The Google Tax

The announcement by the Conservative UK government of a tax on diverted profits (popularly referred to as the “Google Tax”), along with reports that the Abbott government may follow suit, has received only limited attention (as far as I have seen) but seems like a very big deal. A few observations on this

* It’s notable that these are conservative, business friendly governments that are, like all governments, short of money. It appears that, thanks to the steady drip feed of revelations about the “Double Irish”, Luxembourg private rulings and so on, that, even for such governments, highly profitable multinationals have become an appealing target, at least relative to domestic taxpayers

* If successful, this tax will turn two of the standard presumptions of the corporate tax debate on their heads. First, that corporate tax minimisation is not only legitimate but part of the obligation of managers (the corresponding shift was made with respect to individuals, in Australia at least) decades ago. Second, and more important, that global corporations can choose where they pay tax. The point of the UK tax is that, once corporations are found to be engaged in tax avoidance (pretty much a slam dunk), they can be made to pay in any jurisdiction, at rates that jurisdiction considers appropriate.

* It’s hard to see how corporations like Apple and Google can dodge this. They could refuse to supply their goods and services to the UK, but that would be immensely costly, and would be likely to provoke retaliation from other EU members.

* This will make a big change to the OECD processes aimed at a co-ordinated response to base erosion and profit shifting. Until now, corporations have had a strong interest in slowing this process down, and shopping around for good deals from the likes of Ireland, Luxembourg and, of course, Delaware. Now that they face the risk of facing unco-ordinated punitive action applied in many different countries, enlightened self-interest would suggest that they should support a global deal.

* In combination with the GFC, which revealed the extent to which “global” banks actually depended on protection from their home national governments, limits on global tax evasion undermine much of the analysis of globalisation that was dominant in the late 20th century

* If capital income can be taxed effectively in the countries where profits are generated, there’s much less need for ideas like Piketty’s global wealth tax.

71 thoughts on “The Google Tax

  1. Worth having a look at the debate and discussions on Richard Murphy’s Tax Reform UK blog. Murphy and others have been campaigning on this issue for years. Murphy is doubtful about the likely effectiveness of the UK version of the Google Tax, and we should be similarly sceptical about a Joe Hockey version.

  2. Some good points there, and he clearly has a lot of expertise on the topic. Still, I think the fact that such a tax is being imposed at all is more significant than the details

  3. I take your point that the imposition of the tax is in itself important. It sends a message. But there is also the possibility that governments are clamoring to be seen to be doing something on an issue that is gathering much attention. After all big business is somewhat on the nose. The credibility of Australia’s approach to this tax must then be treated with some skepticism. This is especially so when the government continues to strip money out of the ATO, which is consistent with the ethos that tax is deleterious to ‘economic growth’. When he first announced the end of age of entitlement in a 2012 speech to the Institute of Economic Affairs in London, Joe Hockey argued that “given the general acceptance that the increased drag from higher taxes would compromise economic growth, the clear mandate is to lower expenditure”. Nothing said or done since contradicts.

  4. Amazing that Osbourne has done something fiscally sensible. Stopped clock, or total eclipse?

  5. I think it is improbable that Joe Hockey would actually do such a thing. Say it, sure, do it, no way.

    And, call me a cynic, I have my doubts about Mr Osborne. It goes against their most basic belief – taxes bad : reduced government good.

    More likely this is simple “signalling” to the multinationals and their accountants that some publicly visible changes might be required (to keep these conservative governments in place). Plus of course a bit of positive sounding PR for the chooks.

  6. @Cambo
    I’m a little more optimistic. These entities are mostly foreign (ie mostly not part of the constituency) acting against the interest of the government, the taxpayers in the electorate, the businesses in the electorate, the corporations in the electorate and the beneficiaries of government spending in the electorate – in fact, just about the entire electorate. Providing there’s media attention on the issue, I can’t possibly see how serious action is avoidable.

  7. @John Quiggin Well I am optimistic too, the British and Australian moves have at least a symbolic value (not to be underestimated in politics), and they put the issue on the agenda, which means future governments can enter the field with stronger measures. A big reason for Richard Murphy’s pessimism is that by their very nature these measures require an internationally agreed approach, country-by-country reporting, etc. On this issue no country can really go it alone… like climate change responses… then there are matters like transparency. Murphy and others have also pointed out repeatedly that the big four accountancy firms need to be reined in; at present they actually provide policy advice to governments as well as accounting advice to the big international firms. Watch this space.

