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<title>C.2 Why is capitalism exploitative?
</title>

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<h1>C.2 Why is capitalism exploitative?</h1>

<p>
For anarchists, capitalism is marked by the exploitation of labour
by capital. While this is most famously expressed by Proudhon's 
<i><b>"property is theft,"</b></i> this perspective can be found in all forms 
of anarchism. For Bakunin, capitalism was marked by an <i>"economic
relationship between the exploiter and exploited"</i> as it meant the
few have <i>"the power and right to live by exploiting the labour of
someone else, the right to exploit the labour of those who possess
neither property nor capital and who thus are forced to sell their
productive power to the lucky owners of both."</i> [<b>The Political
Philosophy of Bakunin</b>, p. 183] This means that when a worker
<i>"sells his labour to an employee . . . some part of the value of
his produce will be unjustly taken by the employer."</i> [Kropotkin, 
<b>Anarchism and Anarchist-Communism</b>, p. 52]
</p><p>
At the root this criticism is based, ironically enough, on the
<b>capitalist</b> defence of private property as the product of labour.
As noted in <a href="secB4.html#secb42">section B.4.2</a>, Locke 
defended private property in terms
of labour yet allowed that labour to be sold to others. This 
allowed the buyers of labour (capitalists and landlords) to 
appropriate the product of other people's labour (wage workers and 
tenants) and so, in the words of dissident economist David Ellerman, 
<i>"capitalist production, i.e. production based on the employment 
contract denies workers the right to the (positive and negative) 
fruit of their labour. Yet people's right to the fruits of their 
labour has always been the natural basis for private property 
appropriation. Thus capitalist production, far from being founded 
on private property, in fact denies the natural basis for private 
property appropriation."</i> [<b>The Democratic worker-owned firm</b>, 
p. 59] This was expressed by Proudhon in the following way:
</p><p><blockquote><i>
"Whoever labours becomes a proprietor -- this is an inevitable
deduction from the principles of political economy and 
jurisprudence. And when I say proprietor, I do not mean simply
(as do our hypocritical economists) proprietor of his allowance,
his salary, his wages, -- I mean proprietor of the value his 
creates, and by which the master alone profits . . . <b>The 
labourer retains, even after he has received his wages, a natural
right in the thing he was produced.</b>"</i> [<b>What is Property?</b>, 
pp. 123-4]
</blockquote></p><p>
In other words, taking the moral justification for capitalism,
anarchists argue that it fails to meet its own criteria (<i>"With me
who, as a labourer, have a right to the possession of the products
of Nature and my own industry -- and who, as a proletaire [wage
labourer], enjoy none of them."</i> [Proudhon, <b>Op. Cit.</b>, p. 65]).  Whether
this principle should be applied in a free society is a moot point
within anarchism. Individualist and mutualist anarchists argue it
should be and, therefore, say that individual workers should receive
the product of their toil (and so argue for distribution according to 
deed). Communist-anarchists argue that <i>"social ownership and sharing
according to need . . . would be the best and most just economic
arrangement."</i> This is for two reasons. Firstly, because <i>"in modern 
industry"</i> there is <i>"no such thing"</i> as an individual product as <i>"all 
labour and the products of labour are social."</i> [Berkman, <b>What is 
Anarchism?</b>, pp. 169-70] Secondly, in terms of simple justice need
is not related to the ability to work and, of course, it 
would be wrong to penalise those who cannot work (i.e. the sick, 
the young and the old). Yet, while anarchists disagree over exactly 
how this should be most justly realised, they all agree that labour 
should control <b>all</b> that it produces (either individually or 
collectively) and, consequently, non-labour income is exploitation 
(it should be stressed that as both schemes are voluntary, there 
is no real contradiction between them). Anarchists tend to call 
non-labour income "surplus-value" or "usury" and these terms 
are used to group together profits, rent and interest (see 
<a href="secC2.html#secc21">section C.2.1</a> for details).
</p><p>
That this critique is a problem for capitalism can be seen from the many 
varied and wonderful defences created by economists to justify non-labour
income. Economists, at least in the past, saw the problem clear 
enough. John Stuart Mill, the final great economist of the classical 
school, presented the typical moral justification of capitalism, 
along with the problems it causes. As he explains in his classic 
introduction to economics, the <i>"institution of property, when 
limited to its essential elements, consists in the recognition, in 
each person, of a right to the exclusive disposal of what he or she 
have produced by their own exertions . . . The foundation of the whole 
is, the right of producers to what they themselves have produced."</i> He 
then notes the obvious contradiction -- workers do <b>not</b> receive what 
they have produced. Thus it <i>"may be objected"</i> that capitalist society
<i>"recognises rights of property in individuals over which they have 
not produced,"</i> for example <i>"the operatives in a manufactory create, by 
their labour and skill, the whole produce; yet, instead of it belonging 
to them, the law gives them only their stipulated hire [wages], and 
transfers the produce to someone who has merely supplied the funds, 
without perhaps contributing to the work itself."</i> [<b>Principles of
Political Economy</b>, p. 25] With the rise of neoclassical economics, 
the problem remained and so did need to justify capitalism continued 
to drive economics. J. B. Clark, for example, knew what was at stake 
and, like Mill, expressed it:
</p><p><blockquote><i>
"When a workman leaves the mill, carrying his pay in his pocket, the 
civil law guarantees to him what he thus takes away; but before he 
leaves the mill he is the rightful owner of a part of the wealth 
that the day's industry has brought forth. Does the economic law 
which, in some way that he does not understand, determines what 
his pay shall be, make it to correspond with the amount of his 
portion of the day's product, or does it force him to leave some 
of his rightful share behind him? A plan of living that should 
force men to leave in their employer's hands anything that by 
right of creation is theirs, would be an institutional robbery -- 
a legally established violation of the principle on which property 
is supposed to rest."</i> [<b>The Distribution of Wealth</b>, pp. 8-9]
</blockquote></p><p>
Why should the owners of land, money and machinery get an income in the
first place? Capitalist economics argues that everything involves a cost 
and, as such, people should be rewarded for the sacrifices they suffer 
when they contribute to production. Labour, in this schema, is considered 
a cost to those who labour and, consequently, they should be rewarded for
it. Labour is thought of a disutility, i.e. something people do not want, 
rather than something with utility, i.e. something people do want. Under 
capitalism (like any class system), this perspective makes some sense as 
workers are bossed about and often subject to long and difficult labour.
Most people will happily agree that labour is an obvious cost and should
be rewarded. 
</p><p>
Economists, unsurprisingly, have tended to justify surplus value by 
arguing that it involves as much cost and sacrifice as labour.  For 
Mill, labour <i>"cannot be carried on without materials and machinery . . . 
All these things are the fruits of previous production. If the 
labourers possessed of them, they would not need to divide the 
produce with any one; but while they have them not, an equivalent 
must be given to those who have."</i> [<b>Op. Cit.</b>, p. 25] This rationale 
for profits is called the "abstinence" or "waiting" theory. Clark, 
like Mill, expressed a defence of non-labour income in the face of 
socialist and anarchist criticism, namely the idea of marginal 
productivity to explain and justify non-labour income. Other theories 
have been developed as the weaknesses of previous ones have been 
exposed and we will discuss some of them in subsequent sections.
</p><p>
The ironic thing is that, well over 200 years after it came of age 
with Adam Smith's <b>Wealth of Nations</b>, economics has no agreed 
explanation for the source of surplus value. As dissident economists 
Michele I. Naples and Nahid Aslanbeigui show, introductory economics 
texts provide <i>"no consistent, widely accepted theory"</i> on the profit 
rate. Looking at the top three introductions to economics, they 
discovered that there was a <i>"strange amalgam"</i> of theories which 
is <i>"often confusing, incomplete and inconsistent."</i> Given that 
internal consistency is usually heralded as one of the hallmarks 
of neoclassical theory, <i>"the theory must be questioned."</i> This 
<i>"failure . . . to provide a coherent theory of the rate of profit 
in the short run or long run"</i> is damning, as the <i>"absence of a 
coherent explanation for the profit rate represents a fundamental 
failure for the neoclassical model."</i> [<i>"What <b>does</b> determine the 
profit rate? The neoclassical theories present in introductory 
textbooks,"</i> pp. 53-71, <b>Cambridge Journal of Economics</b>, vol. 20, 
p. 53, p. 54, p. 69 and p. 70] 
</p><p>
As will become clear, anarchists consider defences of <i>"surplus value"</i> 
to be essentially ideological and without an empirical base. As we will 
attempt to indicate, capitalists are not justified in appropriating 
surplus value from workers for no matter how this appropriation is 
explained by capitalist economics, we find that inequality in wealth 
and power are the real reasons for this appropriation rather than 
some actual productive act on the part of capitalists, investors or
landlords. Mainstream economic theories generally seek to justify the 
distribution of income and wealth rather than to understand it. They 
are parables about what should be rather than what is. We argue that 
any scientific analysis of the source of <i>"surplus value"</i> cannot help 
conclude that it is due, primarily, to inequalities of wealth and, 
consequently, inequalities of power on the market. In other words, 
that Rousseau was right:
</p><p><blockquote><i>
"The terms of social compact between these two estates of men may
be summed up in a few words: 'You have need of me, because I am
rich and you are poor. We will therefore come to an agreement. I
will permit you to have the honour of serving me, on condition that
you bestow on me that little you have left, in return for the pains
I shall take to command you.'"</i> [<b>The Social Contract and Discourses</b>,
p. 162]
</blockquote></p><p>
This is the analysis of exploitation we present in more detail in 
<a href="secC2.html#secc22">section C.2.2</a>. To summarise it, labour faces social inequality 
when it passes from the market to production. In the workplace, 
capitalists exercise social power over how labour is used and this 
allows them to produce more value from the productive efforts of 
workers than they pay for in wages. This social power is rooted in 
social dependence, namely the fact that workers have little choice 
but to sell their liberty to those who own the means of life. To 
ensure the creation and appropriation of surplus-value, capitalists 
must not only own the production process and the product of the 
workers' labour, they must own the labour of the workers itself. 
In other words, they must control the workers. Hence capitalist 
production must be, to use Proudhon's term, <i>"despotism."</i> How much 
surplus-value can be produced depends on the relative economic 
power between bosses and workers as this determines the duration 
of work and the intensity of labour, however its roots are the
same -- the hierarchical and class nature of capitalist society.
</p>

<h2><a name="secc21">C.2.1 What is <i>"surplus value"</i>?</a></h2>

<p>
Before discussing how surplus-value exists and the flaws in capitalist
defences of it, we need to be specific about what we mean by the term
<i><b>"surplus value."</i></b> To do this we must revisit the difference between 
possession and private property we discussed in <a href="secB3.html">section B.3</a>. For 
anarchists, private property (or capital) is <i>"the power to produce 
without labour."</i> [Proudhon, <b>What is Property?</b>, p. 161] As such,
surplus value is created when the owners of property let others 
use them and receive an income from so doing. Therefore something 
only becomes capital, producing surplus value, under specific social 
relationships. 
</p><p>
Surplus value is <i>"the difference between the value produced by the
workers and the wages they receive"</i> and is <i>"appropriated by the 
landlord and capitalist class . . . absorbed by the non-producing 
classes as profits, interest, rent, etc."</i> [Charlotte Wilson, 
<b>Anarchist Essays</b>, pp. 46-7] It basically refers to any non-labour 
income (some anarchists, particularly individualist anarchists, 
have tended to call <i>"surplus value"</i> usury). As Proudhon noted, it 
<i>"receives different names according to the thing by which it is 
yielded: if by land, <b>ground-rent</b>; if by houses and furniture, 
<b>rent</b>; if by life-investments, <b>revenue</b>; if by money, <b>interest</b>; 
if by exchange, <b>advantage</b>, <b>gain</b>, <b>profit</b> (three things which 
must not be confounded with the wages of legitimate price of labour)."</i> 
[<b>Op. Cit.</b>, p. 159] 
</p><p>
For simplicity, we will consider <i>"surplus value"</i> to have three component 
parts: profits, interest and rent. All are based on payment for letting 
someone else use your property. Rent is what we pay to be allowed to exist 
on part of the earth (or some other piece of property). Interest is what 
we pay for the use of money. Profit is what we pay to be allowed to work 
a farm or use piece of machinery. Rent and interest are easy to define, 
they are obviously the payment for using someone else's property and have 
existed long before capitalism appeared. Profit is a somewhat more complex 
economic category although, ultimately, is still a payment for using 
someone else's property.
</p><p>
The term "profit" is often used simply, but incorrectly, to mean an 
excess over costs. However, this ignores the key issue, namely how a 
workplace is organised. In a co-operative, for example, while there 
is a surplus over costs, <i>"there is no profit, only income to be divided 
among members. Without employees the labour-managed firm does not have 
a wage bill, and labour costs are not counted among the expenses to be 
extracted from profit, as they are in the capitalist firm."</i> This means 
that the <i>"<b>economic category of profit does not exist in the 
labour-managed firm,</b> as it does in the capitalist firm where wages 
are a cost to be subtracted from gross income before a residual 
profit is determined . . . Income shared among all producers
is net income generated by the firm: the total of value added by
human labour applied to the means of production, less payment of
all costs of production and any reserves for depreciation of plant
and equipment."</i> [Christopher Eaton Gunn, <b>Workers' Self-Management in
the United States</b>, p. 41 and p. 45] Gunn, it should be noted, follows
both Proudhon and Marx in his analysis (<i>"Let us suppose the workers 
are themselves in possession of their respective means of production 
and exchange their commodities with one another. These commodities 
would not be products of capital."</i> [Marx, <b>Capital</b>, vol. 3, p. 276]).
</p><p>
In other words, by profits we mean income that flows to the owner of 
a workplace or land who hires others to do the work. As such returns 
to capital are as unique to capitalism as unemployment is. This means 
that a farmer who works their own land receives a labour income when 
they sell the crop while one who hires labourers to work the land will
receives a non-labour income, profit. Hence the difference between 
<i><b>possession</b></i> and <i><b>private property</b></i> (or <i><b>capital</b></i>) and anarchist 
opposition to <i>"capitalist property, that is, property which allows 
some to live by the work of others and which therefore presupposes a 
class of . . . people, obliged to sell their labour power to the 
property-owners for less than its value."</i> [Malatesta, <b>Errico Malatesta:
His Life and Ideas</b>, p. 102]
</p><p>
Another complication arises due to the fact that the owners of private
property sometimes do work on them (i.e. be a boss) or hire others to 
do boss-like work on their behalf (i.e. executives and other managerial
staff). It could be argued that bosses and executives are also <i>"workers"</i> 
and so contribute to the value of the commodities produced. However, 
this is not the case. Exploitation does not just happen, it needs to 
be organised and managed. In other words, exploitation requires labour 
(<i>"There is work and there is work,"</i> as Bakunin noted, <i>"There is 
productive labour and there is the labour of exploitation."</i> [<b>The 
Political Philosophy of Bakunin</b>,  p. 180]). The key is that while 
a workplace would grind to a halt without workers, the workers could 
happily do without a boss by organising themselves into an association 
to manage their own work. As such, while bosses may work, they are not 
taking part in productive activity but rather exploitative activity.
</p><p>
Much the same can be said of executives and managers. Though they may 
not own the instruments of production, they are certainly buyers and 
controllers of labour power, and under their auspices production is 
still <b>capitalist</b> production. The creation of a "salary-slave" strata 
of managers does not alter the capitalist relations of production. In 
effect, the management strata are <b>de facto</b> capitalists and they are
like "working capitalist" and, consequently, their "wages" come from 
the surplus value appropriated from workers and realised on the
market. Thus the exploitative role of managers, even if they can be 
fired, is no different from capitalists. Moreover, <i>"shareholders and
managers/technocrats share common motives: to make profits and to
reproduce hierarchy relations that exclude most of the employees from
effective decision making"</i> [Takis Fotopoulos, <i>"The Economic Foundations 
of an Ecological Society"</i>, pp. 1-40, <b>Society and Nature</b>, No.3, p. 16]
In other words, the high pay of the higher
levels of management is a share of profits <b>not</b> a labour income based
on their contribution to production but rather due to their position 
in the economic hierarchy and the power that gives them. 
</p><p>
So management is paid well because they monopolise power in the company
and can get away with it. As Bakunin argued, within the capitalist
workplace <i>"administrative work . . . [is] monopolised . . . if I 
concentrate in my hands the administrative power, it is not because 
the interests of production demand it, but in order to serve my own 
ends, the ends of exploitation. As absolute boss of my establishment 
I get for my labours [many] . . . times more than my workers get for 
theirs."</i> [<b>Op. Cit.</b>, p. 186] Given this, 
it is irrelevant whether those in the hierarchy simply control (in 
the case of managers) or actually own the means of production. What 
counts is that those who do the actual work are excluded from the 
decision making process.
</p><p>
This is not to say that 100 percent of what managers do is exploitative. 
The case is complicated by the fact that there is a legitimate need for 
co-ordination between various aspects of complex production processes -- 
a need that would remain under libertarian socialism and would be filled 
by elected and recallable (and in some cases rotating) managers (see 
<a href="secI3.html">section I.3</a>). But under capitalism, managers 
become parasitic in proportion 
to their proximity to the top of the pyramid. In fact, the further the 
distance from the production process, the higher the salary; whereas the 
closer the distance, the more likely that a "manager" is a worker with 
a little more power than average. In capitalist organisations, the less 
you do, the more you get. In practice, executives typically call upon 
subordinates to perform managerial (i.e. co-ordinating) functions and 
restrict themselves to broader policy-making decisions. As their 
decision-making power comes from the hierarchical nature of the firm, 
they could be easily replaced if policy making was in the hands of 
those who are affected by it. As such, their role as managers do not 
require them to make vast sums. They are paid that well currently 
because they monopolise power in the company and can, consequently,
get away with deciding that they, unsurprisingly, contribute most to
the production of useful goods rather than those who do the actual
work.
</p><p>
Nor are we talking, as such, of profits generated by buying cheap and
selling dear. We are discussing the situation at the level of the economy
as a whole, <b>not</b> individual transactions. The reason is obvious. If 
profits could just explained in terms of buying cheap in order to sell 
dear then, over all, such transactions would cancel each other out when
we look at the market as a whole as any profit will cancel any loss. 
For example, if someone buys a product at, say, 20 and sells it at 25 
then there would be no surplus overall as someone else will have to pay 
20 for something which cost 25. In other words, what one person gains 
as a seller, someone else will lose as a buyer and no net surplus has 
been created.  Capitalists, in other words, do not simply profit at 
each other's expense. There is a creation of surplus rather than mere 
redistribution of a given product. This means that we are explaining 
why production results in a aggregate surplus and why it gets distributed 
between social classes under capitalism.
</p><p>
This means that capitalism is based on the creation of surplus rather 
than mere redistribution of a given sum of products. If this were not
the case then the amount of goods in the economy would not increase, 
growth would not exist and all that would happen is that the distribution 
of goods would change, depending on the transactions made. Such a world 
would be one without production and, consequently, not realistic. 
Unsurprisingly, as we noted in <a href="secC1.html">section C.1</a>, 
this is the world of 
neoclassical economics. This shows the weakness of attempts to explain 
the source of profits in terms of the market rather than production. 
While the market can explain how, perhaps, a specific set of goods 
and surplus is distributed, it cannot explain how a surplus is generated 
in the first place. To understand how a surplus is created we need to 
look at the process of value creation. For this, it is necessary to 
look at production to see if there is something which produces more 
than it gets paid for. Anarchists, like other socialists, argue that 
this is labour and, consequently, that capitalism is an exploitative 
system. We discuss why in the <a href="secC2.html#secc22">next section</a>.
</p><p>
Obviously, pro-capitalist economics argues against this theory of how a
surplus arises and the conclusion that capitalism is exploitative. We will
discuss the more common arguments below. However, one example will suffice 
here to see why labour is the source of a surplus, rather than (say) 
"waiting", risk or the productivity of capital (to list some of the more
common explanations for capitalist appropriation of surplus value). This 
is a card game. A good poker-player uses equipment (capital), takes risks, 
delays gratification, engages in strategic behaviour, tries new tricks 
(innovates), not to mention cheats, and can make large winnings. However, 
no surplus product results from such behaviour; the gambler's winnings are 
simply redistributions from others with no new production occurring. For 
one to win, the rest must lose. Thus risk-taking, abstinence, entrepreneurship, 
and so on might be necessary for an individual to receive profits but they
are far from sufficient for them not to be the result a pure redistribution 
from others. 
</p><p>
In short, our discussion of exploitation under capitalism is first and foremost
an economy-wide one. We are concentrating on how value (goods and services) and 
surplus value (profits, rent and interest) are produced rather than how they
are distributed. The distribution of goods between people and the division of
income into wages and surplus value between classes is a secondary concern as
this can only occur under capitalism if workers produce goods and services to 
sell (this is the direct opposite of mainstream economics which assumes a
static economy with almost no discussion of how scarce means are organised
to yield outputs, the whole emphasis is on exchanges of ready made goods). 
</p><p>
Nor is this distribution somehow fixed. As we discuss in <a href="secC3.html">section C.3</a>, 
how the amount of value produced by workers is divided between wages 
and surplus value is source of much conflict and struggle, the outcome 
of which depends on the balance of power between and within classes. 
The same can be said of surplus value. This is divided between profits, 
interest and rent -- capitalists, financiers and landlords. This does not 
imply that these sections of the exploiting class see eye to eye or that
there is not competition between them. Struggle goes on within classes 
and well as between classes and this applies at the top of the economic 
hierarchy as at the bottom. The different sections of the ruling elite 
fight over their share of surplus value. This can involve fighting over 
control of the state to ensure that their interests are favoured over 
others. For example, the Keynesian post-war period can be considered a
period when industrial capitalists shaped state policy while the period 
after 1973 represents a shift in power towards finance capital.
</p><p>
We must stress, therefore, that the exploitation of workers is not defined 
as payment less than competitive ("free market") for their labour. Rather,
exploitation occurs even if they are paid the market wage. This is because 
workers are paid for their ability to labour (their <i>"labour-power,"</i> to use 
Marx's term) rather the labour itself. This means that for a given hour's 
work (labour), the capitalist expects the worker to produce more than their 
wage (labour power). How much more is dependent on the class struggle and 
the objective circumstances each side faces. Indeed, a rebellious workforce 
willing to take direct action in defence of their interests will not allow 
subjection or its resulting exploitation.
</p><p>
Similarly, it would be wrong to confuse exploitation with low wages. Yes,
exploitation is often associated with paying low wages but it is more than
possible for real wages to go up while the rate of exploitation falls or
rises. While some anarchists in the nineteenth century did argue that 
capitalism was marked by falling real wages, this was more a product of
the time they were living through rather than an universal law. Most 
anarchists today argue that whether wages rise or fall depends on the 
social and economic power of working people and the historic context 
of a given society. This means, in other words, that labour is 
exploited not because workers have a low standard of living (although 
it can) but because labour produces the whole of the value created 
in any process of production or creation of a service but gets only 
part of it back. 
</p><p>
As such, it does not matter <b>if</b> real wages do go up or not. Due to 
the accumulation of capital, the social and economic power of the 
capitalists and their ability to extract surplus-value can go up at 
a higher rate than real wages. The key issue is one of freedom rather 
than the possibility of consuming more. Bosses are in a position, due 
to the hierarchical nature of the capitalist workplace, to make workers 
produce more than they pay them in wages. The absolute level of those 
wages is irrelevant to the creation and appropriation of value and 
surplus-value as this happens at all times within capitalism.
</p><p>
As an example, since the 1970s American workers have seen their wages 
stagnate and have placed themselves into more and more debt to maintain an 
expected standard of living. During this time, productivity has increased 
and so they have been increasingly exploited. However, between 1950s and 
1970s wages did increase along with productivity. Strong unions and a 
willingness to strike mitigated exploitation and increased living 
standards but exploitation continued. As Doug Henwood notes, while
<i>"average incomes have risen considerably"</i> since 1945, <i>"the amount of
work necessary to earn those incomes has risen with equal relentlessness
. . . So, despite the fact that productivity overall is up more than 
threefold"</i> over this time <i>"the average worker would have to toil six
months longer to make the average family income."</i> [<b>After the New
Economy</b>, pp. 39-40] In other words, rising exploitation <b>can</b> go hand
in hand with rising wages. 
</p><p>
Finally, we must stress that we are critiquing economics mostly in its own
terms. On average workers sell their labour-power at a "fair" market price
and still exploitation occurs. As sellers of a commodity (labour-power) they 
do not receive its full worth (i.e. what they actually produce). Even if
they did, almost all anarchists would still be against the system as it is
based on the worker becoming a wage-slave and subject to hierarchy. In other
words, they are not free during production and, consequently, they would still
being robbed, although this time it is as human beings rather than a factor
of production (i.e. they are oppressed rather than exploited). As Bookchin
put it:
<blockquote>
<i>"To the modern mind, labour is viewed as a rarefied, abstract activity, a 
process extrinsic to human notions of genuine self-actualisation. One 
usually 'goes to work' the way a condemned person 'goes' to a place of
confinement: the workplace is little more than a penal institution in 
which mere existence must a penalty in the form of mindless labour . . . 
We 'measure' labour in hours, products, and efficiency, but rarely do we 
understand it as a concrete human activity. Aside from the earnings it 
generates, labour is normally alien to human fulfilment . . . [as] the
rewards one acquires by submitting to a work discipline. By definition,
these rewards are viewed as incentives for submission, rather than for
the freedom that should accompany creativity and self-fulfilment. We
commonly are 'paid' for supinely working on our knees, not for heroically
standing in our feet."</i> [<b>The Ecology of Freedom</b>, p. 308]
</blockquote></p>
Almost all anarchists seek to change this, combat oppression and alienation as
well as exploitation (some individualist anarchists are the exception on
this issue). Needless to say, the idea that we could be subject to oppression 
during working hours and <b><i>not</i></b> be exploited is one most anarchists would 
dismiss as a bad joke and, as a result, follow Proudhon and demand the 
abolition of wage labour (most take it further and advocate the abolition 
of the wages system as well, i.e. support libertarian communism).
</p>

