2018-03-31

The Fairy Tale of Capitalism: Capital and the Chairman

FTC consists of anecdotes confirming to some people that universal laws of human behavior and circumstance imply their views.




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The Chairman -- and in our enlightened age, nearly all chairpersons are male --  knew that, as representative of the shareholders, he set an example for others even here in the directors’ private dining room.

Annually, the company paid him a modest few tens of thousands of dollars in director’s fees for attending four meetings a year and signing a few reports. As one of the larger owners, he received several millions more in dividends, stock buybacks, and unrealized gains, of course. He put his napkin on the table, placed the napkin ring upon it, and stood up.

The Chairman’s Staff had suggested the man who was CEO, and the man had talent for his role. Despite the recession and declining revenues and dismissing 8,000 employees last quarter, the CEO preserved the company’s rising trend of profit, the return on Capital. He whined unceasingly about the stress of his job. Still, this man’s value to the firm far exceeded the couple of million the directors voted to increase his Supercompensation, as they voted when the CEO whined every year. 

The Chairman moved toward the door, with quick goodbyes to other directors. These were the faces of Capital. Some were wealthy individuals. Others represented investment funds, insurance companies and non-profits. Several were chosen by the CEO, including CEOs of other companies. How predictable the directors! How predictable the meetings! How predictable the decisions, always consistent with the accumulation of Capital!

The Chairman was eager to get to Los Angeles for a swim before sundown and a good sleep before the predictable director’s meeting of another Corporation the next day. The CEO approached him at the door.

“You visit Washington, tomorrow, right?” said the Chairman, hoping to minimize the conversation, it being perfunctory anyway.

“Yes, our industry is vital to the nation and creates so many good jobs for the middle class. I’m optimistic right-minded senators understand the stressful economic environment. I think they’ll consider our indispensable service to the country and accommodate the unique characteristics of our industry by extending the research tax credit or otherwise easing our crushing tax burden. If they want more employment -- and who doesn’t? -- then why tax the innovative job creators?”

“Good,” said the Chairman, shook the CEO’s hand with a false smile, and strode quickly to the car.

8,000 employees dismissed last quarter, mused the Chairman. If sales increased, and the remaining workers couldn’t produce enough product, the company would miss profit opportunities. If sales declined with further recession, then would 8,000 dismissed have been not enough? The CEO made the decision. Any of the faces of Capital would have decided similarly with the same information. The dismissed employees would grumble, but employees always grumble. They’ll be all right. It was unavoidable. If Capital growth slows, then the capitalist must dismiss Labor to preserve the profit which is the growth. Growth is good. Growth means an ever more prosperous society. They’ll soon have new jobs with new employers. Any competitive worker will get snapped up right away.

The capitalist buys Land, buildings and equipment. These were “fixed Capital” in the Business School Professors’ songs. The capitalist also acquires raw materials, parts and small tools, stuff that gets used up within a few months' making the product. The Professors sang of this as “working Capital”.

The capitalist acquires Labor by hiring employees. If a worker can gather the tools and materials at home to make, say, a table, then he can contribute his Labor to build a table for the use of himself and his family and get the full utility and value from his Labor. If, in the same way, he builds a second table, and takes it to the market, then he can sell it in exchange for money which will more or less suffice to replace the materials, compensate for the wear of the tools, and compensate him for his Labor, and perhaps save a little money.

If the worker becomes the employee of the capitalist, and makes a table, then the employer receives the money from the sale in the marketplace. From this money, the capitalist replaces fixed Capital and working Capital, and takes a portion for profit which is his property, and pays the worker the smallest wage that will keep the worker alive and working through the next day. If the capitalist pays the worker more, then he must raise the price of the table, or reduce his own profit. If he raises the price of the table, then he will sell fewer tables than competitors, who will sell similar tables for less by paying their workers less. If he reduces his own profit below normal levels, then he will close the table factory and seek normal rates of profit in other businesses.

Every five or 10 years, manufacturers of tables and other manufacturers will come on hard times. It becomes hard to sell a table. The capitalist can't readily sell the full production of the factory, so he reduces the level of production, say by half. Reducing the working hours of each employee by half won’t reduce Labor costs by half, since he must still pay some costs per employee. So he discharges half the employees. Our society confers authority, derived from government protecting Capital as private property, on the capitalist. He may seek counsel from colleagues and workers, or he can decide on their future income without them. So half the employees join what the Old Ones called the unemployed reserve, or as we modernists know it, the natural level of unemployment.

In a fair trade, each of the parties to the trade give up something they want less in exchange for something they want more. After the trade each party has something they wanted more than what they had. Each party benefits from a fair trade.

The Old Ones described how wages may rise somewhat during periods of high production or for a few years for a few employees with special skills, but in the long run, a worker’s wage barely suffices to keep his family alive. If the worker is discharged, his income stops. How will he and his family eat? Circumstances favor families differently. Some starve. 13m people in Europe and North America hadn’t sufficient food in 2016.

The worker’s wage doesn’t suffice for a fair trade. Not only does the capitalist take all the benefit of the trade, but he also takes a bit of the worker’s portion of the trade. The worker knows there are hungry people at the factory door. The worker knows it is better to eat today and take a chance on starving tomorrow, than to starve today. So the worker agrees to the wage which leaves him yet hungry rather than to no wage at all.

Arrived at his hotel suite, the Chairman changed clothes. Daydreaming, he made his way to the pool. Artificial intelligence couldn’t substitute for employees, yet. Someday, robotic Capital would minimize the wage bargaining nuisance and bring spectacular economic growth.

The capitalist takes money from his vault of Capital to pay the costs for buildings and machinery and tools and materials, and for Labor at Labor's diminished wage. Crucially, Labor transforms Capital into product. The capitalist receives money from the sale of the product, more than enough money to replace the Capital expended on Labor, buildings, machinery and the rest. The additional money is profit added to the property of the capitalist, an excess of transformed Labor beyond that necessary to replace the Capital. The capitalist replaces the Capital in the vault and adds a portion of the profit to the Capital, increasing the accumulation in the vault of Capital.

The Old Ones Marx and Engels told their Tale of the Ever-Repeated Transformative Cycle of Capital, the inexorable iron tendency of Capital to grow by transforming Labor into Capital. With each cycle, a portion of Labor transforms into additional Capital. The possessors of Capital, whoever they are, however bad or good they may be, act consistently. Their faces are the face of Capital.

The face of Capital glanced at the L.A. Times on the poolside table. “Thousands Laid Off” said the headline. He smiled as he sank into the warm oxygenated pool of the Biltmore Hotel. It had been a long day.



I thank my dear friends who read and critiqued the pre-publication draft.
They preserve my relevance.





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Images

United States Department of Agriculture, Economic Research Service, “U.S. households by food security status, 2016” (Public Domain, retrieved Mar 27, 2018, https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx)



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