  8. I find it absurd that it has taken this long, what were govts doing prior to this ? head in the sand ?

  9. Troy has a good point – the local business constituency has a strong interest in getting foreign interlopers to pay tax, on competitive neutrality grounds. It is by no means inevitable that a government captured by business interests will want Google et al to get off scot free – that depends which business interest has done the capturing.

  10. I wonder whether this sort of thing will be undone by trade agreements, specifically for Australia the Trans-Pacific Partnership. The TPP process seems to be run largely by multinational corporate lobbyists, who would now be preparing legal timebombs so they could sue the problem away. The $880M News Corp victory over the ATO would seem small by comparison.

    Abbott would see it as his Howard GST moment: a conservative implementing a big new tax to fund middle class welfare. The fact that it is progressive and wouldn’t need to be taken to an election would suit his current situation neatly, because he couldn’t win a popularity contest in his own backyard at the moment.

  11. @Troy Prideaux
    Ah yes Troy, but plenty of the Libs’ biggest donors are multinationals. It may be called the Google Tax but it would also apply to resource giants. Can you imagine the Mining Council poring over this and figuring out it may cost them more than the original MRRT?

  12. Apart from anything else, the Tax Justice Network has calculated News Corp avoids $1.6 billion in taxes per year through a large network of tax haven subsidiaries. They would be hurt far more by a Google Tax than Google in this country. Westfield, Transurban, Sydney Airport… not to mention the pervasive nature of the Macquarie Group and the big four accountancy firms in perpetuating this system of tax avoidance. It’s anathema to traditional Liberal values to step in and stop it, I tell you.

    Which probably means Abbott will bung it on, because he’s got an ear so tinny you could sail it on Sydney Harbour.

  13. Murphy and others have been campaigning on this issue for years.
    (Spam link deleted)

  14. m0nty :
    @Troy Prideaux
    Ah yes Troy, but plenty of the Libs’ biggest donors are multinationals. It may be called the Google Tax but it would also apply to resource giants. Can you imagine the Mining Council poring over this and figuring out it may cost them more than the original MRRT?

    Other industries like the resource industries do have some tricks, but they also contribute significantly to both the economy and government revenue (both state and fed). What’s more they’re good employers and they take significant risk in terms of exploration and capital costs and bring income to the economy from international trade to allow us to enjoy a higher standard of living (other than trade exposed export industries). So, these industries actually do have some (arguably) earned political capital to utilise to protect their interests.
    These IT behemoths, don’t really do any of that. The benefit to the economy is purely in the capability of the products they market and they use these IP tax expenses that we all agree are purely bogus to avoid paying tax. The amount of tax Google paid in 2012 IIRC was utterly ridiculous and nearly all that revenue came from marketing services.

  15. Good to see that spambot filter that is so frustrating to real commenters is doing its job.

    Makes it worth all the hassle!

  16. JQ: “If capital income can be taxed effectively in the countries where profits are generated ..” My limited understanding is that the feasible approach is to tax corporations by prorating global declared profits as declared to investors by country, according to the share of sales or value added or even employees, which are reasonably objective. That’s what California does. The whole tax avoidance scam works because it’s easy for accountants to shift profits to low-tax jurisdictions, and hard for taxmen to challenge.

  17. @Megan

    I have to admit this is really good spam, so I’m going to leave it up for a while, in case others want to look at it.. Prompt and right on topic, almost as if it’s being done manually. Given that WordPress still inserts a no-follow, I don’t see the point, though.

    Just to restate, there’s nothing I can do about the spam filter, or about the general problem of spam. If only the NSA would use its powers for good!

  18. I was going to say the same. That’s an annoyingly clever way of passing through the filter. Stick to one link, and only use (mine for) words that have already made it onto the page. I can’t really think how you could block it…

  19. @John Quiggin

    Your call.

    But I note that you have also left the spam link active in the spam-bot’s comment – a “comment” which appears to me to be “farmed” from a section of Peter Chapman’s comment at #1, rather than manually done.

    I take your point and don’t direct my criticism at you, rather at the nonsensical ‘system’ which let’s that sort of thing through but sends genuine comments to eternal moderation.

