Turning Piketty Right Side Up

Thomas Piketty, a neo-Marxist French Professor, has written a near-700-page book, published by Harvard University Press. His book is titled Capital in the Twenty-First Century, in honor of Karl Marx’s 19^th century Das Capital. It has been greeted with fervent applause from the left-wing intellectual establishment and has been on The New York Times’ and Amazon.com’s best-seller lists.

While his book is ostensibly devoted to the study of capital and its rate of return, Piketty comes to his subject apparently without having read a single page of Ludwig von Mises or Eugen von Böhm-Bawerk, the two leading theorists of the subject. There is not a single reference to either of these men in his book. There are, however, seventy references to Karl Marx.

In his book, Piketty argues that saving and capital accumulation by wealthy capitalists serves to reduce wages. The capital accumulated does nothing to increase production, he claims (pp. 228, 358, passim). All that it accomplishes is allegedly to increase the share of national income going to profits while equivalently reducing the share going to wages (p. 361). Because there is no additional production, the effect of the change in shares is a corresponding change in absolute terms, i.e., real profits up, and real wages down.

In order to avoid endless such destructive capital accumulation and its accompanying “inegalitarian spiral,” Piketty advocates a progressive income tax as high as 80 percent “on incomes over $500,000 or $1 million a year,” accompanied by a progressive tax directly on capital itself, as high as 10 percent per year (pp. 512f., 572).

Now Piketty’s claims about the wage and profit shares are refuted simply by imagining an increase in saving and investment by capitalists and then observing the consequences both for wage payments and for the amount of profit in the economic system. It will be found that wage payments necessarily rise and the amount of profit necessarily falls, results in diametric opposition to Piketty’s claims.

Thus, assume that initially the total amount of profit in the economic system is 200 units of money. (Each unit can be conceived as representing as many tens of billions of dollars as may be necessary for 200 units to equal the actual current amount of aggregate profit.)

Assume also that accumulated capital in the economic system is initially 2000 units of money. Thus the initial average rate of profit is 10 percent.

And, finally, assume that the capitalists, who have up to now been consuming their 200 of profit, decide to save and invest half of it. They now make an additional expenditure for capital goods and labor in the amount of 100.

Whatever portion of this 100 is wage payments necessarily increases the total of wages paid in the economic system. At the same time, the spending of an additional 100 on capital goods and labor must sooner or later add 100 to the aggregate costs of production of business that are deducted from sales revenues, thereby equivalently reducing aggregate profits.

The rise in costs can take place immediately or over many years, depending on what the 100 is spent for. At one extreme, if it were spent entirely on items that were not capitalized, such as, typically, selling, general, and administrative expenses, it would show up immediately as equivalent additional costs. At the other extreme, if it were spent entirely on the construction of buildings with a 40-year depreciable life, it would take 40 years for it to show up as equivalent additional costs of production. But one way or the other, it will show up as equivalent additional costs and thus equivalently reduce the amount of profit in the economic system.

Thus, Piketty’s “findings,” as they are called, are reversed. The capitalists’ saving and investment that increases the ratio of accumulated capital to income, increases the wage share of national income and decreases the profit share.

Moreover, the larger supply of capital goods that results from the transition to a higher capital/income ratio serves to raise the productivity of labor and increase the total of what can be produced, including a still larger supply of capital goods. With technological progress to offset diminishing returns to a growing supply of capital goods, capital accumulation in physical terms can potentially go on indefinitely, without further increases in the ratio of capital to income. But a higher ratio would reinforce this process. This is because insofar as it represents a more abundant supply of savings, it makes it possible for the economic system to implement more costly technological advances, thereby increasing the contribution of technological progress to capital accumulation.

Piketty’s program is one of unmitigated economic destruction. America and the world, above all the wage earners of the world, need the abolition of taxes and regulations that stand in the way of capital accumulation and the increase in production. Capital accumulation and more production, not egalitarianism and its absurd theories and programs, are the foundation of rising living standards in general and rising real wages in particular.

Copyright © 2014 by George Reisman. George Reisman, Ph.D. is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). See his Amazon.com author's page for additional titles by him.  His website is www.capitalism.net and his blog is georgereismansblog.blogspot.com.  On Twitter @GGReisman. 

 

Interview with John O'Donnell on PowerTradingRadio.com

Yesterday, April 29, I had the pleasure of being interviewed for half an hour by John O'Donnell on www.PowerTradingRadio.com. The interview was wide ranging, covering economic inequality, the 99% and the 1%, and the fact that the wealth of the 1% is the source both of the supply of the products that the 99% buys and the demand for the labor that the 99% sells, and thus operates in the self-interest of everyone.

We also discussed the fact that under capitalism the thinking and planning of all the millions of individuals and business firms, harmonized and integrated through the price system, constitutes the planning of the economic system. In contrast, socialism cannot plan, because it attempts to substitute the thinking and planning of the handful of members of the Central Planning Board for the necessary thinking and planning of everyone under the price system.

And we discussed the fact that contrary to Adam Smith and Karl Marx, profits, not wages, are the original and primary form of labor income, a subject which I gave an introduction to in my post of February 21 of this year, and fully explain in my book Capitalism in Part C of Chapter 11 (pp. 473-500).

Labor Unions Are Anti-Labor

Many Americans, perhaps a substantial majority, still believe that, irrespective of any problems they may have caused, labor unions are fundamentally an institution that exists in the vital self-interests of wage earners. Indeed, that it is labor unions that stand between the average wage earner and a life of subsistence wages, exhausting hours of work, and horrific working conditions.

Nevertheless, labor unions (and the public at large) have a profoundly flawed understanding of how real wages and the general standard of living are increased. For the individual, the simplest, most direct and obvious method for improving his standard of living is to go out and earn more money. People observe this behavior of individuals and assume that it is also feasible for labor unions to raise the standard of living of wage earners throughout the economic system simply by increasing the money that wage earners are paid.

This is an enormous error.

The goal of earning higher money wages is perfectly rational and socially beneficial when pursued by individuals. But it is contrary to purpose, highly destructive, and downright antisocial when pursued by labor unions.

