Wealth centralization in a free-market?

Economics Economics Questions
61

Wrong. There are all types of different workers: farmhands, factory workers, mechanics, engineers, grocers, burgerflippers, systems analysts, data-inserters, managers, secretaries, programmers, executives, bankers, etc. Different workers get different pay. Wage laborer is not an accurate categorization because you can still be a “wage laborer” and be very wealthy.

Haha. Did you even read the rest of my post? My point has nothing to do with the fact that workers get a different level of pay from each other. It’s that such pay in total cannot equal the price of the product they produce, and therefore “overproduction” in a capitalist economy is inevitable.

62

well, we can solve the riddle by saying that 800,000 units circulate, and they can exchange hands many time, so that a large volume of transactions much greater than 800,000 can be counted occuring over a sufficiently long period.

or we can assume that you mean for all payments and transactions to occure stepwise at fixed intervals, in which case we simply laugh at the notion of the total cost of all the commodies adding up to 1000000 given the stipulation that there is only 800,000 which they could exchange for.

I’m not sure if that would make a difference. Could you give me an example of how this would work (like I did)? Every time a commodity is bought, the money returns to a capitalist, who must decide whether to reinvest the money or spend it on commodities. If he keeps deciding to reinvest it, then there must be an increasing number of unsold commodities (discounting other factors such as expanding credit).

I expect what you really want to ask is how there can be a spread in the aggregate between labour costs and sales receipts. well the sales receipts come from the spending of both the labourers and the capitalists whereas only the labourers income shows up as cost on the accounting whereas the capitalists income shows up as profit.

but we always new that accounting profits are business income minus business expenditure. big whoop.

So you’re suggesting that capitalists spend all of their profits on commodities and reinvest the same amount every year? If a capitalist did that, his business would never grow and he would get annihilated by the competition.

63

“well, we can solve the riddle by saying that 800,000 units circulate, and they can exchange hands many time, so that a large volume of transactions much greater than 800,000 can be counted occuring over a sufficiently long period.”

Yeah, one widget could be sold 100 million times to a total of over 800,000 units, but then we’ve still got all those unsold widgets.

64

no Birthday Pony, its 800,00 units of currency…

When Time 1
who: capitalists workers
money balances: 800k 0k
goods: no goods no goods
Action capitalists pay workers 500K to make goods
When Time 2
who: capitalists workers
money balances: 300k 500k
goods: a quantity of goods that were produced for 500k worth of labour payments no goods
Action workers use 500k to buy 9/10th of the capitalists store of goods
When Time 3
who: capitalists workers
money balances: 800k 0k
goods: a quantity of goods that were produced for 50k worth of labour payments (1/10th of the 500k the workers made in the previous step a quantity of goods that were produced for 450k worth of labour payments
Action capitalists pay workers 500K to make goods
When Time 4
who: capitalists workers
money balances: 300k 500k
goods: a quantity of goods that were produced for 550k worth of labour payments a quantity of goods that were produced for 450k worth of labour payments
Action workers use 500k to buy 9/10th of the capitalists store of goods
When Time 5
who: capitalists workers
money balances: 800k 0k
goods: a quantity of goods that were produced for 100k worth of labour payments a quantity of goods that were produced for 900k worth of labour payments
After two work steps and two worker purchasing steps the capitalist has retained his capital (800k), the workers didn’t bother becoming capitalists and spent all their wages(0k)
the capitalist has been rewarded in real goods (they had at some point in time cost him 100k to hire the labour to make)
the workers have been rewarded in real goods (goods that had at some point in time cost a 900k to make)

the amounts of goods that the capitalist and the workers end up with costed a total of 100k+900k = 1000k to produce

there was only ever 800k physical pieces of currency in the economy.

65

Yeah, one widget could be sold 100 million times to a total of over 800,000 units, but then we’ve still got all those unsold widgets.

Yep. The more I think about it, the clearer it is that this “solution” doesn’t solve anything.

