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Wednesday, May 5, 2021


The systematic divorce of ownership from managerial control of productive resources, a process growing organically within capitalism as it develops, makes it possible for the first time to think seriously about collective ownership of the means of production. The first question that arises is: what about the surplus? Capitalism is ideally organized to extract a surplus from the annual production and consumption of commodities and to vest ownership of that surplus in private hands. But no matter who owns it, the question naturally arises, what to do with it.


Let us be clear: one portion of what might be considered the surplus is actually required by ongoing depreciation to replace productive inputs that are used up or worn out. That is not really surplus at all. One portion of the genuine surplus can be set aside to expand production in such a way as to meet the needs of a steadily expanding population. This is not required. The present generation could perfectly well choose to deprive its children and grandchildren of the comfortable life that the present generation enjoys, but let us suppose that parental sentiment and common decency lead the people of America, once they have taken possession of the means of production, to expand output to take account of a growing population. It is of course also possible for the present generation to deprive itself in order to expand production sufficiently to raise the standard of living of future generations. Since I have in many ways and for many years been critical of the work of John Rawls, this would be a good time to point out that he is the only moral philosopher of any note whom I have ever read who considers the choice of an appropriate rate of social savings to be an important question for social and political philosophy.


But there are other choices for the allocation of the social surplus, some of which modern capitalist societies have been making for some generations, even though it may not have been obvious that that was what was going on. First of all, childhood can be extended into young adulthood a before generation is required to go to work. Some of this delay is of course required for more complicated job preparation in the form of further schooling but some of it is simply a way of spending the social surplus. Secondly, a portion of the social surplus can be devoted to improving the lives of those who have become too old to work productively. Medicare and Social Security in the United States have transformed the life circumstances of the old. What was once a time of impoverished dependency on children and grandchildren has now become the golden years of retirement. A third possible allocation of a portion of the social surplus is its use to shorten the number of years that men and women are required to work before they retire. The United States by and large has not chosen to devote its social surplus to this but many countries in Europe have. And finally, of course, a portion of what is at any time considered surplus can be devoted to raising the standard of living of those who are productively employed, which after a while will come to be considered a necessary expenditure for subsistence, rather than a desirable but unnecessary allocation for luxury expenditures. (Those who have read my book on the economic theories of the classical economists and Marx will recall my citation of Ricardo’s observations about living conditions in Ireland.)


All of these choices, even the last courtesy of union organizing  and strikes for higher wages, are decisions that have been made within existing capitalist economies, decisions made possible by the development of capitalism into its present form. This is what I mean by the new order growing in the womb of the old.


But none of this yet touches the central question, which is: how shall private ownership of the means of production give way to collective ownership of the means of production? Like Marx, whose practice is my model in these matters, I am more inclined to analyze the society and economy in which we live than to make idle speculations about how to make changes some time in the future, but I will end this post by suggesting some things that come to mind.


The best way to end patrimonial capitalism, it seems to me, is to do away with the patrimony. Confiscatory inheritance taxes that would require transferring to the state ownership of accumulations of capital in the hands of those who pass away would over time result in a massive transfer of ownership from private hands to the public. I am not talking about taxing away several hundred thousand dollars in corporate shares that have been accumulated by a grandfather or grandmother and which are left in a will to the children and grandchildren. I am talking about the tens and hundreds and thousands of millions of dollars of capital that the rich leave to their children. Sam Walton died superrich, thanks to the success of Walmart. There is no reason at all why Sam Walton’s children should inherit those shares.


Note, it would be destructively counterproductive to require the estate of the dead billionaire to attempt to sell the shares on the market so that the cash could be turned over to the government. That would simply have the effect of crashing the market so that a large portion of the wealth would evaporate. Rather, I am suggesting that the accumulated shares simply be turned over to public ownership. Over the course of a generation, a large portion of the capital accumulation in an economy like the United States would come to be owned by the state.


So many objections to this proposal spring to mind that I think I should wait until tomorrow to address them.


Jerry Brown said...

