Wealth centralization in a free-market?

Economics Economics Questions
75

I give you permission to adjust the scenario. So that we have two categories ; consumer and capital goods, itll hold up fine.

No, it’s not about consumer goods vs. capital goods (by which I assume you mean the means of production). It’s about goods vs. the commodity of labor-power. If the capitalist uses his profit to pay additional wages, then the goods will remain unsold, since as soon as the laborer is able to purchase the goods, he has already produced a new good of greater value than his wage.

You’ve probably noticed by now that this is a zero sum game. It is impossible for the capitalists as a class to realize profits in any given time period (there is an exception of sorts, which I’ll get to). So to say that they spend or reinvest their profits doesn’t really make sense until we split the group. So let’s do that. I’ll divide the capitalists up evenly into groups A and B. Group A will spend half their profits on goods and half on new wages. We also have to note the goods that are consumed–that is, that have been bought and have been withdrawn from the market. Hopefully my math is right:

When Time 2
who: total capitalists capitalists group A capitalists group B workers
money balances: 300k 150k 150k 500k
goods: a quantity of goods that were produced for 500k worth of labour payments a quantity of goods that were produced for 250k worth of labour payments a quantity of goods that were produced for 250k worth of labour payments
Action workers use 500k to buy 90% of the capitalists store of goods workers use 275k to buy 100% of group A’s store of goods workers use 225k to buy 80% of group B’s store of goods
When Time 2a
who: capitalists capitalists group A capitalists group B workers
money balances: 800k 425k 375k 0k
goods: a quantity of goods that were produced for 50k worth of labour payments (10% of the 500k the workers made in the previous step No goods a quantity of goods that were produced for 25k worth of labour payments (10% of the 250k the workers made in the previous step [not on the market: a quantity of goods that were produced for 450k worth of labour payments]
Action capitalists spend 486.25k on new wages group A buys goods from group B made for 12.5k (but sold for 13.75k); group A pays workers 261.25k to produce new goods group B pays workers 225k to produce new goods (doesn’t have money from A yet)
When Time 2b
who: capitalists capitalists group A capitalists group B workers
money balances: 313.75k 150k 162.5k 486.25k
goods: a quantity of unsold goods that were produced for 37.5k worth of labour payments plus 486.25k of payments = 498.75k (priced at 547.375k) [not on the market: a quantity of goods that were produced for 12.5k worth of labour payments] and new goods of 261.25**k of payments (priced at 287.375k) a quantity of unsold goods that were produced for 37.125k worth of labour payments plus 225k of payments for new goods = 262.5k (priced at 288.75) [not on the market: a quantity of goods that were produced for 450k worth of labour payments]
Action workers use 486.25k to buy 88% of the capitalists store of goods workers use 287.375k to buy 100% of market goods from A workers use 198.875k to buy 69% of market goods from B
When Time 2c
who: capitalists capitalists group A capitalists group B workers
money balances: 800k 437.375k 361.375k 0k
goods: a quantity of unsold goods that were produced for 83.5125k worth of labour payments [not on the market: a quantity of goods that were produced for 12.5k worth of labour payments] a quantity of unsold goods that were produced for 83.5125k worth of labour payments [not on the market: a quantity of goods that were produced for 887.625k worth of labour payments]
Action capitalists spend 471.95k on new wages group A buys goods from group B made for 13k (but sold for 14.3k); group A pays workers 273.075 to produce new goods group B pays workers 198.875k to produce new goods (doesn’t have money from A yet)
When Time 2d
who: capitalists capitalists group A capitalists group B workers
money balances: 800k 150k 164.3k 471.95k
goods: a quantity of unsold goods that were produced for 70.5125k worth of labour payments plus goods that cost 471.95 to produce = 542.4625 [not on the market: a quantity of goods that were produced for 25.5k worth of labour payments] plus goods that cost 273.075 to produce a quantity of unsold goods that were produced for 70.5125k worth of labour payments plus goods that cost 198.875k to produce = 269.3875 [not on the market: a quantity of goods that were produced for 887.625k worth of labour payments]

(by the way, hats off to you for making that table the first time–that was hard)

So total price of unsold goods at end: 542.4625k

Total amount of workers money: 471.95k

Total price of unsalable goods: 70.5125

General observations:

  1. The quantity of unsold goods increases at each step

  2. Say’s Law is false for a capitalist economy (it is probably true for an economy that doesn’t sell labor-power as a commodity–i.e. feudalism, peasant/artisan, mutualism).

  3. Workers real wages decline at each step (provided the rate of surplus value doesn’t fall). They buy a smaller percentage of their total product each time.

  4. Capital naturally tends towards centralization. Group A only makes profits as group B experiences losses. It’s theoretically possible that they could switch between being profitable each step, but I think we all agree that a group that has won the first step is more likely to win the following step–with its chances increasing each successive round.

  5. Eventually, the value of old unsold goods will equal the value of newly produced goods. In other words, the capitalists will be trying to sell goods that total twice the value of the money consumers are able to spend. Thus it will become virtually impossible for any firm to make a profit. Crisis is inevitable.

  6. The greater percentage of profits capitalists spend on goods, the slower will unsold goods accumulate, the longer it will be before a crisis.

  7. There would be few if any unsold goods, and few crises, if the capitalists spent 100% of their profits on goods. This is essentially how feudalism worked.

  8. If all but one capitalist spent 100% of his profits on consumer goods, then the one that didn’t would begin to accumulate money and cause the others to experience losses. Yes, this is a prisoner’s dilemma.

There are several things capitalism has done to try to prevent this overproduction from occurring. One is taxation and government spending. If the government taxes capital gains and then uses the money on goods, this will have the same effect as if the capitalists spent an equivalent share of their profits on goods. If the government taxes capital gains at less than 100%, then crises will still occur; they will just take longer to develop. If the government taxes capital gains at 100%, then capitalists will have no reason to invest at all.

Another attempted solution is the one we’ve just gone through. Instead of reinvesting their money as wages, capitalists could lend the money to the workers who would then spend it on the unsold goods. The capitalists win twice on this, as the unsold goods bring in profits and they get to collect interest on the money they lend. But, uh oh, if they receive interest on their loans, that means they are owed more money than what they lent out. This is the exact same problem as overproduction. The quantities on each side don’t add up. The people who borrowed the money (not individually–but as a class) must default on their debt. Thus, if wages aren’t falling, workers are instead experiencing increasing debt. This video explains it pretty well (see also the work of Hyman Minsky and Steve Keen). Debt and the expansion of the money supply gives the illusion that profits aren’t a zero sum game. I’ve tried telling people this before, but they insist that I’m crazy and need to read an economics textbook (presumably an Austrian one). They insist that 2 + 2 = 5. But what can I do? I guess I’ll go read an economics textbook.