Profits are a tax on labor

[Trinopus]

@Shagnasty

. . . What about a military analogy? What if someone said that Generals only benefit off of the efforts of their soldiers because Generals aren’t generally under direct fire? It would be true in a way but someone else could point out that Generals are soldiers too and started out at much lower ranks and they were the ones that worked their way up to the rank they have because unusual talents, heroism, and dedication. That would be a better point.

An interesting analogy! It certainly doesn’t appear that a general is all that important. He just says, “Attack to the north, while maintaining a screen to the west.” Well, big deal! I could have said that! But what’s easy to overlook is that somebody has to say it. A committee wouldn’t work, because they’d take too long to say it, and a vote among the ranks would take even longer. Putting command in one man’s hand (or mouth!) works. Nothing else ever tried works anywhere near as well. (The Red Army, after the Russian Revolution, tried holding votes among the soldiers. Imagine how well this worked…)

. . . It is a 19th century child’s understanding of the world that leads people to believe that only human capital measured in raw muscle-power output is the primary measure that is important. That is where Marxism breaks down fatally. It views some groups of people like draft animals and that doesn’t apply very much in the modern Western world.

It is mirrored by the 20th century child’s understanding, per Ayn Rand, that only the creative ideas of the inventive minds are truly a means of creating value or wealth. This view holds that labor is nothing but machinery, but the genius who drew the plans for the factory is the only one to be admired. This idea, too, is insanely unbalanced and warrants ridicule.

The truth is that we all contribute to the success of the economy. The guy who draws the blueprints, the guy who tightens the bolts, the guy who invests, and the guy from the government who comes and inspects for safety.

It’s like the joke about the parts of the body arguing over who is more important: the brain, the heart, the stomach, and, yeah, the large intestine.

[Dissonance]

@Shagnasty

What about a military analogy? What if someone said that Generals only benefit off of the efforts of their soldiers because Generals aren’t generally under direct fire? It would be true in a way but someone else could point out that Generals are soldiers too and started out at much lower ranks and they were the ones that worked their way up to the rank they have because unusual talents, heroism, and dedication. That would be a better point.

I’d be wary of military analogies to the business world - I blame that fad of adapting Sun Tzu’s The Art of War as a business model. With very rare exceptions, generals don’t rise through the ranks of the enlisted. They are commissioned as officers upon joining the military. Leadership while not under direct fire isn’t something that occurred as a purposeful decision on the part of militaries, it occurred as a result of the realities of the march of technology. Alexander the Great led from the front with his Companion cavalry, modern generals don’t generally avoid being under direct fire out of a desire to benefit off of the efforts of their soldiers. They do it because it is impossible to command an army that way anymore.

[Damuri_Ajashi]

@LinusK

Or maybe you’re confusing owners with the things they own: maybe you think that if owners disappear, the things they own will disappear as well.

in many cases, without investors, the thing is never created.

[LinusK]

@Voyager

People who invest in VC funds are effectively owners of large parts of startups. Investors, as opposed to the venture capitalists themselves, are hands off. Do you think their return from successful startups is immoral? If you do, lots of people in Silicon Valley would like a word with you.

There’s no doubt that people need capital. Desks, for example. And clothes.

But while it’s true that people need things like tools, and machines, and land, to do their work, what I’m actually asking about is why do we need capitalists, not why do we need capital?

So in your example, there’s no doubt that people need money. Start-ups need money (capital) in order to… start up. Without money, that would be pretty hard to do. So yes… startups need money. Now the question is, do we need a small group of people to control a disproportional share of the money in order to have start-ups?

[RickJay]

@LinusK

So in your example, there’s no doubt that people need money. Start-ups need money (capital) in order to… start up. Without money, that would be pretty hard to do. So yes… startups need money. Now the question is, do we need a small group of people to control a disproportional share of the money in order to have start-ups?

Well, you need a person, or people, to decide where the capital will be invested. Money doesn’t grow little legs and walk about on its own. Who do you think should direct the investments?

[Lemur866]

Without private ownership of capital, private capital will never be invested in productive enterprises. With me so far? If we decree that a worker might get wages, and save his money, but cannot spend that money to increase his productivity it would be pretty silly right?

A carpenter takes some of the money he gets from building a deck and buys a new power saw with it. Why would he do such a thing? Because with his new power saw he can work faster and produce the same output for less effort. He takes his current excess money and spends it on capital, in the hope that the money he spent now will bring him even more money in the future.

