What Doth It Profit a Man? - Politics Forum.org | PoFo

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The profit motive is a cornerstone of capitalism. Adam Smith claimed that each individual’s pursuit of his own self-interest led to optimal social outcomes through what he called the “invisible hand” of the market. Capitalists have repeatedly had recourse to this argument against collectivists who denounce profit as a social evil.

We must, however, be careful about what we mean by “profit.” If we mean that the entrepreneur seeks financial compensation for their work, then of course profit is a positive thing. The problem with the profit motive is the tendency for capital to pursue unlimited growth. This was noticed by Marx in his equations of exchange. Exchange starts with barter, which may be represented as C –> C, where C represents a commodity. Commodities are exchanged for other commodities perceived to be of equivalent value. Money helps facilitate this exchange by standing in for other commodities and representing value. Thus, exchange becomes C –> M –> C, where M represents money. Marx noted that for the capitalist, this is reversed, such that we have M –> C –> M’, where money is invested in commodities in order to reap more money(represented by M’), thus earning a profit. The process goes on indefinitely to continually accumulate more and more profit.

Where did this extra money come from? Marx believed it came from the exploitation of labor. Labor, he thought, was creating all this value when applied to the machinery which the capitalist controlled. The only way, he thought, that this profit could emerge from the process, was to pay labor less than the value that they had created. The difference between what labor contributed and what they were paid was called “surplus value.” We needn’t think of “value” in any objective, metaphysical way to understand this. We need merely to see that the final product is valued at a certain price on the market, and that this price is greater than the value of the raw materials used to produce it. This added value comes from the application of labor to the raw materials to produce the finished product.

Silvio Gesell thought something was missing from Marx’s line of reasoning. Marx, it seems, had a fairly primitive view of money, thinking it to be simply another commodity to stand in for other commodities. He hadn’t noticed a notable difference between money and the commodities it buys. Commodities rot, rust, decay, or at lost have storage costs. Money, by contrast, maintains its value over time, giving it an edge over commodities. From this advantage comes the phenomenon of interest. Since the owner of money can withhold it without a loss, and the owner of a commodity cannot do likewise, he has the upper hand, and can demand tribute in exchange for lending out his money, thus creating interest. Thus, interest becomes an additional cost of production, creating a markup in the price of finished goods.

So there we have markup, but where is the profit? Obviously the lender has made a profit, but doesn’t the capitalist make one as well? Indeed, and this is because the capitalist is also a lender. He gives money to the worker in exchange for creating commodities to be sold on the market. Since the capitalist has the money, and can withhold it more longer than the worker can withhold his labor, the terms are in favor of the capitalist, and he, too, can exact a tribute, again in what Marx described as surplus value, by paying the workers less than their full contribution.

But wait a minute. If the only thing causing this imbalance of power is money, what’s to stop the workers from getting loans of their own to acquire their own capital and produce for themselves without being exploited, thus cutting out the middle man? Furthermore, if the capitalist can pay the worker less than they produce, what is the minimum amount that he can pay?

The answer to the first question obviously has something to do with collateral, but what is usually put up as collateral? The answer will give us insight into the second question. There is another commodity which, like money, does not rust or rot. In fact, more so than money, its value grows even as its owner sleeps at night. This commodity is land. As for that second question, a traditional answer has been the iron law of wages, which states that wages fall to the level of subsistence. However, given that even the legally mandated minimum wage often does not cover the cost of living, we must reject this view. Instead, we turn to Henry George’s theory of land, and particularly the margin of production.

As population centers develop, and wealth is produced, certain locations prove to be more profitable spots for business than others, by virtue of their proximity to other businesses, residences, and services. They therefore render a social surplus called rent, which is created by the society writ large, rather than by the owner. The least productive land yields no rent, and any capitalist operating on this land would have the least bargaining power with workers, thus having no choice but to pay them for the full product of their labor, with nothing left over for profit. For this very reason, capitalists tend to stay away from marginal land. On more valuable land, however, more value can be attained from the same application of labor.

The capitalist, however, owning valuable land and money, only needs to pay them what their labor would fetch at the margin of production, and can pocket the rest. What’s more, the owner of land, like the owner of money, can withhold his asset for a better deal, and thus can afford to refrain from using the land to its full productive potential. Leaving the land underused in this manner pushes the margin of production back, making the valuable land even more valuable, and increasing the concentration of rent, and therefore wealth. There is a point at which any higher level of production will yield less profit by cutting into the rental profits from leaving the land fallow. In a growing economy, rent continues to advance ahead of production until eventually the cost of living and the corresponding accumulation of debt becomes too great to support further production, thus resulting in a recession. The underuse of land from this conflict between production and rent means that there is a gap between the level of production and the level of demand. The result is unemployment, even during the strongest economic boom. Those who do have employment are exploited not only by this imbalance of bargaining power, but also by being taxed on their labor while rent and interest go relatively untaxed.

So, it is through rent that wealth initially accumulates. The rent then becomes collateralized when the landlord decides to become a capitalist and takes out a loan. With this loan, he buys physical capital such as tools and machinery, and hires labor at a cost determined by the margin of production. He uses the land for production up to the point where the returns of production and the rental profits from land are in equilibrium, such that any further increase in the former cuts into the latter. The combined surplus is counted as profit.

Now, then, what happens if we rid money and land of these competitive advantages? Suppose we tax all the rent from land and render it to public use. Then we can untax labor, and the landowner will be compelled to put his land to its most productive use. In this way, the capitalist will be as desperate to hire the worker as the worker is to find a job. The capitalist will then be compelled to pay labor as much as they can demand.

Suppose also that money is to be charged demurrage, so as to have the same negative interest rate as the goods whose exchange it facilitates. Then the capitalist will be all the more eager to pay handsome wages to his workers, lest that money rot in his own possession. The workers, then, will spend freely what they want, thus further stimulating commerce, and deposit the rest in banks. The banks will still owe them the amount of their ledger on demand, but will have to quickly lend out the money in order to ensure that the money they hold maintains its value. With so many deposits, however, they will have a lot of money that must be lent out. So they lower interest rates, until they have to lend it out at zero interest in order to keep up its value.

Who, then, will take these loans? Land is no longer a source of collateral, as its rental value is now rendered to the commons. So the loans will essentially be based on expected future production. This makes it much easier for the worker to become a capitalist in his own right, either going into business for himself, or collaborating with other workers to form cooperatives.

It may be the case that with profit as we know it taken out of the system, such cooperatives will be more practical than the normal capitalist business. It may also be the case that with the death of interest, for-profit banks will give way to credit unions. This is all to be welcomed, as it would lead to a new collaborative society. However, it needn’t be mandated. If capitalists and private bankers can still find a niche in this post-interest, post-rent society, they are welcome to do so. But they will be stripped of their coercive power, and will have to compete on even ground.

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