-
You only get this “stream of income” if you continuously invest: employing staff, powering the factory, maintaining equipment, paying for security, cleaning etc. And all the while there is risk.
-
Much of the value of the factory is the fact that it has this potential for making money indefinitely. It wouldn’t cost, say, $5 million if there were not that potential.
It’s a very costly investment that just dribbles money back.
It’s not at all a non-brainer that a person would rather have a dribble of money in perpetuity – with risk of losing much or all of the initial investment, than have $5 million cash in hand right now.
The rest of the money is deferred compensation for building the factory.
Building the factory involved risk. The investor could have lost part or all of his investment. The risk paid off, however, and so the investor made a profit. Profits are the reward for successfully taking risks.
Profits are a “tax on labor” in the same way that losses are a subsidy for labor. If I build a factory, hire workers, and the factory closes after a year, the workers don’t have to give their wages back. But I don’t get my investment back, and I don’t get any profits. I have lost on the transaction, even though the workers got a year’s salary.
Something like two thirds of business start ups in the US go bankrupt within a couple of years. Ergo, two thirds of the time investors are subsidizing their workers.
Regards,
Shodan
You make it sound so easy. Except that you also have to pay back the debt you took on to start this company with interest. You might get full market value for your factory and all that is inside, you also have full market value of the debt you assumed to create this entity.
Presumably you paid down that debt as your factory became profitable. None of this happens over night. Of the five companies I have worked for in the last 25 years, each of them have carried a fair amount of debt. Two have been in business over 100 years. One of the two is a family business and if they would have tried to sell it last year it would not have netted a huge fortune for the family.
Why aren’t the workers who built the factory (actually built it) also getting an endless stream of deferred compensation?
Didn’t you understand why investors make money on investments? I lend you 50 shekels to buy a power saw so you can make more money in your carpentry business. You pay me back, after you’ve make a more money, not the original amount of 50 shekels, but 60 shekels.
If I can’t get an agreement from you to pay back 60 shekels, then I would never loan you the 50 shekels. If I don’t loan you the 50 shekels you don’t get your power saw and instead of making 60 shekels you make 0 shekels.
This is how capital is valuable, because it allows you to earn more money from your labor. If you have enough capital to buy your own power saw you don’t need someone else’s, you can invest your own capital in your own business. But you could also invest your capital in someone else’s business. If you’ve made enough money to buy two power saws, you could lend the money to your buddy and he could buy a power saw and make more money, and pay you back later with the extra money.
Again, you’d loan money interest free to your buddy or your mom because you have a tight social connection with them. But you wouldn’t loan money to a random guy unless you could make more money.
The excess capital accumulated from building the factory can be put to use building more factories. That’s why people want money from investors, so they can buy capital goods and expand their businesses and make more money. If the investor’s money wasn’t useful to the business they wouldn’t want it, would they?
Your average working person doesn’t accumulate investment capital because they don’t spend their money on capital improvements–defined as things that will (hopefully) increase the ability to make money in the future–but rather on consumption. Like, you know, food, clothing, medicine, shelter, and so on.
If I give you a million dollars tomorrow, you can only get more money from that million dollars if you don’t spend it on consumption. You only get more money from your money if you spend it on capital goods. Maybe you don’t own a factory, but you can loan–that is “invest”–your money with someone who does. The factory owner takes your money and buys drill presses and computers and whatever, and makes more widgets thereby, and sells more widgets, and makes more money, and pays you back plus a bit more. Or maybe he buys all that crap and makes more widgets, but the widgets don’t sell, and he makes less money, and can’t pay you back, and you lose your investment.
The average return to capital is simply the average amount over the global economy that businesses are willing to pay to borrow money to expand their businesses. If the economy is contracting, nobody wants to expand their business, you can earn a zero or negative average return on capital. It just so happens that averaged over the last few hundred years the economy has been growing, rather than flat or contracting. This is why we always expect capital to provide a positive return.
