Thought Experiment 1 - Do Capitalists Oppress Workers?
Updated: Oct 28, 2020
People are confused about what ‘capital’ is? The Austrian School economists explain how it necessarily equals savings. Some people consume less of than their incomes.
People are confused about what ‘capital’ is? The Austrian School economists explain how it necessarily equals savings. Some people consume less of than their incomes. The resulting money savings become ‘financial capital’ – bonds, loans, shares. Financial capital is a claim on the corresponding ‘physical capital’ - factories, offices, machinery, docks and railways, communications networks etc. - created with those savings. Like everything in a free society, voluntary exchange between providers of capital (savers, investors and business managers) and providers of labour (employees high and low) tends towards being the best deals available to both parties.
In peddling their anti-business prejudices, Marx and Keynes resolutely overlooked the starkly obvious fact that voluntary co-operation between ‘capitalists’, essentially savers and investors, and ‘labour’ had raised wages in Britain far above wages in other countries.
Keynes was an inflationist crank and (but I repeat myself) an ‘intellectual yet idiot’ in Nicholas Taleb’s wonderful phrase (see ‘Skin in the Game’, ‘Fooled by Randomness’ and ‘The Black Swan’). Keynes came up with the ‘Paradox of Thrift’ where he purports to believe that savings simply take consumer ‘demand’ out of the economy and so cause unemployment. However, investment ‘demand’ also creates employment. And Keynes does know that savings and investment are basically two sides of the same coin. He says so in some chapters of his 1936 ‘General Theory’, and then contradicts himself in others. (For a chapter by chapter demolition of that useless book see Hazlitt’s ‘The Failure of the New Economics’).
Keynes is just a sub-Marxist scribbler with ‘savers’ rather than ‘capitalists’ as the alleged ‘oppressors’. He sought the ‘euthanasia of the rentier’ (i.e. he wanted to eliminate those who live by employing capital rather than labour). He gave vote buying politicians everywhere the green light to attack the foundations of prosperity through taxation (‘theft’) and deliberate undermining of money purchasing power (‘inflation’). The result is the mess we see now and the bigger mess we are about to see. We are living in unnecessarily fragile, impoverished societies on the edge of depression and monetary collapse.
I propose the thought experiment below about the true nature of savings and ‘financial capital . Contrary to Keynes’s views savings have an indispensable role in promoting prosperity. More savings mean more prosperity and employment not less as Keynes averred. I hope it will be instructive and entertaining:
Imagine a world with two islands. Festooned about the beaches of both islands happen to be bits of wood which could be converted with 60 days labour by the whole population into a crude boat. This fact is however of no apparent use to anyone and so hasn’t even been discovered. The islands are unaware of each other’s existence.
One warm but unlucky island – which we will call ‘Latin America’ – has a population which lives on coconuts. If everybody collects coconuts using every available hour, then all have just enough to live for another day. In the last seconds as they drift off into weary sleep the inhabitants vaguely dream of having time ‘one day’ to kick a ball around with friends.
The second more fortunate if chillier island – which could be ‘Britain’ - has a population which lives wholly on dried fish netted near the shore. If everybody works only half of all available hours then they have enough to eat. The remaining leisure hours of the day are devoted to a rich cultural life. The island has formalized kicking a leather ball around with friends into a ‘Sport’. There is a league of teams which play regularly. Most people spend their leisure time discussing the essentially random results of these football matches.
Anyway, time passes and, as in most of history, nothing happens. Then by chance a Briton messing around on a flat piece of wood in the waves is seized by a great storm and blown away to the island of Latin America. Even more improbable, he makes it back to Britain. Perhaps history is so long just to let rare, random events move things forward.
Our accidental tourist returns to a hero’s welcome. He explains how he really had deduced the existence of another island all along. He is promptly knighted, awarded a lifetime supply of dried fish, and forgotten. He returns to the beach determined to tie the next conveniently flat piece of wood he finds to his ankle so as not to lose it.
Meanwhile, however, the inhabitants of both islands now have new information, as follows: There is another island in the world. It produces different food. The people in both islands could vary their dreadful diets by voluntarily exchanging food. But you need a boat.
