When asked about my economic politics, I say I’m “socialist, kinda”. I owe a lot of that to listening to The Barefoot Bum over many years talking directly about how economic systems work, and the problems with capitalism. By comparison, I find a lot of other socialist arguments on the internet unsatisfying. It’s all “overthrow capitalism” and “seize the memes of production”, and I wish we could talk about specifics more often.
So, I’d like to lead a discussion about the problems with capitalism, much like what I did with health insurance years ago. Don’t treat me as an authority, tell me how wrong I am, discuss.
My first subject of discussion, is exploitation of labor. This is a Marxist concept, but I’m not interested in exploring what exactly Marx did or did not believe. I’m interested in exploring (and improving upon) the concept as I understand it. So here goes:
Each worker produces resources at a certain rate, and also consumes resources at a certain rate in order to maintain their life as a laborer. The surplus value of labor is equal to the amount of resources produced, minus the maintenance cost.* The exploitation of labor expresses the idea that the people at top will pay workers only the maintenance cost, while keeping most of the surplus value for themselves.
*Technical language note: in Marxist theory, the amount of resources a worker produces is their “labor power”, and the maintenance cost is called the “reproduction cost”. see comments
For example, suppose a worker produces 150 cans of soup a day, and spends the equivalent of 100 cans a day (40 cans on rent, 15 cans on food, 25 cans on a retirement fund, 15 cans on healthcare, 2 cans on entertainment, and 3 cans on miscellany). 100 cans per day is the maintenance cost, and 50 cans per day is the surplus. The factory owners only pay a salary of 100 cans per day, and keeps the 50 cans surplus for themselves. The laborers earn enough to maintain a certain quality of life, but never enough to move upwards.
Of course, it’s one thing to tell a narrative, and another to show the narrative to be accurate. In practice, I’d expect that workers receive at least some of the surplus. On the other hand, 80% of Americans live paycheck-to-paycheck, so maybe not very much.
As for that 1 to 2 surplus/maintenance ratio? I pulled that out of my ass, and I have no idea what a realistic ratio would be. The true surplus might be quite complicated to calculate. Perhaps the worker operates a single step of an assembly line, and goes through 10,000 cans a day, but you have to account for the workers on every other step of the assembly line, as well as the cost of procuring raw materials, maintaining machinery, managing workers, etc.
Anyway, in Marxist theory, the surplus rightfully belongs to the workers, but instead it gets hogged by the owners of capital–the people who put up the initial investment to buy machinery and a building.
I want to keep this post brief in order to encourage discussion, so I’ll stop here and continue later. Here’s a permalink to the series.
Discussion questions:
- One issue with the “maintenance cost” and “surplus value”, is that we might disagree on what counts. Does “entertainment” count as a maintenance cost, or is it extra? What about paying off a mortgage, or student debt? How much do these questions matter?
- To what extent do you think workers are receiving the surplus of their own labor? What economic forces allow them to get at least a slice of that pie?
- Does the surplus rightfully belong to workers? What would a fair distribution look like?
- Where would you like me to take this discussion next?
A meta-quibble, so to speak: conventional economics, both capitalist and Marxist, has major gaps which render moot most big-picture analyses moot.
One of these is the tendency to regard natural resources as a given, valued only by the cost of extraction – with no regard to renewability or scarcity except as that affects immediate costs of obtainment.
Another, maybe even more undermining, is glossing over “externalized costs” – say, if the farm workers who produce the soup ingredients accrue illnesses and injuries from pesticide exposure and unsafe working conditions, they (and possibly taxpayers and charities) bear a load of expenses actually attributable to the food production but never included in the price of soup.
You might as well try to engineer a structure using weight figures taken from a balance scale with monkeys pulling on the pans at every measurement… except the monkeys would be truly random, while most factors warping economic data have a consistent and pro-actively scheming bias not so easily shooed away.
A note on item 3 which recently occurred to me: Even if we accept that _some_ worker is entitled to the surplus, it’s not always clear _which_ worker can assert that claim. I’m a TPM by trade, which means that one of the major focuses of my work is process improvement. Suppose I jigger with the process you described above, resulting in an output improvement of 25 can/days for a total surplus of 75 cans. Once I’ve done my process improvement thing and gone away I’m effectively invisible (I won’t show up on the labor roles), and yet we’re it not for my labors daily output would by 25 cans/day less.
Am I entitled to 25 cans/day? Something less? Nothing?
Oops @ my # 1 – pls disregard that first “moot”…
Thanks for the kind words.
Your technical Marxist terminology is not quite correct. The amount that a worker produces is their labor. The amount that a worker needs to survive is the cost of their labor power. The amount that we need to rear and train the next generation of workers is the cost of reproduction.
Back to the substance. I don’t think it’s really possible to directly calculate an individual worker’s surplus. Instead, economists usually rely on aggregates at the level of the firm (microeconomics) or the national economy (macroeconomics). So we might look at a firm’s revenue, cost of capital, and aggregate wage bill and start doing arithmetic from there.
The analysis is further complicated by the fact that senior executives are usually paid “wages”, but some economists (myself included) consider most of their compensation to be distribution of the surplus.
Any analysis must also consider the cost of physical capital. It’s actually quite difficult to do so. See Sraffa’s Production of Commodities by Means of Commodities for a more complete treatment.
Suppose to produce soup we have 100 workers using physical capital (a machine or set of machines) and natural resources to create soup. The physical capital required the labor of 100 workers for one year (plus natural resources and no other physical capital) to create, lasts for 10 years. Using the physical capital and natural resources, 100 workers can produce 20,000 cans of soup per year (some of those workers perform routine maintenance on the physical capital). Each worker requires 100 cans of soup per year to live. To a first approximation, the output per worker is 200 cans per year. All numbers here are completely arbitrary and used for illustration of the underlying concepts; they are not intended to be in any sense “realistic”.