    If we had to put up with a bit of that AND we could get our comments up, then fair enough. But it’s a bit irksome to have “real” comments regularly sent down the hole in the name of spam purity and then see this stuff get through anyway.

    The NSA is incapable of doing good – it is designed for evil.

  20. I hadn’t realised that the spam comment had mined Peter’s comment. That’s tricky! I’ve deleted the spam link but, given that the nofollow attributed was inserted automatically, I can’t see what the spammers are gaining from this, unless they think people will click on the link themselves.

    When I get a free moment, I’ll check with Jacques (Ozblogistan host) as to whether we can retune the spam filter, or whether that is built in.

  21. It may well be that like minded govts will have to band together, a coalition of the willing, to build a war chest to finance the inevitable legal challenge to such a tax. There would be no doubt that these companies would spend huge amounts of cash fighting such a tax.

    As mentioned above perhaps such a coalition could then tackle climate change?

  22. Perhaps the real problem is the extraction (theft) of surplus value from workers by capitalists. The need for redistribution and thus taxation would be considerably less if the workers’ production was not stolen in the first place.

  23. JQ: “I can’t see what the spammers are gaining from this, unless they think people will click on the link themselves.”

    I can think of two possibilities:

    1) The ‘online Turkish flower seller’ site it linked to is a complete scam. ie. any money you send them, you’ll never see again. Any credit card details you submit to them will be abused. Like most of these things, it’s just a numbers game. They don’t care about the 999,970 people who don’t click and buy something (or who insult you and slam the phone down when you try to flog them dodgy negative gearing property investments). They care about the 30 who do. The exceptionally stupid or naive 0.03%.

    2) The ‘online Turkish flower seller’ site it linked to is actually legitimate, but purchased a useless and counter-productive SEO/automated marketing product. ie. they were the ones being scammed.

    Judging by the site content though, I’d definitely lean towards 1!

  24. My letter in yesterdays Fin.

    Without seeing the detail of the so-called ‘Google tax’, as a former Assistant Commissioner of Taxation in the international area of the ATO it appears to me there is one possibly insurmountable problem, Australia’s double tax agreement with Singapore. (Phillip Coorey and Fleur Anderson, ‘Treasurer poised to impose “Google tax”‘ AFR Tuesday 9 December page 1.)

    Under that treaty (and all Australia’s tax treaties) Singapore has taxing rights over the income of its resident companies. As a company incorporated there Google Singapore is subject to income tax in Singapore and not Australia, including on profits which are sourced from Australia. The exception is when Google Singapore has a permanent establishment (PE) in Australia, for example a branch physically located here. Australia then has taxing rights over the income attributable to that PE.

    I understand when an Australian contracts with Google Singapore (by for example placing an advertisement on Google) they do so through a server not located in Australia rather than by dealing directly with its branch here. This means that our treaties, and indeed all our and other country tax treaties, based as they are on 19th century concepts of physical presence, make collecting tax from Google Singapore almost impossible to do because Singapore, not Australia, has the taxing rights over Google Singapore profits arising in Australia. (I am assuming the Australian PE of Google Singapore has little role in earning the income here.) Without a change to our Singapore, and indeed all the other tax treaties, any income tax imposed on Google by Australia will in all likelihood be invalid under the treaty.

    My suggestion is to impose an operating fee on Google and other taxpayers carrying on business in Australia but paying little tax here. Twenty percent of estimated turnover might be a starting point.

    And while I have your attention on tax matters, Joe Hockey’s announcement that ten multinationals have ATO auditors embedded in them is a joke. Only ten? Are the other hundreds of multinationals all squeaky clean?

    Further, that doesn’t address the fact that for the last decade the International area of the ATO has been destroyed and its expertise wrecked, lost or dispersed. With 2200 staff cuts so far in the last twelve months (and an extra 2500 planned for the end of 2017), more of that international and audit experience has been or will be lost. The beneficiaries of the massive job cuts in the ATO by the former KPMG partner and current Commissioner are the rich and powerful.

    Putting a few auditors into ten multinationals isn’t going to change that. It is a smokescreen to cover the destruction of international expertise and capacity in the ATO and institutional changes within the organisation which favour tax avoiding big business at the expense of the rest of us.

