What's wrong with this argument?

Economics Economics Questions
21

“1500k worth [i.e. that is retail price]of widgets are produced in the first round. workers get 1200K, and buy 1200K worth of widgets and milk. The employers are left with 300K worth of widgets and milk, all for themselves. That is their profit. If they wish they can drink that milk and play with the widgets. If they want they can sell them next round. But the point is, those 300K worth of goods are theirs, pure profit, for all expenses have been paid.”

Ok, this is fine so far. I like the way of thinking about the 300K worth of produce as being left over as profit.

“Next round. which lasts 2 and a half weeks, they pay the workers 300K, which is used by them to buy 30K worth of stuff, and the employers profit is 75K worth of goodies, to consume or to sell.”

You forget about the 300K left over from last round. So it is 375K worth of goods left over after 12.5 weeks. The problem here is about how those goods become monetised - what use is a load of milk and widgets (or is that ‘midgets’ maybe?) to a self-respecting capitalist? Hard cold cash is where it’s at.

22

Sorry, there was a typo. Here is the corrected second paragraph:

“Next round. which lasts 2 and a half weeks, they pay the workers 300K, which is used by them to buy 300K worth of stuff [which is the leftovers from the first round], and the employers profit is 75K worth of goodies [=everything created in the second round], to consume or to sell.”

Dave, we are not talking about a real economy. It was just a simplified picture to bring out the essential point that the employer is not screwing the workers, and that there is not an inherent contradiction in the free market system.

But of course you raise a good point. What can he do with all those widgets and milk? Isn’t cold hard cash what it is all about?

This is a deep question. First, in our little world of widgets and milk, what will he do with cash but buy widgets [or midgets, as you so astutely point out] and milk?

And indeed in the real world as well, you cannot eat cold hard cash. Its ultimate purpose is to buy stuff, now or in the future. Basically this was the insight that the Mercantilist world didn’t grasp. They thought the wealth of a nation is silver and gold, cold hard cash. Adam Smith taught the world that cash is merely a medium of exchange and a store of value [=made to be spent now or later]. The true wealth of a nation is the things it produces.

After all, imagine a desert island where everyone has plenty of gold and nothing else, They all die. In another island where there is plenty of everything but money, they will flourish. A trade system will be worked out.

May I suggest reading up a bit here on Say’s Law, right here: http://www.econlib.org/library/Say/sayT15.html

23

Sorry, there was a typo. Here is the corrected second paragraph:

“Next round. which lasts 2 and a half weeks, they pay the workers 300K, which is used by them to buy 300K worth of stuff [which is the leftovers from the first round], and the employers profit is 75K worth of goodies [=everything created in the second round], to consume or to sell.”

Yes, I noticed the typo and understood it to mean 300K not 30K. But now you are forgetting the 300K worth of goods that the workers make in these 2.5 weeks. There is 375K left after 12.5 weeks, not just 75K.

Dave, we are not talking about a real economy. It was just a simplified picture to bring out the essential point that the employer is not screwing the workers, and that there is not an inherent contradiction in the free market system.

I understand it is a simplified model. But all models need to address the key issues in a satisfactory way - assuming that the excess produce counts as ‘profit’ that does not then need to be realised as money just ignores the real world in which making money IS the requirement that the business sector has on it to survive.

And I am not trying to make the point that employers are screwing workers. Employers fill a role that is necessary to the system; there is not ethical argument being made here. My point is merely about how the numbers on each side of the balance sheet work themselves out when the economy is looked at as a whole.

24

Dave, to the capitalist in your example, profits in widgets and milk are indistinguishable from cash. He could be paying the workers in widgets and milk, as they only need the cash to buy them anyway. So the answer to your OP is: There’s no contradiction, and the system is sustainable, as answered previously.

Z.

25

Dave, to the capitalist in your example, profits in widgets and milk are indistinguishable from cash. He could be paying the workers in widgets and milk, as they only need the cash to buy them anyway. So the answer to your OP is: There’s no contradiction, and the system is sustainable, as answered previously.

I’m sorry that just won’t do. The capitalist in my example is there to represent how the real economy works, and so the need to realise value in monetary terms has to be assumed even in this simplistic model. Otherwise what right do you have to claim that austrian theory bears any importance to anything other than austrian theory - let alone the real world?

