for example. One borrows money and buys computers, rents premises and hires staff etc.

    Rather than insult your intelligence with a simplistic or sarcastic answer (see the fishing comment below) I decided to examine the modern institutional and business origins of money and value and thus by extension the origins and continuations of the accumulations of money (capital) as best I could in the space and time of a blog.

    It seemed to me you were maybe fishing for the answers;

    (a) capital is borrowed from those who have spare money;
    (b) they lend it to earn interest.

    Perhaps I do you an injustice in suspecting that. Answers (a) and (b) above are true enough in themselves but they are only the surface phenomena. We have to go deeper and find out money is, what capital is, why do we create them and use them in the manner we do? What is their relation to the real economy, to real goods and real services? To real poople? To workers and owners of capital, which groups overlap now perhaps more than ever before. What is ownership? What does ownership actually mean? What is its legitimation? By what combination of consensus, coercion, force, trickery, convention, tradition, inertia, moral right or moral wrong (morality always being arguable) is ownership “made” and stamped on things as apparently valid “coin” or “seal” in its own right?

    I sometimes wonder, and this is not aimed at you J-D, how people who only seem to be able imagine capitalism (because it is the only system thay have ever lived under and they have read no history) think the world of multifareous human societies worked before capitalism. By extension, I wonder greatly how they can fall into the “Fukayama Trap” and think capitalism is the “end of history” meaning the arrival at a stable though growing system that is a final crowning development which will persist forever or at least as long as the earth lasts.

    Capitalism may indeed be “the end of history” but not in the sense Fukuyama meant it. It may be the end of history as it destroys the biosphere as a workable support for our global society and economy and sends humanity into extinction.

    Often the argument for capitalism is explicitly or implicitly that it is the most effective, efficient, productive and workable system yet developed and everything we have we owe exclusively to capitalism. This view immediately ignores the major contributions of democracy, humanism and science to our progress. All three arose before capitalism and both vastly moderated capitalism’s excesses and supercharged and channeled its productive power. The excessively pro-capitalist view also ignores the fact that apparent adaptiveness at one extensive level is about to be superseded by the revelation of inherent structural maladativeness at the next level on a stupendous and catastrophic scale.

  30. J-D
    January 8th, 2013 at 14:46 | #30

    @Chris Warren
    So am I correct in thinking that when you say we don’t need capitalists, you mean that we don’t need people who invest money to purchase ‘means of production’ (another term for which it might be helpful to have a definition) in order to sell them for more money?

    Because if that’s what you’re saying, I wonder whether you think (a) that we don’t need ‘means of production’ or (b) that we don’t need to purchase ‘means of production’ or (c) that we don’t need to invest money to purchase ‘means of production’ or (d) that we do need people who invest money to purchase ‘means of production’, but with some other purpose than selling them for more money or (e) something else that I haven’t thought of?

    Also, I wonder whether you realise that the terms in which you have chosen to define ‘capitalist’ won’t always include a person who buys some machines, pays people to operate the machines, and sells the products of the machines.

  31. Chris Warren
    January 8th, 2013 at 15:23 | #31

    @BilB

    In essence I agree with you, except that if a tribal elder:

    employs the young uninitiated teenagers to gather fish and lay them out for drying so that the elder, who does not normally work can have an income as well.

    this is not capitalism.

    It would only be capitalism if the tribal elder, received fish from others, then used the fish to gain more wealth by some means.

    If he uses the fish for standard consumption he is not a capitalist.

    In fact there can be many individuals receiving incomes outside of the labour force. Elderly, handicapped, children, or those involved in pure research, soldiers, priests, entertainers etc etc. Once society as a whole reaches a level of productivity, it can decide to allocate food, consumables and services to a huge raft of other occupations – or people can be forced to allocate wealth to others. This can lead to huge wealth differentials. It also allows monopolists and mafia bosses to reap huge personal wealth.

    Such flows do not cause instability, provided the recipients do not seek to use their accumulated wealth to extract a capitalist profit.

    You have in fact not described a capitalist society, but some form of feudal society. Feudal societies have a different regime of injustices than capitalist societies and a different mode of production.

    Having other classes receiving income (consumables, food, services) can benefit society and enhance culture, science, and humanity.

  32. Chris Warren
    January 8th, 2013 at 16:03 | #32

    @J-D

    Just use Wikipedia for common terms.

    Once you are aware with the formula M – C – M’, it is best to remember that Marx presented this when M (as money in 1850′s) was different to money today. For Marx, money was specie and always had the equivalent value to what it was exchanged for.

    In our modern era, M should be understood as value (or money as precious metal or cowrie shells or pigs etc depending on the nature of society).

    (a) no

    (b) no

    (c) no

    (d) yes

    (e) why ask?

    People who buy machines, pay people to operate them, and sells products are not necessarily capitalists.

    Capitalists do this but sell at prices determined by Marginal Cost curve, when the only funds available are represented by the Total Average Cost curve. A government may even decide to sell at prices determined by Average Variable costs curve, to keep their finances in order while still providing public services such as affordable housing.

    Google cost curves if you need to.

  33. BilB
    January 8th, 2013 at 16:11 | #33

    Chris Warren,

    The Tribal Elder is every bit the capitalist. He uses equipment, drying racks, he employs and pays with Cowry shells labour to collect and process product, he sells that product to obtain Cowry shells with which to obtain all of the product and services that he needs for his personal needs. His buying power is not limited to his own personal abilities and can be many times that depending on how many young people he has available to him to exploit.

    Your problem is Chris that you believe that the taking of a profit by a non work contributor will destabilise the system and cause a collapse. Wrong.

    The missing element in your considerations is “that which nature provides for free”. Nature is an abundant supplier and underpins most (I argue all) profit.

    As a check to the above argument, I am a capitalist. I own equipment which I exploit a person to operate to produce products, from material that I buy from others, which I sell for profit and with which I buy food and other goods for my family, as well as luxury goods. My role equates exactly to the Elder in the example.

    You need to take your thinking back to drawing board making it relevent to real life situations.

  34. Chris Warren
    January 8th, 2013 at 16:44 | #34

    @BilB

    Think things through.

    Once you introduce the word “exploit” you have moved dramatically from your original scenario. This just disrupts consideration.

    His “buying power” is not well represented in your original scenario. If he has extra through exploitation then this can be slavery, feudalism, or capitalism depending on the specifics.

    Taking an income by a non-work contributor does not destabilise, taking a capitalist profit does.

    If you sell for profit, and this just purchases food, goods and services for you and your family – this is not capitalism. The same would occur in a co-operative.

    Maybe you should look at a drawing board. Do you know what is happening in real life? Check out the IMF website for statements throughout 2012 and recently over the fiscal cliff. How is your thinking relevant to the GFC and the destruction of so many societies in Europe?

  35. Chris Warren
    January 8th, 2013 at 17:10 | #35

    @BilB

    I have just realised – you have basically repeated TerjeP’s misunderstanding, except where he uses apples you want fish.

  36. BilB
    January 8th, 2013 at 17:19 | #36

    Chris Warren,

    “If you sell for profit, and this just purchases food, goods and services for you and your family”

    What else does anyone do.

    The fact that there can be a surplus seems to be your requirement for capitalism. There being a on day surplus, a one year surplus or a thousand year surplus is conceptionally equal. Equally a surplus can be stored on a shelf in product, converted to Cowrie shells US dollars or Yuen, it can be stored in a Bum box, a jar under the floor or a bank. Again conceptionally equal.

    The GFC was about complex fraud, the economic consequence of which was that a lot of people had their Cowrie shells stolen,…in a very complicated way.

  37. BilB
    January 8th, 2013 at 17:43 | #37

    Chris W,

    “Capitalism is an economic system that is based on private ownership of the means of production and the creation of goods and services for profit.

    In Classical economics and Marxian economics, profit is the return to an owner of capital stock (means of production or land) in any productive pursuit involving labor, or a return on bonds and money invested in capital markets”

    I think the example above fits thes criteria, and most likely so does Terje’s.

