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.

The labor theory of value

Labor is prior to, and independent of, capital.  Capital is only the fruit of labor, and could never have existed if labor had not first existed.  Labor is the superior of capital, and deserves much the higher consideration.

==Abraham Lincoln

In an earlier post, I wrote about the importance of capital for economic growth and prosperity.  In this post, I write about the idea that the most important thing is labor.

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Karl Marx based his economic theory on the labor theory of value, but many people besides his followers have held to this theory.   They point out that everything of human value that exists is the product of human toil and thought and resources occurring in nature (which in principle belong to everyone).   This includes capital, whether in the form of financial assets or of capital goods such as machine tools.

Put this way, I do not see how the labor theory of value can be refuted.  Without human labor, nothing of value would exist, except maybe low-hanging fruit growing in the wild.  But I don’t see how the theory can be usefully applied for economic analysis.  Capital, whatever its origins, is still the force multiplier, still the key to economic growth.

I have read about the successful worker-owned Mondragon cooperative in Spain, which supposedly does economic calculation based on return on labor, and treats capital as a cost.  I would be very interested to know how this works.  My suspicion is that that this is just window-dressing, and that the Mondragon planners make their decisions based on signals from the overall market economy, just as government planners do.  But I would be pleased to be shown I’m wrong about this and, if I am, I would change my mind about many things.

The importance of the labor theory of value is not as a tool of economic analysis, but as a moral claim.   The Roman Catholic Church and the major Protestant churches teach that corporate managers have an obligation not just to investors, but to all the stakeholders who’ve made the corporation a success.  According to their teaching, corporate managers are obligated obligated to pay its workers a fair wage, to pay subcontractors a fair price, to give customers a good service or product and to refrain from harm to the surrounding community.  Then, and only then, should stockholders get their profit.

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I don’t think this is a bad deal for stockholders.  We get a potentially unlimited return based on a limited investment, so it is only fair to put us at the end of the line behind the other stakeholders.   I write “we” because I have my retirement savings invested in mutual funds that hold corporate stocks and bonds.  It is true my savings are the product of my labor.  My savings are what I didn’t spend of my salary during my working years.  But the gains in my investment are not due to anything I have done.   They are the result of the labor of others, not mine.  My only contribution is to retroactively provide an aftermarket to the entrepreneurs who started the companies in my mutual fund portfolios.

Capital is seldom the product of the capitalist’s own labor, unless the capitalist happens to also be an entrepreneur.  I’ll write about entrepreneurs in a later post.   I’ll just say here that the function of the entrepreneur, which is to organize an enterprise or bring an idea to fruition, is different from the function of the capitalist, which is to direct economic resources toward a productive use.  The entrepreneur, when successful, deserves a rich reward, because everyone benefits from a successful new enterprise, an improved way to do things, or a useful new product or service.  But even entrepreneurs, unless they do everything with their own money and their own work, have obligations to those who make their success possible.