<h2><a name="secc22">C.2.2 How does exploitation happen?</a></h2>

<p>
In order to make more money, money must be transformed into capital, 
i.e., workplaces, machinery and other <i>"capital goods."</i> By itself, however,
capital (like money) produces nothing. While a few even talk about <i>"making 
money work for you"</i> (as if pieces of paper can actually do any form of work!) 
obviously this is not the case -- human beings have to do the actual work.  
As Kropotkin put it, <i>"if [the capitalist] locks [his money] up, it will not 
increase, because [it] does not grow like seed, and after a lapse of a 
twelve month he will not find 110 in his drawer if he only put 100 into 
it.</i> [<b>The Place of Anarchism in Socialistic Evolution</b>, p. 4] 
Capital only becomes productive in the labour process when workers use it: 
</p><p><blockquote><i>
"Values created by net product are classed as savings and capitalised 
in the most highly exchangeable form, the form which is freest and 
least susceptible of depreciation, -- in a word, the form of specie, 
the only constituted value. Now, if capital leaves this state of 
freedom and <b>engages itself</b>, -- that is, takes the form of machines, 
buildings, etc., -- it will still be susceptible of exchange, but much 
more exposed than before to the oscillations of supply and demand. Once 
engaged, it cannot be <b>disengaged</b> without difficulty; and the sole 
resource of its owner will be exploitation. Exploitation alone is 
capable of maintaining engaged capital at its nominal value."</i> [<b>System 
of Economical Contradictions</b>, p. 291]
</blockquote></p><p>
Under capitalism, workers not only create sufficient value (i.e. produced 
commodities) to maintain existing capital and their own existence, they 
also produce a surplus. This surplus expresses itself as a surplus of 
goods and services, i.e. an excess of commodities compared to the number 
a workers' wages could buy back. The wealth of the capitalists, in other
words, is due to them <i>"accumulating the product of the labour of others."</i> 
[Kropotkin, <b>Op. Cit.</b>, p. 3] Thus Proudhon: 
</p><p><blockquote><i>
"The working man cannot . . . repurchase that which he has produced for his
master. It is thus with all trades whatsoever. . . since, producing for a
master who in one form or another makes a profit, they are obliged to pay
more for their own labour than they get for it."</i> [<b>What is Property</b>, 
p. 189]
</blockquote></p><p>
In other words, the price of all produced goods is greater than the money 
value represented by the workers' wages (plus raw materials and overheads 
such as wear and tear on machinery) when those goods were produced. The 
labour contained in these "surplus-products" is the source of profit, which 
has to be realised on the market (in practice, of course, the value 
represented by these surplus-products is distributed throughout all the 
commodities produced in the form of profit -- the difference between the 
cost price and the market price). In summary, surplus value is unpaid 
labour and hence capitalism is based on exploitation. As Proudhon noted, 
<i>"<b>Products,</b> say economists, <b>are only bought by products</b>. This maxim 
is property's condemnation. The proprietor producing neither by his own 
labour nor by his implement, and receiving products in exchange for 
nothing, is either a parasite or a thief."</i> [<b>Op. Cit.</b>, p. 170]
</p><p>
It is this appropriation of wealth from the worker by the owner which 
differentiates capitalism from the simple commodity production of artisan 
and peasant economies. All anarchists agree with Bakunin when he stated 
that:
</p><p><blockquote><i>
"<b>what is property, what is capital in their present form?</b> For the
capitalist and the property owner they mean the power and the right,
guaranteed by the State, to live without working . . . [and so] the power
and right to live by exploiting the work of someone else . . . those . . .
[who are] forced to sell their productive power to the lucky owners of
both."</i> [<b>The Political Philosophy of Bakunin</b>, p. 180]
</blockquote></p><p>
It is the nature of capitalism for the monopolisation of the worker's
product by others to exist. This is because of private property in the
means of production and so in <i>"consequence of [which] . . . [the] worker, 
when he is able to work, finds no acre to till, no machine to set in
motion, unless he agrees to sell his labour for a sum inferior to its 
real value."</i> [Peter Kropotkin, <b>Anarchism</b>, p. 55]
</p><p>
Therefore workers have to sell their labour on the market. However, as 
this "commodity" <i>"cannot be separated from the person of the worker like
pieces of property. The worker's capacities are developed over time and
they form an integral part of his self and self-identity; capacities are
internally not externally related to the person. Moreover, capacities 
or labour power cannot be used without the worker using his will, his 
understanding and experience, to put them into effect. The use of labour
power requires the presence of its 'owner'. . . To contract for the use
of labour power is a waste of resources unless it can be used in the
way in which the new owner requires . . . The employment contract must,
therefore, create a relationship of command and obedience between
employer and worker."</i>  So, <i>"the contract in which the worker allegedly 
sells his labour power is a contract in which, since he cannot be 
separated from his capacities, he sells command over the use of his 
body and himself. . . The characteristics of this condition are captured 
in the term <b>wage slave.</b>"</i> [Carole Pateman, <b>The Sexual Contract</b>, 
pp. 150-1] 
</p><p>
Or, to use Bakunin's words, <i>"the worker sells his person and his 
liberty for a given time"</i> and so <i>"concluded for a term only and
reserving to the worker the right to quit his employer, this contract 
constitutes a sort of <b>voluntary</b> and <b>transitory</b> serfdom."</i> [<b>The 
Political Philosophy of Bakunin</b>, p. 187] This domination is the 
source of the surplus, for <i>"wage slavery is not a consequence of 
exploitation -- exploitation is a consequence of the fact that 
the sale of labour power entails the worker's subordination. The 
employment contract creates the capitalist as master; he has the 
political right to determine how the labour of the worker will be 
used, and -- consequently -- can engage in exploitation."</i> [Pateman, 
<b>Op. Cit.</b>, p. 149] 
</p><p>
So profits exist because the worker sells themselves to the capitalist, 
who then owns their activity and, therefore, controls them (or, more
accurately, <b>tries</b> to control them) like a machine. Benjamin Tucker's 
comments with regard to the claim that capital is entitled to a reward 
are of use here. He notes that some <i>"combat. . . the doctrine that 
surplus value -- oftener called profits -- belong to the labourer 
because he creates it, by arguing that the horse. . . is rightly 
entitled to the surplus value which he creates for his owner. So 
he will be when he has the sense to claim and the power to take 
it. . . Th[is] argument . .  is based upon the assumption that 
certain men are born owned by other men, just as horses are. Thus 
its <b>reductio ad absurdum</b> turns upon itself."</i> [<b>Instead of a Book</b>, 
pp. 495-6] In other words, to argue that capital should be rewarded 
is to implicitly assume that workers are just like machinery, another
"factor of production" rather than human beings and the creator
of things of value. So profits exists because during the working 
day the capitalist controls the activity and output of the worker 
(i.e. owns them during working hours as activity cannot be
separated from the body and <i>"[t]here is an integral relationship
between the body and self. The body and self are not identical,
but selves are inseparable from bodies."</i> [Carole Pateman, <b>Op. Cit.</b>,
p. 206]). 
</p><p>
Considered purely in terms of output, this results in, as Proudhon 
noted, workers working <i>"for an entrepreneur who pays them and keeps 
their products."</i> [quoted by Martin Buber, <b>Paths in Utopia</b>, p. 29]
The ability of capitalists to maintain this kind of monopolisation of 
another's time and output is enshrined in <i>"property rights"</i> enforced by 
either public or private states. In short, therefore, property <i>"is the 
right to enjoy and dispose at will of another's goods - the fruit of 
an other's industry and labour."</i> [P-J Proudhon, <b>What is Property</b>, 
p. 171] And because of this "right," a worker's wage will always be 
less than the wealth that he or she produces. 
</p><p>
The surplus value produced by labour is divided between profits, interest 
and rent (or, more correctly, between the owners of the various factors 
of production other than labour). In practice, this surplus is used 
by the owners of capital for: (a) investment (b) to pay themselves dividends 
on their stock, if any; (c) to pay for rent and interest payments; and (d) 
to pay their executives and managers (who are sometimes identical with the 
owners themselves) much higher salaries than workers. As the surplus is
being divided between different groups of capitalists, this means that
there can be clashes of interest between (say) industrial capitalists and
finance capitalists. For example, a rise in interest rates can squeeze
industrial capitalists by directing more of the surplus from them into
the hands of rentiers. Such a rise could cause business failures and so
a slump (indeed, rising interest rates is a key way of regulating working 
class power by generating unemployment to discipline workers by fear of
the sack). The surplus, like the labour used to reproduce existing capital, 
is embodied in the finished commodity and is realised once it is sold. This 
means that workers do not receive the full value of their labour, since the 
surplus appropriated by owners for investment, etc. represents value added 
to commodities by workers -- value for which they are not paid nor control.
</p><p>
The size of this surplus, the amount of unpaid labour, can be changed 
by changing the duration and intensity of work (i.e. by making workers 
labour longer and harder). If the duration of work is increased, the 
amount of surplus value is increased absolutely. If the intensity is 
increased, e.g. by innovation in the production process, then the amount 
of surplus value increases relatively (i.e. workers produce the equivalent 
of their wage sooner during their working day resulting in more unpaid 
labour for their boss). Introducing new machinery, for example, increases 
surplus-value by reducing the amount of work required per unit of output. 
In the words of economist William Lazonick:
</p><p><blockquote><i>
"As a general rule, all market prices, including wages, are given to
the particular capitalist. Moreover, in a competitive world a
particular capitalist cannot retain privileged access to process or
product innovations for any appreciable period of time. But the 
capitalist does have privileged access to, and control over, the
workers that he employs. Precisely because the work is not 
perfectly mobile but is dependent on the capitalist to gain a
living, the capitalist is not subject to the dictates of market
forces in dealing with the worker in the production process. The
more dependent the worker is on his or her particular employer, the
more power the capitalist has to demand longer and harder work in
return for a day's pay. The resultant unremunerated increase in
the productivity of the worker per unit of time is the source of
surplus-value.
</p><p>
"The measure of surplus-value is the difference between the value-added
by and the value paid to the worker. As owner of the means of production,
the industrial capitalist has a legal right to keep the surplus-value
for himself."</i> [<b>Competitive Advantage on the Shop Floor</b>, p. 54]
</blockquote></p><p>
Such surplus indicates that labour, like any other commodity, has a use
value and an exchange value. Labour's exchange value is a worker's wages, 
its use value their ability to work, to do what the capitalist who buys
it wants. Thus the existence of "surplus products" indicates that there 
is a difference between the exchange value of labour and its use value,
that labour can <b>potentially</b> create <b>more</b> value than it receives back 
in wages. We stress potentially, because the extraction of use value from
labour is not a simple operation like the extraction of so many joules
of energy from a ton of coal. Labour power cannot be used without subjecting
the labourer to the will of the capitalist - unlike other commodities, 
labour power remains inseparably embodied in human beings. Both the
extraction of use value and the determination of exchange value for labour
depends upon - and are profoundly modified by - the actions of workers.
Neither the effort provided during an hours work, nor the time spent in
work, nor the wage received in exchange for it, can be determined 
without taking into account the worker's resistance to being turned 
into a commodity, into an order taker. In other words, the amount of
"surplus products" extracted from a worker is dependent upon the
resistance to dehumanisation within the workplace, to the attempts by
workers to resist the destruction of liberty during work hours.
</p><p>
Thus unpaid labour, the consequence of the authority relations explicit 
in private property, is the source of profits. Part of this surplus 
is used to enrich capitalists and another to increase capital, which 
in turn is used to increase profits, in an endless cycle (a cycle, 
however, which is not a steady increase but is subject to periodic 
disruption by recessions or depressions - "The business cycle." The basic 
causes for such crises will be discussed later, in sections 
<a href="secC7.html">C.7</a> and <a href="secC8.html">C.8</a>). 
</p><p>
It should be noted that few economists deny that the "value added" 
by workers in production must exceed the wages paid. It has to, if 
a profit is to be made. As Adam Smith put it:
</p><p><blockquote><i>
"As soon as stock has accumulated in the hands of particular persons, 
some of them will naturally employ it in setting to work industrious 
people, whom they will supply with materials and subsistence, in order 
to make a profit by the sale of their work, or by what their labour 
adds to the value of the materials . . . The value which the workmen 
add to the materials, therefore, resolves itself in this case into two 
parts, of which one pays their wages, the other the profits of their 
employer upon the whole stock of materials and wages which he 
advanced. He could have no interest to employ them, unless he expected
from the sale of their work something more than what was sufficient
to replace his stock to him."</i> [<b>The Wealth of Nations</b>, p. 42]
</blockquote></p><p>
That surplus value consists of unpaid labour is a simple fact. The 
difference is that non-socialist economists refuse to explain this 
in terms of exploitation. Like Smith, David Ricardo argued in a 
similar manner and justified surplus value appropriation in spite 
of this analysis. Faced with the obvious interpretation of non-labour
income as exploitation which could easily be derived from classical 
economics, subsequent economists have sought to obscure this fact 
and have produced a series of rationales to justify the appropriation 
of workers labour by capitalists. In other words, to explain and 
justify the fact that capitalism is not based on its own principle 
that labour creates and justifies property. These rationales have 
developed over time, usually in response to socialist and anarchist 
criticism of capitalism and its economics (starting in response to
the so-called Ricardian Socialists who predated Proudhon and Marx
and who first made such an analysis commonplace). These have been 
based on many  factors, such as the abstinence or waiting by the 
capitalist, the productivity of capital, "time-preference," 
entrepreneurialism and so forth. We discuss most rationales and
indicate their weaknesses in subsequent sections.
</p>

<h2><a name="secc23">C.2.3 Is owning capital sufficient reason to justify profits?</a></h2>

<p>
No, it does not. To understand why, we must first explain the
logic behind this claim. It is rooted in what is termed "marginal
productivity" theory. In the words of one of its developers:
</p><p><blockquote><i>
"If each productive function is paid for according to the amount 
of its product, then each man get what he himself produces. If he 
works, he gets what he creates by working; if he provides capital, 
he gets what his capital produces; and if, further, he renders 
service by co-ordinating labour and capital, he gets the product 
that can be separately traced to that function. Only in one of 
these ways can a man produce anything. If he receives all that 
he brings into existence through any one of these three functions, 
he receives all that he creates at all."</i> [John Bates Clark, <b>The 
Distribution of Wealth</b>, p.7]
</blockquote></p><p>
Needless to say, this analysis was based on the need to justify 
the existing system, for it was <i>"the purpose of this work to show 
that the distribution of income to society is controlled by a 
natural law, and that this law, if it worked without friction, 
would give to every agent of production the amount of wealth which 
that agent creates."</i> In other words, <i>"what a social class gets is, 
under natural law, what it contributes to the general output of 
industry."</i> [Clark, <b>Op. Cit.</b>, p. v and p. 313] And only mad people 
can reject a <i>"natural law"</i> like gravity -- or capitalism!
</p><p>
Most schools of capitalist economics, when they bother to try and 
justify non-labour income, hold to this theory of productivity. 
Unsurprisingly, as it proves what right-wing economist Milton 
Friedman called the <i>"capitalist ethic"</i>: <i>"To each according to what 
he and the instruments he owns produces."</i> [<b>Capitalism and Freedom</b>, 
pp. 161-162] As such, this is one of the key defences of capitalism, 
based as it is on the productive contribution of each factor (labour, 
land and capital). Anarchists as unconvinced.
</p><p>
Unsurprisingly, this theory took some time to develop given the theoretical 
difficulties involved. After all, you need all three factors to produce a 
commodity, say a bushel of wheat. How can we determine that percentage of 
the price is due to the land, what percentage to labour and what percentage 
to capital? You cannot simply say that the "contribution" of each factor 
just happens to be identical to its cost (i.e. the contribution of land 
is what the market rent is) as this is circular reasoning. So how is it 
possible to specify contribution of each factor of production independently 
of the market mechanism in such a way as to show, firstly, that the 
contributions add up to 100 percent and, secondly, that the free 
market will in fact return to each factor its respective contribution?
</p><p>
This is where marginal productivity theory comes in. In neo-classical theory, 
the contribution of a specific factor is defined as the marginal product of 
that factor when the other factors are left constant. Take, as an example,
a hundred bushels of wheat produced by X acres of land being worked by Y 
workers using Z worth of capital. The contribution of land can then be
defined as the increase in wheat that an extra acre of land would produce
(X+1) if the same number of workers employed the same capital worked it.
Similarly, the contribution of a worker would be the increase that would 
result if an addition worker was hired (Y + 1) to work the same land (X)
with the same capital (Z). The contribution of capital, obviously, would
be the increase in wheat produced by the same number of workers (X) working 
the same amount of land (Y) using one more unit of capital (Z+1). Then
mathematics kicks in. If enough assumptions are made in terms of the 
substitutability of factors, diminishing returns, and so forth, then a 
mathematical theorem (Euler's Theorem) can be used to show that the sum 
of these marginal contributions would be a hundred bushels. Applying
yet more assumptions to ensure "perfect competition" it can be mathematically
proven that the rent per acre set by this perfect market will be precisely 
the contribution of the land, that the market wage will be the contribution 
of the worker, and the market interest rate will be the contribution of 
capital. In addition, it can be shown that any monopoly power will enable 
a factor owner to receive more than it contributes, so exploiting the
others.
</p><p>
While this is impressive, the problems are obvious. As we discuss in
<a href="secC2.html#secc25">section C.2.5</a>, this model does not (indeed, cannot) describe any actual
real economy. However, there is a more fundamental issue than mere 
practicality or realism, namely that it confuses a <b>moral</b> principle 
(that factors should receive in accordance with their productive 
contributions) with an ownership issue. This is because even if we 
want to say that land and capital "contribute" to the final product, 
we cannot say the same for the landowner or the capitalist. Using 
our example above, it should be noted that neither the capitalist 
nor the landowner actually engages in anything that might be called 
a productive activity. Their roles are purely passive, they simply 
allow what they own to be used by the people who do the actual work, 
the labourers. 
</p><p>
Marginal productivity theory shows that with declining marginal
productivity, the contribution of labour is less than the total product.
The difference is claimed to be precisely the contribution of capital
and land. But what is this "contribution" of capital and land? Without 
any labourers there would be no output. In addition, in physical terms, 
the marginal product of, say, capital is simply the amount by which 
production would decline is one piece of capital were taken out of 
production. It does not reflect any productive activity whatsoever 
on the part of the owner of said capital. <b>It does not, therefore, 
measure his or her productive contribution.</b> In other words, capitalist 
economics tries to confuse the owners of capital with the machinery they 
own. Unlike labour, whose "ownership" cannot be separated from the 
productive activities being done, capital and land can be rewarded
without their owners actually doing anything productive at all.
</p><p>
For all its amazing mathematics, the neo-classical solution fails simply
because it is not only irrelevant to reality, it is not relevant ethically.
</p><p>
To see why, let us consider the case of land and labour (capital is more
complex and will be discussed in the next two sections). Marginal productivity
theory can show, given enough assumptions, that five acres of land can
produce 100 bushels of wheat with the labour of ten men and that the 
contribution of land and labour are, respectively, 40 and 60 bushels each. 
In other words, that each worker receives a wage representing 6 bushels of
wheat while the landlord receives an income of 40 bushels. As socialist 
David Schweickart notes, <i>"we have derived both the contribution of labour 
and the contribution of land from purely technical considerations. We have 
made no assumptions about ownership, competition, or any other social or 
political relationship. No covert assumptions about capitalism have been 
smuggled into the analysis."</i> [<b>After Capitalism</b>, p. 29] 
</p><p>
Surely this means that economics has produced a defence of non-labour 
income? Not so, as it ignores the key issue of what represents a valid 
contribution. The conclusion that the landlord (or capitalist) is 
entitled to their income <i>"in no way follows from the technical premises
of the argument. Suppose our ten workers had cultivated the five acres
<b>as a worker collective.</b> In this, they would receive the entire product,
all one hundred bushels, instead of sixty. Is this unfair? To whom should
the other forty bushels go? To the land, for its 'contribution'? Should
the collective perhaps burn forty bushels as an offering to the Land-God?
(Is the Land-Lord the representative on Earth of this Land-God?)."</i>
[<b>Op. Cit.</b>, p. 30] It should be noted that Schweickart is echoing the 
words of Proudhon:
</p><p><blockquote><i>
"How much does the proprietor increase the utility of his tenant's
products? Has he ploughed, sowed, reaped, mowed, winnowed, weeded?
. . . I admit that the land is an implement; but who made it? Did
the proprietor? Did he -- by the efficacious virtue of the right
of property, by this <b>moral quality</b> infused into the soil -- endow 
it with vigour and fertility? Exactly there lies the monopoly of the
proprietor, though he did not make the implement, he asks pay for
its use. When the Creator shall present himself and claim farm-rent,
we will consider the matter with him; or even when the proprietor
-- his pretended representative -- shall exhibit his power of 
attorney."</i> [<b>What is Property?</b>, pp. 166-7]
</blockquote></p><p>
In other words, granting permission cannot be considered as a 
"contribution" or a "productive" act:
</p><p><blockquote><i>
"We can see that a moral sleight-of-hand has been performed. A technical
demonstration has passed itself off as a moral argument by its choice of
terminology, namely, by calling a marginal product a 'contribution.' The
'contribution = ethical entitlement' of the landowner has been identified
with the 'contribution = marginal product' of the land . . . What is the
nature of the landowner's 'contribution' here? We can say that the landlord
<b>contributed the land</b> to the workers, but notice the qualitative 
difference between his 'contribution' and the contribution of his 
workforce. He 'contributes' his land -- but the land remains intact and
remains his at the end of the harvest, whereas the labour contributed by
each labourer is gone. If the labourers do not expend <b>more</b> labour next
harvest, they will get nothing more, whereas the landowner can continue
to 'contribute' year after year (lifting not a finger), and be rewarded
year after year for doing so."</i> [Schweickart, <b>Op. Cit.</b>, p. 30]
</blockquote></p><p>
As the examples of the capitalist and co-operative farms shows, the 
"contribution" of land and capital can be rewarded without their
owners doing anything at all. So what does it mean, "capital's share"? 
After all, no one has ever given money to a machine or land. That money 
goes to the owner, not the technology or resource used. When "land" gets 
its "reward" it involves money going to the landowner <b>not</b> fertiliser 
being spread on the land. Equally, if the land and the capital were owned 
by the labourers then "capital" and "land" would receive nothing despite 
both being used in the productive process and, consequently, having 
"aided" production. Which shows the fallacy of the idea that profits, 
interest and rent represent a form of "contribution" to the productive 
process by land and capital which needs rewarded. They only get a 
"reward"</i> when they hire labour to work them, i.e. they give permission 
for others to use the property in question in return for telling them 
what to do and keeping the product of their labour.
</p><p>
As Proudhon put it, <i>"[w]ho is entitled to the rent of the land? The 
producer of the land, without doubt. Who made the land? God. Then, 
proprietor, retire!"</i> [<b>Op. Cit.</b>, p. 104] Much the same can be said 
of "capital" (workplaces, machinery, etc.) as well. The capitalist, 
argued Berkman, <i>"gives you a job; that is permission to work in the 
factory or mill which was not built by him but by other workers like 
yourself. And for that permission you help to support him for the 
rest of your life or as long as you work for him."</i> [<b>What is 
Anarchism?</b>, p. 14] 
</p><p>
So non-labour income exists <b>not</b> because of the owners of capital and 
land "contribute" to production but because they, as a class, <b>own</b> 
the means of life and workers have to sell their labour and liberty
to them to gain access:
</p><p><blockquote><i>
"We cry shame on the feudal baron who forbade the peasant to turn a
clod of earth unless he surrendered to his lord a fourth of his crop.
We called those the barbarous times, But if the forms have changed,
the relations have remained the same, and the worker is forced, under
the name of free contract, to accept feudal obligations."</i> [Kropotkin,
<b>The Conquest of Bread</b>, pp. 31-2]
</blockquote></p><p>
It is capitalist property relations that allow this monopolisation of 
wealth by those who own (or boss) but do not produce. The workers do 
not get the full value of what they produce, nor do they have a say 
in how the surplus value produced by their labour gets used (e.g. 
investment decisions). Others have monopolised both the wealth 
produced by workers and the decision-making power within the company. 
This is a private form of taxation without representation, just as 
the company is a private form of statism. 
</p><p>
Therefore, providing capital is <b>not</b> a productive act, and keeping the
profits that are produced by those who actually do use capital is an act of
theft. This does not mean, of course, that creating capital goods is not
creative nor that it does not aid production. Far from it!  But owning the
outcome of such activity and renting it does not justify capitalism or 
profits. In other words, while we need machinery, workplaces, houses and
raw materials to produce goods we do <b>not</b> need landlords and capitalists.
</p><p>
The problem with the capitalists' "contribution to production" argument is 
that one must either assume (a) a strict definition of who is the producer 
of something, in which case one must credit only the worker(s), or (b) a 
looser definition based on which individuals have contributed to the 
circumstances that made the productive work possible. Since the worker's 
productivity was made possible in part by the use of property supplied by 
the capitalist, one can thus credit the capitalist with "contributing to 
production" and so claim that he or she is entitled to a reward, i.e. 
profit. 
</p><p>
However, if one assumes (b), one must then explain why the chain of credit 
should stop with the capitalist. Since all human activity takes place within 
a complex social network, many factors might be cited as contributing to the 
circumstances that allowed workers to produce -- e.g. their upbringing and 
education, the contribution of other workers in providing essential products,
services and infrastructure that permits their place of employment to operate, 
and so on (even the government, which funds infrastructure and education). 
Certainly the property of the capitalist contributed in this sense. But his 
contribution was less important than the work of, say, the worker's mother. 
Yet no capitalist, so far as we know, has proposed compensating workers' 
mothers with any share of the firm's revenues, and particularly not with 
a <b>greater</b> share than that received by capitalists! Plainly, however, if 
they followed their own logic consistently, capitalists would have to agree 
that such compensation would be fair.
</p><p>
In summary, while some may consider that profit is the capitalist's 
"contribution" to the value of a commodity, the reality is that it is
nothing more than the reward for owning capital and giving permission
for <b>others</b> to produce using it. As David Schweickart puts it, 
<i>"'providing capital' means nothing more than 'allowing it to be 
used.' But an act of granting permission, in and of itself, is not a 
productive activity. If labourers cease to labour, production ceases 
in any society. But if owners cease to grant permission, production 
is affected only if their <b>authority</b> over the means of production 
is respected."</i> [<b>Against Capitalism</b>, p. 11] 
</p><p>
This authority, as discussed earlier, derives from the coercive mechanisms 
of the state, whose primary purpose is to ensure that capitalists have 
this ability to grant or deny workers access to the means of production. 
Therefore, not only is "providing capital" not a productive activity, it 
depends on a system of organised coercion which requires the appropriation 
of a considerable portion of the value produced by labour, through taxes, 
and hence is actually parasitic. Needless to say, rent can also be considered 
as "profit", being based purely on "granting permission" and so not a 
productive activity. The same can be said of interest, although the 
arguments are somewhat different (see <a href="secC2.html#secc26">section C.2.6</a>).
</p><p>
So, even if we assume that capital and land <b>are</b> productive, it 
does not follow that owning those resources entitles the owner to 
an income. However, this analysis is giving too much credit to
capitalist ideology. The simple fact is that capital is <b>not</b>
productive at all. Rather, <i>"capital"</i> only contributes to production 
when used by labour (land does produce use values, of course, but
these only become available once labour is used to pick the fruit,
reap the corn or dig the coal). As such, profit is not the reward
for the productivity of capital. Rather <b>labour</b> produces the 
marginal productivity of capital. This is discussed in the 
<a href="secC2.html#secc24">next section</a>.</p>