  38. Chris Warren
    January 8th, 2013 at 18:00 | #38

    @BilB

    Macquarie Bank, LendLease, Superannuation Funds, Microsoft, Coles Woolworths, BHP Billaton, privatised road tollways, and etc do not sell at a profit to just purchase food, goods and services.

    A surplus can be saved and invested but while this may create an economic profit opportunity during adjustment, eventually this is competed away and therefore is not capitalist profit. In a capitalist society, capitalists make profits at equilibrium.

    A capitalist wants the same profit rate year after year and even on an accumulated quantity of capital.

  39. BilB
    January 8th, 2013 at 18:45 | #39

    Chris W,

    Macquarie Bank, LendLease, Superannuation Funds, Microsoft, Coles Woolworths, BHP Billaton, privatised road tollways, and etc do not sell at a profit to just purchase food, goods and services.

    Correction, fundamentally……they do. Chris, you’re being dazzled by the money. At the end of the day all of the profit is dispersed into individual’s personal accounts for their personal needs and this may well include a surplus beyond their immediate needs. And the organisation that understands this relationship better than any other is the Tax Department.

    Regardless of the complexity of the capital mechanics or the management of the return on capital, the principle remains the same. At the end of the day it is all about personal gain for sustenance and comfort.

  40. Chris Warren
    January 8th, 2013 at 19:24 | #40

    BilB :

    Chris W,
    “Capitalism is an economic system that is based on private ownership of the means of production and the creation of goods and services for profit.
    In Classical economics and Marxian economics, profit is the return to an owner of capital stock (means of production or land) in any productive pursuit involving labor, or a return on bonds and money invested in capital markets”
    I think the example above fits thes criteria, and most likely so does Terje’s.

    This is a common definition within the humanities. In fact a better definition is just:

    revenues less costs.

    However what I want to prove is that there is no cause for capitalists to receive any income, let alone a stable rate of return, and certainly not the same rate of return on accumulated amounts of capital – provided investment still occurs without a capitalist demanding their extra slice.

    It does not really matter how this flow to capital is defined or viewed – the problem remains.

    A feudal system also had private ownership of the means of production and worked them for a profit.

    This may help:

    http://en.wikipedia.org/wiki/Profit_%28economics%29

    Capitalists, essentially, demand that short-run economic profits are paid in the long-run.

    Not even economic theory supports this dream – so it must be politics.

  41. BilB
    January 8th, 2013 at 19:53 | #41

    I think that you are desperate to be dissatisfied, Chris, and live in a Shelden Cooper straight jacket for life. Go outside and look around, Capitalism works.

  42. Chris Warren
    January 8th, 2013 at 20:08 | #42

    Go outside and look around, Capitalism works.

    Yes, from such a Ptolemaic point of view, all analysis is meaningless.

    This explains why so many Occupy Wall Street protestors must take to the streets and beggars litter the streets in most of the worlds capitals.

  43. Ikonoclast
    January 8th, 2013 at 20:18 | #43

    “The directing motive, the end and aim of capitalist production is to extract the greatest possible amount of surplus value, and consequently to exploit labor power to the greatest possible extent.” – Karl Marx, Capital, Vol. 1, ch. 12.

    Crudely, surplus value is the difference between a worker’s wages and the value of goods and services he or she produces when the goods or services are sold.

    However, the workers also transfer part of the value of fixed assets and materials to the new product, equal to economic depreciation (consumption of fixed capital) plus intermediate goods used up (constant capital inputs). Such transfer of value (from consumption of fixed capital) would not and could not occur without the worker’s agency and labour.

    Ergo, a capitalist is he who seeks to extract surplus value from workers. In this way he steals a portion of the value of the worker’s labour and appropriates it to himself. He is able to do this by possession of or access to capital (fixed assets and/or liquid assets). This capital exists today because of previous capitalist activity, previous theft of surplus value from workers and it goes on and on in a reinforcing feed-back cycle.

    Prior to capitalism arising, the conditions were set for it by so-called “primitive accumulation” This might take the form of resource extraction, conquest and plunder, and/or enslavement along with earlier economic forms like feudalism allowing accumulation of primitive capital (buildings, goods, gold, silver) by lords exploiting serfs, warring and murdering etc.

    Note: I plagiarised parts of this from Wikipedia. I am not passing it off as original.

  44. Ernestine Gross
    January 9th, 2013 at 08:38 | #44

    Ikonoclast, I am writing regarding your post on the thread “How effective is fiscal policy: Guest…”.

    Don’t go, please. You made the point of relative speed of evolution of the subject matter in natural sciences versus the speed of change in the evolution of economies. I fully agree with you on this one. But I ask you to reconsider your conclusion as to the hopelessness of economics. IMHO, what is hopeless is the aim of treating economics as a natural science, expecting predictions which hold for long periods of time, and, worth still, expecting the predictions to have properties that apply only to some parts of natural science. In support of my plea, I’d like to note the science of climate change is a good example of the assumption of nature’s behaviour being independent of the behaviour of its part (eg humans) cannot be maintained. There is, if you like, a convergence is complexity of the subject matter of natural science and the subject matter of economics (and the interrelationship between the 2 and others is difficult to ignore). So, don’t opt out at a point where it really gets exciting. (I wish I’d be only 25 years old and know what I know now!) Wouldn’t life be perfectly boring if we wouldn’t have unresolved important problems? Happy and exciting 2013.

  45. Chris Warren
    January 9th, 2013 at 08:59 | #45

    Joan Robinson also in effect concluded economics was hopeless, tagging it ‘mumbo jumbo’.

    Using Sraffa, she seems to have realised she needed to look for some form of intelligble Marxism.

    As it was then, so it is today.

  46. BilB
    January 9th, 2013 at 09:24 | #46

    Ernestine gross

    Economics needs to be a science every bit as quantitative and definitive as, say, electrical engineering. Whereas economic relationships are well understood in static and theoretical form economics failing is in that it does not yet deliver realtime dynamic performance. Electrical engineering copes with this routinely and is able to drive monitor integrate synchronise and control complex systems with precision in real time. Economics can achieve this too and there is no better time in history than now to achieve this with today’s computer saturated commerce. Economists need to determine which data points give them dynamic feedback in real time and then develop the relationships algorithms to develop predictive and interactive engagement with the economy. Business is able to achieve much of this internally, and the broad economy also needs this level scientific engagement.

    It can be done. It simply needs the inspiration and ingenuity backed by the science of economics to take economic management to the next level. GFC should never happen again, even in the face of resource depletion and climate catastrophies.

  47. J-D
    January 9th, 2013 at 10:18 | #47

    @Chris Warren
    It appears, unless I have misunderstood you, that you’re saying that we do need people who invest money to purchase ‘means of production’, but with some other purpose than selling them for more money.

    The question that (to my mind) obviously follows is this: with what purpose would you expect people to invest money to purchase ‘means of production’, if not to sell them for more money?

  48. Chris Warren
    January 9th, 2013 at 10:36 | #48

    @J-D

    Yes.

    A suitable scenario is obviously wealth creation or the provision of more leisure. without capitalism, say, a black and white TV, might sell for $500, which is the real cost as per the post at the top of this thread.

    After, all the players have done their thing, in later years, a color TV, might sell for $500.

    This makes no sense to a capitalist, but ensures a rock stable economic flow without any inherent tendency to macroeconomic instability other than frictional unemployment.

  49. Ootz
    January 9th, 2013 at 10:38 | #49

    Bilb, there is an inherent problem in trying to systematise economy as you do in electrical engineering. For example, capital systems are human value systems, they come with an additional complexity which conventional systems theory has problems to deal with. From memory, the best fit systematic theoretical analytical tool I have found for human systems is Peter Checkland’s Soft System Methodology (SSM), which I know has been successfully applied in information technology and organisational restructuring.

