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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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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]
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<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>
<blockquote><p><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]
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<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."</b></i> 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:</p>
<blockquote><p> <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]
</p></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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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.<br>
</i></p>
<p><i>"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]</p>
</blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<p>In other words, granting permission cannot be considered as a "contribution" or a "productive" act:</p>
<blockquote><p><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]
</p></blockquote>
<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" 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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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.<br>
</i></p>
<p><i>"'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]</p>
</blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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 . . ."<br>
</i></p>
<p><i>"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]</p>
</blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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.<br>
</i></p>
<p><i>"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]</p>
</blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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.<br>
</i></p>
<p><i>"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]</p>
</blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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.'<br>
</i></p>
<p><i>"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]</p>
</blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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.<br>
</i></p>
<p><i>"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>]</p>
</blockquote>
<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 Böhm-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>
<blockquote><p><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. . .<br>
</i></p>
<p><i>"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]</p>
</blockquote>
<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 Böhm-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>
<blockquote><p><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]
</p></blockquote>
<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" 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>
<blockquote><p><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>
</p></blockquote>
<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>
<blockquote><p><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 Böhm-Bawerk, <b>Capital and Interest</b>, p. 277]
</p></blockquote>
<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" 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> [Böhm-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>
<blockquote><p><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.<br>
</i></p>
<p><i>"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]</p>
</blockquote>
<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>
<blockquote><p><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 . . .<br>
</i></p>
<p><i>"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]</p>
</blockquote>
<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 Böhm-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), Böhm-Bawerk argued that profits could only by explained by means of time preference:</p>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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 Böhm-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>Böhm-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 Böhm-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. Böhm-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, Böhm-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 Böhm-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>
<blockquote><p><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]
</p></blockquote>
<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 Böhm-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" 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>
<blockquote><p><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]
</p></blockquote>
<p>If, as Chomsky stresses, the capitalist firm is organised in a fascist way, the "entrepreneurial" defence of profits is its ideology, its <b>"Führerprinzip"</b> (the German for <i>"leader principle"</i>). This ideology sees each organisation as a hierarchy of leaders, where every leader (Führer, 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>
<blockquote><p><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]
</p></blockquote>
<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>
<blockquote><p><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]
</p></blockquote>
<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" 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>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" 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" 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." 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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