When pursued by an individual, the goal of earning more money almost always requires that he increase the supply of goods or services that he produces. This increase in the supply of goods or services not only serves to increase the money earned by this particular individual but, at the same time, it also serves to increase the overall supply of goods and services in the economic system. This, in turn, serves, however slightly in most cases, to reduce the prices paid by the buyers of the goods or services whose supply has been increased. (There are numerous cases in which the increase in supply accompanying the earning of more money is quite substantial, as when productive geniuses revolutionize entire industries. In these cases, however, the individuals concerned will almost certainly not be wage earners but businessmen and capitalists, and the increased money incomes in question will be profits, not wages.)

What is crucial to realize is that the reduction in prices that results from additional production and supply serves to raise the real wages of all those wage earners throughout the economic system who are buyers of the goods or services concerned. Real wages are the goods and services that wage earners are able to buy with the money they earn. They are always the reflection of the relationship between money wages on the one side and the prices of goods and services on the other. Increases in production and supply raise real wages by virtue of reducing prices and thus enabling any given amount of money wages to buy more. In this way, they correspondingly raise the wage earner’s standard of living.

Labor unions and the general public almost totally ignore the essential role played by falling prices in achieving rising real wages. They see only the rise in money wages as worthy of consideration. Indeed, in our environment of chronic inflation, prices that actually do fall are relatively rare.

Nevertheless, the only thing that can explain a rise in real wages throughout the economic system is a fall in prices relative to wages. And the only thing that achieves this is an increase in production per worker. More production per worker—a higher productivity of labor—serves to increase the supply of goods and services produced relative to the supply of labor that produces them. In this way, it reduces prices relative to wages and thereby raises real wages and the general standard of living.

What raises money wages throughout the economic system is not what is responsible for the rise in real wages. That is essentially just the increase in the quantity of money and resulting increase in the overall volume of spending in the economic system. In the absence of a rising productivity of labor, the increase in money and spending would operate to raise prices by as much or more than it raised wages. This outcome is prevented only by the fact that at the same time that the quantity of money and volume of spending are increasing, the output per worker is also increasing, with the result that prices rise by less than wages. A fall in prices is still present in the form of prices being lower than they would have been had only an increase in the quantity of money and volume of spending been operative.

With relatively minor exceptions, real wages throughout the economic system simply do not rise from the side of higher money wages. Essentially, they rise only from the side of a greater supply of goods and services relative to the supply of labor and thus from prices being lower relative to wages. The truth is that the means by which the standard of living of the individual wage earner and the individual businessman and capitalist is increased, and the means by which that of the average wage earner in the economic system is increased, are very different. For the individual, it is the earning of more money. For the average wage earner in the economic system, it is the payment of lower prices.

What this discussion shows is that the increase in money wages that labor unions seek is not at all the source of rising real wages and that the source of rising real wages is in fact a rising productivity of labor, which always operates from the side of falling prices, not rising money wages. The plain fact is that in their concentration on increasing money wages, labor unions demonstrate that they are utterly ignorant of the process by which real wages and the standard of living are increased. Indeed, their efforts to raise money wages are profoundly opposed to the goal of raising real wages and the standard of living.

When the unions seek to raise the standard of living of their members by means of raising their money wages, their policy inevitably reduces to the attempt to make the labor of their members artificially scarce. That is their only means of raising the wages of their members. The unions do not have much actual power over the demand for labor. But they often achieve considerable power over the supply of labor. And their actual technique for raising wages is to make the supply of labor, at least in the particular industry or occupation that a given union is concerned with, as scarce as possible.

 Thus, whenever they can, unions attempt to gain con­trol over entry into the labor market. They seek to impose apprenticeship programs, or to have licensing require­ments imposed by the government. Such measures are for the purpose of holding down the supply of labor in the field and thereby enabling those fortunate enough to be admitted to it, to earn higher incomes. Even when the unions do not succeed in directly reducing the supply of labor, the imposition of their above-market wage demands still has the effect of reducing the number of jobs offered in the field and thus the supply of labor in the field that is able to find work.

If the unions were confined to just one or a small number of industries, and did not have the power to determine wage rates in the rest of the economic system, their achievement of higher wages in particular indus­tries would not cause unemployment in the economic system as a whole. The workers displaced from the unionized industries would be able to find work—at lower wages—in the nonunion industries. The effect of unions in these circumstances would be the creation of an artificial inequality of wages—higher wages in the unionized fields, based on an artificially imposed scar­city of labor in those fields, accompanied by correspond­ingly lower wages in the nonunion fields, based on an artificially imposed oversupply of labor in those fields.

The artificial wage increases imposed by the labor unions result in unemployment when above-market wages are imposed throughout the economic sys­tem. This situation exists when it is possible for unions to be formed easily. If, as in the present-day United States, all that is required is for a majority of workers in an establishment to decide that they wish to be represented by a union, then the wages imposed by the unions will be effective even in the nonunion fields.

Employers in the nonunion fields will feel compelled to offer their workers wages comparable to what the union workers are receiving—indeed, possi­bly even still higher wages—in order to ensure that they do not unionize. The nonunion employers will be likely to believe that if they do not pay wages comparable to union wages, then they will be faced with a union and, as a result, not only union wages, but also the loss of major management prerogatives concerning the efficiency of production, and thus experience an even greater increase in costs than is incurred merely by matching union wages.

In this case, artificially high wages create unemployment in virtually every line of work, and leave no avenue open for workers displaced from any one branch of production to find work in another, save by displacing still other workers, who then cannot find work. Even if the wage increases caused by the unions are not universal, they will still certainly result in unemployment if they take place alongside the existence of minimum-wage laws and public welfare assistance. Widespread wage increases closing large numbers of workers out of numerous occupations put extreme pres­sure on the wage rates of whatever areas of the economic system may still remain open. These limited areas could absorb the overflow of workers from other lines at low enough wage rates. But minimum-wage laws prevent wage rates in these remaining lines from going low enough to absorb these workers. So too does the exis­tence of public welfare assistance, inasmuch as people are not willing to work at such low wages if they can obtain a comparable or higher income without working.

In these ways, labor unions cause unemployment—and unnecessarily low wages for those who work in whatever lines may remain open to free competition. Indeed, they cause unnecessarily low wage rates even for workers in unionized fields insofar as there are workers in some unionized fields who have been closed out of employment at higher wages in other unionized fields (for example, unionized auto workers who might have worked at higher pay as electricians or plumbers had they not been excluded by unions in those fields).