  50. Chris Warren
    January 9th, 2013 at 10:52 | #50

    @Ootz

    Such attempts are usually naive and illustrate a weak understanding of capitalism.

    It was all attempted by Phillips in his famous hydraulic model at Cambridge. However the reality of capitalism quickly doomed his model to the dustbin of history. According to one commentator;

    By today’s standards, the Phillips machine was limited. It made no provision for inflation and, with capital controls in force, had no need to take account of the curse of the modern UK economy – the wild swings in the credit cycle. Professor Brian Henry, a visiting fellow at the National Institute for Economic and Social Research, said: “It was a child of its time. It looked at how the economy could be stabilised when people were worried about the stabilisation of aggregate demand. That is the way things were in the 1950s.

    “Things are different now. There is a different financial system and a completely different global economy. But Phillips was a brilliant guy. He came up with interesting ways of providing practical advice on policy.”

    Even so, Henry says the machine is far more than a museum piece. Today the Bank of England’s models are supposed to show how shocks affect the economy and the time it takes for a change in policy to have an effect, precisely the sort of problems that the Phillips machine helped identify. Even with the most up-to-date computers, the Bank is still finding it hard to come up with the right answers.

    Any engineer will be well away that any uncontrolled feedback in any engineered system will destroy the whole lot in chaotic oscillations.

    If you do not know what capitalism is – you cannot model it.

  51. Ootz
    January 9th, 2013 at 10:57 | #51

    Further, Bilb’s cowry currency analogy is of value because of its simplicity. It has the potential to highlight the underlying fault lines of any value system. If you do make your currency nuts instead of cowries or dollars, then there is an relevant psychological experiment which indicates the problems such currency as a resource faces. In Edney’s (1979) “Nuts Game” you will find the game almost always ends in the same predictable manner for some psychological reasons. As a psychological experiment, Edney’s nut game almost perfectly demonstrates Garrett Hardin’s paper, “The Tragedy of the Commons” which many of you are familiar with. Edney and others propose that nuts, cowries and Dollars are a renewable resource and thus similarly exposed to human ‘short -sightedness’ and ‘inability to collaborate’ or ‘selfish-behaviour’, in other words greed.
    http://www.g-r-e-e-d.com/GREED%20I.htm

  52. J-D
    January 9th, 2013 at 11:30 | #52

    @Chris Warren
    I don’t see that you’ve answered my question.

    You think we do need people to invest money to purchase ‘means of production’.

    You think we need that to happen without those people having the purpose of selling for more money.

    So my question remains: what purpose do you expect people to have for investing money to purchase ‘means of production’, if not to sell for more money?

    To answer in terms of televisions isn’t relevant unless you consider televisions to typify ‘means of production’.

  53. Chris Warren
    January 9th, 2013 at 12:12 | #53

    A move from black and white to color TV’s is an increase in wealth or use-value.

    The money is constant.

    Therefore you do not need to invest to get more money.

    You invest to get more wealth.

  54. J-D
    January 9th, 2013 at 13:40 | #54

    @Chris Warren
    People are not going to invest the amount of money needed to construct a factory that produces colour televisions if all they get out of it is a supply of colour televisions for personal use.

    Also, people are not going to invest the amount of money needed to construct a factory that produces machine tools if all they get out of it is a supply of machine tools for personal use.

  55. Chris Warren
    January 9th, 2013 at 15:38 | #55

    @J-D

    You are being deliberately silly.

    Just exchange the televisions for everything else you want.

  56. Jon
    January 9th, 2013 at 16:29 | #56

    @Chris Warren

    The solution is right before you: reality happens. The capitalist by definition must possess some capital. Now, we have two options: 1. the capital is an essential part of the means of production 2. the capital is not an essential part.

    If 1 is true and the capitalist can protect his capital from the other 9 people (i.e. property rights exist), the capitalist considers his options. He can either lend out the capital to the workers so that they can produce, or he can just produce himself. If he produces alone, he keeps all the widgets and eats them (if there’s only 10 people in this town they must be producing food), but some of the capital inevitably goes to waste. If the system is closed as you have postulated, and the other 9 lack this essential capital, then they will beg him to feed them or to let them use the capital. He has plenty of capital to spare, so he lets them use it. Since he has nothing to gain from renting it out for free, he loans it out to them. The price of the loan is that he keeps some of the widgets they produce. If for some zany reason 10 people can’t keep track of how many widgets each gets, they introduce some unnecessary currency that the capitalist pays his workers instead. Since the capitalist is the only seller of capital, and the workers are the only buyers of widgets, they barter over how many widgets each unit of currency is worth. They have just invented fiat currency. Wages will always be lower than revenue so long as the workers need the capital and don’t just gang up on the capitalist and take it from him.

    In scenario two where the capital is non-essential, the outcome is dependent upon how much the workers can produce on their own. If they can all produce enough to live comfortably, everyone does so and the capitalist just uses his capital to do so more efficiently. Maybe the other 9 guys realize they could save some work if they used his capital, and again they invent some method of exchange to negotiate how to split the difference of the cost savings.

    If the capital is non-essential but the labor is, well the capitalist quickly learns how to do the labor or he starves.

    If the whole process requires both the capital and 9 units of labor, the 10 people quickly figure out how to cooperate and distribute the production evenly. They may become a family unit that cooperates and distributes widgets to whomever needs them. They probably don’t have much in the way of societal norms for property rights, and if they do the capitalist is given higher social status. But, if he abuses his higher status the 9 guys revolt against him. Just like real kingdoms in history.

    What was the point of this silly hypothetical again?

  57. J-D
    January 9th, 2013 at 16:42 | #57

    Chris Warren :
    @J-D
    You are being deliberately silly.
    Just exchange the televisions for everything else you want.

    I’m not being any sillier than you are.

    Televisions aren’t directly exchangeable for everything people want: the only way you can exchange them for everything else you want is by selling them for money and using the money to buy other things, but investors selling televisions for money is the thing you wanted to rule out. And machine tools are even less freely exchangeable than televisions.

  58. Jarrah
    January 9th, 2013 at 17:02 | #58

    “The workers are creating ALL the net value.”

    The heart of the Marxian fallacy. The workers are creating value by applying labour AUGMENTED by capital. Their labour alone can’t create as much value.

    Therefore the capitalist does have a moral right to profit, because part of the value created was made possible by his or her contribution.

  59. Chris Warren
    January 9th, 2013 at 17:22 | #59

    @J-D

    You are being deliberately silly.

    Please provide evidence for your false claim:

    …but investors selling televisions for money is the thing you wanted to rule out.

    I rule out selling commodities for more money than is provided according to the scenario at the top of this thread.

    I also suggested as an example, $500 for a TV.

    You are arguing against your own misreading and/or over-active imagination.

  60. Chris Warren
    January 9th, 2013 at 17:47 | #60

    @Jon

    You definition of capitalist is unclear. Possession of capital is not relevant. Governments, cooperatives, misers, unions, charities, trusts and private individuals can all possess capital.

    Workers also can own capital.

    Therefore my model is completely relevant. If you review it, you will see that workers producing capital for production is clearly provided for separately to the capitalist. So why would they want to borrow? They can produce simply by cooperating with workers who are researching and producing capital goods.

    When governments invest capital, they do not thereby operate as capitalists.

    Workers co-operatives investing their capital, do not necessarily operate as capitalists.

    In a free, competitive society, all capital is produced by workers. If anyone else tried to get capital by other means, they would be told to “get a job”.

    You need to present a much better and realistic concept of capitalism.

    How on earth can a capitalist produce for themselves??? This makes no sense. If a capitalist produces for themselves – they are obviously a worker.

    A possible solution is that workers own their own capital and sell products to cover costs, and if they want to expand, they can use their own savings, or possibly and carefully, issue bonds.

