2017-11-13

The Fairy Tale of Capitalism: Rand, Marx and the Downward Trickle


FTC the Fairy Tale of Capitalism is deeply, but inconsistently, sarcastic.




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 Once upon a time, ...

Ayn Rand, 1925, Public Domain

... economics described the behavior of people as observed by the Economists. The Economists included Old Ones David Ricardo and Adam Smith. They set their tales in scenes of the emergent industrial age and described human behavior for all time. Both were aware of the Downward Trickle, the waste stream of the Aristocracy, though neither of them named it that. The name arose in the time of Reagan as the Great Wars drew to a close, but that’s another story.


Smith wrote that the Invisible Hand guides the rich to divide necessities into equal parts for all.  Ricardo wrote that the capitalist employs Workers from the unemployed reserve to operate the highly productive machines of the new technologies. The capitalist pays wages of Labor to the Workers for their necessities of life, just enough to keep the Worker working for another week. When the business cycle flattened or turned down, as it did every 8 or 10 years, the employer capitalist dismissed the employee Worker, who would then join the unemployed reserve, receiving no wages, ready to work all day for bare necessities, and suffering privation. From this economic background emerged Karl Marx.


The Old One Karl Marx was a well educated newspaper editor, active in the hodgepodge of socialist political movements of post-Napoleonic Europe. He read Ricardo and Smith, understood them well, and didn’t dispute the main character of their descriptions.


Karl Marx, circa 1870, Public Domain
Marx and the Old One Engels met as young men and began a lifelong collaboration. Legend informs us they were dividing the bar bill with some anarchist friends in a Parisian bistro just after Christmas 1857, when Engels overheard one word which was the punchline of a joke, the word "capitalism".


Marx and Engels compiled factual detail of the Downward Trickle of wealth and income from the Ten Percent to the Workers. They saw chronic starvation among the Workers and their families, with some starving to death during business downturns. They said these deaths were the unavoidable consequence of private property. A minor political party commissioned them to write a mission statement, the "Manifesto of the Communist Party", in which the word “capitalism” appeared in print for the first time. The word “capitalism”, with the tranquility of a thunderbolt, cleaved modern governments into two parts.


Capitalism, wrote Marx and Engels, was the scientifically unavoidable result of private property. Communists opposed capitalism. Communists called for the abolition of private property beyond the modest house, garden, storefront and workshop of an ordinary household. The coercive powers of government defended capitalism, so that peaceful reform would never overcome capitalism. For Marx and Engels, Workers had no choice. Workers would rise imminently, unavoidably, inevitably in violent revolution to replace Capitalism with a new social structure featuring the control by the Workers over the means of production.


As you know, not uncommonly FTC uses a word with two different meanings. "Capitalism", named by Marx and synonymous in his work with "capitalist production" and "capitalist system", means the way a capitalist (person wealthy in private property) uses her capital (wealth in private property) to establish and operate a Firm with intent to increase her capital, employing Workers when necessary to operate the equipment. "Capitalism" also means a political view advocated by persons who favor the capitalist system, who may or may not have great wealth of their own. Perhaps you can easily imagine a capitalist of much private property would likely consider herself a capitalist of view, advocating for private property. Let's also remember that a poor person can be a capitalist of view, but can't be a capitalist of great wealth.


Skyline of New York City, circa 1950, Public Domain
Marx's christening capitalism stirred a shiver of alarm among the capitalists of wealth at the time. Though capitalists controlled the governments, socialists and other friends of communists successfully got legislation over the next decades to abolish child labor, to limit the hours of the workweek, to legalize labor unions, etc. Capitalists of wealth and their allies self-identified as capitalists of view and organized to preserve private property and to prevent impairment of profits.


A century after Marx's midwifery of capitalism, during the Great Wars, Ayn Rand emerged to write gigantic novels and host an intellectual salon of capitalists of view in Manhattan. She gave the most lucid defense of capitalism. She sang like a Professor, but she was not one. She was not an Old One, nor an Economist, but she wrote long unintelligible tales. Like Jeanne d’Arc, she evades classification.


Rand claimed virtuous selfishness was objective and rational with the same superstition that Marx claimed communist revolution was scientific and inevitable. Rand conflated Stalinist and Maoist tyrannies with communism and socialism. Stalin and Mao were dictators. Stalin and Mao were socialists and communists. Therefore, all socialists and communists are dictators, so her reasoning went.