From the perspective of most of those lucky enough to keep their jobs, the most serious consequence of the unions is the holding down or outright reduction of the productivity of labor. With few exceptions, the labor unions openly combat the rise in the productivity of labor. They do so virtually as a matter of principle. They oppose the introduction of labor-saving machinery on the grounds that it causes unemployment. They oppose competition among workers. As Henry Hazlitt pointed out, they force employers to tolerate feather­bedding practices, such as the classic requirement that firemen, whose function was to shovel coal on steam locomotives, be retained on diesel locomotives. They impose make­work schemes, such as requiring that pipe delivered to construction sites with screw thread already on it, have its ends cut off and new screw thread cut on the site. They impose narrow work classifications, and require that specialists be employed at a day’s pay to perform work that others could easily do—for example, requiring the employment of a plasterer to repair the incidental dam­age done to a wall by an electrician, which the electrician himself could easily repair. (See Henry Hazlitt, Economics In One Lesson, chaps. VII and VIII.)

To anyone who understands the role of the productivity of labor in raising real wages, it should be obvious that the unions’ policy of combatting the rise in the productivity of labor renders them in fact a leading enemy of the rise in real wages. However radical this conclusion may seem, however much at odds it is with the prevailing view of the unions as the leading source of the rise in real wages over the last hundred and fifty years or more, the fact is that in combatting the rise in the productivity of labor, the unions actively combat the rise in real wages!

The unions are almost certainly unaware of this fact. That is because all that they see and are concerned with is the money wages of their members. They do not care at all about the destructive effect of their actions on the prices of the goods or services their members help to produce and thus on the real wages of all those workers throughout the economic system who are buyers of those goods and services.

In this, their behavior is profoundly antisocial. It is, of course, also antisocial in its indifference to the destruction of employment opportunities in the unionized fields and the consequent reduction of wages in the lines into which the workers displaced by the policy of above-market wages must crowd.

In sum, far from being responsible for improvements in the standard of living of the average worker, labor unions operate in more or less total ignorance of what actually raises the average worker’s standard of living. In consequence of their ignorance, they are responsible for artificial inequalities in wage rates, for unemployment, and for holding down real wages and the av­erage worker’s standard of living. All of these destructive, antisocial consequences derive from the fact that while individuals increase the money they earn through increasing production and the overall supply of goods and services, thereby reducing prices and raising real wages throughout the economic system, labor unions increase the money paid to their members by exactly the opposite means. They reduce the supply and productivity of labor and so reduce the supply and raise the prices of the goods and services their members help to produce, thereby reducing real wages throughout the economic system.

---

This article is an adaptation and abridgement of material that appears on pages 655 to 658 of the author’s book Capitalism.

 

Copyright © 2014 by George Reisman. George Reisman, Ph.D. is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). See his Amazon.com author's page for additional titles by him.  His website is www.capitalism.net and his blog is georgereismansblog.blogspot.com.  Follow him on Twitter. 

 

 

Smith, Marx, and Piketty: Reisman’s New York Times Comments on Steven Erlanger’s Article “Taking on Adam Smith (and Karl Marx)"

I made the following comments in response to a New York Times article by Steven Erlanger titled “Taking On Adam Smith (and Karl Marx),” which appeared yesterday. Erlanger’s article is essentially a review of the book Capital in the Twenty-First Century by Thomas Piketty, who appears to be the current rage among much of the economics profession. His book was dubbed by Krugman as “one of the watershed books in economic thinking.”

COMMENT 1 (at http://nyti.ms/1lv1FH5):

Mr. Erlanger’s article is titled “Taking on Adam Smith (and Karl Marx).” Allow me to suggest a different perspective than Mr. Piketty’s from which these two figures can be taken on. Namely, the fact that both of them make the same profound error.

This is the belief that the original and primary form of labor income is wages, with profits appearing only later, with the emergence of capitalists and their capitals, as an unearned, unjust deduction from wages.

The truth is that the income of workers producing and selling such things as pairs of shoes and loaves of bread in Smith’s “original state of things,” or in Marx’s equivalent “simple circulation,” is not wages. It is sales revenue. And precisely because there are no capitalists and thus no expenditure of money for the purpose of bringing in the sales revenues, there are no money costs to deduct from those sales revenues. Thus, the whole of the sales revenues is profit. Profit is the original and primary form of labor income.

What capitalists and their buying for the sake of selling are responsible for is not the existence of profit, but the existence of wages and the other costs of production, and thus a reduction in the proportion of sales revenues that is profit.

And just as Columbus, and not his crew, is given primary responsibility for the discovery of America, so it is businessmen and capitalists who are the primary producers in modern conditions. Profit is the income of their, mainly intellectual labor.

COMMENT 2 (at http://nyti.ms/1mqlXmh):

The wealth of the rich is not the cause of the poverty of the poor, but rather of making the poor less poor, indeed, rich. The wealth of the rich is invested in means of production, which are the foundation of the supply of products available to everyone through purchase. Their wealth—their capital—is also the source of the demand for labor and thus of wages. The greater is the capital of the rich, the larger is the supply of products and the demand for labor, i.e., the higher are real wages and the general standard of living. Where would you rather live and work? In a society whose means of production were a few goat farms, accompanied by a correspondingly small demand for labor, or in a society filled with multi-billion dollar corporations producing a corresponding supply of products and competing for your labor?

Over the last generation or more, economic progress has greatly slowed, and many people are economically worse off than they used to be. Why should that be a surprise? Producers are laboring under the ever-growing oppression of government regulation: now 700,000 accumulated pages just at the federal level.

Massive credit expansion entering the stock and real estate markets has created artificial inequality as it drives up the prices of stocks and real estate, which are owned predominantly by the rich. It has also caused massive losses of capital through such things as the construction of millions of homes whose buyers could not afford to pay for them.

COMMENT 3 (at http://nyti.ms/1lvZN0B):

Contrary to Mr. Piketty, the fact that the rate of return on capital is higher than the rate of economic progress does not at all imply that the fortunes of the rich will increase more rapidly than the overall size of the economic system.

The fortunes of the rich can grow only to the extent that they save and invest out of their relatively high rate of return. But to the extent that they do so, economic progress tends to increase and the rate of return tends to decrease.