  61. Chris Warren
    January 9th, 2013 at 18:12 | #61

    @Jarrah

    If capital claims value on top of a wage and depreciation (ie profit + costs), they are outcompeted by workers using tools who sell cheaper because they only have to cover wages plus depreciation.

    Capital may be a return in the short-term, but this is always competed away at equilibrium.

    Capitalist profit is the fallacy. This is a long running dispute, and I am a fan on Joan Robinson on this point.

  62. J-D
    January 9th, 2013 at 18:20 | #62

    @Chris Warren
    I’m still not being any sillier than you are. If the person who invests the money to establish a television factory is not able to sell the televisions produced by the factory for any more than the amount of money paid in wages to the people who actually produce the televisions, then the investor will get nothing out of the exchange, having no money left over to buy anything else the investor may want; but under such a restriction the investor has no reason to invest in establishing the factory in the first place.

  63. Chris Warren
    January 9th, 2013 at 18:25 | #63

    @J-D

    Exactly correct…

    then the investor will get nothing out of the exchange, having no money left over to buy anything else the investor may want; but under such a restriction the investor has no reason to invest in establishing the factory in the first place.

    There is no need for this “investor”. The other 9 workers do everything that is required, and do so for a wage, and can buy everything that is produces out of their wages – without inflation and without unemployment.

    Congratulations – this is the whole point.

  64. Jarrah
    January 9th, 2013 at 20:11 | #64

    @Chris Warren
    You’re not making any sense. “Workers using tools” is labour + capital. Humans have been building capital since the first digging stick, the first stone hammer, the first flint axe. The miracle of capital is that, properly used by labour, you end up with more than you started with. The build-up of capital is what makes us ‘rich’ today – it enables productivity light-years ahead of pure human body exertion.

    The Marxian fallacy is that the product of labour + capital is somehow pure labour. Yes, capital is labour transformed, but not by the workers in question!

  65. Jim Rose
    January 9th, 2013 at 20:31 | #65

    Israel Kirzner addressed Marxist exploitation in his Discovery, Capitalism and Distributive Justice

    The market is a process of learning and discovery and he emphasizes the ability of the competitive market to detect errors and generate systemic incentives to correct those errors. At any point in time, many market inefficiencies exist. These inefficiencies drive the entrepreneurial process of discovery.

    Entrepreneurs provide a service not supplied by workers: alertness to new opportunities and judgment about what to buy now in light of their competing forecasts of an uncertain future.

    These entrepreneurial discoveries and forecasts are the source of capitalist incomes.

    The finder of any new resource or new product creates what he finds, not by hard work or chance, but by discovering it through their superior alertness. Someone has to discover a production possibility, assemble the necessary resources, and deploy the necessary inputs. Before the opportunity was discovered it did not exist in any significant sense.

    An entrepreneur who is more alert than another to satisfying the most urgent needs and requirements of consumers is rewarded for his superior alertness and greater foresight.

  66. Ernestine Gross
    January 9th, 2013 at 20:33 | #66

    @BilB

    ‘Economics needs to be a science every bit as quantitative and definitive as, say, electrical engineering.”

    I don’t agree with you on this one, BilB.

    Am I wrong in saying the problem of electrical engineering is to design systems of supplying services, which utilise knowledge from natural science, fulfill certain technical efficiency properties, at quantities and price for which there is sufficient demand to make a profit (at least break even)? Furthermore, am I wrong in saying the performance is judged by technical efficiency parameter values and (accounting) profit and the management problem consists of more or less continuous adjustment (via the dynamic process you indicated) of parameter values under the control of the operators of the system?

    “Business is able to achieve much of this (commercial performance management) internally, and the broad economy also needs this level scientific engagement.”

    Yes, there are businesses who internally achieve what you say is desirable. But this can be a problem for ‘the economy’. For example, there are many large businesses who manage their profit performance target via ‘head counts’. That is, one of their critical values is the number of employees. Once profit levels fall to a predetermined level, a ‘head count’ memo goes out to all subsidiaries to specify the reduction in the number of employees. This information is classified as commercial in confidence. To counteract the effect of this ‘efficient’ business management, an economic planner would have to have the data and a counteracting response could be to increase taxation on a company level such that the incentive for dismising people for the sake of achieving a predetermined positive profit is removed. This is not a feasible response because the necessary information is ‘commercial in confidence’. This is only one little technical example of the difficulties.

    There is a much deeper problem. While the notion of ‘free will’ is much debated and not to be taken literally, surely the idea of individuals having some decision making power is fundamental to our society. Who, for example would be the designer of an economic system, which works like an electrical engineering system? This person or group of persons would have a position in society, which is definitely different from those of everybody else. Absolute monarch? Absolute power?

  67. Chris Warren
    January 9th, 2013 at 20:59 | #67

    @Jarrah

    No.

    A worker using tools is not a worker using capital.

    Tools are not capital – they need to be converted into capital by another relationship.

    As you note, tools increase output. You only needs tools to end up with more than you started with. You can make them yourself, with the same effect. The new earnings are then your own product – the increment belongs to the tool-maker as their income.

    This is a critical issue so nuances are important.

    As an experiment, just think of theoretical Robinson Crusoe. All of his income was his personal income that provided for his consumption and he improved his income to the extent he developed more tools. Tools only increase output and income of workers (including tool makers). They only need to do this for a long-run stable economy.

    That is the real miracle. If a tool-maker then wants to capitalise on this role, and arranges this somehow – the subsequent economy develops crisis tendencies that eventually threaten crisis.

    Anyway this was not the point of this thread, but is interesting anyway.

  68. Chris Warren
    January 9th, 2013 at 21:03 | #68

    @Jim Rose

    A workers cooperative can have their own members as dedicated entrepreneurs. The income can then be paid out wages. There is no need for any other flow to any other factor.

    Give the entrepreneur their income if they earnt it, the same as everyone else. This is a wage.

  69. Jarrah
    January 9th, 2013 at 21:13 | #69

    @Chris Warren
    “Tools are not capital”

    That’s completely false. Tools are the quintessential capital goods.

  70. Chris Warren
    January 9th, 2013 at 22:14 | #70

    @Jarrah

    I know people like to hang onto this idea.

    But if you have a tool worth $100, and it increases output by 10% (2% deprec. 8% net) then the toolmakers assets have gone up 8% to $108.

    Now if the tool was true “capital” given the interest rate was 10%, the capitalist would want to sell the next years product for $108 + $10.80.

    But the increase in output is only $10.

    However if the tool is not used as capital – it still increases output by 10% (8% net), and in the next year, it again provides the same benefit, and there is no need to extract the $0.80 extra due to capitalisation of the tool. This can continue indefinitely without demanding extra population, unemployment or inflation.

    In summary:

    Each year with a normal tool, over time the producer accumulates (net); $100 – $108 – $116 – $124 – $132 – $140 and etc. The net rate of profit is falling from 8% to 6% (in this example) This is normal and stable because the work expected out of the same number of work hours is constant – $10. Everyone wins.

    On the other hand the capitalist will resist the falling rate of profit and will, over time, seek the 10% (8% net) on the accumulating money, ie. $100 – $108 – $117 – $126 – $136 – $147 etc. This grows exponentially and cannot continue indefinitely. This is a constant rate of profit – which is only relevant under capitalism. This then causes crisis.

    While this is a simple example the principle is – Capitalising tools is the problem, and is not necessary for a stable economy.

    The solution is to ensure that tools and assets do not oppose society as capital. They should serve society as a stable source of extra income.

  71. Jarrah
    January 9th, 2013 at 22:31 | #71

    @Chris Warren
    You’re playing games of your own making. You’re trying to draw a distinction between capital goods and money, which is fair enough, but then conflating ‘capital’ with money, and ‘capitalism’ with a constant rate of profit. It’s quite bizarre.