Rand said private property was necessary for human rights. Marx said the 90 Percent had no rights, and that only the Ten Percent (whom he most frequently called the "bourgeoisie"), the possessors of capital (which he called "bourgeois property"), enjoyed rights.


Marx said capitalism had produced wonders of production far surpassing the Egyptian pyramids. Rand said capitalism produced the grand skyline of New York.


Pyramids of Egypt, circa 1900, Public Domain
Rand said the Downward Trickle of capitalism raises the standard of living of all people, and the inhabitants of the slums lead a life of luxury compared to an ancient Egyptian slave. Marx said the slums are where the workers die under capitalism. Marx explained why slums exist under capitalism. Rand did not.


The word "slum" was seldom used after the death of Reagan. Earlier, when the children of the Ten Percent asked "Daddy, what's a slum?", they were told "That's where the poor people live."


The Staffs, promoting enhancements to the Firehose Up, describe how the Downward Trickle, the waste stream of the Aristocracy, conveys a rising standard of living to all people. Several verses of the Professors' song "Growth of GDP" focus on per capita GDP, Adam Smith’s promised equal parts for all by the Invisible Hand. As the 50 Percent pluck their rising standard of living from the Downward Trickle, children starve.


In our next episode of the Fairy Tale of Capitalism, the amazing Invisible Hand will guide the Corporations as they frolic in the Free Market.




My kind friends who read the prepublication drafts and sent me their comments have my sincerest thanks.


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Images


“Ayn Rand” (1925, USSR passport photo, Public Domain, https://commons.wikimedia.org/wiki/File:Ayn_Rand.jpg)


Gottscho-Schleisner, Inc., “New York City skyline” (Mar 14, 1950, Library of Congress, LC-G613- 56750, Public Domain, http://www.loc.gov/pictures/item/gsc1994001246/PP/)


John Jabez Edwin Mayall, “Karl Marx” (circa 1870, UK National Portrait Gallery, http://www.npg.org.uk/collections/search/portrait/mw75680/Karl-Marx, Public Domain in USA, https://commons.wikimedia.org/wiki/File:Karl_Marx_by_Mayall_c1870.jpg)


“U.S.S. Raleigh, sailors at the pyramids” (circa 1900, Library of Congress, LC-D4-20921, Public Domain, http://www.loc.gov/pictures/item/det1994010117/PP/)


Sources

Crane Brinton, “The Anatomy of Revolution” (1965, Prentice Hall, https://www.amazon.com/Anatomy-Revolution-Crane-Brinton/dp/0394700449)

Daniel Brockman, "The Eric Tetralogy: 3: The Firehose Up" (Sep 9, 2017, https://daniel-brockman.blogspot.com/2017/09/FTC-eric-tetra-3-the-firehose-up.html)


Daniel Brockman, “The Fairy Tale of Capitalism: Land and Ricardo” (Apr 27, 2017, https://daniel-brockman.blogspot.com/2017/04/FTC-Land-and-Ricardo.html)

Daniel Brockman, "The Fairy Tale of Capitalism: Workers, GDP and Economists" ( Mar 17, 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html)


Alisha Coleman-Jensen, Matthew P. Rabbitt, Christian A. Gregory and Anita Singh, “Household Food Security in the United States in 2016” (2017, U.S. Department of Agriculture,  https://www.ers.usda.gov/webdocs/publications/84973/err-237.pdf?v=42979 )


Friedrich Engels, “The Condition of the working Class in England” (1886 American Edition, first published 1845, republished by Penguin 1987, http://amzn.to/2zzUygE)


Karl Marx (Friedrich Engels, ed.), “Capital” (1867, 2010 republication by Digireads, http://amzn.to/2jmOjac)


Karl Marx and Friedrich Engels, "Manifesto of the Communist Party" (1858, 1908 New York Labor News Edition, http://amzn.to/2hl0LCS)


P. J. O’Rourke, “On the Wealth of Nations” (2007, Grove/Atlantic, http://amzn.to/2zDk9Uc)


Ayn Rand, “Atlas Shrugged” (1957, Penguin, 1168 pages, http://amzn.to/2ytJpuy)


Ayn Rand, “The Virtue of Selfishness” (1961, Penguin, http://amzn.to/2hmkC4u)


David Ricardo, “On the Principles of Political Economy and Taxation” (1817, 2013 Heraklion Press edition, https://smile.amazon.com/Principles-Political-Economy-Taxation-ebook/dp/B00EINTMBI)


Adam Smith, “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776, http://amzn.to/2jjusby)


Adam Smith, “The Theory of Moral Sentiments” (1759, 2010 republication by Digireads, http://amzn.to/2ADCAYL)