Would it be wrong to consider your 'social surplus' as arising from an exploitation of both labor and capital by the government? If society was to own most all capital as related to production facilities and equipment would that not still leave labor being exploited by society through the government in order to produce this social surplus?

aaall said...

Would not proper marginal income tax rates and a wealth tax, as well as actual anti-trust enforcement be more efficient and far less dangerous?

Ahmed Fares said...

"even the last courtesy of union organizing and strikes for higher wages"

Higher wages lead to higher prices leaving real wages unchanged. Joan Robinson wrote:

Generally speaking, in the orthodox system, it was taken for granted, without much thought, that a rise in money-wage rates, brought about by a bargain between employers and employed, entails a more or less commensurate rise in real-wage rates, and that a rise in real wages causes a decrease in employment. In any one industry the workers obtain a higher real wage when their money wage rises, for even if the product of the industry is consumed by the workers, a rise in its price, following the rise in its wages cost, will make only a small reduction in the purchasing power of money, so that the workers in that industry gain, while the countervailing loss is thinly spread over the rest of the community. Again, in a single country, an all-round rise in money wages, even if it is accompanied by an equivalent rise in home prices, leaves the prices of imported goods unchanged in the first instance, and so leads to some rise in real wages in the home country. The orthodox economists seem to have pushed the inquiry no further than this, and appear never to have posed the question : What happens when there is an all-round rise in money wages in a closed system without international trade?

There is no doubt what their answer ought to have been. On the orthodox assumptions of perfect competition, marginal prime cost is equal to marginal wages cost in a closed system. An equal proportional rise in all money wages must therefore lead to the same proportional rise in the level of prices of a given rate of output. It follows that, unless something happens to alter the rate of output, real wages remain unchanged when money wages rise. But this proposition is not to be found in the orthodox writings. On the contrary, it was always assumed that the money-wage bargain determines the real wage, and it was not until Mr. Keynes challenged this assumption that any discussion of the problem was undertaken at all.

—Joan Robinson (An Essay On Marxian Economics)

Anonymous said...

Dear Ahmed Fares,

You support your claim [i.e. Higher wages lead to higher prices leaving real wages unchanged.] on those two paragraphs by Joan Robinson (You quote, of course, from pages 82-83 of Chapter X. That's the second edition of Robinson's book.)

Robinson is not my favorite writer. She is verbose and tiresome in extreme; her prose is convoluted; her sentences extend endlessly, to say nothing of her paragraphs. But, to be fair, in those two paragraphs she does not say what you think she says.

In the first paragraph she says that in the orthodox system it was accepted that a rise in money-wage could entail a rise in real wages.

In the second paragraph she says that the inclusion in that system of the marginal prime cost, which is supposed to be equal to marginal wages cost, in a closed economy, guarantees that that is not so, because either other prices rise or employment falls

That's what the "orthodox" believed, not what Robinson herself believed. In the paragraph just following those you quoted, she writes:

Thus it was held that trade unions, by refusing to accept wage equivalent to the marginal product of the total labour force, may cause part of it to be unemployed, and so upset the natural self-righting mechanism of the laisser-faire system, which was believed to ensure full employment in the absence of interference".

Robinson was writing about what marginalism (as you'll see by the numerous "marginal" in those quotes) taught about wage rises. Robinson was not a marginalist, as her polemic against marginalism (only partially successful, in my modest opinion) demonstrates.

And my bet is that neither Prof. Wolff nor his readers (and perhaps even yourself) are marginalists either.


Let me repeat: She was summarising what marginalists believed, not what she herself believed (which, evidently, does not guarantee neither the correctness of her beliefs nor the wrongness of marginalists').

In your defense, I say that Robinson's writing can be difficult even for those whose native language is English.


Robert Paul Wolff said...

Anonymous is correct. Note that in 1865, at a meeting of the first international, a member named John Weston, drawing on the theories of David Ricardo, argued against striking for higher wages for just this reason. In response, Marx gave a two-part speech (in English, note) in which he explained what was wrong with Ricardo's theory and with John Weston's argument. The two-ppart speech was eventually published as a pamphlet called Value Price and Profit.

Anonymous said...

