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Sandpit

January 7th, 2013

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

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  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.

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