124 thoughts on “Sandpit

  1. @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.

  2. @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.

  3. @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.

  4. @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.

  5. @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.

  6. @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.

  7. @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.

  8. 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.

  9. @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?

  10. @BilB

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

  11. 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.

  12. 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.

  13. @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.

  14. 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.

  15. 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:


    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.

  16. 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.

  17. 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.

  18. “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.

  19. 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.

  20. 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.

  21. 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.

  22. @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?

  23. @J-D


    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.

  24. 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.

  25. @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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