We must, however, consider the cost of the physical capital. Since the approximate output per worker is 200 cans, the cost of labor (not labor power) of the capital is 100 workers * 200 cans per worker = 20,000 cans / 10 years = 2,000 cans per year. Observe that the production of capital also produces a profit.
So our soup-making capitalist’s profit is 20,000 cans (output) – 10,000 cans (wages) – 2,000 cans (cost of capital) = 8,000 cans. Our machine-making capitalist’s profit is 2,000 cans (revenue) – 1,000 cans (annualized wage) = 1,000 cans.
Note that this approximation does not include discounting, since the machine actually requires 10,000 cans of soup the first year so the workers producing it can eat. Also note that this approximation requires that a lot of soup actually exists before production, since the workers must consume soup during the process of production. Getting everything to work out even in this simple example requires considerable mathematics.
@1
Pierce, I kind of understand: I spent eight years of my live delving into the complications. On the other hand, we have to start somewhere, and the OP is not a bad place to start.
I would also note that even an engineering education starts with very simplified stylized machines and structures, to illustrate basic principles, and then adds complications from there.
Larry Hamelin @ # 5 – Fair enough, though I think in terms of your comparison you might imagine an engineer who draws plans for a “metal” object and never gets around to steel specifications or possibilities for rust.
Only when really aggravated do I call economics a “pseudo-science”; given its track record of partial success (e.g., accurate predictions of recent Republican tax cut effects), “semi-science” seems most appropriate.
As to your discussion questions…
First, I will lean a little on my credentials: I have a BA in economics and political science, and an MA in economics. I will use my credentials only to support my assertions below that “some economists argue” this or that point, without implied judgement as to the quality (or lack thereof) of their arguments. I do not intend to invoke my credentials to justify any of my own assertions. The real value of my credentials is that I have learned to actually make good arguments. If I cannot do so, my credentials are useless.
One issue with the “maintenance cost” and “surplus value”, is that we might disagree on what counts. Does “entertainment” count as a maintenance cost, or is it extra? What about paying off a mortgage, or student debt? How much do these questions matter?
Marx noted that the cost of labor power is political in no small part. The minimum cost of labor power is the minimum number of hours of labor required to produce the commodities necessary to allow a worker to be able to work for a specified period. The “absolute surplus” (my own terminology) is the number of labor hours worked less the minimum cost of labor power.
However, workers can use persuasion, negotiation, and force to extract some of the absolute surplus. Furthermore, some of the absolute surplus must be diverted to reproducing the work force, i.e. rearing and training the next generation of workers, since those in the current work force will eventually retire or die.
Some economists argue that a political high cost of labor power is an incentive to develop physical capital, and argue that capitalism and industrialization took hold in England rather than in France precisely because of England’s higher political cost of labor power. Naturally, some economists reject that argument.
To what extent do you think workers are receiving the surplus of their own labor? What economic forces allow them to get at least a slice of that pie?
To this question, I will direct your attention to the August 2018 article, The Productivity–Pay Gap by the Economic Policy Institute, showing that the compensation of production/nonsupervisory workers has lagged considerably behind economic productivity since 1973. Clearly, workers are capturing much less of the surplus today than they were in 1973.
Does the surplus rightfully belong to workers? What would a fair distribution look like?
As noted earlier, some of the surplus must be directed towards reproduction. Children must be reared and trained to form the next generation of workers. Additionally, some of the surplus must be directed to “overhead”, activity not directly related to production or sustaining workers. For example, we might want to have some systematic method of resolving disputes between individuals with a minimum of violence, and perhaps some systematic method to discourage “free riding”, i.e. consuming the social product without making a contribution to that product (with exceptions, of course, for those unable to contribute). And there are issues of high-level economic coordination. At a minimum, all but the most batshit crazy Rockwellian anarchists would assent to a consistent publicly coordinated monetary system; even commodity money requires some public coordination. And of course all the institutional arrangements to provide overhead must themselves be reproduced.
Where would you like me to take this discussion next?
I will let other commenters direct the conversation. I will weigh in as needed. My current personal hobbyhorse is Modern Monetary Theory (See also my posts on the topic).
Pierce @ #6
Only when really aggravated do I call economics a “pseudo-science”;
I do the same thing. And since I study economics all day, I probably get really aggravated more often than you do.
GG @ #2:
(I assume you mean Total productive maintenance for TPM, no?)
You make a good point. Consider the even simpler case of trade under comparative advantage. Who is “responsible” for the increased consumption by both parties outside their respective production-possibility frontiers?
I think trying to answer distributional questions from a purely moral perspective is misguided, as it leads us into a swamp of competing preferences disguised as moral principles.
@Pierce #1,
Hmm, I’ll consider talking about external costs at a later point. Although, you should set your expectations lower, this is just sort of a casual discussion, not even deserving to be called pseudo-science. Thanks for the comment.
@Larry #4,
Yeah, I thought I might be using the Marxist terminology incorrectly. And since the point isn’t even to present Marx, well I think it was a good choice to use more of a colloquial vocabulary instead of a technical one.
Thanks for the illustrative example of the cost of capital. It makes perfect sense to me. I had definitely been thinking that capital requires some sort of labor, so if we believe that surplus rightfully belongs to workers, some of that surplus belongs to the people who produced the capital. Of course, there’s a difference between the laborers who produce capital, and the people who own the result.