  25. @John Passant

    It’s interesting to me that you allude to the destruction of governmental capacity in the ATO. You say;

    “… for the last decade the International area of the ATO has been destroyed and its expertise wrecked, lost or dispersed. With 2200 staff cuts so far in the last twelve months (and an extra 2500 planned for the end of 2017), more of that international and audit experience has been or will be lost. The beneficiaries of the massive job cuts in the ATO by the former KPMG partner and current Commissioner are the rich and powerful.”

    I think we can safely say that this is part of a much wider pattern. Quite recently, the Australian National Audit Office. (ANAO) bungled its job data. This has turned out also to be due to systematic dismantling of its capacity to do its work.

    More widely, governmental capacity is being dismantled almost globally to allow Transnational Corporations and the world’s richest oligarchs to run economies rather than having national economies run by governments. One shudders to think of the free rein the TPP will give to these same transnational corporations and the oligarchs.

    At the same time, I suspect China and Russia are not so naive. They will make every use of the current capitalist system whilst ensuring the state (admittedly a one party state or chekist state) retains effective overall control. The EU is attempting to move this control to the supranational level. The USA has largely arrived at full oligarchic control where oligarchs run the government entirely in their own interests.

    Outside of those big polities and maybe one or two more like India and Brazil, no nation on earth has the power to resist the TNCs and the mega-states. The rest of us small-fry nations are going to be eaten alive.

  26. As someone who is completely clueless on all this tax stuff, I’m wondering if anyone knows of an accessable introduction to the problems and possible solutions.

    I’m self employed with a pty ltd company, and I never pay company tax. All income earned by my company is either used for expenses, superannuation contributions, or wages. In my circumstance, there is absolutely no point in retaining money in the company and getting taxed on that.

    So, naively, it seems to me that ultimately company funds must either be paid out in wages or dividends to shareholders, at both points where it can be taxed, or retained for further investment. So I’m not sure why that retained profit should be taxed.

  27. bjb, yes company tax must be paid by workers or by capital holders and theory says it is always the first in a small open economy (different matter in a closed economy or one big enough to influence return on capital worldwide). So in one sense tax dodging multinationals just means Australian workers are taxed directly rather than indirectly.

    But it may not be the workers you want taxed. And it is no consolation to local businesses that their workers are being taxed extra because their competitors aren’t taxed.

  28. I originally wrote a very long comment. In short, in essence, I think some genius time is needed, the smartest and most experienced tax experts coming together for the purpose of rethinking the underlying model of physical jurisdictional taxation. The Internet works precisely because its protocols don’t care how info goes from A to B, merely that B is recipient and A is sender. The rest is just routing (well, in a simplified world). Maybe taxation models need to work along those lines.

    Just an entirely under-baked idea.

  29. The problem is that governments, especially those pesky somewhat democratically elected governments, get in the way of capitalist corporations and oligarchs doing exactly what they want. The answer is to minimise, hogtie and then abolish government.

  30. @John Passant

    The UK also has a double taxation treaty with Singapore, and presumably with most of the favored jurisdictions for incorporation, but this doesn’t seem to have stopped the tax (at least not so far). Is the UK case different, or do you expect challenges there also?

  31. The idea of multinational corporations paying the locally stipulated tax rate on profits earned in each of the local economies in which they operate appears to be reasonable and fair. Reasonable and fair objectives are, however, not sufficient conditions to achieve the objective.

    Profit is determined by accountants and verified by auditors. These people may be working on the highest ethical level (not corrobrated by all empirical evidence, but lets set this aside) and the outcome may still be other than expected by the policy makers. The reason is that in most if not all cases accountants neither have the technological knowhow to judge whether a cost item, as evidence by an invoice, is technologically required to generate the profit nor do they have the power to decide to include or exclude an invoive using rules (which would correspond to the assumption underlying the policy objective) other than those provided either by the government or internally. Transfer pricing is perhaps the best known example of the general problem I am talking about.

    A related problem is known as ‘third party related transactions’, often involving a Pty, which allows costs to be shifted from the Pty to the publicly listed company, or, equivalently, revenue to be shifted from the publicly listed company to the Pty. Third party related transactions may or may not involve corporations that are empirically classified as multinationals.

    A gross (no pun intended) example of the pitfalls of governments aiming to introduce a ‘fair tax’, including on multinationals, is the Gillard mining tax. It was not the objective which was misguided. It failed because of lack of technological knowhow – on something good accountants could have advised.

