Capitalism by a Better Name: Sweeter Still

Karl Marx is usually credited with coining the term “capitalism” to describe the economic system of our age.  The prior system, feudalism, accorded power and wealth to those that controlled the land.  Marx observed that power and wealth had shifted to those that controlled capital.  The irony of describing today’s economy as capitalistic is that for Marx capitalism, as he thought of it, was only a small portion of the overarching system that really set him off.

The plain fact is that prosperity and productivity had nothing to do with Marx’s ire.  The Communist Manifesto contains arguably the greatest paean to the productivity of the new system ever penned to paper:

Marx3“The bourgeoisie, in its reign of barely a hundred years, has created more massive and more colossal productive power than have all previous generations put together.  Subjection of nature’s forces to man, machinery, application of chemistry to agriculture and industry, steam navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization of rivers, whole populations conjured out of the ground – what earlier century had even an intimation that such productive power slept in the womb of social labor?”

Wow!  After that you would think Marx would be wild about the bourgeoisie reign.  Note that Marx did not refer to a capitalist system, but to actions and accomplishments of a class of people.  Indeed they were an entirely new class of people eschewing the status of birth for the status of wealth, relentlessly pursuing profit.

This all suggests something deeper and broader for Marx’s negative sentiments found in his manifesto.  In what I believe is the greatest paragraph in all of English nonfiction prose, the Communist Manifesto contains the answer.  Having read both Capital by Marx and Conditions Of The Working Class In 1844 by Engels, I believe the following ideas are from Marx, but the words were Engels’:

“Constant revolutionizing of production, uninterrupted disturbance of all social relations, everlasting uncertainty and agitation, distinguish the bourgeois epoch from all earlier times.  All fixed, fast-frozen relationships, with their train of venerable ideas and opinions, are swept away, all new-formed ones become obsolete before they can ossify.  All that is solid melts into air, all that is holy is profaned, and men at last are forced to face with sober senses the real conditions of their lives and their relations with their fellow men.”

This is powerful stuff.  The context of this text embedded in the Communist Manifesto is clearly negative in its thrust.  Yet, a free market objectivist like me can only be moved by its eloquence, perception and accuracy.  Unlike Marx, I revel in this new state of affairs.  Unfortunately most are not unlike Marx.

In the narrowest sense, Marx preferred the old status based system because it favored lazy intellectuals like him.  Later in the Communist Manifesto he notes that professionals, intellectuals, artists etc. merge into the working class and:

“[L]ive only so long as they find work, and … find work only so long as their labor increases capital.  These workers, who must sell themselves piecemeal, are a commodity like every other article of commerce, and are consequently exposed to all the vicissitudes of competition, to all the fluctuations of the market.”

Heaven forbid!  Intellectuals, professionals and artists have to actually work for a living providing something people actually want and for which they will pay.  Dare I say it, they must be commercial!!!

More broadly and fundamentally, Marx strikes a deeply harmonious cord with the evolutionary base of the human psyche.  The new system, which the word “capitalism” does not fully encompass, is as much about actions and change as it is about a market economy, laissez faire and globalization.  Marx was the first to fully understand this.  He was the canary in the coalmine of the industrial revolution noting that the new system brought constant, even accelerating change.

Humans are wired to detest change.  For all of the history of life on earth change was always bad.  Organisms strive to be in a place where they met their needs, and once there any new development was surely negative.  This is why, despite the colossal productive prosperity all around us we are far from content, let alone happy.

Slow motion legs of business people walkingWe live in The Age Of Angst!  Ours is the only truly unique age in all of history – future as well as past.  Until yesterday, from a historical perspective, a person would be born, live and die in a world essentially unchanged.  That is why ancient structures were built to last forever (and more than a few succeeding in that aim).

Therefore the correct word to describe the past’s prevailing world view was not cyclical, but circular.  Details differed here and there, but everything eventually returned to its original position.  Pestilence and war commonly caused havoc.  Technology caused minor lifestyle differences.  The world remained the same.

That world view has been obliterated.  In my lifetime the world has been turned upside down and inside out not once, but going on twice.  Historical processes that changed fundamental cultural traits like manners, dress, attitudes toward sex and women, marriage, family and religion used to take centuries and now take decades or less.

It is more than ideas and opinions that are swept away.  We are in the only age where there is no cultural consensus about anything.  People are making it up as they go along because there is no cultural point of reference.  Until our age the notion of a fulfilling marital relationship or being a good parent had no meaning.  You rose at dawn, worked like hell all day, hopefully ate afterword and dropped of exhaustion at dusk.  There was not time or energy for anything else.

In a few hundred years or so humanity will probably sort this all out bringing a close to this only real age of change.  We need a new word or phrase to denote this system impelling accelerating change referred to by Marx as the reign of the bourgeoise.  The concept of the free market is incomplete.  Liberty and law may be better.  Any suggestions?

Karl Marx Photo Credit: http://www.PhillWeb.net

Income Inequality

In order to become more prosperous we need to become more productive. Greater productivity requires more capital (e.g. machinery, software), and better methods. Both require the workers at every level to develop skills to operate in higher productivity environments. This guarantees to a mathematical certainty that income inequality will increase as our overall standard of living goes up.