Economic progress tends to increase insofar as the savings result in a larger supply of capital goods, which serves to increase production, including the further production of capital goods. The rate of return on capital tends to fall because the larger expenditure for capital goods (and labor) shows up both as larger accumulations of capital and as an increase in the aggregate amount of costs of production in the economic system, which serves to reduce the aggregate amount of profit.

Our problems today result largely from government policies that serve to hold down saving and the demand for capital goods. Among these policies are the corporate and progressive personal income taxes, the estate tax, chronic budget deficits, the social security system, and inflation of the money supply. To the extent that these policies can be reduced, the demand for and production and supply of capital goods will increase, thereby restoring economic progress, and the aggregate amount and average rate of profit will fall.      

 

The Road to a Geriatric Holocaust and How to Get Off It: Reisman's Comments on New York Times Article "Cost of Treatment May Influence Doctors"

On April 18, the National (print) edition of The New York Times published a front-page article titled "Cost of Treatment May Influence Doctors." The article reveals a growing acceptance in the medical profession of the belief that it is proper for doctors to practice medicine with only one eye on the patient because the other eye must be attentive to the impact of the patient’s treatment on the government’s budget.

Comment 1at http://nyti.ms/1ngD4JY:   

Prior to WW II, the principle operative in medical care in the United States was essentially that a patient was entitled to all the medical care he could afford to buy from willing providers. Lack of ability to pay could be made good only by private charity, often provided by doctors and hospitals.

Starting in WW II, with the government’s exemption of employer-provided medical insurance from wartime wage controls, the principle became ascendant that a patient was entitled simply to all the medical care he needed, without consideration of his ability to pay.

Now, it appears, we have come full circle, and the ability to pay is once again to be an essential element in the provision of medical care. Only now, it is not the individual’s ability to pay, but the State’s ability to pay.

This is a very dangerous situation, for it means that it is now up to the State to determine who lives and who dies. It is particularly dangerous for the elderly.

If one looks at medical care for the elderly from the perspective of the government’s finances, it is obvious that their care is a major expense to the government, while their limited ability to work prevents them from contributing very much in the way of tax revenue.

The horrifying truth is that we have created a situation in which the government’s finances would be improved to the extent that the elderly simply did not receive care, and further improved as they then died off, which would reduce the government’s Social Security payments.

Comment 2 at http://nyti.ms/1jjP1Ie:

The ever-rising cost of medical care certainly does need to be restrained. But asking doctors to treat patients with one eye on the government's budget is not the way to do it.

Medical care can be made more affordable to the extent that the supply of it can be increased, while the demand for it is decreased. We can increase the supply of medical care by abolishing or at least greatly liberalizing medical licensing requirements. We can reduce the demand for medical care by eliminating as far as possible the interference that makes it appear to be costless to the individual or far less costly than it actually is.

It is true that if medical licensing requirements were reduced, less capable people would be performing tasks that today only more capable people perform.  That would be the medical equivalent of an automobile market in which people are allowed to buy not only a Cadillac or a Lexus, but also a Chevrolet or Toyota. We need to open up the medical market to competition, particularly at the low end.

The cost of drugs could be reduced by opening up their production to competition—from imports and from new drugs. The latter could be accomplished by sharply reducing the FDA's power to restrain the introduction of new drugs.

Some Answers to Global Warming Propaganda: Reisman's Comments on NY Times Article "Political Rifts Slow U.S. Effort on Climate Laws"

 

On April 15, the National (print) edition of The New York Times published an article titled "Political Rifts Slow U.S. Effort on Climate Laws." The article was inspired by the latest report of the United Nations Intergovernmental Panel on Climate Change (IPCC) and naively and uncritically accepted the findings of that report as true.

Because The Times limits comments to 1500 characters, including spaces between words, I had to submit two, separate comments. And even then, I could not include some essential points, though I've included them here, following the end of my first comment.

The comments can be found on The Times' website, be clicking the respective links that follow the headings "Comment 1" and "Comment 2."

COMMENT 1 at http://nyti.ms/1eEJJuM:

It's remarkable that the author of this article, and the authors of the IPCC report that inspired it, can be concerned about the destructive effects on food production and other essentials of human well-being that will allegedly result from global warming, but do not give the slightest thought to the destructive effects on human well-being of forcibly imposing drastic reductions in CO2 emissions. These emissions are a by-product of such things as the use of tractors and harvesters in food production and of refrigerators and freezers in food preservation. They are the result of people driving automobiles, lighting, heating, and air conditioning their homes, and using electricity to power their machinery and appliances. In short, CO2 emissions are a by-product of producing and enjoying the material goods that distinguish a modern standard of living from that of the Third World.

Preventing government imposed reductions in the use of fossil fuels is not something that is merely in the narrow self-interest of the oil and coal industries. Rather it is in the self-interest of the hundreds of millions of average people who vitally depend on the products of these industries.

Perhaps there will someday be economical substitutes for fossil fuels. Until then, substantially reducing the use of fossil fuels means imposing the certainty of a drastic decline in the standard of living of the average person in order to avoid what is at most the possibility of some seriously bad weather.

[The following two paragraphs were not included in my Times comment because of lack of space, i.e., they would have exceeded the 1500 character limit.]

And if we need such things as massive sea walls to avoid such effects of that bad weather as the flooding of coastal areas, we had better be sure that we have the largest possible modern industrial base available to construct them.

It’s equally remarkable that those who fear global warming have given virtually no consideration to non-destructive ways of dealing with it, assuming that the threat is real in the first place. Why aren’t major prizes being offered for the development of low-cost, effective methods of removing large quantities of CO2 from the atmosphere? For example, is it beyond us to develop plant species that will absorb vast multiples of the CO2 that plants normally absorb? Why is the only possible solution thought to be the destruction of modern economic life?

COMMENT 2 at http://nyti.ms/1eEJrEl:

If global warming is a real threat, why haven’t politicians the world over made the negotiation of treaties for free immigration a top priority? If it’s a serious threat, and people will not willingly deal with it by committing economic suicide in the form of depriving themselves of the massive amounts of energy that would be lost through such measures as imposing a 70 percent reduction in CO2 emissions, then preparations should be starting now to allow for the future migration of hundreds of millions of Indians and Chinese into what will then be an inhabitable Siberia. The United States, Mexico, and the countries of Central America, should likewise be negotiating for free immigration into what will then be an inhabitable central Canada. Greenland should be declared open to all comers. Whatever the problems it may cause, global warming, if it really comes, will also be accompanied by vast new economic opportunities if not blocked by government migration barriers.