Let me ask you this question. In the real world, what would happen if an employer could not turn all the produced goods into money? He can’t consume it all because it keeps on growing, what what on earth does he want with thousands of widgets anyway? Thousands of dollars on the other hand… well, you get the picture.

26

Ugh, why would he want these dollars, if the only thing (by construction) he can get for them in this world is either widgets or milk?

27

Dave, you assume a fixed amount of cash in your example, then use that very same assumption (non-growing profits in cash terms) to show a contradiction.

The existence of wealth, profit, “evil” capitalists, and “exploited” workers is not-contradictory regardless of whether supply of money increases, decreases, or is kept constant.

Btw, I already answered your OP question.

Z.

28
  1. Dave, you are right and I am wrong. After all, the employers are doing it to profit. So of course they will keep on profiting. So of course each week they pile up more and more product in their warehouse.

However, one thing is clear. The employees have their needs satisfied. As in the original post, they will make enough to keep themselves happily supplied with widgets and milk.

  1. The problem is that the employer was too successful. He made more than can be sold. It’s called his profit.

As a first step, we note that the widget maker uses his profits [=excess widgets] to sell to the farmer [not only to his employees] and buy milk. The farmer sells his excess profits to the widget maker to buy widgets.

One may argue that if the profis are huge, what is he or the farmer going to do with all those widgets and milk. One answer is that he will have arranged his production plans in the first place to ensure he makes only what is needed for the 10,000 workers and himself and the farmer. He will probably make sure he has widgets for his wife and chidren and same for the farmer’s whole family, as well as maybe spare widgets in case one breaks.They are wealthier than the employees, who have to stick to one widget per household. The farmer and he will also have excess milk, to make fancy cheeses that the employees don’t have.

He will fine tune things so that he can lay off some workers but still make enough to supply everyone. After all, he is making more widgets and milk than is needed. Would that we had such problems. The workers he laid off he and the farmer will then hire as butlers and chauffers and other service related jobs, paying them off in widgets and milk. After all, he and the farmer are making enough to afford that. [BTW, this argument seems to show that a service economy is possible only after enough is being made to feed and widget everyone. It is a sign of a wealthy productive nation].

He can also hire the excess labor to open a new factory that makes some other goodie, say Ipods.

He and the farmer might pool their resources and have some workers build two yachts, paying them in widgets and milk. When the yachts get a bit banged up, they will order new ones, selling the used yachts to a group of workers who pool their savings to open a yacht club for the wife and kiddies on weekends.

If there is competition, he and the farmer, if indeed they have such huge surpluses, will start lowering the prices of their wares.

In short, what looks like a problem is really a great thing.

  1. Going back to the original post, profits, according to Austrian theory, come from the following: The workers do not have to wait until the car they make is sold to get their paycheck. They are paid off week after week, whether the car they make is sold today, or tomorrow, or even never. Which would never be the case if they were self employed. The self employed get money for their work only after they sell their wares, and only if they succeed in selling it, and only if no accident happens to their product in the interim.

Such a cushy, risk free, salary in advance position that an employee has is worth paying for. Therefore the employer pays them less than they would make if they were self employed, because he is paying them in advance and because he assumes all the risk. That difference is his profit.

29

Dave, you assume a fixed amount of cash in your example, then use that very same assumption (non-growing profits in cashterms) to show a contradiction.

Actually I have done far more than that. I have assumed a zero growth economy.

I am willing to admit that I may have not made myself clear as to the point I was making, and from some of the responses I’ve gotten I think it would be good to clarify my position exactly.

My starting point is that capitalism is a dynamic and evolving system. It never stops expanding into new area’s and reproducing itself. This is something I am sure Austrians will agree with more than anyone else.

I am claiming that the reason capitalism expands in this way is because of an inbuilt nessecity that can only be explained by first analysing a model of a static, zero growth economy. This was the model I was explaining earlier.

In this model, the ‘employer’ represents the entire sphere of capital (this is extremely important to understand, as it is the system in aggregate that I am trying to explain). The ‘workers’ represent the entire sphere of wage labour.

My contention is that in this type of economy, effective demand could not keep pace with productive output unless profits were exactly zero, and as a result, a large number of produced goods would go unsold.