    A revenue tax (‘turnover tax’) would simplify the complexity of the problem(s).

    Wage earners pay taxes on revenue – called income – and on expenditure – called consumption. Is anybody really suprised that wealth inequality grows?

  32. The press stressed Piketty’s global wealth tax as a solution to income and wealth inequality. But Piketty wrote much more carefully. My reading of Piketty’s work is that a global wealth tax is a logical solution to the problem (just as a global price on carbon is a logical solution). As such it can be treated as a theoretical solution concept to the problem. It does not exclude that there exists a portfolio of policy measures, which taken together, achieve the same thing.

  33. Why not provide more details on the double tax agreement.

    What’s the problem?

    If I pay tax in the UK, surely I just claim a 100% deduction from tax bill in Australia. Paying tax in one economy, does not mean it cannot be taxed in another (when residence and earnings do not coincide)?

  34. Matters go much deeper than mere taxes. There is no point fussing about taxes if we don’t understand political economy and environmental fundamentals. A check on world growth indicates a decline in world growth from about six point something percent in the 1960s to about two point something percent now. This indicates advancing stagnation in the global economy over a period of 50 years. (Can I use the term “advancing stagnation” or is there a better term?) The advanced economies taken together are stagnant now. Growth there, or rather here, is finished permanently.

    The limits to growth (which I always bang on about) were not operative in this period except perhaps from about 2005 onwards. So what accounts for the long term decline of world growth? Something else has been going on. Theories abound of course. Some likely suspects are the rise of inequality and the continued rise of monopoly-finance capital.

    The stagnation phenomenon itself is indisputable. World growth is failing, has been progressively failing for fifty years before limits to growth became an immediate issue and it has been failing from the about the end of the Keynesian consensus, right on through monetarism and neoliberalism. This is not to let Keynesianism off the hook either. There might be a case that Keynesianism failed somewhat in its own right before being “repealed”.

    All this points to some fundamental problem with capitalism at least if it is not ameliorated and regulated by Keynesian style macroeconomics and democratic soc***ism and maybe even if it is so regulated. Where government is minimised (1975 until today), we find clear evidence that unregulated or less regulated capitalism tends to monopoly, inequality and stagnation.

    We have two other important things happening as well. Capitalism is moving production from the developed world to the developing world (another reason for the stagnation of the Triad of EU, USA, Japan). The limits to growth are becoming operative. The developed world is in for continuous decline, albeit this will be decline from a high base. All these forces operate against the developed world although I might add that limits to growth will hit the EU and Japan harder and earlier than the USA. The Americas are not as resource exhausted as Europe and Japan. China will also be hard hit by LTG.

    We are absolutely kidding ourselves if we think the game is not changing fundamentally. The West has to accept the end of its growth and find a way to decline gracefully to a lower, maintainable steady state. The whole world will have to do the same thing, accepting growth to be at an end not long after the West’s or Triad’s growth ends.

    Capitalism cannot meet this challenge. It is precisely the wrong system from now on.

  35. @Ikonoclast

    Without wishing to be pedantic, “an end to growth” (presumably in GDP or a derivative of it) does not imply “a decline”. Surely, if there is to be a convergence between the material welfare of people in so-called less developed countries and those in ‘the West’ (as defined by you) then it is a good thing that “growth” in “the West” will be zero or close to zero.

    You keep on talking about ‘capitalism’ (and Prof Q repeatedly said there are many versions of ‘capitalism’). I observe that the term capitalism is typically not used in some countries that are classified as ‘capitalist’. For example, the term ‘soziale Marktwirtschaft’ (social market economy) was first coined in Germany by the leader of the most ‘liberal’ Party, the Freie Demokraten (‘free democrates), Mr Genscher, several decades ago. The term ‘ekologisch-soziale Marktwirtschaft’ was introduced during the Kohl (CDU-CSU) coalition government, which is considered to be conservative, relative to the social democrates. Again this happened a few dacades ago. I read there is a debate whether the appropriate term should be soziale-ekologische Marktwirtschaft to indicate a ranking of priorities. I suppose this ranking, if any, changes over time. The first post WWII Minister for the Economy, Ludwig Erhard (an economist) publicly proclaimed as the objective of all policies: “Wohlfahrt fuer alle” (welfare for everybody). This is an objective consistent with a crucial assumption in theoretical models of a ‘market economy’ available in the early 1950s (minimum wealth constraint). This assumption is not based in prior empirical observations (to counter your critique of economic methodology). The later qualifications (social-ecological) of the mental model of a market economy reflects both, empirical observations and theoretical developments.

