Daniel Brockman: The Fairy Tale of Capitalism: Managers, Professors and Engels

The motifs of FTC the Fairy Tale of Capitalism give hope and value to many people.

Friedrich Engels 1820-1895 (Wikipedia)

Once upon a time, a German boy dropped out of high school. His father sent the boy to Bremen to take a job we of modern times would call an intern office clerk in a commercial business. He read the philosopher Hegel in his spare time and wrote newspaper articles. His mother begged him to stop writing such scandalous ideas. His name was Friedrich Engels, the “forgotten” Old One. At 21, he joined the army which ordered him to Berlin. Thus began his adventure. He would shake the world. The aftershocks continue even in our modern times.

In his spare time, the young man attended university classes but never got a degree. He hung out with a group called the “Young Hegelians”. He wrote controversial articles. The editor of a political newspaper published the articles.

Engels wasn’t in Berlin long. He went to Manchester in Lancashire, England to work with his father’s partner in the Manchester office of the family business, a thread factory in that city. At the time, Manchester and the surrounding Lancashire County were the world’s manufacturing center. The city was the throbbing innovative edge of the most advanced technologies, using steam and water to power spindles and looms for manufacture of textiles. The city also hosted an array of other industries as well. It was full of factories, each employing several hundred workers, a way of working made possible by powered machinery. Manchester was a boom town.

Engels took great interest in the lives and working conditions of the factory Workers. He went down from the company office to get to know them. He visited them on the job. He wandered the streets at all hours, ate and drank with the workers, and learned their ways. He took copious notes. To his German editor, he sent several articles which he subsequently collected into the book “The Condition of the Working Class in England” , both a detailed economic history and a polemic.

Engels wrote “Condition” in the style which the times favored. You may recognize this style from your reading his contemporary Charles Dickens. Long strings of words form sentences that cascade over two or three pages.

Engels documented the utter poverty in which many Workers died from starvation and disease. The Workers typically shared a bed of rags with six or eight comrades in a leaky house without furniture. He saw children, women and men working 70 or 80 hours per week for wages of pennies. He read reports of doctors, police and government agencies describing the illnesses of Workers living in squalor. In the factories, strained working postures and dangerous equipment injured Workers. Bad light and detailed work blinded makers of lace and fine threads. If they survived, infirmities often disabled them for work. They sometimes lived to 40 or 50 years of age.

The Workers, or “proletarians”, in the textile factories of Manchester had no, or very little, property from which to get income. Engels included the petite bourgeoisie, the people who owned small shops selling modest goods, among the proletarians. Their lack of property distinguished them from the bourgeoisie, the capitalists who owned property, among whom he included the nobility. To sustain their lives, the proletarians had only their Labor. The wages of Labor sufficed to sustain their lives for at most the next few days.

Technical innovation enabled lower product prices, because the new methods could produce much more product with the same quantity of Labor. People who wove cloth by hand in their cottages fell on bad times. They couldn’t sell their product at the low prices of machine-made goods. The cottage weavers moved to Lancashire to find work in the factories.

Samuel Compton's Spinning Mule (circa 1779), image by Pezzab

The owners of property, the bourgeoisie or middle class, as Engels called them, began to receive orders for manufactured goods from distant markets, colonies and other countries where buyers couldn’t get similar goods so cheaply from local sources. To meet demand, they would activate idle factory capacity, hiring Labor from the “unemployed reserve” to operate the machines. As orders continued, owners invested Capital to buy the latest versions of automated spinning machines and hired more Labor from the reserve.

Orders grew in size and number. Commerce boomed. Workers were a bit more scarce during short periods of the boom. To to entice them to fill the last vacancies in the factory, the bourgeois owner offered a little more pay for short periods. The Workers liked the modestly improved diet and housing the higher wages made available. The slightly better pay brought more Workers to the factories of the bourgeoisie. The factory owner called for additional production in anticipation of future orders, which continued to arrive for a few years. Bourgeois neighbors, encouraged by the example of the successful factory, set up their own factories, too. Times were good.

It came to pass that production outpaced the slowing stream of buyers’ orders. Overproduction resulted in glut of product. Factory owners reduced prices to clear unsold inventories. They dismissed some Workers and reduced hours of operation. The money Workers got from wages fell even below the cost of sustenance. In some cases, the owners ceased operation and closed the factory.

The bad times returned. Discharged Workers joined the “unemployed reserve”. Having no wages, they had no means to pay for rent and food. Landlords evicted many. Starvation and disease reduced the numbers of the “unemployed reserve”. New orders for goods didn’t cease entirely, but sank to low levels easily met by remaining inventories and the production from remaining factories.

A new machine would lower the cost of making product, often by more advanced automation requiring fewer Workers for operation. Initially, the owners had higher rates of profit with the new machines, even while the lower prices of product attracted more orders. A new period of good times began.

