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.

Crisis. Thought of the Day 66.0

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Why do we have a crisis? The system, by being liberal, allowed for the condensation of wealth. This went well as long as there was exponential growth and humans also saw their share of the wealth growing. Now, with the saturation, no longer growth of wealth for humans was possible, and actually decline of wealth occurs since the growth of capital has to continue (by definition). Austerity will accelerate this reduction of wealth, and is thus the most-stupid thing one could do. If debt is paid back, money disappears and economy shrinks. The end point will be zero economy, zero money, and a remaining debt. It is not possible to pay back the money borrowed. The money simply does not exist and cannot be printed by the borrowers in a multi-region single-currency economy.

What will be the outcome? If countries are allowed to go bankrupt, there might be a way that economy recovers. If countries are continuing to be bailed-out, the crisis will continue. It will end in the situation that all countries will have to be bailed-out by each-other, even the strong ones. It is not possible that all countries pay back all the debt, even if it were advisable, without printing money by the borrowing countries. If countries are not allowed to go bankrupt, the ‘heritage’, the capital of the citizens of countries, now belonging to the people, will be confiscated and will belong to the capital, with its seat in fiscal paradises. The people will then pay for using this heritage which belonged to them not so long time ago, and will actually pay for it with money that will be borrowed. This is a modern form of slavery, where people posses nothing, effectively not even their own labor power, which is pawned for generations to come. We will be back to a feudal system.

On the long term, if we insist on pure liberalism without boundaries, it is possible that human production and consumption disappear from this planet, to be substituted by something that is fitter in a Darwinistic way. What we need is something that defends the rights and interests of humans and not of the capital, there where all the measures – all politicians and political lobbies – defend the rights of the capital. It is obvious that the political structures have no remorse in putting humans under more fiscal stress, since the people are inflexible and cannot flee the tax burden. The capital, on the other hand, is completely flexible and any attempt to increase the fiscal pressure makes that it flees the country. Again, the Prisoner’s Dilemma makes that all countries increase tax on people and labor, while reducing the tax on capital and money. We could summarize this as saying that the capital has joined forces – has globalized – while the labor and the people are still not united in the eternal class struggle. This imbalance makes that the people every time draw the short straw. And every time the straw gets shorter.

Liberalism.

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In a humanistic society, boundary conditions (‘laws’) are set which are designed to make the lives of human beings optimal. The laws are made by government. Yet, the skimming of surplus labor by the capital is only overshadowed by the skimming by politicians. Politicians are often ‘auto-invited’ (by colleagues) in board-of-directors of companies (the capital), further enabling amassing buying power. This shows that, in most countries, the differences between the capital and the political class are flimsy if not non-existent. As an example, all communist countries, in fact, were pure capitalist implementations, with a distinction that a greater share of the skimming was done by politicians compared to more conventional capitalist societies.

One form of a humanistic (!!!!!????) government is socialism, which has set as its goals the welfare of humans. One can argue if socialism is a good form to achieve a humanistic society. Maybe it is not efficient to reach this goal, whatever ‘efficient’ may mean and the difficulty in defining that concept.

Another form of government is liberalism. Before we continue, it is remarkable to observe that in practical ‘liberal’ societies, everything is free and allowed, except the creation of banks and doing banking. By definition, a ‘liberal government’ is a contradiction in terms. A real liberal government would be called ‘anarchy’. ‘Liberal’ is a name given by politicians to make people think they are free, while in fact it is the most binding and oppressing form of government.

Liberalism, by definition, has set no boundary conditions. A liberal society has at its core the absence of goals. Everything is left free; “Let a Darwinistic survival-of-the-fittest mechanism decide which things are ‘best'”. Best are, by definition, those things that survive. That means that it might be the case that humans are a nuisance. Inefficient monsters. Does this idea look far-fetched? May it be so that in a liberal society, humans will disappear and only capital (the money and the means of production) will survive in a Darwinistic way? Mathematically it is possible. Let me show you.

Trade unions are organizations that represent the humans in this cycle and they are the ways to break the cycle and guarantee minimization of the skimming of laborers. If you are human, you should like trade unions. (If you are a bank manager, you can – and should – organize yourself in a bank-managers trade union). If you are capital, you do not like them. (And there are many spokesmen of the capital in the world, paid to propagate this dislike). Capital, however, in itself cannot ‘think’, it is not human, nor has it a brain, or a way to communicate. It is just a ‘concept’, an ‘idea’ of a ‘system’. It does not ‘like’ or ‘dislike’ anything. You are not capital, even if you are paid by it. Even if you are paid handsomely by it. Even if you are paid astronomically by it. (In the latter case you are probably just an asocial asshole!!!!). We can thus morally confiscate as much from the capital we wish, without feeling any remorse whatsoever. As long as it does not destroy the game; destroying the game would put human happiness at risk by undermining the incentives for production and reduce the access to consumption.