    I have never come across a precise theoretical model of ‘capitalism’. So, I rely on my own observations. Relative to the theoretical models of market economies (complete, incomplete, imperfect, partially segmented), capitalism has everything back to front. Its basic premise seems to be that anything which is economically meaningful must be profitable (as defined by accountants) and then, and this is the interesting bit, the practitioners conclude that if an ‘agent’ (to borrow a term from the previously mentioned models) ‘makes a lot of money’ then he or she or it (organisation) must be ‘good’. The more money the better. Now, the profit motive also features in the previously mentioned theoretical models. However, the conclusion which the practitioners of capitalism wish to draw does not follow because the relevancy of profit (and its distribution) is conditional on a lot of other factors. This back to front thing shows up in some opinions I’ve come across. For example, I recall a conversation with a believer in ‘capitalism’, who reasoned aloud: Capitalism works because private firms would go broke if they would not operate efficiently. I didn’t know what to say because it is a little awkward to tell a stranger the obvious, namely that private firms do go broke and there is a long time series of such events and therefore the assertion cannot be true. (This event happened at least 10 years before the GFC).

    I have come to associate the term ‘capitalism’ with legally tolerated confusions, which are profitable for some and not for others. I am probably totally mistaken. Any help on getting clarity in this regard would be appreciated.

  36. So it is of the market system we teach the young. It is of this, as I’ve said, that sophisticated political leaders, compatible journalists, and many scholars speak. No individual or firm is thus dominant, no economic power is evoked. There is nothing here from Marx or Engels. There is only the impersonal market, a not wholly innocent fraud.

    An historical connection does exist, one that should not be passed over. “Capitalism” in its time was not only the accepted designation of the economic system by the identification of those who exercised economic and therefore political authority. There was merchant capitalism, industrial capitalism, finance capitalism. These terms still have use: They create a small barrier to the complete renaming of the system even as it appears in history. One cannot speak of Venice, the supreme example of merchant capitalism, as having had a market system. Reference to the Industrial Revolution still celebrates the birth and power of industrial capitalism. In the modern financial world, allusion to capitalism has never been fully eliminated; wealth, capital, too visibly empowers. But no one can doubt that the renaming of the system from the unacceptable term “capitalism” has been somewhat successful.

    Reference to a market system is, to repeat, without meaning, erroneous, bland, benign. It emerged from the desire fro protection from the unsavory experience of capitalist power and, as noted, the legacy of Marx, Engels and their devout and exceptionally articulate disciples. No individual firm, no individual capitalism is now thought to have power; that the market is subject to skilled and comprehensive management is unmentioned even in most economic teaching. Here the fraud.

    Another name for the system does come persuasively to the eye and ear: “the Corporate System”. None can doubt the modern corporation is a dominant force in the present-day economy, and certainly so in the United States. Nonetheless, allusions to it are used with caution or not at all. Sensitive friends and beneficiaries of the system do not wish to assign definitive authority to the corporation. Better the benign reference to the market.

    [ J.K. Galbraith “The Economics of Innocent Fraud: Truth For Our Time”, Chapter 2-Renaming the System, London, 2004, pp. 19-21. ]

  37. @Ernestine Gross

    The point I was making is that there was an underlying, longstanding trend to lower growth and stagnation even before the limits to growth became or soon become a clear and present drag on the economy. This trend seems intrinsic to late stage capitalism. The proximal cause appears to be an involved complex of decreasing democracy, decreasing regulation, increasing monopolisation, increasing financialisation and increasing inequality.

    The question “What is capitalism?” has a simple answer which leaves a lot out and a long and complex set of answers and disagreements which require a tome. Do you really want a simple answer that leaves a lot out or are you willing to study the literature? That is the real question.

    My simple and somewhat ideosyncratic answer which leaves a lot out is this.

    One person owns the factory, mine or other enterprise. Other persons work for him/her and are paid a wage. The workers produce a product which the owner sells. The difference between the input costs of materials and labour and the selling price of the product(s) is the profit. If the profit is positive then a surplus has been extracted from the process.

