Sources of capitalist profit

[malice_iw]

I've been wondering for quite a while what's wrong with the explanation of where profits come from in the capitalist economy provided by neoclassical economists.

For instance, how Lester C. Thurow puts it:

"Capitalists earn a return on their efforts by providing three productive inputs.

First, they are willing to delay their own personal gratification. Instead of consuming all of their resources today, they save some of today’s income and invest those savings in activities (plant and equipment) that will yield goods and services in the future. When sold, these future goods and services will yield profits that can then be used to finance consumption or additional investment. Put bluntly, the capitalist provides capital by not consuming. Without capital much less production could occur. As a result, some profits are effectively the “wages” paid to those who are willing to delay their own personal gratification.

Second, some profits are a return to those who take risks. Some investments make a profit and return what was invested plus a profit; others do not. When an airline goes broke, for example, the investors in the airline lose some of their wealth and become poorer. Just as underground miners, who are willing to perform a dangerous job, get paid more than those who work in safer occupations, so investors who are willing to invest in risky ventures earn more than those who invest in less risky ones. On average, those who take risks will earn a higher rate of return on their investments than those who invest more conservatively.

Third, some profits are a return to organizational ability, enterprise, and entrepreneurial energy. The entrepreneur, by inventing a new product or process, or by organizing the better delivery of an old product, generates profits. People are willing to pay the entrepreneur because he or she has invented a “better mousetrap.”"

The third factor may be irrelevant as it's paid for in the form of management salaries, not as return on capital. What about the first two?

Sorry if my question is poorly formulated or pertains to a different section, I'm new to this forum (and political economy in general).

[ernie]

I've been wondering for quite a while what's wrong with the explanation of where profits come from in the capitalist economy provided by neoclassical economists.

For instance, how Lester C. Thurow puts it:

"Capitalists earn a return on their efforts by providing three productive inputs.

First, they are willing to delay their own personal gratification. Instead of consuming all of their resources today, they save some of today’s income and invest those savings in activities (plant and equipment) that will yield goods and services in the future. When sold, these future goods and services will yield profits that can then be used to finance consumption or additional investment. Put bluntly, the capitalist provides capital by not consuming. Without capital much less production could occur. As a result, some profits are effectively the “wages” paid to those who are willing to delay their own personal gratification.

Second, some profits are a return to those who take risks. Some investments make a profit and return what was invested plus a profit; others do not. When an airline goes broke, for example, the investors in the airline lose some of their wealth and become poorer. Just as underground miners, who are willing to perform a dangerous job, get paid more than those who work in safer occupations, so investors who are willing to invest in risky ventures earn more than those who invest in less risky ones. On average, those who take risks will earn a higher rate of return on their investments than those who invest more conservatively.

Third, some profits are a return to organizational ability, enterprise, and entrepreneurial energy. The entrepreneur, by inventing a new product or process, or by organizing the better delivery of an old product, generates profits. People are willing to pay the entrepreneur because he or she has invented a “better mousetrap.”"

The third factor may be irrelevant as it's paid for in the form of management salaries, not as return on capital. What about the first two?

Sorry if my question is poorly formulated or pertains to a different section, I'm new to this forum (and political economy in general).
What are you asking? Are you asking if this how it happens now or are you asking if this is how it should happen (i.e., if it a fair way to distribute wealth)?

[ckaihatsu]

I've been wondering for quite a while what's wrong with the explanation of where profits come from in the capitalist economy provided by neoclassical economists.


Malice,

The biggest problem with bourgeois ("neoclassical") explanations is that they are class-biased. This is the history -- or in this case, economics -- that is written by the winners. Anything written by those who have blood stains on their suits needs to be viewed with caution.

In more objective terms, the biggest problem is that the definitions do not acknowledge that existing capital / infrastructure was created by labor in the first place. The easiest way to see this is to compare people to animals -- animals do not build up surpluses -- we do. Therefore it's *human* labor, utilizing industrial energy reserves, that brought about the initial profits and capital in the first place.



First, they are willing to delay their own personal gratification. Instead of consuming all of their resources today, they save some of today’s income and invest those savings in activities (plant and equipment) that will yield goods and services in the future.


