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Posted in Columnists, Opinion

The Eudaimonist: Capitalism’s Flaws, Part 2

By
April 2, 2012

Newt Gingrich recently asked, “Is capitalism really about the ability of a handful of rich people to manipulate the lives of thousands of people and then walk off with the money?”

My answer: YES!

Some proponents of capitalism, particularly libertarians, seem to believe that free market utopia lies in mass self-employment. As anti-tax advocate Grover Norquist explained, his “ideal citizen is the self-employed, homeschooling, IRA-owning guy with a concealed-carry permit.” Self-employment would seem to ease my concern, too – workers cannot be exploited by employers if they do not have employers. But this may be a cure worse than the problem. The self-employed earn less money, work more hours, experience more stress and have no greater job satisfaction than workers with similar levels of autonomy and skill utilization. From an economic perspective, it seems likely that a society of self-employed individuals would be extremely inefficient at best and impractical at worst. There would likely be significant duplication of effort, reduced potential for specialization, and destruction economies of scale and scope. And, from a well-being perspective, the workers themselves may become worse off, especially compared to the alternative of persuading organizations to offer employees a greater degree of independence. In addition, self-employment cannot completely insulate workers from the problem of exploitation, because most still need access to capital, thereby requiring them to borrow. According to the 2007 Survey of Consumer Finances, 87% of the self-employed held debt, more than any other work status, including employees, the retired, and those not working. In 2011 alone, nearly 50% of small businesses (a rough proxy for self-employment) needed to take out a bank loan.

So do we have to submit to the exploitation – capital owners extracting wealth generated by labor –
of capitalism? After all, we do need a method of accumulating and allocating capital. I am not questioning whether or not people deserve compensation for their skill and ability in intelligently, efficiently allocating wealth. What I am questioning is compensating wealth itself. Is wealth a skill or an ability? Does wealth itself deserve to be rewarded?

It is argued that wealth deserves remuneration because of financial risk and deferred consumption, but there is no reason that workers themselves cannot take over these responsibilities. If, instead of private ownership of the means of production, we transition to either worker or public ownership, the income that is currently absorbed by capital would go to the workers and worker- or publicly-owned investment funds. In this case, workers would be the beneficiaries of risk-taking, deferred consumption, and their labor, while intelligent investors, managing worker-owned funds, would benefit from their investment competence.

The common complaint against socialism is that people will work harder for their own benefit than for the benefit of others and make more careful financial decisions with their own money than with the money of others. These claims may or may not be true. I do know of people who work harder for the benefit of others they care about than when they are working for themselves, and who are more financially prudent with the money of others they care about, or if they appreciate the trust and responsibility that others have given them. Nonetheless, accepting the claim that people work hardest for their own benefit is an argument for worker ownership of the means of production (socialism), not against it, because, according to that claim, workers would work harder if they themselves were the owners as opposed to today when so many work for capitalist owners and shareholders.

In addition, if people are more financially prudent when performance affects their own finances, then independent, competitive worker- or publicly-owned funds that utilize pay for performance would offer the same incentive structure without the enormous expense to workers of capital income. As it is, individual investing has been on the decline for years, with many instead opting to put their assets under professional investment managers (institutional investors now accounting for about 80% of total trade volume). So the main change in the financial markets would simply be that these professional investors were managing a different group of people’s wealth (workers instead of capitalists). And the discretionary income of workers could still be mobilized through non-exploitative, interest-free savings and loan sys tems, like Sweden’s JAK Members Bank.

I do not even understand why socialism is so controversial when everyone advocates for socialist principles. As one Michigan Tea Partier explained, “I don’t want my hard earned money, my parents’ money, my siblings’ money to go to people who don’t deserve it.” Ayn Rand believed each person had the right “to keep the product of his work,” quite reminiscent of Marx’s claim that workers under capitalism were alienated from the product of their labor. Rightly or not, most people in our society seem to believe that each person ought receive the full value of their labor efforts; that no one else but them should enjoy the wealth they create, especially not the “lazy and undeserving.” I think this sentiment could be summed up in the socialist maxims, “to each according to his contribution” and “he who does not work, neither shall he eat.” On the other hand, there are a few who believe that we should all contribute to the extent that we are able, and, by virtue of the fact that we are contributing to our fullest extent possible, we are therefore entitled to utilize the goods and services we need – “From each according to his ability, to each according to his needs.”

Almost everyone I meet seems to fall somewhere along this spectrum between distribution according to contribution or need. Yet, capital income is antithesis of those beliefs. I find it very curious that ardent capitalists constantly preach about how only work should be rewarded and yet have no qualms about capital being remunerative. The essence of capitalism is the maxim “to each according to his wealth,” a view I have never heard anyone openly embrace. So either most people actually agree with that in private, or they are confused about the difference between capitalism and socialism. The profit-motive, competition, the market economy, the free price mechanism, and the many other components of our economic model that people confuse with capitalism could just as easily be incorporated into a socialist model if we desired. The only difference between any form of capitalism and any form of socialism is that you cannot acquire wealth simply from having wealth.