We aren’t certain Engels knew the works of Sismondi who wrote an early description of episodic economic crises. Engels traced the repetition of boom and bust in the factories of Manchester and figured it to recur every ten years plus or minus a few years. Later Economists also considered these fluctuations. A widely shared consensus view developed during the time of the Great Wars, and the Professors began singing the song “The Business Cycle Goes Up and Down”.

The Professors, and we mean the Business School Professors, studied the Tales of the unintelligible Economists. The Professors interpreted the Tales and composed their understandings in the more marketable form of songs. Some of the Professors were themselves Economists, but that’s another story.

Sir Richard Arkwright 1732-1792,
one of Lancashire's early capitalists.
Portrait by Mather Brown.

The Professors performed their songs in the business schools for the students who listened carefully so they could become Managers or Professors or Economists. Some of the students would become Supercompensated CEOs and would donate large amounts of money to their favorite business schools to employ Professors. Thus, in the songs, the CEOs were Ingenious Innovative Job Creators, great leaders, and the vital sina qua non of the Society. The Professors published their songs in the journals. Hoping for tenure, many also composed long chansons de geste (or sagas) which they published as books, not uncommonly sold to students at high prices. Few of the published chansons were ever sung at all except for a selected stanza or two. None were ever sung in their entirety.

In our modern age, the Professors’ repertoire includes songs ranging from the classic “Led by the Invisible Hand” to the recent hit “Quantitative Ease”, still popular at this writing. As a historical note, there is a list of songs, believed to be an all-time greatest hits list, compiled, we think, by a Professor “Captain” Ed Murphy of Caltech in Pasadena, California circa 1965. Per legend and rumor, at Edwards Air Force Base in California during the great wars, after a scientific experiment performed by his assistant, a Dr. Stapp, Murphy articulated the well-known natural law “If anything can go wrong, it will.” A rumored many times photocopied one-page biography bore his portrait. Unfortunately, due to a fire that destroyed department records, we know nothing more of Professor Murphy. Here is the list of songs from Murphy's list:

“...High Plateau” [Song not recognized. Initial part of the paper is burned away.]

“Growth of GDP”

“Corporations Serve the Interests of the Shareholders”

“Mark to Market”

“Led by the Invisible Hand”

“Inelastic Supply Blues”

“Total Quality Control”

“Looking for my Marginal Return”

“Debits on the Left”

But we digress. People who wanted to be Managers learned many of the songs (at least long enough to take the exam). Managers oversee the planning and operation of Firms and the direction of Workers. Peter Drucker, a highly esteemed Professor and composer of dozens of chansons, taught that the main job of a Manager was to choose, according to candidates’ best capabilities, the subordinates who could best do the job. The notion of Management originated early in the period of the Great Wars. Before then, there were overseers and Workers. In our modern times, four kinds of Managers have evolved.

Supervisors - Managers who manage Workers directly.

Directors - Managers of Managers. Not to be confused with the members of the Board of Directors.

Executives - A small subset of Managers, typically no more than a half-dozen per Firm. The Executives have authority over all the other Managers of the Firm.

Chief Executive Officer or CEO - Equivalent to President. The most highly ranked Manager in the Firm. The CEO can tell any of the Workers or other Managers what to do.

In Engels’ Manchester, each factory had a single manager, similar to a modern CEO, usually the owner or a relative of the owner. The only other kind of manager in the factory was the overseer, something like our modern Supervisor.

Thomas High's Spinning Jenny circa 1764

Ricardo said the value of Labor equaled the cost of subsistence. The capitalist collected the full price of the product, less the rent paid for the Land and the wages paid to Labor. The capitalist’s profit captured the value of changes in price of product. The rent on Land depended on its usefulness relative to other tracts of Land. The wages of Labor tended toward the value of necessities to sustain the Workers’ human lives, which seldom changed much. Wages and rent didn’t vary with the price of the product. If a high product price or lower cost of production occurred, neither rent nor wages would increase, but the additional value would go to Capital.

Engels saw that, at the factories of Lancashire, in the course of a business cycle, to maintain or improve their profits, the bourgeoisie would seek to reduce wages or to get more Labor for a given wage. In “Condition”, Engels diagnosed the private ownership of property, lying at the core of the “factory system” or “capitalist system”, as the cause of the Workers’ distress. Since higher wages reduced Capital’s profit, Engels saw the interests of the Workers in direct opposition to the interests of the bourgeoisie. He saw that the state served the bourgeoisie who sustained and directed the state. The Workers interacted with the state only when imprisoned or beaten by the police. Engels predicted that the bourgeoisie would accord Workers no improvement of their condition, and that the Workers would, with certainty, wrest control from the bourgeoisie by violent revolt, for they had no other recourse.

Violent Workers’ revolt to effect change in the treatment of Workers wasn’t a new idea with Engels. Perhaps he had heard of the Merthyr Rising of 1831 or the Newport Rising of 1839. In any case, his writings usually mentioned violent revolt.