Prof. Wolff's comment above is wonderfully apropos, because it is, in fact, well-known that Marx really did believe unions could achieve not only improvements in working conditions, but also in real wages.

Orthodox economists in Marx's time believed that capitalists paid their workers from a predetermined wages fund. The relationship was this:

Money_Wages = Wages_Fund/Workforce

Say, there were $1,000 in one dollar coins in that fund. If capitalists had to divide the fund among 500 workers, each would receive 2 coins ($2*500 = $1,000). Given the same technology, that workforce produces a given quantum of goods.

Case 1: If those workers, however, demanded $4 in wages, only 250 workers could be employed ($4*250 = $1,000, and output of goods falls by half: prices double. Real wages remained constant: the increase in money wage was merely a "monetary illusion", as modern economists use to say.

Case 2: If workforce doubled, money wages would fall ($1,000/1,000 = $1), but output would double with the doubling workforce, so prices would fall by half. Again, real wages remained constant. And again, the fall in money wages is only a monetary illusion.

Note that in both cases real wages remain constant, but unemployment goes up in case 1, and down in case 2. The moral is clear and quite convenient for capitalists: the less they pay their workers, the greater the output and the better-off the workforce.

Well, then there was no need for unions or even industrial relations laws and that is precisely what Citizen Weston was trying to teach the delegates of the International Working Men's Association.

Marx challenged him: Money wage rises can lead to real wages increases, he argued. This is how he concluded his exposition:

"Firstly. A general rise in the rate of wages would result in a fall of the general rate of profit, but, broadly speaking, not affect the prices of commodities.

Secondly. The general tendency of capitalist production is not to raise, but to sink the average standard of wages.

Thirdly. Trades Unions work well as centers of resistance against the encroachments of capital. They fail partially from an injudicious use of their power. They fail generally from limiting themselves to a guerilla war against the effects of the existing system, instead of simultaneously trying to change it, instead of using their organized forces as a lever for the final emancipation of the working class that is to say the ultimate abolition of the wages system.

He did that in a document published in 1898 and, therefore, should have been well-known to Robinson. And yet, at the very bottom of page 83 Robinson inexplicably writes:

Marx goes even further than the orthodox economists, for he argues explicitly that a rise in money wages has no effect upon the general level of prices.

(Continues in the next comment)

Anonymous said...

First of all, Marx did not go "even further than the orthodox economists", as Robinson writes. Marx concluded exactly the opposite of what orthodox economists argued. It's there, in black and white, in understandable English.

Robinson knows that, although she just wrote otherwise. So, in a footnote on the next page [i.e. page 84] she admits Marx's conclusion, but now she moves the goal posts. He assumed, she writes, what he needed to prove:

"Here Marx is evidently thinking in long-period terms. His view is that, when wages rise, prices in the first instance remain unchanged (see below, p. 86) so that profits fall by the amount by which wages rise. [My comment: therefore real wages rise in the first instance]. Thus the rate of profit falls most in those industries where wage costs is the highest proportion of total costs. These industries therefore contract, while industries where profits are relatively raised expand. Prices therefore rise in the first group of industries and fall in the second, until the rate of profit is restored to equality throughout the industries, and fall in the second, until the rate of profit is restored to equality throught industry at a new, lower level. [My comment: which means that real wages increase also in the long-term]. If this interpretation is correct, the whole argument is based on assuming what it requires to prove. It elaborates the consequences of a rise in real wages, but does nothing to show that real wages will rise."

Let's think. Marx describes a re-distribution of income, from profits to wages. To put this the economese Robinson mastered: consumption of capitalists directly affected falls; consumption of workers directly benefited rises; prices for the first may fall slightly, prices for the second may rise slightly; overall, no major changes in price levels. Real wage increase.

Or, in Marxese. Profits (monetary measure) come from surplus value: the result of selling surplus output (physical measure). The redistribution of money, in other words, is necessarilly accompanied by a redistribution of consumption goods. Real wage increase.

What else needs Robinson, who writes on "Marxian economics", have explained to her?

That's why Robinson is not one of my favorite writers.

Jerry Brown said...