2017-09-14

The Eric Tetralogy: 4: Ideas as Monops

A subsaga of FTC the Fairy Tale of Capitalism

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Hansen, "Coronation of Eric of Pomerania" (1884, Public Domain)
Who could object when governments, such as Elizabeth I of England and Eric of Pomerania, granted or allowed Monops to their subjects, their citizens or themselves? Complaints did arise, as we saw a few episodes back. The government receives the loyalty of the Monop, possibly taxes or part ownership, political campaign contributions, opportunity to trade on the Exchange in advance of news, and perhaps some undisclosed deposits in foreign bank accounts. The Monop receives suppresson of competitors by the coercive powers of government. As with all fair trades, both parties gain benefits from the trade. Some governments, citing the peoples’ right to pursuit of happiness, didn’t generally require advance grant of permission to operate a Monop, and benefits to government weren’t visible.  


Each gets something valuable in the trade for something less valuable. From where do complaints arise? While the counterparties to a trade do benefit, the trade may have pros and cons, called “externalities”, for people who don’t participate in the trade. If your neighbor establishes a bakery on her premises, you may enjoy the “free ride” (positive externality) of delicious aromas when she removes bread from the oven each morning, though you never buy anything. If your other neighbor establishes an unlicensed retail pharmacy, though you never buy the wares, you may suffer the negative externality of strange people shooting each other in your neighborhood at all hours to resolve customer service issues.
The Monop’s customers don’t participate in the cozy trade between the Monop and the government. With each customer trade, the Monop gathers Rent, which diminishes the net benefit the customers receive. Their diminution of benefit, which Sam Adams called tantamount to tax, is a negative externality of the Monop’s trade with the government.

With sufficient political opposition to negative externalities, governments acted against Monops. Sometimes, governments broke them up into multiple smaller firms, as with Standard Oil Company and AT&T. Among other actions were monetary fines, regulation, mandated sharing of intellectual property or changes in operations, requiring compatibility with component parts from other companies, and disclosure of secret business information and software.

On the other hand, governments protected, even enabled, some Monops, like the IPRs we mentioned in the last episode. A government granted to an applicant an IPR on an idea. Of course you know what an idea is. You probably had an idea recently, like today, and maybe it was “original”, that is, no one ever thought of it before. The government granted IPRs only for original ideas. If a person had an IPR, then government protected the idea like property, and no one could use the idea without permission from the holder of the IPR. Before governments began granting IPRs, anyone could use a idea, whether they thought of it themselves or knew of it from someone else.

With the IPR, the protected idea became artificially scarce, thus enabling a Monop. Before the great wars, the grand Monop J. P. Morgan said

A man always has two reasons for what he does --
a good one and the real one.

J. P. Morgan (Public Domain)
The “good” reason for IPRs was to reward persons with good ideas by giving them a potentially lucrative Monopoly, and the reward would enable people to think. Security had to escort out a few impolite people who observed that humans thought for thousands of years before IPRs were granted. The “real” reason, of course, was the IPR allowed unlimited income from Monopoly Rents. After the great wars, the most esteemed dean of the Staffs, himself an unintelligible Economist, asserted that “conceptual products” (IPRs) increasingly dominated “the economy” (GDP). The Staffs acquired and tended and leased IPRs for their client Aristocrats, thereby increasing Firehose Up capacity, making more likely they could describe increasing after-tax income in their quarterly reports to their Aristocrats, and thus Staffers anticipated enhanced future personal income.

If 40% of the workers in a small town work for your company and can’t easily get jobs elsewhere, or if you own nearly all the oil refineries in America, or if no one can buy tea unless they buy it from your company, or if 90% of all new computers won’t work except with software sold by your company, or if every telephone call runs through your company’s switching network, or if all the merchant vessels must pass through your strait and pay your toll, then you have a Monop, by which the Firehose Up delivers a stream of Rents to you.

As a professional courtesy, the other Great Powers didn’t object to the negative externalities of King Eric’s magnificent Monop, for they also had Monops to enrich their treasuries and keep their wealthier nobles compliant.

Further, the monarchs tempered professional rivalries with nepotism. When Eric was in his twenties, his aunt Margaret arranged Eric’s marriage to the twelve-year-old Princess Philippa of England. Their marriage continued 24 years. Philippa died.

