Giving and Establishing Value
Let me start by observing that the term ‘Capitalism’ is a Marxist concept. That doesn’t invalidate it but the misunderstanding of the Marxist analysis led to some of the most reprehensible global activity, megalomania and downright tyranny that only careful study can counter. It was said that the failure of Marxism lay in Marx’s greater hatred of ‘Capitalists’ than his love of the ‘Proletariat’, and when hate trumps love disaster ensues.
Marx wrote his analysis in the mid-19th century England when the Aristocracy was the ruling class and the many landless people were being crushed by a rampant industrialisation. The division was supported by the craven church with such hymns as ‘The rich man in his castle, the poor man at his gate, God made them high and lowly, and ordered their estate’ from ‘All things bright and beautiful … the Lord God made them all.’ Marx was bravely countering the class war and religion, but the world has moved on and maybe different windmills need to be tilted at: global business, monopoly economics and private land ownership.
Contemporaneously with Marx, Henry George was writing ‘Progress and Poverty’ in America: both works were motivated by the obscenity of growing poverty amidst the growth of flamboyant wealth acquisition and display. Marx’s target was the ‘capitalist’ whereas George aimed at the ‘land-owning’ American aristocracy. It was Jefferson who observed that America had the choice either of ‘free enterprise’ or ‘free land’ and it mistakenly chose the former. That having been done the last 150 years was sadly all too predictable.
This blog is not going to be an essay on Henry George – there is far too much written upon that subject, but if you intend even a vague understanding of Political Economy Henry George and Frédéric Bastiat, as well as Adam Smith and Davids Riccardo & Hume, are essential reading. This blog is about value and how it is given and assessed.
Imagine a shipwreck on a temperate island in which there are many survivors. Assuming a society of bullying and tyranny doesn’t arise, but reason prevails, within a week an economy will have been established. Within a short time working together a society will establish itself – as happened on Pitcairn Island after the Mutiny on the Bounty. The greater the reason available to the inhabitants the more productive and happy will that society be.
The economy will start off producing essentials first, but eventually the economy will expand into non-essential luxury items. Why? Because that what the community desires. Once needs are met desires take over, and toys like the computer upon which I am writing and you are reading will become commonplace. This occurs because of the ‘economies of scale’ Smith et al elucidated.
There are two essential forms of economy; one is the ‘demand’ economy in which the market place exists to establish relative value and hence price and the other is the ‘supply’ economy, where a political elite determine what will be produced and how much, etc. ‘Capitalism’ is an example of the demand economy and ‘Communism’ exemplifies the latter. Given human nature and its ever present desire for individual freedom the ‘supply’ economy has within itself the seeds of its own destruction, as the latter decades of the 20th century demonstrated so conclusively.
A demand economy is based upon mutual trust between people that together they will act in the common good, whereas a supply-side economy is built on the mistrust that acting freely together will serve the best interests of the community. The questions you have to ask yourself are: are you optimistic about trusting your fellow man or are you pessimistic and through mistrust seek to control your fellow man? Your answer to these questions will largely determine whether you are a free-marketer or one of the various forms of socialist.
What is the purpose of a market? It is to establish relative value, especially when markets were principally bartering forums. In facilitating this relativity of value the market also tends to determine the level of wages that the various producers will be able to secure. If something is in high demand the price rises until sufficient numbers of producers are attracted into the market and demand can be easily met. Equally, if a product is not ‘selling’ in bulk producers will leave that sector until once again gluts are avoided and the price settles down and the remaining producers can earn a decent living. Note, in a pure market there is no ‘profit’ there is only relative income.
Sometimes, pain is experienced with this natural inhalation or exhalation of economic activity, but the pain is magnified today because there are few true markets. Cabals, monopolies and price-fixing distort the efficiency of the market and bring a perfectly reasonable mechanism into disrepute, and ‘profit’ replaces income. The perennial response from the populace is: control it! The most recent example of this is Ed Miliband’s blatant populist promise to control the cost of energy in the UK. It, like King Knut’s failure to control the tide, will fail; it has to because it completely ignores basic economic law, but that won’t stop it being a vote-winner. *smh*
Henry George showed (by use of the ‘island’ diagram) that location is all-important to the effective production of wealth. He defined ‘wealth’ as the productive uniting of land and labour. Sometimes ‘capital’ is needed in a business to develop it to meet demand, or to undertake research to improve the company’s products. He defined ‘capital’ as that portion of ‘wealth’ that is reused within the business, and of course it deserves a return, but he shows in a truly free market the return on capital would be entirely reasonable.
The all-important exegesis of Henry George was the identification of the economic margin (which has the function of establishing the minimum wage) and the realisation that non-marginal sites have a surplus arising which has nothing to do with the input of labour. This is what David Riccardo identified as the ‘economic rent’ and it was George’s insight that this unearned increment is actually the natural fund of income to the community as a whole as it arises through the mere existence of the community and not through any action. He argued that this natural surplus is the basis of ‘land value taxation’ or ‘site value rating’.