On the other hand, the spokesmen of the capital will always talk about labor cost contention, because that will increase the marginal profit M’-M. Remember this, next time somebody talks in the media. Who is paying their salary? To give an idea how much you are being fleeced, compare your salary to that of difficult-to-skim, strike-prone, trade-union-bastion professions, like train drivers. The companies still hire them, implying that they still bring a net profit to the companies, in spite of their astronomical salaries. You deserve the same salary.

Continuing. For the capital, there is no ‘special place’ for human labor power LP. If the Marxist equation can be replaced by

M – C{MoP} – P – C’ – M’

i.e., without LP, capital would do just that, if that is optimizing M’-M. Mathematically, there is no difference whatsoever between MoP and LP. The only thing a liberal system seeks is optimization. It does not care at all, in no way whatsoever, how this is achieved. The more liberal the better. Less restrictions, more possibilities for optimizing marginal profit M’-M. If it means destruction of the human race, who cares? Collateral damage.

To make my point: Would you care if you had to pay (feed) monkeys one-cent peanuts to find you kilo-sized gold nuggets? Do you care if no human LP is involved in your business scheme? I guess you just care about maximizing your skimming of the labor power involved, be they human, animal or mechanic. Who cares?

There is only one problem. Somebody should consume the products made (no monkey cares about your gold nuggets). That is why the French economist Jean-Baptiste Say said “Every product creates its own demand”. If nobody can pay for the products made (because no LP is paid for the work done), the products cannot be sold, and the cycle stops at the step C’-M’, the M’ becoming zero (not sold), the profit M’-M reduced to a loss M and the company goes bankrupt.

However, individual companies can sell products, as long as there are other companies in the world still paying LP somewhere. Companies everywhere in the world thus still have a tendency to robotize their production. Companies exist in the world that are nearly fully robotized. The profit, now effectively skimming of the surplus of MoP-power instead of labor power, fully goes to the capital, since MoP has no way of organizing itself in trade unions and demand more ‘payment’. Or, and be careful with this step here – a step Marx could never have imagined – what if the MoP start consuming as well? Imagine that a factory robot needs parts. New robot arms, electricity, water, cleaning, etc. Factories will start making these products. There is a market for them. Hail the market! Now we come to the conclusion that the ‘system’, when liberalized will optimize the production (it is the only intrinsic goal) Preindustrial (without tools):

M – C{LP} – P – C’ – M’

Marxian: M – C{MoP, LP} – P – C’ – M’

Post-modern: M – C{MoP} – P – C’ – M’

If the latter is most efficient, in a completely liberalized system, it will be implemented.

This means

1) No (human) LP will be used in production

2) No humans will be paid for work of producing

3) No human consumption is possible

4) Humans will die from lack of consumption

In a Darwinistic way humanity will die to be substituted by something else; we are too inefficient to survive. We are not fit for this planet. We will be substituted by the exact things we created. There is nowhere a rule written “liberalism, with the condition that it favors humans”. No, liberalism is liberalism. It favors the fittest.

It went good so far. As long as we had exponential growth, even if the growth rate for MoP was far larger than the growth rate for rewards for LP, also LP was rewarded increasingly. When the exponential growth stops, when the system reaches saturation as it seems to do now, only the strongest survive. That is not necessarily mankind. Mathematically it can be either one or the other, without preference; the Marxian equation is symmetrical. Future will tell. Maybe the MoP (they will also acquire intelligence and reason somewhere probably) will later discuss how they won the race, the same way we, Homo Sapiens, currently talk about “those backward unfit Neanderthals”.

Your ideal dream job would be to manage the peanut bank, monopolizing the peanut supply, while the peanut eaters build for you palaces in the Italian Riviera and feed you grapes while you enjoy the scenery. Even if you were one of the few remaining humans. A world in which humans are extinct is not a far-fetched world. It might be the result of a Darwinian selection of the fittest.

Malthusian Catastrophe.

