The Feedback of Capital and Standard of Living. Some Wayside Didactics.

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It is often said to countries in trouble that their people were living above their standards. That their consumption is higher than their production. This, in fact, is true … for everybody on this planet. In financial terms.

Look at the image of Figure 1. People (Labour Power), together with machines from the capital (MoP) produce goods that only (mostly) humans consume. Left the production, right the consumption.

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Figure 1: Production and consumption of humans and capital

If everything that is produced is consumed (according to Jean Baptiste Say), it is obvious that humans consume more than they produce. This seems contradictory with the ideas of Marx, but it isn’t. Marx said that Labour Power with the help of MoP produces, and that this production is fully attributed to Labour Power and is thus skimmed when it consumes less than this production. We can also equally well say that MoP (‘capital’) is producing with the help of Labour Power. Or just say that both are producing and say that each is the right ‘owner’ of its own production.

In the above figure, the arrows show the flow of production-consumption. The payment for produced products is an arrow in opposite direction. In this example, humans get 95% of consumption while they do only 50% of the production. They thus also only get 50% of payment. The rest of the consumption is paid by ‘borrowing’ money somehow, and they live above their standard. The payment goes 50% to the capital. But, because capital does not consume, this payment is used to increase the capital. Two extreme scenarios:

• The money for payment of production is fully in the form of a loan to the humans. Money starts thus accumulating at the capital.

• The money for payment is fully used to invest in new capital. In that case, the ‘consumption’ of capital is 50%, but after one cycle, a larger part of the production is done by capital. See figure 2 below.

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Figure 2: Production and consumption of humans and capital, if the capital consumes as human, but this consumption is used as new starting capital in a new cycle

In the first step, 50% of the production and consumption is done by capital. In the second cycle it is already 67%. In the third cycle it is 80%, then 89%, etc. In general 2n−1/(2n−1 + 1) at step n; capital doubles at every cycle, where humans stay constant. The final situation is that 100% of production is done by capital. Obviously, sooner or later the system has to switch to the first scenario.

In either scenario, the capital accumulates. The basic ingredient is that capital does not need consumption for its survival; any ‘consumption’ is directly converted into more capital. The system will probably have a mix of the two. After all, capital cannot go on doubling all the time.

So, we see that capital is condensing at the capital. That is because the means of production – other than human labor – do not consume, and, therefore, humans do consume more than they produce, and the means of production (machines) do consume less than they produce, with the total in a zero-sum-game way consuming exactly what they produce. The owners of the means of production get the rights to consumption and these rights are constantly increasing. It is a positive-feedback run-away system.

Let’s put this in an example to explain it better. Imagine I make clothespins and so does my neighbor. However, my neighbor has slightly more costs than me, or is slightly less productive for some reason (work accident, or so). He earns just enough to survive. He makes one ’unit’ and this barely covers the cost of life, which is also minimally 1 unit. I am slightly more productive, or my cost of living is slightly lower. Therefore, I can save a little ‘money’. Let’s assume the former, I am more productive. Now, either I make 1.1 units and the surplus 0.1 units I trade for a clothespin machine, or I work a little less on making clothespins and in this spare time – one hour per day – I make the machine myself. Let’s assume the second scenario, because it is easier reasoning, although they are equivalent. We both make two ‘units’ of pins, sell them and buy things (two units worth) to survive. I however, make as well a machine that makes pins.

After finishing my machine, maybe after ten years, the total production goes up. The demand for our pins stays the same. The markets needs two units of clothespins. It now means that I will get more share of the profit. Imagine my machine makes as much units as a human can, one unit per year. We thus have three units to offer to the market. The price of pins on the market could (and will) drop through the mechanism of supply and demand. In principle down to 67% of the original price. Not lower, because that would imply that the total price of more pins would be lower than before.

To make it simple, imagine exactly that happens. The price is 2/3; one unit of pins gives only 2/3 consumption rights. We sell three units and thus get a total of two units of consumption rights. These are distributed over the production units. My neighbor has one third of the production units and thus gets 1/3 share of the consumption rights, a total of 2/3 units. I and my machine get 2/3 share, 4/3 consumption rights. Note that I confiscate – skim – the production rights of my ‘slave’ machine.

Now my neighbor has a problem. He gets 2/3 units of consumption rights, there where one full unit is needed to survive. He did not start working less, or become less productive, or lazy. He simply lost his percentage share of the means of production. And once this starts, there is no stopping it. It in fact accelerates.

There are two scenarios. Either I keep producing pins myself, as shown above, resulting in immediate misery for my neighbor, or I stop working altogether on making pins manually, and we go back to the situation where we make two units of pins, sell them, and each one gets one unit of consumption rights. However, now I have 100% free time (my machine doing all the work), and I can dedicate it to make a new machine. This takes only one year instead of ten, since I now have 100% free time, instead of only 10%. In the first situation, I could lend 1/3 of my consumption rights to my neighbor. However – nothing is for free in this life – next year I want 10% profit on my loan. His problems will be bigger next year. Next year I will refinance his loan. Etc. The reader will easily understand that my neighbor will wind up being my feudal possession. I will take everything he owns. Instead, I could opt for the second path, producing a new machine in my spare time. In that case, next year we will have 4 production units, my neighbor and I as human labor, and two mechanical units. These mechanical units are mine and will claim the consumption rights; together with my own labor, I will now get 75% of the two consumption rights. 1.5 for me and 0.5 for my neighbor. This path leads to the state where I have 100% of the consumption rights. Or I can again decide to use part or all of my human labor or machine power to make new machinery. Sooner or later, anyway, my neighbor will have to borrow consumption rights from me. This is a feedback system. Any small perturbation results in a saturation in which I will get 100% of the consumption rights and where I will wind up being the feudal lord of my neighbor. One could argue that this reasoning does not work, because the rest of the world is also increasing productivity and the price of the products offered by them (and the cost of living for me and my neighbor) goes down, as fast as the price of our clothespins go down and we will both easily survive. First of all, we consider here only the local effect, independent of the full market. Technological innovation creates immediate misery for some, a deterioration of life while these people are doing nothing worse. Second, when the rest of the market is behaving in the same way, we remain with an overall effect of condensation of wealth. Capital attracts capital. This is a form of the Matthew Effect, named after the apostle from the bible, transferring money from the poor to the rich. Matthew 25:29,

For onto everyone that hath shall be given, and he shall have abundance, but from him that hath not shall be taken away even that which he hath.

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