    What characterises capitalism is who has control over disposition of the surplus. In the simplest example, the one owner has control over the disposition of the surplus. It can be otherwise as for example a cooperative bakery, Alvarado Street Bakery, in California demonstrates. The workers own and run the bakery cooperatively and democratically. Thus the workers determine the size of the surplus and how it is disposed.

    There might be no surplus if the cooperative workers distribute all the profits as their own wages. There might be an agreed surplus kept back to allow expansion of the bakery. There might be an agreed surplus kept back to be donated to assist poor people. The possibilities are endless and democratically decided by the workers’ collective. I might note that with the capitalist cut out of the picture workers in this bakery earn about double the standard wage for bakery workers. This gives an idea of the size of the surplus extracted by capitalists in America. Alvarado St. bakery is a vibrant, viable ongoing concern, at least last time I fact checked.

    The issue is really about ownership and power. Who has the ownership of the surplus and the power to dispose it? Who has the power to direct the workers, including hiring and firing? Is it to be the one owner (or manager working for share owners) or is to be the workers themselves operating cooperatively and democratically?

    You will see that owners and managers are cut out in worker cooperative socialism and workplaces become democratic rather than autocratic. You will see that much has also been left out of this picture. The state has not even been mentioned yet. A democratic state amends the picture as we know. The state appropriates part of the surplus via taxation of wages, profits and other wealth sources like land and capital accumulation. The state then on behalf of the people disposes of that part of the surplus via all the avenues of state spending. Here we have a hybrid system which we might call social democratic capitalism. It will be more or less social and democratic depending on the detail of all its processes and the size of the state appropriated surplus compared to the capitalist appropriated surplus.

    Already the answer is becoming too long for a blog.

    Footnote on another question: The convergance in wealth between the material welfare of people in so-called less developed countries and the more developed countries could be a good thing. This is if it was orderly, widespread and meant “more of enough” for most people. But we see a lot of trends running counter to this. Where “capitalism” is mature as in the USA we are seeing very significant increases in inequality, so much so that is no stretch to say that the USA contains a third world underclass in its midst. The oppression of this underclass (mostly black) is intensifying rapidly now.

  38. @Ernestine Gross

    I have never come across a precise theoretical model of ‘capitalism’.

    This indicates you have no knowledge of Marx. Typically, this generally disqualifies people from being taken seriously.

    Marx defined capitalism precisely as:

    M – C – M’ (M 19th C money, C productive, ie circulating, capital)

    This was simple schoolboy stuff in Yugoslavia.

    It is not possible to discuss these issues without some familiarity with Marx.

  39. @Ivor

    I hope that Ernestine will read my original reply as well as this.

    It is possible to get into arguments (some definitional and some real) about what is the fundamental basis of Capitalism.

    You said, “Wage labour is the fundamental basis of Capitalism.”

    I said, “What characterises capitalism is who has control over disposition of the surplus.”

    Each of our definitions is one side of a coin which implies and indeed mandates the other side. Each definition and indeed both added together still suffer from being too short just as the description “An elephant is a big animal.” suffers from being too short and does not really tell us much about an elephant.

    The term “wage labour” used in the context of a discussion about capitalism and as a precise term in that discussion aleady contains some other definitions and assumptions.

    “Wage labour is the socioeconomic relationship between a worker and an employer, where the worker sells their labour under a formal or informal employment contract. These transactions usually occur in a labour market where wages are market determined.” – Wikipedia.

    This might be thought a neutral or even a bourgeoise definition of wage labour. It at least implicity contains two general classes, workers and employers, and notes a socioeconomic relationship exists between them. To a Marxist or Marxian thinker, the idea of wage labour would further encapsulate and suggest the quite precise idea of “surplus value” and the employer’s appropriation of and power to dispose of the surplus value. This surplus value is or becomes “capital”.

    To return to my analogy, capitalism is a big animal and it has been and can be hybridised in many ways. We cannot expect any short description or definition to capture anything near its entirety and variety.

    I am not sure whether Ernestine’s questions about “capitalism” and thus by implication political economy mean;

    (a) Ernestine has not read any political economy as opposed to “mere” economics;
    (b) Ernestine is ideologically “colour blind” to political economy by nature or training;
    (c) Ernestine has a comprehensive alternative socio-economics that is non-Marxian or a-Marxian in nature but every bit as extensive and profound in its own right and also seeks to provide a political-economic “theory of everything” as it were. It might be Veblenesque for example or it might be an institutionalist political economy; or
    (d) Ernestine might be rather kindly limiting herself to “pulling my leg” as the vernacular goes when she might in fact comprehensively demolish me.

