Profit, Wages, and Capitalists

Perhaps one of the most influential and popular economic theories over the past century has been the theory of exploitation. The theory, which found its footing, ironically, in the writings of Adam Smith, was mostly promoted by the writings of Karl Marx. The exploitation theory laid the groundwork for the more recent theories of Keynes and the overall prevalence of socialist economic policies in our society.

According to the exploitation theory, capitalism promotes a system of slavery wherein the labor of workers is exploited to attain profits on behalf of the relatively few businessman or capitalists. These capitalists are seen as parasites upon the masses. Never mind the steady increase in the standard of living and working conditions. If it weren't for government intervention and labor unions, we would all still be working for $1 per day and dying of black lung.
George Reisman* explains the framework of the labor theory of value, one of the main aspects of the exploitation theory:

This framework is the belief that wages are the original and primary form of income, from which profits and all other non-wage incomes emerge as a deduction with the coming of capitalism and businessmen and capitalists. The framework easily leads to the assertion of the wage earner’s right to the whole produce or to its full value. It itself is based on the further belief that all income which is due to the performance of labor is wages and that all who work are wage earners.

In order to illustrate this assertion, let us imagine a pre-capitalist economy, if there ever was such a thing. In this economy, each person is the sole producer of any given commodity. Thus, each person would sell his or her commodity for a price. According to this theory, all income received in this economy is supposed to be wages, not profit, because all income is received by workers. The conclusion Marx made from this theory is that profit did not exist before capitalism because all income was wages. Thus, the advent of capitalism brought profit, at the expense of the wages of the laborer.

Marx says that in this pre-capitalist economy, production follows the sequence C-M-C. That is, a worker produces a commodity (C), sells it for money (M), and then buys other commodities (C). Here there is no exploitation because there is no supposed profit; all income is wages. Profit, or surplus value, comes about with capitalism which follows the sequence M-C-M. The capitalist spends money to pay for materials, machinery, and wages, a commodity is produced, and the commodity is sold for a larger sum of money than it cost to produce. The difference is profit.

Many non-Marxist economists actually ascribe to this framework but reach differing conclusions about profit based on the law marginal utility and time preference. These arguments are valuable, but they miss the point: the framework itself is flawed and needs to be re-evaluated. The definitions of the terms profit, wages, and capitalist themselves serve in restructuring the idea of a proto-capitalist economy.

• Profit is the surplus in money received from the sale of commodities over the money costs of producing them
• A capitalist buys products in order to sell them at a profit
• Wages are money received in exchange for the performance of labor--not the products of labor, but the labor itself

It follows from these definitions that if there were only workers who made and sold their commodities, the money received from the sale of their commodities is not wages, but profit. In buying commodities, one does not pay wages, and in selling them, one does not receive wages. These roles are performed by the capitalist. Now, in the strictest sense, the workers in this economy are not capitalists because they have incurred no money costs in the production of their goods. Still, they have acted as capitalists in that they sell their products, not their labor, for money. Thus, all income received is profit, not wages.
Reisman* explains again, better than I can:

Wages are not the primary form of income in production. Profits are. In order for wages to exist in production, it is first necessary that there be capitalists. The emergence of capitalists does not bring into existence the phenomenon of profit. Profit exists prior to their emergence. The emergence of capitalists brings into existence the phenomena of wages and money costs of production.

Accordingly, the profits which exist in a capitalist society are not a deduction from what was originally wages. On the contrary, the wages and the other money costs are a deduction from sales receipts—from what was originally all profit. The effect of capitalism is to create wages and to reduce profits relative to sales receipts. The more economically capitalistic the economy—the more the buying in order to sell relative to the sales receipts, the higher are wages and the lower are profits relative to sales receipts.