I hope we can agree that this sort of personal investment is only sensible and logical, correct?

Now imagine that the carpenter doesn’t have any extra money to buy a power saw. But his buddy does. And his buddy offers to buy him the saw, because with the saw the carpenter can make more money and pay back the buddy in the future. One possibility is that next year once he’s made more money, the carpenter should pay his buddy back exactly what the buddy paid for the saw. His buddy paid 50 shekels for the saw, so he should be paid back 50 shekels. And this was the custom in many pre-capitalist societies, even going so far as to declare that anything else was displeasing to the gods and make the spirits angry.

But why would your buddy lend you 50 shekels for a year, if he only gets back 50 shekels? Because he’s your buddy, or your family, or someone you have a close social relation with. He loans you the money, not because he makes money from lending money, but as a favor. In fact he’s losing money–he could buy the saw for himself and use it to make even more money for himself, but instead he gives it to the carpenter.

So we see the problem. No one will lend money except as a favor, which means there is no way to borrow money except from people within your close social group. And the inability to borrow money is a very high barrier to economic development. Finance isn’t just an afterthought, it is technology that was a necessary precondition to the industrial revolution.

Without private capital–the ability to loan money to existing enterprises, and the ability to buy and sell existing enterprises–our modern economy just wouldn’t work. Real world attempts to do away with private capital have turned out to be pretty much disastrous.

You are absolutely correct that money and ownership are legal and social fictions. They exist only in the minds of human beings, because we agree to pretend as if they exist. And we very often stop pretending these things exist, and we get barbarian hordes looting and pillaging. But a barbarian horseman who robs a city and enslaves the citizens and refuses to pretend that the citizens have ownership over themselves or their farms and houses and so on, will at the same time absolutely respect his fellow barbarian’s claim of ownership over particular horses, weapons, slaves, treasure, and so on.

Because unless the barbarians work together as a group there’s no way they can pillage a city, and one way they work together is to agree that Thag’s horse belongs to Thag, and Tork’s scimitar belongs to Tork, and Vong’s slave belongs to Vong. Tork’s scimitar is a capital good that enables him to kill city-dwellers and steal their goods. Without his sword, Tork cannot rob as efficiently. And if Tork didn’t have a sword, it would be in Thag and Vong’s interest to somehow provide him with one, so he can help them pillage.

And so we have the comical spectacle of the slavemaster insisting on the sacred rights of property that allow him to own the bodies and labor of other human beings, who do not own themselves, and the other slavemasters agreeing.

But of course, ownership and property do not descend from God, or from nature, but are just ways that human beings organize their activity. The reason we agree to pretend that Bob owns a store even though he doesn’t work in the store is that ownership of this kind is a consequence of allowing private capital, the investment of previously accumulated money into productive enterprises. We need capital, therefore we need some source of capital. We can restrict people to providing their own capital, except through the rare public provision of capital goods and improvements. But for industrial civilization it turns out we need more than that, we need private capital. When we try to do away with it, as people in the 19th and 20th century sometimes argued, we find that it doesn’t work very well.

Not that private capital is any sort of panacea. You need all sorts of social institutions as well, otherwise you have the rich stealing from the government and the government stealing from the people, and on and on.

[Kimmy_Gibbler]

Has anyone but LinusK expressed any support for the thesis of his OP? It isn’t seemly to spend so much time shooting fish in a barrel, my dear fellow Derps.

[RickJay]

@Lemur866

Not that private capital is any sort of panacea. You need all sorts of social institutions as well, otherwise you have the rich stealing from the government and the government stealing from the people, and on and on.

Even social institutions, though, are simply a form of capital direction and ownership. The freeways I used to get to work today are owned collectively by the people of the Province of Ontario (legally, the Queen, but really it’s the people) and its construction, maintenance and repair are matters at the de facto command and direction of the government of Ontario, managed by the Ministry of Transportation, who in effect are selling the people a usable freeway in return for tax dollars. It’s not necessarily a profitable enterprise on paper if you’re a Randian zealot, but in terms of social utility it is, and it still represents all the same agents of a business enteprise; you have shareholders (the people of Ontario) directors (the government) managers (the Ministry) contractors, workers, suppliers, and the like.

