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Two Theories of Value--And Their Consequences
This story is not copyright; it is public domain


    As the planet seems to be spining into economic chaos and depression I find myself repeatedly telling this idea to my friends and acquaintances. I thought to share it with you too, because to me it explains a lot about what is happening on Earth, provides suggestions as to how to weather the coming storm, and indicates a real, though improbable, solution.


The Reason For The Business Cycle

    I should say at the get-go that I did not think this one up myownself. It was thought up by my old buddy, Karl Marx.

    Although Karl was quite wrong about the remedy (or at least, his followers, and those who label themselves "marxists" were certainly wrong about the remedy they proposed to the evils of capitalism) Marx's analysis of WHAT was wrong was probably correct. So he is worthy of paying attention to; please do not discredit Karl by putting him into the same group as the rest of the Marxists. Few know that while attending the great Communist International Convention held in Paris during the 1870s, and after listening to many many dull speeches and exortations by his followers, Marx took the podium and said emphatically that though all the others he had heard considered themselves tp be "Marxists," he was NOT a Marxist. Marxists could not deviate from the principles they believed had been laid down by Marx; he could.

    This is a concise restatement of Marx's Theory of Surplus Value:

    The Capitalist system is so complex and has so many aspects to it that to try to develop an explanation for the business cycle by considering the whole system at one time is near impossible. However, if one could construct a simplified model of how the system works it would be much easier to see the workings of that model and thus generalize from the model to the whole system.

    So--imagine a Capitalist system that consists of only a single widget factory employing only 100 workers and having only one boss. This is the whole shebang. A widget is a nameless economic good. The people in this system eat, drink, wear, shelter with and recreate with widgets. The widget is the sole and only economic good produced and needed within this system.

    Every day each worker goes to work and produces two widgets. Every day the factory produces 200 widgets. Every day the workers get a daily pay packet containing enough money to purchase one widget. The workers much spend their pay every day because they have no excess to save, so they buy their widget and their family consumes this single widget, living day-to-day in simple poverty. Every day there is a surplus of widgets left over, 100 to be exact, that accrue to the boss as his "profit," his SURPLUS VALUE.

    The boss of this widget factory does not live in simple poverty, but enjoys living in high style. However, try as he may, he cannot consume 100 widgets a day. I mean, how many widgets can one eat a day and how many can you wear at one time? So every day that passes a few unused widgets accumulate in the bosses warehouse. It doesn't matter how many extra accumulate. Eventually the warehouse is bulging with unused, unsold widgets, full to the brim.

    So the boss says to the workers, "you guys are laid off for awhile." And then the workers suffer. The boss doesn't personally mind hard times much; he has lots of widgets in his warehouse and can always bring the workers back to make more. The workers, however, starve and freeze and suffer whilst the boss continues to draw down his widget surplus, barely reducing the standard of his lifestyle, though he may consume a bit more discretely during a depression. Eventually the boss and his family have used enough widgets that the boss feels a need to make more widgets and thus calls the workers back to the factory. And thus good times resume.

    This scenario would be totally satisfactory to the boss but for the fact that the suffering workers fail to suffer in silence. They resent the boss and his family continuing as their usual fat and happy selves, whilst they are starving and freezing, and begin to contemplate assorted radical reorganizations concerning who possesses the widget factory. So the boss, now obsessed with how to preserve his position and happiness from the "greed" of the workers, has to come up with some solution to ameloriate the distresses caused by the business cycle. There are but two: war and what Marx named "imperialism," what we might today call globalization.

    Imperialism means that if the factory could but sell one widget a year to every Chinese, a billion widgets each year could be sold and the warehouse would never fill up. Trouble with this is that the widget factory in our model is not the only one with a bulging warehouse. There's a widget factory in each country, and each must complete for access and control of these overseas markets. The competition for control of imperial markets brings on the second solution, war.

    War is a great emptier of widget warehouses. The government creates new money, piles up widgets now labeled "war material" and the system chugs on merrily. Whichever way these widgets are used, for war or later declared "waste," the system chugs on merrily. If there is a shooting war, the widgets are used up whilst the workers are distracted by the hostilities and do not focus on the boss as the source of their poverty. If there is no shooting war, the widgets still are destroyed because, being war material, they are soon considered technologically obsolete and "surplus," requiring replacement with up-to-date widgets for the army.

    However, as with all solutions created in this universe, the solution itself becomes a new problem. Inevitably. Overseas markets are limited and eventually they are adsorbing all the widgets that can be produced. And overseas markets eventually industrialize themselves, and begin trying to export their own widgets back to the original capitalist countries, greatly increasing the competition. And the trouble with war is that occasionally, it can be totally WON. As long as limited war or preparations for war continues, war fulfills its economic function. The irony is that when a war has been thoroughly won, it has been lost; lost in that there is no more war to have. When we lose our war and can't expand our exports, we no longer have a solution and the old problem comes back with a vengence.

    I should mention that whilst there is a war, while the solutions are operative, there still may be a business cycle, but it's severity has been strongly ameloriated. The distinction between an ameloratied cycle and a full-blown one is the difference between a recession and a depression. Modern economists, not prone these days to the politically-incorrect action of crediting Marx for any of their ideas, still frequently refer to a recession as an "inventory" recession.

