My economic philosophy in a nutshell

When, lo, these many years ago, I studied economics in college, I learned that capital was the most important factor in a prosperous economy.

I still think this is true.  But that doesn’t mean that owners of financial assets are the most valuable members of society.

Standard economics teaches that three  are factors of production—land, labor and capital.  “Land” means all natural resources—everything of value not created by human beings.  “Labor” means all human effort, physical or mental.

 “Capital” is the most important of the three.  It means everything that increases the productivity of land and labor—railroads, machine tools, computers.  It is the force multiplier for land and labor.  It is what makes economic growth possible.

The problem is that “capital” also means also the financial resources available (but not necessarily used) to create these tangible resources.

Landlords who receive rents contribute nothing to the wealth of nations.  Laborers who earn wages contribute a fixed amount.  Capitalists who make profits have—so I was taught—an incentive to direct their capital in a way that created the most value, and thus increase the total wealth of society.

Late in life I have come to read Karl Marx’s rebuttal.  Physical and intellectual capital is not created by capitalists, he noted.  Every railroad, every machine tool, every computer was created not by money, but by the mental and physical effort of human beings.

The increase in human wealth that physical capital generates does not go to those who created it.  It goes to those who own it.

Marx denied that the owners of capital are job creators.  He asserted that workers are capital creators.

As a moral argument, I think Marx’s labor theory of value is unanswerable.  But it can’t be quantified.  As a tool of economic analysis, it is useless.

Nobody has been able to figure out a substitute for the concept of return on equity as a tool for setting economic priorities.

The rulers of the Soviet Union thought profit was immoral.  But in order to make economic decisions, they had to figure out some substitute for ROI—say, years for payback.

And even then, their centrally planned economy did not work because no group of planners was smart enough to set economic priorities more efficiently than the workings of supply and demand

Another problem with Marx’s analysis, as I see it, is that the labor that creates physical capital, such as a machine tool, is not the same as the labor of the worker who operates the machine.

 The wealth of society is not just the product of its living workers.  It also is the result of the work and inventiveness of generations that have gone before, and so is part of our common heritage.

The justification for capitalism is pragmatic, not moral.  Experience shows that market centrally planned economies don’t work well.

In theory, private ownership of capital, plus a free market system, should be more effective because it is self-correcting.  Good ideas result in success, bad ideas result in failure without jeopardizing society as a whole.

We progressives favor capitalism but with checks and balances to correct market failure, and to make sure all the wealth of society doesn’t wind up in the hands of holders of financial assets.

A free market is like a powerful and useful computer algorithm that requires constant de-bugging and new applications.

But there are fundamental problems for which we don’t have good answers.

One fundamental problem is that it can be more profitable to figure out ways of milking society and its institutions than by figuring out ways to create value. This is what is going on in the USA and much of the rest of the world today.

In such a situation, there is no way to force the capitalists to invest in creating wealth.  It is possible for government to set economic priorities by means of industrial policy, but this only works if the capitalists agree with the industrial policy.   What is done unwillingly will be done badly.

Left to itself, concentration of wealth leads to concentration of economic power.  Government can’t be a countervailing power to big business because government has been captured by big business.  This also is going on today in the United States and much of the rest of the world.

I would like to think that there are other possibilities.

I am interested in learning about alternative economic systems—anarchism, guild socialism, worker-owned cooperatives—democratic systems that are controlled neither by tiny group of bureaucrats nor a tiny group of billionaires.

LINKS

Bubbles Always Burst: the Education of an Economist by Michael Hudson for Counterpunch.

Parasites in the Body Economic: the Disasters of Neoliberalism, an interview of Michael Hudson for  Counterpunch Radio.

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5 Responses to “My economic philosophy in a nutshell”

  1. Nick Johnson Says:

    Thanks for this thoughtful post. Like you I have explored Marxist economics, and even managed to slog through the three vols of Capital, although with some guidebooks to help me! I can see the appeal of the labour theory of value for those who are exploited or oppressed, but I am no socialist and favour a reformed capitalism. There are clearly some entrepreneurs who are essential to economic progress, and when they grow their business they rely on workers. But even if capital and labour are in conflict in the workplace, they still need each other: there is a need for cooperation to achieve a good business performance. So I am still struggling with the LTV and trying to find an alternative. Economist Steve Keen has suggested that all commodities create a surplus in production, not just labour, and this is appealing, while it leaves much of Marx’s ideas intact.

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  2. paintedjaguar Says:

    Nick —
    Treating labour — that is to say, chunks of people’s lives — as a mere commodity is one of the greatest sins of capitalism. That causes all sorts of misery and is one of the main reasons people look for alternative systems. Also, there’s no particular reason to limit enterprise by defining it as a function of capitalism. Or to regard capitalists as necessary to the employment of capital, for that matter.

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    • Nick Johnson Says:

      Labour is indeed a commodity under capitalism, and even Marx praised capitalism for its capacity to create wealth and advance humanity. However he clearly thought that the society that superseded it would be greater and would lead to the flourishing of every individual. So far he has proved mistaken. The tension between labour as commodity and as humanity is a very real one under capitalism, but can we do better under the latter or do we need a revolutionary change?

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  3. aworlduncensored Says:

    great summary. In addition, I feel that the single biggest problem with the free market is that it breeds greedy corporations who unlike the individual have no responsibility to its shareholders to act morally towards its consumers or the environment as the main goal is to increase profits. Its also worthy to note that in a free market, everything can be bought including entire governments through the process of lobbying such as is done in the US. As for alternate systems, you should check out the zeitgeist movement which proposes a resource based economy.

    Like

  4. John Pennington Says:

    Nice. Succinctly done.

    Like

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