As we become more productive prosperity increases as defined by a rise in the median income (half earning more than the median and half earning less). Participating in step with the rising median income requires increasing ones skills.

In particular, to keep pace, we must increase our intellectual skills. The reason for this is that, beyond a very basic level of productivity, rising prosperity means intellectualizing the production process. Muscles and stamina give only a small boost to productivity. The difference in output between the strongest and average human being is small by comparison with the intellectual harnessing of the power of machines.

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We all start life with a labor market value of zero. Some never develop much in the way of skills. Business owners (especially small business owners) will tell you that it is not uncommon for employees lacking even the simplest skills like showing up on time. Such people continue to have a minimal value in the labor market.

With the median income rising as we become more productive and skilled, it therefore follows that those who never develop skills will fall further and further behind. This is the most basic reason for rising income inequality. It is a metaphysically required byproduct of rising prosperity. The same analysis applies to every level of skills as each skill set becomes increasingly valuable as productivity and prosperity rises.

There is another aspect of this analysis which relates to uniquely talented individuals and the increase in the total output of the economy. When the average person earns barely more than subsistence, there is little left for discretionary purchases like a movie ticket, music album, a day at Yankee stadium or an I-Phone. As the economy grows the money available for discretionary spending grows faster. However, the number of uniquely talented individuals barely increases at all. The number of professional football players in the NFL has grown perhaps four fold in the last 50 years while the economy has grown more that twenty fold. Therefore, the best (even average) players must experience a much sharper rise in income than the median. Also, the number of top 10 songs each week have not increased at all.

The fairness of this situation is a philosophical, not an economic issue. Future installments will show that any attempt to reduce this inequality effect will do significant damage to the economy as a whole and make everyone worse off. Only relatively poor or small homogenous economies can have muted inequality effects.

Ask yourself which economy is better for everyone (given that the poorest get enough to eat, clothes and basic shelter) – one where the deciles increase arithmetically or geometrically? The arithmetic progression is 1, 2, 3, 4, 5, 6, 7, 8, 9, 10. An example of a geometric progression of income deciles is 1, 2, 4, 8, 16, 64, 128, 256, 512, 1024. This example used a geometric factor of 100% difference in deciles. A stark difference would also occur at substantially smaller differences.

Even the lowest incomes today earn a standard of living far superior to even royalty 250 years ago. Not long ago poverty meant not having enough food. Nobody has to be concerned with enough to eat (obesity is the problem today) and no matter how rich you were back then you could not travel faster than a horse, and you had to defecate into a pot or a pit with no plumbing.

Fundamental Theorem Of Economics

Adam Smith is the father of economics but Jean-Baptiste Say stated the most important fact about economics, “Supply creates its own demand.”  In recent decades this statement known as Say’s Law has been sneered at by believers in the current orthodoxy that the consumer drives the economy.

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Reflect upon this statement for a moment.  What do we mean by “demand”?  We all want lots of stuff, but can afford to buy much less than what we want.  Therefore demand in this context means that which we can afford to pay for in the marketplace.

The next consideration is how we get the wherewithal to demand anything.  In common language we speak of where we get the money.  Someone can give it to us, we could steal it, or we could earn it.  Even if money is given to us, or stolen by us, someone had to earn it first.

This last point brings us just a step away from nailing down the principle involved here.  Someone had to earn the money first.  That means someone had to do something to get the money.  Someone had to act to create something of value (a good or service) for which another person was willing to give him money.

Now we have completed the circle.  In order to “demand” something someone had to first perform a creative act – an act that produces something.  Therefore, we can now restate Says Law as “Supply is the only source of demand.”  Without someone creating, producing, supply there can be no demand.  In more common terms this means that nothing can be consumed before it is produced.

This may sound trite, but it is a profound truth that is completely ignored by present day theoreticians and politicians.  It is a metaphysical truth.  Restated as The Fundamental Theorem of Economics we have “Production precedes consumption.”

Understanding this allows us to deduce and thoroughly understand the source of prosperity and points the way to deciding which policies promote prosperity.  If we want to consume more we must produce more.  This applies to each of us individually and all of us collectively.  If you want more you can work longer, harder and smarter.

Working longer and harder is viscerally understood.  Working smarter is a conceptual idea that can be reworded as working more productively.  Over the very short term we must work longer and harder to become wealthier.  Unfortunately, our individual mental and physical capabilities combined with time limitations severely restrict how wealthy we can become by only working harder and longer.

Beyond the very short term, in order to dramatically increase wealth and prosperity we must work smarter.  We must become more productive.  We must produce more, produce it better (higher quality), produce it faster, produce it more efficiently (at less cost).

This all derives form our fundamental theorem, “Production precedes consumption.”  Now we have a reference point and tool to help us make reasoned decisions about economic policy issues.  We can ask whether a proposed statute or regulation increases or decreases productivity. For that matter we can better understand what, if any, government activities enhance productivity.

Contribued by:
Steve Reiss @ SedonaSteve.wordpress.com