Daily Beinhart

As  promised yesterday, another installment of the wisdom of Larry Beinhart:

"Low taxes create an incentive for profit taking.

"It is easy to confuse profitability with wealth creation.

"They are not the same.

"President Eisenhower built the interstate highway system. There is no doubt that this gave the country an asset of great value, one that was very productive. It created great 'wealth.'  But, aside from the construction companies that contracted the work, it was not profitable.

"Selling subprime mortgages, trading in derivatives, packaging mortgage-backed securities and 'flipping' condos were all very profitable but did not create wealth."

As we now know, derivatives and "flipping condos" not only did not create wealth --except for a handful of gazillionaires-- they bankrupted the country. 

Comments

[Steve R.]

My question to the stock brokers, the real estate agents, the insurance salesmen, the investment bankers and their ilk:

What do you make?

The answer: nothing. They take wealth from those who actually create it: the workers.

Yes folks, Marx was right, and it's still true today: Labor Creates All Wealth.

[Craig]

Ummm, not quite, Steve.

Econ 101 -- Producing something, i.e., creating wealth, requires more than just labor. There are, in fact, three factors of production: land, labor, and -- oops, here comes that dirty word -- capital.

For example, to grow something, you need land and labor, but you also need capital goods, which, in the case of agriculture, usually means at least a hoe, and, for the last 100 years or so, a tractor, a reaper, etc.

The modern farmer also needs another form of capital. It's called money. S/he needs money to buy seeds, fertilizer, machines, etc. And because s/he needs these things at the beginning of the growing season, but won't be able to sell any of his/her agricultural produce until after the harvest, s/he probably also needs a loan from - oh my, oh my, dare I say it -- a bank to get him or her through the growing season. Modern farmers also need money to buy things like crop insurance from -- dare I say it, an insurance company -- to insure against crop failure.

Now, let's see. The farmer sell his or her, say, wheat to the local mill, which tranforms the wheat into flour. To do this, the miller needs the land on which the mill sits, labor to work in the mill, and, capital goods -- the machines in the mill, a source of energy, etc. Chances are the miller also needed, an still needs, another form of capital -- called money -- to buy land, buy the machines, pay for the machines' upkeep, pay for the energy to run the mill, buy the wheat from the farmer, pay the people who work in the mill, etc.

Now let's see. The miller sells his flour to a trucker who....

Well, you get the idea. Labor alone is simply insufficient to produce wealth. If you read Marx, even he agreed on that.

[Terry]

Well, yes.

But bear in mind what Abraham Lincoln said shortly before Marx published Das Kapital:

"Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration."

Maybe times have changed, but "labor still deserves much the higher consideration."

[Steve R.]

Yes, capital is an ingredient, as are raw materials. But they don't produce anything.

It is labor alone that takes capital and raw goods and adds value them.

Econ 101 indeed.

Capital and raw goods don't produce anything on their own; they just sit there. (Which is why Marx saw the taking of profit as a form of theft from workers.) Capital doesn't appreciate by virtue of being moved around. It appreciates because it is invested in ventures that employ workers who add value to raw materials.

Thanks for econ the lesson, Craig. How'd I do? ;)

[Steve R.]

By the way, I didn't intend to imply in my first comment that banking an insurance are bad things. They're quite necessary to any economy. But they needn't be profit-taking organizations. Credit unions, mutual insurance companies and government-run single-payer health plans are all examples of banking and insurance organizations that don't take wealth from the workers who create it, but rather pool it for the common good.

[Craig]

Steve,

You did just fine -- B+ -- maybe an A-.

Lincoln and Marx lived in an era where most production was labor-intensive. We now live in an era in which most production is capital-intensive. Some factories, in fact, now use robots in place of labor. That's the real dilemma for labor today -- capital-intensive industries crowding out the demand for labor.

That said, I completely agree with the original post that all the financial flimflammery -- derivatives, mortgage-backed securities, etc. -- do nothing to create wealth and should be illegal. As I think I've said before in this space, if a bank gives me a mortgage loan, it should be illegal for that bank to sell my mortgage to some other bank without my permission.

[Steve R.]

Gee, what happened to grade inflation? Whatever. I've gotten better grades from better profs.

Labor still exists, but increasingly the workers sit at computer terminals and use their minds instead of their bodies. But they're still the ones adding value to raw materials and capital, even if the raw materials are increasingly data.

In the post-industrial age, as workers are increasingly "knowledge workers," they are decreasingly unionized and are getting a smaller share of the pie than they did at the end of the industrial age.

Nothing about the information age obviates labor. We (the workers) still produce all the wealth.

[Steve R.]

