Ending the Investor Class

| Friday, August 12, 2011
To start off on a related topic: Tobold, labor is a cost. The cost is easily seen if you imagine what labor buys with wages. In that way you can view TVs and food as input costs for manufacturing, but the point is that labor cannot be ignored as a cost.

Moving on from that, the problem is still, as I commented, the existence of an 'investor class'. At first glance they seem necessary. After all, projects need capital, whether public infrastructure, research and development, or machinery for manufacturing. But what is capital? It is money. And what is money? It's an abstraction of labor or material goods, a way to generalize them to make them easily interchangeable. Is a dollar valuable? By itself, no, but it can give access to labor or products which are valuable.

Investment capital is essentially a way of regulating labor. It is a way to bring the labor of miners, engineers, welders, carpenters, and everyone else needed to one place. It pays them and is in turn paid back, plus interest, from the fruits of their labor.

Note that while the investor is essentially passive, since he does not build, gather, or even organize, he does still add value. That capital is needed to get things rolling. But is he needed? No.

Try this for an imperfect alternative: government using inflation to create a loan to the business, which is then gradually paid back. There is no need for interest, in fact that would be counter-productive, since it makes little sense to take extra money from productive companies if it (the money) isn't adding value (to distinguish it from the money we take from companies for salaries and taxes).

Here are the benefits: lower consumer prices, greater employment, redirection of intellectual labor to more productive pursuits, and a reduction in the dangerous concentration of capital.

Lower consumer prices:
What goes into the cost of a product? There are the obvious ones of labor and materials. Included in those are research and development. But then there's that strange thing called profit. Where does that go? It doesn't go to the workers, managers, or suppliers*, but instead is an added amount that is siphoned away by investors. It is a perpetual tax. By removing investors, companies would no longer need to run net profits. They would of course build up and drain capital for projects, but would not need to constantly shovel out money, money which they get by charging more than the real cost of a product (labor and materials). With the no-interest loan, companies could instead charge a slightly higher amount, temporarily, to pay off the loan, and once that is completed, lower their price, or perhaps pay workers more, either one of which could offer a competitive advantage in gaining customers or quality workers.

Greater employment:
Since interest is a cost to the company, and since higher costs discourage economic activity, it is obvious that interest is harmful to employment. Even worse, consider that to hire a worker may mean also buying equipment for them to use, which with interest is even more expensive, causing productive labor to be idled. Eliminating the interest effectively lowers labor costs (since the equipment is attached to the labor)

Reduction of dangerous concentrations of wealth:
Why do we desire representative government? Because it is safer than non-representative government. One reason is how it distributes power, taking some of the power of government and giving it back to the greater population. Wealth is a source of power, so concentrations of wealth are also concentrations of power, which are potentially dangerous. Now consider the specific power-holders, the investors, whose immediate interests are directly opposed to those of workers. Workers need money (or to fit with labor being a cost, TVs and food), while investors want profit, which draw from the very same pool of incoming money. But investors have a great deal more power in this situation. Unions used to counter this, by creating their own dangerous concentrations of wealth; Reagan dealt with that, but failed to finish the job by taking down the investor class as well.

Redirection of intellectual capital:
Supposedly investors are intelligent. Actually I'm fairly confident they are, based on their ability to accumulate massive personal wealth and power through little work and often without even needing to break the law, too much. So in theory they are also useful. Currently they are, but in an industry which could be replaced, much like telephone operators who were very good at what they did, but could be replaced by computers. They found other productive work, enriching other industries with their mental and physical deftness. Perhaps investors could do the same, turning toward directly productive activities, such as anything else.

Of course no one likes losing their job or seeing it happen to their friends or family, so I doubt this will be a popular idea. It's certainly imperfect and would need a lot of details to work out. But despite the disruption, the new system would be beneficial in the long run. Isn't that the creative destruction they love to glorify?


scrusi said...

I don't know, not being an expert at all, but this seems to point towards socialism which, while a nice idea on paper, has been proven not to work.
By removing investors (and dividends) you remove any desire to create value-generating businesses in the first place. Instead you'll get bloated colossi which barely manage to keep up the status quo and will hardly ever innovate. You'll also still get individuals exploiting the system, except they will have an even easier time. Been there, done that.

Capitalism is a bitch, but many have tried to find a working alternative and I have yet to see one. Much like democracy, Capitalism is the worst form of an economy, except for all the others that have been tried. (Loosely after Winston Churchill)

Nils said...