66

Um… you just proved my point. Over time the number of unsold goods increases, ending with unsold goods totaling 100K worth of inputs. What do you think would happen if you continued along these line? This stock pile of unsold goods would keep increasing. And remember, the capitalists don’t want these goods. These are goods that are on the market. This proves the Keynesian assertion that capitalism inherently causes aggregate demand to fall below aggregate supply.

67

Um no those are the capitalist’s Consumer goods that the workers had made. a nice variety of them!. Things like mansions and sportscars and fine clothes and the best food. If the capitalists hadnt wanted them they could have kept less and sent more over to the workers but why? They would want to send less to the workers and have more good stuff for themselves but alas you just can’t find willing workers if you don’t share the booty like they do

before when I criticised the worker buying back his own product, that was legitimate since we were talking about singular customers with singular products. but you asked to aggregate so now we are looking at the class of all workers,and all the consumer products.

68

Um no those are the capitalist’s Consumer goods that the workers had made. a nice variety of them!. Things like mansions and sportscars and fine clothes and the best food. If the capitalists hadnt wanted them they could have kept less and sent more over to the workers but why? They would want to send less to the workers and have more good stuff for themselves but alas you just can’t find willing workers if you don’t share the booty like they do

Ah, so the capitalists spend 100% of their profits on consumer goods (i.e. on the goods that other businesses produced)? What would stop one of them from reinvesting his profits instead of spending them on consumer goods? If he reinvested his profits, he could expand his business, hire more laborers, increase productivity, reduce the price of his goods, and steal the market share of his competitors. Why wouldn’t he do this? In fact, isn’t this what most businesses do?

69

How about we agree to go read a basic economics textbook before discussing economics, eh?

70

How about we agree to go read a basic economics textbook before discussing economics, eh?

Well, I just read Capital, does that count?

71

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

72

Try something more like Principles of Economics by Mankiw. New Keynesian, but better than nothing.

73

Yeah, I agree with FOTH on this. I’m not seeing what happens with those unsold goods, or consumer goods, or whatever goods.

And Wheylous, I’d still like to know how wages can ever decrease since apparently employers can’t lower them.

74

Syntax misunderstanding. I didn’t mean that they can’t lower them. I mean that they can’t “just” lower them. There’s supply and demand for labor as well.

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.

76

As far as I’m concerned, it wasn’t clear at all. You used the term “capitalism” in place of “free market”, which was the term used in the OP and by others here. So it seemed natural to me to assume that you’ve been using those two terms as synonyms. If that’s not the case, then I think the onus is on you to clarify your usage so the rest of us (hopefully) aren’t confused.

Please do.

Again, please clarify. I think your intentions are irrelevant.

If you define “capitalism” as “an economy in which wage labor is the predominant mode of employment”, then saying that “wage labor will be the predominant mode of employment in capitalism” is tautological and provides no new meaning or understanding. On the other hand, and given this definition of “capitalism”, I’d like to ask you - what, then, is your definition of “economy”?

Can you please explain what you see as this “very basic division between employers and employees”? Can you also please explain what you mean by “capital”?

This last statement seems to be the crux of your position here. What exactly do you think is so bad/wrong about “selling one’s time for a living”?

77

I’m assuming by “value” you actually mean “current selling price”? Otherwise, it sounds to me like you’re implicitly appealing to the notion of objective value.

As others have asked, do you mean workers can never afford said product, or that the wage a given worker is paid to make one unit of said product is less than the current selling price for that unit?

If you’re talking about the latter, I don’t see how this is an issue unless you’re implicitly appealing to the Marxian labor theory of value (or similar).

Why would both wages and price have to go up? Or am I not understanding your first sentence in the above quote?

Why is it a problem for commodities and capital of the capitalist to be deinvested in said industry? Why is “hoarding” a problem?

As Jargon pointed out, you’re using non-standard definitions for “demand” and “supply” in the context of labor markets. Otherwise, why is it a problem that some workers can’t afford the product because they’re unemployed? It sounds as though you think they’re somehow prima facie entitled to the product. If so, where do you think this entitlement comes from?