At some point, a limited number of people had to direct capital towards the construction of the freeway. Whether a given capital project is directed by a government agency that centrally plans things, as is the case with freeways, or by a private concern, as is the case with grocery stores or machine shops, or a combination of both, as is the case with, say, the airport, or a CHOICE of both, as is the case with schools, is purely a matter of what happens to be convenient at the time, and can change over time (the trucking industry in Ontario used to be partially government-directed, but no longer is) or from place to place (health insurance is almost entirely a government matter in Ontario, but is largely a private matter an hour from here in the State of New York.)

No matter how you slice it, though,

1. Someone is directing the labor of others, and
2. Someone “owns” the means of production who isn’t laboring over them.

[Voyager]

@LinusK

There’s no doubt that people need capital. Desks, for example. And clothes.

But while it’s true that people need things like tools, and machines, and land, to do their work, what I’m actually asking about is why do we need capitalists, not why do we need capital?

So in your example, there’s no doubt that people need money. Start-ups need money (capital) in order to… start up. Without money, that would be pretty hard to do. So yes… startups need money. Now the question is, do we need a small group of people to control a disproportional share of the money in order to have start-ups?

Are you talking about income inequality now? That’s a totally different subject. You can think that wealth is too unevenly distributed while still recognizing the need for return on capital.
Money for startups doesn’t accumulate by itself. The entrepreneur can take out a loan, but these things are inherently risky and he might not be able to afford the risk. VCs bring together people who can afford the risk with people who need the money. The need for giant returns on big successes comes from the simple fact that the capitalists will lose money on most of the startups.
How would you fund them?

[bump]

@Dissonance

I’d be wary of military analogies to the business world - I blame that fad of adapting Sun Tzu’s The Art of War as a business model. With very rare exceptions, generals don’t rise through the ranks of the enlisted. They are commissioned as officers upon joining the military.

Even at that, you still have the hourly/salaried divide, which in many companies roughly parallels the enlisted/commissioned officer divide. Just because someone came in as a 2nd Lt. or as a salaried junior something-or-other, doesn’t mean that they didn’t start out “in the shit” so to speak, and work their way up.

Granted, the situation’s a lot more fluid in the corporate world, where favoritism and other somewhat corrupt practices are more common than in the highly regulated military promotion system.

If there was anything I’d be idealistic and indignant about, it would be the horrible corporate inbreeding that seems to be endemic to the US business world. I’ve seen any number of flat-out incompetent people literally get fired from my company for incompetence, and yet get some kind of executive position at our competitors and partners, likely making the same cash they were before, mostly because these guys all know each other.

[OldGuy]

I build a factory, do all the organizing, hire the right workers, and get things started. I believe you agree that I’ve done some work and am entitled to some payment for that. Well when do I get paid?

I only get paid when we start producing and selling the stuff. It may take five or more years before the company starts to make a profit. You seem to be insisting that I must continue to “work” in order to be entitled to any of this profit, but “morally” I am entitled to it because I already did the work.

One of the big reasons we have ownership is exactly to get around the need to temporally tie the working and the getting paid. In a modern society the rewards are often not that immediate so somebody has to own the right to get those rewards in the future.

Now given that I do have the right to get paid in the future for my work, what should I be allowed to do with that right? Society has agreed that one thing I’m allowed to do with my right to my deferred compensation is to transfer that right to someone else. If I’m old I can transfer that right to my heirs.

But maybe I have a new idea I want to try or maybe I’m sick and need cash now to pay the doctor. I can also sell that right to my deferred compensation. I sell it to you. Society has agreed that I owned the deferred compensation and I had the right to transfer it to you. On what moral grounds do you want someone to argue that you no longer have the right to collect that deferred compensation that you and I willingly transferred to you just because you did no work in setting up this particular company?

[QuickSilver]

For a fair and balanced perspective, I suggest the OP read Ayn Rand next.

[LinusK]

@RickJay

Well, you need a person, or people, to decide where the capital will be invested. Money doesn’t grow little legs and walk about on its own. Who do you think should direct the investments?

Well, in the case of venture capital funds, according to Voyager, the people who direct the investments are the managers of the funds, not the investors. Which makes sense. Just because you have money doesn’t mean you’re good at making investments. That’s why fund managers exist.

Besides, deciding which start-up to invest in would require research, analysis, number crunching, watching power-points… What’s the point of being rich if you have to spend all day at work?

Of course, you’d still have to decide which fund manager should be managing your funds. Given recent history, though… the financial crisis, LTCM, AIG Financial, Enron, etc… It doesn’t seem like anybody’s doing a very good job of that.