    The first world-wide depression began about 1870. It was probably triggered by the world-wide development of the capitalist system into its current, mature form. This depression lasted the best part of the decade of the 1870s and was probably ended by an arms race in Europe. All during the 80s, 90, and so on, there was great prosperity and stability in the West, as nations armed themselves and the governments filled and refilled their armories with ever-higher-tech weaponry. By 1914 all the nations had alligned themselves into two more-or-less equal and opposing camps. Then a spark set off the momentum of all this offensive posturing and a shooting war started. WW I ended with the complete collapse of one of the two sides. There was no one to serve as the "enemy" of the victors any longer, although the victorious side did try to create a new enemy out of Russia by aiding in the establishment of a competitive economic ideology there. The Communists, unfortunately, were starving and freezing for decades and could not organize their system without considerable economic aid from the West (which they were given) so the Communists could not serve as a justification to further arms creation, so during the 1920s the world entered a period of rapidly reducing arms production. (The Communists did have a useful function, though. Their "threat" enabled the bosses to label as "reds" anyone who oppposed their interest and thus conveniently supress all opposition.)

    During the 1920s, this disarmourment seemed to produce a time of great prosperity in the victorious countries, as taxes were lowered and all that productive capacity turned to consumer goods and the empire of the loosers soaked up the surplus of the victors. But by the end of the decade the warehouses of the world were bulging with unsold commodities and products. The countries were strongly competing for overseas markets and the boom began to collapse. Their responses were natural and two-fold: tariff barriers and competitive devaluations--keep the other guy's stuff out of your own country whilst selling your stuff into his; lowering the worth of your currency whilst raising the worth of his, thus making your goods cheaper, and his dearer, thus improving your trade position and increasing your own exports at the other guys' expense. Economic warfare, in other words. These measures when instututed by all sides, led instead to a deepening cutoff of trade because tariff barriers are a two-way street and devaluations are a zero-sum game--everyone can't devalue simultaneously; your currency can only weaken if the other guy's strengthens. If everyone devalues at once . . . .

    The resulting depression was insoluble until the economic warfare of the late 20s through 30s led to preparation for a real fighting war. The next war began in 1936 in Spain (in a small way) and then continued and increased with assorted shifting alliances and ups and downs among the participants until it finally ended in 1991 with the fall of the Soviet Union. The historians of the 21st century will probably refer to this period as the Fifty Five Years War of the late 20th century. The victors of this war, if there were any, were probably the Americans, the Germans and the Japanese; the big loser was Russia.

    Again there was no serious enemy left in the world, though the Americans have tried to create one out of "terrorists" and also out of Iraq. Maybe the spacemen will threaten us. Or the Muslims will unify and seem to get genuinely dangerous. But unfortunately, none of these "enemies" in their current condition can serve as a justification for the use of massive amounts of war materials, so the victors of the 55 years war of the late 20th century have been experiencing an ever-decreasing amount of war production. Naturally, this initially led to a period of great prosperity but is now entering the next phase where commodities are overly abundant and the factories are having a harder and harder time to make profit due to the extreme competition developing. Competitive devaluations are begining as one currency after another collapses. The one thing we have not yet seen is trade barriers, though the unprecidented severity of these currency devaluations (without a gold standard) may serve the same function, in that the the devalued countries can hardly afford to purchase anything with their worthless paper.

    Thus our planet is sinking into depression, despite our "modern" system of economic regulation and apparent cooperation.

    Do the "bosses" mind? I doubt it. Depression to them means only that they get to gobble up failing businesses and foreclose heavily mortgaged real estate at ten cents on the dollar. If government seeks to ameloriate depression by money creation, do the bosses then mind inflation? No, they don't actually possess very much currency; instead they wisely own the means of production; the value of a widget factory is always the value of a widget factory, despite how many units of currency this is expressed in.

    Will this depression be as severe as past ones? Or worse? Answer: I don't know. After all, we are living in the era of the "end of history," "things are all different this time," and "governments have the ability to regulate the economy now" which they "did not have before."

    What would you do if you have investments? Currently I am about 90% in short-term cash or bonds, spread around in three different fairly solid (at this moment) currencies from various regions. I expect there will soon be a great opportunity to buy businesses at ten cents on the dollar. When? When everyone else has lost their ass in the shares markets and wouldn't own shares on a bet. Which businesses would I own? The ones the major power-broker-bosses own, like Rio Tinto and Royal Dutch and Dupont and Citibank. The ones that are too big to fail. The ones that own the governments. I will soon have about 5% of my assets in gold bullion. This is "insurance" against inflation and simultaneously, the time that my businesses (the ones I'll soon become part owner of) for a few years during the hardest of times, fail to pay sufficient dividend income to live modestly on. A couple of ounces of gold/month will pay the property taxes and buy a little gas and food, enough to eek out a living for awhile, until preparation for the next war starts.


THE THEORY OF FAIR VALUE

    Here's a model of an economic system that probably would have no business cycles and enjoy a steady uptrend of prosperity unless it were impinged upon by outside forces destructive to well-being. This system probably would never originate a war and would be defended so fiercely by its members that it probably never would be attacked. The system would be enormously productive. Because productivity would be highly rewarded there would be very few individuals needing assistance to survive and thus governmental redistribution of income would be very minimal. And taxes would be very low.

    A typical production unit in this society would consist of a worker-owned factory run by 99 worker-owners having one worker-owner-manager. There would be no "boss," in the traditional sense. Every day this factory would produce a certain number of widgets. Every day the value of those widgets (less what had to be reserved for depreciation and reinvestment and what the workers desired to reserve for expansion, if any) would be distributed to the workers. The pay of the workers would not be identical. Each worker's daily production would be measured as a numerical statistic and their pay would be that portion of the total businesses' production they individually produced. The manager would receive the same pay as the highest paid worker in the factory. The manager would be elected by the workers. The workers would not have equal votes. In the very same way they are paid on their productivity, each worker would have the same number of votes as their pay. Thus the highest paid workers would have more votes than the lowest paid workers and the productive ones would control the running of the system.



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