One more thing I should amplify: "capital-intensive" production does not eliminate labor. The industrial revolution mechanized production, displacing a great deal of physical work, but it sure didn't eliminate labor. Likewise in the "information age."

There isn't a mechanized factory on the planet that operates without labor. From the design and construction of the "robots", through their programming, installation, operation and maintenance, labor continues to be required in order to add value to raw materials. Lots of that labor has shifted to white collar trades like engineering, but capital and raw materials are still inert without labor.

The increasing mechanization of the post-industrial era is no different than that of the industrialized era in another way. Workers are not benefiting proportionately from the increases in productivity brought on by automation. Instead, hours worked are longer and real wages are lower today in the US than they were three decades ago.

Just another way the idle rich steal the wealth produced by labor.

Social democracies with stronger labor movements have managed to turn this increased productivity into shorter work weeks and more time off (e.g. France, with it's 35-hour work week and five weeks of vacation, not to mention its rock-solid cradle-to-grave social welfare system).

If we didn't allow those who are born rich to continue siphoning off the wealth produced by the masses in this country, we wouldn't be looking at decades of increasing productivity coupled with decreasing living standards.

That is the real crime of capitalism.

[Craig]

Steve,

I didn't say that capital-intensive production "eliminated labor." I said it "crowded out the demand for labor." To be clearer, I probably should have just used the verb "reduced," as in "reduced the demand for labor," or, better yet, "transfigured."

Why transfigured?

The demand for labor in the extractive and manufacturing industries has been reduced over the last century because the ratio of capital to labor in most extractive and manufacturing enterprises is considerably higher than it was 100 or even 50 years ago. What that means is it takes fewer American man-hours to produce a widget because a far greater portion of the value of the widget is produced by its capital component.

This is why it can truthfully be claimed that the American worker is the most productive in the world. The wealth created by this greater productivity has been a primary driver of America's extraordinary economic growth in the last century.

This economic growth has, in turn, produced an extraordinary growth in the demand for a different kind of labor -- services. 100 years ago, your great-grandparents did not go very far in school and rarely went to barber shops or beauty parlors. Today, most of us get through high school and some college and almost all of us get our hair cuts outside the home. Thus, the demand for barbers and teachers compared to assembly line workers has skyrocketed. As a result, most U.S. GDP is produced now in the provision of services, rather than in extraction or manufacturing.

What has not changed -- much, although some -- is the way we price labor. It's still largely, if not entirely, by supply and demand. If the supply of elementary school teachers was less than the supply of university professors, elementary school teachers would make more money than university professors.

Labor could, of course, be priced differently. Everyone could work for the state and the state could pay everyone the same salary. As I recall, some countries tried something like that in the last century and most of those countries abandoned the effort when it didn't work.

Or, we could have some government intervention -- minimum wages laws, etc. -- that rein in pure supply and demand. Hey, don't we have that now -- at least to a certain extent?

What do you think, Steve -- A+ or just an A?

[Steve R.]

I give it a B at best, Craig, and that's with grade inflation. (You disobey Strunk & White's cardinal commandment to "omit needless words.")

It's a lot of hand waving to back track on your initial implication that "capital-intensive" production, in "crowding out the demand for labor," somehow changes the basic fact that labor still creates all wealth out of capital and raw materials.

You also failed to directly address my point that the radical gains in productivity we've experienced have been stolen by the idle rich. The real standard of living in this country has declined in inverse proportion to gains in productivity.

You make oblique reference to it in your discussion of labor pricing, but you seem reluctant to address the ethical and moral impropriety of it head-on.

[Craig]

Steve,

You are right that the gap between the rich and the poor in the U.S. has increased way out of proportion to the increase in the country's wealth.

I'm not quite sure, however, what you mean when you say that "the real standard of living in this country has declined in inverse proportion to gains in productivity." The fact is that most Americans, including most laborers, have a much higher standard of living than was the case 100 years ago (although average real wages have stagnated, perhaps even declined a bit, during the Bush administration.)

You also undermine your argument when you use loaded verbs like "stolen." I agree that the rich have too much of the country's wealth, but, in most cases, they did not break any laws to obtain their wealth.

Here's a deal for you. I concede that you always need labor to create wealth out of land and capital. I also concede that the huge gap between the rich and the rest of us is wrong. Will you now stop lamenting our income inequality and suggest how to fix it short of Soviet- or Cuban-style solutions -- that is, in a way that does not decrease productivity?

[Steve R.]

Social Democracy, Craig.

I mentioned France, not the Soviet Union or Cuba. (C- for a red herring.)