[Martin_Hyde]

@LinusK

But while it’s true that people need things like tools, and machines, and land, to do their work, what I’m actually asking about is why do we need capitalists, not why do we need capital?

Define “need.” If you’re not willing to do that you’re not really here to discuss anything at all, but just to pontificate a grab bag of slogans you’ve found in some old pamphlets written by disgruntled German guys.

[KarlGauss]

I would like to thank everyone who has contributed to this thread. I know that I have found it informative (and interesting). Many of the posts here have made strong cases justifying the need and desirability of “profits”. Here is a link to one of Lemur’s posts that I found particularly helpful in understanding this important, and complex, issue:

@Lemur866

Without private ownership of capital, private capital will never be invested in productive enterprises. . . . And the inability to borrow money is a very high barrier to economic development. Finance isn’t just an afterthought, it is technology that was a necessary precondition to the industrial revolution.

Without private capital–the ability to loan money to existing enterprises, and the ability to buy and sell existing enterprises–our modern economy just wouldn’t work. . . .

The reason we agree to pretend that Bob owns a store even though he doesn’t work in the store is that ownership of this kind is a consequence of allowing private capital, the investment of previously accumulated money into productive enterprises. We need capital, therefore we need some source of capital. . . .

I found that (and other similar) arguments rather convincing. But how would, say, a Marxist, or socialist, respond to them? Would their rebuttal be primarily a moral/ethical one? Or is there a more ‘objective’ response, i.e. a response based on some underlying, consistent, and real-world-applicable model? Finally, I’l ask, whether all this faith in capitalism (declarations of which permeate this thread, both implicitly and explicitly) is nowadays simply empirically based, i.e. most non-capitalist systems have collapsed or have stagnated (and have often transposed into systems of varying degrees of totalitarianism and/or ones where human rights are repudiated)?

[LinusK]

@Lemur866

Without private ownership of capital, private capital will never be invested in productive enterprises. With me so far? If we decree that a worker might get wages, and save his money, but cannot spend that money to increase his productivity it would be pretty silly right?

A carpenter takes some of the money he gets from building a deck and buys a new power saw with it. Why would he do such a thing? Because with his new power saw he can work faster and produce the same output for less effort. He takes his current excess money and spends it on capital, in the hope that the money he spent now will bring him even more money in the future.

I hope we can agree that this sort of personal investment is only sensible and logical, correct?

Now imagine that the carpenter doesn’t have any extra money to buy a power saw. But his buddy does. And his buddy offers to buy him the saw, because with the saw the carpenter can make more money and pay back the buddy in the future. One possibility is that next year once he’s made more money, the carpenter should pay his buddy back exactly what the buddy paid for the saw. His buddy paid 50 shekels for the saw, so he should be paid back 50 shekels. And this was the custom in many pre-capitalist societies, even going so far as to declare that anything else was displeasing to the gods and make the spirits angry.

But why would your buddy lend you 50 shekels for a year, if he only gets back 50 shekels? Because he’s your buddy, or your family, or someone you have a close social relation with. He loans you the money, not because he makes money from lending money, but as a favor. In fact he’s losing money–he could buy the saw for himself and use it to make even more money for himself, but instead he gives it to the carpenter.

So we see the problem. No one will lend money except as a favor, which means there is no way to borrow money except from people within your close social group. And the inability to borrow money is a very high barrier to economic development. Finance isn’t just an afterthought, it is technology that was a necessary precondition to the industrial revolution.

Without private capital–the ability to loan money to existing enterprises, and the ability to buy and sell existing enterprises–our modern economy just wouldn’t work. Real world attempts to do away with private capital have turned out to be pretty much disastrous.

You are absolutely correct that money and ownership are legal and social fictions. They exist only in the minds of human beings, because we agree to pretend as if they exist. And we very often stop pretending these things exist, and we get barbarian hordes looting and pillaging. But a barbarian horseman who robs a city and enslaves the citizens and refuses to pretend that the citizens have ownership over themselves or their farms and houses and so on, will at the same time absolutely respect his fellow barbarian’s claim of ownership over particular horses, weapons, slaves, treasure, and so on.

Because unless the barbarians work together as a group there’s no way they can pillage a city, and one way they work together is to agree that Thag’s horse belongs to Thag, and Tork’s scimitar belongs to Tork, and Vong’s slave belongs to Vong. Tork’s scimitar is a capital good that enables him to kill city-dwellers and steal their goods. Without his sword, Tork cannot rob as efficiently. And if Tork didn’t have a sword, it would be in Thag and Vong’s interest to somehow provide him with one, so he can help them pillage.