Both populations suddenly value boat building knowledge. Newly motivated enquiry reveals hitherto worthless and so unresearched knowledge. The logs inconveniently strewn on the beach may be converted into boats and so may not be rubbish after all. Let’s consider the case of the island of the ‘Latin Americans’. They decide to build a boat. Here’s the question:
How long will it take for the ‘Latin Americans’ to build a boat?
Surely 60 days, you say, if they all work on the boat every available hour. Nope. They will never build it. They are fine fellows. They are not lazy. On the contrary they must work all day to stay alive unlike the sports mad Brits. But that’s the problem. They have no savings. There is no accumulated reserve of consumables, in this case coconuts, to sustain them in their work for the sixty days.
Nor can they save a new store of coconuts. They still need to spend every hour gathering coconuts just to live. Savings or ‘financial capital’ is simply a reserve or store of consumables allowing men to work on investment projects (making ‘physical capital’) like the boat. It’s not their fault they are too poor to save. But they therefore cannot build productive ‘physical capital’ to improve their lives. They can never attempt any improvement (‘physical capital’) no matter how promising, unless they find outside savers willing to loan them consumables – i.e. ‘financial capital’.
How long will it take for the ‘British’ to build a boat?
Well the feckless Brits have no savings either. They only do the minimum half day of work needed to sustain themselves. But they are bored by a fish only diet and they crave coconuts. They are, crucially, also able to increase output by working more and talking about football less. They can save the extra production. And they hope coconuts might be convertible into alcohol. Therefore, spurred into action, the Brits agree to make a boat. Half of them agree to double their fish output by working full time to feed both themselves and the other half. The other half in return for their daily fish agree to build the boat.
The fishermen will be saving half of their new, higher output of dried fish (a heroic 50% savings rate!) and investing it directly into the bellies of their boat building neighbours. Please note that ‘savings’, i.e. fish which is not immediately consumed by the fishermen, is the same amount as fish ‘investment’ in feeding the boat builders. A huge savings effort has enabled much more employment - everyone has doubled their work hours. By the way at no point do these magnificent savings lead the island of Britain to suffer a Keynesian slump, contrary to his nonsensical ‘paradox of thrift’ notion.
Back to the boat yard. The Brits will take at least 120 days to build the boat. That is 120 days food production multiplied by half (half a day is spent on the boat and half on fishing) to allow = 60 days of food saved and invested in boat building work.
Now the Brits use the new boat to open trade. They are willing to exchange fish for coconuts at a rate somewhat advantageous to the Latin-American islanders to secure the deal. Both populations return to nearly their previous work habits. They are both now able to eat fish and coconuts. Both countries also have plenty of arrack, an alcoholic drink made from coconuts by the dipsomaniac Brits. Equally importantly the Latin Americans can now meet their needs and still have one hour of leisure a day. Which they use to get much better at football than the Brits.
So, what has happened overall? Well people in Britain who can save have indeed worked extra in order to save, thereby accumulating ‘financial capital’, i.e. a sum of consumables in the form of dried fish. This has sustained labour (employment), enabling it to build ‘physical capital’, i.e. a boat. Mutually beneficial trade has become possible. This helps everyone really enjoy a shared football culture with an inter-island championship, which Britain never wins. Everyone is better off than they were through some people’s willingness to make a voluntary saving effort. Nobody is being exploited. It’s all consensual exchange and trading.
I am not saying everyone is equally better off. That is impossible to achieve, or indeed to know, since all value is subjective in the mind of each individual, and changeable.
However, on Latin America island the inhabitants finally have a little leisure. For the first time, ever, they could decide to work more in order to save. They could accumulate financial capital (saved coconuts) and build productive physical capital (coconut harvesting machines?). They could set out on the laborious road taken by Britain to prosperity.
Or they could just play football instead. They could rely on the British islanders continuing to work in Britain to save and to invest in their island. Latin American islanders’ wages and leisure would still increase as investment increases productivity. But they will have no just grounds for complaining that it is not fair that savers in Britain happen to own all their island’s productive physical capital.