  72. BilB
    January 9th, 2013 at 23:03 | #72

    Ernestine,

    That is true but a very superficial appreciation of electrical engineering. I was suggesting an internal workings parallel between electrical/electronic equipment and the workings of an economy. I see significant similarities between the flow of electrons in servo systems and the flow of money and value in an economy. Economics could benefit from an understanding of the techniques developed to manage high tech manufacturing machinery in real time.

    One of the challenges in servo systems is controlling a mass to stop from high speed in an exact position. This requires calculating the distance to go, determining the restraint force required and applying that force in an exact and controlled manner to achieve the deceleration to the target exactly and without overshoot. And this is done regardless of the random forces applied to the body, the body which might well represent unemployment. Yes people can be chaotic, random and unpredictable, but not as much as you might think.

    Much of what might be thought of as “commercial and in confidence” can be detected and determined quite accurately externally once there is a body of known performance information. Most business classes operate on guide ratios. In retail for instance one can look at gross turnover and divide that by the number of employees (all public information) to find the power level of a business class. This figure might be $200,000 per employee. So by tracking this with other published information for several years one can begin to predict various things about that business’ operations. aggregate that information and an economic prediction capability begins to develop, apply PID techniques and unemployment can be predicted and corrective action engaged well ahead of time to disrupt economic risk.

    Now much of this may well be done already, what I am saying is that with a broader understanding of the sciences economics way well acquire new strengths and performance capability.

    You do not know what you don’t know until you look.

  73. TerjeP
    January 10th, 2013 at 00:25 | #73

    Jarrah is right. The term “capital” and “tools” are essentially interchangeable for any discussion of economic basics. If you want to talk about money and credit then fine but if you want to talk about capital items then stick to the topic.

  74. J-D
    January 10th, 2013 at 06:42 | #74

    @Chris Warren
    Me: ‘I wonder whether you think … (d) that we do need people who invest money to purchase “means of production”, but with some other purpose than selling them for more money’
    You: ‘(d) Yes’
    Me: ‘It appears, unless I have misunderstood you, that you’re saying that we do need people who invest money to purchase “means of production”, but with some other purpose than selling them for more money.’
    You: ‘Yes’
    You: ‘There is no need for this “investor”.’
    Well, which is it?

  75. J-D
    January 10th, 2013 at 06:44 | #75

    @Chris Warren
    ‘The other 9 workers do everything that is required, and do so for a wage,’

    In your scenario, who’s paying wages to workers to build a factory?

  76. Chris Warren
    January 10th, 2013 at 08:04 | #76

    Jarrah :
    @Chris Warren
    You’re playing games of your own making. You’re trying to draw a distinction between capital goods and money, which is fair enough, but then conflating ‘capital’ with money, and ‘capitalism’ with a constant rate of profit. It’s quite bizarre.

    No. There is no such distinction.

    Money should not be such a problem provided its value is constant. It is just a convenience.

    But the logic does not require money.

    If a capitalist uses a tool that previously made 100 widgets and now makes (net) 108, then the rate of profit is 8%. So after sales they now have the equivalent of 108 widgets to deal with.

    So given the capitalist assumption that there is no tendency for a falling rate of profit, the next year will also produce 8% but now on accumulated capital, with the same factory, into the same market and using the same number of workers.

    So the numbers are exactly the same but without dollar signs.

    Under capitalism, with a constant rate of profit, the capitalist demands:

    Y1 – 108
    Y2 – 117
    Y3 – 126
    Y4 – 136
    Y5 – 147
    Etc.

    By which time the workers are completely exhausted and there is insufficient market for the widgets. Workers originally made 100 with no tools made 108 with a new tool, and now the capitalist wants them to work harder to produce 147.

    However for a co-operative, things are different;

    If a cooperative uses tools that previously made 100 widgets, and now makes (net) 108, then the productivity rate is 8%. This does not go into capital but into wages. So after sales they have 100 widgets to deal with in production. The extra 8 gives workers a more commodious lifestyle. This applies every year.

    Under cooperative arrangements a possibility is,

    Y1 – 108
    Y2 – 108
    Y3 – 108
    Y4 – 108
    Y5 – 108

    And workers receive whatever rise in standard of living they can get with a constant extra flow of 8 widgets per year, without being exhausted and with enough wages to provide all the market that is needed.

    If the cooperative put the extra 8 widgets into assets (not wages) and calculated a profit: the rate of profit would fall as described earlier.

    In practice, a cooperative may choose to split the extra 8 widgets between building their assets (or more tools even) or funding wage increases.

    The capitalist ends up in an economic crisis, the cooperatives end up with a stable growing economy.

  77. Chris Warren
    January 10th, 2013 at 08:04 | #77

    Jarrah :

    You’re playing games of your own making. You’re trying to draw a distinction between capital goods and money, which is fair enough, but then conflating ‘capital’ with money, and ‘capitalism’ with a constant rate of profit. It’s quite bizarre.

    No. There is no such distinction.

    Money should not be such a problem provided its value is constant. It is just a convenience.

    But the logic does not require money.

    If a capitalist uses a tool that previously made 100 widgets and now makes (net) 108, then the rate of profit is 8%. So after sales they now have the equivalent of 108 widgets to deal with.

    So given the capitalist assumption that there is no tendency for a falling rate of profit, the next year will also produce 8% but now on accumulated capital, with the same factory, into the same market and using the same number of workers.

    So the numbers are exactly the same but without dollar signs.

    Under capitalism, with a constant rate of profit, the capitalist demands:

    Y1 – 108
    Y2 – 117
    Y3 – 126
    Y4 – 136
    Y5 – 147
    Etc.

    By which time the workers are completely exhausted and there is insufficient market for the widgets. Workers originally made 100 with no tools made 108 with a new tool, and now the capitalist wants them to work harder to produce 147.

    However for a co-operative, things are different;

    If a cooperative uses tools that previously made 100 widgets, and now makes (net) 108, then the productivity rate is 8%. This does not go into capital but into wages. So after sales they have 100 widgets to deal with in production. The extra 8 gives workers a more commodious lifestyle. This applies every year.

    Under cooperative arrangements a possibility is,

    Y1 – 108
    Y2 – 108
    Y3 – 108
    Y4 – 108
    Y5 – 108

    And workers receive whatever rise in standard of living they can get with a constant extra flow of 8 widgets per year, without being exhausted and with enough wages to provide all the market that is needed.

    If the cooperative put the extra 8 widgets into assets (not wages) and calculated a profit: the rate of profit would fall as described earlier.

    In practice, a cooperative may choose to split the extra 8 widgets between building their assets (or more tools even) or funding wage increases.

    The capitalist ends up in an economic crisis, the cooperatives end up with a stable growing economy.

  78. Ernestine Gross
    January 10th, 2013 at 08:16 | #78

    BilB,

    I still disagree with you even though I would agree there are many applications of mathematics in natural sciences and in economics and sometimes the transfer of the mathematical knowledge goes via engineering. Sometimes it works well for a short period of time and then causes problems . An example from macro-economics is the Phillips Curve. Why the Phillips curve didn’t work anymore in a macro-economic management context is still the subject of some discussions (ie competing theories). Lets look at a simpler example. It was an electronics engineer who privately and without charge taught me the mathematics known as Fourier transformation in 1976 and I applied the mathematics to the analysis of short versus long term relationships between money supply and inflation in several countries. I understand the application still works in engineering but I am very confident in saying my specific application to a topic in economics wouldn’t work now because the institutional environment has changed (changes in the regulation of financial markets and ‘globalisation’). Another example is the application of game theory in biology and in economics. While both use the same mathematical theory, the applications (methods) differ because the subject matter differs.

    Consider ‘unemployment’. The word is easy to write down but that is about it. As mentioned in one of JQ’s recent post, even if one set aside mesurement problems, there are conceptual problems as to what one is trying to mesure because the notion of ‘unemployent’ is not independent of the way people tend to think of ‘how the economy works’ and, more importantly, what the subject matter of economics is. Under the heading ‘unemployment’, people who have invested their time in becoming an electronics engineer are lumped together with people who invested their time in becoming train drivers, cooks, English teachers, accountants, etc, etc. Is there an equivalent aggregation of electrones??

