My Blog List

Friday, January 29, 2016

The Trouble with Capitalism

http://web.stanford.edu/~chadj/piketty.pdf

The trouble with capitalism is that it tends to lump together "capital" with rental opportunities and create an aristocracy of wealth and power that has the ability to take the first cut on production and starve labor. This can't be good for anyone. Not all capital is the same, and when capitalists are disinvesting from actual production that increases inequality and eventually collapses the economy.

  1. All Capital is not equal
  2. Much of what is labeled capital is not "actual capital" but rental wealth.
  3. Much capital results from converting public goods to club goods.
  4. Or from converting common goods to private goods.
  5. Who owns and controls capital matters.

You can't cure the patient without a valid diagnosis

At the heart of reforming anything is the diagnosis. A good doctor takes a history, observes the symptoms, makes a diagnosis and then can treat the patient. He can tell if the patient has something serious or something minor. Often a good doctor will take a swab of whatever is infected to find out what is causing the infection before prescribing a treatment. Many usually take a guess. Bad doctors prescribe the same, often wrong medicine, for every symptom. Our mainstream Economists are mostly bad doctors. Their prescriptions are killing us.

The Symptoms

There are literally billions of poor people, supporting a narrow class of well off people, and an even narrower class of super-wealthy. When countries or areas try to improve things, the good doctors from the establishment come in and recommend that public goods be privatized, taxes get replaced by user fees, labor taxes and fees go up -- and of course the fees and taxes on the "Investor class" be reduced. This naturally attracts privateering investors who do indeed invest in the local economy. This produces a brief period of prosperity as workers borrow money to survive, a middle class briefly appears and borrows even more money and the pirates make sure that local officials get their palms greased -- in the form of loans to the country where the people live. The wealthy are happy to loan money because our system guarantees their investments and they usually are loaning "other people's money" anyway. It's usually the proceeds from money collected from sales of goods produced in their home country. Indeed they often are investing in hiring people at lower wages than they were making in their home country. The term for this is disinvestment and offshoring, but it's "their money" -- collected because they usually own the businesses and capital which are used to make that money in the first place. The "capitalists" are looking for people who will work for lower wages than they are paying back home. They find those places and send the capital to where it will produce more income with less labor expense.

This continues until folks can't borrow money anymore -- at which point the system collapses. Unemployed Laborers lose their homes. Unemployed people can't buy the goods made in the factories. Their home country is no longer wealthy enough to buy the goods that the "capitalist" used to make in his home country from the one their investing in. The Middle class disappears. But because both systems are rigged. This just makes the wealthy wealthier by comparison. They can buy property on the cheap and people either find a way to pay the rents or live on the street.

Bad Capital

Thus the world is sick with eternal wars, famine, environmental abuse, etc.... all related to poor stewardship of wealth and resources. And if you ask any mainstream economist since the 80's, they'll tell you that the cause is "government." So their answer is to give power to private persons over resources on the theory that folks pursuing their self interest will magically address the needs of the poor. Meanwhile the folks they dispossess become poor, are set to fighting one another, and resources get wasted because they are in the hands of folks disinterested in the public good. When we are lucky some of these folks have bad consciences and donate to charities some of the money they looted from their workers or from having monopoly or "club good" power. But overall the result is just FUBAR.

The problem is that not all capital is actual capital. And capital in the wrong hands is "bad capital."

A factory that produces automobiles is producing a private good that can be sold to people who can afford it.

and at the heart of all this is economics. I've been looking at various economists for ideas on this. Neo-Classicist, neo-liberals, and other "Free Market" types can't even get the symptoms right, much less provide much of a diagnosis. So I've been looking at the "Post Keynesians;" Krugman, Stiglitz, Reich, and Piketty.

I read Picketty's "Capital" initially to verify some things I was reading in Stiglitz' book "Rewriting the rules!" (and my previous post My Post).

Getting the Symptoms Right

But then I broke my leg and couldn't take it back, so I renewed it. I kept finding things I wanted to double check and went back to it, so I wound up renewing it again. As a result I've spent the past few months chewing on it like a bone. Piketty describes the Symptoms right! And if you combine his findings with the work of others you start to get the diagnosis right! He shows that the power of financial wealth to command returns tends to exceed the power of the economy to grow (r > g) and that feeds into inequality. We have a system that redistributes wealth up pyramids.