<h2><a name="secc24">C.2.4 Is profit the reward for the productivity of capital?</a></h2>

<p>
In a word, no. As Proudhon pointed out, <i>"Capital, tools, and machinery 
are likewise unproductive. . . The proprietor who asks to be rewarded 
for the use of a tool or for the productive power of his land, takes 
for granted, then, that which is radically false; namely, that capital 
produces by its own effort -- and, in taking pay for this imaginary 
product, he literally receives something for nothing."</i> [<b>What is 
Property?</b>, p. 169] In other words, only labour is productive and
profit is not the reward for the productivity of capital.
</p><p>
Needless to say, capitalist economists disagree. <i>"Here again the philosophy 
of the economists is wanting. To defend usury they have pretended that 
capital was productive, and they have changed a metaphor into a reality,"</i> 
argued Proudhon. The socialists had <i>"no difficulty in overturning their 
sophistry; and through this controversy the theory of capital has fallen 
into such disfavour that today, in the minds of the people, <b>capitalist</b> 
and <b>idler</b> are synonymous terms."</i> [<b>System of Economical Contradictions</b>,
p. 290] 
</p><p>
Sadly, since Proudhon's time, the metaphor has become regained its hold, 
thanks in part to neo-classical economics and the "marginal productivity" 
theory. We explained this theory in the <a href="secC2.html#secc23">last section</a> as part of our 
discussion on why, even if we assume that land and capital <b>are</b> productive
this does not, in itself, justify capitalist profit. Rather, profits accrue 
to the capitalist simply because he or she gave their permission for others 
to use their property. However, the notion that profits represent that 
"productivity" of capital is deeply flawed for other reasons. The key one
is that, by themselves, capital and land produce nothing. As Bakunin put
it, <i>"neither property nor capital produces anything when not fertilised 
by labour."</i> [<b>The Political Philosophy of Bakunin</b>, p. 183] 
</p><p>
In other words, capital is "productive" simply because people use it.
This is hardly a surprising conclusion. Mainstream economics recognises
it in its own way (the standard economic terminology for this is that 
<i>"factors usually do not work alone"</i>). Needless to say, the conclusions
anarchists and defenders of capitalism draw from this obvious fact are 
radically different.
</p><p>
The standard defence of class inequalities under capitalism is that 
people get rich by producing what other people want. That, however, 
is hardly ever true. Under capitalism, people get rich by hiring other 
people to produce what other people want or by providing land, money or 
machinery to those who do the hiring. The number of people who have 
became rich purely by their own labour, without employing others, is 
tiny. When pressed, defenders of capitalism will admit the basic point 
and argue that, in a free market, everyone gets in income what 
their contribution in producing these goods indicates. Each factor 
of production (land, capital and labour) is treated in the same 
way and their marginal productivity indicates what their contribution 
to a finished product is and so their income. Thus wages represent the
marginal productivity of labour, profit the marginal productivity of
capital and rent the marginal productivity of land. As we have used 
land and labour in the <a href="secC2.html#secc23">previous section</a>, we will concentrate on land 
and "capital" here. We must note, however, that marginal productivity 
theory has immense difficulties with capital and has been proven to 
be internally incoherent on this matter (see 
<a href="secC2.html#secc25">next section</a>). However,
as mainstream economics ignores this, so will we for the time being.
</p><p>
So what of the argument that profits represent the contribution of
capital? The reason why anarchists are not impressed becomes clear 
when we consider ten men digging a hole with spades. Holding labour 
constant means that we add spades to the mix. Each new spade 
increases productivity by the same amount (because we assume that 
labour is homogenous) until we reach the eleventh spade. At that 
point, the extra spade lies unused and so the marginal contribution 
of the spade ("capital") is zero. This suggests that the socialists 
are correct, capital <b>is</b> unproductive and, consequently, does not 
deserve any reward for its use. 
</p><p>
Of course, it will be pointed out that the eleventh spade cost money
and, as a result, the capitalist would have stopped at ten spades 
and the marginal contribution of capital equals the amount the tenth
spade added. Yet the only reason that spade added anything to 
production was because there was a worker to use it. In other words,
as economist David Ellerman stresses, the <i>"point is that capital 
itself does not 'produce' at all; capital is used by Labour to 
produce the outputs . . . Labour produces the marginal product 
<b>of capital.</b>"</i> [<b>Property and Contract in Economics</b>, p. 204] As 
such, to talk of the "marginal product" of capital is meaningless
as holding labour constant is meaningless:
</p><p><blockquote><i>
"Consider, for example, the 'marginal product of a shovel' in a 
simple production process wherein three workers use two shovels 
and a wheelbarrow to dig out a cellar. Two of the workers use two 
shovels to fill the wheelbarrow which the third worker pushes a 
certain distance to dump the dirt. The marginal productivity of 
a shovel is defined as the extra product produced when an extra 
shovel is added and the other factors, such as labour, are held 
constant. The labour is the human activity of carrying out this 
production process. If labour was held 'constant' is the sense 
of carrying out the same human activity, then any third shovel 
would just lie unused and the extra product would be identically 
zero.
</p><p>
"'Holding labour constant' really means reorganising the human 
activity in a more capital intensive way so that the extra shovel 
will be optimally utilised. For instance, all three workers could 
use the three shovels to fill the wheelbarrow and then they could 
take turns emptying the wheelbarrow. In this manner, the workers 
would use the extra shovel and by so doing they would produce 
some extra product (additional earth moved during the same time 
period). This extra product would be called the 'marginal product 
of the shovel, but in fact it is produced by the workers who are 
also using the additional shovel . . . [Capital] does not 'produce' 
its marginal product. Capital does not 'produce' at all. Capital 
is used by Labour to produce the output. When capital is increased, 
Labour produces extra output by using up the extra capital . . . In 
short, <b>Labour produced the marginal product of capital</b> (and used 
up the extra capital services)."</i> [<b>Op. Cit.</b>, pp. 207-9]
</blockquote></p><p>
Therefore, the idea that profits equals the marginal productivity of 
capital is hard to believe. Capital, in this perspective, is not only 
a tree which bears fruit even if its owner leaves it uncultivated, it 
is a tree which also picks its own fruit, prepares it and serves it 
for dinner! Little wonder the classical economists (Smith, Ricardo, 
John Stuart Mill) considered capital to be unproductive and
explained profits and interest in other, less obviously false, means.
</p><p>
Perhaps the "marginal productivity" of capital is simply what is 
left over once workers have been paid their "share" of production,
i.e. once the marginal productivity of labour has been rewarded.
Obviously the marginal product of labour and capital are related. 
In a production process, the contribution of capital will (by 
definition) be equal to total price minus the contribution
of labour. You define the marginal product of labour, it is necessary 
to keep something else constant. This means either the physical 
inputs other than labour are kept constant, or the rate of profit 
on capital is kept constant. As economist Joan Robinson noted:
</p><p><blockquote><i>
"I found this satisfactory, for it destroys the doctrine that
wages are regulated by marginal productivity. In a short-period
case, where equipment is given, at full-capacity operation the
marginal physical product of labour is indeterminate. When
nine men with nine spades are digging a hole, to add a tenth
man could increase output only to the extent that nine dig
better if they have a rest from time to time. On the other
hand, to subtract the ninth man would reduce output by more 
or less the average amount. The wage must lie somewhere between
the average value of output per head and zero, so that marginal
product is greater or much less than the wage according as 
equipment is being worked below or above its designed capacity."</i>
[<b>Contributions to Modern Economics</b>, p. 104]
</blockquote></p><p>
If wages are not regulated by marginal productivity theory, then
neither is capital (or land). Subtracting labour while keeping
capital constant simply results in unused equipment and unused
equipment, by definition, produces nothing. What the "contribution"
of capital is dependent, therefore, on the economic power the
owning class has in a given market situation (as we discuss in
<a href="secC3.html">section C.3</a>). As William Lazonick notes, 
the neo-classical theory
of marginal productivity has two key problems which flow from its
flawed metaphor that capital is "productive":
</p><p><blockquote><i>
"The first flaw is the assumption that, at any point in time, the
productivity of a technology is given to the firm, irrespective of
the social context in which the firm attempts to utilise the
technology . . . this assumption, typically implicit in mainstream
economic analysis and [is] derived from an ignorance of the nature
of the production process as much as everything else . . ." 
</p><p>
"The second flaw in the neo-classical theoretical structure is the
assumption that factor prices are independent of factor productivities.
On the basis of this assumption, factor productivities arising from
different combinations of capital and labour can be taken as given
to the firm; hence the choice of technique depends only on variations
in relative factor prices. It is, however, increasingly recognised
by economists who speak of 'efficiency wages' that factor prices and
factor productivities may be linked, particularly for labour inputs
. . . the productivity of a technology depends on the amount of
effort that workers choose to supply."</i> [<b>Competitive 
Advantage on the Shop Floor</b>, p. 130 and pp. 133-4]
</blockquote></p><p>
In other words, neo-classical economics forgets that technology has
to be used by workers and so its "productivity" depends on how it is
applied. If profit did flow as a result of some property of machinery 
then bosses could do without autocratic workplace management to ensure 
profits. They would have no need to supervise workers to ensure that 
adequate amounts of work are done in excess of what they pay in wages.
This means the idea (so beloved by pro-capitalist economics) that a 
worker's wage <b>is</b> the equivalent of what she produces is one violated 
everyday within reality:
</p><p><blockquote><i>
"Managers of a capitalist enterprise are not content simply to respond 
to the dictates of the market by equating the wage to the value of
the marginal product of labour. Once the worker has entered the 
production process, the forces of the market have, for a time at least,
been superseded. The effort-pay relation will depend not only on 
market relations of exchange but also. . . on the hierarchical relations
of production -- on the relative power of managers and workers within
the enterprise."</i> [William Lazonick, <b>Business Organisation and the
Myth of the Market Economy</b>, pp. 184-5]
</blockquote></p><p>
But, then again, capitalist economics is more concerned with justifying 
the status quo than being in touch with the real world. To claim that
a workers wage represents her contribution and profit capital's is 
simply false. Capital cannot produce anything (never mind a surplus) 
unless used by labour and so profits do not represent the productivity
of capital. In and of themselves, fixed costs do not create value. 
Whether value is created depends on how investments are developed and 
used once in place. Which brings us back to labour (and the social 
relationships which exist within an economy) as the fundamental source 
of surplus value. 
</p><p>
Then there is the concept of profit sharing, whereby workers are get 
a share of the profits made by the company. Yet profits are the return 
to capital. This shatters the notion that profits represent the 
contribution of capital. <b>If</b> profits were the contribution of the 
productivity of equipment, then sharing profits would mean that 
capital was not receiving its full <i>"contribution"</i> to production 
(and so was being exploited by labour!). It is unlikely that bosses
would implement such a scheme unless they knew they would get more
profits out of it. As such, profit sharing is usually used as a technique 
to <b>increase</b> productivity and profits. Yet in neo-classical economics,
it seems strange that such a technique would be required if profits, in 
fact, <b>did</b> represent capital's "contribution." After all, the machinery 
which the workers are using is the same as before profit sharing was 
introduced -- how could this unchanged capital stock produce an increased 
"contribution"? It could only do so if, in fact, capital was unproductive 
and it was the unpaid efforts, skills and energy of workers' that actually
was the source of profits. Thus the claim that profit equals capital's 
"contribution" has little basis in fact. 
</p><p>
As capital is not autonomously productive and goods are the product of human 
(mental and physical) labour, Proudhon was right to argue that <i>"Capital, tools, 
and machinery are likewise unproductive . . . The proprietor who asks to be 
rewarded for the use of a tool or for the productive power of his land, 
takes for granted, then, that which is radically false; namely, that capital 
produces by its own effort - and, in taking pay for this imaginary product, 
he literally receives something for nothing."</i> [<b>What is Property?</b>, p. 169]
</p><p>
It will be objected that while capital is not productive in itself, its 
use does make labour more productive. As such, surely its owner is 
entitled to some share of the larger output produced by its aid. Surely
this means that the owners of capital deserve a reward? Is this 
difference not the "contribution" of capital? Anarchists are not convinced. 
Ultimately, this argument boils down to the notion that giving permission 
to use something is a productive act, a perspective we rejected in the 
<a href="secC2.html#secc23">last section</a>. In addition, providing capital is unlike normal commodity 
production. This is because capitalists, unlike workers, get paid 
multiple times for one piece of work (which, in all likelihood, 
they paid others to do) and <b>keep</b> the result of that labour. As 
Proudhon argued:
</p><p><blockquote><i>
"He [the worker] who manufactures or repairs the farmer's tools receives 
the price <b>once</b>, either at the time of delivery, or in several payments; 
and when this price is once paid to the manufacturer, the tools which he has 
delivered belong to him no more. Never can he claim double payment for the 
same tool, or the same job of repairs. If he annually shares in the products 
of the farmer, it is owing to the fact that he annually does something for 
the farmer.
</p><p>
"The proprietor, on the contrary, does not yield his implement; eternally he 
is paid for it, eternally he keeps it."</i> [<b>Op. Cit.</b>, pp. 169-170]
</blockquote></p><p>
While the capitalist, in general, gets their investment back plus something 
extra, the workers can never get their time back. That time has gone, forever, 
in return for a wage which allows them to survive in order to sell their time 
and labour (i.e. liberty) again. Meanwhile, the masters have accumulated more 
capital and their the social and economic power and, consequently, their 
ability to extract surplus value goes up at a higher rate than the wages 
they have to pay (as we discuss in <a href="secC7.html">section C.7</a>, this process is not without
problems and regularly causes economic crisis to break out). 
</p><p>
Without labour nothing would have been produced and so, in terms of justice, 
<b>at best</b> it could be claimed that the owners of capital deserve to be paid 
only for what has been used of their capital (i.e. wear and tear and damages).
While it is true that the value invested in fixed capital is in the course 
of time transferred to the commodities produced by it and through their sale 
transformed into money, this does not represent any actual labour by the 
owners of capital. Anarchists reject the ideological sleight-of-hand that
suggests otherwise and recognise that (mental and physical) labour is the 
<b>only</b> form of contribution that can be made by humans to a productive 
process. Without labour, nothing can be produced nor the value contained 
in fixed capital transferred to goods. As Charles A. Dana pointed out in 
his popular introduction to Proudhon's ideas, <i>"[t]he labourer without capital 
would soon supply his wants by its production . . . but capital with no 
labourers to consume it can only lie useless and rot."</i> [<b>Proudhon and his 
"Bank of the People"</b>, p. 31] If workers do not control the full value of 
their contributions to the output they produce then they are exploited and 
so, as indicated, capitalism is based upon exploitation. 
</p><p>
Of course, as long as "capital" <b>is</b> owned by a different class than as those 
who use it, this is extremely unlikely that the owners of capital will simply
accept a "reward" of damages. This is due to the hierarchical organisation 
of production of capitalism. In the words of the early English socialist 
Thomas Hodgskin <i>"capital does not derive its utility from previous, but 
present labour; and does not bring its owner a profit because it has been 
stored up, but because it is a means of obtaining a command over labour."</i> 
[<b>Labour Defended against the Claims of Capital</b>] It is more than a 
strange coincidence that the people with power in a company, when working 
out who contributes most to a product, decide it is themselves! 
</p><p>
This means that the notion that labour gets its "share" of the products 
created is radically false for, as <i>"a description of <b>property rights</b>, 
the distributive shares picture is quite misleading and false. The 
simple fact is that one legal party owns all the product. For example, 
General Motors doesn't just own 'Capital's share' of the GM cars produced; 
it owns all of them."</i> [Ellerman, <b>Op. Cit.</b>, p. 27] Or as Proudhon put it,
<i>"Property is the right to enjoy and dispose of another's goods, -- the 
fruit of another's industry and labour."</i> The only way to finally abolish 
exploitation is for workers to manage their own work and the machinery 
and tools they use. This is implied, of course, in the argument that 
labour is the source of property for <i>"if labour is the sole basis of 
property, I cease to be a proprietor of my field as soon as I receive 
rent for it from another . . . It is the same with all capital."</i> Thus,
<i>"all production being necessarily collective"</i> and <i>"all accumulated capital 
being social property, no one can be its exclusive proprietor."</i> [<b>What is 
Property?</b>, p. 171, p. 133 and p. 130]
</p><p>
The reason why capital gets a "reward" is simply due to the current system 
which gives capitalist class an advantage which allows them to refuse access 
to their property except under the condition that they command the workers 
to make more than they have to pay in wages and keep their capital at the 
end of the production process to be used afresh the next. So while capital 
is not productive and owning capital is not a productive act, under 
capitalism it is an enriching one and will continue to be so until such 
time as that system is abolished. In other words, profits, interest and 
rent are not founded upon any permanent principle of economic or social 
life but arise from a specific social system which produce specific social 
relationships. Abolish wage labour by co-operatives, for example, and the
issue of the "productivity" of "capital" disappears as "capital" no longer
exists (a machine is a machine, it only becomes capital when it is used
by wage labour).
</p><p>
So rather that the demand for labour being determined by the technical 
considerations of production, it is determined by the need of the 
capitalist to make a profit. This is something the neo-classical theory 
implicitly admits, as the marginal productivity of labour is just a 
roundabout way of saying that labour-power will be bought as long as 
the wage is not higher than the profits that the workers produce. In
other words, wages do not rise above the level at which the capitalist 
will be able to produce and realise surplus-value. To state that workers 
will be hired as long as the marginal productivity of their labour 
exceeds the wage is another way of saying that workers are exploited 
by their boss. So even if we do ignore reality for the moment, this
defence of profits does <b>not</b> prove what it seeks to -- it shows that 
labour <b>is</b> exploited under capitalism.
</p><p>
However, as we discuss in the <a href="secC5.html">next section</a>, this whole discussion is 
somewhat beside the point. This is because marginal productivity theory 
has been conclusively proven to be flawed by dissident economics and has 
been acknowledged as such by leading neo-classical economists. 
</p>