It is nonsensical to suggest that going from private to worker ownership is the road to serfdom, because it would liberate workers from control and manipulation at the hands of capital. I do not know if capital income is an unnecessary relic from an era when capital and resources were scarce or a necessary component even for advanced economies transitioning to a postindustrial society. But unless you believe in “to each according to his wealth,” or you actually want to be exploited for the benefit of a few plutocrats, I think we, as a society, should seriously consider studying and discussing the potential results of eliminating capital income, and thus capitalism as well.

3 Responses to The Eudaimonist: Capitalism’s Flaws, Part 2

  1. Eric Taneda Reply

    April 5, 2012 at 8:27 am

    What this author fails to take into account is that ownership of capital and making decisions about how to put it into use is not just some afterthought in the economic process. It is the engine that is the bedrock of progressive increases in the standard of living of people who are merely in the vicinity of that capital. Owners of capital fully risk all of their capital when they make decisions about where to invest it. If they mess up, they can lose the whole investment. If taking a 10% risk of loss brings 30% likelyhood of doubling the investment, for example, an investor may rationally accept the risk. But if a “people’s manager” is faced with the same — on one hand, “worker’s trust” may theoretically double its funds; on the other hand if the capital is lost, the manager loses his job and livelihood.

    The the quality of investments necessarily suffers, and that is before considering Ludwig von Mises’ revolutionary work _Socialism_ where he proves that rational economic calculation is not merely difficult but impossible under socialism. For example, if a miner digs up an ounce of silver from the ground, there is no means to calculate which of the thousands of competing uses for the silver it ought to be put, so it becomes the caprice of political leadership, influenced by “friendship” of fellow political animals that determines how the silver is used, instead of the use that is determined by an objective process of measuirng the value of the silver put to each potential use and systematically putting it to use where it does the most good.

    Capital accumulation is not due to pre-existing capital. It is entirely due to deferred ratification of some who, through their temporary hardship, make possible the creation of tools which improve the productivity of labor, combined with creativity and rational risk taking where the totality of the deferred consumption may be lost.

    Generally speaking, the amount of remuneration capital requires is dirt cheap. A carpenter with a hammer can produce ten times as quikly as the equivalent carpenter with a piece of rock. Yet, the person who put up the hammer may only require 10% annum as interest on the cost of that hammer (not even the value of extra production made possible by the hammer). The carpenter is also free to defer his own consumption and obtain the hammer himself (thus deprive the “capitalist” any further interest. The carpenter who refuses to defer consumption to buy a hammer yet wails about the unfairness of the person who, through his own deferred satisfsaction, and made the carpenter 10x more productive, is simply spoiled, ungrateful, and self-destructive (not to mention others-destructive) to the degree he influences the political process with such sentiments.

    That the quality and quantity of the tools made available in this manner does not change the pattern. In the United States, the per capita wealth is about $600,000. This means that for every human being living in this country, someone has deferred $600,000 in consumption and thereby made possible factories, cars, buildings, etc., that made possible jobs that allow people o live the standard of living that is prevalent here. In certain parts of africa, where the per capita wealth is measure in the single thousands, people are literally dying of starvation, even though the people are just as good as the people here, as far as potential value of their labor.

    Anyone who sincerely desires to see everyone’s standard of living rise, should be clammoring for the per capita of the _entire world_ to rise to somethin in the order of $10 million — and learn what conditions are required to reach this goal and sustain and grow even further, i.e., purer capitalism worldwide.

    Like I said, the issue of capital is not a joke of somethin to be taken lightly. If you distributed $600,000 to each person in the United States to represent all the capital in existence here, based on the immediate gratification mentality that is prevalent, you will see consumer goods skyrocket in price, and people’s standard of living reduced to african levels in quick order, just as fast as machines and building wear out.

    Anyone advancing flawed theories about the nature of capital is regressive, in the sense their efforts can only result in the impoverishment of the masses, and bringing starvation and misery where abundanvce and high standard of living existed before.

    Capitalism is fully democratic, in the sense that anyone is free to defer gratification, and gain the benefits of remuneration for capital aquired thereby. Everyone is free to risk that capital for potentially unlimited earning potential, based on contribution to productivity of labor (which as a general rule benefits capital-less laborers far more than the investor). The investor can lose it all – while laborers are free to change jobs based on who bids the most for his services (which gets bid up higher, the bigger the amount of accumulated per capita capital, regardless of who owns it!).

    Envy is a destructive force. Some people wish they were in the position of a capitalist who controls millions or billions of dollars. But they don’t realize these people and their risk taking and stewardship are integral to the operations of a modernsociety with standard of living surpassing thayt of our ancestors.

    So I encourae any and all who are at all receptive, to do the right thing and study the actual natire of capital, capitalism, set aside personal feelings of envy, and advocate for the advancement of humanity. Advocate for capitalism in pure unadulterated form.

    Thank you,

    Eric

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  2. Sam Reply

    October 31, 2012 at 7:39 pm

    It’d be nice to get a different link color. It’s hard to see where the links are as it is.

    Thumb up 0 Thumb down 0

  3. Danielle C. Reply

    November 1, 2012 at 4:32 pm

    It’s not everyday you see Ludwig von Mises quoted on the DG thread!

    Thumb up 0 Thumb down 0

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