Engels’ Berlin editor was the Old One Karl Marx. In our story, FTC the Fairy Tale of Capitalism, these two great villains threatened the Society. The two young villians had hit it off from the start. “Condition” was first published by Marx in a series of articles subsequently compiled as a book in 1845. Four years later, they collaborated to produce “Manifesto of the Communist Party”.

“A spectre is haunting Europe”, they wrote. The “Manifesto” encouraged Workers worldwide to overthrow the bourgeoisie with violent revolution.

“The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win. Workingmen of all countries unite!”

And capitalists worldwide did tremble and oppose the Communists. Engels, the scion of a bourgeois capitalist, had called out his foe. In decades to follow, capitalists, monarchies and empires fell to revolutionaries quoting Marx and Engels. In various regions of the world, some form of collective ownership of the means of production replaced the private property of the bourgeoisie.

In 1867, Engels and Marx published their collaboration, the immense book “Capital”, identifying Louis Blanc’s notion of “Capitalism” as the current phase of the evolution of civilization. The Old Ones Adam Smith and David Ricardo simply described the economic system of private property and free exchange by which the world worked. Engels and Marx said there was an alternative. They called the existing system “Capitalism” and said “Communism” was an alternate and “inevitable” successor system.

In our Fairy Tale of Capitalism, no good comes from Communism, and it threatens the Society. Capitalists adopted the term “Capitalism” to describe themselves, their adherents, and the Old Ones Adam Smith and David Ricardo (who had never heard of Capitalism). Communists, said the Capitalists, were all those who challenged Capitalism, and by challenging Capitalism, they threatened the civilization on which Society depended.

Marx and Engels challenged Capitalism. They predicted a violent proletarian revolution (though Engels wrote in his preface to the 1886 English edition of “Capital” that England might effect the revolution peacefully). Communism is the evil menace in FTC that the CEOs and Aristocracy feel called to conquer.

Notably, Engels and Marx articulated an idea that was then novel but seems quite natural in our modern times: that history has an economic basis. They said innovations in economic means of production shape social systems and the trajectory of history. But that’s another story.

“Causes of Civil War are also, that the Wealth of the Nation is in too few mens hands, and that no certain means are provided to keep all men from a necessity either to beg, or steal, or be Souldiers.”

-- William Petty 1623-1687

I wish to thank my several good friends who read prepublication drafts and offered corrections and advice.

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Images

Image: [Public domain] Sir Richard Arkwright (1732-1792) portrait by Mather Brown (1790, Wikipedia)

Image: [Creative Commons Attribution-Share Alike license] Samuel Compton’s Spinning Mule (circa 1779, image by Pezzab, Wikimedia)

Image: [Public Domain] Friedrich Engels 1820-1895 (Wikipedia)

Image: [Public Domain] Thomas Highs’ spinning jenny (circa 1764, Wikipedia), published in Edward Baines, “History of the Cotton Manufacture in Great Britain” (1835)

Sources

Daniel Brockman, “CEOs, Growth and Prosperity of Society” (Mar 31, 2017, https://daniel-brockman.blogspot.com/2017/03/ftc-ceos-growth-prosperity-society.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: Supercompensation, Income and the Exchange” (Apr 6, 2017, https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.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)

Peter Drucker, “The Essential Drucker” (2001, https://smile.amazon.com/dp/0061345016)

Friedrich Engels, “The Condition of the Working Class in England” (1845, http://amzn.to/2snelK9)

Friedrich Engels, Paul Sweezy (tr), “The Principles of Communism” (1847, Creative Commons Attribution-ShareAlike 2.0 license, https://www.marxists.org/archive/marx/works/1847/11/prin-com.htm)

Andrew Hill, “The management revolution” (Jun 12, 2013, Financial Times, https://www.ft.com/content/25def0a6-d352-11e2-b3ff-00144feab7de)

Mark Hulbert, “New CEO is Ford’s Hail Mary pass” (May 23, 2017, Marketwatch, http://www.marketwatch.com/story/new-ceo-is-fords-hail-mary-pass-2017-05-23)

Karl Marx, Friedrich Engels, Samuel Moore (tr), “Capital: Critique of Political Economy” (1867, http://amzn.to/2sEPAsr)

Karl Marx, Friedrich Engels, Samuel Moore (tr), “Manifesto of the Communist Party” (1848, Marx/Engels Internet Archive, Creative Commons Attribution-ShareAlike license, https://www.marxists.org/archive/marx/works/1848/communist-manifesto/index.htm)

Pedro Schwartz, "Capitalism and Its Names" (Nov 7, 2016, Library of Economics and Liberty http://www.econlib.org/library/Columns/y2016/Schwartzcapitalism.html)

"J.C.L. Simonde de Sismondi” (Biography.com https://www.biography.com/people/jcl-simonde-de-sismondi-37535)

Note: We regret we have mislaid our note citing the source of our information regarding Professor “Captain” Ed Murphy.