This is one-sided history that borders on mythology -- it makes the capitalists out to be like gods for doing things that even children know how to do. If someone wants to make things happen in the larger world they know it takes effort, or use of money, or the assistance (exploitation) of others.

It just so happens that we were born into this era which features an elite ruling class that controls the means of future mass production, along with enormous vaults of existing wealth (that can be used to activate human labor power).



Second, some profits are a return to those who take risks. Some investments make a profit and return what was invested plus a profit; others do not.


The term "risk" really depends on how deep one's pockets are. Smart financial management demands diversification of assets -- one must keep an eye on portfolios of various assets, looking to weed out any batches of investments that happen to weaken. The same thing goes for exploiting workers, which is why we don't have nationalized health care in the U.S. -- just leave the unprofitable workers to the wolves -- it's even cheaper than keeping them enslaved 24/7...!

When one has plenty of resources and good information for managing them, it's really not that big a deal -- the "risk" involved is akin to the "risk" we take in owning a bunch of consumer items -- which ones are we using, which ones are working, which ones are broken, which ones should we get rid of or upgrade?



People are willing to pay the entrepreneur because he or she has invented a “better mousetrap.”"

The third factor may be irrelevant as it's paid for in the form of management salaries, not as return on capital.


As you noted, Malice, this last point is a total red herring -- "intellectual capital" is simply treated as labor, at best -- the rest is about whether existing capital will decide to use ideas or not -- whether they can be turned into profitable commodities through production.


Chris




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[malice_iw]

Thank you for your contribution, ckaihatsu.

I was a bit confused about the whole thing at first, but now I see this is just another piece of propaganda.

While the definition offered by Thurow sounds alright, what matters is, of course, that "deferred gratification" and "risk" have nothing (or pretty little) to do with how capitalist profits are derived now. So these two factors are cited merely as yet another moral justification for the current state of affairs, as is the case with much of the rest of neoclassical economics. So the above "definition" is useless at best.



The biggest problem with bourgeois ("neoclassical") explanations is that they are class-biased. This is the history -- or in this case, economics -- that is written by the winners. Anything written by those who have blood stains on their suits needs to be viewed with caution.

Exactly, and they're very good at disseminating their ideology. After the collapse of socialism in this country (Russia), they swiftly removed Marxist-Leninist political economy from university curricula and took to neo-classical and Austrian school economics with abandon. So the students now uncritically absorb a single point of view, the one propagated by the ruling class. If someone mentions Marx, the standard reply is “We used to live in accordance with his teachings, but history proved him wrong”. Even though the way how things went in the Soviet Union was not probably what Marx had had in mind and there is definitely more than a grain of truth to his theory. Well, it may change now when the going is not so good any more…

[ZeroNowhere]

I've been wondering for quite a while what's wrong with the explanation of where profits come from in the capitalist economy provided by neoclassical economists.
You mean the ones that believe that time does not exist?


"First, they are willing to delay their own personal gratification. Instead of consuming all of their resources today, they save some of today’s income and invest those savings in activities (plant and equipment) that will yield goods and services in the future. When sold, these future goods and services will yield profits that can then be used to finance consumption or additional investment. Put bluntly, the capitalist provides capital by not consuming. Without capital much less production could occur. As a result, some profits are effectively the “wages” paid to those who are willing to delay their own personal gratification.
Ah, Marx loved this one.
"The simple dictates of humanity therefore plainly enjoin the release of the capitalist from this martyrdom and temptation, in the same as that the Georgian slave-owner was lately delivered, by the abolition of slavery, from the painful dilemma, whether to squander the surplus-product, lashed out of his niggers, entirely in champagne, or whether to reconvert a part of it into more niggers and more land."