Not all Capital is Equal

Piketty's book accepts the "conventional" version of what Capitalism is -- as all wealth other than labor. Capital is wealth that is used to make more wealth. But not all means of creating more wealth are equal. Much wealth comes from "ownership" (possession) of natural resources, from the ability to rent capital to others or the ability to control vital properties. As I explained in a post Capital versus unearned Wealth not all forms of capital are the same. There are "good" forms of Capital and "bad" forms of capital. The difference isn't arbitrary. Henry George considered "[that] part of wealth—that [is] devoted to aid production" and Capital is "wealth in the course of exchange" -- what I call Actual Capital" to be "Good Capital." Another term for "good capital" is wealth that is used to sustain and increase the societies goods -- actual industry and production.

Bad Capital

Those are bad enough. But there are even worse kinds of "capital." All those are sources of rent seeking and oppression for those who are forced to pay rents on borrowed money, a living or workplace, or other resources in order to survive.

Converting Public Goods to Club Goods:

"Club goods (are artificially scarce goods) are a type of good in economics, sometimes classified as a subtype of public goods that are excludable but non-rivalrous, at least until reaching a point where congestion occurs. These goods are often provided by a natural monopoly."

Or a Golf-course.

"Club goods are excludable but non-rival." A Golf course is a club good. It’s excludable, because you have to have a membership; it’s nonrival, though, because up to a certain point it doesn’t matter how many people are members -- as long as they can afford the fees. It would take a whole bunch of people to cause congestion, and the owners of country clubs make sure that that never occurs

The goal of privateers is to take vital public goods and turn them into club goods. That is take goods that are "nonrival and nonexcludable" and make them excludable. A public police force protects an entire society. A private security force protects the golf course only. When a public good is converted to a club good, the new owners can exclude people from using it -- and collect revenues/rents on it. A railroad is also a "club good" when run by a monopolist. It is a vital good for those who live near it -- which makes the power to exclude a power of life and death.

Not everyone needs to join a golf course. But everyone needs access to fresh air, water, food and other vital resources. And the creation of club goods ignores a third attribute that makes a difference between what can be a legitimate market and what can't be; Is the good a vital good for survival? Is it necessary for livelihood? The owner of a Golf course can make a pretty penny. The owner of a water supply can make a lot of money -- or kill people (as is happening in Flint Michigan).

Converting Common Goods to Private or club Goods

Everyone has heard of the "tragedy of the commons". Clearcutting forests or mountain-top removal are classic examples of taking goods that are "Common goods" which are "rival, but non-excludable" and converting them to an exclusive economic property that is both rival and excludable. In the early modern period aristocrats took the rights and privileges that they'd acquired for governing the countryside and turned them into private property. The "tragedy of the commons" is a matter of good versus bad government, self limits versus reckless rapacious greed. And "Bad Capitalists" seize on commons as a short term gold-mine -- leaving mercury and heavy metals behind and downstream in the process.

Of course the assertion that common goods are "rival but non-excludable" is an exaggeration. A well managed commons can produce sufficient food to feed all those having access to it -- if the rulers don't take everything!. The sustainability movement is about managing commons so that they aren't depleted. Indeed the difference between a club good and a commons is in the way it is managed and for whom. When a vital common good is turned into a private good, it may seem like a club good to the members of the club. But for those locked outside such "private, separate advantage" becomes an issue of oppression -- and tyranny!

In both cases the issue is not business, but government. Running a mine or a sawmill is government. The "employer" can pay people what he wills because of the power of owning the club. The operation becomes a 'club good' while the common goods are extracted. Capitalists like these kinds of "bad capital" because the risks of loss are lower. When people can extract rents from vital goods, they can oppress others. When they can oppress, they often do.

Actual Capital is Good Capital

Actual capital was defined best by Henry George (see Disambiguating Capital from Simple Wealth Post and from "Wealth and Progress Chapter 2":

"Capital is ... [that] part of wealth—that [is] devoted to aid production." and "wealth in the course of exchange."

But that definition excludes what George calls "spurious capital" and the sorts of derivatives, "promises to pay" and other "pseudo-wealth" instruments that most capitalist call capital and that cause so much mischief in the economy -- and whose whole purpose is to transfer to or protect the "ordinary" wealth of the pirates who create them. Not all capital is equal. And wealth that isn't actual capital is not aiding production or improving human life -- but it does generate revenues for the capitalists.