But there have been times and places where the economy has contracted steadily for hundreds of years, think of the fall of the Roman Empire. Capital becomes worthless and people bury their treasure in the backyard rather than invest it in productive enterprises.
If, tomorrow, nobody needed to borrow investment money to expand their businesses, capital would be worthless. If, tomorrow, the average business lost money on average, you’d be an idiot to invest money in anything. But it turns out that today lots of businesses make money, and lots of businesses think they need more money so they can make even more money, and so capital is valuable. And so people with money who can lend that money can make even more money.
Why can’t they? They were paid wages for the job, they are free to invest them just as the factory owner invests his capital gains after selling the factory.
Sometimes they do–there are cooks and janitors who got in early at Google and Microsoft that earned millions of dollars.
The answer is that usually the workers don’t demand part ownership of the company as a condition of employment. That’s because they often aren’t in a position to demand such a thing.
But they do get paid their salaries, and if they take a portion of their salaries and save rather than consume, they will accumulate money that can be invested.
Where I work plenty of people have small amounts of stock they got from the company as a bonus for employment. But they also get good salaries, and they don’t spend their entire salaries on consumption, they save and invest those salaries. And so from that savings they do get an endless stream of deferred compensation, unless they invest in companies that lose money in which case they lose the money they invested in those companies.
As I said, investment money doesn’t typically generate a guaranteed predictable future income stream. It just earns future income on average. Plenty of people earn much more than they could by buying “safe” investments, plenty of people lose money too.
They did not invest. They took no financial risk. They hold no stake in the success of failure of the factory they built. They traded their skills and labor for paid compensation. They could have, if given the option and choosing to take it, have accepted shares in the factory as compensation. If the factory was successful their shares would have increased in value and they would be getting profits long after they stopped laying those bricks and mortar. If the factory failed, they’d get nothing for their labor.
If you were a brick layer, which type of compensation would you choose?
But also note that it is a commonplace bit of investment advice to not invest in the company you work for, because it increases your risk. If the company goes in the toilet you lose both your job and your investment. Invest in something else and if your company goes broke you lose your job but at least you have your investment money, or if your investment goes broke at least you still have your job. Of course the two events are not independent variables, during an economic downturn your investments can turn out worthless and you can lose your job because lots of companies are failing. Diversification can only go so far in a global economy.
But it’s so hard to invest when you need food, shelter, a car, a smart phone, a computer, High Speed Internet, an Ipod, an Ipad, cable TV………….
However, when times are good, owning stock in the company you work for can have great advantages.
One company I worked for went through hard times in the late 70’s and offered stock as partial compensation to all employees. They also had a nice profit sharing philosophy. When times got really good, stock was valuable and profit sharing was incredible. When times were bad, not so much. However, because of the timing of economic booms many unskilled laborers retired early with million dollar nest eggs.
That being said I agree with your analysis.
I think you’re misunderstanding the example. That ongoing revenue stream IS the deferred compensation. It’s not a loan, which is how you’re thinking about it from what I can tell.
Investing is essentially giving someone money in the expectation that you’ll get some proportion of profits back, or that the value of your investment will increase, while a loan is basically giving money with the expectation that they’ll give it back along with some agreed upon extra amount as payment for letting them use your money.
The thinking is that on a loan, you take risk, for a defined payback, both in time and in money. In investing, you’re taking risk for an undefined payback both in time and in money.
Scratch that, I misunderstood what you were getting at.
I’m assuming that when you own the factory, you agree that you’re entitled to the profits from that factory as the owner.
When you sell your factory, and any future profits that you’re entitled to, now the new owner will get those future profits, right? What if you sold it to a group of people, with their piece of the future profits in proportion to the amount they paid?
That’s how stocks work; in reality, if you owned the factory, you’d have a defined number of shares in the company that you just sold.
The same thing happens in reverse when you take your cash from the factory sale and invest it- you’re buying chunks (shares of stock) of other people’s factories, and getting their future profits as well, assuming there are profits at all.