Wow. You have both a very intelligent and very polite Anonymous commenter. What are the odds of that?

It is pretty obvious that unions can increase real wages of workers. You don't need any economic arguments to observe that many corporations spend lots of money (and break laws) trying to prevent their employees from joining unions. And nobody is dumb enough to think they do that for their workers' benefit. I hope.

Achim Kriechel (A.K.) said...

In many places you talk about the use of surplus by society and for society. Education, pensions, shorter working hours, comprehensive health insurance, increasing savings rates, etc. These are all measures that were taken in the beginning, although not sufficiently for a long time, in Europe after the war. The countries of Scandinavia, are considered a shining example of social democracy. These are all enormously important projects that may be supplemented with an unconditional basic income for all.

In another place you wrote that a part of the surplus is in reality not a real "surplus", because it would be needed for depreciation, or in short for the replacement of means of production. Exactly at this point, in the determination of the required capital for the permanent repeatability of the production process, there is a blind spot. For in the same way as the depreciation on machines etc. would appear in the operating balance sheet, the costs for the replacement of two further production factors would also have to appear there. Namely, the costs for raw materials and energy. In fact, these costs do appear there, but in what form? Under the condition that both can be procured again endlessly on the basis of prices which develop after offer and demand. The real costs for finite raw materials do not appear in any balance sheet, just like the energy produced on this basis.

Who can really answer the question to what extent capitalism owes its success a) to the exploitation of workers on the one hand, and to the exploitation of natural resources on the other hand. Only slowly these factors appear in the balance sheets, since e.g. climate certificates must be bought and by rising prices.

Anonymous said...

Greetings from the land of the peasant. I am a groundling who has less than 50.00 in the bank and live by my wits. You are giving humanity too much credit. The first question that arises from my perspective is not what about the surplus, but what about the idiot (to use the term loosely) people who are legion down in my status place. I am down here but I ascribe to what Neitzsche says when he says man is at his best when, as an adult, he recaptures for a moment the seriousness of a child at play. I want Soren Keirkegaard's writings to be my bible. I am a nice guy, and certainly finishing last. Marx fundamentally is leaving out the human condition and not factoring in the seven deadly sins into his philosophy. Its not the big bad capitalists hurting me, its the little guy who is robbing, cheating and stealing. So as a nice guy I need the capitalist system to help me along. Bill Gates can have his billions, he doesn't bother me but thanks to him I am vaccinated. Elon Musk is innovating space technology. Bezos is rich but my package is here. Socialism does nothing for the little guy except exacerbate misery. You live in the world of academia, where intellectual property is at a premium. You have no idea how it is down here. This is way past Rousseau, the human condition needs to be factored in. And when it is, capitalism is the way to go, and I speak from experience.

Ahmed Fares said...

Jerry Brown,

"It is pretty obvious that unions can increase real wages of workers."

Of course they do, union workers that is. But it comes at the expense of non-union workers.

There was a time when a GM worker with a Grade 10 education was making $150k/yr ($50/hr in wages and $25/hr in pension and post-retirement benefits). This when a tenured professor was making $90k/yr.

We're sticking it to the man they said. Except that GM took those labor costs and passed them right along to car consumers, some of whom don't have the benefit of those high union wages. That's who bears the cost, not the GM shareholders. The real wages of GM workers rose while the real wages of car purchasers fell.

Corporations earn their returns on equity after all costs, including the cost of labor. Battle of the mark-ups.

This is easier seen with government worker unions, who when they get high wages for their workers, means you pay higher taxes. Good for them of course, not so good for you.

The phrase "aristocracy of labor" comes to mind here.

Magpie said...

Ahmed Fares

In comment number one your claim was that higher wages [result of union bargaining] lead to higher prices leaving real wages unchanged. So, nobody wins, nobody loses.

In comment number two, however, we have that Of course they do [i.e. unions can increase real wages of workers], union workers that is. But it comes at the expense of non-union workers. So, unionized workers win, others lose.

Which of those two different statements is the one you really believe in? Or this is just a matter of changing the goal posts?

Magpie said...