Unearned Rents And Bad Capital

When people own properties and rent them out, that is a good thing, within limits. When we save for our retirement, that retirement fund becomes a fund of capital that is loaned by the fiduciary to businesses so they can make capital investments or do business. That is good. When we are old and get a living from such income, that is also good. It's not really "unearned income" until it is more than what we need to live on as human beings. The "old middle class" before labor could aspire to call themselves that used to have to acquire properties worth about 30 times the average persons labor income in a year, just to guarantee themselves enough income so they wouldn't have to hire themselves out as labor. In a relatively equitable society labor supports the old, the infirm, the weak, and uses wealth to allow some folks to exercise "superintendence" or other vital functions.

Rental Opportunities and the emancipation of "duty"

In Feudal times rental properties were the properties of the nobility, who were expected to protect and govern the country and the people living on "their" property. In the modern age, they were emancipated from such duties, with the result that there was a rise of a "capitalist" aristocracy that is dependent on such rents, but has no duties or "noblesse oblige". Just sometimes tax breaks for throwing some pennies at their victims. Privilege has to be earned or it is unearned wealth and income. If a person is doing their duties then they are earning their wealth and status. When they are not, it is unearned wealth and they should pay a high duty for the privilege of holding it -- unless they put it to actual productive uses. Then it is actual capital.

Thus "bad capital" is simply capital in the hands of people who aren't using it justly, fairly, or appropriately. When wealth is misallocated it no longer benefits society as a whole but becomes a source of "private, separate benefit" -- and a source of tyranny for those not in the club. Taxation policy can help rectify that situation. But in the meantime many of these people are acting like pirates.

We aren't going to eliminate rent seeking. It is a natural function of humans to seek safe niches and to want to get paid. So it is natural to accumulate property and rent it to others. Prohibition worked with capitalism about as well as it did for alcohol. The communist countries that did away with "capitalism" never really dealt away with it and failed while trying to do so.

At the same time inequality doesn't have to rise at exponential rates, and unbounded greed doesn't have to be the order of the day. We don't need billionaires. And we don't need concentrated power. Those things aren't good for society and inequality and misallocation breeds poverty and conflict. So we need to tax unearned wealth, and especially tax inherited wealth.

Final note -- Capital investment Costs

Now the thing about actual capital is that actual production is like owning a boat. Indeed the first major capital investments were ships. You have to continuously pour resources into them to keep them afloat. Same with capital goods -- they either are directly consumed or they are worn or destroyed in the process of producing other goods. Moreover, "r" as defined by piketty can be some arbitrary and traditional rate like 5% that ignores actual production. If a person can't pay their rent the landlord evicts them. If they make enough production to pay the rent, the landlord takes it and raises rents to try to get even more of the renter's production.

Actual Capital Tracks Actual Production

Actual capital tends to be fixed to actual production (mostly). So actual growth and actual capital tend to track. Which is another reason why we have to make the distinction between rental property and capital firmer. It is easier to pour money into rental opportunities if you don't have to maintain them.

The trouble with capitalism arises as with all human systems from the behavior of capitalists. There is no system that is perfect. That doesn't mean we can enforce principles of justice, equity and paying for privilege.

Further reading:
http://www.amazon.com/Capital-Twenty-First-Century-Thomas-Piketty/dp/1491534656
"Rewriting the rules." [http://rooseveltinstitute.org/rewrite-rules/]
Related Posts:
Piketty, Capital versus unearned Wealth
http://holtesthoughts.blogspot.com/2015/10/disambiguating-capital-from-simple.html
Rewrite the Rules!
http://thebadeconomist.com/tag/club-good/
Henry George's definition http://www.henrygeorge.org/pchp2.htm
(critic)http://web.stanford.edu/~chadj/piketty.pdf
OxFam Article: "The Conversation;" Was there ever a time when so few people controlled so much wealth?
https://theconversation.com/was-there-ever-a-time-when-so-few-people-controlled-so-much-wealth-53350
Actual Oxfam Report:http://policy-practice.oxfam.org.uk/publications/an-economy-for-the-1-how-privilege-and-power-in-the-economy-drive-extreme-inequ-592643

2 comments:

  1. From some comments on facebook:
    I'm referring to economic rent. And I'm defining it based on common meaning as well as jargon meaning. For example interest is rent on the loaning of money. Anything that can be owned (figuratively or literally) can be a source for rents.
    Like · Reply · 1 · 1 hr
    Christopher Hartly Holte
    Christopher Hartly Holte I'm also referring to the fact that the wealthy prefer to refer to themselves as "capitalists" rather than landlords, rentiers, and to claim they are "entrepreneurs" or "job creators" when they are renting their surplus wealth. Piketty's book "capital" lumps all forms of wealth other than labor into the word "capital" because it makes the numbers easier. Your economics books tend to try to parse the meaning into what I'm calling "actual capital" - but they also tend to add in terms like "financial capital", 'human capital', etc... that only confuse the terms. "Human capital" implies the ownership of human beings.
    Like · Reply · 2 · 1 hr
    Christopher Hartly Holte
    Christopher Hartly Holte So, while the wikipedia folks would define "economic rent" as the amount greater than the amount needed to put a factor of production into production; economic rent in fact is pretty much any payment that people must make to use assets belonging to someone else.
    Like · Reply · 1 · 1 hr
    Christopher Hartly Holte
    Christopher Hartly Holte The parsing in the wikipedia article is made to make it look like some of that "rent" isn't rent. That may be appropriate for tax purposes -- as we have to distinguish between wealth used for valuable purposes versus wealth used simply to provide a living without having to work. [Unearned income]
    Like · Reply · 1 · 1 hr · Edited
    Christopher Hartly Holte
    Christopher Hartly Holte As you can tell I'm not impressed by the newspeak. I'll go with what ordinary people would call rent.
    Like · Reply · 1 · 1 hr
    Christopher Hartly Holte
    Christopher Hartly Holte Also I'm not trying to oversimplify. People are trying to survive. They use whatever strategy will help them survive, thrive and pass on wealth to their children. Rent seeking is as natural as breathing. How one does it and whether one is allowed to ac...See More
    Like · Reply · 1 · 1 hr
    Christopher Hartly Holte
    Christopher Hartly Holte So I'm rejecting (though still acknowledging) the dictionary as written by neo-classic/neo-liberal and libertarian economists.
    Like · Reply · 2 · 1 hr
    Christopher Hartly Holte
    Christopher Hartly Holte That's why the article talks of "good capital" and "bad capital" -- though the difference is mostly in how money and resources are allocated not the resources themselves.
    Like · Reply · 1 · 1 hr
    Christopher Hartly Holte
    Christopher Hartly Holte Now the thing about actual capital is that actual production is like owning a boat. Indeed the first major capital investments were ships. You have to continuously pour resources into them to keep them afloat. Same with capital goods -- they either are directly consumed or they are worn or destroyed in the process of producing other goods. Moreover, "r" as defined by piketty can be some arbitrary and traditional rate like 5% that ignores actual production. If a person can't pay their rent the landlord evicts them. If they make enough production to pay the rent, the landlord takes it and raises rents to try to get even more of the renter's production. Actual capital tends to be fixed to actual production. So actual growth and actual capital tend to track. Which is another reason why we have to make the distinction between rental property and capital firmer.

    ReplyDelete
  2. And:
    I'm not neutral on Georgism. I love Henry George and his ideas. When I talk about "Actual Capital" I'm using his definition of Capital. When I criticize rent seeking i'm using his language from Progress and Poverty. When I talk about labor being stiffed I'm drawing on the same arguments his movement used early on to ask for a tax on unearned income from rents. I believe most modern Georgists ignore him.
    Like · Reply · 21 mins
    Christopher Hartly Holte
    Christopher Hartly Holte If by dumping misleading jargon I'm doing a "layman's explanation" great!
    Like · Reply · 20 mins
    Christopher Hartly Holte
    Christopher Hartly Holte That being said I'm a Post Keynesianist and not looking to be bound by any dead philosophers but rather by their still living ideas.
    Like · Reply · 18 mins
    Christopher Hartly Holte
    Christopher Hartly Holte I don't define labor unions as economic rent. I see them as local democracy.
    Like · Reply · 17 mins
    Christopher Hartly Holte
    Christopher Hartly Holte When someone owns a part of the commons they try to turn it into a club good. But since the commons are "rivalrous" they become private goods and the owners usually stiff the people they are now ruling to process and access the goods belonging to the commons. Workplace democracy means that if you want to own and govern a vital good, then you need to be forced to do so with the consent of the governed.
    Like · Reply · 14 mins

    ReplyDelete