Profits are a tax on labor

Great Debates
141

OK, capital is provided by other workers. One worker at a factory makes a power saw, that is a capital good for the carpenter.

How does the carpenter get the power saw? Often he buys it himself. He is the owner of his small business, he is the sole worker. He provides his own capital. But wait, didn’t you just say that another worker had to provide him his capital? Of course, the worker who made the saw, the worker who made the nails, the worker who cut the lumber.

Except how does the carpenter get those things? He has to buy them, and turn them into products and services worth more than the individual components.

If the carpenter can buy them himself, he is a capitalist on a small scale. He owns his own means of production. He doesn’t have a boss, he has clients instead. He doesn’t have employees, he does all the work himself. Yay for him.

Except there are plenty of people in the world who do work where they absolutely cannot own the means of production themselves. Take me for instance. I work in software qa. That means I test software, report bugs, try to make developers fix their broken crap.

How can I make a living as a sole proprietor? I mean, I could hire myself to developers and get paid by the piece, or whatever. But generally it makes a lot more sense for me to work as an employee of a company, that has developer employees, marketing employees, designers, PMs, and on and on. I make more money as an employee than I would if I called up all the developers I know and asked them if they wanted to hire me to test their crap.

So what does that mean? It means the company I work for–a very large software company in the Puget Sound area–provides a chunk of the capital I need to work. That is, desks, computers, chairs, developed code, test tools, co-workers and so on. I provide some capital of my own, mostly my professional skills and knowledge.

The profit that the company owners get from employing me is the difference between what it costs them to employ me and the value of the work I do for them. Note that the value of my work isn’t a static value, and can have different values depending on who’s buying. If I worked for my buddy I’d get paid a pittance. Not because I do crappier work for my buddy, but because the software he is developing isn’t worth very much. He’ll be lucky to ever see a dime from it.

However, the place I work expects to make a lot of money from the stuff they release. And that shit has to be tested, or it won’t work and people won’t pay for it. So they hire me, and thousands of others like me. And the value–to them–of the work I do for them is a lot more than the value of the money they pay me. It has to be, otherwise they wouldn’t bother hiring me in the first place.

If I tried to work for myself, I’d make a lot less than I do at my current job. So the value of the money I get from working for them is–to me–a lot more valuable than the work I do. It has to be, otherwise I wouldn’t bother working for them in the first place.

So we are both better off from this transaction. So why do they make billions in profits, and I make a modest salary? But they don’t make a billion dollars from me. The incremental value of my work to the company is tiny. And there’s no guarantee that the product I’m working on will actually make money. In fact it is highly likely that the company will lose a bucketload of money over this. Like, billions of dollars. Or maybe they’ll break even.

I have no way of knowing, and I don’t really care except that working on a successful project makes getting future work easier. I mean, I could demand a portion of the profits from the product instead of a salary. Except, fuck that, pay me. Lots of my coworkers get a small percentage of their compensation in profits from the company, but most of their compensation is in the form of salary. And they’d be idiots to work for stock options, and couldn’t do it unless they could afford to live off their savings for years while they work for no salary.

Owning capital isn’t anything mysterious. It just means owning goods that can be used to create more goods and services. I assume you’re not upset about carpenters owning saws, right?

People work as employees because they make more money as employees than they would as sole proprietors. The employer provides value to the employee, not just the employee to the employer.

The contention that it isn’t the employer who gives his employees the saw, but rather the worker who made this saw, is kind of silly. No the worker who made the saw didn’t give anyone anything. He didn’t give the carpenter a saw. He SOLD the saw to whoever bought it. If the carpenter wanted the saw he’d have to buy it. If his employer bought it, then his employer provided it. And he provided it from his saved capital. Just the same as the carpenter, if he wanted to provide his own saw, would have to buy it from his own saved capital, if he had any.

At the end of the day, the guy who owns the saw and the guy swings the saw have made more together than they could separately. This is why the owner gets paid. And this is why the worker gets paid. And it certainly isn’t the case that the owner makes more than the worker. I worked for a year at a company that lost millions of dollars. I made my salary, the owners lost millions. Owners don’t always make money just because they provide capital goods that allow workers to create value. Often the lose money.

142

Well then, thank goodness we don’t live under the laissez-faire capitalism of Ayn Rand. Neither do we live under feudalism, or the despotic rule of a God-King, or SkyNet.

A factory worker only earns a pittance when his work could be done by millions of other people, and the capital goods that represent the factory are hugely expensive to create. In that case the excess value created by one worker is very small, the excess value created by the capital equipment in the factory is huge, and therefore the owners, whoever we agree to pretend those are, make the bulk of the profits from the factory.

