In Praise of the Capitalist 1
Percent
by George Reisman
The protesters in the Occupy
Wall Street movement and its numerous clones elsewhere in the country and
around the world chant that 1 percent of the population owns all the wealth and
lives at the expense of the remaining 99 percent. The obvious solution that
they imply is for the 99 percent to seize the wealth of the 1 percent and use
it for their benefit rather than allowing it to continue to be used for the benefit
of the 1 percent, who are allegedly undeserving greedy capitalist exploiters.
In other words, the implicit program of the protesters is that of socialism and
the redistribution of wealth.
Putting aside the hyperbole in
the movement's claim, it is true that a relatively small minority of people
does own the far greater part of the wealth of the country. The figures "1
percent" and "99 percent," however exaggerated, serve to place
that fact in the strongest possible light.
The protesters have no
awareness of this, because they see the world through an intellectual lens that
is inappropriate to life under capitalism and its market economy. They see a
world, still present in some places, and present everywhere a few centuries
ago, of self-sufficient farm families, each producing for its own consumption
and having no essential connection to markets.
In such a world, if one sees a
farmer's field, or his barn, or plow, or draft animals, and asks who do these
means of production serve, the answer is the farmer and his family, and no one
else. In such a world, apart from the receipt of occasional charity from the
owners, those who are not owners of means of production cannot benefit from
means of production unless and until they themselves somehow become owners of
means of production. They cannot benefit from other people's means of
production except by inheriting them or by seizing them.
In the world of the
protesters, means of production have the same essential status as consumers'
goods, which as a rule are of benefit only to their owners. It is because of
this that those who share the mentality of the protesters typically depict
capitalists as fat men, whose plates are heaped high with food, while the
masses of wage earners must live near starvation. According to this mentality,
the redistribution of wealth is a matter merely of taking from the overflowing
plates of the capitalists and giving to the starving workers.
Contrary to such beliefs, in the modern world in which we actually live,
the wealth of the capitalists is simply not in the form of consumers' goods to
any great extent. Not only is it overwhelmingly in the form of means of production,
but those means of production are employed in the production of goods and
services that are sold in the market. Totally
unlike the conditions of self-sufficient farm families, the physical beneficiaries of the capitalists' means of production
are all the members of the general consuming public who buy the capitalists'
products.
For example, without owning so much as a single share of stock in General
Motors or Exxon Mobil, everyone in a capitalist economy who buys the products
of these firms benefits from their means of production: the buyer of a GM
automobile benefits from the GM factory that produced that automobile; the
buyer of Exxon's gasoline benefits from its oil wells, pipelines, and tanker
trucks. Furthermore, everyone benefits from their means of production who buys
the products of the customers of GM or Exxon, insofar as their means of
production indirectly contribute to the products of their customers. For
example, the patrons of grocery stores whose goods are delivered in trucks made
by GM or fueled by diesel oil produced in Exxon's refineries are beneficiaries
of the existence of GM's truck factories and Exxon's refineries. Even everyone
who buys the products of the competitors of
GM and Exxon, or of the customers of those competitors, benefits from the
existence of GM's and Exxon's means of production. This is because GM's and
Exxon's means of production result in a more abundant and thus lower-priced
supply of the kind of goods the competitors sell.
In other words, all of us, 100 percent of
us, benefit from the wealth of the hated capitalists. We benefit without
ourselves being capitalists, or being capitalists to any great extent. The
protesters are literally kept alive on the foundation of the wealth of the
capitalists they hate. As just indicated, the oil fields and pipelines of the
hated Exxon corporation provide the fuel that powers the tractors and trucks
that are essential to the production and delivery of the food the protesters
eat. The protesters and all other haters of capitalists hate the foundations of
their own existence.
Nevertheless, the world the
protesters yearn for is a world from which the billionaire capitalists and
their corporations have been banished, replaced by small, poor producers, who
would not be significantly richer than they themselves are, which is to say,
impoverished. They expect that in a world of such producers, producers who lack
the capital required to produce very much of anything, let alone carry on the
mass production of the technologically advanced products of modern capitalism,
they will somehow be economically better off than they are now. Obviously, the
protesters could not be more deluded.
In addition to not realizing
that the wealth of the so-called 1 percent is the foundation of the standard of
living of the so-called 99 percent, what the protesters also do not realize is
that the "greed" of those who seek to become part of the 1 percent,
or to enlarge their position within it, is what serves progressively to improve
the standard of living of the 99 percent.