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As long as wealth is growing exponentially, it does not matter that some of the surplus labor is skimmed. If the production of the laborers is growing x% and their wealth grows y% – even if y% < x%, and the wealth of the capital grows faster, z%, with z% > x% – everybody is happy. The workers minimally increased their wealth, even if their productivity has increased tremendously. Nearly all increased labor production has been confiscated by the capital, exorbitant bonuses of bank managers are an example. (Managers, by the way, by definition, do not ’produce’ anything, but only help skim the production of others; it is ‘work’, but not ‘production’. As long as the skimming [money in] is larger than the cost of their work [money out], they will be hired by the capital. For instance, if they can move the workers into producing more for equal pay. If not, out they go).

If the economy is growing at a steady pace (x%), resulting in an exponential growth (1+x/100)n, effectively today’s life can be paid with (promises of) tomorrow’s earnings, ‘borrowing from the future’. (At a shrinking economy, the opposite occurs, paying tomorrow’s life with today’s earnings; having nothing to live on today).

Let’s put that in an equation. The economy of today Ei is defined in terms of growth of economy itself, the difference between today’s economy and tomorrow’s economy, Ei+1 − Ei,

Ei = α(Ei+1 − Ei) —– (1)

with α related to the growth rate, GR ≡ (Ei+1 − Ei)/Ei = 1/α. In a time-differential equation:

E(t) = αdE(t)/dt —– (2)

which has as solution

E(t) = E0e1/α —– (3)

exponential growth.

The problem is that eternal growth of x% is not possible. Our entire society depends on a

continuous growth; it is the fiber of our system. When it stops, everything collapses, if the derivative dE(t)/dt becomes negative, economy itself becomes negative and we start destroying things (E < 0) instead of producing things. If the growth gets relatively smaller, E itself gets smaller, assuming steady borrowing-from-tomorrow factor α (second equation above). But that is a contradiction; if E gets smaller, the derivative must be negative. The only consistent observation is that if E shrinks, E becomes immediately negative! This is what is called a Malthusian Catastrophe.

Now we seem to saturate with our production, we no longer have x% growth, but it is closer to 0. The capital, however, has inertia (viz. The continuing culture in the financial world of huge bonuses, often justified as “well, that is the market. What can we do?!”). The capital continues to increase their skimming of the surplus labor with the same z%. The laborers, therefore, now have a decrease of wealth close to z%. (Note that the capital cannot have a decline, a negative z%, because it would refuse to do something if that something does not make profit).

Many things that we took for granted before, free health care for all, early pension, free education, cheap or free transport (no road tolls, etc.) are more and more under discussion, with an argument that they are “becoming unaffordable”. This label is utter nonsense, when you think of it, since

1) Before, apparently, they were affordable.

2) We have increased productivity of our workers.

1 + 2 = 3) Things are becoming more and more affordable. Unless, they are becoming unaffordable for some (the workers) and not for others (the capitalists).

It might well be that soon we discover that living is unaffordable. The new money M’ in Marx’s equation is used as a starting point in new cycle M → M’. The eternal cycle causes condensation of wealth to the capital, away from the labor power. M keeps growing and growing. Anything that does not accumulate capital, M’ – M < 0, goes bankrupt. Anything that does not grow fast enough, M’ – M ≈ 0, is bought by something that does, reconfigured to have M’ – M large again. Note that these reconfigurations – optimizations of skimming (the laborers never profit form the reconfigurations, they are rather being sacked as a result of them) – are presented by the media as something good, where words as ‘increased synergy’ are used to defend mergers, etc. It alludes to the sponsors of the messages coming to us. Next time you read the word ‘synergy’ in these communications, just replace it with ‘fleecing’.

The capital actually ‘refuses’ to do something if it does not make profit. If M’ is not bigger than M in a step, the step would simply not be done, implying also no Labour Power used and no payment for Labour Power. Ignoring for the moment philanthropists, in capitalistic Utopia capital cannot but grow. If economy is not growing it is therefore always at the cost of labor! Humans, namely, do not have this option of not doing things, because “better to get 99 paise while living costs 1 rupee, i.e., ‘loss’, than get no paisa at all [while living still costs one rupee (haha, excuse me the folly of quixotic living!]”. Death by slow starvation is chosen before rapid death.

In an exponential growing system, everything is OK; Capital grows and reward on labor as well. When the economy stagnates only the labor power (humans) pays the price. It reaches a point of revolution, when the skimming of Labour Power is so big, that this Labour Power (humans) cannot keep itself alive. Famous is the situation of Marie-Antoinette (representing the capital), wife of King Louis XVI of France, who responded to the outcry of the public (Labour Power) who demanded bread (sic!) by saying “They do not have bread? Let them eat cake!” A revolution of the labor power is unavoidable in a capitalist system when it reaches saturation, because the unavoidable increment of the capital is paid by the reduction of wealth of the labor power. That is a mathematical certainty.