Second, some profits are a return to those who take risks. Some investments make a profit and return what was invested plus a profit; others do not. When an airline goes broke, for example, the investors in the airline lose some of their wealth and become poorer. Just as underground miners, who are willing to perform a dangerous job, get paid more than those who work in safer occupations, so investors who are willing to invest in risky ventures earn more than those who invest in less risky ones. On average, those who take risks will earn a higher rate of return on their investments than those who invest more conservatively.
So if I steal your television, I am thus entitled to it? Hey, it's a pretty big risk. I risk going to jail, the capitalists just risk joining 95% or so of the population that make up the working class. The issue is not whether the thief snuck past your back, or just came at midnight and nicked it, it is that he is still a thief.
Also, about the point on underground miners, that's a far more dangerous job that being a capitalist. Especially an established capitalist, the risk talked about is mainly borne on small-scale capitalists, or the petit-bourgeoisie, and by workers attempting to make it big by starting a business (both who, in fact, earn less than the established capitalists. Obviously we have a problem here, they're taking far more risk. I thought...). In fact, the most common examples used for justifying this is a small investor gambling their savings and facing a major risk if their investment turns foul, rather than, say, a billionaire with millions of stocks in hundreds of companies, and thus earns a large income without lifting a finger, as "property owners can spread their risks by putting small bits of their property into a large number of concerns, a worker cannot easily put small bits of his effort into a large number of different jobs. This presumably is the main reason we find risk-bearing capital hiring labour." For that matter, the workers are the major victims when a capitalist makes a bad risk, as Marx points out, "The worker does not necessarily gain when the capitalist gains, but he necessarily loses with him." So basically, capitalists who take these risks do not endanger simply themselves, but also the workers. The workers then have to pay the cost of the capitalist's mistake through wage cuts, elimination of healthcare benefits and such, etc (or even a bailout scheme?) So basically, the people who do the work also get no say over their working lives. As it is, many can't even take part in this game of Risk, "large numbers of people simply do not have any discretionary funds to invest. They can't play at all . . . among those who can play, some are better situated than others. Wealth gives access to information, expert advice, and opportunities for diversification that the small investor often lacks."
Also, how exactly did they measure this 'risk'? Risk is entirely subjective, how can you suddenly measure that people who take more risks will on average get more money? Unless we are to beg the question here and use the current rate of profits to measure the cost of bearing a risk.

Also, "the capitalist investment game (as a whole and usually in its various parts) is positive sum. In most years more money is made in the financial markets than is lost. How is this possible? It is possible only because those who engage in real productive activity receive less than that to which they would be entitled were they fully compensated for what they produce. The reward, allegedly for risk, derives from this discrepancy." -Schweikart

Also, how does 'risk' help productivity? To quote Schweikart, "[i]n the vast majority of cases, when you buy stock, you give your money not to the company but to another private individual. You buy your share of stock from someone who is cashing in his share. Not a nickel of your money goes to the company itself. The company's profits would have been exactly the same, with or without your stock purchase." This whole thing makes the false assumption that capital is productive, it is not. Perhaps one is allowing others to use their money at best, but this isn't productive. Also, there is the whole 'limited liability' thing which makes the whole process a lot less risky.
For that matter, one could go on to argue that risk actually harms the economy due to the nature of the stock market.
Also, this is fairly ironic. In the neoclassical model of capitalist equillibrium, in which time itself stops in awe, there is no uncertainty.



Third, some profits are a return to organizational ability, enterprise, and entrepreneurial energy. The entrepreneur, by inventing a new product or process, or by organizing the better delivery of an old product, generates profits. People are willing to pay the entrepreneur because he or she has invented a “better mousetrap.”"
I'll have to quote an entire SLP article (they're not perfect as a group, certainly, but it's a pretty accurate article) here, since I can't post links:



How do you respond to the argument that it's the capitalists' entrepreneurial abilities and skills which organize the means of production in such a way as to make the most efficient use of labor and create the most wealth?
__________________________________________________
Capitalists do have an interest in squeezing the greatest possible productivity out of each worker. But capitalists themselves no longer have much to do with the organization of production. More importantly, the overall social impact of productivity increases under capitalism doesn't exactly make an argument in favor of preserving the system.
Historically, capitalist "entrepreneurs" did play a vital role in bringing together the forces of modern industrial production. But the successful capitalists were those who were most "efficient" at accumulating capital-which means that they were most efficient, not merely in making the most productive use of labor, but in reaping surplus value through the ruthless exploitation of wage labor. Frequently, they were also among the most efficient at scheming against, swindling and otherwise robbing each other, the most successful of them in this country earning the epithet, "the robber barons."
Today there is very little "entrepreneurship" remaining in the capitalist system. New businesses are regularly being started up, but most either die within a few years or are swallowed up by long-established firms. New ways and means of stepping up the rate of exploitation-including, but not limited to, increases in productivity-are of course still being implemented by capitalist firms, but this is done by the capitalists' hired executives and management. Established capitalists may "dabble" in such activity; most don't. In any event, they don't have to.
Today's top capitalists -- most of whom inherited their class status, further indicating that they had little to do with the organizing of production -- typically live off the surplus value from a diversified array of stocks, bonds, banking and other investments. They are far removed from the process of production. For example, a capitalist may have a few thousand shares of stock in an airline in the morning, sell it and use the proceeds to buy up shares of stock in a pharmaceutical firm in the afternoon, and sell that stock two days later to buy up shares in an electronics company. It is obvious that such a capitalist will have little or nothing to do with organizing the means of production in any of those firms.
For that matter, many capitalists don't even have to involve themselves in such buying and selling. They have firms to "manage their investments" for them too!