Of course, this does not apply
to wealth that has been acquired by such means as obtaining government subsidies
or preventing competition through protective tariffs and other forms of
government intervention. These are methods that are made possible to the extent
that the government is permitted to depart from a policy of strict
laissez-faire and thereby arbitrarily reward or punish firms.
Apart from such aberrations,
the way that business fortunes are accumulated is by means of the high profits
generated by the introduction of new and improved products and more efficient,
lower-cost methods of production, followed by the heavy saving and reinvestment
of those high profits.
For example, the $6 billion
fortune of the late Steve Jobs was built on a foundation of Mr. Jobs having
made it possible for Apple Computer to introduce such new and improved products
as the iPod, the iPhone, and the iPad, and then heavily saving and reinvesting
the share of the profits that came to him.
Two closely related points
need to be stressed. First, the fortunes that are accumulated in this way
generally serve in the larger-scale production of the very sort of products
that provided the profits out of which their accumulation took place. Thus, for
example, Jobs's billions serve largely in the production of Apple's products.
Similarly, old Henry Ford's great personal fortune, earned on the foundation of
introducing major improvements in the efficiency of automobile production,
which brought down the price of a new automobile from about $10,000 at the
beginning of the 20th Century to $300 in the mid 1920s, was used to make
possible the production of millions of Ford automobiles.
Second, the high rates of
profit earned on new and improved products and methods of production are
temporary. As soon as the production of the new product or use of the new
method of production becomes the norm in an industry, it no longer provides any
exceptional profitability. Indeed, further improvements again and again render
earlier improvements downright unprofitable. For example, the first generation
of the iPhone, which was highly profitable just a few years ago, is or soon
will be unprofitable, because further advances have rendered it obsolete.
As a result, the accumulation of great business fortunes generally requires
the introduction of aseries of
improvements in products or methods of production. This is what is required to
maintain a high rate of profit in the face of competition. For example, Intel's
ability to maintain its high rate of profit over the years has depended on its
ability to introduce one substantial improvement in its computer chips after
another. The net effect has been that computer users have gotten the benefit of
improvement after improvement not only at no rise but a drastic decline in the
prices of computer chips. Insofar as high profits rest on low costs of
production, competition drives prices down to correspond to the lower level of
costs, which necessitates the achievement of still further cost reductions to
maintain high profits.
The same outcome, of course,
applies not only to Intel and microprocessors but also to the rest of the
computer industry, where gigabytes of memory and terabytes of hard-drive data
storage now sell at prices below the prices of megabytes of memory and
hard-drive data storage just a couple of decades ago. Indeed, if one knows how
to look, the principle of ever more and better products for less and less
applies throughout the economic system. It is present in the production of
food, clothing, and shelter as well as in the high-tech industries, and in
virtually all industries in between.
It is present in these industries even though the government's inflation of
the money supply has caused the prices of their products to rise sharply over
the years. Despite this, when calculated in terms of the amount of labor the average person must expend
in order to earn the wages needed to enable him to buy these products, their
prices have sharply fallen.
This can be seen in the fact
that today, the average worker works 40 hours per week, while a worker of a
century or so ago worked 60 hours a week. For the 40 hours he works, the
average worker of today receives the goods and services comprising the average
standard of living of 2011, which includes such things as an automobile,
refrigerator, air conditioner, central heating, more and better living space,
more and better food and clothing, modern medicine and dentistry, motion
pictures, a computer, cell phone, television set, washer-dryer, microwave oven,
and so on. The average worker of 1911 either did not have these things at all
or had much less of them and of poorer quality.
If we describe the goods and services received by the average worker of
today for his 40 hours of labor as being 10 times as great as those received by
the average worker of 1911 for his 60 hours of labor, then it follows that, expressed
in terms of the amount of labor that needs to be performed today in order to be
able to buy goods and services equivalent to the standard of living of 1911,
prices have fallen to two-thirds of one-tenth of their level in 1911, i.e., to
one-fifteenth of their level in 1911, which is to say, by 93 1/3 percent.
Capitalism — laissez-faire
capitalism — is the ideal economic system. It is the embodiment of individual
freedom and the pursuit of material self-interest. Its result is the
progressive rise in the material well-being of all, manifested in lengthening
life spans and ever-improving standards of living.
The economic stagnation and
decline, the problems of mass unemployment and growing poverty experienced in
the United States in recent years, are the result of violations of individual
freedom and the pursuit of material self-interest. The government has enmeshed
the economic system in a growing web of paralyzing rules and regulations that
prohibit the production of goods and services that people want, while
compelling the production of goods and services they don't want, and making the
production of virtually everything more and more expensive than it needs to be.