Anonymous @May 7, 2021 at 7:20 AM writes

You are giving humanity too much credit.

You are living proof of that.:-)

Ahmed Fares said...


Both statements are true and do not contradict each other.

In my first comment, I was referring to a wage-price spiral that leaves the labor share unchanged.

In my second comment, I was referring to the unfair distribution within that labor share.

Magpie said...

Ahmed Fares,

Both statements are true and do not contradict each other.

I will not argue. It's enough to repeat your two statements here. Anyone interested and able to read English is free to judge. Luckily, the exercise is a lot easier than Robinson's writing. :-)

Claim 1:
Higher wages [result of union bargaining] lead to higher prices leaving real wages unchanged

Claim 2:
Of course they do [i.e. unions can increase real wages of workers], union workers that is. But it comes at the expense of non-union workers.


Ahmed Fares said...

“When unions get higher wages for their members by restricting entry into an occupation, those higher wages are at the expense of other workers who find their opportunities reduced. When government pays its employees higher wages, those higher wages are at the expense of the taxpayer. But when workers get higher wages and better working conditions through the free market, when they get raises by firm competing with one another for the best workers, by workers competing with one another for the best jobs, those higher wages are at nobody's expense. They can only come from higher productivity, greater capital investment, more widely diffused skills. The whole pie is bigger - there's more for the worker, but there's also more for the employer, the investor, the consumer, and even the tax collector.

That's the way the free market system distributes the fruits of economic progress among all people. That's the secret of the enormous improvements in the conditions of the working person over the past two centuries.”
—Milton Friedman

As for my first comment...

Higher wages [result of union bargaining] lead to higher prices leaving real wages IN THE AGGREGATE unchanged

Some things are implied. I'll try to spell things out more clearly for you in the future.

Jerry Brown said...

There are a whole lot of assumptions that have to turn out to be true in the statement that wage increases for union members come only at the expense of non-union workers in the form of higher prices such that taken together, there is no increase in real wages for labor overall.

I would think that your government employees causing tax rates to rise as a result of wage increases would be the easiest example for you to prove. Even here there are problems with your story. One big problem is that while a nominal raise in wages for government employees may require a tax increase, taxes are not just paid by workers only- they are also paid by capital owners which has the effect of lowering their share of disposable income relative to labor. So you get a rising real wage when you consider the incidence of a broad based tax increase.

But another problem is government is also able to run deficits and an increase in its labor costs do not necessarily mean a tax increase anytime soon or at all. The only time a tax increase might be completely necessary following the rising wage is if the economy was already at full employment and the extra spending on the wage increase would cause an overheated inflationary economy.

Ahmed Fares said...

Jerry Brown,

taxes are not just paid by workers only- they are also paid by capital owners

Corporations earn their return on equity after all costs, including the cost of taxes. The costs of higher taxes show up as higher prices than would otherwise be the case.

But another problem is government is also able to run deficits and an increase in its labor costs do not necessarily mean a tax increase anytime soon or at all.

Opportunity cost. There are better ways of closing an output gap. Even in an economy at full employment, less money for government workers means more money can be spent elsewhere.

Government workers are overpaid. Here, have a look (2018 figures - check out the chart):

Federal Government versus Private Sector Compensation

A quote from the above article:

The average total compensation of U.S. government workers for all education levels is $134,784 per year (in constant 2015 U.S. dollars), which is 17 percent higher than the average annual compensation of comparable private sector workers.

Jerry Brown said...

Ahmed Fares, you say "The costs of higher taxes show up as higher prices than would otherwise be the case." Avoids the point that higher prices are paid by both labor and capital owners, and likewise with the taxes. Both of which indicate that the sector of the economy getting an increased nominal raise along with increased taxes will be relatively better off than the sector only experiencing the increased taxes. Even assuming any increased labor cost directly translates to increased taxes and increased prices. I don't see how you can even argue this.

"Even in an economy at full employment, less money for government workers means more money can be spent elsewhere." Can be spent doesn't mean will be spent-and the main point is that the economy is seldom at full employment to begin with.

Opinions about public employee compensation vary widely.

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Magpie said...