As for the hyper-rich, well, you can delegate managers to run your vast fortune for you, but that’s not necessarily the best idea because those managers will end up enriching themselves at your expense.

Hey, if you want higher taxes on rich people, feel free to demand higher taxes on rich people. But if you want to abolish private capital I have to ask how you intend to allocate scarce capital resources in the future. “No company can be worth over $1,000,000,000” doesn’t seem like a helpful plan either.

143

Incorrect. As has been repeatedly noted, the owner has provided the welder with a place of work and a wage. This is not a trivial matter and it was accomplished with some amount of financial risk on the owner’s part.

The owner has provided the means for ALL the workers to make a wage for their respective skills. He/she has likely invested in his workforce in many other important ways with respect to training and health benefits and contributions to their 401K, etc. All at a financial cost/risk to him/her-self. And when a worker gains experience and leaves to ply his/her trade elsewhere for a higher wage, what net gain does that afford the previous owner except the loss in investment in that skilled worker?

That you choose to trivialize these risks and investments made by owners does not actually make them so.

144

You’re ignoring the element of risk. The owner of the land takes the risk that the tenants will pay their rents. The owner of the land has to eat etc. Imagine the owner were a retired person: she’s too old to work so she invests in real estate. Her income depends upon the tenants being able to pay. Maybe she owns fields suitable only for sheep. Oops! Chernobyl just blew and irradiated the land. Now her tenants cannot sell the meat from sheep grazing on her land so they can’t make a profit so they move their sheep elsewhere.

145

But let’s not overplay the notion of risk. If I lend my buddy my power saw, I risk that he’ll break it. So if I lend it to him I’m assuming a risk, and if at the end of the day I get back the exact same saw I had before and nothing more, what have I gained?

But even without the risk, I might lend a saw to my buddy. But I’m not going to lend a saw to some random guy on the street, even if there was no risk that my saw would be broken, because what’s in it for me? I don’t just need to be compensated for the risk, I need to be compensated for the capital value of the saw, because otherwise I’d use the saw myself rather than lend it.

Of course if I’ve got two saws then I don’t forgo anything by lending one. But why did I purchase two saws? I’ve got capital invested in the saw that I could have spent on hookers and cocaine, or squandered.

The whole point of goods and services is that we consume them, and the whole point of capital goods and services is that the allow us to consume more in the future rather than the present.

If you don’t allow me to make a profit from lending my capital goods, then I won’t buy any capital goods other than the ones I need myself for my work. And that means the guy who could work except he doesn’t have a saw doesn’t work. Private capital then creates value, if you outlaw private capital then that value doesn’t get created and everyone is worse off.

Yes, you can provide capital publicly, but experiments along those lines haven’t worked out so well, and countries that decided to legalize private capital had extremely positive results.

Of course private capital isn’t everything, capital investments like roads and electrical grids and justice systems and educational systems and medical care and military defense have been effectively provided publicly, and private provision of those sorts of things hasn’t worked as well.

So if you’re looking for me to demand that roads and sidewalks be privatized because I believe in that public ownership of capital goods is somehow morally wrong, you’re going to be disappointed. Public ownership of capital is not morally wrong. Neither is private ownership of capital. Neither public or private ownership is a law of nature, merely a socio-politico-economic decision that we humans have to make and then live with the consequences of our decisions.

146

You apparently know very little about the Koch brothers. The value of their company when they inherited it from their father in the mid 60’s was probably about $90 million. While a substantial sum even in todays terms for your average Joe, but considering that today it’s worth about $90 billion, hard to say that they didn’t create their own current wealth. And as I understand it, both the brothers are actively involved in the day to day operations of their company, which apparently somewhat meets the OP standard if earned income.

The increase in value has been primarily driven by their policy of reinvesting 90% of the earnings annually back into the company as opposed to taking them out in dividends over those 50 years. This reinvestment has taken the form of building new plants, starting new businesses, acquiring troubled businesses from other companies and improving them, all the while creating products that society needs and wants. Add to this that when they inherited the company there were about 500 employees compared to about 60,000 today. That’s quite abit of value creation not just for themselves as well.

147

There are more than two Koch brothers. One of them, I believe, is a billionaire yet his primary avocations are, stereotypically enough, yacht sailing (America’s Cup, natch) and wine collecting.

One point that is a pet peeve for me, and that I think is at least tangentially related to this issue, is how often someone will claim that by opening a restaurant in town they created 30 jobs or whatever. I find this risible.

Most likely, after the dust settles, there will be the same total number of restaurant workers in town, simply distributed somewhat differently. Maybe one of the other restaurants in town will go out of business, or maybe many of them will have slightly less business and cut hours. Even if this restaurant were to be so legendary as to attract customers from other regions, then it will be a boon to our town but will still kill jobs in other places.

