The Eudaimonist: Capitalism’s Flaws, Part 1

“Obama is a socialist,” his critics charge. No explanation why that would be bad – everyone assumes we know socialism is evil. In the past few decades even Europe and Scandinavia have been retreating from socialism – socialists have become social democrats, social democrats have become neo-liberals; few dare to associate themselves with this completely disparaged program on the decline. What little support socialism has gained in the wake of the Great Recession and the Occupy movement seems more reactionary than thoughtful. Should socialists finally admit defeat and just move on?

We have all been taught what socialism is about – totalitarianism, gulags, unbearable taxation, the elimination of the profit motive, central planning, leveling down through radical egalitarianism, the suppression of individuality, mass misery – in short, the most oppressive form of slavery known to humanity. This entertaining cartoon from 1948 explains it all. It is certainly true that every socialist model I have read about – from the community experiments in America, to the Israeli kibbutzim, to the Soviet Union, to Tanzania – has displayed, to varying degrees, an ignorance of economics and human psychology. But do these flawed models prove socialism itself is untenable? While we have to be very cautious of that possibility, we should be careful to distinguish between the system itself (what is inherent to the system) and its proper or improper execution. As I see it, the one and only inherent difference between capitalism and socialism is the issue of capital income, caused by the private ownership of the means of production.

We obsess a lot about inequality of income and whether or not entertainers, corporate executives, and financial services employees deserve their staggering levels of compensation (i.e. Oracle CEO Lawrence Ellison’s 2009 compensation of $557 million, or the average $361,180 made in the securities industry, or how the average Wall Street bonus declined by 13% when profits fell 51%), at the same time when compensation on the low end is so abysmal that millions of full-year, full-time workers live in poverty. But what is truly unjust is how capitalism ensures that even though workers initially get paid, all the wealth will still end up at the top through capital accumulation. The top 1% takes home 21% of the income, the top 10% earns 50%, the bottom 60% earns less than 20%, and the bottom 40% earn less than 10%. Yet in terms of total household non-home wealth (net worth minus the net equity of one’s home), the top 1% owns double their share of the income, 43%, the top 10% owns 83%, the bottom 60% own .3%, and the bottom 40% own -1% (they are, collectively, in debt).

The cumulative advantage of wealth in capitalism makes this inevitable; even in Scandinavia, where incomes are much less unequal, wealth is still quite highly concentrated compared to what many consider ideal (check Note 2). Because the people who initially earn more in income have more discretionary income (“play money”) they can invest or lend money in order to generate more money – capital income. In fact, the top 1% of households own 50% of all investment assets and 5% of total household debt, while the bottom 90% owns less than 20% of all investment assets and three-quarters of all the debt. Just 2% of the bottom quintile owns stock worth more than $10,000, while 90% of those making more than $250,000 do. And this is the result:

Nearly all of the wealth produced is necessarily produced by work (even the technology used in production had workers who created it, and natural resources usually require labor for extraction), but workers capture only 80% of total household income, while the other 20% goes to capital income and capital gains (capital gains, profit from the sale of capital assets, is a subset of capital income), and nearly all of that 20% goes to the wealthy, making them more wealthy, so they can, in turn, buy up more capital assets, and accumulate more wealth. Capital income accounts for at least 30% of the top 1%’s total income, and the wealthier you are the more likely your income came from capital. In 2007, 81% of the $139 billion “earned” by the top 400 tax filers came from capital income. In other words, these reverse Robin Hoods took in $112 billion from the work of others. In 2008, this group, the .00028%, claimed more than 13% of total capital gains, meaning their share of capital gains was an impressive 46,786 times greater than their percentage of the tax-paying population.

What do you call this massive redistributive system in which workers keep hardly any of the fruits of their labor, while nearly all of it goes to a few? Most call it capitalism; I call it slavery. When (some) workers are paid, yet all the wealth still ends up highly concentrated simply reflects that it is a more cunning, more evolved formed of exploitation. And the manipulation is clearly effective, as we can see with the “We are the 53%” movement. The blog features endless stories of people working two to three jobs and 60-80 hours a week to just barely afford a decent standard of living, yet these severely exploited workers are more than happy to be loyal servants so long as they are extended the courtesy of being called “free.” And in order to keep us docile, every once in a while, the media indulges our naïve mobility beliefs by relaying some inspirational rags-to-riches story that lets people believe that maybe, just maybe, if they suffer enough, work hard enough, and work long enough, they can become a master, too. And, if they eventually manage to succeed (or think they have), like many who have to endure suffering in order to join a group, they believe others should have to suffer, too, even if it seems evident that it such suffering is harmful to everyone.