“When unions get higher wages for their members by restricting entry into an occupation, those higher wages are at the expense of other workers who find their opportunities reduced.”

Out of Friedman's quote (which for some reason, presumably implied, you decided to reproduce in its largely irrelevant entirety), that's the bit which has relevance to this discussion.

As a side note: you may not be aware of that, but an argument from authority (which is what your counter boils down to) is not much of a logical argument.

But never mind, I'll bite.

According to Friedman's unproven opinion, when unions get higher wages for its members by restricting entry into an occupation, they hurt non-union workers. Well, it follows that when unions get higher wages for its members by other means, non-union workers don't need to be hurt. When unions, for instance, get higher wages by enterprise bargaining or by striking or by litigation, they don't need to hurt non-union workers.

You see, restricting entry into an occupation is not the only way unions have to get wage increases.

Which is quite lucky, for in fact unionization rates in the US are falling. In the US the public sector has the most unionized workforce. According to the Bureau of Labor Statistics (UNION MEMBERS — 2020 news release), in the year 2020 34.8% of all public servants were members of a union. Evidently those unions are not very successful restricting entry into the occupation: 65.2% of public servants entered the public service without any restriction.

Incidentally, 38.4% of public sector employees are represented by unions, which means that unions directly benefit not only the 34.8% who are union members, but an additional 3.6% who are not. Those in that 3.6% not only entered the public sector without any union restrictions, they actually get union representation for free.

So much for Friedman.


Note as well that Friedman wrote other workers who find their opportunities reduced. He did not write that those other workers find their wages reduced. In English, opportunities has a broader meaning than wages.


My advice? Leave economics aside for now. Go back to basics and exercise your reading and your writing.

Ahmed Fares said...


"argument from authority"

Not every argument from an authority is an argument from authority.

"34.8% of all public servants were members of a union. Evidently those unions are not very successful restricting entry into the occupation: 65.2% of public servants entered the public service without any restriction"

Restricting entry would apply to that 34.8%, not the 65.2%.

But, let me give you a more concrete example. I had a friend who worked for a railroad making $60k/yr in a union job. Being in the same field, I'd offer to do his job for $50k/yr, the going non-union rate. But I'm blocked from doing that.

So I get a job making $50k/yr, and it takes more than an hour of my labor to buy an hour of my friends labor, given that his labor costs end up in my product prices. The reverse is true for him, i.e., it takes less than an hour of his time to buy an hour of my time, which also ends up in product prices.

Absent unions, his wage would be $50k/yr. In that case, each of would buy an hour's labor for an hour's labor. This would be an equitable division of the labor share.

Now I have no problem paying a doctor $200k/yr, which means I work 4 hours to buy an hour of a doctor's time, the doctor working 15 minutes to buy an hour of my time. After all, it's hard and expensive to become a doctor.

I do however have a problem with working 3 hours to pay an autoworker for an hour of his time, given that my skill and education level is higher than his.

As an aside, unions end up destroying the very people that they're trying to help. In the example of autoworkers, Toyota and Honda set up shops in those Southern US right-to-work states, paid their workers $40/hr, which was still roughly twice the rate for manufacturing workers, and the jobs shifted there.

Auto purchases ended up with cheaper cars, which means their real wages rose. Meanwhile, in Michigan, not only did they lose their jobs, but the value of their houses collapsed.

Michigan became a right-to-work state in 2013.

Magpie said...

Let’s see if I get your more concrete example straight. Feel free to correct me at any point if I am wrong.

Your friend earns $60k/yr in a job paying rates his/her union gained for him/her. You, however, earn only $50k/yr (presumably doing the same job, with the same skill, but without any union benefits).

Based on that and on an early comment of yours (May 7, 2021 at 2:46 PM), I suppose that situation makes of your friend a representative of the aristocracy of labor: he/she does not really deserve that income differential, yes?

By comparison, a doctor (and presumably other highly paid workers like lawyers, professors, and such) does deserve his/her higher incomes, because it’s hard and expensive to become a doctor. An autoworker earns an unjustified premium when compared to you, the doctor also earns a premium when compared to you, but in his/her case the premium is justified.