<h2><a name="secc25">C.2.5 Do profits represent the contribution of capital to production?</a></h2>

<p>
In a word, no. While we have assumed the validity of "marginal productivity"
theory in relation to capital in the previous two sections, the fact is that
the theory is deeply flawed. This is on two levels. Firstly, it does not 
reflect reality in any way. Secondly, it is logically flawed and, even 
worse, this has been known to economists for decades. While the first 
objection will hardly bother most neo-classical economists (what part of
that dogma <b>does</b> reflect reality?), the second should as intellectual
coherence is what replaces reality in economics. However, in spite of
"marginal productivity" theory being proven to be nonsense and admitted
as such by leading neo-classical economists, it is still taught in 
economic classes and discussed in text books as if it were valid.
</p><p>
We will discuss each issue in turn.
</p><p>
The theory is based on a high level of abstraction and the assumptions used 
to allow the mathematics to work are so extreme that no real world example 
could possibly meet them. The first problem is determining the level at 
which the theory should be applied. Does it apply to individuals, groups,
industries or the whole economy? For depending on the level at which it
is applied, there are different problems associated with it and different
conclusions to be drawn from it. Similarly, the time period over which it
is to be applied has an impact. As such, the theory is so vague that it
would be impossible to test as its supporters would simply deny the results
as being inapplicable to <b>their</b> particular version of the model. 
</p><p>
Then there are problems with the model itself. While it has to assume that 
factors are identical in order to invoke the necessary mathematical theory, 
none of the factors used are homogenous in the real world. Similarly, for 
Euler's theory to be applied, there must be constant returns to scale and
this does not apply either (it would be fair to say that the assumption of
constant returns to scale was postulated to allow the theorem to be invoked
in the first place rather than as a result of a scientific analysis of real 
industrial conditions). Also, the model assumes an ideal market which 
cannot be realised and any real world imperfections make it redundant. In 
the model, such features of the real world as oligopolistic markets (i.e. 
markets dominated by a few firms), disequilibrium states, market power, 
informational imperfections of markets, and so forth do not exist. Including 
any of these real features invalidates the model and no "factor" gets its 
just rewards.
</p><p>
Moreover, like neo-classical economics in general, this theory just assumes 
the original distribution of ownership. As such, it is a boon for those who 
have benefited from previous acts of coercion -- their ill-gotten gains 
can now be used to generate income for them!
</p><p>
Finally, "marginal productivity" theory ignores the fact that most production 
is collective in nature and, as a consequence, the idea of subtracting a 
single worker makes little or no sense. As soon as there is <i>"a division 
of labour and an interdependence of different jobs, as is the case 
generally in modern industry,"</i> its <i>"absurdity can immediately be 
shown."</i> For example, <i>"[i]f, in a coal-fired locomotive, the train's 
engineer is eliminated, one does not 'reduce a little' of the product
(transportation), one eliminates it completely; and the same is true if
one eliminates the fireman. The 'product' of this indivisible team of
engineer and fireman obeys a law of all or nothing, and there is no
'marginal product' of the one that can be separated from the other. The
same thing goes on the shop floor, and ultimately for the modern factory
as a whole, where jobs are closely interdependent."</i> [Cornelius Castoriadis,
<b>Political and Social Writings</b>, vol. 3, p. 213] Kropotkin made the same
point, arguing it <i>"is utterly impossible to draw a distinction between
the work"</i> of the individuals collectively producing a product as all
<i>"contribute . . . in proportion to their strength, their energy, their
knowledge, their intelligence, and their skill."</i> [<b>The Conquest of Bread</b>,
p. 170 and p. 169]
</p><p>
This suggests another explanation for the existence of profits than the
"marginal productivity" of capital. Let us assume, as argued in marginal
productivity theory, that a worker receives exactly what she has produced 
because if she ceases to work, the total product will decline by precisely 
the value of her wage. However, this argument has a flaw in it. This is 
because the total product will decline by more than that value if two or 
more workers leave. This is because the wage each worker receives under 
conditions of perfect competition is assumed to be the product of the 
<b>last</b> labourer in neo-classical theory. The neo-classical argument 
presumes a "declining marginal productivity," i.e. the marginal product 
of the last worker is assumed to be less than the second last and so on.
In other words, in neo-classical economics, all workers bar the mythical
"last worker" do not receive the full product of their labour. They only
receive what the <b>last</b> worker is claimed to produce and so everyone
<b>bar</b> the last worker does not receive exactly what he or she produces.
In other words, all the workers are exploited bar the last one.
</p><p>
However, this argument forgets that co-operation leads to increased 
productivity which the capitalists appropriate for themselves. This is 
because, as Proudhon argued, <i>"the capitalist has paid as many times one day's wages"</i>
rather than the workers collectively and, as such, <i>"he has paid nothing
for that immense power which results from the union and harmony of
labourers, and the convergence and simultaneousness of their efforts.
Two hundred grenadiers stood the obelisk of Luxor upon its base in a
few hours; do you suppose that one man could have accomplished the 
same task in two hundred days? Nevertheless, on the books of the 
capitalist, the amount of wages would have been the same."</i> Therefore,
the capitalist has <i>"paid all the individual forces"</i> but <i>"the collective
force still remains to be paid. Consequently, there remains a right
of collective property"</i> which the capitalist <i>"enjoy[s] unjustly."</i>
[<b>What is Property?</b>, p. 127 and p. 130] 
</p><p>
As usual, therefore, we must distinguish between the ideology and reality 
of capitalism. As we indicated in <a href="secC1.html">section C.1</a>, the model of perfect 
competition has no relationship with the real world. Unsurprisingly, 
marginal productivity theory is likewise unrelated to reality. This means
that the assumptions required to make "marginal productivity" theory work are
so unreal that these, in themselves, should have made any genuine scientist
reject the idea out of hand. Note, we are <b>not</b> opposing abstract theory, 
<b>every</b> theory abstracts from reality is some way. We are arguing that, to 
be valid, a theory has to reflect the real situation it is seeking to explain 
in some meaningful way. Any abstractions or assumptions used must be relatively 
trivial and, when relaxed, not result in the theory collapsing. This is not
the case with marginal productivity theory. It is important to recognise 
that there are degrees of abstraction. There are <i>"negligibility assumptions"</i> 
which state that some aspect of reality has little or no effect on what is 
being analysed. Sadly for marginal productivity theory, its assumptions are 
not of this kind. Rather, they are <i>"domain assumptions"</i> which specify <i>"the 
conditions under which a particular theory will apply. If those conditions 
do not apply, then neither does the theory."</i> [Steve Keen, <b>Debunking Economics</b>, 
p. 151] This is the case here.
</p><p>
However, most economists will happily ignore this critique for, 
as noted repeatedly, basing economic theory on reality or realistic 
models is not considered a major concern by neoclassical economists.
However, "marginal productivity" theory applied to capital is riddled 
with logical inconsistencies which show that it is simply wrong. In 
the words of the noted left-wing economist Joan Robinson:
</p><p><blockquote><i>
"The neo-classicals evidently had not been told that the neo-classical
theory did not contain a solution of the problems of profits or of
the value of capital. They have erected a towering structure of 
mathematical theorems on a foundation that does not exist. Recently
[in the 1960s, leading neo-classical economist] Paul Samuelson was 
sufficiently candid to admit that the basis of his system does not 
hold, but the theorems go on pouring out just the same."</i> 
[<b>Contributions to Modern Economics</b>, p. 186]
</blockquote></p><p>
If profits <b>are</b> the result of private property and the inequality it
produces, then it is unsurprising that neoclassical theory would be
as foundationless as Robinson argues. After all, this is a <b>political</b> 
question and neo-classical economics was developed to ignore such questions. 
Marginal productivity theory has been subject to intense controversy, 
precisely because it claims to show that labour is not exploited under 
capitalism (i.e. that each factor gets what it contributes to production). 
We will now summarise this successful criticism.
</p><p>
The first major theoretical problem is obvious: how do you measure capital?
In neoclassical economics, capital is referred to as machinery of all sorts
as well as the workplaces that house them. Each of these items is, in 
turn, made up of a multitude of other commodities and many of these are
assemblies of other commodities. So what does it mean to say, as in marginal
productivity theory, that "capital" is varied by one unit? The only thing 
these products have in common is a price and that is precisely what 
economists <b>do</b> use to aggregate capital. Sadly, though, shows <i>"that 
there is no meaning to be given to a 'quantity of capital' apart from 
the rate of profit, so that the contention that the 'marginal product of 
capital' determines the rate of profit is meaningless."</i> [Robinson, <b>Op. Cit.</b>, 
p. 103] This is because argument is based on circular reasoning:
</p><p><blockquote><i>
"For long-period problems we have to consider the meaning of the rate of 
profit on capital . . . the value of capital equipment, reckoned as its 
future earnings discounted at a rate of interest equal to the rate of 
profit, is equal to its initial cost, which involves prices including 
profit at the same rate on the value of the capital involved in producing
it, allowing for depreciation at the appropriate rate over its life up to 
date.
</p><p>
"The value of a stock of capital equipment, therefore, involves the rate of 
profit. There is no meaning in a 'quantity of capital' apart from the rate 
of profit."</i> [<b>Collected Economic Papers</b>, vol. 4, p. 125]
</blockquote></p><p>
Looking at it another way, neo-classical economics seeks to simultaneously 
solve the problems of production and income distribution. It attempts
to show how the level of employment of capital and labour is determined 
as well as how national income is divided between the two. The latter is 
done by multiplying the quantities of labour and capital by the equilibrium 
wage and interest rate, respectively. In the long term, equilibrium conditions 
are governed by the net marginal productivity of each factor, with each 
supplied until its net marginal revenue is zero. This is why the market 
rate of interest is used as capital is assumed to have marginal productivity 
and the existing market interest reflects that.
</p><p>
Yet in what sense can we say that capital has marginal productivity? How is 
the stock of capital to be measured? One measure is to take the present value 
of the income stream expected to accrue to capital owners. However, where 
does this discount rate and net income stream come from? To find a value for 
these, it is necessary to estimate a national income and the division of 
income between labour and capital but that is what the analysis was meant to 
produce. In other words, the neo-classical theory requires assumptions which 
are, in fact, the solution. This means that value of capital is dependent 
on the distribution of income. As there is no rationale offered for choosing 
one income distribution over another, the neo-classical theory does not solve 
the problem it set out to investigate but rather simply assumes it away. It 
is a tautology. It asks how the rate of profit is determined and answers by 
referencing the quantity of capital and its marginal revenue product. When 
asked how these are determined, the reply is based on assuming a division 
of future income and the discounting of the returns of capital with the 
market rate of interest. That is, it simply says that the market rate 
of interest is a function of the market rate of interest (and an assumed 
distribution of income).
</p><p>
In other words, according to neoclassical theory, the rate of profit and 
interest depends on the amount of capital, and the amount of capital depends 
on the rate of profit and interest. One has to assume a rate of profit in
order to demonstrate the equilibrium rate of return is determined. This 
issue is avoided in neo-classical economics simply by ignoring it (it 
must be noted that the same can be said of the "Austrian" concept of
<i>"roundaboutness"</i> as <i>"it is impossible to define one way of producing
a commodity as 'more roundabout' than another independently of the rate
of profit . . . Therefore the Austrian notion of roundaboutness is as
internally inconsistent as the neoclassical concept of the marginal
productivity of capital."</i> [Steve Keen, <b>Debunking Economics</b>, p. 302]).
</p><p>
The next problem with the theory is that "capital" is treated as something
utterly unreal. Take, for example, leading neoclassical Dennis Robertson's 
1931 attempt to explain the marginal productivity of labour when holding 
"capital" constant:
</p><p><blockquote><i>
"If ten men are to be set out to dig a hole instead of nine, they will be
furnished with ten cheaper spades instead of nine more expensive ones; or
perhaps if there is no room for him to dig comfortably, the tenth man will
be furnished with a bucket and sent to fetch beer for the other nine."</i>
[<i>"Wage-grumbles"</i>, <b>Economic Fragments</b>, p. 226]
</blockquote></p><p>
So to work out the marginal productivity of the factors involved, <i>"ten 
cheaper spades"</i> somehow equals nine more expensive spades? How is this 
keeping capital constant? And how does this reflect reality? Surely, 
any real world example would involve sending the tenth digger to get 
another spade? And how do nine expensive spades become nine cheaper ones? In the real
world, this is impossible but in neoclassical economics this is not
only possible but required for the theory to work. As Robinson argued,
in neo-classical theory the <i>"concept of capital all the man-made
factors are boiled into one, which we may call <b>leets</b> . . . [which], 
though all made up of one physical substance, is endowed with the 
capacity to embody various techniques of production . . . and a change 
of technique can be made simply by squeezing up or spreading out leets, 
instantaneously and without cost."</i> [<b>Contributions to Modern Economics</b>, 
p. 106] 
</p><p>
This allows economics to avoid the obvious aggregation problems
with "capital", make sense of the concept of adding an extra unit of
capital to discover its "marginal productivity" and allows capital to
be held "constant" so that the "marginal productivity" of labour can
be found. For when <i>"the stock of means of production in existence can 
be represented as a quantity of ectoplasm, we can say, appealing to 
Euler's theorem, that the rent per unit of ectoplasm is equal to the 
marginal product of the given quantity of  ectoplasm when it is fully 
utilised. This does seem to add anything of interest to the argument."</i> 
[<b>Op. Cit.</b>, p. 99] This ensures reality has to be ignored and so 
economic theory need not discuss any practical questions:
</p><p><blockquote><i>
"When equipment is made of leets, there is no distinction between
long and short-period problems . . . Nine spades are lumps of
leets; when the tenth man turns up it is squeezed out to provide 
him with a share of equipment nine-tenths of what each man had
before . . . There is no room for imperfect competition. There is
no possibility of disappointed expectations . . . There is no 
problem of unemployment . . . Unemployed workers would bid down
wages and the pre-existing quantity of leets would be spread out
to accommodate them."</i> [<b>Op. Cit.</b>, p. 107]
</blockquote></p><p>
The concept that capital goods are made of ectoplasm and can be remoulded 
into the profit maximising form from day to day was invented in order to
prove that labour and capital both receive their contribution to society,
to show that labour is not exploited. It is not meant to be taken literally,
it is only a parable, but without it the whole argument (and defence of
capitalism) collapses. Once capital equipment is admitted to being actual,
specific objects that cannot be squeezed, without cost, into new objects
to accommodate more or less workers, such comforting notions that profits 
equal the (marginal) contribution of "capital" or that unemployment is 
caused by wages being too high have to be discarded for the wishful 
thinking they most surely are.
</p><p>
The last problem arises when ignore these issues and assume that marginal
productivity theory is correct. Consider the notion of the short run,
where at least one factor of production cannot be varied. To determine
its marginal productivity then capital has to be the factor which is
varied. However, common sense suggests that capital is the least flexible
factor and if that can be varied then every other one can be as well? As
dissident economist Piero Sraffa argued, when a market is defined broadly
enough, then the key neoclassical assumption that the demand and supply
of a commodity are independent breaks down. This was applied by another
economist, Amit Bhaduri, to the "capital market" (which is, by nature, a
broadly defined industry). Steve Keen usually summarises these arguments,
noting that <i>"at the aggregate level [of the economy as a whole], the 
desired relationship -- the rate of profit equals the marginal productivity
of capital -- will not hold true"</i> as it only applies <i>"when the capital to
labour ratio is the same in all industries -- which is effectively the
same as saying there is only one industry."</i> This <i>"proves Sraffa's assertion 
that, when a broadly defined industry is considered, changes in its 
conditions of supply and demand will affect the distribution of income."</i> 
This means that a <i>"change in the capital input will change output, but it
also changes the wage, and the rate of profit . . . As a result, the
distribution of income is neither meritocratic nor determined by the
market. The distribution of income is to some significant degree 
determined independently of marginal productivity and the impartial
blades of supply and demand . . . To be able to work out prices, it
is first necessary to know the distribution of income . . . There is
therefore nothing sacrosanct about the prices that apply in the 
economy, and equally nothing sacrosanct about the distribution of
income. It reflects the relative power of different groups in society."</i>  
[<b>Op. Cit.</b>, p. 135] 
</p><p>
It should be noted that this critique bases itself on the neoclassical
assumption that it is possible to define a factor of production called
capital. In other words, even if we assume that neo-classical economics
theory of capital is not circular reasoning, it's theory of distribution 
is still logically wrong.
</p><p>
So mainstream economics is based on a theory of distribution which is 
utterly irrelevant to the real world and is incoherent when applied to
capital. This would not be important except that it is used to justify
the distribution of income in the real world. For example, the widening 
gap between rich and poor (it is argued) simply reflects a market 
efficiently rewarding more productive people. Thus the compensation for 
corporate chief executives climbs so sharply because it reflects their 
marginal productivity. Except, of course, the theory supports no such
thing -- except in a make believe world which cannot exist (lassiez
fairy land, anyone?). 
</p><p>
It must be noted that this successful critique of neoclassical economics 
by dissident economists was first raised by Joan Robinson in the 1950s (it 
usually called the Cambridge Capital Controversy). It is rarely mentioned 
these days. While most economic textbooks simply repeat the standard theory, 
the fact is that this theory has been successfully debunked by dissident 
economists over four decades go. As Steve Keen notes, while leading 
neoclassical economists admitted that the critique was correct in the
1960s, today <i>"economic theory continues to use exactly the same 
concepts which Sraffa's critique showed to be completely invalid"</i> in 
spite the <i>"definitive capitulation by as significant an economist as Paul 
Samuelson."</i> As he concludes: <i>"There is no better sign of the intellectual 
bankruptcy of economics than this."</i> [<b>Op. Cit.</b>, p. 146, p. 129 and p. 147]
</p><p>
Why? Simply because the Cambridge Capital Controversy would expose the
student of economics to some serious problems with neo-classical economics
and they may start questioning the internal consistency of its claims. 
They would also be exposed to alternative economic theories and start to
question whether profits <b>are</b> the result of exploitation. As this would
put into jeopardy the role of economists as, to quote Marx, the <i>"hired
prize-fighters"</i> for capital who replace <i>"genuine scientific research"</i>
with <i>"the bad conscience and evil intent of apologetics."</i> Unsurprisingly,
he characterised this as <i>"vulgar economics."</i> [<b>Capital</b>, vol. 1, p. 97]
</p>

<h2><a name="secc26">C.2.6 Does interest represent the "time value" of money?</a></h2>

