Monday, September 02, 2013

Ruminations 54: On Labor Day--Reconsidering the Premise in Both Capitalist and Marxist States that Labor is Hired and Capital Invested

"The profits of stock, it may perhaps be thought are only a different name for the wages of a particular sort of labour, the labour of inspection and direction. They are, however, altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock." (Adam Smith, The Wealth of Nations, Book 1, Chapter 6, "Of the Component Parts of the Price of Commodities" ¶ 06).
"Thus the advance made by human labour in converting the product of nature into the manufactured product of nature increases, not the wages of labour, but in part the number of profitable capital investments, and in part the size of every subsequent capital in comparison with the foregoing." (Karl Marx, Economic and Philosophical Manuscripts of 1844, Profit of Capital ¶2 "The Profit of Capital")


(Damon Silvers, "How a Low Wage Economy with Weak Labor Laws Brought Us the Mortgage Credit Crisis", The Berkeley Journal of Employment and Labor Law presents the Second Annual David E. Feller Memorial Labor Law Lecture, April 2, 2008)

On this Labor Day holiday in the United States, it might be useful to consider, if only briefly, why it is that, without giving the premise much thought (other than to confirm its power by observing economic activity), both Capitalists and Marxists insist that labor must be hired and capital invested.

It has always struck me as odd that, with little more than historical habit to support it, theorists of virtually every political and ideological stripe have grounded their most elaborate systems on the premise that capital is invested and entitled to a return--measured by the right of the capitalist to certain claims to income, assets and control of the enterprise in which she has invested but that labor is purchased and entitled to no more claim than the return of the value of her labor with no further claim on the enterprise.  Lenders of capital, on the other hand, are assumed to have claims to both the return of their investment (the loan amount) and a claim (determined by markets for such things and memorialized in contract) in the income of the enterprise.  Suppliers of commodities, however, are entitled only to the sale price of their goods.  It is for that reason, one assumes, that loans are characterized as more like an investment and labor more like a commodity.  

These assumptions are as strongly held by capitalists (and now free market theorists) as it is by orthodox Marxists and their progeny. The wage labor and profit-capital system as as intensely entrenched in the most right wing capitalist state as it is in the most left wing Marxist one. The differences between them focus more on profit capture between capitalist and state.  In capitalist states capitalists retain most profit subject to profit sharing by the state (in the form of taxes, some of which is then redistributed to others, including capitalists). In Marxist states the state plays a more active role as a "shareholder" through taxation or the direct receipt of profit from enterprises, which it then redistributes as it sees fit, some of it finding its way to workers.  The net result is equivalent--profit is tied to capital (and in the form of interest to lenders) and the financial expectations of labor are diminished in relation thereto (as are those of other commodity suppliers).

Yet each of these inputs to economic activity can be understood to share a common characteristic--they are each consumables (though of varying kinds).  A going concern consumes capital, commodities, labor and loans in equal measure. It can as easily purchase each as it  characterize the transaction with any of them as a classically formulated "investment."  And indeed, in both capitalist and Marxist economies, deviations from the conventional standards.  Profit sharing is common, at least among executives--high level laborers in capitalist enterprises. Labor cooperatives in Stalinist Marxist states seek to capture profit to labor.  Both trade creditors and lenders might take the compensation in the form of a residual interest in the profits (if any) of the enterprise. At the same time, taxation has tended to be a crude and inefficient means of income redistribution to the extent it is meant to serve as a substitute means of redirecting profit to labor.  These exceptions are still either reserved for the highest level employees or otherwise treated in a paternalistic way by employers (who usually will take it upon themselves to direct the use and available of these shared profits). Yet, even in the U.S. it is not uncommon for the value of labor to be valued for purposes of determining the contribution of value to a corporation, for which the contributor, otherwise un- or under-compensated, receives stick or other securities.  Thus, the Delaware Corporations Code  §152  provides: "The board of directors may authorize capital stock to be issued for consideration consisting of cash, any tangible or intangible property or any benefit to the corporation, or any combination thereof." And the Model Business Corporations Act § 6.221(b) provides: "The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation." In either case, it is clear that the idea of treating labor, at least under some circumstances, as an investment is not unknown to capitalist states. Marxist states have yet to fully confront this possibility.