Or are we to fear that the “sin” of enjoying a modern standard of living must end in nothing less than a version of hellfire and brimstone—in the form of the recreation on Earth of the climate conditions on the planet Venus?

If so, what is the proof? Is it the direct observation of another planet Earth that turned into a Venus? Or is it strings of assumptions and inferences? And how can the Earth have had ice ages accompanied by more than10 times the CO2 that it is supposedly on track to experience now?

 

 

THE PIONEER VS. THE WELFARE STATE: Essays on Liberty in Peril by GEN LAGRECA

Available at Amazon.com (http://amzn.to/O7WIbR) in Kindle format. 99¢.

A New Declaration of Independence

This is a wonderful book. It evoked despair when the author described the conditions of our welfare state. At the same time, and especially as the result of the next-to-last essay “Why I Love America,” it evoked great admiration for our Constitution and Bill of Rights, and resulted in my having hope for the America I also love. Hopefully, the author’s projected “New Declaration of Independence” will someday become a reality. This book should be required reading in all the high schools and colleges of this country.

EDITH PACKER


Strangling the Pioneering Spirit

The essays in this book are gems of excellent, powerful writing in a great cause. Again and again, when the book describes the original, pioneering spirit of America, it brings the reader to a mountaintop of admiration for freedom, for the unimpeded action freedom makes possible, and for the genius of our Founding Fathers in establishing a country dedicated to freedom. And again and again, when it describes the very different spirit that prevails today—the spirit of the welfare state—it plunges the reader into the depths of despair. Here, the reader is made to confront such things as the entitlement mentality run amok and the results of the 700,000 pages of stifling arbitrary rules and regulations that have been promulgated and accumulated in The Federal Register since 1936.

One cannot read this book without a sense of tragic loss over what has gone so terribly wrong in our country. The author concludes with a call for a “NEW Declaration of Independence.” One can only hope that someday it will happen. But for now and the foreseeable future, it would have the greatest difficulty in finding signers, let alone a sufficient number of soldiers willing to fight for a renewal of the ideals on which our country was founded. But enough people reading this book would certainly help to improve the odds.

GEORGE REISMAN

Second Comment on the Big Bang Theory Appering in the New York Times Online

The “Big Bang” theory and its associated estimate of the age of the universe are not empirical facts of any kind but strictly inferences from propositions that are themselves questionable. Namely, an estimate of the size of the universe and the claim that the universe is expanding and is so at some definite rate. Given a definite size and rate of expansion of the universe, it follows mathematically that at some point, allegedly 13.8 billion years ago, the universe was disappearingly small.

The analogy of a financial “Big Bang” may be useful. Thus, for example, a hypothetical present-day fortune of a trillion dollars might be traced back to the “Big Bang” of the investment of a single penny 339 years ago that has earned a 10 percent compound rate of interest ever since. For 0.01*1.1^339 equals a little more than a trillion dollars. The fortune could be declared to be 339 years old.

In fact, of course, no one has an actual fortune of a trillion dollars, and a uniform rate of compound interest or any rate of interest has never been earned on the same fortune probably even for as long as a single century. So the mathematics does not tell us anything about actual reality here.

So it is with the Big Bang theory. It is an exercise in mathematics. But more than that, it claims the equivalent of $1 trillion being physically stuffed into the space of a single penny. No. It claims the whole physical universe being stuffed into the space of single penny.
 
This comment appears in TheTimes at

http://nyti.ms/1d1D64X

 

Reisman's New York Times Comment on the "Big Bang" Theory

The other day I posted a series of tweets on the "Big Bang" Theory. They were inspired as a response to a New York Times article on the subject by Dennis Overbye, titled "Space Ripples Reveal Big Bang’s Smoking Gun."

Today, I consolidated the tweets and posted them on the Times' website as a reader's comment. My statement follows and the hyperlink to it appears at the end.

The universe is the totality of all of existence.

If the universe is expanding, into what is it expanding? Mustn’t that into which it is expanding exist and thus be part of the universe?
If the universe is the totality of all of existence, how can there be anything beyond the universe?

As the totality of all of existence, the concept of boundaries cannot apply to the universe.

As the totality of all of existence, nothing could have existed before the universe except non-existence, which cannot exist.

The concepts before and after cannot apply to the universe without implying the contradiction of the existence of non-existence.

The universe did not have a beginning. Nor will it have an end.

Not having had a beginning, the universe did not originate in a “Big Bang” or any other event.

http://nyti.ms/1mhKpIS. Click “All” if necessary.

Letter to Secretary of Labor Perez Against Raising the Minimum Wage

Secretary Tom Perez
Department of Labor

Dear Secretary Perez:

Raising the minimum wage is a formula for causing unemployment among the least-skilled members of society. The higher wages are, the higher costs of production are. The higher costs of production are, the higher prices are. The higher prices are, the smaller are the quantities of goods and services demanded and thus the number of workers employed in producing them. These are all propositions of elementary economics that you and the President should well know.

It is true that the wages of the workers who keep their jobs will be higher. They will enjoy the benefit of a government-created monopoly that excludes from the market the competition of those unemployed workers who are willing and able to work for less than what the monopolists receive.

The payment of the monopolists’ higher wages will come at the expense of reduced expenditures for labor and capital goods elsewhere in the economic system, which must result in more unemployment.

Those who are unemployed elsewhere and who are relatively more skilled will displace workers of lesser skill, with the ultimate result of still more unemployment among the least skilled members of society.

The unemployment directly and indirectly caused by raising the minimum wage will require additional government welfare spending and thus higher taxes and/or greater budget deficits to finance it.

Your and the President’s policy is fundamentally anti-labor and anti-poor people. While it enriches those poor people who are given the status of government-protected monopolists, it impoverishes the rest of the economic system to a greater degree. It does this through the combination both of taking away an amount of wealth equal to the monopolists’ gains and of causing overall production to be less by an amount corresponding to the additional unemployment it creates. The rise in prices and taxes that results from raising the minimum wage both diminishes the gains of the monopolists and serves to create new and additional poor people, while worsening the poverty of those who become unemployed.