To solve those injustices you want to do away with the aristocracy of labor. You want to level both your friend’s and your own income at your current income level of $50k/yr, by removing the protections the union affords him/her. There is no problem with the doctor’s higher income, but the autoworker’s should fall below yours, I suppose.

So far, am I understanding you correctly?

Okay, for completeness, let me ask your views on those people’s employers. Do the owners of the firms where you, your friend, the doctor, and the autoworker deserve their incomes or not?

Ahmed Fares said...

"So far, am I understanding you correctly?"

Yes. I'm ignoring equality of opportunity, which while important, is a separate issue.

"Do the owners of the firms where you, your friend, the doctor, and the autoworker deserve their incomes or not?"

Assuming a competitive market, yes.

Magpie said...

Thanks for your answers. I have many questions but I will try to keep things reasonable.

Would I be mistaken to infer you are a follower of Austrian economics? I ask because I find it curious you mentioned the aristocracy of labor at all. That topic is not precisely hot among the mainstream or even among Marxists.

What attracted you from this blog and made you comment here? It's hard to find any obvious affinity between your beliefs and the beliefs of both blogger and his readership, but I might be mistaken.

And, lastly, the subject of competitive markets and the incomes of businesspersons. In a competitive market, according to both Austrian and mainstream economics, there is no "economic profit" (or monopoly rent). I've seen that often interpreted as saying that in a competitive market in the long term there is no profit (without adjective). I believe that interpretation to be wrong, but I would like to confirm with you.

Ahmed Fares said...

"Would I be mistaken to infer you are a follower of Austrian economics?"

No, I can't stand most of the ideas of Austrian economics. I once spent a few months arguing on Reddit with followers of Austrian economics. I do respect the fact that they think hard about issues, but they make some basic flawed assumptions. Like when Böhm-Bawerk left money out of his analysis, thinking instead of a barter economy. We live in a monetary economy. I like listening to Robert Murphy, again to see how others think about economics.

I'm a follower of MMT and Post-Keynesian economics.

"What attracted you from this blog and made you comment here?"

Tom Hickey from Mike Norman economics posts articles from here on that blog. Again, for the same reason I've discussed economics with Austrians, one can clarify their thought by seeing the ideas of other schools of economics.

"I've seen that often interpreted as saying that in a competitive market in the long term there is no profit"

Here's my thinking on that.

There are four factors of production as I learned them: land, labor, capital, and enterprise. Each of these factors earns their respective returns.

Say we start with a simple island economy. We have some people who fish, and we have some people who make fishing nets. The people who fish trade fish for fishing nets. What I've described is a simple guns and butter economy, i.e., production of consumption and capital goods. Note that in a such a simple economy, there is no need for enterprise.

However, when an economy becomes complicated, there is a need for someone to organize the other factors of production. In a capitalist economy, that function is provided by the private sector, which may or not be the capitalist. For example, an entrepreneur can rent land, labor, and capital, and make a profit. In a command economy, that function is provided by the government. Either way, a portion of labor has to go to those who organize the other three factors of production.

What about worker co-ops? Say for example a bakery run by bakers. In that case, the bakers have to give up some time baking to decide the future of the business. That reduces baking output. In that case, the pay of the workers in a co-op would match the pay of the workers in a bakery run by an entrepreneur.

There's no free lunch here. It's like when people say they are saving money by pumping their own gas, but they haven't accounted for the time they spent pumping gas.

Let's look at this another way.

Say unskilled labor is making $8/hr and the capitalist is selling their output at $12/hr, making $4/hr off that labor (lets ignore capital costs to keep it simple). Let's also assume a pool of unemployed workers.

Now another capitalist can hire workers from that pool, pay them $8/hr and sell their output at $11/hr, making $3/hr off that labor. This process will continue until all the excess profits are competed away. (Some necessary profit will remain.)

Note also that the real wage is rising, because if you are paid $8/hr and output prices are falling, that's a rise in your real wage. See how businesses drive real wages up? And even if nominal wages were falling, prices would fall faster, and the spread between wages and prices would compress at the same rate.