Love blossomed publicly between the recently widowed Eric and Philippa’s lady-in-waiting, the beautiful Cecilia, scandalizing the kingdom. Seeking relief from the critics, Cecilia wed Eric with a brief pre-nuptial agreement by which she got nothing but Eric, which was all she wanted. But the scandalmongers persisted. Ten years after Philippa’s death, exasperated, Eric said “Cecilia, the scene drags. Let’s split.” Cecilia said “We can’t. You’d lose the Sound Dues Monop and the throne.” Eric said “But I’ll have you.” Cecilia gasped and threw herself into his arms.

He was heard to mutter something like “fake news”, and off they went to Visby on the island of Gotland in the Baltic Sea, a centuries-old pirates’ and smugglers’ hideout. Supposing the ever-intemperate Eric had yet another tantrum, the nobility waited for him to return to Copenhagen. But he didn’t. Eric took up piracy. The nobility elected Christopher of Bavaria to the throne.

Epilog

Monops are components of the Firehose Up, conveying streams of Rents extracted from trade counterparties. The Monop gets a better price than would prevail in competitive markets.

Tea Party votes politically supported Staff efforts to enhance the Firehose Up, the Aristocracy’s stream of income.

Royal officers collected the Oresund Sound Dues until, four centuries later, Denmark limped, diminished by wars. The Great Powers demanded and got zero toll for their vessels, in exchange for a one-time payment. Likewise, the young government of the United States paid $400,000, which was less costly than sending a warship to Denmark. Made ineffective, the Sound Dues Monop ended.

In Eric’s time, a contemporaneous Silk Road bandit might have started with ambushing travelers in a defile, then building a fortress on a high hill to secure the takings, then driving competitors from the lands visible from the fortress, then establishing orderly customs houses for bloodless loot collection at the periphery of lands he claimed. He would end his life the greatest and most serene of kings.

But Eric lived his kaleidoscopic adventures in reverse. He ended his life a pirate commandeering merchant vessels in the straits, preceded that with a levy on travelers passing his tax collector in the fortress at Helsingor. Before that were wars with contentious foes, and he began his life as the splendid dashing Prince and King of the unsurpassed Kingdom of Denmark, Norway and Sweden.

In our future episodes of FTC the Fairy Tale of Capitalism, we’ll meet Ayn Rand and Karl Marx and tell the story of the Downward Trickle, the Aristocracy’s waste stream.

The Workers told their children that money can’t buy love.

Thus ends the Eric Tetralogy. Cecilia and Eric lived happily every after.



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I appreciate friends. Their criticisms of prepublication drafts improved FTC.



2017-09-09

The Eric Tetralogy: 3: The Firehose Up

A subsaga of FTC the Fairy Tale of Capitalism

Our planet is much like the Fairy Tale of Capitalism, but not quite.


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Oresund Map (1888, Public Domain)
In our last episode we envisioned Eric’s future Monop emerging from a future war. We saw the Boston Tea Party disrupt the British East India Company tea Monop. We saw Rick Santelli’s modern Tea Party align Workers with the Aristocrats and their Staffs to influence government. The Workers brought votes, and the Staffs brought intellectual charm. The Tea Party gained political power via seats in the legislature. The Staffs used that power to minimize government interference with the income source for their patron Aristocrats, the Firehose Up.   


As you probably know, the Fairy Tale of Capitalism sometimes uses one term for two meanings. One meaning of "Firehose Up" refers to the more or less complex system of an Aristocratic household’s incomes from Capital (owned properties and wealth), Supercompensation, and all other income. The household employs a Staff, also known as the “family office”, of accountants, investment advisors, business managers, lawyers, portfolio managers, and lobbyists (or contracts with providers of some of these services) to assure the assets are well managed, with optimal accounting and legal practices applied to the Capital and Labor income of the household. Thus the Staff assures they can give quarterly reports of increasing after-tax income from the household’s well-maintained Firehose Up. King Eric’s Firehose Up evolved from ancient customs maintaining the King’s property and incomes by the might of the King’s ships, soldiers and police. With centuries of improvements, the modern Firehose Up became a system of complex conveyances transporting portions of GDP and the greater part of GDP growth to the Aristocrat, with legal authority maintained by the might of the government’s ships, soldiers and police.


The other meaning of "Firehose Up" refers to all Aristocratic income sources as enabled and optimized by law, regulation, public policy, custom, convention and tradition.


In generations preceding Margaret and Eric, after disappointing results from war, hard times befell the monarchy of Denmark. To make ends meet, the King pawned southern counties. After a large part of these debts were paid, Margaret presented the pawn tickets. She wanted the lands back. Many kings and Aristocrats who loaned money to Denmark conveniently forgot the pawns and repayments. They said “What collateral? Those weren’t loans. Those were sales!”  Via many meetings, letters and conference calls, she reacquired some lands, but negotiations continued tediously.