Furthermore, the higher the minimum wage is raised, the worse are the effects on poor people. This is because, on the one hand, the resulting overall unemployment is greater, while, on the other hand, the protection a lower wage provides against competition from higher-paid workers is more and more eroded. At today’s minimum wage of $7.25 per hour, workers earning that wage are secure against the competition of workers able to earn $8, $9, or $10 per hour. If the minimum wage is increased, as you and the President wish, to $10.10 per hour, and the jobs that presently pay $7.25 had to pay $10.10, then workers who previously would not have considered those jobs because of their ability to earn $8, $9, or $10 per hour will now consider them; many of them will have to consider them, because they will be unemployed. The effect is to expose the workers whose skills do not exceed a level corresponding to $7.25 per hour to the competition of better educated, more-skilled workers presently able to earn wage rates ranging from just above $7.25 to just below $10.10 per hour. The further effect could be that there will simply no longer be room in the economic system for the employment of minimally educated, low-skilled people.

Of course, the minimum-wage has been increased repeatedly over the years since it was first introduced, and there has continued to be at least some significant room for the employment of such workers. What has made this possible is the long periods in which the minimum wage was not increased. Continuous inflation of the money supply and the rise in the volume of spending and thus in wage rates and prices throughout the economic system progressively reduce the extent to which the minimum wage exceeds the wage that would prevail in its absence. The minimum wages of the 1930s and 1940s—25¢ an hour and 75¢ an hour—long ago became nullities. To reduce and ultimately eliminate the harm done by today’s minimum wage, it needs to be left unchanged.

The standard of living is not raised by arbitrary laws and decrees imposing higher wage rates, but by the rise in the productivity of labor, which increases the supply of goods relative to the supply of labor and thus reduces prices relative to wage rates, and thereby allows prices to rise by less than wages when the quantity of money and volume of spending in the economic system increase.

If raising the standard of living of the average worker is your and the President’s goal, you should abandon your efforts to raise the minimum wage. Instead, you should strive to eliminate all government policies that restrain the rise in the productivity of labor and thus in the buying power of wages.

If your goal is to raise the wages specifically of the lowest-paid workers, you should strive to eliminate everything that limits employment in the better-paid occupations, most notably the forcible imposition of union pay scales, which operate as minimum wages for skilled and semi-skilled workers. In causing unemployment higher up the economic ladder, union scales serve to artificially increase the number of workers who must compete lower down on the economic ladder, including at the very bottom, where wages are lowest. To the extent that occupations higher up could absorb more labor, competitive pressure at the bottom would be reduced and wages there could rise as a result.

Abolishing or at least greatly liberalizing licensing legislation would work in the same way. To the extent that larger numbers of low-skilled workers could work in such lines as driving cabs, giving haircuts, or selling hot dogs from push carts, the effect would also be a reduction in competitive pressure at the bottom of the economic ladder and thus higher wages there.

The principle here is that we need to look to greater economic freedom, not greater government intervention, as the path to economic improvement for everyone, especially the poor.

Sincerely yours,

George Reisman, Ph.D.

The Capitalist Economist

Pepperdine University Professor Emeritus of Economics

Author: Capitalism: A Treatise on Economics and other titles

Website: www.capitalism.net

Blog: http://georgereismansblog.blogspot.com

On Twitter @GGReisman

 

Reisman's Comments Against Proposed IRS "Guidance for Tax-Exempt Social Welfare Organizations on Candidate-Related Political Activities"

On February 26 and 27, I posted the following comments on the website www.regulations.gov. They concerned the proposed regulation IR-2013-92, which is described as "Guidance for Tax-Exempt Social Welfare Organizations on Candidate-Related Political Activities."

Any and all government "guidance" with respect to political activities are ipso facto violations of the freedoms of speech and press, which freedoms are explicitly protected by the US Constitution. It is immoral, unconstitutional, and outrageous for the government to attempt to "guide" [i.e., control] any of its citizens' political activities. Therefore, the IRS's proposed rule for "Tax Exempt Social Welfare Organizations on Candidate-Related Political Activities" known as "Regulation IR-2013-92" should be withdrawn at once.

While it is not accurate to call the IRS a terrorist organization, the IRS is definitely a TERRIFYING organization. Millions of Americans live in dread of its "audits," which trample all rights of privacy and private property. Such dread also inhibits the rights of free speech and free press.

The very existence of the IRS is incompatible with the foundations of the United States as originally conceived, which is why its existence was unconstitutional prior to the enactment of the 16th Amendment. That amendment and the consequent creation of the IRS has changed the character of our country from one inhabited by free and self-confident citizens who could look to their government for protection against thieves and bandits into one made up of frightened cowards, who must live in fear of their government that more and more resembles a gang of bandits.

The IRS must not add to its already rampant trampling of individual rights any new abridgement. It must not seek to further silence its helpless victims by this new proposed rule for "guiding" their political activities.
 

***

This proposed rule seeks to reduce the influence of money on the outcome of elections for public office, even though the money is used merely for the purpose of spreading ideas and arguments concerning political candidates and their qualifications for office based on the soundness, or lack of soundness, of their ideas and programs. The only possible way for the IRS, or any government agency or organ, to accomplish the objective of this rule is by means of threatening the imposition of fines for its violation, the payment of which fines is compelled by the threat of imprisonment.

Thus to reduce the influence of money on the outcome of elections, the IRS is proposing to replace it with the influence of THE THREAT OF GOVERNMENT FORCE. Threatening such force is a blatant violation of the freedoms of speech and press, and of free elections as well. Such a rule belongs in China, Russia, or Venezuela, whose citizens are accustomed to tyranny.  It certainly does not belong in the United States of America. It should be withdrawn at once and those responsible for its suggestion should be fired.

 

Overthrowing Smith and Marx: Profits, Not Wages, as the Original and Primary Form of Labor Income. Reisman's Remarks at the Conferral of His Honorary Doctorate from Universidad Francisco Marroquin, July 9, 2013

A video of the degree ceremony appears at http://newmedia.ufm.edu/reismandoctoraldegree

Vice President Calzada (President Calzada as of next month), Provost Castillo, Treasurer Parellada, and friends.

I want to thank Universidad Francisco Marroquin, in the persons of these three of its highest officials, for the great honor just conferred on me, of an honorary doctorate in social sciences.