  40. @Ivor

    William Godwin used the word ‘capitalist’ in his Enquiry concerning Political Justice, and its Influence on General Virtue and Happiness, published in 1794. Obviously Godwin knew nothing of Marx; but he’s still worth taking seriously.

  41. @J-D

    “He (Godwin) distinguishes three “degrees” of property. The first is property in the goods an individual uses personally. The second is property in the product of an individual’s own labour. The third is property which entitles the beneficiary to appropriate the labour of others.

    For Godwin, this third type of property was unjust as it involves exploitation:

    “All wealth, in a state of civilised society, is the produce of human industry. To be rich is merely to possess a patent entitling one man to dispose of the produce of another man’s industry.”

    “Privilege entitles a favoured few to engross to themselves gratifications which the system of the universe left at large to all her sons.”

    This “monopoly of property”, exercised by both landlords and capitalists (Godwin actually uses the term), should simply be abolished by the state ceasing to uphold it. The other two types of property should remain inviolate.” – from worldsoc***ism dot organisation.

    Godwin is pretty much on the money in my opinion. it is no surprise that he anticipates Marx and even develops ideas for Marx as it were. All ideas are social constructs. Nobody invents an idea let alone an intellectual system all by him or her self and without antecedent developments and help.

    Marxist and Institutionalist approaches to political economy are first cousins IMO.

  42. @J-D

    I am not aware of Godwin. Do you study economic history? However if Icon is right – Godwin’s approach to the prevailing mode of production seems to have been a pre-Marx “Marxist” approach.

  43. @Ivor

    You made the general assertion that people with no knowledge of Marx are not to be taken seriously. On reflection, would you qualify that, or do you stand by it just as you first made it?

  44. @Ivor

    Complaints about being taken out of context are valueless unless accompanied by an explanation of what was meant in context.

  45. @J-D

    I can’t reply for Ivor of course but post Marx it would be a little surprising for someone to talk broadly about political economy or national economics without mentioning Marx. Marxist or Marxian analyses are looking considerably more plausible following the failure of the Great Moderation and the ensuing Great Recession or Global Financial Crisis of about 2007 – 2009.

    I agree with Ivor that it is a little hard to take commentators seriously at least now (post 2009) who make NO mention of Marx nor of Marxist or at least Marxian analysis.

    Krugman wrote in 2012;

    “The American economy is still, by most measures, deeply depressed. But corporate profits are at a record high. How is that possible? It’s simple: profits have surged as a share of national income, while wages and other labor compensation are down. The pie isn’t growing the way it should — but capital is doing fine by grabbing an ever-larger slice, at labor’s expense.

    Wait — are we really back to talking about capital versus labor? Isn’t that an old-fashioned, almost Marxist sort of discussion, out of date in our modern information economy? Well, that’s what many people thought; for the past generation discussions of inequality have focused overwhelmingly not on capital versus labor but on distributional issues between workers, either on the gap between more- and less-educated workers or on the soaring incomes of a handful of superstars in finance and other fields. But that may be yesterday’s story.”

    Krugman then goes on to demonstrate that he needs to read Marx or re-read him. Look up “Paul Krugman Discovers Marx (and misses the point)” on workerscompass dot organisation.

    It’s interesting and indicative that the New York Times felt it necessary to run and publish “Was Marx Right?” in its Opinion Pages – Room for Debate on March 30, 2014. Does this sound like the establishment are as confident now that Marxism is totally dead (as an explanatory system of modern political economy) as they were when the Berlin Wall came down? I think not.

    Writing for the affirmative, Doug Henwood opens “I don’t see how you can understand our current unhappy economic state without some sort of Marx-inspired analysis.” IMO he is spot on.

  46. @Ivor

    “Marx defined capitalism precisely as:

    M – C – M’ (M 19th C money, C productive, ie circulating, capital)”

    So, we get

    1 – 1 – 0 is one version of capitalism
    0 – 0 – 0 is another version of capitalism

    etc, etc,

    or, using the alphabet, we get

    A – B – B’

    B – C – C’


    It is even worse than what I had claimed.

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