I would describe myself as a minor socialist. Right now, we have a mixed economy, with some things run by the government and some by private industry. I think that situation is almost ideal, but could be tweaked some. On a scale of 0 to 10, where 0 is complete laissez faire, where the government doesn’t get involved in industry at all (eg. 1800s England and America) and 10 is the government runs everything (eg. Soviet Russia, Venezuela), I think that America is around a 3, Europe is maybe a 5, and the Nordic countries are perhaps a 6. Personally, I would like to see the US raised to a 4 — slightly more socialistic. I realize this opinion has no place whatsoever in contemporary politics, which doesn’t allow for nuance. As far as Fox News is concerned, even something as benign as student loan forgiveness is exactly equivalent to the government taking over all industry.
More specifically, we currently have a socialist police and fire system, highways, libraries, most of K-12 education, and some of higher ed (in the form of loans and public colleges). I think we should add health care and utilities to that mix.
The greatest strength of capitalism is its emphasis on competition. In theory, as new companies find new, more efficient ways of doing things, they assume a greater market share and drive out less-efficient competitors. This is why communist governments tend to fail — they keep on pumping out cars that people want to drive, or tech that doesn’t advance. (Of course, capitalism’s greatest weakness is its tendency to create monopolies, which is why a strong government is needed to occasionally break them up.)
But in the sectors I name, there isn’t really that much competition. There is none at all in utilities — when I want to get electricity or water, I don’t have a choice of which company should hook up my house. And if my utility decides to jack up my rates, I can’t jump to a competitor. All I can do is vote for state reps who will institute strict controls over the utility. So why not just cut out the middleman (in this case, the utilities’ stockholders) and have them run directly by a state utilities commission?
Likewise, in healthcare, there are only a few people who live in cities big enough that they can choose which hospital to go to. Most hospitals are effectively monopolies, so they ought to be run by the state as well. And people don’t really do cost-benefit comparisons when they’re looking for a doctor — they choose based on convenience. Let the state run all of them, I say.
Larry Hamelin @ #8: TPM = “Technical Program Manager”
I honestly don’t have any idea what the Marxist perspective on this dilemma is. On one hand I seem to be contributing to “alienation” (https://demoskratia.org/marxs-conception-of-alienation-7e9d47b78220), but on the other hand I’m not personally alienated because I very definitely have a say in how production is organized. Does this make me the petite bourgeoisie (https://www.encyclopedia.com/social-sciences-and-law/sociology-and-social-reform/sociology-general-terms-and-concepts/petite-bourgeoisie) or something else entirely?
brucegee1962 @ #10
On a scale of 0 to 10, where 0 is complete laissez faire, where the government doesn’t get involved in industry at all (eg. 1800s England and America) and 10 is the government runs everything (eg. Soviet Russia, Venezuela)
Beware of oversimplification. There’s no such thing as complete laissez faire; the closest you can get in theory is maybe anarcho-capitalists such as Lew Rockwell or Murray Rothbard, who are both batshit-crazy lunitarians. And while the government of the Soviet Union ran a lot, it didn’t run everything, and a lot of its control was indirect. The government of Venezuela didn’t even come close to running everything; it mostly just nationalized petroleum extraction and did some “socialistic” redistribution. Ian Welsh has some good analyses of Venezula, as does Jacobin Magazine
The greatest strength of capitalism is its emphasis on competition.
As you note, competition is a social add-on to capitalism. Capitalism, strictly speaking, is private ownership of the means of production. Capitalists do not want competition; more precisely, each capitalist wants competition for everyone but him- or herself. See e.g. Adam Smith, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, . . . or in some contrivance to raise prices.”
I am presently teaching Managerial Economics, which is the application of economic theory to avoiding competition and creating monopoly or monopolistic competition. And as best I can tell, aside from accounting, avoiding competition is the entire curriculum of every business school.
Capitalism does not “naturally” produce competition, as you correctly observe, “a strong government is needed to occasionally break them up.” I would quibble about “occasionally”.
[C]ommunist governments tend to fail [because[ they keep on pumping out cars that people want to drive, or tech that doesn’t advance.
I don’t believe this is correct. Actual scholarship on state communist economies (USSR and pre-Deng PRC) is extremely thin; even “expert” modern economic opinion lacks, as far as I can tell, support from legitimate academic research.
During my undergraduate education, I tried to research the economics of the USSR. After moderately diligent searching, I was able to find only one print collection, which I had to obtain by inter-library loan. Research there suggested that the Soviet economy was actually about as efficient as western economies; their production was much lower due not to inherent inefficiency but because they started industrialization much later than the west. One must also note that the West constituted a credible existential threat against the USSR, which required them to divert a lot of resources to defense and deterrence.
YMMV: if you are interested, try to find good secondary sources (and primary sources, if you can read Russian or Chinese).
@CG #11
I don’t think there is a singular “Marxist perspective” on either your dilemma or your occupation. Marx himself does not have an opinion: your occupation did not really exist in the mid-1800s, and Marx is presently too deceased to revise his opinions on current economic organization.
I personally would argue that you are a member of the professional-managerial class (PMC). You can read my own work on the subject in The Fall and Rise of the American Bourgeoisie.
The class relations between the capitalist class and the PMC are complicated and much different from the relationship between the capitalist and working classes.
It was amazing to me how my pay rose when I went from being an “employee” to a “contractor”. Pay jumped about 5 times over 4 years.
I basically see myself as a very small scale capitalist now. I think government policy should work to make everybody independent, not favor large employers over their employees.
The main reason I don’t want to be completely independent is I don’t like selling stuff. Rather have someone else deal with that. But I let several contract houses several deal with that in the past, not just one..
Again, look at a family running a taco truck rather than working at McDonald’s
Sorry, some comments were stuck in the moderation queue.
