Tuesday, 11 August 2015

How the 1% Provides the Standard of Living of the 99%

George Reisman explains the role of great fortunes in a capitalist economy. No, not exploitation, but further prosperity:

The overwhelming majority of our contemporaries, ranging from the illiterate to the highly educated, are utterly ignorant of the role of privately owned means of production—capital—in the economic system. As they see matters, wealth in the form of means of production and wealth in the form of consumers’ goods are essentially indistinguishable. For all practical purposes, they have no awareness of the existence of capital and of its importance.

Thus, capitalists are generally depicted as fat men, whose girth allegedly signifies an excessive consumption of food and of wealth in general, while their alleged victims, the wage earners, are typically depicted as substantially underweight, allegedly signifying their inability to consume, thanks to the allegedly starvation wages paid by the capitalists.

imageThe truth is that in a capitalist economic system, the wealth of the capitalists is not only overwhelmingly in the form of means of production, such as factory buildings, machinery, farms, mines, stores, warehouses, and means of transportation and communication, but all of this wealth is employed in producing for the market, where its benefit is made available to everyone in the economic system who is able to afford to buy its products.

Consider. Whoever can afford to buy an automobile benefits from the existence of the automobile factory and its equipment where that car was made. He also benefits from the existence of all the other automobile factories, whose existence and competition served to reduce the price he had to pay for his automobile. He benefits from the existence of the steel mill that provided the steel for his car, and from the iron mine that provided the iron ore needed for the production of that steel, and, of course, from the existence of all the other steel mills and iron mines whose existence and competition served to hold down the prices of the steel and iron ore that contributed to the production of his car.

imageAnd, thanks to the great magnitude of wealth employed as capital, the demand for labour, of which capital is the foundation, is great enough and thus wages are high enough that virtually everyone is able to afford to a substantial degree most of the products of the economic system. For the capital of the capitalists is the foundation both of the supply of products that everyone buys and of the demand for the labour that all wage earners sell. More capital—a greater amount of wealth in the possession of the capitalists—means a both a larger and better supply of products for wage earners to buy and a greater demand for the labour that wage earners sell. Everyone, wage earners and capitalists alike, benefits from the wealth of the capitalists, because, as I say, that wealth is the foundation of the supply of the products that everyone buys and of the demand for the labour that all wage earners sell. More capital in the hands of the capitalists always means a more abundant, better quality of goods and services offered for sale and a larger demand for labour.

The further effect is lower prices and higher wages, and thus a higher standard of living for wage earners.

Furthermore, the combination of the profit motive and competition operates continually to improve the products offered in the market and the efficiency with which they are produced, thus steadily further improving the standard of living of everyone.

In the alleged conflict between the so-called 99 percent and the so-called 1 percent, the program of the 99 percent is to seize as far as possible the wealth of the 1 percent and consume it.

To the extent that it is enacted, the effect of this program can only be to impoverish everyone, and the 99 percent to a far greater extent than the 1 percent. To the extent that the 1 percent loses its mansions, luxury cars, and champagne and caviar, 99 times as many people lose their houses, run-of-the mill cars, and steak and hamburger.

In the realm of economics and politics, there is probably nothing of greater importance than recognition of the very profound yet utterly simple truth that the existence of wealth in the form of privately owned means of production is of economic benefit to everyone, i.e., not only to the owners of the means of production, but also the non-owners as well, that is, to the buyers of products in general and to the sellers of labour.

Finally, the essay also shows how the accumulation of great business fortunes generally requires a series of important innovations that are the source of continuing high profits that are in turn needed as the source of the continuing high rate of saving and capital accumulation needed to build a business fortune.

What essay? Why, Reisman’s new essay on Kindle, of course.  Read more.

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