    It may well be the integration of knowledge via mathematics results in a theoretical framework where biology, engineering, economics, psychology, etc can be treated within one coherent theoretical framework. To the best of my knowledge, there have been and there are now many bright mathematicians working in conjunction with people from other fields or alone but the ‘model of everything’ is at best work in progress at present.

  79. Chris Warren
    January 10th, 2013 at 08:50 | #79

    J-D :
    @Chris Warren
    ‘The other 9 workers do everything that is required, and do so for a wage,’
    In your scenario, who’s paying wages to workers to build a factory?

    If a cooperative initially has no factory, the first year is spent producing factory plus food.

    The second year then produces – depreciation plus food plus products.

    No issue

  80. Chris Warren
    January 10th, 2013 at 08:51 | #80

    J-D :

    ‘The other 9 workers do everything that is required, and do so for a wage,’
    In your scenario, who’s paying wages to workers to build a factory?

    If a cooperative initially has no factory, the first year is spent producing factory plus food.

    The second year then produces – depreciation plus food plus products.

    No issue

  81. J-D
    January 10th, 2013 at 09:13 | #81

    @Chris Warren
    Why would the workers in your scenario put in the effort to build the factory in the first place on top of the effort they would have to be putting in to support themselves at the same time?

  82. TerjeP
    January 10th, 2013 at 10:13 | #82

    Especially given that as owners of the factory in Chris Warren land they would not have any right to demand a return on their capital.

  83. Ootz
    January 10th, 2013 at 10:15 | #83

    J-D, you may want to look up the Mondragon collective to get your answer. From wikipedia:

    The Mondragon system is one of four case studies analyzed in “Capital and the Debt Trap”, which summarized evidence claiming that cooperatives tend to last longer and are less susceptible to perverse incentives and other problems of organizational governance than more traditionally managed organization.

    However, as Noam Chomsky commented, they still operate within the limitations of an overall capitalist system with all its warts and all:

    “Take the most advanced case: Mondragon. It’s worker owned, it’s not worker managed, although the management does come from the workforce often, but it’s in a market system and they still exploit workers in South America, and they do things that are harmful to the society as a whole and they have no choice. If you’re in a system where you must make profit in order to survive, you’re compelled to ignore negative externalities fixed on others.”

  84. Chris Warren
    January 10th, 2013 at 10:23 | #84

    @J-D

    They would put the effort in to support themselves and obtain a surplus to obtain a higher standard of living.

    Chomsky is part-right – Mondragon is a strange case, and not representative of a stable growing economy.

    It is however better for everyone concerned than pure capitalism.

  85. Chris Warren
    January 10th, 2013 at 10:25 | #85

    TerjeP :
    Especially given that as owners of the factory in Chris Warren land they would not have any right to demand a return on their capital.

    Workers just get the ever increasing higher standard of living. They will recognise that their capital does demand depreciation.

  86. Ootz
    January 10th, 2013 at 10:36 | #86

    Further, my argument is, what ever role and name you give to the various ‘actors’ in Chris’ fictional enterprise, they still are only players in a game where everyone wants to get more out of it than the enterprise can sustain. As the above mentioned ‘Nut Game’ experiment demonstrates, most players go for short term unsustainable gains or want to ‘get into it’ before someone else does. To complicate the game and ‘invent’ more rules and ‘types’ of players will only prolong it artificially for it to crash latter with increased fallout.

    BTW, in all my time playing Monopoly in my misspent youth, I have only managed once for all the players to collaborate and bust the bank. With all the real estate on the board and $s jammed under, we all declared our selves winners.

  87. Tom
    January 10th, 2013 at 11:02 | #87

    @Ernestine Gross In reply to comment #12 in the thread “How effective is fiscal policy: Guest post from Roger Farmer (crosspost at CT)”

    It seems there might have been some miscommunication.

    I now have a bit of clarity on the points you were trying to make.

    “negative wealth is excluded by the minimum wealth condition”

    This may be to be expanded. For example, what is negative wealth, does it mean people have more liability than asset? Or expenditure exceeds income? Or both conditions must apply? If people can have more liability than asset is there a point of having a minimum wealth condition concept? If so to what degree of negative wealth would harm the existence of people or distortion to made to the market when institutions like charities and bankruptcy laws apply? It is difficult to model everything, this is certainly problematic for students and people who want to learn macroeconomics, but like I said before, macroeconomists’ thinking are not confined to models.

    “Unemployment benefit is not necessarily the same as satisfying a minimum wealth constraint (the latter ensures each individual can chose at least a little bit of everything on offer”

    I have no objection to you claim of the poor level of unemployment benefit Australia and Germany currently have, but if minimum wealth constraint should ensure each individual can chose at least a little bit of everything on offer, what level should unemploment benefit be at would be increasingly hard to determine. How much choice should individual have to meet minimum wealth constraint differs if you ask different people.

    “…reject your statement “as long as the financial market is willing to lend them money, they should not die from starvation” as a solution to the problem.”

    Maybe I wasn’t clear in my previous comment, I do not mean that is a mean to a solution to the problem. I was simply referring to what happens to people with expenditure exceeding income even when they have negative wealth. In the US, prior to the the crisis, people were allowed to take mortgage more than 100% value of the house (there were products that allows you to take even more than 100%), there were negative amortisation loans which meant that your repayment doesn’t even cover the interest on the loan. Using a simplier example, people can use overdraft, credit card or personal loans even if you are in negative wealth (and unemployed) as long as the financial market are willing to lend to them. The evolution and creation of the financial products as risky as the above is very difficult to model if one is to model the financial market (although the US financial market is significantly underregulated), because it is hard to predict what product will the financial market come up with in the future thus affecting the “equilibrium”.

    The conventional finance courses aren’t much help either, as the banks in the US were raking up leverage ratio of 40:1 before the crisis, but their cost of finance is significantly lower than what it should be. In this sense, risk was mispriced, and finance equations simply broke down.

    “However, the EU[Euro] countries have effectively limits on government debt.”

    In a sense, yes, but there is no strict ceiling that the government debt “must not” exceed 60% of GDP, but the debt ceiling in the USA do. This has major difference as although they are both “forced” to use austerity, the USA government can not literally borrow further if it exceeds the ceiling while EU countries can. This creates major economic disruptions and shocks.

    “limiting government debt is of no use without limiting private debt creation”

    Like I said before I’m not a MMTer, but national account really is important. If price hardly ever go downwards (other than Great Depression and Japan like episodes), if a country have a trade deficit, either the government or the private sector must incur debt (go into deficit) to match the trade deficit, if not living standard simply falls and the debt ratio to GDP may not even change at all. This is exactly what we are seeing in EU.

  88. J-D
    January 10th, 2013 at 11:33 | #88

    The experience of Mondragon — and, in fact, the experience of cooperatives generally — shows that it’s possible for cooperative investment to perform most and perhaps all of the kinds of economic function that are performed by capitalist investment.

    But for some reason there’s a lot more capitalist investment around than there is cooperative investment.

    I don’t know of anything now that prohibits people from starting new cooperative ventures, and I don’t know of anything in the past that prohibited people from starting cooperative ventures back when the economy was not already dominated by capitalist ventures. But cooperative ventures are on average far smaller than capitalist ventures in size and in aggregate a far smaller part of the whole economy.

    So I wonder whether, if capitalist ventures were prohibited, leaving it to cooperative ventures to fill their place in the economy, there’d be a substantial negative effect on aggregate production and on people’s material well-being. I don’t say there would be. I don’t know. It just seems to me that it’s something that anybody who advocates the prohibition of capitalist ventures should be taking into account.

  89. Chris Warren
    January 10th, 2013 at 12:11 | #89

    @J-D

    Is the university co-op bookshop far smaller than capitalist bookshops?