A very short guide to Marxist class terminology. This is from memory; I apologize for any errors or inaccuracies, and I am egregiously oversimplifying. It should also be noted that Marxist economic classes are not intended to be a strict partition, merely a guide to looking at the specific actually-existing relations of production. Also, Marx primarily analyzed the relations of industrial capitalism; there are additional terms relevant to pre-capitalist/pre-industrial means and relations of production.
Proletariat (working class): Those who work for hourly wages, usually in industrial occupations. (Sometimes specified as the industrial proletariat to distinguish them from service workers.) When a proletarian loses his job, they lose their primary source of income. Unemployment insurance and welfare may mitigate this loss of income. Those who work for salary are usually members of the professional-managerial class.
The etymology of proletariat originates from the Latin, “a man whose only wealth is his offspring, or whose sole service to the state is as father.”
Peasantry: Pre-capitalist agricultural workers. Now that agriculture has been thoroughly industrialized, most agricultural workers are more accurately described as proletarian.
Labor aristocracy: a subset of the the proletariat. Members of the labor aristocracy generally have relative scarce skills and therefore have a degree of bargaining power when negotiating with the bourgeoisie. One priority of the bourgeoisie is to “de-skill” labor so that the labor aristocracy loses economic bargaining power.
Bourgeoisie: Those whose income is primarily derived from profit and the ownership of physical capital. Some of the bourgeoisie manage firms, some merely collect profit. The bourgeoisie of Marx’s time have largely been replaced by financial capitalists; day-to-day management of firms is usually relegated to members of the professional-managerial class.
The etymology of bourgeoisie is from the French, “a class of citizens who were wealthier members of the Third Estate (i.e. wealthier than “commoners”, i.e. workers and peasants). The bourgeoisie were the original “middle class” between the landed aristocracy and the peasantry/proletariat.
Petty (or petite) bourgeoisie: Those who own their means of production, but rely for their income mostly on their own labor operating that means of production. Marx generally meant small shopkeepers who owned their store and merchandise. Marx noted the tendency of proletarianization of the petty bourgeoisie, as small owners were bought out and converted to wage labor by larger capitalist enterprises.
Professional-Managerial Class: A modern class division, consisting of upper- and middle-level managers of large firms, as well as professional occupations such as physician, lawyer, contract engineer, etc.
HTH
No worries, Siggy. I try to substantiate my comments, so the links tend to overwhelm the spam filters.
@robertbaden #15
I think government policy should work to make everybody independent, not favor large employers over their employees.
A tough sell. First, what precisely do you mean by “independent”? Like it or not, we have very large-scale industrial enterprises that require the coordination of hundreds or thousands of workers. Should we reconstitute the assembly line at Ford from scratch every day/week/month/year?
Contracting works moderately well for people with relatively rare skills, especially when those skills are required only intermittently by any specific firm. I was a contract computer programmer for many years before becoming an economist. But only moderately well. Rare skills have the tendency to become more common over time, as people try to acquire those skills to get in on the economic surplus generated by scarcity. Without some sort of organization of “independents” (an oxymoron), a heavy investment in human capital that can become an expensive sunk cost.
And the taco trucks will eventually get bought out by corporate conglomerates. Remember, taxi drivers used to be independents, then they became proletarians for petty bourgeois medallion owners, and now they’re “independents” again exploited by Uber and Lyft.
“Does the surplus rightfully belong to workers? What would a fair distribution look like?”
It sounds like this question presumes the division of workers & owners in the first place, and then asks how profit should be divided from there. Or… put differently: why do we need a separate class of “owners” at all?
@Coyote #21
[W]hy do we need a separate class of “owners” at all?
I do not agree with him at all, but Hayek said in 1939: “The ultimate decision for and against socialism cannot rest on purely economic grounds, and cannot be based merely on the determination of whether a greater or smaller output of society is likely to be obtained under the alternative systems in question. The aims of socialism as well as the costs of its achievement are mainly in the moral sphere. The conflict of ideals is one of ideals other than merely material welfare. . . . it is on considerations like those discussed here that we shall have to base our final choice.” (qtd. by Corey Robin, Uninstalling Hayek)
Robin goes on to explain: Hayek’s “social theory remained dedicated to elaborating what he saw as the essential problem of economics: how to allocate finite resources between different purposes when society cannot agree on its most basic ends. [emphasis added]”
The Hayekian version of freedom, I would argue, rests not on the idea of freedom as “everyone does as he pleases” but that superior men (and lo! how often it is always men) should have the freedom to command and dispose of the labor of the inferior. When we cannot agree on society’s most basic ends, then it must therefore be the province of superior men to impose their correspondingly superior ends on society.
For an elaboration of this argument, see Corey Robin’s The Reactionary Mind.
@GG #12
Alienation of labor is another thing to add to future topics.
@Coyote #21
I’m not sure that it does presume a laborer/owner distinction. You could imagine a world where we all do both, but still ask how much our rightful reward should be apportioned according to one or the other. I think the reason that there are separate classes is because ownership is so much more highly rewarded at a certain level.
@21 Coyote
Because, as others have noted here, labor alone is not enough to produce goods; it requires capital as well. Factories don’t build themselves.
Businesses also require a certain assumption of risk, which some people are more willing to do than others. Take restaurants, for example. My understanding is that almost half of new restaurants fail. On the one hand, you could have someone with four million dollars say “I think I know enough about restaurants to invest half a million to start one and have it succeed. But if it fails, oh well, I’ll write off the loss on my taxes.” On the other hand, you could have a group of chefs, waiters, and other staff who all pool their assets to build a restaurant. Sure, they have a lot more incentive to make the thing work — but if it fails, they’re all completely wiped out and have lost their entire life’s savings. Which system creates more new restaurants in a year?