People who come up with innovative ways for people to have a higher standard of living using the same resources are really creating value; everyone else is just shuffling it around and playing tug-of-war with each other.

148

But of course we all know that isn’t true at all. You are assuming some type of steady state in society as well as a zero sum game in the economy and both of those are false. There are winners and losers but the general trend in successful economies like most places in the U.S. is some gain for everyone no matter how it is distributed.

It isn’t worth arguing with you if you can’t see this for yourself. Look at Las Vegas for example. It is a city that shouldn’t even exist because of its location but it does in a phenomenal way and it has generated a tremendous amount of wealth across many different demographic groups. Different versions of the same thing are happening in China and other developing countries right now.

There isn’t a real number to describe how few fucks I give hearing the trivia that there are a few people out there like a Koch brother (to use your example) who live large based on legal monetary gains that originated from someone who chose to give it to them whether they generate anything useful individually or not. I have no idea why anyone else would either. That is just simple jealousy and it is the opposite of a virtue. Lots of people have different types of fortunes of their own and some of the wealthiest also have other types of misfortunes. That isn’t anyone else’s concern.

149

I think it is unfair that I am not allowed to buy up copies of software, movies, music, and e-books, burn them to DVD for about a $1 a piece and sell them from my van down in the local parking lots. I could probably make $10 - $20 a piece on some select titles and still have people lined up out the door. That is illegal and frowned upon for some reason. I have no idea why because it is my personal capital and physical labor that is making them. I, as a laborer, should be able to do that and be patted on the back for my hard work. However, everyone from Microsoft to Steven Spielberg to Disney would sue me or have me thrown in jail even for copying things they did decades ago. I don’t see why they are entitled to anything now. Walt Disney is dead and the rest will be too eventually. I have no idea why their heirs should get anything. It is me that would be doing ALL THE WORK.

Why is that?

150

That’s what the better restaurant does. For the same resources, everyone has a higher standard of living when the best restaurants prosper and the worst ones close. For the same $x, I get a better meal with better service. That makes my life better, and I didn’t have to do anything to get it except vote with my dollars.

You must have a very odd definition of value.

151

In my town, probably 60% of the new restaurants that open are in the bottom decile or at least quintile of the set of restaurants in town. After a flurry of initial activity, they die out and are unmissed. Hard to see how all that wasted setup and training helps anyone economically; even the workers get just a few months’ wages and become unemployed all at once.

Another 30 to 35% of new restaurants are somewhere fairly close to the median in quality. Their food is very similar to fare available elsewhere; in fact it is likely to have been prepared by at least some of the same people who used to work at other places. It is rare that any restaurant, good or bad, opens that has anything novel or representing an ethnic cuisine that we do not already have in town.

At best, we get the occasional restaurant that makes similar food to that available elsewhere but provides it at a slightly higher quality level or perhaps a lower price point. But this is not the norm, and only provides the most marginal benefits to the town’s residents. It certainly does not provide the 30 jobs claimed when it opens. Does anyone dispute that? This is an important point, because entrepreneurs are described as job creators when they are really so often just job competitors. When they first open, they may bid up the labor market and slightly increase wages or decrease unemployment; but after all is said and done, the boom is likely to become a bust and the net effect is flat or even negative due to the churn.

To move away from food service for a moment: does anyone seriously believe that when my neighbourhood bank was bought out by one corporation, then another, then another within a two year span, it was somehow of net economic benefit to the world to have three different large slickly produced signs created and mounted and then junked? Yet all that churn counts as GDP, which is madness.

152

OK, suppose I want to build a factory, but I’m not a contractor, or a project manager, so I hire a project manager and a contractor to build the factory for me. If the money is deferred compensation for building a factory, doesn’t that mean the people who built the factory should be getting the money, instead of me?

And if not, doesn’t that mean the money is not for building a factory, but for something else?

153

Enjoying that strawman? The fact is, I left plenty of room for something other than a steady state economy or zero sum game. Some important and large sectors that come to mind are IT, manufacturing, agriculture, and construction. Then there are those who produce unique creative content for entertainment and/or edification. But there are a lot of other “entrepeneurs” out there opening new car washes or nail salons when there were no long lines or dissatisfied customers at the near-identical, already extant versions down the street. These “job creators” are doing nothing of the kind.

ETA:

But you provided the money, silly! And you made that money the old-fashioned way: you inherited it from your great grandfather, who stole it. :wink:

154

This doesn’t really make a coherent picture though. Either the restaurant industry is dog-eat-dog (so to speak) – which would encourage increasing standards and efficiency over time – or restaurants are not changing.