EFFICIENT AT ROBBERY
One could argue that the capitalists collectively are still ultimately responsible for the efficient organization of production. But their profits are not the "rewards" of efficient organization of production. The most efficiently organized production facility in the world wouldn't yield a penny of profit if its owners (or their hired management) did not hold the price of labor power (wages) down below the price of labor's product, i.e., if they did not exploit the workers.
Moreover, to whatever small degree some capitalists may still be "credited" for efficient organization of production within individual firms, the system of capitalist production is marked by anarchy, not efficiency. Separate firms competing for the same markets, with wasteful duplication of effort; the inevitable "crises of overproduction" that arise from that competition and the exploitation of wage labor; the waste of having 20 percent or more of the nations' productive capacity and 10 percent or more of the nation's potential workforce involuntarily idled at the same time; the colossal waste of potentially useful labor being channeled into advertising, real estate, "business services," militarism, regulatory agencies and other institutions that are "necessary" only to capitalism-these conditions are hardly indicative of the most efficient organization of production.
Finally, to whatever small extent capitalists may be responsible for the "efficient use of labor" within a firm, such efficiency, under the capitalist system, does more social harm than good. Productivity improvements under capitalism are used, not to lessen the1 necessary hours of labor for all, but to eliminate the jobs of many, and frequently entail stepping up the workloads or the pace of work for the workers remaining.
All told, capitalists do have an interest in seeing production organized such that it will "create the most wealth"-for themselves. But for the vast majority of the people, who belong to the working class, this is hardly an argument in favor of capitalism.
A class of parasites is not needed for production to be organized in an efficient manner. Production will operate far more efficiently, in the social interest, when the workers themselves are in full control of production and distribution, and there no longer exists another class to "make...use of labor," for its own selfish ends.

Capitalism "does not utilise a socially neutral technology for capitalist ends. Capitalism has created capitalist technology, which is by no means neutral. The real essence of capitalist technology is not to develop production for production's sake: It is to subordinate and dominate the producers." Thusly, technological progress simply causes unemployment, and causes capital to further dominate the workers. For that matter, what happened to the 'Research and Development' groups? I thought that only capitalists do the innovation... :confused:
In fact, innovation and progress (and HOPE and CHANGE!) are conducted by "teams of trained specialists, who turn out what is required and make it work in predictable ways"
Innovation is not monopolised by a small elite. Crud, remember the anarchist collectives back in the Spanish revolution? Productivity and innovation were at very high levels. In fact, industry was "transformed from top to bottom . . . there were achieved feats pregnant with significance for people who had always striven to deny the reality of the wealth of popular initiatives unveiled by revolutions." "Experts were truly astounded at the expertise of the workers in building new machinery for the manufacture of arms and munitions. Very few machines were imported. In a short time, two hundred different hydraulic presses of up to 250 tons pressure, one hundred seventy-eight revolving lathes, and hundreds of milling machines and boring machines were built."

[JimmyJazz]

First, they are willing to delay their own personal gratification. Instead of consuming all of their resources today, they save some of today’s income

Wouldn't we all love to be able to do this??


Second, some profits are a return to those who take risks.

They're not gambling their money for anything but their own self-interest, so I've never understood the logic of making this sound like a personal virtue.

We would all do the same thing if we had extra money to risk. It's only rational.