The way in which this contradiction is resolved in real life is by the production of capital goods as well as consumables. When this happens, and capitalist profit is used to build new factories, find investments, employ more people etc, then the system can raise the effective demand enough to allow the purchase of all the unsold stock. This type of investment in in capital inrastructure HAS to keep on going otherwise we get what appears to be a crisis of overproduction/underconsumption. It is equilibrium economics that I am opposing here, not capitalism per se.

30

In a truely free market, production will always match demand and demand will always rise.

Take an economy with a single indivdual. In your argument he can create more food, water and shelter than he needs to survive so therefor he has to create additional supply of something (assuming he is utilizing his time well) and that extra supply goes to waste. However, what will really happen is he will produce as much food, water and shelter as he needs and then he will create a new demand to be filled which he can then work towards supplying, such as entertainment, better food, flavored water, more asthetic shelter, etc.

In the more complex example of multiple workers, yes, they can collectively produce more than they consume but as soon as they do new demands will be created and that excess labor can be put to use fulfilling new demands. The manager in your example is still a laborer, he just labors in a different way just as a researcher labors in a different but productive way. The manager doesn’t physically hammer together widgets but instead employs techniques that result in all of the assebly workers hammering widgets together faster (increasing the supply of widgets, or whatever). The investor is also a laborer, he uses his brain power to figure out a way to leverage previously saved widgets to build a better widget making factory and thus increasing the productivity of the assebly workers, thus increasing the supply of widgets.

31

In a truely free market, production will always match demand and demand will always rise.

Unsubstatiated claim.

Take an economy with a single indivdual… etc

I’m not talking about Robinson Crusoe, I’m talking about a fully developed capitalist production. It is a complete non-sequiter to go from talking about an individual on an island, and then to draw conclusions regarding the real world.

In the more complex example of multiple workers, yes, they can collectively produce more than they consume but as soon as they do new demands will be created and that excess labor can be put to use fulfilling new demands.

Another unsubstantiated claim

The manager in your example is still a laborer, he just labors in a different way just as a researcher labors in a different but productive way. The manager doesn’t physically hammer together widgets but instead employs techniques that result in all of the assebly workers hammering widgets together faster (increasing the supply of widgets, or whatever). The investor is also a laborer, he uses his brain power to figure out a way to leverage previously saved widgets to build a better widget making factory and thus increasing the productivity of the assebly workers, thus increasing the supply of widgets.

Maybe so, but this bears no relevance to the points I am making.

32

By the way, sorry if that last post came across as a bit sharp. I was in the middle of a debate on another website which got heated. I think a bit of that heat transfered to my post here. Appologies.

33

Always good to present one’s point within the first ten pages of a debate.

Amazing discovery. In a world comprised of 1 pie (economy), 2 pigs (capitalists), and 8 sheep (workers), the pigs can’t keep claiming ever larger pieces of the pie (profits) to themselves without running out of pie to claim at some point in the future. Got it.

You still have not presented an objection to my previous answer for your OP.

Z.

34

Amazing discovery. In a world comprised of 1 pie (economy), 2 pigs (capitalists), and 8 sheep (workers), the pigs can’t keep claiming ever larger pieces of the pie (profits) to themselves without running out of pie to claim at some point in the future. Got it.

No. You haven’t got it because that’s not what I’m saying. Not sure how else to put it if you haven’t got it by now.

You still have not presented an objection to my previous answer for your OP.

You mean this one? :

Dave, to the capitalist in your example, profits in widgets and milk are indistinguishable from cash. He could be paying the workers in widgets and milk, as they only need the cash to buy them anyway. So the answer to your OP is: There’s no contradiction, and the system is sustainable, as answered previously.

35

Your model doesn’t include other employers as buyers of goods. They need things for themselves, too

36

Your model doesn’t include other employers as buyers of goods. They need things for themselves, too

Like I say, The model is a simplified one assuming a steady state and representing production as a whole (not just an individual business). An expanded model that includes reinvestment in new means of production would include exactly what you mention. The expanded model explains how the contradiction is overcome via constant movement. If the movement stops - bam! - it looks like overproduction.

ETA; if the simplified model is a model of anything, it is a model of an economy in which Capital, for whatever reason, cannot reproduce itself.

37

There are three possibilities: Either a particular factory is producing less than there is demand for, or exactly equal to demand, or more.

A businessman can’t tell in advance which it is. Only after the prodcut is made and put on the market can he tell.

