HOME PAGE STEVE SOLOMON'S PAGE Steve Solomon's Stories
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.
HOME PAGE STEVE SOLOMON'S PAGE Steve Solomon's Stories