What if some of the original owner/investors decide they want to pull up stakes and get out — are the rest obligated to buy them out? Cooperatives are dicey on a social level as well.
Also, capitalization is an ongoing process. What happens if your cooperative restaurant is profitable, but has a fire and needs a lot of money to repair? Is it fair to ask all your employee/co-owners to lose their last year’s worth of profits, or else let the place go under?
There’s also the fact that even a cooperatively owned business needs someone to make decisions like, say, whether to buy new ovens or keep using the old ones. Making decisions like this requires a set of specialized skills that not everyone may have. But if you have a class of co-owners habitually making decisions like these, they will end up increasingly alienated from the other workers.
If I’d been alive in the 1920s and 30s, with my current temperment, I’m sure I would have been an ardent communist. What I think would have cured me was reading Animal Farm. I think that book has the perfect description for why communism can’t work.
BTW, thanks to Larry Hamelin for your expertise. It’s always good to have someone in these threads who knows what they’re talking about!
@brucegee1962 #24
You’re most welcome. I hope to remain informative.
Businesses also require a certain assumption of risk, which some people are more willing to do than others. . . .
You switched between willing and able; millionaires are more able to take risks, because, as you note, they have so much social privilege a failed restaurant is not really much of a risk. The ability is not some kind of intrinsic merit, but a social and socially-constructed privilege.
The “socialist” way of doing it is that the state takes over some of the risk. And limits the upside too: you won’t fail catastrophically under socialism, but neither will you get fabulously wealthy.
There’s also the fact that even a cooperatively owned business needs someone to make decisions like, say, whether to buy new ovens or keep using the old ones.
There are a lot of ways to make cooperative decisions. Having an owner with all the power over the employees by virtue of his socially privileged access to finance capital is only one of those ways.
What I think would have cured me [of communism] was reading Animal Farm. I think that book has the perfect description for why communism can’t work.
Orwell’s main point in Animal Farm was that communism, at least the Soviet attempt under Stalin, collapses into capitalism. All capitalism does is cut out the middleman in the race to the bottom, if you’ll forgive my egregious mixing of metaphors.
Marx on communism: “In a higher phase of communist society, after the enslaving subordination of the individual to the division of labor, and therewith also the antithesis between mental and physical labor, has vanished; after labor has become not only a means of life but life’s prime want; after the productive forces have also increased with the all-around development of the individual, and all the springs of co-operative wealth flow more abundantly – only then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banners: From each according to his ability, to each according to his needs!” Critique of the Gotha Programme, Part I
I highly recommend the entire document.
Sorry for the broken link above. Critique of the Gotha Programme, Part I
@Larry, 22
Well, count me not in favor of the Hayekian version of freedom, then.
@Siggy, 23
Hm, you got me there. Technically the question didn’t use the word “owners,” just “workers,” so that threw me because of the discussion leading up to it. I guess “What would a fair distribution look like?” is also a good question just in general.
Anyway — can you elaborate on “ownership is so much more highly rewarded at a certain level”? I could be thinking of the same things you are, but I’m not sure. Would you say that’s inherent, or is that just how the incentive structure seems to be set up right now?
@brucegee1962, 24
I hear you saying that production requires capital and also requires decision-making people. That makes sense. But factories are not interchangeable with the concept of owning factories, and needing decision-makers isn’t the same thing as needing owners. So while I agree with some of the things you’ve said, I don’t see where you’ve answered my question. Which is fine, to be fair. It’s not an especially important question.
In any case, citing a novel written by a socialist as an allegory for how certain forms of socialism can go wrong by turning into capitalism… is, I think, an interesting reason to give for why communism won’t work. All roads lead back to Rome, I take it. Where “Rome” here means “capitalism.” I mean, I guess “capitalism is bad but inevitable” is as good a reason as any for not being a communist.
(Personally, though — you’d need something more than a fictional allegory to sell me on the “inevitable” part.)
BTW in case anyone didn’t realize, Larry Hamelin is the person I refer to in the OP as The Barefoot Bum. That’s why he’s all over this comment thread. 🙂
@Coyote #27,
Well it seems like people of sufficiently high socioeconomic class don’t need to work, because they can just live off investments. If we believe that owners of capital do not deserve quite so much of the surplus, and if we waved a wand to create a society following that principle, it might be that this socioeconomic class disappears. In this hypothetical society, people would still work, and still own things, but there wouldn’t be a class of people who can live off of investments, because they just don’t make enough money doing that.
So, let me take stock of the discussion so far.
– The amount of goods produced by each worker is ill-defined, especially when people are working together, or if one worker is there to improve the efficiency of other workers (GG #2, Larry #9).
– Workers are paid somewhat more than the absolute minimum due to political power. But some of this money goes towards rearing and training new workers for the next generation (Larry #7).
– There’s some muddling of the distinction between owners and workers. Capital implies some amount of labor (Larry #4). And to what extent do independent contractors own the results of their own labor (robertbaden #15, Larry #20)?
– Taking ownership of capital involves some assumption of risk, which some people are more willing/able to do than others. (brucegee #24)
– Several people are offering general opinions on capitalism and socialism. This is welcome, and gives me ideas for later topics. However, I hope you don’t respond to all of them.
Ideas that I might discuss more in the future:
– How to define labor when products are a collaborative effort.
– External costs
– Alienation of labor
– Competition
– Owning capital as assumption of risk
One idea that I haven’t seen touched upon yet: What if surplus ought to be distributed neither according to labor, nor capital, but instead according to need?
@Larry Hamelin re: Hayek
Can you comment on the “calculation problem”? I’ve generally been compelled by Hayek’s observation that there needs to be a mechanism for the propagation of cost information, and (perhaps more importantly) an incentive to use that information wisely. All of the socialist-branded alternatives I’ve ever seen have either been light on details or have been creepily authoritarian.