<p>
One defence of interest is the notion of the "time value" of money,
that individuals have different "time preferences." Most individuals 
prefer, it is claimed, to consume now rather than later while a few 
prefer to save now on the condition that they can consume more later. 
Interest, therefore, is the payment that encourages people to defer 
consumption and so is dependent upon the subjective evaluations of 
individuals. It is, in effect, an exchange over time and so surplus 
value is generated by the exchange of present goods for future goods.
</p><p>
Based on this argument, many supporters of capitalism claim that it is 
legitimate for the person who provided the capital to get back <b>more</b> 
than they put in, because of the "time value of money." This is because 
investment requires savings and the person who provides those had to 
postpone a certain amount of current consumption and only agree to 
do this only if they get an increased amount later (i.e. a portion, 
over time, of the increased output that their saving makes possible). 
This plays a key role in the economy as it provide the funds from 
which investment can take place and the economy grow.
</p><p>
In this theory, interest rates are based upon this "time value" of money
and the argument is rooted in the idea that individuals have different 
"time preferences." Some economic schools, like the Austrian school, 
argue that the actions by banks and states to artificially lower 
interest rates (by, for example, creating credit or printing money) 
create the business cycle as this distorts the information about people's 
willingness to consume now rather than later leading to over 
investment and so to a slump.
</p><p>
That the idea of doing nothing (i.e. not consuming) can be considered 
as productive says a lot about capitalist theory. However, this is 
beside the point as the argument is riddled with assumptions and,
moreover, ignores key problems with the notion that savings always
lead to investment.
</p><p>
The fundamental weakness of the theory of time preference must be 
that it is simply an unrealistic theory and does not reflect where
the supply of capital does come from. It <b>may</b> be appropriate to the
decisions of households between saving and consumption, but the 
main source of new capital is previous profit under capitalism. The 
motivation of making profits is not the provision of future means of 
consumption, it is profits for their own sake. The nature of capitalism 
requires profits to be accumulated into capital for if capitalists <b>did</b> 
only consume the system would break down. While from the point of 
view of the mainstream economics such profit-making for its own sake 
is irrational in reality it is imposed on the capitalist by capitalist 
competition. It is only by constantly investing, by introducing new 
technology, work practices and products, can the capitalists keep their 
capital (and income) intact. Thus the motivation of capitalists to 
invest is imposed on them by the capitalist system, not by subjective
evaluations between consuming more later rather than now.
</p><p>
Ignoring this issue and looking at the household savings, the theory
still raises questions. The most obvious problem is that an individual's 
psychology is conditioned by the social situation they find themselves 
in. Ones "time preference" is determined by ones social position. If 
one has more than enough money for current needs, one can more easily 
"discount" the future (for example, workers will value the future 
product of their labour less than their current wages simply because 
without those wages there will be no future). We will discuss this 
issue in more detail later and will not do so here (see 
<a href="secC2.html#secc27">section C.2.7</a>).
</p><p>
The second thing to ask is why should the supply price of waiting 
be assumed to be positive? If the interest rate simply reflects 
the subjective evaluations of individuals then, surely, it could 
be negative or zero. Deferred gratification is as plausible a 
psychological phenomenon as the overvaluation of present satisfactions, 
while uncertainty is as likely to produce immediate consumption 
as it is to produce provision for the future (saving). Thus Joan 
Robinson:
</p><p><blockquote><i>
"The rate of interest (excess of repayment over original loan) 
would settle at the level which equated supply and demand for
loans. Whether it was positive or negative would depend upon
whether spendthrifts or prudent family men happened to predominate 
in the community. There is no <b>a priori</b> presumption in favour of 
a positive rate. Thus, the rate of interest cannot be account for 
as the 'cost of waiting.'
</p><p>
"The reason why there is always a demand for loans at a positive 
rate of interest, in an economy where there is property in the 
means of production and means of production are scarce, is that 
finance expended now can be used to employ labour in productive 
processes which will yield a surplus in the future over costs of 
production. Interest is positive because profits are positive 
(though at the same time the cost and difficulty of obtaining 	
finance play a part in keeping productive equipment scarce, and so 
contribute to maintaining the level of profits)."</i> [<b>Contributions 
to Modern Economics</b>, p. 83]
</blockquote></p><p>
It is only because money provides the authority to allocate resources 
and exploit wage labour that money now is more valuable (<i>"we know
that mere saving itself brings in nothing, so long as the pence
saved are not used to exploit."</i> [Kropotkin, <b>The Conquest of Bread</b>,
p. 59]). The capitalist does not supply "time" (as the "time value" 
theory argues), the loan provides authority/power and so the
interest rate does not reflect "time preference" but rather the 
utility of the loan to capitalists, i.e. whether it can be used
to successfully exploit labour. If the expectations of profits by 
capitalists are low (as in, say, during a depression), loans would 
not be desired no matter how low the interest rate became. As 
such, the interest rate is shaped by the general profit level 
and so be independent of the "time preference" of individuals. 
</p><p>
Then there is the problem of circularity. In any real economy, interest 
rates obviously shape people's saving decisions. This means that an 
individual's "time preference" is shaped by the thing it is meant 
to explain:
</p><p><blockquote><i>
"But there may be some savers who have the psychology required
by the text books and weigh a preference for present spending
against an increment of income (interest, dividends and capital
gains) to be had from an increment of wealth. But what then?
Each individual goes on saving or dis-saving till the point 
where his individual subjective rate of discount is equal to
the market rate of interest. There has to be a market rate of
interest for him to compare his rate of discount to."</i> 
[Joan Robinson, <b>Op. Cit.</b>, pp. 11-12]
</blockquote></p><p>
Looking at the individuals whose subjective evaluations allegedly 
determine the interest rate, there is the critical question of 
motivation. Looking at lenders, do they <b>really</b> charge interest 
because they would rather spend more money later than now? 
Hardly, their motivation is far more complicated than that. It 
is doubtful that many people actually sit down and work out how 
much their money is going to be "worth" to them a year or 
more from now. Even if they did, the fact is that they really 
have no idea how much it will be worth. The future is unknown and 
uncertain and, consequently, it is implausible that "time preference" 
plays the determining role in the decision making process. 
</p><p>
In most economies, particularly capitalism, the saver and lender 
are rarely the same person. People save and the banks use it 
to loan it to others. The banks do not do this because they have a 
low "time preference" but because they want to make profits. They 
are a business and make their money by charging more interest on 
loans than they give on savings. Time preference does not enter 
into it, particularly as, to maximise profits, banks loan out more 
(on credit) than they have in savings and, consequently, make the 
actual interest rate totally independent of the rate "time preference" 
would (in theory) produce. 
</p><p>
Given that it would be extremely difficult, indeed impossible, to 
stop banks acting in this way, we can conclude that even if "time
preference" were true, it would be of little use in the real world. This, 
ironically, is recognised by the same free market capitalist economists 
who advocate a "time preference" perspective on interest. Usually 
associated with the "Austrian" school, they argue that banks should 
have 100% reserves (i.e. they loan out only what they have in savings, 
backed by gold). This implicitly admits that the interest rate does 
not reflect "time preference" but rather the activities (such as credit 
creation) of banks (not to mention other companies who extend business
credit to consumers). As we discuss in <a href="secC8.html">section C.8</a>, 
this is not due to 
state meddling with the money supply or the rate of interest but rather 
the way capitalism works.
</p><p>
Moreover, as the banking industry is marked, like any industry, by 
oligopolistic competition, the big banks will be able to add a mark 
up on  services, so distorting any interest rates set even further 
from any abstract "time preference" that exists. Therefore, the 
structure of that market will have a significant effect on the 
interest rate. Someone in the same circumstances with the same 
"time preference" will get radically different interest rates depending 
on the "degree of monopoly" of the banking sector (see <a href="secC5.html">section C.5</a> for
"degree of monopoly"). An economy with a multitude of small banks,
implying low barriers of entry, will have different interest rates than 
one with a few big firms implying high barriers (if banks are forced 
to have 100% gold reserves, as desired by many "free market" 
capitalists, then these barriers may be even higher). As such, 
it is highly unlikely that "time preference" rather than market power 
is a more significant factor in determining interest rates in any 
<b>real</b> economy. Unless, of course, the rather implausible claim is 
made that the interest rate would be the same no matter how competitive 
the banking market was -- which, of course, is what the "time preference" 
argument does imply.
</p><p>
Nor is "time preference" that useful when we look at the saver. 
People save money for a variety of motives, few (if any) of which 
have anything to do with "time preference." A common motive is, 
unsurprisingly, uncertainty about the future. Thus people put 
money into savings accounts to cover possible mishaps and
unexpected developments (as in <i>"saving for a rainy day"</i>). Indeed, 
in an uncertain world future money may be its own reward for 
immediate consumption is often a risky thing to do as it reduces 
the ability to consumer in the future (for example, workers facing 
unemployment in the future could value the same amount of money 
more then than now). Given that the future is uncertain, many save 
precisely for precautionary reasons and increasing current consumption 
is viewed as a disutility as it is risky behaviour. Another common 
reason would be to save because they do not have enough money to buy 
what they want now. This is particularly the case with working class 
families who face stagnating or falling income or face financial 
difficulties.[Henwood, <b>Wall Street</b>, p. 65] Again, "time preference" 
does not come into it as economic necessity forces the borrowers to 
consume more now in order to be around in the future. 
</p><p>
Therefore, money lending is, for the poor person, not a choice between
more consumption now/less later and less consumption now/more later. 
If there is no consumption now, there will not be any later. So 
not everybody saves money because they want to be able to spend 
more at a future date. As for borrowing, the real reason for it is 
necessity produced by the circumstances people find themselves in. 
As for the lender, their role is based on generating a current 
and future income stream, like any business. So if "time preference" 
seems unlikely for the lender, it seems even more unlikely for the 
borrower or saver. Thus, while there is an element of time involved 
in decisions to save, lend and borrow, it would be wrong to see 
interest as the consequence of "time preference." Most people do 
not think in terms of it and, therefore, predicting their behaviour 
using it would be silly.
</p><p>
At the root of the matter is that for the vast majority of cases 
in a capitalist economy, an individual's "time preference" is 
determined by their social circumstances, the institutions which 
exist, uncertainty and a host of other factors. As inequality 
drives "time preference," there is no reason to explain interest 
rates by the latter rather than the former. Unless, of course, 
you are seeking to rationalise and justify the rich getting richer.
Ultimately, interest is an expression of inequality, <b>not</b> exchange:
</p><p><blockquote><i>
"If there is chicanery afoot in calling 'money now' a different good 
than 'money later,' it is by no means harmless, for the intended 
effect is to subsume money lending under the normative rubric of 
exchange . . . [but] there are obvious differences . . . [for in 
normal commodity exchange] both parties have something [while in 
loaning] he has something you don't . . . [so] inequality dominates 
the relationship. He has more than you have now, and he will get 
back more than he gives."</i> [Schweickart, <b>Against Capitalism</b>, p. 23]
</blockquote></p><p>
While the theory is less than ideal, the practice is little better.
Interest rates have numerous perverse influences in any real economy. 
In neo-classical and related economics, saving does not have a negative
impact on the economy as it is argued that non-consumed income must 
be invested. While this could be the case when capitalism was young, 
when the owners of firms ploughed their profits back into them, as
financial institutions grew this became less so. Saving and investment
became different activities, governed by the rate of interest. If 
the supply of savings increased, the interest rate would drop and
capitalists would invest more. If the demand for loans increased,
then the interest rate would rise, causing more savings to occur.
</p><p>
While the model is simple and elegant, it does have its flaws. These
are first analysed by Keynes during the Great Depression of the 1930s,
a depression which the neo-classical model said was impossible.
</p><p>
For example, rather than bring investment into line with savings, a 
higher interest can cause savings to fall as <i>"[h]ousehold saving, of 
course, is mainly saving up to spend later, and . . .  it is likely 
to respond the wrong way. A higher rate of return means that 'less' 
saving is necessary to get a given pension or whatever."</i> [Robinson, 
<b>Op. Cit.</b>, p. 11] Similarly, higher interest rates need not lead to 
higher investment as higher interest payments can dampen profits as 
both consumers and industrial capitalists have to divert more of 
their finances away from real spending and towards debt services. 
The former causes a drop in demand for products while the latter 
leaves less for investing. 
</p><p>
As argued by Keynes, the impact of saving is not as positive as some 
like to claim. Any economy is a network, where decisions affect everyone. 
In a nutshell, the standard model fails to take into account changes of 
income that result from decisions to invest and save (see Michael
Stewart's <b>Keynes and After</b> for a good, if basic, introduction).
This meant that if some people do not consume now, demand falls for 
certain goods, production is turned away from consumption goods, and 
this has an effect on all. Some firms will find their sales failing 
and may go under, causing rising unemployment. Or, to put it slightly 
differently, aggregate demand -- and so aggregate supply -- is changed 
when some people postpone consumption, and this affects others. The 
decrease in the demand for consumer goods affects the producers of 
these goods. With less income, the producers would reduce their 
expenditure and this would have repercussions on other people's 
incomes. In such circumstances, it is unlikely that capitalists 
would be seeking to invest and so rising savings would result in 
falling investment in spite of falling interest rates. In an
uncertain world, investment will only be done if capitalists think
that they will end up with more money than they started with and
this is unlikely to happen when faced with falling demand.
</p><p>
Whether rising interest rates do cause a crisis is dependent on 
the strength of the economy. During a strong expansion, a modest 
rise in interest rates may be outweighed by rising wages and profits.
During a crisis, falling rates will not counteract the general 
economic despair. Keynes aimed to save capitalism from itself and
urged state intervention to counteract the problems associated with
free market capitalism. As we discuss in <a href="secC8.html#secc81">section C.8.1</a>, this ultimately
failed partly due to the mainstream economics gutting Keynes' work
of key concepts which were incompatible with it, partly due to Keynes' 
own incomplete escape from neoclassical economics, partly due the 
unwillingness of rentiers to agree to their own euthanasia but
mostly because capitalism is inherently unstable due to the 
hierarchical (and so oppressive and exploitative) organisation of 
production.
</p><p>
Which raises the question of whether someone who saves deserve a reward 
for so doing? Simply put, no. Why? Because the act of saving is no more 
an act of production than is purchasing a commodity (most investment 
comes from retained profits and so the analogy is valid). Clearly the 
reward for purchasing a commodity is that commodity. By analogy, the 
reward for saving should be not interest but one's savings -- the 
ability to consume at a later stage. Particularly as the effects of
interest rates and savings can have such negative impacts on the rest
of the economy. It seems strange, to say the least, to reward people 
for helping do so. Why should someone be rewarded for a decision which 
may cause companies to go bust, so <b>reducing</b> the available means of 
production as reduced demand results in job loses and idle factories?
Moreover, this problem <i>"becomes ever more acute the richer or more
inegalitarian the society becomes, since wealthy people tend to save
more than poor people."</i> [Schweickart, <b>After Capitalism</b>, p. 43]
</p><p>
Supporters of capitalists assume that people will not save unless promised 
the ability to consume <b>more</b> at a later stage, yet close examination of 
this argument reveals its absurdity. People in many different economic 
systems save in order to consume later, but only in capitalism is it 
assumed that they need a reward for it beyond the reward of having those 
savings available for consumption later. The peasant farmer "defers 
consumption" in order to have grain to plant next year, even the squirrel 
"defers consumption" of nuts in order to have a stock through winter. 
Neither expects to see their stores increase in size over time. Therefore, 
saving is rewarded by saving, as consuming is rewarded by consuming. 
In fact, the capitalist "explanation" for interest has all the hallmarks 
of apologetics.  It is merely an attempt to justify an activity without 
careful analysing it. 
</p><p>
To be sure, there is an economic truth underlying this argument for 
justifying interest, but the formulation by supporters of capitalism 
is inaccurate and unfortunate. There is a sense in which 'waiting' 
is a condition for capital <b>increase</b>, though not for capital per 
se. Any society which wishes to increase its stock of capital goods 
may have to postpone some gratification. Workplaces and resources 
turned over to producing capital goods cannot be used to produce 
consumer items, after all. How that is organised differs from society
to society. So, like most capitalist economics there is a grain of 
truth in it but this grain of truth is used to grow a forest of 
half-truths and confusion.
</p><p>
As such, this notion of "waiting" only makes sense in a 'Robinson Crusoe"
style situation, <b>not</b> in any form of real economy. In a real economy, we
do not need to "wait" for our consumption goods until investment is complete
since the division of labour/work has replaced the succession in time by a
succession in place. We are dealing with an already well developed system 
of <b>social</b> production and an economy based on a social distribution 
of labour in which there are available all the various stages of the 
production process. As such, the notion that "waiting" is required makes
little sense. This can be seen from the fact that it is not the capitalist 
who grants an advance to the worker. In almost all cases the worker is paid 
by their boss <b>after</b> they have completed their work. That is, it is the 
worker who makes an advance of their labour power to the capitalist. This
waiting is only possible because <i>"no species of labourer depends on any 
previously prepared stock, for in fact no such stock exists; but every 
species of labourer does constantly, and at all times, depend for his 
supplies on the co-existing labour of some other labourers."</i> [Thomas 
Hodgskin, <b>Labour Defended Against the Claims of Capital</b>] This means
that the workers, as a class, creates the fund of goods out of which
the capitalists pay them.
</p><p>
Ultimately, selling the use of money (paid for by interest) is not the same 
as selling a commodity. The seller of the commodity does not receive the 
commodity back as well as its price, unlike the typical lender of money. 
In effect, as with rent and profits, interest is payment for permission 
to use something and, therefore, not a productive act which should be 
rewarded. It is <b>not</b> the same as other forms of exchange. Proudhon 
pointed out the difference:
</p><p><blockquote><i>
"Comparing a loan to a <b>sale</b>, you say: Your argument is as valid against 
the latter as against the former, for the hatter who sells hats does not
<b>deprive</b> himself.
</p><p>
"No, for he receives for his hats -- at least he is reputed to receive for 
them -- their exact value immediately, neither <b>more</b> nor <b>less</b>. But the 
capitalist lender not only is not deprived, since he recovers his capital 
intact, but he receives more than his capital, more than he contributes 
to the exchange; he receives in addition to his capital an interest which 
represents no positive product on his part. Now, a service which costs no
labour to him who renders it is a service which may become gratuitous."</i>
[<b>Interest and Principal: The Circulation of Capital, Not Capital Itself, 
Gives Birth to Progress</b>]
</blockquote></p><p>
The reason why interest rates do not fall to zero is due to the class nature
of capitalism, <b>not</b> "time preference." That it is ultimately rooted in social
institutions can be seen from Bhm-Bawerk's acknowledgement that monopoly can
result in exploitation by increasing the rate of interest above the rate 
specified by "time preference" (i.e. the market):
</p><p><blockquote><i>
"Now, of course, the circumstances unfavourable to buyers may be corrected by 
active competition among sellers . . . But, every now and then, something will 
suspend the capitalists' competition, and then those unfortunates, whom fate 
has thrown on a local market ruled by monopoly, are delivered over to the 
discretion of the adversary. Hence direct usury, of which the poor borrower 
is only too often the victim; and hence the low wages forcibly exploited 
from the workers. . .
</p><p>
"It is not my business to put excesses like these, where there actually is 
exploitation, under the aegis of that favourable opinion I pronounced above 
as to the essence of interest. But, on the other hand, I must say with all 
emphasis, that what we might stigmatise as 'usury' does not consist in the 
obtaining of a gain out of a loan, or out of the buying of labour, but in 
the immoderate extent of that gain . . . Some gain or profit on capital there 
would be if there were no compulsion on the poor, and no monopolising of 
property; and some gain there must be. It is only the height of this gain 
where, in particular cases, it reaches an excess, that is open to criticism, 
and, of course, the very unequal conditions of wealth in our modern communities 
bring us unpleasantly near the danger of exploitation and of usurious rates 
of interest."</i> [<b>The Positive Theory of Capital</b>, p. 361]
</blockquote></p><p>
Little wonder, then, that Proudhon continually stressed the need for
working people to organise themselves and credit (which, of course, 
they would have done naturally, if it were not for the state intervening
to protect the interests, income and power of the ruling class, i.e.
of itself and the economically dominant class). If, as Bhm-Bawerk
admitted, interest rates could be high due to institutional factors
then, surely, they do not reflect the "time preferences" of individuals.
This means that they could be lower (effectively zero) if society 
organised itself in the appropriate manner. The need for savings could
be replaced by, for example, co-operation and credit (as already exists,
in part, in any developed economy). Organising these could ensure a
positive cycle of investment, growth and savings (Keynes, it should
be noted, praised Proudhon's follower Silvio Gesell in <b>The General
Theory</b>. For a useful discussion see Dudley Dillard's essay <i>"Keynes 
and Proudhon"</i> [<b>The Journal of Economic History</b>, vol. 2, No. 1,
pp. 63-76]).
</p><p>
Thus the key flaw in the theory is that of capitalist economics in
general. By concentrating on the decisions of individuals, it 
ignores the social conditions in which these decisions are made. 
By taking the social inequalities and insecurities of capitalism
as a given, the theory ignores the obvious fact that an individual's
"time preference" will be highly shaped by their circumstances.
Change those circumstances and their "time preference" will also
change. In other words, working people have a different "time
preference" to the rich because they are poorer. Similarly, by 
focusing on individuals, the "time preference" theory fails to 
take into account the institutions of a given society. If working 
class people have access to credit in other forms than those
supplied by capitalists then their "time preference" will differ
radically. As an example, we need only look at credit unions. In
communities with credit unions the poor are less likely to agree
to get into an agreement from a loan shark. It seems unlikely, to
say the least, that the "time preference" of those involved have
changed. They are subject to the same income inequalities and 
pressures as before, but by uniting with their fellows they give
themselves better alternatives. 
</p><p>
As such, "time preference" is clearly not an independent factor.
This means that it cannot be used to justify capitalism or the 
charging of interest. It simply says, in effect, that in a society 
marked by inequality the rich will charge the poor as much interest 
as they can get away with. This is hardly a sound basis to argue
that charging interest is a just or a universal fact. It reflects 
social inequality, the way a given society is organised and the 
institutions it creates. Put another way, there is no "natural" 
rate of interest which reflects the subjective "time preferences" of 
abstract individuals whose decisions are made without any social 
influence. Rather, the interest rate depends on the conditions and 
institutions within the economy as a whole. The rate of interest is 
positive under capitalism because it is a class society, marked by 
inequality and power, <b>not</b> because of the "time preference" of 
abstract individuals.
</p><p>
In summary, providing capital and charging interest are not productive 
acts. As Proudhon argued, <i>"all rent received (nominally as damages, but 
really as payment for a loan) is an act of property -- of robbery."</i> 
[<b>What is Property</b>, p. 171]</p> 

<h2><a name="secc27">C.2.7 Are interest and profit not the reward for waiting?</a></h2>