What protects us from "greedy" capitalists is "less-greedy" capitalists.

Magpie said...

@Ahmed Fares

Yes, I've seen you commenting at Mike Norman's blog. I used to follow that blog and even comment there, but I seldom do that these days. So, you follow MMT and Post-Keynesian economics.

This is going to be a long reply, thus my apologies to blogger and his readership. Maybe we should move this discussion to my own blog. This seems a good place:


Given what you write after "Let's look at this another way" let me outline the approach I would have taken to a critique of unions.

In that part of your comment you are describing a long-run equilibrium in a perfectly competitive market.

Now, those words are anathema for Post-Keynesians who -- for their own reasons -- hate marginalism as much as they want to claim Keynes as one of their own. And "a long-run equilibrium in a perfectly competitive market" is a marginalist notion: where all factors of production get what they put into production, no more no less. There is no surplus, everything is accounted for.

But in Chapter 24 of his General Theory, Keynes (who never really broke with marginalisim: h/t Brad DeLong) reasons in ways quite similar to you.

DeLong's point: In section III of that chapter, Keynes writes:

Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards ... (my bold)

The "classical theory" you see there is marginalism/neoclassical economics, just like Robinson's "orthodox economists" are marginalist/neoclassical economists.


Magpie said...

Anyway, in section II -- a paragraph above the "euthanasia of the rentier" paragraph -- Keynes writes:

This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment.

Note that profit would not go to zero (note as well, that Keynes does not include "entrepreneurship" as a factor of production separate from capital: the return to "entrepreneurship" is included within the return to capital). What disappears is rent, economic profit: incomes to the factors of production in excess and not accounted for contribution to output.

Mono/oligopolies (i.e. combinations of sellers) and mono/oligopsonies (i.e. combinations of buyres) go against perfect competition and unions are attempts to create a monopoly. Thus unions, as monopolies/oligopolies, are market imperfections, and disturb that result as other mono/oligopolies and mon/oligopsonies do.



Magpie said...
This comment has been removed by the author.
Magpie said...


Of course, that critique has weaknesses. Firstly, Government intervention underpins both monopoly formation and all sorts of regulation of the economy, including Keynesian stabilization policies.

Secondly, unions are neither the only mono/oligopolies, nor are they the most powerful, but are the easiest to bash: they are targets of choice for both Left and Right. Are anti-union campaigners going to do something effective against the other monopolies? Without that, there is no "long-run equilibrium in a perfectly competitive market".

Thirdly, PoKes dispute marginalism. Methodological individualism is kaka. Homo economicus is blasphemy. There is no such thing as a production function: the Cambridge Capital Controversies. (Personally, I think Robinson's critique is overstated, but not all the CCC is bullshit). So, how can there be "a long-run equilibrium in a perfectly competitive market"? Add to that that some MMTers do not accept the notion of long-run: long-run, they say, is nothing but a succession of short-runs.

And the last question: if profit in "a long-run equilibrium in a perfectly competitive market" does not go to ZERO, well, what explains that small but positive quantity? After all, as Matt Bruenig very aptly remarked: marginal product of capital is not the same as marginal product of capitalists.


Ahmed Fares said...


Thank you for the reply. I'll have to re-read your comments a few times as you cover a lot of material here. Also, thanks for the link to your site. I'll check it out when I have more time.

As an aside, MMT kills a lot of birds with one stone. The Job Guarantee (JG) for example means that no one can exploit labor anymore because people always have that option of working for the government, albeit at a lower rate of pay. There's no more taking advantage of someone in a dire situation because there is no one in a dire situation.

The JG also anchors the price level. No more wage-price spiral. If things heat up, the government uses fiscal policy to force some people out of work into the JG program, where the government sets the wage level.

Also, MMT says that the natural rate of interest is zero. By letting the interest fall to zero and not issuing bonds, the r in Piketty's r>g falls and you no longer have that extreme accumulation of wealth. The g is also higher because you run the economy at or close to full capacity.

With full employment, you reduce crime and drug use. You can use the cost savings in the economy elsewhere.

There's probably a few more things that I've missed.

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