    Is the NRMA /RACV far smaller than capitalist alternatives?

    In London, are housing associations far smaller than capitalist housing enterprises?

    In principle there would be a boost to aggregate production because some unemployment would be soaked-up. This would boost final consumption and lower taxes. Risk and losses will also be reduced because prices will better reflect society’s purchasing power. Uni Co-op bookshop prices for members are typically 10% less than capitalist prices.

  90. J-D
    January 10th, 2013 at 13:04 | #90

    @Chris Warren
    My statement was that cooperative ventures are on average far smaller than capitalist ventures in size and in aggregate a far smaller part of the whole economy. Citing some instances of large cooperative ventures doesn’t show that statement to be untrue.

  91. Chris Warren
    January 10th, 2013 at 15:08 | #91

    @J-D

    But not citing any examples doesn’t show your statement to be true.

    Anyway this may interest you and others.

    http://tinyurl.com/oz-coops

  92. Jim Rose
    January 10th, 2013 at 15:44 | #92

    If cooperative ownership is so efficient, why are there so few cooperatives? Workers’ cooperatives should be able to slowly under cut other firms on price because they do not have to pay a profit to capitalists.

    Building societies, credit unions and some life insurance companies were mutually owned by their customers, but they fell out of favour because of a lack of price and product competitiveness.

    Cooperatives are not economically viable because of the intrinsic difficulties of entrepreneurship and management and most workers prefer working in capitalist firms.

    Nozick pointed out that few join a kibbutz. Six per cent is the maximum proportion of any population who would voluntarily choose to live in a socialist community. More recently, 2.6% of the Israeli population live on a kibbutz.

    Originally, most kibbutzim followed strict socialist policies forbidding private property. They required near-total equality of income regardless of differences in productivity.

    An even more durable example of voluntary collectivist living is Catholic monasteries and convents but notice that these too were founded on a realisation that close family ties are inimical to communal ordering.

    Like monasteries and convents, kibbutzim prevent people from fleeing through communal ownership of all property. You leave with the shirt on your back.

    Many hybrid organisations exist in the market ranging from joint ventures and agricultural seller and supermarket buyer co-ops to labour owned firms such as in many professions. Rarely do we find real existing cooperatives with all workers and only workers having equal ownership rights. Non-working owners, non-owning workers and unequal distribution of shares are frequent.

  93. rog
    January 10th, 2013 at 16:35 | #93

    @Jim Rose That is simply not true, building societies and credit unions were and are still very effective in bringing competition to the banks. Their only negative is lack of capital for expansion and regulation.

  94. Chris Warren
    January 10th, 2013 at 21:36 | #94

    Jim Rose

    You completely misunderstand. The argument for cooperatives is that they provide for much greater stability and long-term prospects for the Australian population and that, as capitalism goes into crisis, this is necessary.

    Whether cooperatives are more efficient is another matter. By increasing employment and better pricing, and better satisfying social needs, this may be the case. No system is efficient if it leads to a GFC with over 20% unemployment and destroying national currencies, so this issue is passe.

    Cooperatives have no intrinsic difficulties with entrepreneurship or management – this is a furphy. Cooperatives take all these necessary functions and entrench them within the labour force. There is no outside capitalist distorting production for their own ends.

    You should read the AI paper at: http://tinyurl.com/oz-coops This will broaden your understanding. Citing monasteries and kibbutz is far too narrow and pathetic for the modern era.

    Whether there are hybrids or not, is not really a moot point.

  95. J-D
    January 11th, 2013 at 08:55 | #95

    @Chris Warren
    ‘According to the International Cooperative Alliance 2007 Annual Report – worldwide, cooperatives have a turnover of nearly £500bn, around one fiftieth of world GDP, …

    ‘Every OECD country has an important and very successful cooperative based component of their economy ranging from 0.5% (Australia) to 16.1% (Finland) of total GDP.’

    Source:
    http://www.artzone.coop/2012/year/

    This appears to confirm what seems obvious to me, that in aggregate cooperative ventures are a far smaller part of the whole economy than capitalist ventures.

    What I don’t know is why this is so.

  96. Ernestine Gross
    January 11th, 2013 at 09:58 | #96

    @Tom

    Good idea to move to the sandpit.

    “negative wealth is excluded by the minimum wealth condition”
    With respect to Radner’s model of a competitive private ownership economy with a sequence of commodity and securities markets:

    For each date-event pair in the sequence of markets, each individual’s wealth (before the market opens) is defined as the market value of the commodities (sum of price x quantities), which it owns at this point in time (outcome of predecessor period’s transactions) plus the market value of the share portfolio (including dividends) which it owns at this point in time (outcome of predecessor period’s transactions).

    Joint ownership of ‘producers’ is possible, Equity shares are tradable, short sales (borrowing) is possible, for each individual as well as in aggregate up to an exogenously determined limit (in Radner’s model).
    A ‘commodity’ is defined by its physical characteristics, time of availability, location of availability and state of nature conditional upon which it is made available. Human services – various types of skills – are treated as commodities owned by the people who supply these types of ‘labour’. A person may have several skills.

    The minimum wealth constraint means at each date-event pair, each individual has positive wealth such that it can choose a little bit of whatever he or she likes. Relatively more wealthy individuals can have a bit more at some date-event pairs or for all date event pairs. There is no presumption of people being ‘capitalists’ or ‘labourers’. Suppose a particular individual owns nothing except his ‘labour skills’. Then the minimum wealth constraint requires that the market value (‘price’, ‘wage’) is high enough such that by supplying his skills he or she can make a consumption and investment decision (eg short selling securities) to have a ‘standard of living’ as described. (In short, the budget constraint is not zero in terms of micro-economics. In my interpretation, the minimum wealth constraint removes the sharp distinction between a Walrasian demand and the Keynesian notion of effective demand.)

    The change in an individual’s wealth from one date-event pair to the subsequent date-event pair could be interpreted as ‘income’. It could also be interpreted as ‘profit or loss’.

    “Unemployment benefit is not necessarily the same as satisfying a minimum wealth constraint (the latter ensures each individual can choose at least a little bit of everything on offer.)” and your question: “…what level should unemploment benefit be at would be increasingly hard to determine. How much choice should individual have to meet minimum wealth constraint differs if you ask different people.”
    The model in question (as all other models in analytical economics) is not prescriptive. As an economist, I would be prepared to say:
    a) Obviously the minimum wealth condition cannot be taken literally (how would I be able to consume a little bit of what is on offer in New York in restaurant XYZ while I am living in Sydney, eh?).
    b) In an applied context, the notion of ‘minimum wealth constraint’ can be interpreted in a social context (eg via representative democratic processes, which often aggregate information from other social sciences or people in general). I would expect public debate on this topic.
    c) People with relatively substantial personal wealth, who preach freedom of choice but are unwilling to pay relatively higher taxes for unemployment benefit (or other social services like health, education, transport infrastructure, research in various scientific fields) are not credible.
    Debt limits, US vs EU[Euro]. The debt limit I the US is effectively also flexible.