I am ideologically uncomfortable with the exploitation of capitalism and allowing people to make money from having money, but I acknowledge the possibility that it may be, pragmatically, a necessary evil- the least bad of bad alternatives. As Cambridge economist Joan Robinson once said, “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.” I will address that in part 2 of the column.

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  1. 0
    Bourgeois Libertarians and "Voluntary" Exchange ( User Karma: 0 ) says:

    Also, with regard to voluntary exchange, imagine that you are an illiterate, uneducated farmer in a developing country. Your country decides (or is forced) to open up to free trade, and the market is flooded with cheap, heavily subsidized Western agricultural goods, including the crop you produce. Your livelihood destroyed, you and your family, along with thousands of other rural peasants, now migrate to the city to seek work. There some multinational corporations are waiting with their arms wide open to welcome you. They have a need for a few thousand workers, and the unemployed in the labor market exceeds their demand by a substantial percentage. You’re impoverished, unemployed, and desperate to feed your children. And you face competition from thousands of others in the exact same position. So you “volunteer” to work twelve hours a day, six days a week. The corporation you work for will get $1,000 in profit (revenue minus costs) from your weekly productivity and in return you will get a few dollars a week. (To be clear, I am not against free trade or the increased efficiency produced by market forces (even private equity), what I oppose is the way many societies handle displaced workers, i.e. no retraining or education, poor unemployment benefits, little protection from market exploitation, etc.)

    Many people would consider this a voluntary exchange. Now I am sure that every American would protest that this is not how capitalism works in the United States, but I believe it is only a difference of degree, not kind. The socioeconomic conditions in this country, the indoctrination into consumerism, materialism, and conspicuous consumption, the lack of fair opportunity, the constant attempts by finance to get people into debt, the marker power of capital, everything in this country is designed to enslave people to capitalist interests, to force them into exploitative “voluntary” exchange.

    Bourgeois, libertarian capitalist notions of liberty and voluntary exchange are devoid of meaning to me. To me any meaningful conception of voluntary exchange should include that both parties are well-informed (or, at least, that there is not information asymmetry regarding the exchange), have been given a fair opportunity to succeed in the market (i.e. quality education), have roughly equal market power (unequal market power often leads to domination and exploitation in my view), are not being compelled by desperation (i.e. poverty), and (at least in some cases), and have meaningful alternatives that either party could choose to exchange with, among other things. “Necessitous men are not, truly speaking, free men, but, to answer a present exigency, will submit to any terms that the crafty may impose upon them”

    Capitalism is designed to prevent such exchanges because capital is supposed to be the dominant market force, and indeed it is, finance and capital are the dominant market powers and while they are excellent at creating socioeconomic conditions that push people into “voluntary” exchanges, I, personally, do not believe capitalism is well suited to allow for anything approximating genuine voluntary exchange.

    Lastly, with regard to your example as an owner of apartments, why should someone profit because they happened to have the wealth to own an apartment complex? In my (possibly unjustified) opinion, an owner, insofar as he is an owner, is doing nothing of value and therefore deserves nothing of value. If he manages the building, then he deserves compensation for how well he manages the building, if he provided maintenance on the building, then he deserved compensation for his maintenance work, if he selected the location and the apartment models, and they were popular, he deserves compensation for his good decision-making. If someone is making money from some activity of theirs then they are not benefiting at the cost of others, provided that their market power is not so enormous that it allows them to extract rent, because they have helped to create or add value and wealth. But if someone is profiting from nonactivity, i.e. capital ownership, they are almost always profiting from someone else’s activity, because profits, generally, don’t generate themselves, someone’s (labor’s) activity produces it. Again, I understand that todays capital owners bear risk and must compensated in order for a capitalist market economy to work, I am just not convinced (yet) that a market economy would suffer if labor took on that risk, provided that there was enough competition among (employable) investors and that the incentive structure was appropriate.