<p>
Another defence of surplus value by capitalist economics is also based 
on time. This argument is related to the "time preference" one we have
discussed in the <a href="secC6.html">last section</a> and is, likewise, rooted in the idea that 
money now is different than money later and, as a consequence, surplus 
value represents (in effect) an exchange of present goods for future 
ones. This argument has two main forms, depending on whether it is 
interest or profits which are being defended, but both are based on
this perspective. We will discuss each in turn.
</p><p>
One of the oldest defences of interest is the "abstinence" theory first 
postulated by Nassau Senior in 1836. For Senior, abstinence is a sacrifice
of present enjoyment for the purpose achieving some distant result.
This demands the same heavy sacrifice as does labour, for to <i>"abstain
from the enjoyment which is in our power, or to seek distant rather
than immediate results, are among the most painful exertions of the
human will."</i> Thus wages and interest/profit <i>"are to be considered as
the rewards of peculiar sacrifices, the former the remuneration for
labour, and the latter for abstinence from immediate enjoyment."</i> [<b>An 
Outline of the Science of Political Economy</b>, p. 60 and p. 91]
</p><p>
Today, the idea that interest is the reward for "abstinence" on the part 
of savers is still a common one in capitalist economics. However, by the 
end of the nineteenth century, Senior's argument had become known as the 
"waiting" theory while still playing the same role in justifying non-labour 
income. One of the leading neo-classical economists of his day, Alfred 
Marshall, argued that <i>"[i]f we admit [a commodity] is the product of 
labour alone, and not of labour and waiting, we can no doubt be compelled 
by an inexorable logic to admit that there is no justification of interest, 
the reward for waiting."</i> [<b>Principles of Economics</b>, p. 587] While 
implicitly recognising that labour is the source of all value in 
capitalism (and that abstinence is not the <b>source</b> of profits), it 
is claimed that interest is a justifiable claim on the surplus value 
produced by a worker. 
</p><p>
Why is this the case? Capitalist economics claims that by "deferring
consumption," the capitalist allows new means of production to be
developed and so should be rewarded for this sacrifice. In other words, in
order to have capital available as an input -- i.e.  to bear costs now for
returns in the future -- someone has to be willing to postpone his or her
consumption. That is a real cost, and one that people will pay only if
rewarded for it:
</p><p><blockquote><i>
"human nature being what it is, we are justified in speaking of the
interest on capital as the reward of the sacrifice involved in waiting
for the enjoyment of material resources, because few people would save
much without reward; just as we speak of wages as the reward of labour,
because few people would work hard without reward."</i> [<b>Op. Cit.</b>, p. 232]
</blockquote></p><p>
The interest rate is, in neo-classical economic theory, set when
the demand for loans meets the supply of savings. The interest 
rate stems from the fact that people prefer present spending over 
future spending. If someone borrows 200 for one year at 5%, this 
is basically the same as saying that there would rather have 
200 now than 210 a year from now. Thus interest is the cost of
providing a service, namely time. People are able to acquire today 
what they would otherwise not have until sometime in the future. 
With a loan, interest is the price of the advantage obtained from 
having money immediately rather than having to wait for.
</p><p>
This, on first appears, seems plausible. If you accept the logic 
of capitalist economics and look purely at individuals and their 
preferences independently of their social circumstances then it 
can make sense. However, once you look wider you start to see 
this argument start to fall apart. Why is it that the wealthy 
are willing to save and provide funds while it is the working 
class who do not save and get into debt? Surely a person's 
"time preference"</i> is dependent on their socio-economic position? 
As we argued in the <a href="secC2.html#secc26">last section</a>, this means that any subjective 
evaluation of the present and future is dependent on, not independent 
of, the structure of market prices and income distribution. It varies 
with the income of individual and their class position, since the 
latter will condition the degree or urgency of present wants and 
needs. 
</p><p>
So this theory appears ludicrous to a critic of capitalism -- 
simply put, does the mine owner really sacrifice more than a miner, a
rich stockholder more than an autoworker working in their car plant, a 
millionaire investor more than a call centre worker? As such, the notion
that "waiting" explains interest is question begging in the extreme as
it utterly ignores inequality within a society. After all, it is far
easier for a rich person to "defer consumption" than for someone on an
average income. This is borne out by statistics, for as Simon Kuznets has
noted, <i>"only the upper income groups save; the total savings of groups
below the top decile are fairly close to zero."</i> [<b>Economic Growth and
Structure</b>, p. 263] Obviously, therefore, in modern society it is the 
capitalist class, the rich, who refrain from expending their income on 
immediate consumption and <i>"abstain."</i> Astonishingly, working class people
show no such desire to abstain from spending their wages on immediate 
consumption. It does not take a genius to work out why, although many 
economists have followed Senior in placing the blame on working class 
lack of abstinence on poor education rather than, say, the class system 
they live in (for Senior, <i>"the worse educated"</i> classes <i>"are always the
most improvident, and consequently the least abstinent."</i> [<b>Op. Cit.</b>, 
p. 60]).
</p><p>
Therefore, the plausibility of interest as payment for the pain of 
deferring consumption rests on the premise that the typical saving 
unit is a small or medium-income household.  But in contemporary 
capitalist societies, this is not the case. Such households are not 
the source of most savings; the bulk of interest payments do not 
go to them. As such, interest is the dependent factor and so "waiting"
cannot explain interest. Rather, interest is product of social 
inequality and the social relationships produced by an economy. 
Lenders lend because they have the funds to do so while borrowers 
borrow because without money now they may not be around later. As 
those with funds are hardly going without by lending, it does not 
make much sense to argue that they would spend even more today 
without the temptation of more income later.
</p><p>
To put this point differently, the capitalist proponents of interest only
consider "postponing consumption" as an abstraction, without making it
concrete. For example, a capitalist may "postpone consumption" of his 10th
Rolls Royce because he needs the money to upgrade some machinery in his
factory; whereas a single mother may have to "postpone consumption" of
food or adequate  housing in order to attempt to better take care of her
children.  The two situations are vastly different, yet the capitalist
equates them.  This equation implies that "not being able to buy anything
you want" is the same as "not being able to buy things you need", and is
thus skewing the obvious difference in costs of such postponement of
consumption! 
</p><p>
Thus Proudhon's comments that the loaning of capital <i>"does not involve an 
actual sacrifice on the part of the capitalist"</i> and so <i>"does not deprive 
himself. . . of the capital which be lends. He lends it, on the contrary, 
precisely because the loan is not a deprivation to him; he lends it because 
he has no use for it himself, being sufficiently provided with capital 
without it; be lends it, finally, because he neither intends nor is able 
to make it valuable to him personally, -- because, if he should keep it 
in his own hands, this capital, sterile by nature, would remain sterile, 
whereas, by its loan and the resulting interest, it yields a profit which 
enables the capitalist to live without working. Now, to live without working 
is, in political as well as moral economy, a contradictory proposition, 
an impossible thing."</i> [<b>Interest and Principal: A Loan is a Service</b>]
</p><p>
In other words, contra Marshall, saving is <b>not</b> a sacrifice for the
wealthy and, as such, not deserving a reward. Proudhon goes on:
</p><p><blockquote><i>
"The proprietor who possesses two estates, one at Tours, and the other 
at Orleans, and who is obliged to fix his residence on the one which he
uses, and consequently to abandon his residence on the other, can this 
proprietor claim that he deprives himself of anything, because he is not,
like God, ubiquitous in action and presence? As well say that we who live 
in Paris are deprived of a residence in New York! Confess, then, that
the privation of the capitalist is akin to that of the master who has 
lost his slave, to that of the prince expelled by his subjects, to that 
of the robber who, wishing to break into a house, finds the dogs on the 
watch and the inmates at the windows."</i>
</blockquote></p><p>
Given how much income this "abstinence" or "waiting" results in, we can 
only conclude that it is the most painful of decisions possible for a
multi-millionaire to decide <b>not</b> to buy that fifth house and instead 
save the money. The effort to restrain themselves from squandering their 
entire fortunes all at once must be staggering. In the capitalist's world, 
an industrialist who decides not to consume a part of their riches "suffers" 
a cost equivalent to that of someone who postpones consumption of their
meagre income to save enough to get something they need. Similarly, if the 
industrialist "earns" hundred times more in interest than the wage of the 
worker who toils in their workplace, the industrialist "suffers" hundred 
times more discomfort living in his palace than, say, the coal miner does 
working at the coal face in dangerous conditions or the worker stuck in 
a boring McJob they hate. The "disutility" of postponing consumption while 
living in luxury is obviously 100 times greater than the "disutility" of, 
say, working for a living and so should be rewarded appropriately. 
</p><p>
As there is no direct relationship between interest received and the 
"sacrifice" involved (if anything, it is an <b>inverse</b> relationship), 
the idea that interest is the reward for waiting is simply nonsense.
You need be no anarchist to come to this obvious conclusion. It was 
admitted as much by a leading capitalist economist and his argument
simply echoes Proudhon's earlier critique:
</p><p><blockquote><i>
"the existence and height of interest by no means invariably correspond 
with the existence and the height of a 'sacrifice of abstinence.' Interest, 
in exceptional cases, is received where there has been no individual 
sacrifice of abstinence. High interest is often got where the sacrifice 
of the abstinence is very trifling -- as in the case of [a] millionaire 
-- and 'low interest' is often got where the sacrifice entailed by the 
abstinence is very great. The hardly saved sovereign which the domestic 
servant puts in the savings bank bears, absolutely and relatively, less 
interest than the lightly spared thousands which the millionaire puts to 
fructify in debenture and mortgage funds. These phenomena fit badly into 
a theory which explains interest quite universally as a 'wage of 
abstinence.'"</i> [Eugen von Bhm-Bawerk, <b>Capital and Interest</b>, p. 277]
</blockquote></p><p>
All in all, as  Joan Robinson pointed out, <i>"that the rate of interest is 
the 'reward for waiting' but 'waiting' only means owning wealth . . . In 
short, a man who refrains from blowing his capital in orgies and feasts 
can continue to get interest on it. This seems perfectly correct, but 
as a theory of distribution it is only a circular argument."</i> [<b>Contributions 
to Modern Economics</b>, p. 11] Interest is not the reward for "waiting," 
rather it is one of the (many) rewards for being rich. This was admitted 
as much by Marshall himself, who noted that the <i>"power to save depends 
on an excess of income over necessary expenditure; and this is greatest 
among the wealthy."</i> [<b>Op. Cit.</b>, p. 229]
</p><p>
Little wonder, then, that neo-classical economists introduced the term 
<b>waiting</b> as an "explanation" for returns to capital (such as interest). 
Before this change in the jargon of economics, mainstream economists used 
the notion of "abstinence" (the term used by Nassau Senior) to account 
for (and so justify) interest. Just as Senior's "theory" was seized upon
to defend returns to capital, so was the term "waiting" after it was 
introduced in the 1880s. Interestingly, while describing <b>exactly</b> the 
same thing, "waiting" became the preferred term simply because it had a 
less apologetic ring to it. Both describe the <i>"sacrifice of present pleasure
for the sake of future"</i> yet, according to Marshall, the term <i>"abstinence"</i> 
was <i>"liable to be misunderstood"</i> because there were just too many wealthy 
people around who received interest and dividends without ever having 
abstained from anything. As he admitted, the <i>"greatest accumulators of 
wealth are very rich persons, some [!] of whom live in luxury, and 
certainly do not practise abstinence in that sense of the term in which
it is convertible with abstemiousness."</i> So he opted for the term "waiting" 
because there was <i>"advantage"</i> in its use to describe <i>"the accumulation
of wealth"</i> as the <i>"result of a postponement of enjoyment."</i> [<b>Op. Cit.</b>, 
pp. 232-3] This is particularly the case as socialists had long been 
pointing out the obvious fact that capitalists do not <i>"abstain"</i> from 
anything. 
</p><p>
The lesson is obvious, in mainstream economics if reality conflicts with 
your theory, do not reconsider the theory, change its name!
</p><p>
The problems of "waiting" and "abstinence" as the source of interest 
becomes even clearer when we look at inherited wealth. Talking about 
"abstinence"</i> or "waiting" when discussing a capitalist inheriting a 
company worth millions is silly. Senior recognised this, arguing that 
income in this case is not profit, but rather <i>"has all the attributes of
rent."</i> [<b>Op. Cit.</b>, p. 129] That such a huge portion of capitalist revenue 
would not be considered profit shows the bankruptcy of any theory which 
see profit as the reward for "waiting." However, Senior's argument does 
show that interest payments need not reflect any positive contribution 
to production by those who receive it. Like the landlord receiving 
payment for owning a gift of nature, the capitalist receives income 
for simply monopolising the work of previous generations and, as 
Smith put it, the <i>"rent of land, considered as the price paid for 
the use of land, is naturally a monopoly price."</i> [<b>The Wealth of 
Nations</b>, p. 131]
</p><p>
Even capitalist economists, while seeking to justify interest, admit 
that it <i>"arises independently of any personal act of the capitalist. It 
accrues to him even though he has not moved any finger in creating it
. . . And it flows without ever exhausting that capital from which it 
arises, and therefore without any necessary limit to its continuance. 
It is, if one may use such an expression in mundane matters, capable 
of everlasting life."</i> [Bhm-Bawerk, <b>Op. Cit.</b>, p. 1] Little wonder we 
argued in <a href="secC2.html#secc23">section C.2.3</a> that simply owning property does not justify 
non-labour income. 
</p><p>
In other words, due to <b>one</b> decision not to do anything (i.e. <b>not</b> 
to consume), a person (and his or her heirs) may receive <b>forever</b> 
a reward that is not tied to any productive activity. Unlike the people
actually doing the work (who only get a reward every time they "contribute" 
to creating a commodity), the capitalist will get rewarded for just 
<b>one</b> act of abstention.  This is hardly a just arrangement. As David 
Schweickart has pointed out, <i>"Capitalism does reward some individuals 
perpetually. This, if it is to be justified by the canon of contribution, 
one must defend the claim that some contributions are indeed eternal."</i> 
[<b>Against Capitalism</b>, p. 17] As we noted in <a href="secC1.html#secc11">section C.1.1</a>, current
and future generations should not be dominated by the actions of the
long dead.
</p><p>
The "waiting" theory, of course, simply seeks to justify interest rather 
than explain its origin. If the capitalist really <b>did</b> deserve an income
as a reward for their abstinence, where does it come from? It cannot
be created passively, merely by the decision to save, so interest 
exists because the exploitation of labour exists. As Joan Robinson
summarised:
</p><p><blockquote><i>
"Obviously, the reward of saving is owning some more wealth. One of the 
advantages, though by no means the only one, of owning wealth is the 
possibility of getting interest on it.
</p><p>
"But why is it possible to get interest? Because businesses make profits 
and are willing to borrow."</i> [<b>Collected Economic Papers</b>, vol. 5, p. 36]
</blockquote></p><p>
This is the key. If ones ability and willingness to "wait" is dependent on 
social facts (such as available resources, ones class, etc.), then interest 
cannot be based upon subjective evaluations, as these are not the independent 
factor. In other words, saving does not express "waiting", it simply expresses 
the extent of inequality and interest expresses the fact that workers have to
sell their labour to others in order to survive:
</p><p><blockquote><i>
"The notion that human beings discount the future certainly seems to
correspond to everyone's subjective experience, but the conclusion
drawn from it is a <b>non sequitor</b>, for most people have enough sense to
want to be able to exercise consuming power as long as fate permits, and
many people are in the situation of having a higher income in the present
than they expect in the future (salary earners will have to retire, 
business may be better now than it seems likely to be later, etc.) and
many look beyond their own lifetime and wish to leave consuming power
to their heirs. Thus a great many . . . are eagerly looking for a
reliable vehicle to carry purchasing power into the future . . . It is
impossible to say what price would rule if there were a market for
present <b>versus</b> future purchasing power, unaffected by any other
influence except the desires of individuals about the time-pattern
of their consumption. It might will be such a market would normally
yield a negative rate of discount . . . 
</p><p>
"The rate of interest is normally positive for a quite different reason.
Present purchasing power is valuable partly because, under the capitalist
rules of the game, it permits its owner . . . to employ labour and 
undertake production which will yield a surplus of receipts over costs.
In an economy in which the rate of profit is expected to be positive,
the rate of interest is positive . . . [and so] the present value of
purchasing power exceeds its future value to the corresponding extent. . .
This is nothing whatever to do with the subjective <b>rate of discount
of the future</b> of the individual concerned. . ."</i> [<b>The Accumulation
of Capital</b>, p. 395]
</blockquote></p><p>
So, interest has little to do with "waiting" and a lot more to do 
with the inequalities associated with the capitalist system. In effect,
the "waiting" theory assumes what it is trying to prove. Interest is 
positive simply because capitalists can appropriate surplus value from
workers and so current money is more valuable than future money because
of this fact. Ironically, therefore, the pro-capitalist theories of who 
abstains are wrong, <i>"since saving is mainly out of profits, and real 
wages tend to be lower the higher the rate of profit, the abstinence 
associated with saving is mainly done by the workers, who do not 
receive any share in the 'reward.'"</i> [Robinson, <b>Op. Cit.</b>, p. 393]
</p><p>
In other words, "waiting" does not produce a surplus, labour does. As 
such, to <i>"say that those who hold financial instruments can lay claim 
to a portion of the social product by abstaining or waiting provides no 
explanation of what makes the production process profitable, and hence 
to what extent interest claims or dividends can be paid. Reliance on a 
waiting theory of the return to capital represented nothing less than a 
reluctance of economists to confront the sources of value creation and 
analyse the process of economic development."</i> [William Lazonick, 
<b>Competitive Advantage on the Shop Floor</b>, p. 267] This would involve
having to analyse the social relations between workers and managers/bosses 
on the shop floor, which would be to bring into question the whole nature 
of capitalism and any claims it was based upon freedom.
</p><p>
To summarise, the idea that interest is the "reward" for waiting simply 
ignores the reality of class society and, in effect, rewards the wealthy 
for being wealthy. Neo-classical economics implies that being rich is the 
ultimate disutility. The hardships ("sacrifices") of having to decide to 
consume or invest their riches weighs as heavily on the elite as they do 
on the scales of utility. Compared to, say, working in a sweatshop, 
fearing unemployment (sorry, maximising "leisure") or not having to 
worry about saving (as your income just covers your out-goings) it 
is clear which are the greatest sacrifices and which are rewarded 
accordingly under capitalism.
</p><p>
Much the same argument can be applied to "time-preference" theories of 
profit. These argue that profits are the result of individuals preferring 
present goods to future ones. Capitalists pay workers wages, allowing them
to consumer now rather than later. This is the providing of time and this 
is rewarded by profits. This principle was first stated clearly by Eugen 
von Bhm-Bawerk and has been taken as the basis of the "Austrian" school 
of capitalist economics (see <a href="secC1.html#secc16">section C.1.6</a>). 
After rejecting past theories 
of interest (including, as noted above, "abstinence" theories, which he 
concluded the socialists were right to mock), Bhm-Bawerk argued that 
profits could only by explained by means of time preference:
</p><p><blockquote><i>
"<b>The loan is a real exchange of present goods against future goods</b> 
. . . present goods invariably possess a greater value than future 
goods of the same number and kind, and therefore a definite sum of 
present goods can, as a rule, only be purchased by a larger sum of 
future goods. Present goods possess an agio in future goods. <b>This 
agio is interest.</b> It is not a separate equivalent for a separate 
and durable use of the loaned goods, for that is inconceivable; it 
is a part equivalent of the loaned sum, kept separate for practical 
reasons. The replacement of the capital + the interest constitutes 
the full equivalent."</i> [<b>Capital and Interest</b>, p. 259] 
</blockquote></p><p>
For him, time preference alone is the reason for profit/interest due 
to the relative low value of future goods, compared to present goods. 
Capital goods, although already present in their physical state, are 
really <b>future</b> goods in their <i>"economic nature"</i> as is labour. This
means that workers are paid the amount their labour creates in terms
of <b>future</b> goods, not <b>current</b> goods. This difference between the
high value of current goods and low value of future goods is the
source of surplus value:
</p><p><blockquote><i>
"This, and nothing else, is the foundation of the so-called 'cheap' 
buying of production instruments, and especially of labour, which the 
Socialists rightly explain as the source of profit on capital, but 
wrongly interpret . . . as the result of a robbery or exploitation of 
the working classes by the propertied classes."</i> [<b>The Positive Theory 
of Capital</b>, p. 301]
</blockquote></p><p>
The capitalists are justified in keeping this surplus value because
they provided the time required for the production process to occur.
Thus surplus value is the product of an exchange, the exchange of
present goods for future ones. The capitalist bought labour at its
full present value (i.e. the value of its future product) and so 
there is no exploitation as the future goods are slowly maturing
during the process of production and can then be sold at its full 
value as a present commodity. Profit, like interest, is seen as 
resulting from varying estimates of the present and future needs.
</p><p>
As should be obvious, our criticisms of the "waiting" theory of interest
apply to this justification of profits. Money in itself does not produce 
profit any more than interest. It can only do that when invested in 
<b>actual</b> means of production which are put to work by actual people. As 
such, "time preference" only makes sense in an economy where there is 
a class of property-less people who are unable to "wait" for future 
goods as they would have died of starvation long before they arrived. 
</p><p>
So it is the <b>class</b> position of workers which explains their time 
preferences, as Bhm-Bawerk <b>himself</b> acknowledged. Thus capitalism 
was marked by an <i>"enormous number of wage-earners who cannot employ 
their labour remuneratively by working on their own account, and 
are accordingly, as a body, inclined and ready to sell the future 
product of their labour for a considerably less amount of present 
goods."</i> So, being poor, meant that they lacked the resources to 
"wait" for "future" goods and so became dependent (as a class) on 
those who do. This was, in his opinion the <i>"sole ground of that 
much-talked-of and much-deplored dependence of labourer on capitalist."</i> 
It is <i>"only because the labourers cannot wait till the roundabout 
process . . .  delivers up its products ready for consumption, that 
they become economically dependent on the capitalists who already 
hold in their possession what we have called 'intermediate products.'"</i> 
[<b>Op. Cit.</b>, p. 330 and p. 83]
</p><p>
Bhm-Bawerk, ironically, simply repeats (although in different words) 
<b>and agrees</b> with the socialist critique of capitalism which, as we
discussed in <a href="secC2.html#secc22">section C.2.2</a>, is also 
rooted in the class dependence
of workers to capitalists (Bakunin, for example, argued that the
capitalists were <i>"profiting by the economic dependence of the worker"</i> 
in order to exploit them by <i>"turn[ing] the worker into a subordinate."</i>
[<b>The Political Philosophy of Bakunin</b>, p. 188]). The difference is that 
Bhm-Bawerk thinks that the capitalists deserve their income from 
wealth while anarchists, like other socialists, argue they do not 
as they simply are being rewarded for being wealthy. Bhm-Bawerk simply 
cannot bring himself to acknowledge 
that an individual's psychology, their subjective evaluations, are 
conditioned by their social circumstances and so cannot comprehend 
the <b>class</b> character of capitalism and profit. After all, a landless 
worker will, of course, estimate the "sacrifice" or "disutility" of 
selling their labour to a master as much less than the peasant farmer 
or artisan who possesses their own land or tools. The same can be said 
of workers organised into a union.
</p><p>
As such, Bhm-Bawerk ignores the obvious, that the source of non-labour 
income is not in individual subjective evaluations but rather the 
<b>social</b> system within which people live. The worker does not sell 
her labour power because she "underestimates" the value of future 
goods but because she lacks the means of obtaining any sort of 
goods at all except by the selling of her labour power. There is no 
real choice between producing for herself or working for a boss -- she 
has no real opportunity of doing the former at all and so <b>has</b> to do 
the latter. This means that workers sells their labour (future goods) 
"voluntarily" for an amount less than its value (present goods) because
their class position ensures that they cannot "wait." So, if profit is 
the price of time, then it is a monopoly price produced by the class 
monopoly of wealth ownership under capitalism. Needless to say, as 
capital is accumulated from surplus value, the dependence of the 
working class on the capitalists will tend to grow over time as the 
"waiting" required to go into business will tend to increase also.
</p><p>
An additional irony of Bhm-Bawerk's argument is that is very similar to
the "abstinence" theory he so rightly mocked and which he admitted the
socialists were right to reject. This can be seen from one of his 
followers, right-"libertarian" Murray Rothbard:
</p><p><blockquote><i> 
"What has been the contribution of these product-owners, or 'capitalists', 
to the production process? It is this: the saving and restriction of 
consumption, instead of being done by the owners of land and labour, has 
been done by the <b>capitalists.</b> The capitalists originally saved, say, 
95 ounces of gold which they could have then spent on consumers' goods. 
They refrained from doing so, however, and, instead, <b>advanced</b> the money 
to the original owners of the factors. They <b>paid</b> the latter for their 
services while they were working, thus advancing them money before the 
product was actually produced and sold to the consumers. The capitalists, 
therefore, made an essential contribution to production. They relieved 
the owners of the original factors from the necessity of sacrificing 
present goods and waiting for future goods."</i> [<b>Man, Economy, and State</b>, 
pp. 294-95]
</blockquote></p><p>
This meant that without risk, <i>"[e]ven if financial returns and consumer 
demand are certain, <b>the capitalists are still providing present goods 
to the owners of labour and land</b> and thus relieving them of the burden 
of waiting until the future goods are produced and finally transformed 
into consumers' goods."</i> [<b>Op. Cit.</b>, p. 298] Capitalists pay out, say, 
100,000 this year in wages and reap 200,000 next year not because of 
exploitation but because both parties prefer this amount of money this 
year rather than next year. Capitalists, in other words, pay out wages 
in advance and then wait for a sale. They will only do so if compensated 
by profit.
</p><p>
Rothbard's argument simply assumes a <b>class</b> system in which there is a 
minority of rich and a majority of property-less workers. The reason why 
workers cannot "wait" is because if they did they would starve to death. 
Unsurprisingly, then, they prefer their wages now rather than next year. 
Similarly, the reason why they do not save and form their own co-operatives 
is that they simply cannot "wait" until their workplace is ready and their 
products are sold before eating and paying rent. In other words, their 
decisions are rooted in their class position while the capitalists (the 
rich) have shouldered the "burden" of abstinence so that they can be 
rewarded with even more money in the future. Clearly, the time preference 
position and the "waiting" or "abstinence" perspective are basically the 
same (Rothbard even echoes Senior's lament about the improvident working 
class, arguing that <i>"the major problem with the lower-class poor is 
irresponsible present-mindedness."</i> [<b>For a New Liberty</b>, p. 154]). 
As such, it is subject to the same critique (as can be found in, say, 
the works of a certain Eugen von Bhm-Bawerk).
</p><p>
In other words, profit has a <b>social</b> basis, rooted in the different
economic situation of classes within capitalism. It is not the fact
of "waiting" which causes profits but rather the monopoly of the 
means of life by the capitalist class which is the basis of <i>"economic
dependence."</i> Any economic theory which fails to acknowledge and 
analyse this social inequality is doomed to failure from the start.
</p><p>
To conclude, the arguments that "waiting" or "time preference" explain or
justify surplus value are deeply flawed simply because they ignore the
reality of class society. By focusing on individual subjective evaluations,
they ignore the social context in which these decisions are made and, as
a result, fail to take into account the class character of interest and
profit. In effect, they argue that the wealthy deserve a reward for being
wealthy. Whether it is to justify profits or interest, the arguments used
simply show that we have an economic system that works only by bribing
the rich!</p>

<h2><a name="secc28">C.2.8 Are profits the result of entrepreneurial activity and innovation?</a></h2>