It is likely that the premise that labor is purchased may remain strong because labor's contribution to an enterprise is usually valued too low to afford a material return, and that labor, usually less well able to afford loses, might not be able to bear the risk of treating her labor in the same way as a capital investment. Yet the result is that, as has been the case in the U.S. (and likely elsewhere), labor productivity gains--the excess value of labor over its purchase price--has been captured by lenders and capital investors producing the appearance of steady labor pricing even as the real value of labor investment in enterprises has been declining.  Moreover, in the form of deferred benefits, the usual way in which labor sometimes captures some value of its investment in enterprise activity, is increasingly viewed as an obligation easily modified or eliminated at the whom of the enterprise. In the West labor unions remain complicit in the perpetuation of the structures that are based on the premise that labor must be hired and capital invested. And the state, through its management of labor-investor relations has hard wired these premises into elaborate legal structures of law and regulation.  In Marxist states, the failure to interrogate this basic premise of the characterization of the return on capital versus the return on labor, has substantially hampered the movement toward socialism.  It has created a system in which the state must serve the role of supra investor and use traditional capitalist tools--a toleration of mass movements, taxation and administrative management, to capture and redistribute the gains from economic activity.  Yet under both systems the basic premise holds--labor is waged and capital is invested.  Labor has no claim to the productive value of enterprise activity however long they invest their labor contributions to the enterprise, and investors may claim their proportionate share as long as they retain their investment.

Thus the difficulty raised in the observations of both Adam Smith and Karl Marx remain as vibrant today as when they were observed in the late 18th and mid-19th centuries. Neither capitalist nor Marxist states have advanced much from the crude capitalist structures put in place at the start of the industrial revolution. Indeed, both systems have appeared to devote an unreasonable amount of time, effort and theorizing power to defend, elaborate and impose structures of control to ensure that the premises of of the special character and primacy of capital investment remains unchallenged--in either system.  The dominance of capital and capital privileging structures remains unchallenged, and much effort continues to be expended in ensuring that people remain convinced that this state of affairs is both natural and immutable.  Yet that unwillingness to scientifically develop the premises under which economic systems operate ought to come as something of a surprise to those who still believe in the underlying core premises of either capitalism or Marxism, core premises that insist on the deployment of theory towards the ends of welfare maximization.  For the moment, maximization appears to remain segmented and uneven. Perhaps labor will all become capitalists (through the investment of extra wages in markets for securities) and the distinctions will fade, even in Marxist states. Yet that promise, sometimes explicitly made (for example explicitly in 1960s America, or implicitly in 2000's China) belie a different reality, where capitalist and Marxist theory is sometimes deployed as a cover for wealth transfer and the expropriation of the investment and productivity values from all factors in the production of economic activity to only one class of stakeholder.

But there is nothing in economic theory that requires that result.  Indeed, it seems almost a perversion to create coercive structures of law that reinforce this forces transfer of productive value from all to only one class of stakeholder, the holder of capital in either capitalist or Marxist systems.  It seems to be time now to begin to reconsider capital as the foundational basis of our economic systems--not to eliminate it or demean its importance, but to de-center it in analysis of the means and ends of deployment of society's productive forces.  But that requires a fundamental rethinking of the premises that produce a treatment of capital as something different and apart, of its essence, from other productive forces that contribute to economic activity. Perhaps the day will come when the promise of American corporate law and Marxist theory will come closer to realization, one in which all productive forces might be treated as equivalents, when capital can be hired and labor invested, when trade creditors can be treated as investors and lenders as fiscal labor.  There is a hint of the future in stories like this: Billy Gallagher, Stealth Startup Fantex Wants To Make It Possible For Celebrities To IPO,, Aug. 31, 2013 ("A stealth startup called Fantex aims to allow celebrities and professional athletes to file for initial public offerings (IPOs). . . .Fantex describes itself as “the world’s first marketplace that lets consumers invest real money in stocks linked to the value and performance of the brands of the world’s top athletes.”"). To achieve this result would not diminish capital so much as it will liberate labor to maximize its return in the process of production.

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