It works like this: a community decides to build a piece of major community infrastructure – like BART or the London Underground Railway/NYSubway/Paris Metro – and, lo and behold, land prices rise around the infrastructure’s stations and termini. The examples of this effect are legion in the economic annals – have a look yourselves – that examples are unnecessary to cite here. This is why prime sites on Main Street/The High Street are always the most expensive, and private land ownership allows the landlord to take the unearned increment, which on prime sites is colossal. Property developers have always known this, and so do we as consumers of residential property. It is so self-evident you have to ask why no government has really tackled this issue, but insists on taxing those sources of income which are artificially held down by the fact of land ownership, because in this scenario wages tend to the least that we are prepared to accept. Most modern taxation is ‘regressive’, the more tax the greater the downward pressure on the ability of the economy to prosper.
When an economy develops to a ‘first world’ dimension it becomes increasingly difficult to see the above fundamentals at play. This is when ‘profit’ becomes a dirty word. Now it is obvious that no business can survive if it makes no profit, but when the ‘profit motive’ becomes primary the market gets distorted by cabals, inclination to monopoly positions and downright criminality. At this point Adam Smith’s ‘natural economy’ becomes a threat to the community it purports to serve, and governments search around for ways to tame the economic tigers.
Just consider the top 100 profitable companies, and you will see that they have their pre-eminence because of their ability to service mass markets. Apple, Microsoft, Coca-Cola, Toyota, Nissan, the internet giants: Google, Twitter, Hotmail, et al. Not only do they provide just what the world wants they do it with excellence and evident pride. It sets off the criminal class scurrying around to fake the most popular products in an attempt to take a slice of the pie, and they can do this because of our collective gullibility and the crass idea that there is such a thing as a free lunch. There isn’t.
Now, consider, do you really think that a ‘supply-side’ economy would have come up with such amazing invention and quality of product? The Chinese Politburo realised that there would be trouble if the natural entrepreneurship of the Chinese business mind was not released, and the ‘Little Red Book’ was consigned to the dustbin of history. Where is North Korea’s creativity and natural business acumen – it has gravitated to South Korea, and produces world beating products such as: Kia, Hyundai, Samsung and so on.
A supply side (communist) economy is akin to a religious hegemony. States that place religion at the apex of their government closely resemble communist societies. Values are established by the religious head, just as the politburos did and do in communist societies. Where is the economic freedom and personal liberty in Cuba, Iran or Afghanistan? Wise up; socialism = a far greater bondage than a free market economy will ever be able to countenance.
Now, I’m not stupid, despite evidence to the contrary, I am fully aware that there are few really free markets in the ‘capitalist’ west. I have tried to show that this state of affairs exists solely because of successive governments refusing to tackle the vested interests in private land ownership where landlords are free to collect the ‘economic rent’ so freely produced by the mere existence of an economic community.
In the UK all the main political parties are self-proclaimed defenders of the market, but their responses are very different. Time and again after the socialists have been in power the Conservatives (currently in coalition with the Liberal democrats) have to be re-elected to re-establish some financial rectitude. Generally, we would love the baubles hung out by Labour politicians (which is why they are so populist) but the electorate is sufficiently mature to see that the ‘nasty’ Conservatives are necessary to bring the economy to some balance between income and expenditure, as so well encapsulated by Dickens in the form of Mr Micawber: “Income 20 shillings, expenditure 19/6d, result happiness; income 20 shillings, expenditure 20/6d, result misery.”
Having said that, the indebtedness of western societies is such that current government policies on either side of the ‘pond’ have no real chance of balancing the books; we have been living so far beyond our means for so long that the horizon is beginning to be filled by doom-mongers of every description predicting complete collapse of ‘capitalism’. The sadness is that I tend to agree with them, but it is never too late to come to our senses.
Just because the above analysis appears simplistic doesn’t make it untrue. As a well-educated electorate we owe it to our children and their children to seek a government of sufficient insight and strength to begin to tackle the underlying distortions so evident in our societies, to tame global capital, Wall Street and the investment banking industry. When an economy becomes transparent the rampant criminals won’t be able to pull the wool over our collective eyes so easily.
I put it to you that if you are a true humanitarian, who believes in equality of opportunity and outcome, then you owe it to yourselves to seek a government that will really tackle the currently distorted economic landscape and seek a return to open and free markets and honest values, and along the way to tackle the gaping disgrace of private land-ownership by an appropriate land taxation. The power is in your hands.
One target of this post is also to show that an atheist cannot be a socialist in all conscience. But that is a very much more minor goal. I don’t expect you to agree with me, but as the reasonable and rational thinkers that I take atheists to be, I humbly suggest that the all too truncated argument above deserves quiet reflection and a good deal of reading, and this means finding that stillness of mind which is essential for reason to operate properly and creatively.
And, if you have been, thanks for listening.
Stephen Coulson @philositect