<p>
One of the more common arguments in favour of profits is the notion that
they are the result of innovation or entrepreneurial activity, that the 
creative spirit of the capitalist innovates profits into existence. This
perspective is usually associated with the so-called "Austrian" school
of capitalist economics but has become more common in the mainstream of
economics, particularly since the 1970s. 
</p><p>
There are two related themes in this defence of profits -- innovation
and entrepreneurial activity. While related, they differ in one key way. 
The former (associated with Joseph Schumpeter) is rooted in production 
while the former seeks to be of more general application. Both are based 
on the idea of "discovery", the subjective process by which people use 
their knowledge to identify gaps in the market, new products or services 
or new means of producing existing goods. When entrepreneurs discover, 
for example, a use of resources, they bring these resources into a new 
(economic) existence. Accordingly, they have created something <b>ex nihilo</b> 
(out of nothing) and therefore are entitled to the associated profit on 
generally accepted moral principle of <i>"finders keepers."</i> 
</p><p>
Anarchists, needless to say, have some issues with such an analysis. The
most obvious objection is that while <i>"finders keepers"</i> may be an acceptable 
ethical position on the playground, it is hardly a firm basis to justify an 
economic system marked by inequalities of liberty and wealth. Moreover, 
discovering something does <b>not</b> entitle you to an income from it. Take, 
for example, someone who discovers a flower in a wood. That, in itself, 
will generate no income of any kind. Unless the flower is picked and taken 
to a market, the discoverer cannot "profit" from discovering it. If the 
flower is left untouched then it is available for others to appropriate 
unless some means are used to stop them (such as guarding the flower). 
This means, of course, limiting the discovery potential of others, like 
the state enforcing copyright stops the independent discovery of the 
same idea, process or product.
</p><p>
As such, "discovery" is not sufficient to justify non-labour income as an
idea remains an idea unless someone applies it. To generate an income 
(profit) from a discovery you need to somehow take it to the market and, 
under capitalism, this means getting funds to invest in machinery and 
workplaces. However, these in themselves do nothing and, consequently, workers 
need to be employed to produce the goods in question. If the costs of producing 
these goods is less than the market price, then a profit is made. Does this 
profit represent the initial "discovery"? Hardly for without funds the idea 
would have remained just that. Does the profit represent the contribution 
of "capital"? Hardly, for without the labour of the workers the workplace 
would have remained still and the product would have remained an idea.
</p><p>
Which brings us to the next obvious problem, namely that "entrepreneurial"
activity becomes meaningless when divorced from owning capital. This is
because any action which is taken to benefit an individual and involves 
"discovery" is considered entrepreneurial. Successfully looking for a 
better job? Your new wages are entrepreneurial profit. Indeed, 
successfully finding <b>any</b> job makes the wages entrepreneurial profit. 
Workers successfully organising and striking to improve their pay and 
conditions? An entrepreneurial act whose higher wages are, in fact, 
entrepreneurial profit. Selling your shares in one company and buying
others? Any higher dividends are entrepreneurial profit. Not selling 
your shares? Likewise. What income flow could <b>not</b> be explained by 
"entrepreneurial"</i> activity if we try hard enough?
</p><p>
In other words, the term becomes meaningless unless it is linked to owning 
capital and so any non-trivial notion of entrepreneurial activity requires 
private property, i.e. property which functions as capital. This can be seen 
from an analysis of whether entrepreneurship which is <b>not</b> linked to 
owning capital or land creates surplus value (profits) or not. It is 
possible, for example, that an entrepreneur can make a profit by buying 
cheap in one market and selling dear in another. However, this simply 
redistributes existing products and surplus value, it does not <b>create</b> 
them. This means that the entrepreneur does not create something from 
nothing, he takes something created by others and sells it at a higher 
price and so gains a slice of the surplus value created by others. If 
buying high and selling low <b>was</b> the cause of surplus value, then 
profits overall would be null as any gainer would be matched by a loser. 
Ironically, for all its talk of being concerned about process, this 
defence of entrepreneurial profits rests on the same a <b>static</b> 
vision of capitalism as does neo-classical economics.
</p><p>
Thus entrepreneurship is inherently related to inequalities in economic 
power, with those at the top of the market hierarchy having more ability 
to gain benefits of it than those at the bottom. Entrepreneurship, in 
other words, rather than an independent factor is rooted in social 
inequality. The larger one's property, the more able they are to gather 
and act on information advantages, i.e. act in as an entrepreneur.
Moreover the ability to exercise the entrepreneurial spirit or innovate
is restricted by the class system of capitalism. To implement a new idea, 
you need money. As it is extremely difficult for entrepreneurs to act on 
the opportunities they have observed without the ownership of property, 
so profits due to innovation simply becomes yet another reward for already 
being wealthy or, at best, being able to convince the wealthy to loan you 
money in the expectation of a return. Given that credit is unlikely to
be forthcoming to those without collateral (and most working class people
are asset-poor), entrepreneurs are almost always capitalists because of 
social inequality. Entrepreneurial opportunities are, therefore, not 
available to everyone and so it is inherently linked to private property 
(i.e. capital).
</p><p>
So while entrepreneurship in the abstract may help explain the distribution 
of income, it neither explains why surplus value exists in the first place 
nor does it justify the entrepreneur's appropriation of part of that surplus. 
To explain why surplus value exists and why capitalists may be justified 
in keeping it, we need to look at the other aspect of entrepreneurship, 
innovation as this is rooted in the actual production process. 
</p><p>
Innovation occurs in order to expand profits and so survive competition
from other companies. While profits can be redistributed in circulation (for 
example by oligopolistic competition or inflation) this can only occur at the 
expense of other people or capitals (see sections <a href="secC5.html">C.5</a> 
and <a href="secC7.html">C.7</a>). Innovation, 
however, allows the generation of profits directly from the new or increased 
productivity (i.e. exploitation) of labour it allows. This is because it is 
in production that commodities, and so profits, are created and innovation 
results in new products and/or new production methods. New products mean 
that the company can reap excess profits until competitors enter the new 
market and force the market price down by competition. New production 
methods allow the intensity of labour to be increased, meaning that 
workers do more work relative to their wages (in other words, the
cost of production falls relative to the market price, meaning extra 
profits).
</p><p>
So while competition ensures that capitalist firms innovate, innovation is
the means by which companies can get an edge in the market. This is because
innovation means that <i>"capitalist excess profits come from the production 
process. . . when there is an above-average rise in labour productivity; 
the reduced costs then enable firms to earn higher than average profits in 
their products. But this form of excess profits is only temporary and 
disappears again when improved production methods become more general."</i> 
[Paul Mattick, <b>Economics, Politics and the Age of Inflation</b>, p. 38]
Capitalists, of course, use a number of techniques to stop the spread
of new products or production methods in order to maintain their position,
such as state enforced intellectual property rights. 
</p><p>
Innovation as the source of profits is usually associated with economist
Joseph Schumpeter who described and praised capitalism's genius for 
<i>"creative destruction"</i> caused by capitalists who innovate, i.e. introduce 
new goods and means of production. Schumpeter's analysis of capitalism 
is more realistic than the standard neo-classical perspective. He 
recognised that capitalism was marked by a business cycle which he 
argued flowed from cycles of innovation conducted by capitalists. 
He also rejected the neo-classical assumption of perfect competition, 
arguing that the <i>"introduction of new methods of production and new 
commodities is hardly compatible with perfect and perfectly prompt 
competition from the start . . . As a matter of fact, perfect 
competition has always been temporarily stemmed whenever anything 
new is being introduced."</i> [<b>Capitalism, Socialism and Democracy</b>, 
p. 104] 
</p><p>
This analysis presents a picture of capitalism more like it actually
is rather than what economics would like it to be. However, this does
not mean that its justification for profits is correct, far from it.
Anarchists do agree that it is true that individuals do see new potential 
and act in innovative ways to create new products or processes. However, 
this is not the source of surplus value. This is because an innovation 
only becomes a source of profits once it actually produced, i.e. once 
workers have toiled to create it (in the case of new goods) or used it 
(in the case of new production techniques). An idea in and of itself 
produces nothing unless it is applied. The reason why profits result 
from innovation is due to the way the capitalist firm is organised 
rather than any inherent aspect of innovation. 
</p><p>
Ultimately, entrepreneurialism is just a fancy name for decision making
and, as such, it is a <b>labour</b> income (labour refers to physical <b>and</b> 
mental activities). However, as noted above, there are two types of 
labour under capitalism, the labour of production and the labour of 
exploitation. Looking at entrepreneurialism in a workplace situation, 
it is obvious that it is <b>not</b> independent of owning or managing capital 
and so it is impossible to distinguish profits produced by "entrepreneurial" 
activity and profits resulting from a return on property (and so the 
labour of others). In other words, it is the labour of exploitation 
and any income from it is simply monopoly profit. This is because 
the capitalist or manager has a monopoly of power within the workplace 
and, consequently, can reap the benefits this privileged position 
ensures. The workers have their opportunities for entrepreneurialism 
restricted and monopolised by the few in power who, when deciding who 
contributes most to production, strangely enough decide it is themselves. 
</p><p>
This can be seen from the fact that innovation in terms of new technology 
is used to help win the class war at the point of production for the 
capitalists. As the aim of capitalist production is to maximise the 
profits available for capitalists and management to control, it follows that
capitalism will introduce technology that will allow more surplus value 
to be extracted from workers. As Cornelius Castoriadis argues, capitalism 
<i>"does not utilise a socially neutral technology for capitalist ends. 
Capitalism has created capitalist technology, which is by no means neutral. 
The real essence of capitalist technology is not to develop production for 
production's sake: It is to subordinate and dominate the producers."</i> 
[<b>Political and Social Writings</b>, vol. 2, p. 104] Therefore, "innovation"
(technological improvement) can  be used to increase the power of 
capital over the workforce, to ensure that workers will do as they are 
told. In this way innovation can maximise surplus value production by 
trying to increase domination during working hours as well as by increasing 
productivity by new processes.
</p><p>
These attempts to increase profits by using innovation is the key to 
capitalist expansion and accumulation. As such innovation plays a key 
role within the capitalist system. However, the source of profits does 
not change and remains in the labour, skills and creativity of workers 
in the workplace. As such, innovation results in profits because labour 
is exploited in the production process, <b>not</b> due to some magical 
property of innovation.
</p><p>
The question now arises whether profits are justified as a reward for
those who made the decision to innovate in the first place. This,
however, fails for the obvious reason that capitalism is marked by
a hierarchical organisation of production. It is designed so that a
few make all the decisions while the majority are excluded from power.
As such, to say that capitalists or managers deserve their profits due
to innovation is begging the question. Profits which are claimed to
flow from innovation are, in fact, the reward for having a monopoly, 
namely the monopoly of decision making within the workplace, rather 
than some actual contribution to production. The only thing management 
does is decide which innovations to pursue and to reap the benefits 
they create. In other words, they gain a reward simply due to their 
monopoly of decision making power within a firm. Yet this hierarchy only 
exists because of capitalism and so can hardly be used to defend that 
system and the appropriation of surplus value by capitalists. 
</p><p>
Thus, if entrepreneurial spirit is the source of profit then we can reply 
that under capitalism the means of exercising that spirit is monopolised 
by certain classes and structures. The monopoly of decision making power 
in the hands of managers and bosses in a capitalist firm ensure that 
they also monopolise the rewards of the entrepreneurialism their workforce 
produce. This, in turn, reduces the scope for innovation as this division 
of society into people who do mental and physical labour <i>"destroy[s] the 
love of work and the capacity for invention"</i> and under such a system, 
the worker <i>"lose[s] his intelligence and his spirit of invention."</i> 
[Kropotkin, <b>The Conquest of Bread</b>, p. 183 and p. 181] 
</p><p>
These issues should be a key concern <b>if</b> entrepreneurialism <b>really</b> 
were considered as the unique source of profit. However, such issues as 
management power is rarely, if ever, discussed by the Austrian school. 
While they thunder against state restrictions on entrepreneurial activity, 
boss and management restrictions are always defended (if mentioned at 
all). Similarly, they argue that state intervention (say, anti-monopoly 
laws) can only harm consumers as it tends to discourage entrepreneurial 
activity yet ignore the restrictions to entrepreneurship imposed by 
inequality, the hierarchical structure of the capitalist workplace and 
negative effects both have on individuals and their development (as 
discussed in <a href="secB1.html#secb11">section B.1.1</a>). 
</p><p>
This, we must stress, is the key problem with the idea that innovation 
is the root of surplus value. It focuses attention to the top of the 
capitalist hierarchy, to business leaders. This implies that they, the 
bosses, create "wealth" and without them nothing would be done. For 
example, leading "Austrian" economist Israel Kirzner talks of <i>"the 
necessarily indivisible entrepreneur"</i> who <i>"is responsible for the 
entire product, The contributions of the factor inputs, being without 
an entrepreneurial component, are irrelevant for the ethical position 
being taken."</i> [<i>"Producer, Entrepreneur, and the Right to Property,"</i> 
pp. 185-199, <b>Perception, Opportunity, and Profit</b>, p. 195] The
workforce is part of the <i>"factor inputs"</i> who are considered <i>"irrelevant."</i>
He quotes economist Frank Knight to bolster this analysis that the
entrepreneur solely creates wealth and, consequently, deserves his
profits:
</p><p><blockquote><i>
"Under the enterprise system, a special social class, the businessman,
direct economic activity: <b>they are in the strict sense the producers,
while the great mass of the population merely furnishes them with 
productive services, placing their persons and their property at the
disposal of this class.</b>"</i> [quoted by Kirzner, <b>Op. Cit.</b>, p. 189]
</blockquote></p><p>
If, as Chomsky stresses, the capitalist firm is organised in a fascist 
way, the "entrepreneurial" defence of profits is its ideology, its
<b>"Fhrerprinzip"</i></b> (the German for <i>"leader principle"</i>). This ideology sees 
each organisation as a hierarchy of leaders, where every leader (Fhrer, 
in German) has absolute responsibility in his own area, demands absolute 
obedience from those below him and answers only to his superiors. This 
ideology was most infamously applied by fascism but its roots lie in 
military organisations which continue to use a similar authority 
structure today. 
</p><p>
Usually defenders of capitalism contrast the joys of "individualism" with
the evils of "collectivism" in which the individual is sub-merged into
the group or collective and is made to work for the benefit of the 
group. Yet when it comes to capitalist industry, they stress the abilities 
of the people at the top of the company, the owner, the entrepreneur, and 
treat as unpeople those who do the actual work (and ignore the very real 
subordination of those lower down the hierarchy). The entrepreneur is 
considered the driving force of the market process and the organisations 
and people they govern are ignored, leading to the impression that the 
accomplishments of a firm are the personal triumphs of the capitalists, 
as though their subordinates are merely tools not unlike the machines on 
which they labour.
</p><p>
The ironic thing about this argument is that if it were true, then the 
economy would grind to a halt (we discuss this more fully in our critique 
of Engels's diatribe against anarchism <i>"On Authority"</i> in 
<a href="secH4.html#sech44">section H.4.4</a>). 
It exposes a distinct contradiction within capitalism. While the advocates 
of entrepreneurialism assert that the entrepreneur is the only real producer 
of wealth in society, the fact is that the entrepreneurialism of the workforce 
industry is required to implement the decisions made by the bosses. Without
this unacknowledged input, the entrepreneur would be impotent. Kropotkin 
recognised this fact when he talked of the workers <i>"who have added to the 
original invention"</i> little additions and contributions <i>"without which
the most fertile idea would remain fruitless."</i> Nor does the idea itself 
develop out of nothing as <i>"every invention is a synthesis, the resultant 
of innumerable inventions which have preceded it."</i> [<b>Op. Cit.</b>, p. 30] Thus 
Cornelius Castoriadis:
</p><p><blockquote><i>
"The capitalist organisation of production is profoundly contradictory . . . 
It claims to reduce the worker to a limited and determined set of tasks, 
but it is obliged at the same time to rely upon the universal capacities 
he develops both as a function of and in opposition to the situation in 
which he is placed . . . Production can be carried out only insofar as 
the worker himself organises his work and goes beyond his theoretical 
role of pure and simply executant,"</i> [<b>Political and Social Writings</b>, 
vol. 2, p. 181]
</blockquote></p><p>
Moreover, such a hierarchical organisation cannot help but generate
wasted potential. Most innovation is the cumulative effect of lots of 
incremental process improvements and the people most qualified to identify 
opportunities for such improvements are, obviously, those involved in the 
process. In the hierarchical capitalist firm, those most aware of what would 
improve efficiency have the least power to do anything about it. They also 
have the least incentive as well as any productivity increases resulting from 
their improvements will almost always enrich their bosses and investors,
not them. Indeed, any gains may be translated into layoffs, soaring stock 
prices, and senior management awarding itself a huge bonus for "cutting 
costs." What worker in his right mind would do something to help their
worst enemy? As such, capitalism hinders innovation:
</p><p><blockquote><i>
"capitalism divides society into a narrow stratum of directors (whose function is to decide 
and organise everything) and the vast majority of the population, who are reduced to 
carrying out (executing) the decisions made by these directors. As a result of this very fact, 
most people experience their own lives as something alien to them . . . It is nonsensical 
to seek to organise people . . . as if they were mere 
objects . . . In real life, capitalism is obliged to base itself on people's 
capacity for self-organisation, on the individual and collective creativity 
of the producers. Without making use of these abilities the system would 
not survive a day. But the whole 'official' organisation of modern society 
both ignores and seeks to suppress these abilities to the utmost. The 
result is not only an enormous waste due to untapped capacity. The system 
does more: It <b>necessarily</b> engenders opposition, a struggle against it by 
those upon whom it seeks to impose itself . . . The net result is not only 
waste but perpetual conflict."</i> [Castoriadis, <b>Op. Cit.</b>, p. 93]
</blockquote></p><p>
While workers make the product and make entrepreneurial decisions every 
day, in the face of opposition of the company hierarchy, the benefits of
those decisions are monopolised by the few who take all the glory for 
themselves. The question now becomes, why should capitalists and managers 
have a monopoly of power and profits when, in practice, they do not and 
cannot have a monopoly of entrepreneurialism within a workplace? If the 
output of a workplace is the result of the combined mental and physical 
activity (entrepreneurialism) of all workers, there is no justification 
either for the product or "innovation" (i.e. decision making power) to 
be monopolised by the few.
</p><p>
We must also stress that innovation itself is a form of labour -- mental 
labour. Indeed, many companies have Research and Development groups in 
which workers are paid to generate new and innovative ideas for their 
employers. This means that innovation is not related to property ownership
at all. In most modern industries, as Schumpeter himself acknowledged, 
innovation and technical progress is conducted by <i>"teams of trained 
specialists, who turn out what is required and make it work in predictable 
ways"</i> and so <i>"[b]ureau and committee work tends to replace individual 
action."</i> This meant that <i>"the leading man . . . is becoming just another 
office worker -- and one who is not always difficult to replace."</i> 
[<b>Op. Cit.</b>, p. 133] And we must also point out that many new innovations 
come from individuals who combine mental and physical labour outside of 
capitalist companies. Given this, it is difficult to argue that profits 
are the result of innovation of a few exceptional people rather than by 
workers when the innovations, as well as being worked or produced by 
workers are themselves are created by teams of workers. 
</p><p>
As such, "innovation" and "entrepreneurialism" is not limited to a few 
great people but rather exists in all of us. While the few may currently
monopolise "entrepreneurialism" for their own benefit, an economy does not
need to work this way. Decision making need <b>not</b> be centralised in a few
hands. Ordinary workers can manage their own productive activity, innovate
and make decisions to meet social and individual needs (i.e. practice 
"entrepreneurialism"). This can be seen from various experiments in 
workers' control where increased equality within the workplace actually 
increases productivity and innovation. As these experiments show workers, 
when given the chance, can develop numerous "good ideas" <b>and</b>, equally 
as important, produce them. A capitalist with a "good idea," on the other 
hand, would be powerless to produce it without workers and it is this fact 
that shows that innovation, in and of itself, is not the source of surplus 
value. 
</p><p>
So, contrary to much capitalist apologetics, innovation is not the monopoly
of an elite class of humans. It is part of all of us, although the
necessary social environment needed to nurture and develop it in all
is crushed by the authoritarian workplaces of capitalism and the effects
of inequalities of wealth and power within society as a whole. If
workers were truly incapable of innovation, any shift toward greater
control of production by workers should result in decreased productivity.
What one actually finds, however, is just the opposite: productivity
increased dramatically as ordinary people were given the chance, 
usually denied them, to apply their skills and talents. They show
the kind of ingenuity and creativity people naturally bring to a 
challenging situation -- if they are allowed to, if they are 
participants rather than servants or subordinates.
</p><p>
In fact, there is <i>"a growing body of empirical literature that is 
generally supportive of claims for the economic efficiency of the 
labour-managed firm. Much of this literature focuses on productivity, 
frequently finding it to be positively correlated with increasing 
levels of participation . . . Studies that encompass a range of 
issues broader than the purely economic also tend to support
claims for the efficiency of labour managed and worker-controlled
firms . . . In addition, studies that compare the economic preference
of groups of traditionally and worker-controlled forms point to
the stronger performance of the latter."</i> [Christopher Eaton Gunn, 
<b>Workers' Self-Management in the United States</b>, pp. 42-3] This is
confirmed by David Noble, who points out that <i>"the self-serving claim"</i> 
that <i>"centralised management authority is the key to productivity"</i> is 
<i>"belied by nearly every sociological study of work."</i> [<b>Progress without 
People</b>, p. 65] 
</p><p>
During the Spanish Revolution of 1936-39, workers self-managed many
factories following the principles of participatory democracy.
Productivity and innovation in the Spanish collectives was exceptionally 
high (particularly given the difficult economic and political situation
they faced). As Jose Peirats notes, industry was <i>"transformed from top 
to bottom . . . there were achieved feats pregnant with significance for 
people who had always striven to deny the reality of the wealth of 
popular initiatives unveiled by revolutions."</i> Workers made suggestions 
and presented new inventions, <i>"offering the product of their discoveries,
genius or imaginings."</i> [<b>The CNT in the Spanish Revolution</b>, vol. 2, 
p. 86]
</p><p>
The metal-working industry is a good example. As Augustine 
Souchy observes, at the outbreak of the Civil War, the metal industry 
in Catalonia was <i>"very poorly developed."</i> Yet within months, the 
Catalonian metal workers had rebuilt the industry from scratch, 
converting factories to the production of war materials for the
anti-fascist troops. A few days after the July 19th revolution, the
Hispano-Suiza Automobile Company was already converted to the manufacture
of armoured cars, ambulances, weapons, and munitions for the fighting
front. <i>"Experts were truly astounded,"</i> Souchy writes, <i>"at the expertise
of the workers in building new machinery for the manufacture of arms and
munitions. Very few machines were imported. In a short time, two hundred
different hydraulic presses of up to 250 tons pressure, one hundred
seventy-eight revolving lathes, and hundreds of milling machines and
boring machines were built."</i> [<b>The Anarchist Collectives: Workers'
Self-management in the Spanish Revolution, 1936-1939</b>, Sam Dolgoff (ed.),
p. 96]
</p><p>
Similarly, there was virtually no optical industry in Spain before the
July revolution, only some scattered workshops. After the revolution, the
small workshops were voluntarily converted into a production collective. 
<i>"The greatest innovation,"</i> according to Souchy, <i>"was the construction of a
new factory for optical apparatuses and instruments. The whole operation
was financed by the voluntary contributions of the workers. In a short
time the factory turned out opera glasses, telemeters, binoculars,
surveying instruments, industrial glassware in different colours, and
certain scientific instruments. It also manufactured and repaired optical
equipment for the fighting fronts . . . What private capitalists failed to
do was accomplished by the creative capacity of the members of the Optical
Workers' Union of the CNT."</i> [<b>Op. Cit.</b>, pp. 98-99]
</p><p>
More recently, the positive impact of workers' control has been 
strikingly confirmed in studies of the Mondragon co-operatives in Spain, 
where workers are democratically involved in production decisions and 
encouraged to innovate. As George Bennello notes, <i>"Mondragon productivity 
is very high -- higher than in its capitalist counterparts. Efficiency, 
measured as the ratio of utilised resources -- capital and labour -- 
to output, is far higher than in comparable capitalist factories."</i> 
[<i>"The Challenge of Mondragon"</i>, <b>Reinventing Anarchy, Again</b>, p. 216] 
</p><p>
The example of Lucas Aerospace, during the 1970s indicates well the 
creative potential waiting to be utilised and wasted due to capitalism. 
Faced with massive job cuts and restructuring, the workers and their
Shop Stewards SSCC in 1976 proposed an alternative Corporate Plan to 
Lucas's management. This was the product of two years planning and 
debate among Lucas workers. Everyone from unionised engineers, to 
technicians to production workers and secretaries was involved in 
drawing it up. It was based on detailed information on the machinery 
and equipment that all Lucas sites had, as well as the type of skills 
that were in the company. The workers designed the products themselves, 
using their own experiences of work and life. While its central aim 
was to head off Lucas's planned job cuts, it presented a vision of
a better world by arguing that the concentration on military goods 
and markets was neither the best use of resources nor in itself 
desirable. It argued that if Lucas was to look away from military 
production it could expand into markets for socially useful goods 
(such as medical equipment) where it already had some expertise 
and sales. The management were not interested, it was their to 
"manage"</i> Lucas and to decide where its resources would be used,
including the 18,000 people working there. Management were more 
than happy to exclude the workforce from any say in such fundamental 
matter as implementing the workers' ideas would have shown how 
unnecessary they, the bosses, actually were.
</p><p>
Another example of wasted worker innovation is provided by the
US car industry. In the 1960s, Walter Reuther, president of the 
United Auto Workers (UAW) had proposed to the Johnson Whitehouse 
that the government help the US car companies to produce small 
cars, competing with Volkswagen which had enjoyed phenomenal 
success in the U.S. market. The project, unsurprisingly, fell 
through as the executives of the car companies were uninterested.
In the 1970s, higher petrol prices saw US buyers opt for smaller 
cars and the big US manufacturers were caught unprepared. This 
allowed Toyota, Honda and other Asian car companies to gain a 
crucial foothold in the American market. Unsurprisingly, 
resistance by the union and workforce were blamed for the 
industry's problems when, in fact, it was the bosses, not the 
unions, who were blind to a potential market niche and the 
industry's competitive challenges. 
</p><p>
Therefore, far from being a threat to innovation, workers' self-management
would increase it and, more importantly, direct it towards improving the
quality of life for all as opposed to increasing the profits of the few 
(this aspect an anarchist society will be discussed in more detail in
<a href="secIcon.html">section I</a>). This should be unsurprising, as vesting a minority with 
managerial authority and deciding that the others should be cogs results 
in a massive loss of social initiative and drive. In addition, see sections 
<a href="secJ5.html#secj510">J.5.10</a>, <a href="secJ5.html#secj511">J.5.11</a> 
and <a href="secJ5.html#secj512">J.5.12</a> for more on why anarchists support self-management 
and why, in spite of its higher efficiency and productivity, the capitalist 
market will select against it.
</p><p>
To conclude, capitalist workplace hierarchy actually hinders innovation 
and efficiency rather than fosters it. To defend profits by appealing to 
innovation is, in such circumstances, deeply ironic. Not only does
it end up simply justifying profits in terms of monopoly power (i.e.
hierarchical decision making rewarding itself), that power also 
wastes a huge amount of potential innovation in society -- namely 
the ideas and experience of the workforce excluded from the decision
making process. Given that power produces resistance, capitalism ensures
that the <i>"creative faculties [the workers] are not allowed to exercise 
<b>on behalf</b> of a social order that rejects them (and which they reject) 
are now utilised <b>against</b> that social order"</i> and so <i>"work under 
capitalism"</i> is <i>"a perpetual waste of creative capacity, and a constant 
struggle between the worker and his own activity."</i> [Castoriadis, 
<b>Op. Cit.</b>, p. 93 and p. 94]
</p><p>
Therefore, rather than being a defence of capitalist profit taking (and 
the inequality it generates) innovation backfires against capitalism. 
Innovation flourishes best under freedom and this points towards 
libertarian socialism and workers' self-management. Given the chance,
workers can manage their own work and this results in increased
innovation and productivity, so showing that capitalist monopoly of
decision making power hinders both. This is unsurprising, for only 
equality can maximise liberty and so workers' control (rather than 
capitalist power) is the key to innovation. Only those who confuse 
freedom with the oppression of wage labour would be surprised by this.
</p>