    1. 0
      Translation Party says:

      Voluntary replacement of developing countries, farmers and free fantasy. Public markets, agricultural water price, cheap, large auxiliary (supply), free trade crops production decisions. Imaichi peasant country, lives of other people and your family thousands… moving the whole multinational people waiting to welcome the thousands of workers unemployment labour market demand destruction. Unemployment and desperate poverty of children again [feed. Will face competition from the thousands of other people’s exact location. So, “12 hours 6 days per week working volunteers”. 1 Week $ ( returns all negative revenue productivity costs. $ ) of Gets the benefit. 1000 Work to the company. (No free trade and market forces (also what e-consent… private equity ) volunteer cooperation of many social, education, unemployment benefits, the wrong person displaced workers are more markets and more efficient protection ) of think people development training. Because of my work to protest the many places in the United States in the same us capitalism is. Terashime and slavery, a fair viewing material constant indoctrination prominent id equal opportunity in the opportunity this country ( terashime terashime bourgeois liberalism, freedom force, the socio-economic situation and terashime have no concept of capital in the trading profit i. marker of capitalist conspicuous consumption display market success including the voluntary replacement of capitalist countries means. Design of asymmetric information) of need to understand the meaning of the concept itself (i.e…. quality education ) if the city forced the field result, market development is the biggest frustration of one dominant force (i.e. poor ) must (at least partially). Meaning of the voluntary replacement impose real answer is the current selection personally really crafty person crisis financial electricity market environment voluntary replacement approximation Necessitous men expert free-market superior all the right words really can be, to push the story of the dominant capitalist can replace. I do not believe. If require the latest sample condominium owners apartment riches profit everyone why. (Perhaps unreasonably ) owner is known to the owner of his long course. He determines his popular choice that he deserves more than he. Proposed power activities from market borrowing costs and a great wealth of some money for other light was extracted. Nonactivity-. You can T s(labor’s) activity itself, another generation of people, activities for the benefit of ownership of the capital or someone from e of the most common. Certainly needs of capitalist economic risk capital market risk and adequate economic investment ( ), bear the suffering of competition, current owner of the structure in the right market incentives were anxious to add.

  2. 0
    Thanks for the response ( User Karma: 0 ) says:

    The answer to your question, in my opinion, is very, very complex; suffice to say I do think that capitalists exploit labor. The question I find myself asking is how millions of hard-working men and women can work full-time year round, and end up making less that $50,000 (in the United States), while a few people make millions or even billions of dollars? Does marginal productivity theory explain it well? Is it possible that these few people (or their capital) are just that much more productive and valuable to the real economy or is there a distortion in market power that allows these people to extract enormous rents?

    Private owners of capital are, technically, not stealing from the poor because they have set up a system, capitalism, which legitimates the flow of wealth from its creators and producers, laborers, to owners, capitalists. I guess it isn’t really stealing because the producers never owned the wealth in the first place; they simply produce it for owners. In that same vain, technically, slave owners did not steal wealth from slaves. My problem is multifold, but first of all even within capitalism I think that private owners of capital are able to use their market power to extract wealth in excess of their contribution to the economy (the productivity of capital), which necessarily distorts the distribution of wealth at the expense of producers, secondly capitalism itself demands a distribution of wealth that favors the private owners of capital over laborers, and even if one favors market economies I don’t think there is sufficient justification for private ownership of the means of production because competition and incentives don’t require it.

    I just don’t understand why labor has to continue to give capitalists the wealth they create, strengthening capitalist market power, and then having to borrow it back from them at interest. Imagine that through your labor you earned $100, and you need an $80 investment to continue working. And then someone suggested that you give them the $100, they would then loan you the $80, and, in order to the get the loan, you had to agree to give them 15% of whatever profits above the $80 that your labor earned. You would probably laugh, right? But then he would get angry, what, he doesn’t deserve the 15% for loaning you the $80, deferring his consumption and taking on this risk? And then you would justifiably respond that the 15% is not the issue, initially giving him the $100 in the first place is what is outrageous. Why wouldn’t you just defer the consumption and take the risk yourself? You would explain that you in no way benefit from this exchange. And then he would say, well I am a better investor; I could probably invest the $80 better than you could. And if you gave me $100 year after year, eventually the technologies my good investments funded would improve your standard of living. And then you might suggest, why don’t I just hire you to invest my money, this way my standard of living will still improve, and I get to keep the money I earned from my labor, minus the money you earned from your labor as an investor. And if this person did not invest the money as well as if it was his own, you could, among other things, seek out competitors or offer performance incentives. Obviously, this is a gross oversimplification of capital-labor relations but I think you could draw parallels.

  3. 0
    Anti says:

    “In 2007, 81% of the $139 billion “earned” by the top 400 tax filers came from capital income. In other words, these reverse Robin Hoods took in $112 billion from the work of others.”

    For clarification’s sake, could you explain how the rich are stealing from the poor through accumulating capital assets?

    I understand that the wealthy benefit enormously through them, but why is it at the cost of others? For example, if I owned several properties and rented them out to tenants, then this would be a voluntary exchange of services (my extra space for your monthly pay so you can get to work more easily).

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