Universidad Francisco Marroquin is a rare beacon of light in a world growing intellectually dark. It is a relatively new light, founded in 1971 by the late Manuel Ayau, the leading advocate of liberty in Latin America and UFM’s first President. (I’m glad to say that in 1987, my wife and I met President Ayau in San Diego, when he was a guest lecturer at the summer conference of our organization The Jefferson School of Philosophy, Economics, and Psychology.) Hopefully Universidad Francisco Marroquin’s example will inspire the establishment of other universities throughout the world that are dedicated to upholding the value of individual freedom and capitalism.

I know that the award just bestowed on me is all the more valuable for having previously been bestowed on men of such caliber as Henry Hazlitt, F.A. Hayek, Leonard Read, and William H. Hutt. All of these men, through their writings, were my teachers, most especially Henry Hazlitt.

Now I would like to accept this honor not just on behalf of myself but also on behalf of the two most outstanding teachers in my life: Ludwig von Mises and Ayn Rand. Mises was the source or inspiration for most of what I know and consider important in the fields of economics and social philosophy. His overall, outstanding accomplishment was to present a comprehensive, in-depth, intellectually powerful, and uncompromising case for laissez-faire capitalism. This was something that no one else had ever done before and which urgently needed doing—more than anything else in the world if individual rights and the founding principles of the United States were to be upheld. Ayn Rand greatly supplemented that knowledge, above all by explaining, the precise nature of individual rights. I also acquired a great deal of other knowledge from her as well, which I’ve described in my book Capitalism.

***

The first thing I want to accomplish in the time available for me to speak, is to explain what I consider to be one of the most important of my own original contributions to economics, namely, my demonstration that profits are not a deduction from wages.

The belief that profits are a deduction from wages goes back to Adam Smith, who is believed by many to be the leading advocate of capitalism. In The Wealth of Nations, Smith claims that wages are the original and primary form of income and that profits are taken from what naturally and rightfully belongs to wage earners.

He postulates a state of affairs that he refers to sometimes as “the early and rude state of society” and sometimes as “the original state of things.”

In this state of affairs he imagines that workers are producing and selling products and that the income they receive from the sale of their products is wages. He imagines that as yet there are no businessmen or capitalists present. Just manual workers. He assumes that because the workers are performing labor, the income they receive must necessarily be wages. Labor and wages in his mind are inseparable concepts. Where labor is performed, its income must be wages, he believes.

The conditions present in his alleged “original state of things” stand in his mind as a kind of economic Garden of Eden insofar as he believes that the situation represents one of economic justice. It is just, he believes, because the workers who produce the products, get to keep the full value of the products they produce. Their wages are allegedly 100 percent of the value of the products they produce.

But then comes the economic version of the Fall from the Garden of Eden. Businessmen and capitalists appear on the scene. And because they provide capital and must be remunerated for doing so, in the form of earning profits on their capital, the workers are no longer able to keep the full value of the products they produce. The capitalists’ profits are deducted from what originally went completely to the workers as wages.

The Wealth of Nations was published in 1776. Ninety one years later, in 1867, Karl Marx’s Das Kapital was published.

Marx took over these ideas of Smith and carried them further. He too argued that profits, along with all other income that was not wages, constituted a deduction from wages, and that this deduction started with the coming into being of capitalists and their capital.

Where Marx differs from Smith is that he goes further and develops “the exploitation theory.” Smith provided merely the framework of the exploitation theory. Within that framework, Marx propounded an elaborate analysis that attempted to show that the nature and extent of the alleged deduction of profits from wages was comparable to the process by which a slave owner gained from owning a slave and that the wage earners of capitalism were in fact virtual slaves. (This is the source of the expressions “wage slave” and “wage slavery.”)

What made the workers of capitalism slaves, according to Marx, was the fact that, like slaves, all of their product in excess of the portion required to keep them alive was taken by the capitalists. Indeed, the capitalists, according to Marx, were not only willing and able to extort profits to the extent of driving wages to the level of bare minimum subsistence but were also motivated by the quest for profit to extend the hours of work to the maximum humanly endurable while making working conditions brutal and driving small children into the mines.

To this day, this is the popular assessment of the effects of the profit motive if it is not restrained by such things as labor unions, minimum wage and maximum hours’ laws, and child labor laws. I believe that practically all the members of the Democratic Party and perhaps half or more of the members of the Republican Party believe that these are the conditions that would result in the absence of labor unions and these laws. When it comes to an understanding of the operations of laissez-faire capitalism, that is, capitalism free of such government interference, the great majority of people today are Marxists, and have been since the late 19^th Century.

Now it’s impossible for me to fully answer all of these beliefs in the course of a talk as brief as this one. But I assure you that I do fully answer them in my book Capitalism.

I will start by demolishing the framework of the exploitation theory—the notion that originally all income is wages and that the emergence of capitalists serves to bring into existence the phenomenon of profit and its deduction from what allegedly was originally all wages.

All we need do to accomplish this demolition is to realize that when a worker sells a product, such as a loaf of bread, or a pair of shoes, he is not being paid wages. There simply are no wages present. A wage is money paid in exchange for the performance of labor, not for the products of labor. Again, a wage is money paid in exchange for the performance of labor, not for the products of labor. In contrast, the money paid in exchange for the products of labor is a sales revenue. The workers producing products that they sell do not earn wages. They earn sales revenues.

Thus what the workers in Smith’s original state of things and Marx’s equivalent, which he called “simple circulation”—what these workers receive are not wages but sales revenues.

And because there are no capitalists and thus no spending to buy anything that would serve in the production of the goods the workers are selling, there are no money costs to deduct from the sales revenues these workers earn.

Let me pause here. Costs of production are always the reflection of expenditures of money made for the purpose of bringing in sales revenues. These expenditures are made by capitalists. In fact, Marx and Smith agree that the essential feature of capitalistic activity is buying for the sake of selling at a profit. Where there are no capitalists, there is no such buying. But if there is no such buying, there can be no money costs. At the same time, for the same reason, there are no wages paid in production. Wages paid in production are the money that capitalists pay to workers to produce the products that the capitalists plan to sell.

The inescapable implication of this is that in the starting point that Smith and Marx have chosen, namely, workers producing and selling products in the absence of capitalists, the income of these workers is profit, not wages. These workers have sales revenues but they have no money costs of production to deduct from their sales revenues, because no one has acted capitalistically and spent any money to bring in those sales revenues. It follows that 100 percent of these workers’ sales revenues is profit.