<h2><a name="secc29">C.2.9 Do profits reflect a reward for risk?</a></h2>

<p>
Another common justification of surplus value is that of "risk taking", 
namely the notion that non-labour income is justified because its owners 
took a risk in providing money and deserve a reward for so doing. 
</p><p>
Before discussing why anarchists reject this argument, it must be noted 
that in the mainstream neo-classical model, risk and uncertainty plays 
no role in generating profits. According to general equilibrium theory, 
there is no uncertainty (the present and future are known) and so there 
is no role for risk. As such, the concept of profits being related to 
risk is more realistic than the standard model. However, as we will 
argue, such an argument is unrealistic in many other ways, particularly 
in relation to modern-day corporate capitalism.
</p><p>
It is fair to say that the appeal of risk to explain and justify profits 
lies almost entirely in the example of the small investor who gambles
their savings (for example, by opening a bar) and face a major risk if 
the investment does not succeed. However, in spite of the emotional 
appeal of such examples, anarchists argue that they are hardly typical 
of investment decisions and rewards within capitalism. In fact, such 
examples are used precisely to draw attention away from the way the 
system works rather than provide an insight into it. That is, the 
higher apparent realism of the argument hides an equally unreal model 
of capitalism as the more obviously unrealistic theories which seek 
to rationalise non-labour income.
</p><p>
So does "risk" explain or justify non-labour income? No, anarchists
argue. This is for five reasons. Firstly, the returns on property 
income are utterly independent on the amount of risk involved. 
Secondly, all human acts involve risk of some kind and so why should 
property owners gain exclusively from it? Thirdly, risk as such 
it not rewarded, only <b>successful</b> risks are and what constitutes 
success is dependent on production, i.e. exploiting labour. Fourthly, 
most "risk" related non-labour income today plays <b>no</b> part in aiding 
production and, indeed, is simply not that risky due to state intervention. 
Fifthly, risk in this context is not independent of owning capital 
and, consequently, the arguments against "waiting" and innovation 
apply equally to this rationale. In other words, "risk" is simply 
yet another excuse to reward the rich for being wealthy.
</p><p>
The first objection is the most obvious. It is a joke to suggest that 
capitalism rewards in proportion to risk. There is little or no relationship
between income and the risk that person faces. Indeed, it would be fairer 
to say that return is <b>inversely</b> proportional to the amount of risk a
person faces. The most obvious example is that of a worker who wants to 
be their own boss and sets up their own business. That is a genuine risk, 
as they are risking their savings and are willing to go into debt. Compare 
this to a billionaire investor with millions of shares in hundreds of 
companies. While the former struggles to make a living, the latter gets 
a large regular flow of income without raising a finger. In terms of 
risk, the investor is wealthy enough to have spread their money so 
far that, in practical terms, there is none. Who has the larger income?
</p><p>
As such, the risk people face is dependent on their existing wealth and so 
it is impossible to determine any relationship between it and the
income it is claimed to generate. Given that risk is inherently subjective, 
there is no way of discovering its laws of operation except by begging the 
question and using the actual rate of profits to measure the cost of 
risk-bearing. 
</p><p>
The second objection is equally as obvious. The suggestion that risk 
taking is the source and justification for profits ignores the fact that 
virtually all human activity involves risk. To claim that capitalists 
should be paid for the risks associated with investment is to implicitly 
state that money is more valuable that human life. After all, workers 
risk their health and often their lives in work and often the most 
dangerous workplaces are those associated with the lowest pay. Moreover, 
providing safe working conditions can eat into profits and by cutting 
health and safety costs, profits can rise. This means that to reward 
capitalist "risk", the risk workers face may actually increase. In 
the inverted world of capitalist ethics, it is usually cheaper (or 
more "efficient") to replace an individual worker than a capital 
investment. Unlike investors, bosses and the corporate elite, workers 
<b>do</b> face risk to life or limb daily as part of their work. Life is
risky and no life is more risky that that of a worker who may be 
ruined by the "risky" decisions of management, capitalists and 
investors seeking to make their next million. While it is possible 
to diversify the risk in holding a stock portfolio that is not possible 
with a job. A job cannot be spread across a wide array of companies 
diversifying risk. 
</p><p>
In other words, workers face much greater risks than their employers 
and, moreover, they have no say in what risks will be taken with their 
lives and livelihoods. It is workers who pay the lion's share of the 
costs of failure, not management and stockholders. When firms are in 
difficulty, it is the workers who are asked to pay for the failures 
of management though pay cuts and the elimination of health and other 
benefits. Management rarely get pay cuts, indeed they often get bonuses 
and "incentive" schemes to get them to do the work they were (over) 
paid to do in the first. When a corporate manager makes a mistake
and their business actually fails, his workers will suffer far 
more serious consequences than him. In most cases, the manager will
still live comfortably (indeed, many will receive extremely generous
severance packages) while workers will face the fear, insecurity and
hardship of having to find a new job. Indeed, as we argued in 
<a href="secC2.html#secc21">section
C.2.1</a>, it is the risk of unemployment that is a key factor in ensuring
the exploitation of labour in the first place. 
</p><p>
As production is inherently collective under capitalism, so must be the
risk. As Proudhon put it, it may be argued that the capitalist <i>"alone
runs the risk of the enterprise"</i> but this ignores the fact that 
capitalist cannot <i>"alone work a mine or run a railroad"</i> nor <i>"alone
carry on a factory, sail a ship, play a tragedy, build the Pantheon."</i>
He asked: <i>"Can anybody do such things as these, even if he has all
the capital necessary?"</i> And so <i>"association"</i> becomes <i>"absolutely 
necessary and right"</i> as the <i>"work to be accomplished"</i> is <i>"the common
and undivided property of all those who take part therein."</i> If not,
shareholders would <i>"plunder the bodies and souls of the wage-workers"</i>
and it would be <i>"an outrage upon human dignity and personality."</i>
[<b>The General Idea of the Revolution</b>, p. 219] In other words, as
production is collective, so is the risk faced and, consequently,
risk cannot be used to justify excluding people from controlling 
their own working lives or the fruit of their labour.
</p><p>
This brings us to the third reason, namely how "risk" contributes
to production. The idea that "risk" is a contribution to production 
is equally flawed. Obviously, no one argues that <b>failed</b> investments 
should result in investors being rewarded for the risks they took. 
This means that <b>successful</b> risks are what counts and this means 
that the company has produced a desired good or service. In other 
words, the argument for risk is dependent on the investor providing 
capital which the workers of the company used productivity to create 
a commodity. However, as we discussed in <a href="secC2.html#secc24">section C.2.4</a> capital is 
<b>not</b> productive and, as a result, an investor may expect the return 
of their initial investment but no more. At best, the investor has 
allowed others to use their money but, as 
<a href="secC2.html#secc23">section C.2.3</a> indicated, 
giving permission to use something is not a productive act.
</p><p>
However, there is another sense in which risk does not, in general,
contribute to production within capitalism, namely finance markets.
This bring us to our fourth objection, namely that most kinds of 
"risks"</i> within capitalism do <b>not</b> contribute to production and,
thanks to state aid, not that risky.
</p><p>
Looking at the typical "risk" associated with capitalism, namely 
putting money into the stock market and buying shares, the idea that
"risk"</i> contributes to production is seriously flawed. As David
Schweickart points out, <i>"[i]n the vast majority of cases, when you
buy stock, you give your money not to the company but to another
private individual. You buy your share of stock from someone who is
cashing in his share. Not a nickel of your money goes to the company
itself. The company's profits would have been exactly the same, with
or without your stock purchase."</i> [<b>After Capitalism</b>, p. 37] In fact
between 1952 and 1997, about 92% of investment was paid for by firms' 
own internal funds and so <i>"the stock market contributes virtually 
nothing to the financing of outside investment."</i> Even new stock 
offerings only accounted for 4% of non-financial corporations 
capital expenditures. [Doug Henwood, <b>Wall Street</b>, p. 72] <i>"In 
spite of the stock market's large symbolic value, it is notorious 
that it has relatively little to do with the production of goods 
and services,"</i> notes David Ellerman, <i>"The overwhelming bulk of stock 
transactions are in second-hand shares so the capital paid for shares 
usually goes to other stock traders, not to productive enterprises 
issuing new shares."</i> [<b>The Democratic worker-owned firm</b>, p. 199]
</p><p>
In other words, most investment is simply the "risk" associated
with buying a potential income stream in an uncertain world. The
buyer's action has not contributed to producing that income stream
in any way whatsoever yet it results in a claim on the labour of
others. At best, it could be said that a previous owner of the 
shares at some time in the past has <i>"contributed"</i> to production 
by providing money but this does not justify non-labour income. 
As such, investing in shares may rearrange existing wealth (often 
to the great advantage of the rearrangers) but it does produce 
anything. New wealth flows from production, the use of labour on 
existing wealth to create new wealth. 
</p><p>
Ironically, the stock market (and the risk it is based on) harms 
this process. The notion that dividends represent the return for 
"risk" may be faulted by looking at how the markets operate in reality,
rather than in theory. Stock markets react to recent movements in the
price of stock markets, causing price movements to build upon price
movements. According to academic finance economist Bob Haugen, this
results in finance markets having endogenous instability, with 
such price-driven volatility accounting for over three-quarters of
all volatility in finance markets. This leads to the market directing
investments very badly as some investment is wasted in over-valued
companies and under-valued firms cannot get finance to produce 
useful goods. The market's endogenous volatility reduces the overall
level of investment as investors will only fund projects which return
a sufficiently high level of return. This results in a serious drag
on economic growth. As such, "risk" has a large and negative impact 
on the real economy and it seems ironic to reward such behaviour. 
Particularly as the high rate of return is meant to compensate for 
the risk of investing in the stock market, but in fact most of this 
risk results from the endogenous stability of the market itself. 
[Steve Keen, <b>Debunking Economics</b>, pp. 249-50]
</p><p>
Appeals to "risk" to justify capitalism are somewhat ironic, given
the dominant organisational form within capitalism -- the corporation.
These firms are based on <i>"limited liability"</i> which was designed explicitly
to reduce the risk faced by investors. As Joel Bakan notes, before this
"no matter how much, or how little, a person had invested in a company,
he or she was <b>personally</b> liable, without limit, for the company's debts.
Investors' homes, savings, and other personal assess would be exposed to
claims by creditors if a company failed, meaning that a person risked
finance ruin simply by owning shares in a company. Stockholding could 
not becomes a truly attractive option . . . until that risk was removed,
which it soon was. By the middle of the nineteenth century, business
leaders and politicians broadly advocated changing the law to limit
the liability of shareholders to the amounts they had invested in a
company. If a person bought $100 worth of shares, they reasoned, he or
she should be immune to liability for anything beyond that, regardless
of what happened to the company."</i> Limited liability's <i>"sole purpose
. . . is to shield them from legal responsibility for corporations'
actions"</i> as well as reducing the risks of investing (unlike for small
businesses). [<b>The Corporation</b>, p. 11 and p. 79] 
</p><p>
This means that stock holders (investors) in a corporation hold 
no liability for the corporation's debts and obligations. As a 
result of this state granted privilege, potential losses cannot 
exceed the amount which they paid for their shares. The rationale 
used to justify this is the argument that without limited liability, 
a creditor would not likely allow any share to be sold to a buyer 
of at least equivalent creditworthiness as the seller. This means 
that limited liability allows corporations to raise funds for 
riskier enterprises by reducing risks and costs from the owners and 
shifting them onto other members of society (i.e. an externality). 
It is, in effect, a state granted privilege to trade with a limited
chance of loss but with an unlimited chance of gain.
</p><p>
This is an interesting double-standard. It suggests that corporations 
are not, in fact, owned by shareholders at all since they take on none 
of the responsibility of ownership, especially the responsibility to 
pay back debts. Why should they have the privilege of getting profit 
during good times when they take none of the responsibility during 
bad times? Corporations are creatures of government, created with the 
social privileges of limited financial liability of shareholders. 
Since their debts are ultimately public, why should their profits
be private?
</p><p>
Needless to say, this reducing of risk is not limited to within a
state, it is applied internationally as well. Big banks and corporations
lend money to developing nations but <i>"the people who borrowed the 
money [i.e. the local elite] aren't held responsible for it. It's 
the people . . . who have to pay [the debts] off . . . The lenders
are protected from risk. That's one of the main functions of the
IMF, to provide risk free insurance to people who lend and invest
in risky loans. They earn high yields because there's a lot of risk,
but they don't have to take the risk, because it's socialised. It's
transferred in various ways to Northern taxpayers through the IMP and
other devices . . . The whole system is one in which the borrowers are
released from the responsibility. That's transferred to the impoverished
mass of the population in their own countries. And the lenders are
protected from risk."</i> [Noam Chomsky, <b>Propaganda and the Public Mind</b>,
p. 125]
</p><p>
Capitalism, ironically enough, has developed precisely by externalising 
risk and placing the burden onto other parties -- suppliers, creditors, 
workers and, ultimately, society as a whole. <i>"Costs and risks are
socialised,"</i> in other words, <i>"and the profit is privatised."</i> [Noam 
Chomsky, <b>Op. Cit.</b>, p. 185] To then turn round and justify corporate 
profits in terms of risk seems to be hypocritical in the extreme, 
particularly by appealing to examples of small business people 
whom usually face the burdens caused by corporate externalising of 
risk! Doug Henwood states the obvious when he writes shareholder 
<i>"liabilities are limited by definition to what they paid for the 
shares"</i> and <i>"they can always sell their shares in a troubled firm, 
and if they have diversified portfolios, they can handle an occasional 
wipe-out with hardly a stumble. Employees, and often customers and 
suppliers, are rarely so well-insulated."</i> Given that the <i>"signals 
emitted by the stock market are either irrelevant or harmful to real 
economic activity, and that the stock market itself counts for little 
or nothing as a source of finance"</i> and the argument for risk as a 
defence of profits is extremely weak. [<b>Op. Cit.</b>, p. 293 and p. 292]
</p><p>
Lastly, the risk theory of profit fails to take into account the 
different risk-taking abilities of that derive from the unequal 
distribution of society's wealth. As James Meade puts it, while 
<i>"property owners can spread their risks by putting small bits of 
their property into a large number of concerns, a worker cannot 
easily put small bits of his effort into a large number of 
different jobs. This presumably is the main reason we find 
risk-bearing capital hiring labour"</i> and not vice versa. [quoted 
by David Schweickart, <b>Against Capitalism</b>, pp. 129-130] 
</p><p>
It should be noted that until the early nineteenth century, 
self-employment was the normal state of affairs and it has declined
steadily to reach, at best, around 10% of the working population
in Western countries today. It would be inaccurate, to say the
least, to explain this decline in terms of increased unwillingness
to face potential risks on the part of working people. Rather, it
is a product of increased costs to set up and run businesses which
acts as a very effect <b>natural</b> barrier to competition (see 
<a href="secC4.html">section C.4</a>). With limited resources available, most working people
simply <b>cannot</b> face the risk as they do not have sufficient funds
in the first place and, moreover, if such funds are found the 
market is hardly a level playing field.
</p><p>
This means that going into business for yourself is always a 
possibility, but that option is very difficult without sufficient 
assets. Moreover, even if sufficient funds are found (either by 
savings or a loan), the risk is extremely high due to the inability 
to diversify investments and the constant possibility that larger
firms will set-up shop in your area (for example, Wal-Mart driving
out small businesses or chain pubs, cafes and bars destroying local
family businesses).  So it is true that there is a small flow of 
workers into self-employment (sometimes called the petit bourgeoisie)
and that, of these, a small amount become full-scale capitalists.
However, these are the exceptions that prove the rule -- there is
a greater return into wage slavery as enterprises fail. 
</p><p>
Simply put, the distribution of wealth (and so ability to take risks)
is so skewed that such possibilities are small and, in spite being 
highly risky, do not provide sufficient returns to make most of them 
a success. That many people <b>do</b> risk their savings and put themselves 
through stress, insecurity and hardship in this way is, ironically, 
hardly a defence of capitalism as it suggests that wage labour is so 
bad that many people will chance everything to escape it. Sadly, this 
natural desire to be your own boss generally becomes, if successful, 
being someone else's boss! Which means, in almost all cases, it shows 
that to become rich you need to exploit other people's labour.
</p><p>
So, as with "waiting" (see <a href="secC2.html#secc27">section C.2.7</a>), taking a risk is much 
easier if you are wealthy and so risk is simply another means for
rewarding the wealthy for being wealthy. In other words, risk
aversion is the dependent, not the independent, factor. The 
distribution of wealth determines the risks people willing to
face and so cannot explain or justify that wealth. Rather than 
individual evaluations determining "risk", these evaluations will 
be dependent on the class position of the individuals involved. 
As Schweickart notes, <i>"large numbers of people simply do not have
any discretionary funds to invest. They can't play at all . . . 
among those who can play, some are better situated than others.
Wealth gives access to information, expert advice, and opportunities
for diversification that the small investor often lacks."</i> [<b>After
Capitalism</b>, p. 34] As such, profits do not reflect the real 
cost of risk but rather the scarcity of people with anything to
risk (i.e. inequality of wealth).
</p><p>
Similarly, given that the capitalists (or their hired managers)
have a monopoly of decision making power within a firm, any 
risks made by a company reflects that hierarchy. As such, risk
and the ability to take risks are monopolised in a few hands.
If profit <b>is</b> the product of risk then, ultimately, it is the
product of a hierarchical company structure and, consequently,
capitalists are simply rewarding themselves because they have
power within the workplace. As with "innovation" and 
"entrepreneurialism" (see <a href="secC2.html#secc28">section C.2.8</a>), 
this rationale for 
surplus value depends on ignoring how the workplace is structured. 
In other words, because managers monopolise decision making 
("risk") they also monopolise the surplus value produced by 
workers. However, the former in no way justifies this 
appropriation nor does it create it.
</p><p>
As risk is not an independent factor and so cannot be the source of 
profit. Indeed other activities can involve far more risk and be 
rewarded less. Needless to say, the most serious consequences of 
"risk" are usually suffered by working people who can lose their 
jobs, health and even lives all depending on how the risks of the 
wealthy turn out in an uncertain world. As such, it is one thing 
to gamble your own income on a risky decision but quite another 
when that decision can ruin the lives of others. If quoting Keynes 
is not too out of place: <i>"Speculators may do no harm as bubbles on a
steady stream of enterprise. But the position is serious when
enterprise becomes the bubble on a whirlpool of speculation. When
the capital development of a country becomes a by-product of the
activities of a casino, the job is likely to be ill-done."</i> 
[<b>The General Theory of Employment, Interest and Money</b>, p. 159]
</p><p>
Appeals of risk to justify capitalism simply exposes that system 
as little more than a massive casino. In order for such a system 
to be fair, the participants must have approximately equal chances of 
winning. However, with massive inequality the wealthy face little chance 
of loosing. For example, if a millionaire and a pauper both repeatedly 
bet a pound on the outcome of a coin toss, the millionaire will always 
win as the pauper has so little reserve money that even a minor run of 
bad luck will bankrupt him. 
</p><p>
Ultimately, <i>"the capitalist investment game (as a whole and usually 
in its various parts) is positive sum. In most years more money is 
made in the financial markets than is lost. How is this possible? 
It is possible only because those who engage in real productive 
activity receive less than that to which they would be entitled 
were they fully compensated for what they produce. The reward, 
allegedly for risk, derives from this discrepancy."</i> [David
Schweickart, <b>Op. Cit.</b>, p. 38] In other words, people would not 
risk their money unless they could make a profit and the willingness
to risk is dependent on current and expected profit levels and so
cannot explain them. To focus on risk simply obscures the influence 
that property has upon the ability to enter a given industry (i.e. 
to take a risk in the first place) and so distracts attention away 
from the essential aspects of how profits are actually generated 
(i.e. away from production and its hierarchical organisation under 
capitalism). 
</p><p>
So risk does not explain how surplus value is generated nor is its origin. 
Moreover, as the risk people face and the return they get is dependent on 
the wealth they have, it cannot be used to justify this distribution. Quite 
the opposite, as return and risk are usually inversely related. If risk 
was the source of surplus value or justified it, the riskiest investment 
and poorest investor would receive the highest returns and this is not 
the case. In summary, the "risk" defence of capitalism does not convince.
</p> 

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