Well, we agree about some things. For example, that the role of manager and owner are not mutually exclusive. Some owners also manage their property, and it can sometimes be hard to distinguish what income comes from ownership of something, and what income comes from work.
That issue seems to have created a lot of confusion in this thread.
We also agree that some small businesses are not really making a profit. They’re really just paying themselves an implicit salary.
In principle though, if the owner could pay somebody else to do all the work, so that the owner could stop working, what’s left over represents his profit: the money he could get without doing any work at all. That’s the difference between earned and unearned income: earned income is money you get from work; unearned income is money you get without work.
We also agree that workers need capital. Without hammers, desks, clothes, and computers it can be hard for them to do their work. Maybe even impossible.
Where we differ, I think, is what it means to provide something. You say the owners - “capitalists” - provide those things, because they have the legal right to withhold them. And generally will withhold them, unless they get paid.
I say those things are provided, not by the owners, but by other workers - specifically, the workers who made them.
So for example, if I own the mineral rights to a piece of land, I may not have anything to do with the process of drilling for oil. But because I have the right to prevent other people from drilling, I may get a share of the value of the oil anyway.
Or suppose the government decides to create a quota system for a fishery. Each fisherman is allowed a quota of fish. What that might mean, for some fishermen, is that they no longer need to fish: instead they can sell, or rent, their quota to someone else.
Of course, somebody still needs to do the actual fishing. The fish aren’t going to jump out of the sea and turn themselves into fillets by themselves. But so long as I can prevent someone else from fishing my fish, I’m in a position to profit from someone else’s work.
The workers can withhold their labor, without which the owner cannot derive any wealth from what he owns. And generally they will withhold it, unless they get paid. Thus, they are extracting wealth for themselves from the owner’s capital.
So in your society, without the capitalists, how do the workers that need the hammers, desks, clothes and computers acquire them from the other workers that make them?
I would not assume that the hammer maker is going to just give the hammer to the builder without being paid for it. The builder has no money to pay for it because he has no hammer to build things and be paid for them.
There can be no banks in your society, because they would expect there to be unearned income for the capital they would be providing.
So who provides this orchestrating hand? Government?
I would say, rather, that the owner’s paying a wage in exchange for services. The difference is that 1.) at the end of the day the welder’s made something; the owner hasn’t. And 2.) The owner’s profits are likely to be more than the welders wages. Maybe more than all the welder’s put together.
And the worker is providing his services in order to use the owner’s capital, to generate some wealth that he gets a piece of. It’s the same thing. Remember, unless the factory is actually productive, nobody gets wealth.
Why does that matter? Is there some moral value to making a tangible good?
And if they aren’t, if the factory is struggling and the owner’s profit is less than one worker’s wage or even non-existent…does that change your assessment of the extraction of wealth?
The factory floor workers do. Yet under the laissez-faire capitalism of Ayn Rand, if they became maimed due to an unsafe condition at work (that shaved off a few more bucks in profits for the owner) they would be unceremoniously dumped aside in favour of the next poor soul desperate to earn a pittance to feed his or her family.
Look, my issue is not with the petit bourgeois, who scrimp and save to start a small business and devote long hours of toil to building it up and managing it. Nor do I believe hard work and/or innovation should go unrewarded. My beef is with those like the Koch brothers who inherit ownership of a huge multibillion dollar company they can delegate others to manage for them, and whose financial “risk”, if any, is limited to an abstraction on a balance sheet that will almost certainly never make any tangible difference in their lifestyle.
Bullhooey. If we eliminated the “celebrity” class, the one per cent of the one per cent…your and my average wealth would diminish.
We may sneer at the super-rich with their private jets and yachts. Except that this provides employment for a lot of people. You want to put a lot of boat-builders out of work. Bad economics!
(I do favor an economy that has a lower “center of gravity.” I’d rather more people worked at building lawnmowers than yachts. I confess to being a socialist leveller. But I’m not under any illusions that it would lead to a magically perfect world.)