It follows further that so far from being responsible for the creation of profit and its deduction from wages, what the capitalists are actually responsible for is the creation of wages and costs of production, including costs of production on account of spending for capital goods such as materials and tools, and thus for the reduction in the proportion of sales revenue that is profit. A true statement, in direct opposition to Smith and Marx, is that capitalists create wages and reduce the proportion of income in the economic system that is profit.

***

I’ve established so far that profits are an income attributable to the performance of labor in the conditions postulated by Smith and Marx as their starting point, indeed, the only such income in those conditions, since there are no wages paid in production without the existence of capitalists.

Now are profits earned by capitalists, rather than the manual workers of Smith’s “original state of things,” are these profits also an income attributable to the performance of labor—namely, to the labor of the capitalists, the people who earn them in the conditions that follow “the original state of things”?

Can the profits of business Titans, ranging from John D. Rockefeller and Henry Ford to Steve Jobs and Bill Gates be understood as being earned on a foundation of their labor? For their manual labor may go no further than jotting down thoughts, dictating memos to subordinates, and reading reports.

Remarkably, a major clue to the answer is provided by none other than Adam Smith, about 200 pages after he presented the views I’ve criticized. Here he points out that what drives the economic system and determines how the great bulk of its labor is used, is the various plans and projects of the capitalists, who use their capital for the purpose of earning profit.

I believe that all by itself this qualifies capitalists as workers and producers. It captures the essential element of being a producer, namely, providing guiding and directing intelligence to the means required to achieve the goal of producing a product.

A manual worker uses his arms to produce his product. What makes him a producer is not the fact that he uses his arms, but that his mind directs the use of his arms to achieve the goal of producing the product. His mind provides guiding and directing intelligence to his arms and to whatever tools, implements, or machines he may use in the production of his product.

Now a capitalist supplies goals and provides guiding and directing intelligence not merely to his own arms and whatever tools or implements he may personally use, but to an organization of men, whose material means of production he has provided. A capitalist is a producer by means of the organization he controls and directs. What is produced by means of it, is his product.

Of course, he does not produce his product alone. His plans and projects may require the labor of hundreds, thousands, even tens of thousands of other workers in order to be accomplished. Those workers are appropriately called “the help”—in producing his products. Thus, the product of Standard Oil is primarily the product of Rockefeller, not of the oil field and refinery workers, who are his helpers. It is Rockefeller who assembles these workers and provides their equipment and in determining what kind of equipment, tells them what to produce and by what means to produce it.

I hasten to point out that the standard of attribution I have just used, is the standard usually employed, at least in fields outside of economic activity. Thus history books tell us that Columbus discovered America and that Napoleon won the battle of Austerlitz. What is the standard by which such outcomes are attributed to just one man? It is by the standard of that one man being the party supplying the goal and the guiding and directing intelligence at the highest level in the achievement of that goal.

Now I also want to point out that everything I have said is perfectly consistent with the well-known fact that in business the amount of profit a firm earns tends to vary with the size of its capital. Of course it does. A businessman who owns one store or one factory will earn a certain amount of profit. If he owns ten such stores or factories, it should not be surprising that he earns ten times the profit. His labor is of an intellectual nature and thus can be applied the more extensively the larger is the capital he owns. In ignorance of this fact, Adam Smith assumed that in order for profits to be attributable to the labor of a capitalist, they would have to be proportional to his labor, and since they were more likely to be proportional to his capital, this precluded their being attributable to his labor.

***

Now I think I have succeeded up to this point both in demolishing the framework of the exploitation theory and in demonstrating the fact that the profits of capitalists are a fully earned income, attributable to their labor by virtue of their providing the goals of their firms and the highest level of guiding and directing intelligence required to achieve those goals.

I now want to demonstrate in briefest essence how capitalism operates in diametric opposition to the claims of the exploitation theory about wages, hours, and working conditions.

Here’s how it does so. Namely, based on the combination of saving and investment, mainly by capitalists, and the profit motive and competition that drives the capitalists, the output of goods per worker under capitalism tends continually to increase.

This is the source of progressively rising real wages. Accordingly, the average wage earner can afford to buy more and more as time goes on.

A major advantage of being able to buy more is being in a position in which one can afford to earn less. In the early years of the Industrial Revolution it was necessary for many people to work 80 hours a week to earn enough to be able to live. (Before that, many such people didn’t live. They died of malnutrition and accompanying disease.) A generation or two later, after the output per worker had doubled or tripled, thanks to the capitalists, the average worker came to be in a position in which he could afford to accept the lower earnings of a shorter work week. In fact, he could afford to accept wages lower in greater proportion than his hours were reduced. This made it actually profitable for employers to shorten the work week, with or without any laws or regulations requiring it.

On the same foundation, people could afford to keep their children at home longer. This was because the earnings of children were less and less required for families to survive. In this way, with or without legislation, child labor progressively disappeared.

And again, on the same foundation, workers came to be able more and more to afford to bear the cost of improvements in working conditions of a kind that benefitted them but did not pay for themselves through improved efficiency. They could afford to accept lesser earnings accompanying more desirable jobs.

***

My overall conclusion is very simple. It is that contrary to Smith, Marx, and the prevailing state of public opinion, a profound harmony of interests exists between wage earners and capitalists. Capitalists not only earn their incomes, but in the process benefit everyone else. They pay wages and use their wealth in the production of ever more and better products that the wage earners can afford to buy. The more and bigger the capitalists, the greater is the demand for labor and the larger the supply of products. Everyone’s actual self-interest lies with the capitalists being free to earn the profits they richly deserve and use them to accumulate as much wealth as possible, for that wealth serves everyone who sells his labor and buys products.

The case for capitalism is virtually unknown, however. And when it is presented, it is viewed with great suspicion, because the influence of Marxism is so ingrained that it is widely taken for granted that capitalism can serve the interests of no one but a handful of capitalists, who are allegedly the exploiters of the great mass of mankind.

Nothing will change until capitalists themselves learn to value their achievements and recognize the actual good they accomplish for everyone. And neither that nor anything else that is necessary will occur until universities begin to teach the value of capitalism.

Universidad Francisco Marroquin is in the forefront of the enormous and vital intellectual change that is needed. I’m proud to have been recognized by it for my contributions to this cause.

Thank you.