Thus, capitalists do not impoverish wage earners, but make it possible for people to be wage earners. For they are responsible not for the phenomenon of profits, but for the phenomenon of wages. They are responsible for the very existence of wages in the production of products for sale. Without capitalists, the only way in which one could survive would be by means of producing and selling one's own products, namely, as a profit earner. But to produce and sell one's own products, one would have to own one's own land, and produce or have inherited one's own tools and materials. Relatively few people could survive in this way. The existence of capitalists makes it possible for people to live by selling their labor rather than attempting to sell the products of their labor. Thus, between wage earners and capitalists there is in fact the closest possible harmony of interests, for capitalists create wages and the ability of people to survive and prosper as wage earners. And if wage earners want a larger relative share for wages and a smaller relative share for profits, they should want a higher economic degree of capitalism—they should want more and bigger capitalists.

*George Reisman's complete article on capital and the exploitation theory originally appeared in The Political Economy of Freedom Essays in Honor of F. A. Hayek, Edited by Kurt R. Leube and Albert H. Zlabinger (München and Wien: Philosophia Verlag, The International Carl Menger Library, 1985).
The article can be accessed in pdf form here

Some Points about Haiti

This post is probably overdue, but I wanted to make some observations and tackle some issues that have been brought up by the terrible earthquake that destroyed so much of Haiti. Please understand my comments in the context that they are meant to be understood. I am speaking from the stance of one concerned about the role of government and how it has increased in size and scope beyond what is both moral and necessary. I am actually quite optimistic about the capacity of the individual to act charitably toward another in need. I think this capacity is rather obvious and even overwhelming at times such as this.

1) The role of government is not to respond to natural disasters and provide humanitarian aid. The government is not a humanitarian aid organization. It is an entity of force established to provide equal protection of property rights under the law. All humanitarian and relief efforts are the responsibility of the individual who gives as he or she sees fit and how he or she sees fit. It thus follows that the military is NOT an organization designed to aid other countries after a natural disaster. The military was formed to defend against invasion and insurrection. That is all. Any performance of acts beyond this scope is an exercise of authority that simply has not been given to the government or the military. The Constitution does not authorize it. If we want government to perform these functions, we need to amend the Constitution to give it power to make the military a worldwide humanitarian aid organization. This would likely make our military the most ironic organization in the world, but at least we could say we weren't ignoring the Constitution because we felt like it.
As one blogger puts it:

Extreme cases like this have a certain educational value, in that they separate the libertarian wheat from the chaff. They separate those whose libertarianism is rooted in a philosophical adherence to the non-aggression axiom and those whose libertarianism is only an emotional predisposition toward less government.

Consider the words of Ron Paul, the only one who opposed government aid to Haiti, on this very issue:

Statement of Congressman Ron Paul

United States House of Representatives

Statement in Opposition to H Res 1021, Condolences to Haiti January 21, 2010

I rise in reluctant opposition to this resolution. Certainly I am moved by the horrific destruction in Haiti and would without hesitation express condolences to those who have suffered and continue to suffer. As a medical doctor, I have through my career worked to alleviate the pain and suffering of others. Unfortunately, however, this resolution does not simply express our condolences, but rather it commits the US government “to begin the reconstruction of Haiti” and affirms that “the recovery and long-term needs of Haiti will require a sustained commitment by the United States….” I do not believe that a resolution expressing our deep regret and sorrow over this tragedy should be used to commit the United States to a “long-term” occupation of Haiti during which time the US government will provide for the reconstruction of that country.
I am concerned over the possibility of an open-ended US military occupation of Haiti and this legislation does nothing to alleviate my concerns. On the contrary, when this resolution refers to the need for a long term US plan for Haiti, I see a return to the failed attempts by the Clinton and Bush Administrations to establish Haiti as an American protectorate. Already we are seeing many argue that this kind of humanitarian mission is a perfect fit for the US
Certainly I would support and encourage the efforts of the American people to help the people of Haiti at this tragic time. I believe that the American people are very generous on their own and fear that a US government commitment to reconstruct Haiti may actually discourage private contributions. Mr. Speaker, already we see private US citizens and corporations raising millions of dollars for relief and reconstruction of Haiti. I do not believe the US government should get in the way of these laudable efforts. I do express my condolences but I unfortunately must urge my colleagues to vote against this resolution committing the United States government to rebuild Haiti. military. I do not agree.