@GG #30,
A good essay to read, is In Soviet Union, Optimization Problem Solves You. Larry also had a response here, and I had a response here.
To summarize, in some ways the hard part of running the economy isn’t giving people incentives, it’s computing the most efficient way to allocate resources (what I think you’re calling the calculation problem). However, capitalism seems to find at least an approximate solution to the calculation problem so there’s no logical barrier to socialism also providing an approximate solution. Not to say that it would be easy.
@Siggy 31
With all due respect, I think that incentives are very much at the heart of the debate.
First of all, I think that, as a motivator for progress, the competition between companies pales in comparison to the competition between nations and cultures. We moderns tend to underestimate the constant worry of our ancestors that they would be conquered by an adversary; most people, throughout human history, have probably known that they lived a few days march from an enemy who would gladly strip away their culture and subjugate them and their families. I note Jared Diamond’s suggestion that a large part of Europe’s leap to preeminence in the 16th-19th centuries may have been based on having a number of technologically even states that were in a condition of constant warfare, but which due to geographical factors could never get far enough ahead of the others to land a knockout blow.
Cultures are in constant competition with each other to use resources more efficiently, or be absorbed by another culture with better memes that allow them more efficient resource use. So cultures need to incentivize their workers to produce more than the minimum they need to survive. And there are precisely three forms of motivation that have ever been invented.
The first is Altruism: you should work harder in order to benefit the tribe. That works really well on a small scale — people will make any number of sacrifices for their children and immediate family members. But Altruism does a lousy job of scaling up beyond the immediate family. Even religious communes, where everyone theoretically shares the same values, tend to fall apart because nobody wants to scrub the floor or do the rest of the scut-work. The most successful versions of this motivation tend to be various forms of brainwashing cults, but even they tend to fall back on the second method, which is…
Fear. Fear is an excellent motivator to get people to work, as all dictators everywhere have found — until it isn’t. At a certain point, people tend to have had enough. Revolutions follow. Besides, fear isn’t really something that people want to advocate out loud.
The third method of motivation is Greed, which is the foundation of capitalism. Capitalism is based on the assumption that everyone is greedy and wants more and more stuff — which seems to be a fairly accurate assessment.
Those are the only three methods of giving incentives that I can see, and only one of them really works to create a livable, competitive society.
Lest anyone think I’m a complete cheerleader for capitalism, let me hasten to add that I do see the need for plenty more restraints on it than what we currently have, including
1) Heavy taxation on the upper echelons of income, to remove incentives for corporations to give CEOs and other bigshots enormous bonuses. Having millionaires may be some benefit to society, but I can’t say the same for billionaires. Any CEO that gets paid more than a thousand times the salary of their lowest-paid worker should see virtually all of that salary taken away by the state.
2) Heavy estate taxes, to prevent the establishment of dynasties. The children of the wealthy have enough advantages already.
3) A strong, well-funded government that can be referee and make sure competition between corporations is fair.
4) Elimination of Citizens United, replaced by laws that take as much corporate money as possible out of government.
5) Free, high-quality K-14 (community college) education, followed by heavily subsidized 4-year and graduate education for all those who can prove they have the intelligence to take advantage of it. Everyone benefits if we can get take full advantage of all our citizens without regard to their economic backgrounds.
As an aside, I think that my opinions once would have put me towards the far-left end of the political spectrum in the US. With recent shifts in Democratic platforms, I feel as if my position is getting closer to the center…
@brucegee #32
No, I still think the calculation problem is a bigger deal than the incentives problem. Between altruism, fear, and greed, it seems to me like all of these options are equally available to capitalist and socialist societies. A socialist society can propagandize people about the common good, it can threaten to punish people, and it can pay people. As long as it can calculate which behaviors to incentivize.
Well, I suppose it can’t pay people quite the same amount that capitalism does, given that the whole point is to distribute surplus more fairly. But I suspect there’s quite a bit of room to get the incentives right without paying CEOs gross amounts. Your proposal to tax “the upper echelons of income” implies agreement on this point. I mean, one vision of socialism is basically just capitalism, but with more progressive taxation. (I’m not here to argue whether that counts as socialism or not, I don’t really care.)
@Siggy #31
I don’t think it’s fair to say with any confidence that capitalism has found an approximate solution to the calculation problem, unless you define any arbitrary outcome as a “solution”. Until we can solve the calculation problem analytically, we have no optimal solution to compare the outcome of a capitalist economy against. Just defining a capitalist outcome as optimal because it’s capitalist seems to beg the question. (Not that you yourself do that, but a lot of economists do.)
If good enough is good enough, then we have to specify more precisely what we mean by good enough. As you note, if we decide capitalism is good enough, then it’s at least logically possible for socialism to be good enough.
Fundamentally, though, I don’t think the underlying economic mechanisms are the fundamental issue. The issue is where the power to set standards and create incentives lies: with the people or with the rich.
Honestly, there’s only one way that you could truly test whether socialism or capitalism works better in the long run. It’s not fair to test the economic success of socialist versus capitalist countries, because of differing cultures, work ethics, yadda yadda. What you’d really have to do is take a country that was fairly homogenous geographically and culturally, and divide it in two. Set up one half with a capitalist system, and the other half as a socialist system, keep them strictly divided from one another, and then check in after a few decades and see which half is doing better.
Of course, actually conducting an experiment like that with the lives of millions of people would be wildly unethical, and impossible to actually carry out in the real…
Wait, what’s that? You say it’s actually been done? Twice? In completely different areas of the world, with wildly different cultures and historical backgrounds? And with similar results in both cases?