And so we have the comical spectacle of the slavemaster insisting on the sacred rights of property that allow him to own the bodies and labor of other human beings, who do not own themselves, and the other slavemasters agreeing.

But of course, ownership and property do not descend from God, or from nature, but are just ways that human beings organize their activity. The reason we agree to pretend that Bob owns a store even though he doesn’t work in the store is that ownership of this kind is a consequence of allowing private capital, the investment of previously accumulated money into productive enterprises. We need capital, therefore we need some source of capital. We can restrict people to providing their own capital, except through the rare public provision of capital goods and improvements. But for industrial civilization it turns out we need more than that, we need private capital. When we try to do away with it, as people in the 19th and 20th century sometimes argued, we find that it doesn’t work very well.

Not that private capital is any sort of panacea. You need all sorts of social institutions as well, otherwise you have the rich stealing from the government and the government stealing from the people, and on and on.

I hear you making two arguments here.

The first is that nobody would loan anybody anything unless they could get something out of it. The second is that attempts to do away with private property have been disastrous.

What I don’t hear you saying is that profit isn’t a transfer of wealth from one group (the people who make things) to another group (the people who own things).

It’s possible, logically, that all three things could be true. That:

1. People won’t lend without an incentive, and
2. Attempts to do away with private property have been disasters, and
3. Profit is a transfer of wealth from workers to owners. (From makers to takers.)

In fact, I’d argue that all three are true.

[Trinopus]

@LinusK

. . . What I don’t hear you saying is that profit isn’t a transfer of wealth from one group (the people who make things) to another group (the people who own things). . . .

Of course it is. What did you think? Why do you imagine Bill Gates lives in a mansion and his employees live in apartments and small tract houses?

The point here is that without capitalism, Bill Gates and all his employees would live in drafty plank huts, and King Alfred the Eighth would live in the big stone castle.

Bill Gates and his ilk create wealth. It benefits everyone. Yeah, it benefits him more than it benefits us, but it benefits everyone.

Again, what the hell is your point? Between stating the obvious, and asking questions with obvious answers, what are you actually debating here?

[Mijin]

@LinusK

What I don’t hear you saying is that profit isn’t a transfer of wealth from one group (the people who make things) to another group (the people who own things).

I think “transfer” is very misleading here.

The widget-maker has utilized a widgeter machine to create wealth. That wealth simply would not exist if the owner had not bought a widgeter. Without the owner, there’s no wealth here. So at the very least we need to adjust the language to a sharing of wealth.

Now in terms of their contribution, I think the main issue you have here is with the workers toiling every day while the owner goes jetskiing or something. But the owner has made an investment risk, so in that sense we can say they deserve to reap the rewards.

Say I offered you a proposition. I’m going to make an adjustment to your house. There is a 75% chance it will double the value of your home. But a 25% chance it will reduce your house to rubble (and your insurance will not cover this). If you take me up on my offer, and fortunately your home doubles in value, did you earn that extra wealth?

[TommyzNR]

@Trinopus

Again, what the hell is your point? Between stating the obvious, and asking questions with obvious answers, what are you actually debating here?

His point is he hates rich people. He has seen a few who are lazy jetsetters living a life of luxury and seemingly not deserving it. What he doesn’t see are the many thousands who are out there putting everything on the line in hopes of getting some work done and maybe a future of an easy life.

He thinks the guy who puts in his 8 hours every day since the day he was 20 and has gone home every night to his favorite leisure activities all his life should be just as wealthy as the owners of his company. After all, the only thing they did to become owners is tell a bunch of people who can do things what to do. To top it off, apparently, those people would have done things without being told.

[AdamF]

LinusK, one of your arguments seems to be that capitalists are not productive members of society. Yet you do not think this through. You are quite correct in saying that some people produce more than they consume, while others consume more than they produces. However, you are too quick to generalize who is in which group. When comparing a person’s production and consumption (goods AND services), you need to consider the net amount. And it seems to me that the (fair-market) monetary value of both production and consumption would be the most fitting comparison. So if a person’s wealth is increasing, do they not by definition produce more than they consume?
For example, if a capitalist invests his $10B, is he not providing a valuable service to the society? And if he manages to earn $500M a year from doing so, and spend “only” $200M, does that not mean, in the society’s opinion, that he is producing more than he is consuming?