    “If price hardly ever go downwards (other than Great Depression and Japan like episodes), if a country have a trade deficit, either the government or the private sector must incur debt (go into deficit) to match the trade deficit, if not living standard simply falls and the debt ratio to GDP may not even change at all. This is exactly what we are seeing in EU.”
    I can’t agree with your argument(s).
    1. Your argument ignores time. Surely there is a difference between an occasional international trade deficit in a time series and a growing and persistent trade deficit.
    2. Some people have promoted ‘globalisation’ (without making clear what it is supposed to mean) and now it shows that some people want to have their cake and eat it.
    3. Growing and persistent private and government debt international debt is not sustainable (because the rest the world is not populated by fools and, as the GFC showed, ‘the market’ is indeed self-correcting in the sense that a bubble bursts – self-correcting has not the same meaning as the naïve believers in ‘free markets’ suggest)
    3. Why would living standards fall if private and public debt would be reduced? I am not sufficiently familiar with the US real estate market (prices and people), so I shall relate my argument to Sydney. There is a ‘high end’ of this market. It isn’t quite clear at what price this ‘high end’ starts. At present my best guess is $3million going up to $25million (or a bit more). I propose the same people (roughly speaking and setting personal circumstances like divorce aside) would live in the same houses if they would be priced at half the amount (because this price would still is too high for middle and lower income people). Not all of these houses were bought cash. Debt drives up the value of real estate. The face value of debt is not flexible (only repayment changes this value). It is debt which causes inflexibility in the ‘price system’. I am saying it is the wealth distribution that is the problem and, at least in the US, the idea of moderate wealth redistribution is like showing a red flag to a bull. Before the US can reduce debt seriously, they have to change the conditions which fuel its growth.
    4. The debt to GDP ratio not changing is not a problem if this ratio is sustainable (or even optimal).
    5. IMHO there are quite distinct segments in Europe at present. There are EURO member countries, which fall into two segments: the relatively large part is stable and a relatively small part is unstable. And there are the non-EURO countries. In this segment of Europe, there is the UK and, quite separately in structure, Denmark and Sweden. Australia is similar to the stable countries in Europe.

  97. Chris Warren
    January 11th, 2013 at 12:23 | #97

    @J-D

    A cooperative serving 50% of the population may represent 10% of GDP.

    A capitalist serving 2% of the population may represent 90% of GDP.

    Serving 50% is more worthy, inclusive, stable and desirable.

    As your link indicates:

    United Nations estimated in 1994 that the livelihood of nearly 3 billion people, or half of the world’s population, was made secure by co‐operative enterprise.

    The fact that cooperatives only occupy a relative smaller part of GDP probably helps explain why the GFC’s we have seen over the last 100 years keep reoccurring.

  98. BilB
    January 11th, 2013 at 14:03 | #98

    Ernestine Gross,

    All I can say to is, again, you don’t know what you don’t know until you look around.

    You mention unemployment. Electons on their own are unable to “represent” unemployment, but quantum physics may have some applications there. But for a far simpler technique the current sweep of 3D cameras are able to apply attributes to each and every pixel. So if people displayed their qualification, age, marital status, income level, lack of income level, interests, etc, as colours, shapes, proportion, position, etc (and think about that, the fact is that largely people do) then it would be possible to extract every economic thing about a demographic with one single aerial image shot. The fact that you use unemployment, a notion that is in fact fuzzy,

    https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=CEF2010&paper_id=141

    ….comes to mind as a useful (Engineering origin) concept.

    Yes, economics is all about data and analysis. Macro economics is about aggregates, behaviour, predictions and dynamic control. and the subject of the week, “is macro economics relevent and effective”. Well obviously it is both, but can it be more effective? I say yes, with new techniques and understanding. Or, maybe, economists should just stick to their knitting and muddle forward.

  99. J-D
    January 11th, 2013 at 14:12 | #99

    @Chris Warren
    I wasn’t suggesting anything about relative worthiness. I was suggesting something about relative scale of investment. I don’t have a problem with the suggestion that it would be better if all the investment that’s channeled through for-profit corporations were instead channeled through cooperatives. What I don’t know is whether it’s possible. I’m not sure quite what the UN means when it talks about the number of people whose livelihood is secured by cooperatives, but more likely than not it’s an indicator that cooperatives are capable of generating employment on the same scale as for-profit corporations. By itself, though, that doesn’t prove that they’re capable of generating investment on the same scale. I don’t know whether they can, but it appears that they don’t, and I think it would be important to know why that is.

  100. January 11th, 2013 at 14:28 | #100

    @Ernestine Gross

    Thanks for explaining the Radner’s model, it was laziness of me to not look up the model for definition.

    “The minimum wealth constraint means at each date-event pair, each individual has positive wealth such that it can choose a little bit of whatever he or she likes.”

    Why does an individual must be constrainted by positive wealth to have a choice of whatever he or she likes? If he/she can borrow in order to expand his/her choices this concept is difficult to apply, unless there is a ‘proper’ constraint on how much negative a person can go into before he/she will no longer be able to receive any finance from any agent in the economy (maybe through laws or regulations).

    For example, a relative well off may decide to borrow 60% of mortgage value for the same house that a relatively worse off decides to borrow 120% of mortgage value (of course this “may” can not happen if there are actual constraints in place). In this sense, the choice made by the two agent is exactly same in quality regardless of their income/wealth level. Of course, the relative worse off agent might end up defaulting, but the ability to make this choice makes the concept of minimum wealth constraint on choices made by individuals difficult to apply.

    “Then the minimum wealth constraint requires that the market value (‘price’, ‘wage’) is high enough such that by supplying his skills he or she can make a consumption and investment decision (eg short selling securities) to have a ‘standard of living’ as described. (In short, the budget constraint is not zero in terms of micro-economics…..”

    Budget constraint only applies if the individual can no longer obtain finance through any means. As I mention in the above, unless there is some predetermined point by the financial market, law or regulation etc. An individual doesn’t get constrainted by the negative wealth or even negative income at long as he/she can obtain finance. While a business may well differ to an individual in the financial market’s risk analysis, how meaningful is budget constraint when there were leverage ratio of 40:1 prior to the crisis? Using non-business agents, some students in the US were having 6 digit student loans without any income. While this “standard of living” may only be temporary, availability of the consumption and investment choice do affect the market (thus it should affect the model).

    On unemployment benefit, I get your point that the level can be determined in social context. However in the world we currently live in, it “may” be difficult to have a consensus or to get an agreed amount if the level of unemploment benefit should to determined by public debate. Through disinformation in the media and the difference in people’s choice, their own calculation on what choice should they have and to add to that taxpayer’s hypocrisy.

    “The debt limit [in] the US is effectively also flexible”

    The ceiling can be raised, but if it is not raised and the ceiling is reached, the Treasury can not issue any new bonds. This debt ceiling in the US however, is not an effective self constraint even in the current legal framework due to the fact that the Treasury, as pointed out by Laurence Tribe, can legally print currency to honor the bonds issued by the Treasury as well as avoid issuing further bonds.

    With regards to National Accounts. It is true that it ignores the flow in these figures through time, however if we are to set an end of year (or half yearly, quarterly or monthly figures) date to summarise the movements in these figures for a particular year. The end result of the relationship between these accounts must match or else the GDP measured at that particular point of time is lowered compared to the same date in the previous year. We can find persistent trade deficits for a number of countries, for example, Australia had historically nearly always had a trade deficit. International trade existed long before globalisation movement and neo-liberalism movement (post 70-80s), we need to know what to do when we get certain trade results.

    “Why would living standards fall if private and public debt would be reduced?”

    Because price is “hardly” ever flexible downwards, if a country have a trade deficit, in the same time private and public debt is reduced; this would lead to decline in production and income. I agree that debt pushes up asset prices, so if private and public debt lowers (this is hardly if ever possible when a country have a trade deficit due to automatically stabilisers) when a country have a trade deficit, asset prices “may” fall.

    “It is debt which causes inflexibility in the ‘price system’”

    I also agree that debt is the major factor, I would like to add profit seeking (keeping or increasing the profit margin) to be the other. The latter is an example of incentive that exists in a market that doesn’t align with social benefit but the free marketers somehow thinks it will all be fine.

    “The debt to GDP ratio not changing is not a problem if this ratio is sustainable (or even optimal).”

    I agree, I have posted data from the US Census Bureau before and have obtained data from the Australian Treasury (which is in excel format). Both data showed periods where budget deficit in the same year when debt to GDP fell, if the fiscal multiplier is large this may well be possible. However, the economic structure changed a lot since the 50-60s, whether Lerner’s Function Finance can still be used today is hard to determine (in this case, however, the government’s ability to print money is ignored for the sake of debt discussion).

Comment pages
1 2 11212
Comments are closed.