On coming to the age of majority, the handsome, strong, daring and impetuous Eric of Pomerania lept to the saddle without touching the stirrups, like a western movie white-hat pursuing the bad guys. He declared diplomacy had produced little, and something about “make Denmark great again”. Then he went to war to get the lands back. The wars drained the treasury, weakened the military, and lost a little more land rather than reclaiming it.


King Eric retreated to long, sulking strolls on the cold, foggy beaches of northern Denmark. One annoyingly sunny day, he saw the bluffs of Sweden on the far side of the Oresund and a merchant ship moving through the strait, having no other way to navigate from the Baltic to Holland and Britain. For centuries, pirates had waylaid vessels in this strait. In a flash of insight, King Eric realized he could chase out the pirate riff-raff, and make the strait safe, and make the Oresund a valuable thing no one else had, and collect Monop rent! “Set up a toll booth!” he ordered an officer.


Eric levied a clever toll. He required masters to stop their vessels at Helsingor and declare the value of the hull and cargo to the officer there. Eric’s officer determined the Sound Dues rate depending on origin and destination of the voyage, the nature of the cargo, applicable treaties, bribes and other considerations, but in any case a small fraction, like 0.5% or 1%. Multiplying the rate by the master’s declared value gave the amount of Sound Dues the master had to pay to transit the Oresund. But there was a catch. The officer could choose to buy the hull and cargo at the declared value. If master declared a low value to minimize the Sound Dues, and if the officer chose to buy, and if the declared value was less than costs, then the master couldn’t repay his investors. If the master declared too high, then the amount of Sound Dues was high, then the officer took the toll, and the master kept the vessel, and the high toll reduced the profits of the voyage. These incentives kept the masters’ declarations close to marketplace value. The masters grumbled and paid the annoying but tolerable toll.


The Sound Dues conveyed robust royal income from the merchants to King Eric’s treasury. Eric used his possession of scarce feasible alternate trade routes to shift to himself part of what would otherwise be the merchants’ profit from each voyage. Eric was a Monop. Eric was an Aristocrat. Eric had an excellent Firehose Up.


Elizabeth I of England (circa 1590,
National Maritime Museum,
noncommercial use with attribution permitted)
As with Eric, Monops dated from the most ancient times, though FTC tends to overlook them. A monarch (as with Eric) or local gangster (as also with Eric as we will later see) would protect an underling in her role as sole provider of some article of trade. The monarch would get a devoted ally, and maybe an additional source of revenue. On the other side of this trade, the underling gets the services of some police or soldiers to suppress competition and the opportunity to maximize profits without limitation.


Monopolies emerged in grand style during the reign of Elizabeth I of England, decades after Eric’s Oresund Sound Dues got underway. She’s dead now. She granted a variety of monopolies. Interesting among others was what later people would call an IPR Intellectual Property Right granted to Tallis and Byrd to print and publish music. But that’s another story.


Luridly and directly affecting matters of state, Elizabeth loved the 2nd Earl of Essex. No one could imagine why, since his volatile personality made Essex the most ill-behaved courtier in her realm. Anyway, he needed an income, so she gave him the Monopoly on sweet wines, by which he received the taxes levied on the wine. When he rebelled and attempted to depose her, she came to her senses and chopped his head off.


Elizabeth ruled long before the Old Ones. You may remember, for the Old Ones, competing buyers and sellers always existed, and so it is in FTC. However, some heretic Professors deviated from orthodox FTC with apocryphal songs about Monopolies and Monopsonies. The more elaborate songs told how these existences were trivial or beneficial to the Society. These songs spun off a subgenre on “natural Monopoly”, Monops for which the scarce good is a huge network, but that’s another story.


Even in Elizabeth’s time, complaints of abuses of Monopoly were heard in the House of Commons. During the decades before the great wars, legislatures began emitting general anti-Monopoly laws. Governments used these laws to constrain or take control of Firms acting as Monopolies.


Even so, Staffers would tell their children “Wise children try to corner a market.”


We come to the end of another episode. Will Eric find happiness in Cecilia’s arms? What happens when ideas become Monops? Who is Cecilia anyway? All will be revealed in the next episode of FTC the Fairy Tale of Capitalism.


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Several friends read my prepublication drafts. They provided criticism and comments that improved this article. I'm grateful for their help.