In the first case [which you don’t consider] he or someone else will make more product, because there is a market for it. If it is impossibloe to make more, prices will go up, reducing demand to the available supply.

In the second case [which you don’t consider] all is well, and things will keep chugging along the same way.

In the third case [the one you describe], he will cut either lower prices to increase demand [if that makes him more money, which is usually the case], or cut down on how much he is producing and divert the resources to things that have greater demand.

Have you read up on Say’s Law, which explains how there is no such thing as overproduction for an economy as a whole? Can you summarize his argument, and then state your refutation?

Please do that so we can profitably continue.

38

No, this one:

Assume that, at the limit, the idiot workers are paid $0+bread+water. Evil capitalists use the resulting hefty profits to buy each other’s products while the workers can’t/don’t buy a thing. How is this a contradiction, or in any way unsustainable? Who says that the workers must be able to buy everything produced?

Z.

39

@Dave_Chappell

My statement that in a truely free market, production will always match demand and demand will always rise was my conclusion, what followed were the premises. It sounds like you also disagreed with some of my premises so I will focus on those.

My purpose of starting with the guy on the island was to start with a very simple and unrefutable claim. If you disagree that a single person on an island can produce more than he currently demands then we should start by discussing that rather than the premises that follow, since they build off of that assumption.

It seems like our disagreement lies in the transition between the single man on an island and multiple men on an island. If we have one man on an island and he can produce more than he needs to survive then it goes to say that unless there are not enough physical resources then 2 men on an island can both individually produce more than they need to survive. Due to gains from trade, a well proven economic theory, if the two men work together their combined output will be higher than the combined output of the two of them working separately.

So now we have scaled from 1 man on an island to 2 men on an island. If you continue adding men to this island then the net output of the society (all men on the island) will continue to rise and if the men continue working together through trade, division of labor, specialization, etc. the total output will continue to be higher than all of the men working separately.

So now we have scaled from 1 man to n-men with the only limiting factor being resources. However, since the earth is far from out of resources we can safely say that for the sake of this argument, resource limitation need not be considered.

We have established that both a single man working alone can produce more than he needs to survive and we have extended that to show that n men working together can produce more than they need to survive. The question now comes to what happens with those extra goods being produced. Since all of the basic needs of the men on this island have been met they can turn that extra production towards increasing their quality of life. Since increased quality of life has no known upper limit we can say that this scales infinitely given infinite supply.

Now none of this directly addresses your original point but rather addresses some of the examples given by various parties throughout this thread.

A more direct response to your original scenorio is that you are making the assumption that the “profiters” are not laborors themselves, even though they are. You are correct that the total labor going into the production of goods equals the total cost of production but if one of the laborers saves up his widgets this is a form of labor on his part. He is choosing not to consume those widgets which is an act of self control and a form of labor. Instead he is saving those widgets so he can later build a factory that produces more widgets per labor and he is rewarded with this initial labor investment with an increase in widgets later. He perhaps also puts in planning and design labor and in the end he has a return on his investment in the form of extra widgets.

In short, your conclusion is based on the premises that either A) widgets are not a form of profit and B) those profiting are not laboring. Both of these assumptions are incorrect which is why your conclusion is false.

40

The original argument doesn’t consider the fact that demand remains for the products regardless of what the consumer income is for the products. Demand is inherent (e.g. If i’m hungry but don’t have any money, that does not mean my demand is any less, I just can’t pay for it).

So, if the supplier lay’s off workers;

And

The workers no longer have income to pay for the goods that the supplier is producing;

Then

The supplier will have to reduce the price until they can be bought by the consumers, or in the case of all workers being layed off, offer the products for free to the consumers and earn no profit. If it still costs the supplier money to make the products (which I would guess yes) then he would bankrupt himself.

It would not be in the supplier interest to pay his workers nothing in this closed system. (*Bread crumbs are better than nothing at all.)

However, if the system is open, which it is in the case of America. And a supplier did this to his workers, they would go find work someplace else to earn the income needed to pay for the products, or make their own.

Free-Market prevails, and self regulates once again.

(I think this argument is symbiotic to the Minimum Wage Law in Amercia, which eliminates and outsources our cheap labour manufacturing facilities, like those of China. Low income workers compete for themselves in the form of producing the most, therby lowering the cost of what they produce, and increasing their wealth)