Indeed, you’ve failed to explain how “concentrations of capital” arise in the first place, either occasionally or necessarily. I thought your whole point was to try to explain that?

78

That contradicts what you said earlier: “Workers cannot afford said product.” “Cannot” used in that way suggests (if not demands) an absolute statement. To say that workers simply can’t afford products relative to their employers lays wide open the possibility that, nevertheless, workers can afford products in absolute terms. Finally, as others have pointed out, this also ignores the time dimension altogether.

What exactly are you supposing “somewhat equitable” to mean? Same thing for “monopoly of oligopoly”.

How exactly does a more equal distribution of “capital” (I’m still not sure what you mean by this term) lead to, or necessarily mean, less risk? I fail to see how people would be any better at anticipating what others will desire in the future just because they have greater possession of or access to “capital”.

79

Your re-working of Nirgraham’s example is more dramatic than it first seems. For one thing, Nirgraham’'s example doesn’t have anything to do with profit. The goods that aren’t purchased by the workers are simply retained by the capitalists between one time period and the next. Your example introduces profit, but doesn’t specify how much profit each group of capitalists makes.

Second, if you’re going to split up capitalists into two groups, then it follows that you must split up workers into two groups as well - those who work for group-A capitalists and those who work for group-B capitalists. But then there’s the possibility that some group-A workers will buy goods from group-B capitalists, and some group-B workers will buy goods from group-A capitalists. How many of these “cross-purchases” are there? You don’t say.

Third, your example isn’t even necessary to show “overproduction” over time. Nirgraham’s own example shows it already. The number of unsold goods (i.e. those retained by the capitalists) rises from $0k worth after Time 1, to $50k worth after Time 3, and finally to $100k worth after Time 5. However, his example had nothing to do with “overproduction” per se and everything to do with dispelling the notion that more money must be needed to produce more goods. Another way of putting this is that the dollar value of goods in “the economy” in no way has to be the same as the number of dollars in “the economy”.

80

Your re-working of Nirgraham’s example is more dramatic than it first seems. For one thing, Nirgraham’'s example doesn’t have anything to do with profit. The goods that aren’t purchased by the workers are simply retained by the capitalists between one time period and the next. Your example introduces profit, but doesn’t specify how much profit each group of capitalists makes.

That was the problem with his example. In real life, capitalist do seek profit and not simply surplus goods. Take my 401K for example. I don’t receive x number of goods every year; all of the profits are reinvested. In my example, both capitalist groups price their goods at 10% above what they paid to produce them. Group A sells all of their goods at each step, so they make 10% profits. Group B shows a loss each time.

Second, if you’re going to split up capitalists into two groups, then it follows that you must split up workers into two groups as well - those who work for group-A capitalists and those who work for group-B capitalists. But then there’s the possibility that some group-A workers will buy goods from group-B capitalists, and some group-B workers will buy goods from group-A capitalists. How many of these “cross-purchases” are there? You don’t say.

Until you show that it would result in an outcome without overproduction, I will assume that such a modification wouldn’t make any difference.

Third, your example isn’t even necessary to show “overproduction” over time. Nirgraham’s own example shows it already. The number of unsold goods (i.e. those retained by the capitalists) rises from $0k worth after Time 1, to $50k worth after Time 3, and finally to $100k worth after Time 5. However, his example had nothing to do with “overproduction” per se and everything to do with dispelling the notion that more money must be needed to produce more goods. Another way of putting this is that the dollar value of goods in “the economy” in no way has to be the same as the number of dollars in “the economy”.

Sure. But by overproduction, I meant unsold goods. Assume this: a worker spends all of his money on goods; a capitalist spends all of his money on wages (or really, all of his previous costs of production plus some of his profits). Thus, every time a worker spends money, an equal amount of money and commodity value is removed from the “economy.” Every time a capitalist spends money, a greater commodity value enters the “economy” than the money value. So there is an ever increasing amount of goods trying to be sold in the “economy” but which cannot be bought. Firms cannot show profits without selling these goods. So the trend is inevitably towards centralization and recession.