2) Haiti does not benefit economically from the natural disaster (though there may be arguments for it benefiting in other ways). This idea is commonly voiced after natural disasters of all kinds. The fallacy is known as the broken window fallacy and takes the following form in this case: Haiti will have to rebuild and that process will create jobs for Haitians and improve their economy.
I understand why one would come to this faulty conclusion, but it is wrong for the same reason that government cannot create real jobs. If it were true that destruction actually helped the economy, why are we not excited about hurricane or tornado season? Why don't we just blow up our own houses and then rebuild them? That would keep us all working and our economy would boom! Right?! The ridiculousness of this idea is clear. The resources that are used to rebuild could have been used otherwise to improve the economy without having to reconstruct buildings. Again, this is the same reason that the Cash For Clunkers program was one of the most ridiculous and economically wasteful programs ever.

3) Haiti is not poor because we don't send it enough money. In fact, a strong argument could be made that Haiti remains poor BECAUSE we send them money. The corrupt government uses that money to maintain power. Haiti is poor primarily for political purposes. Political oppression more often than not manifests itself as economic oppression. The political history of Haiti shows it to be an unstable country, which has discouraged investment, making it difficult, if not impossible, for anyone to raise capital and grow the economy. Some may argue that Haiti was first poor and that the poverty lead to political corruption and a vicious cycle. They may insist that the cycle of poverty must first be broken through foreign aid and then the political side will follow. Not only does this fly in the face of reason, but it ignores historical experience. If this were the case, no country would ever become prosperous. All countries were poorer than they are now, relatively speaking, and even the richest of countries was at some point poorer than the poorest country today. It is freedom that brings prosperity. Economic freedom and political freedom go hand in hand. You cannot truly have one without the other.

Now, all this aside, I believe it is the moral obligation of every person to seek ways to serve others and do it. I encourage those who can to give any way they can to help those who are suffering in Haiti.

Gitmo, Jobs, and Habeas Corpus

I realize I haven't posted in a while. Facebook makes it too easy to soapbox.
I try to choose topics that can lead to meaningful discussion. Usually this means that the topics are somewhat controversial, even among some who read my posts. I find this much more interesting than writing on topics that will spark very little disagreement, but I hope those will come up as well. I find that even if I agree with someone on an issue, it is still beneficial to discuss it.
I came across an article about the moving of Gitmo detainees to Illinois and it brought up a couple of issues that are otherwise pretty unrelated. Here's the article: Ill. town welcomes plan to house detainees

I wanted to first address the issue of job creation. This probably deserves its own post, which may come later, but it came up in the article so I wanted to explain why I feel it is so off-base. It seems that many are preoccupied with the existence of jobs, as if jobs were the whole point of an economy. The goal of politicians seems to be to create jobs. They seem to think that creating jobs will make the economy better. The problem is, they have the whole thing backwards. Jobs don't make the economy better, they are merely one way of measuring the health of an economy. High unemployment is a symptom of a sick economy, not the disease itself. Treating the symptoms of the disease is not a likely cure.
The reason we have an economy is because food and things don't appear at the snap of our fingers in as great abundance as we could ever want. In short, there is scarcity of resources. Economics is the study of how these resources are allocated and the theories of economics postulate how they can best be allocated. Jobs exist as part of the economy, but it is not jobs per se that we need. We need food and stuff. Jobs are simply an aspect of how those things are provided.
So, to assume that we can merely create jobs, and that by so doing, stuff will come into existence is foolish. All the talk about creating jobs will do nothing to actually improve economic conditions unless the stuff exists to allocate. Now, it is true that stuff is produced by people who have jobs, but these jobs need to be productive jobs, not boondoggle jobs as some call them. For instance, it will do no good for a trucking company to hire more drivers if there is nothing for them to transport. Sure, jobs are created, but there is no actual productive work to do. Most government-created jobs consist of digging a hole and filling it again. One can easily see the folly in this, but many advocate this exact type of thing for improving the economy. (This is an Op Ed piece by Paul Krugman--quintessential idiot) Improvement in the economy comes when there are more things to allocate, not when there are simply more jobs to allocate the same amount of stuff. Vedder and Gallaway wrote about this at length in their book Out of Work.
The idea that government can create actual jobs is perpetuated in the AP article:

Federal and state officials estimate the federal takeover will create as many as 3,000 jobs in the area within several years, including an estimated 800 to 900 at the prison and at local businesses that would sprout up as a result.