The twin experiments of Germany and Korea are what make me call bs on Larry’s claim @13 that “Research there suggested that the Soviet economy was actually about as efficient as western economies; their production was much lower due not to inherent inefficiency but because they started industrialization much later than the west.” In West Germany you had dozens of different car companies in competition with each other, and you ended up with many different models of cars, Volkwagons and Mercedes and Audis and BMWs and Porches, filling many different niches and reaching a state of the art that is admired around the world. In East Germany they built one type of car, the Trabant, which had many design flaws and which was never upgraded for decades; as soon as the wall fell, nobody wanted them any more.
East German joke: A guy goes into a store and says “Can I get a radio for my Trabant?” and the shopkeeper thinks for a moment and says, “Yeah, that sounds like a fair trade.”
The comeback of pure socialists when all these failed experiments come up is “Well, those countries weren’t doing it right — it’s still theoretically possible for a socialist country to calculate production properly and find a formula that will incentivize the workers correctly” just seems suspect when dozens of countries have tried it and nobody has ever really made it work.
For just one example, take the problem of corruption. Let’s take a laissez-faire capitalist society (one that doesn’t go around bailing out banks). There are two banks we can go to to get a loan for our restaurant. In one of them, the bankers take bribes for where they lend other peoples’ money, or just make loans to family members and their buddies. The other bank does due diligence and figures out whether they’re going to be repaid. The check on the corrupt bank is that if it makes too many crummy loans, it goes out of business.
In a socialist country, you’re getting your loan from a government official who is handling other peoples’ money. The only check on that official being corrupt is if there is another official over his head who is NOT corrupt. But why should there be? Centralized, top-down economies and bribery go together like itch and scratch–look at Renaissance Britain, where government-enforced monopolies were the foundation of the economy.
I think of capitalism like evolution: competition over limited resources is the ideal way to enforce optimization, bar none.
@ brucegee1962 #33
I do see the need for plenty more restraints on it than what we currently have
Fair enough. Go out there and make them happen. Donate $50 to Sanders, Warren, Ocacio-Cortez, etc. Vote. Organize. Theorize. Write blog posts. Set yourself on fire in front of the White House. Write your congress-critters. Protest. Riot in the streets. Join the revolution.
If you already are, good on ya! I’m not presuming you’re not, but if you’re not, get off your ass and do something.
@ brucegee1962 #36 #37
Wait, what’s that? You say it’s actually been done?
Bruce, thank you ever so much! After studying socialism and communism for close to two decades, and studying/teaching academic economics for almost a decade, I never thought to compare the Germanys and Koreas. Mind blown! </ sarcasm>
Soviet joke: Everything the communists told us about communism was a lie. Unfortunately, everything they told us about capitalism was the truth.
Your argument presupposes that the only difference between East and West Germany and North and South Korea were differing types of economic organization, and that there is little to no variability within a single broad type of economic organization. Neither presupposition is even close to true, so we cannot treat these experiments as true RCTs.
The twin experiments of Germany and Korea are what make me call bs on Larry’s claim @13
Whatever differences there were between East and West Germany for whatever reasons has literally nothing to do with the economics of the USSR. We might as well use the Israel vs. Palestine to compare Judaism and Islam.
And whatever differences there were between East and West Germany for whatever reasons has literally nothing to do with the research that I read, so precisely what claim are you calling BS on? I assume you do not wish to call me a liar; I would appreciate it if you took extra care in your language to avoid the implication.
Let’s take a laissez-faire capitalist society . . .
A laissez-faire capitalist society? That’s even more utopian than Thomas More could imagine!
The comeback of pure socialists when all these failed experiments come up is “Well, those countries weren’t doing it right — it’s still theoretically possible for a socialist country to calculate production properly and find a formula that will incentivize the workers correctly” just seems suspect when dozens of countries have tried it and nobody has ever really made it work.
Tried “it”? What “it”? They all tried exactly the same thing? They all had exactly the same outcome?
In the antebellum American South, the slaves (e.g. Nat Turner and sympathizers, including John Brown) attempted rebellions and failed. The comeback of pure abolitionists, “Well, these rebels didn’t do it right — it’s still theoretically possible for the Black slaves to be free citizens of a democracy,” just seems suspect when dozens of rebellions have tried it and none have made it work.
My point is that societies are complicated things with a lot of moving parts, and they exist in an even more complicated world of alliances, rivalries, and enmities. While it would be nice to have simple answers, the real world is complicated, and requires more than superficial analysis.
There are definitely lessons that we can learn from East/West Germany, North/South Korea, USSR, pre-Deng PRC, Cuba, etc. It is far to superficial to conclude, however, that anything called “socialism” cannot work.
@ brucegee1962 #37
For just one example, take the problem of corruption.
Yes, lets. Any society is susceptible to corruption. People are greedy, selfish, and clever (at the same time as they are generous, altruistic, and naive), and will always seek out ways to exploit the system for personal gain. So what?
All societies have some corruption. And really, the only limit on corruption is legitimacy. If people believe their society is legitimate, they will be less likely to try to exploit it and more likely to expose and punish corruption.
We can, of course, simply define corruption away, to say, whatever someone (or someone I like) does is legitimate and is by definition not corrupt. It’s not a bribe, it’s a consulting fee to solve an information asymmetry, right?
I don’t want to put too fine a point on it, Bruce, but I’ve been talking about socialism for a long time. I’ve heard all of the objections and arguments you’re going to point out.
I don’t want to put you down or say that your objections are unimportant. I am more than happy to discuss them and investigate the complexities. I will almost certainly learn more about the issues you raise just because you raise them here. (What? I don’t know everything… yet.)