The current accounting practice makes business owners maximize the value-added per employee.

And that's how it has to be. If you ignored the number of employees that add value to a product, we would still have cars that cost a fortune and are produced with the help of tens of thousands of employees. Oh - and it wouldn't work in the first place.

Humanity as a whole is the better off the more value each human (per hour!) adds to the products we consume.

Now, the troubles in traditionally rich countries that we experience right now, is mostly a consequence of globalisation. If you allow incredibly poor people to produce your goods, they will replace some employees in your home country. These replaced employees will have little money and will thus buy less.

But please look at the big picture: What the rich ecopnomies have done (via the 'free market') was to allow poor countries to become rich very fast - and at the price of about 30% (the lower class) of their own people who suffered.

Eventually, when the BRIC becomes as rich as we are, we will enter a new equilibrium and things will be better for all of us. But right now (and the last few decades) this is a big problem for the rich countries.

Free-market globalization has turned out to be a welfare program for poor countries at the cost of our own lower-class. It turns out reality likes tones of grey ;)

Klepsacovic said...

@scrusi: There is still incentive to generate value. While the company as an entity creates no profit, everyone within it is still paid, and their ability to create value beyond the material costs is what creates their pay.

@Nils: Is the first half of your comment in response to Tobold? And the second half something that has been on your mind?

"The current accounting practice makes business owners maximize the value-added per employee."
That's not quite right, they seek to maximize the value added to themselves per cost of labor. This takes into account two things: first, they don't care about value in general, merely value that adds to themselves; and second, it isn't the employee that matters, but how much he is paid.

"These replaced employees will have little money and will thus buy less."
Thereby reducing the demand for consumer goods, causing more layoffs, and so on. As a general rule of thumb, everything, no matter how cheap, is too expensive if you have no job.

Replacing a middle class with a slightly less starving lower class and an even richer upper class is not a very good trade. Cheap labor isn't the key to economic growth. Instead, productive and innovative labor is. In other words, trained labor, which can add value beyond their physical ability. We could simply look at the antebellum South where a cheap labor supply, slaves and almost as terrible poor, though theoretically free, white people, created a lot of stuff but not very many innovations. In contrast, the more expensive, but skilled, North, was filled with industry and technology.

Beside all that, if we are going to go with the race to the bottom for labor, which of course we are because it's easy for those in power, I'd prefer greater immigration and integration from poorer to richer countries, rather than the resentment-building and economically disruptive process of poor countries 'stealing' jobs. This is of course from a nationalist perspective; I'd rather the US grow and retain the tax revenues rather than see production vanish overseas. Beside the economy, it's a security risk to lose industrial production.

Nils said...

Klepsacovic, you are right. SOrry for commenting on the post you linked and not on your post :).
(There's no way to respectfully disagree with Tobold, but that's no reason to disagree with him on your blog instead of his ;)

Anyway, I don't think this comments section is appropiate to discuss your perspective. It's too small ;)
What I can say is that I, personally, favour a 90% marginal tax rate. As long as earning more money before taxes leaves you with more money after taxes, the system works, in my opinion.
But that's off topic ;)

I think you are extremely nationalistic, when you consider every job that is shipped over seas a lost job. But that quite typical for the U.S. ;). Your elites have scared you soo long with the cheap Chinese labour that you can't think globaly anymore.

Now, if you just want to maximize national benefit, you should do something similar to the Chinese (free markets only where they are good for the nation).

But if you are interested in humanity and acting morally, you should try to maximize global benefit. If only because if everybody only maximized national benefit, we would all be worse off.

The massive reduction of global poverty in the last three decades is phenomenal in my opinion. Yes, it caused great harm to the western lower-class. And, no, that is not fair. But today the world is a better place than 40 years ago. And that's worth something, is it not ?

Klepsacovic said...

Nils, the problem with "you should do something similar to the Chinese (free markets only where they are good for the nation)." is that too many people in the US think that is 100% of the time. China really pulled a great trick on us, helping (with Russia) to make us fear socialism (it's foreign and scary!), and then grabs the market out from under us with the help of socialism.