I would definitely say it is the former IME.

Furthermore it is only wasted training when restaurants go bust if no-one can find employment afterwards. Prior to the current economic downturn that wasn’t the case.

155

But they didn’t opt for deferred compensation, they opted for immediate compensation for their labour.

If I build a house I have the option of selling it. Or I could rent it out, indefinitely. I can’t sell it however and still get paid a monthly rent for it.

The money is for building the factory. The deferred compensation is for providing the investment.

Now, a group of construction workers could provide the investment themselves. They could form a partnership, and do all the work over the months or years required, without pay, and pool their savings together to buy whatever they need that they can’t do themselves.

It’s not so common however, for many operational reasons. How should ownership be distributed bearing in mind some workers will need to leave or join the project? What if more money is required but some members cannot contribute any more? What if one worker is doing a job that earns $60k on the open market, and another’s job is only worth $20k – should the first worker have 3x the ownership? etc etc

156

Asked and answered. Multiple times. Over and over.

Please demonstrate to the paricipants of this debate that you are at least reading the responses and giving them consideration.

157

You’d think the last thing an urban/suburban areas need is another Starbucks or some other version of a coffee shop. And yet more of them open all the time. Some go out of business, but on the whole, these places of business seem to be flourishing. Now, who decides whether or not the world needs a fifth coffee shop on the fifth consecutive block of the same street? Would that be you? Are you the one with the finger on the pulse of what a market will bear?

158

So…the best restaurants survive, and the inferior ones close. The buying public chooses which ones are good and which ones are not.

Restaurants are a mature industry, so you can expect evolution, not revolution (that you might see in, say, electronics). No one’s going to open a restaurant in your town tomorrow serving the best food you’ve ever had for $5 per meal. Instead, a new place might be 5% better than the old, and in a few years another place might be 5% better than that.

[QUOTE=SlackerInc]
It certainly does not provide the 30 jobs claimed when it opens. Does anyone dispute that? This is an important point, because entrepreneurs are described as job creators when they are really so often just job competitors. When they first open, they may bid up the labor market and slightly increase wages or decrease unemployment; but after all is said and done, the boom is likely to become a bust and the net effect is flat or even negative due to the churn.
[/quote]

That depends on the labor market in your area. The new employees might have been previously unemployed, or they might have left other jobs to take this new one.

Why not? The sign maker and the sign installer were paid. They used that to pay workers, buy new materials, expand the warehouse, etc. Their workers used their wages to buy goods from other merchants. The scrap metal recycler also made out well in the deal.

159

The money is to recompense you for putting up the capital to build the factory. It is the reward for successfully risking your money.

The people who build the factory get wages, because they are not risking their capital. The people who risk the capital get profits instead of wages.

Maybe it will make it clearer to consider the situation of the various participants in this factory-building scenario.

I start out with a million dollars. You are a mason or carpenter or something - you build factories for a living. But you don’t have a million dollars - you have no investment except your labor.

I put up the million dollars, and you build the factory. Other people stock it with raw materials, and get paid wages to work there. The factory runs for a year, then goes bankrupt. From start of construction to bankruptcy, it cost a million dollars.

I started with a million dollars, and wound up with nothing. You started with nothing, and you have a year’s wages. But nobody expects you to give the year’s wages back - you did the work, so you are owed the wages. But I put up the money and I wind up with nothing. I don’t make a profit. That’s because I incurred a risk, but it didn’t pay off. Profits are the reward for taking risks successfully.

So profits are not a tax on labor. In our scenario, the labor got performed and wages were paid but no profits were made. Therefore, no tax on labor. The workers have a years’ wages, just as they should.

Now suppose the factory is a success, and turns a profit at the end of its first year of operation. Guess what - the workers in the factory get exactly the same wages as they would if the factory went bankrupt. Again, no tax on labor - a year’s wages are the same in both scenarios.

So no, profits are not a tax on labor, because the labor gets paid the same whether the risk is successful or not. The investor gets paid differently if the risk is successful or not. Because profits are the reward for taking successful risks.

Regards,
Shodan

160

There is a clearly confusion on what it means to build a factory because the OP has over simplified the process to think that some construction crew builds the factory.

The entity providing the money whether it is a company or an individual is the one building the factory. A general contractor and his sub contractors are in charge of putting up the building. A project manager, likely a full time employee of the company will be in charge of filling the building with utilities, machines and tools. A production manager will fill the building with workers………now you have a factory. This is still overly simplified, but maybe the OP will be able to separate some of the confusion he has shown in his posts.

In many cases the general contractor doesn’t actually do much “work” (as apparently defined by the OP as physical labor). The general contractor spends most of his time getting the right sub contractor in the right place at the right time.