For example, prohibitions on the production of atomic power, oil, coal, and
natural gas, make the cost of energy higher and in the face of less energy
available for use in production, require the performance of more human labor to
produce any given quantity of goods. This results in fewer goods being
available to remunerate the performance of any given quantity of labor.
Uncontrolled government
spending and its accompanying budget deficits and borrowing, along with the
income, estate, and capital gains taxes, all levied on funds that otherwise
would have been heavily saved and invested, drain capital from the economic
system. They thus serve to prevent the increase in both the supply of goods and
the demand for labor that more capital in the hands of business would have made
possible. They have now gone far enough to have begun actually to reduce the
supply of capital in the economic system in comparison with the past.
Capital accumulation is also
impaired, and can ultimately be turned into capital decumulation, through the
effects of additional government regulation in raising the costs of production
and thus reducing its efficiency. This applies to practically all of the
regulations imposed by the Environmental Protection Agency, the Occupational
Safety and Health Administration, the Consumer Product Safety Commission, the
National Labor Relations Board, the Food and Drug Administration, and the various
other government agencies. The effect of their regulations is that for any
given amount of labor performed in the economic system, there is less product
than would otherwise be produced.
Now anything that serves to
reduce the ability to produce in general serves also to reduce the ability to
produce capital goods in particular. Because of such government interference,
any given amount of labor and capital goods devoted to the production of
capital goods results in a smaller output of capital goods, just as any given
quantity of labor and capital goods devoted to the production of consumers'
goods results in a smaller output of consumers' goods. At a minimum, the
reduced supply of capital goods produced serves to reduce the rate of economic
progress. A reduction in the supply of capital goods produced great enough to
prevent the addition of any increment to the previously existing supply of
capital goods, and thus to put an end to capital accumulation, brings economic
progress to a complete halt. A still greater reduction, one that renders the
supply of capital goods produced less than the supply being used up in
production, constitutes capital decumulation and thus a decline in the economic
system's ability to produce. As indicated, the United States already appears to
be at this point.
The problem of capital
decumulation has been greatly compounded as the result of massive credit
expansion induced by the Federal Reserve System and its policy of easy money
and artificially low interest rates. This policy led first to a great
stock-market bubble and then a vast housing bubble, as large quantities of
newly created money poured into the stock market and later the housing market.
Between these two bubbles, trillions of dollars of capital were lost. In both
instances, vast overconsumption occurred as people raced to buy such things as
new automobiles, major appliances, vacations, and all kinds of luxury goods
that they would not have believed they could afford in the absence of the
effects of credit expansion, often incurring substantial debt in the process.
In the one case, it was the
artificial rise in stock prices that misled people into believing that they
could afford these things. In the other, it was the artificial rise in home
prices that produced this result. The seeming wealth vanished with the fall in
stock prices and then again, later, with the fall in housing prices. In the
housing bubble, moreover, millions of homes were constructed for people who
could not afford to pay for them. All of this represented a huge loss of
capital and thus of the ability of business to produce and to employ labor. It
is this loss of capital that is responsible for our present problem of mass
unemployment.
Despite this loss of capital,
unemployment could be eliminated. But given the loss of capital, what would be
required to accomplish this is a fall in wage rates. This fall, however, is
made virtually illegal as the result of the existence of minimum-wage laws and
pro-union legislation. These laws prevent employers from offering the lower
wage rates at which the unemployed would be reemployed.
Thus, however ironic it may
be, it turns out that virtually all of the problems the Occupy Wall Street
protesters complain about are the result of the enactment of policies that they
support and in which they fervently believe. It is their mentality, the Marxism
that permeates it, and the government policies that are the result, that are
responsible for what they complain about. The protesters are, in effect, in the
position of being unwitting flagellants. They are beating themselves left and
right and as balm for their wounds they demand more whips and chains. They do
not see this, because they have not learned to make the connection that in
violating the freedom of businessmen and capitalists and seizing and consuming
their wealth, i.e., using weapons of pain and suffering against this small
hated group, they are destroying the basis of their own well-being.
However much the protesters
might deserve to suffer as the result of the injury caused by the enactment of
their very own ideas, it would be far better, if they woke up to the modern
world and came to understand the actual nature of capitalism, and then directed
their ire at the targets that deserve it. In that case, they might make some
real contribution to economic well-being, including their own.
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