But you are not going to surprise me.
@brucegee,
The whole point of this discussion is to go beyond “capitalism bad, socialism good” memes, and get into specifics about what is good or bad. So I don’t think it is too helpful to bring in Korea or Germany in as examples, and just drop them there without saying exactly what you think is good or bad about those examples. And you shouldn’t feel like you have to make a comprehensive case for or against socialism. The point is to talk about it little by little, piece by piece.
@brucegee,
I mean what I see in this comment thread, is that you’re not really engaging with anything I said in the OP. You’re just taking the opportunity to speak your mind on what you think of the whole socialism thing. Which is fine, get it out of your system. But like, I had ideas for about five other posts in this series. Are you going to pop into each comment thread and make the same arguments each time? I want this discussion to be more than just a place for randos to vent.
Larry@4:
I am very curious about the claim that CEO pay is “distribution of surplus” rather than “wages”.
Presumably the owners are not handing the CEO money out of a sense of altruism.
There are complications resulting from the fact that CEO pay is usually not determined by a true arm’s length negotiation—the stockholders are often a distributed group who have trouble banding together to negotiate, the board of directors are often friends of the CEO, and Boards of Directors don’t usually want to advertise that they got a bargain-basement CEO. But this isn’t always true, particularly when activist shareholders who are frustrated with the company’s management direction get a Board appointed who is accountable to them.
So we have some combination of pay reflecting compensation for the CEO’s management services, and additional pay resulting from principal-agent problems.
Under what conception of “surplus” goes this add up to “distribution of surplus”? Is the claim that CEO pay is almost entirely the result of self-dealing, or something else?
@siggysrobothisband #44
Since I’m not a labor economist, let me dig into Google Scholar and see if I can come up with some good references. I have three midterm exams to write and a trip planned this weekend, so it might take a while, sorry!
This paper looks like a good start. I think the abstract is sufficient for present purposes, but let me know if you want to get the full paper.
Managerial Power and Rent Extraction in the Design of Executive Compensation
Lucian Arye Bebchuk, Jesse M. Fried, David I. Walker
NBER Working Paper No. 9068
Issued in July 2002
NBER Program(s):Corporate Finance, Labor Studies, Law and Economics
This paper develops an account of the role and significance of managerial power and rent extraction in executive compensation. Under the optimal contracting approach to executive compensation, which has dominated academic re-search on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value. In contrast, the managerial power approach suggests that boards do not operate at arm’s length in devising executive compensation arrangements; rather, executives have power to influence their own pay, and they use that power to extract rents. Furthermore, the desire to camouflage rent extraction might lead to the use of inefficient pay arrangements that provide suboptimal incentives and thereby hurt shareholder value. The authors show that the processes that produce compensation arrangements, and the various market forces and constraints that act on these processes, leave managers with considerable power to shape their own pay arrangements. Examining the large body of empirical work on executive compensation, the authors show that managerial power and the desire to camouflage rents can explain significant features of the executive compensation landscape, including ones that have long been viewed as puzzling or problematic from the optimal contracting perspective. The authors conclude that the role managerial power plays in the design of executive compensation is significant and should be taken into account in any examination of executive pay arrangements or of corporate governance generally.
The paper raises the question, however, of why corporate boards of directors would allow such a glaring principal-agent conflict to persist for so long. Economists are not much into people’s motivation; we assume that anything other than “people want more money to get more stuff” is for sociologists, anthropologists and other such riff-raff.
Thanks! It sounds like you are saying that CEO’s getting “distribution of surplus” rather than “wages” means their pay is mostly rents obtained thanks to principal agent problems.
Well, that’s what the authors are saying. This is econ, so for any assertion, you’ll find a Nobel-winning economist saying it’s obviously correct, and another saying it’s obviously wrong.
“If you laid all the economists in the world end to end, they wouldn’t reach a conclusion.” -GBS (?)
@43
If you think the wings are likely to fall off the airplane, there doesn’t seem to be much point in getting into a debate about the workmanship of the wheels.
I started off replying to the OP, but thought that conversation had evolved. But sure, fine, I see where you’re coming from. I had a bunch more I wanted to say about the importance of competition, but I’ll save it for a time when it looks more relevant. I ought to be grading papers anyway.
@38 Larry Hamelin
At least we’re in agreement there (except for the setting oneself on fire bit). I have donated, knocked on doors, gone to meetings, done the whole bit. So should we all.
Holding off now until the field narrows a bit. None of these folks have me excited, but I’ll probably try to jump in once a clear alternative for Biden emerges.
Bruce, I want to note that you seem skeptical of socialism, as well you should be, but you also seem in #33 to endorse some very socialistic proposals.
Remember, the fundamental socialist position is not for this or that mechanism; rather, it is that the people should exert economic power by democratic right. It is just as much socialism for the government to expropriate the (supposedly) hard-earned and (reportedly) well-deserved wealth of the rich as it is to nationalize the oil companies.
Indeed, it is actually just as much socialism for the people to permit private ownership of the oil companies as it is to expropriate them. The fundamental capitalist position is not that private ownership is better, it is that private ownership is a right that the people (via the government) should not infringe. The position is analogous to speech: the government does not permit individuals’ freedom of speech; individuals have the right to speak freely, a right the government should not infringe. The difference is subtle but crucial.
The argument is fundamentally about who should rule. Rich people say that they deserve to rule: they have proven their virtue and capability, their arete, by acquiring wealth. Common people deserve to be ruled: they have proven their lack of virtue and capability by failing to become wealthy.
As our host reminds us, we are veering far off topic. Perhaps we should continue this discussion elsewhere. If you want to suggest a topic or continue this discussion, perhaps you might comment on my blog, perhaps here.