Since 1970 in the US, real wages have dropped, hours worked have increased, and what, 45 million people don't have access to basic, affordable health care. That's a decrease in standard of living in the wealthiest country on the planet. Meanwhile, corporate profits have soared. That's "theft" in the sense Marx discussed. Even if it isn't technically "stealing" (it's legal, after all), it is ethically and morally repugnant.

You're free to disagree and use terms to which I object in justifying this upward redistribution of wealth, e.g. "property rights". But if it makes you feel better, how about we just call it "legal taking of wealth from those who create it"? (We do seem to finally agree that labor creates wealth, after all.)

We can handle a decrease in productivity. In fact, the global warming crisis demands that we stop producing and consuming so much. It is possible -- actually, imperative -- to imagine an economic system whose survival is not predicated on the preposterous idea of infinite growth in production and consumption.

We stand on the precipice of economic and eco-system collapse, led by the irresponsible market fundamentalism of the US. It's absurd to still be arguing from a point of view that continuous gains in productivity are necessary.

It's time for the human race to grow out of its adolescent fascination with markets and realize the invisible hand never existed. We have always manipulated markets, generally to suit the wealthy in the US, but it is possible, as evidenced by most of the other industrialized nations of the world and by our own New Deal, to manipulate markets for the common good instead.

Somebody will have to cite the source for the following: Capitalism will always survive because socialism will always save it.

This crisis will prove no different.

[Terry]

It's fascinating to hear two confirmed atheists debate the "ethical and moral propriety" of the wealth gap between the haves and the have nots. (Well, Steve anyway. Craig merely says it's "wrong", a word which has its own moral imperative.)

I'm glad to hear Steve challenge the notion of ever-increasing productivity as necessary for a healthy economy. I agree that the production and consumption of more stuff, which factors into Craig's idea of an improved standard of living, is ecologically unsustainable. If productivity is the engine of capitalism, we're all doomed.

I've invited Craig to write a guest post here to defend free trade. He is welcome to do the same in defense of ever-increasing productivity.

[Craig]

Yeah, you're right. Down with stuff! Up with primitivism!

I'm ditching this new-fangled gadget. My next communication with the two of you will use smoke signals.

By the way, Terry, atheists can be just as moral or ethical as the religious.

[Terry Olson]

Hope you have a good Thanksgiving, but here's a question for you:

What did you do with your "old" computer?

Computers and their accessories are highly toxic --plastic (especially when incinerated), lead, mercury, and cadmium. It's been estimated that upwards of 50 million used computers end up in landfills annually.

Same for other electronic gadgets, like cell phones. E-waste is hard on the environment and difficult to recycle safely and responsibly.

That's the kind of "stuff" I'm talking about. It might be a different story if such gadgets weren't designed to become obsolete within a year of purchase.

I'll repeat my contention that the rapid production and consumption of such "stuff" is ecologically unsustainable.

[Craig]

Actually, I tried to give my old computer to the Salvation Army, but they said it was too old (later than 1991), so wouldn't take it. So, I gave it back to the store at which I bought the new computer who said they would recycle the parts.

Also, you don't have to convince me about the planned obsolensence of electronic goods. The oomputer I replaced was 11 years old and I don't own a cell phone.

I just returned from Thanksgiving dinner at the upscale home of a divorced male friend. At the dinner -- if you can follow all this -- were:

1. My friend
2. My friend's 23-year old daughter
2. My friend's divorced live-in female companion
3. The female companion's 23-year old daughter
3. My friend's companion's divorced twin brother
4. The twin brother's 4-year old son
5. The twin brother's divorced male frend
6. The divorced brother's lesbian sister-in-law
7. The sister-in-law's lesbian friend (not her wife.)
8. My wife
9 My wife's divorced sister.

My wife and I were the only straight adults in the room who had only had one spouse.

Happy Thanksgiving and welcome to the new America.

[Steve R.]

Primitivism. What a cop out! (And another red herring.)

Terry, please explain how believers in the supernatural have cornered the market for ethics and morals.

[Terry Olson]

Steve, I probably shouldn't have used term "atheists". Theists certainly have no "corner on the market" for moral or ethical behavior. (Note that I didn't refer in any way to the "supernatural".)

Moral ontology is way too complex a subject to delve into on a blog post, so I won't even try.

Suffice it to say that critics of religion argue its irrationality, its unreasonableness. I have a problem with that. Humans are not, by nature, rational beings, at least not entirely. I merely contend that there are ways to apprehend the world we live in beyond the application of pure reason.

"Reason is a whore", said Luther. Depending on which underlying assumptions one starts with (and there are always underlying assumptions) reason can lead you anywhere, and not necessarily to the truth of things.