Why are these not real jobs? Well, these jobs don't create any wealth. These jobs are unproductive in the sense that we gain nothing by their existence. Now, whether or not they are necessary is another question, which I address below, but the fact remains that we would be better off if these jobs didn't have to exist. The resources that government is redirecting from elsewhere to pay for this prison and employees could be used for productive means. This is the problem with so-called government-created jobs: they take real resources from the productive economy and reallocate them toward something less efficient and often completely unproductive.
Now I come to the second issue raised by this article. The saddest part about the whole thing is that quite frankly, this prison is completely unnecessary and unconstitutional. Holding prisoners or "detainees" without a writ of habeas corpus is strictly against Article 1 of the Constitution:

The privilege of the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.

This statement is particularly interesting because Habeas Corpus was thought to be so important that it was actually included in the body of the Constitution and not only implied in the Bill of Rights. The only exceptions that the Constitution allows for the suspension of Habeas Corpus are for rebellion or invasion. Prisoners of war captured in a country on the other side of the world (Afghanistan or Iraq) obviously do not fit this description. Personally, I don't see any reason to suspend Habeas Corpus even in these cases. Basically, a writ of habeas corpus is a judicial mandate requiring that a prisoner be brought before the court to determine whether the government has the right to continue detaining them. The individual being held or their representative can petition the court for such a writ. There are few if any cases where these criteria cannot be satisfied. There is certainly no reason to deny this to the detainees in Guantanamo. It's not as if we don't have any judges available to take their cases. Rather, this is another disturbing case of government disregard for the rights of the individual, which are explicitly protected by the Constitution.
Some argue that since these people are not citizens of the United States that these rights do not apply to them. I think this argument is disturbing and just plain wrong. A person does not have rights because he or she is a citizen of any given country. Our own Declaration of Independence is built on his fact:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

We cannot justly go around the world promoting "democracy" and "freedom," denying it at home all the while.
When, if ever, do you think an executive could justly suspend a writ of habeas corpus? Has there ever been such a time in US history--when habeas corpus was or could have been justly suspended?

Soda: the New Cocaine

A newly proposed tax would pay for health care, and it as a lot of people upset, but I am not sure how they are justifying their objections. I guess this is another case where principle has little or no influence on the strongly-held opinions of some.
Apparently, since soda and other sugary drinks are bad for us, we should tax them in order to discourage consumption and improve the overall health of our country. But the real motive is obvious and even blatant:

The beverage tax is just one of hundreds of ideas that lawmakers are weighing to finance the health-care plans. They're expected to narrow the list in coming weeks.

That is, it's all about money--money and control. Here lies the slippery-slope of government intervention into things like drug prohibition and health care. There no longer exists any consistent precedent for NOT passing such laws. Most have already accepted the notion that government can regulate what substances we can and can't take into our bodies (FDA, drug laws etc.), and with the push for a universal healthcare plan, many are also accepting the premise that government is responsible for our health. One cannot remain consistently opposed to a soda tax and, at the same time, defend anti-drug laws and the like. However, since it is unlikely such laws will be repealed, we can expect many opponents of a soda tax will eventually fall in-line with the program of government regulation of our lives. Thus, we can certainly expect more and more regulation on things we consume simply based on how healthy they are:

Health advocates are floating other so-called sin tax proposals and food regulations as part of the government's health-care overhaul. Mr. Jacobson also plans to propose Tuesday that the government sharply raise taxes on alcohol, move to largely eliminate artificial trans fat from food and move to reduce the sodium content in packaged and restaurant food.

I can only imagine one day someone getting arrested for hiding fried chicken down their pants. Don't get me wrong, I don't drink much soda, I don't drink any alcohol, and I can't remember the last time I ate fried chicken. BUT, outlawing fried chicken is just a hop away from bacon. That creates a problem for me.
What foods do you like that might be illegal or taxed? Would you still buy them on the black market?