Third, some profits are a return to organizational ability, enterprise, and entrepreneurial energy.

That's a valid thing to be compensated for. Any socialist society I'd fight for would reward organizational ability, enterprise, and entrepreneurial energy. Not with profit, in an amount determined by the dictates of the market, but in wages, in an amount that is actually proportional to the work done.

This is actually an argument for socialism, since capitalism only sporadically rewards these efforts--many times a person works hard at his small business, only to see it fail or never become profitable. Under socialism such risks of failure (which can be catastrophic to an individual) would be absorbed by society as a whole and each individual would always be rewarded according to his/her work contribution, including mental/organizational work.

[malice_iw]

ZeroNowhere, thank you for your informative answer




So if I steal your television, I am thus entitled to it? Hey, it's a pretty big risk. .

I guess an anarcho-capitalist like David Friedman would say, that stealing a TV involves a classic case of the risk/return relationship. If you can avoid being caught (risk), the TV is yours (reward).



Also, how exactly did they measure this 'risk'? Risk is entirely subjective, how can you suddenly measure that people who take more risks will on average get more money? Unless we are to beg the question here and use the current rate of profits to measure the cost of bearing a risk.

I believe this is what they (neoclassical? or Austrian school economists? please don't pin me down on this one) propose. Look at the current prices in the market, and you'll know what a thing is worth. Look at the current risk premiums and you learn how much risk is involved. The problem is that some people are not in a position to bargain for risk premiums they feel they should be entitled to and the whole picture will therefore be skewed, like with demand for housing on the part of the homeless. Or maybe this "risk vs. return" talk is too over-generalized to serve any useful purpose other than propaganda.

Does this make sense?

[ckaihatsu]

The problem with discussing risk and reward within the current economic system is that they are defined in terms of *liquidity* -- that is, am I risking liquid money now in order to freeze it up in investments, *but* also see returns on it in the future, through interest (or dividends or whatever)?

Also, risk is defined in terms of the individual entity (person, corporation), as potentially against everyone else participating as players in the markets. This individualistic set-up is contrary to / different than societal or humanistic risk, which would affect *broad numbers* of people the same way -- think hurricanes, earthquakes, disease epidemics, illiteracy, market crashes, etc.

I think the most misleading aspect of the term _risk_ is that, by itself, it tends to make us think of some general, tangible instance, like a leaky dam. That would be a no-brainer, right? Those who make the decision to build their homes downstream of a leaky dam are taking on a lot of risk, aren't they?

But the risk being discussed in the realm of economics is highly individualized, is relative to the investor's cache of poker chips, and has *nothing* to do with the societal picture as a whole. The bourgeoisie makes it sound like this is the only way to fly, and they actually *defend* this hands-off approach to the greatest societal issue there is: the management of surplus labor value.

The problem, of course, is that a bunch of self-interested players, all extracting surplus labor value for themselves, doesn't add up to a society that can come together in a cooperative way when a common threat looms overhead. Unlike in the movies there's no superhero to swoop in and save the day when the 'invisible hand' goes on a rampage, as it's doing these days....

The grand scheme is ever *more* exposed to the light of day in our post-industrial economies which don't really require great concentrations of capital anymore. In the era of industrial build-up, okay, but these days, no. As the service sector came to the fore a few decades ago the distinction and difference between a corporate conglomeration and a private practice became more of a marketing and branding issue than anything else.

I would say the "risk vs. return" question is *under*-generalized, because as someone else pointed out, the workers are the ones who have the *most* to risk from someone else's capital investments, and the least to see a return on, since wages remain stagnant or decrease.

[malice_iw]

Thank you for your valuable insights, ckaihatsu.

It may or may not be pertinent to this discussion, but it would be interesting to know how the idea of lending at interest originated and evolved in human history. For instance, as far as I know, Christian church was opposed to this practice, yet it was widespread during medieval times. There should be a reason why people thought it was or wasn't alright. Also, does this or a similar concept exist in non-capitalist societies?

Some authors, such as Samuel Bowles, use anthropological comparisons to show that some basic tenets of capitalism – such as private property – are not indispensable characteristics of human existence, through citing examples of societies where they are not used. I wonder if this method can be applied here.