"But if you are interested in humanity and acting morally, you should try to maximize global benefit. If only because if everybody only maximized national benefit, we would all be worse off."
Unfortunately this is an ideal, not a practical situation. China does not act globally, but instead exploits others acting globally to further national interest. Given that China is not the sort of country I want to see grow more powerful (at least not under the current government, which shows no signs of leaving or liberalizing), it makes sense to seek forces to counter it. Try my earlier post about Liberty and Cheese for my idea of choosing the least harmful tyrant.

Furthermore, one of these days I will write how tribalism, of which nationalism is a form, is a sort of evolutionary insurance policy. So bow down in awe of my theoretical future post which will counter your love of globalism, eventually.

scrusi said...

@Klepsacovic: There might be incentive for individuals to create added value because that will increase their own wages. (Marginally though, and it can be seen in many cases, games as well, that there are many that will choose to free-roll instead of putting in effort that will benefit them only marginally.) There will be no incentive though to create a value-adding business in the first place or to innovate and take risks to improve an existing one. We likely wouldn't have WoW, Google, or transatlantic flights if it hadn't been for visionaries and investors who saw their visions as a good way of making money. Hell, Columbus wouldn't have sailed to America either without Queen Isabella's investment. I can hardly see a group of laborers dropping their daily chores in order to help some weirdo explorer travel to India the wrong way around.

Kring said...

If the investors don't suck up the profit and all profit is spread between the workers you would have another dangerous situation.

There are companies which produce a lot of profit for little work (e.g. successful software companies who produce a product once and can sell it an infinite time without additional cost).

And there are companies which produce little profit for a lot of hard work (e.g. a coal mine, non-pharmaceutical chemistry, any kind of consulting or service).

Klepsacovic said...

@scrusi: I am not suggesting eliminating investment, but changing where the capital comes from.

@Kring: These are situations created by a lack of education. If we had more educated workers software would have that much more competition, forcing companies to improve their products or lose sales. Similarly, greater technology would reduce the need for low-paying and dangerous work. Well, that and more safety regulation.

Nils said...

Klepsacovic, it's not just the Chinese. I know, U.S. citizens fear them a lot, but it's more like 50% of the 'developing' countries. The Chinese are just a part of them.

About your future post: I agree in a way. I wrote about that myself ;). I just think that nationalism should be treated carefully. Countries/Tribes/whatever should be divers, but they should also trade with each other, because trade is the best way to prevent the "Totalen Krieg".
(Unlike for a U.S. citizen, for a German and many Europeans this is not just a silly caricature ...)

About investors:
Most rich people (=investors in this context) aren't more happy then reasonably well-off people. They don't gain anything from the money they possess.

In fact, they often work very hard to make sure to not lose their money. This work involves trust. "Whom do I trust to not waste my money??"

This thinking doesn't make them happy. Just like poor people despair due to other people having bigger TV screen, rich people despair, because very few people can be trusted when it comes to money.

Having lots of money is a burden. A burden someone who has little money has a really hard time to understand, but it's true non the less. And no, just throwing it away doesn't solve that problem - unfortunately.

What I am saying is this: Humans don't really benefit from lots of money. The investor isn't a more lucky guy than you. And that's because he "works hard" = "suffers" trying to find out how to not lose the money. The market system exploits him as well as you:

At the end of the day both of you "work" = "suffer" inside a system that is extremely powerful when it comes to creating products and services from this "suffering".

Now, "products and services" aren't everything a human want. That's why we should restrict the free market. The Germans call that social market society, but I have a hunch this term wouldn't be successful in the U.S. ;)

Anonymous said...

yeah, i get what tobold is saying, but it reads like apologia for capitalism which i'm not sure was intentional.

profit (and the entire finance industry, for the same reasons) is, in fact, theft. period. that's not marxism; that's reality. the trouble with market forces fans and randians (and libertarians, i suppose?) is that they have this godawful habit of looking at things in a narrow vacuum. profit isn't theft because herpa derpa we should all be nice. it is theft because of the net cumulative effects of what happens in order to create profit, and the above named folks refuckingfuse to think that broadly. or rather they do but pretend not to - it is a significant portion of the population that doesn't think that broadly. hell, most of the people who voted for obama (not it not it not it) probably don't get it either.

for extra credit, those same folks who claim that taxes are theft are actually somewhat correct, just not for the reasons they think. they are theft when we use that money to, for example, pad the corn industry in order to keep their margins high enough to satisfy them. in other words, using tax money to provide profit. that would be theft.


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