The Building Blocks Essays

I greatly fear that my poor prose is inadequate to explain how important the generation of profit (surplus) is, not only to economic growth but to the development of human civilization itself.

The Building Blocks series of essays discuss a vitally important topic that will be the most important issue of the 2020 election (although many people will be unaware of this underlying cause of much heated rhetoric). The progressive left believes profit (or surplus) arises from exploitation and is therefore illegitimate and should be eliminated from the economy (as in their Medicare for All bill currently in Congress). The Building Blocks series of essays discusses why profit is not only vital for economic growth it is also essential to the development of civilization.

Building Blocks -I

July 6, 2018

A recent viewing of the 2016 BBC series on modern geniuses hosted by historian Bettany Hughes that profiled Karl Marx led me to contemplate about the nature of exploitation and surplus.

Marx had a very dim view of surplus. He believed that surplus, which he called capital, was derived from the exploitation of the workers whose physical labor produced all the products necessary for life in the modern world. He even opposed the capital that was used to purchase the great machines that were necessary to create all those products of modern life because those machines were created only to increase productivity (which generates more surplus) and not to improve the lot of the workers.

Marx propounded the Labor Theory of Value wherein the economic value of a good or service was based on the amount of labor necessary to produce the good or service. If the employer of the laborer could increase the economic returns due to the utility of the product (demand) or the scarcity of the product (supply) surplus would be created. The amount of surplus appropriated by the employer was unjustifiable exploitation of the labor of the worker.

Modern progressives carry on this Marxist tradition. They believe that the profit employers and investors receive is not legitimate and is, therefore, subject to expropriation through taxes so that it can be redistributed to deserving workers. In his 2012 hit Shackled and Drawn, famous celebrity .01 percenter Bruce Springsteen sings,

“Freedom, son, is a dirty shirt The sun on my face and my shovel in the dirt A shovel in the dirt keeps the devil gone I woke up this morning shackled and drawn.”

But ditch digging, although it takes a lot of labor, is not highly valued. I am pretty sure that Mr. Springsteen would not want to receive ditch digger wages for his concert performances (he actually made about $60 million last year). Furthermore, I am also pretty sure that, even though his band mates and other workers at the concerts sweated as copiously as Mr. Springsteen, he received the lion’s share of compensation. That’s classic exploitation.

But Karl Marx (and ipso facto Bruce Springsteen) was fundamentally wrong about the nature of surplus. All civilization on this planet is based on surplus. Without surplus we would spend most of our lives searching for berries and running from predators. Let me explain my thinking on this.

Primitive man, except for a few chipped rocks, was little different from the other animals that roamed the forests, plains and savannahs of the pre-historic world. With one exception. Our primitive ancestors learned to talk to each other. Speech not only allowed tribal members to communicate it also allowed one generation to teach the next about the pathways of the forest or the predators of the savannah. All other animals are chained to their instincts. Speech was the tool that created the first form of surplus – knowledge.

But the oral transmission of knowledge is limited. Ancient Greek bards had to perform a prodigious feat of memorization in order to present the 170,000 words of the Iliad to the throngs that gathered to hear the epic poem. But oral transmission is easily corrupted. Writing was developed to facilitate the accurate transmission of information; not of poems but of inventories of agricultural stores in ancient farming communities.

Farming was the next great generator of surplus. By necessity, farmers must generate a surplus to provide food for the winter season and for the planting in the spring. But this level of surplus is insufficient. Granaries must be protected and the weather gods must be appeased so the surplus must be sufficient to feed the soldiers and priests as well as the farmer’s family. And the soldiers and priests needed to make sure the farmer was providing the correct amount of surplus so writing was invented to keep track of the surplus.

The farmer’s surplus allows for the specialization of labor; not just soldiers and priests but also blacksmiths, teamsters and artisans. As surplus grew, more specialization could be supported so that in addition to meeting our material needs we could address our spiritual needs. Poets, artists and musicians are in short supply in primitive subsistence societies that produce little surplus.

The written word (especially after the invention of the printing press) has created a storehouse of knowledge much greater than could be absorbed by any one brain. This surplus of knowledge allows us to build upon the works of earlier scientists to expand our understanding of the physical universe and to create all the technology that makes up our modern world.

Despite Marx’s disdain (as well as that of the progressive left) for money and capital, money is only another tool to manage surplus. It is much easier to pay the soldier guarding the granary in coins instead of giving him a sack of grain and a bushel of vegetables (besides he would probably prefer to take his coins and buy a pint of ale).

It is true that a barter economy can be developed so that exchanges can be made without resorting to money. But bartering is very inefficient and time-consuming. The time and effort put into barter takes away productive time that could be used to create surplus.

Marxian thought rejects innovation and increased productivity because these factors increase the capitalists’ ability to extract more surplus from labor. Socialism seeks to eliminate most surplus from the economic system and what little is left is appropriated by the state for state-sanctioned uses. All productivity growth from surplus in the Soviet Union was dedicated to the military in order keep up with the rapidly growing power of the West (This is the reason why conflict between socialist and free market societies is inevitable - they can't keep up).

Surplus provides the building blocks with which civilization is constructed. You may not like our civilization and wish to tear it down. But you will need surplus to rebuild something to take its place.

Building Blocks - II

July 10, 2018

As I have shown previously (Building Blocks, July 6, 2018) that surplus is an essential building block of civilization. Surplus comes in many forms. It can be food stocks stored for future consumption, it can be seeds saved for the next spring planting, it can be inventories of commodities ready for manufacture or finished products ready for sale. Such products have, however, limited uses. Seeds can be used for consumption or planting but they are ineffective at slaking your thirst. Horseshoes are really only good for shooing horses even though human ingenuity has also been able to convert them into a game.

Agricultural and manufactured products can be sold at market and the surplus inherent in those products converted into money. Money facilitates the transfer and storage of surplus. Many people direct their ire against money in general. But money is just a tool. It was the labor in growing the vegetables or the ingenuity in creating a fabricated product that created the surplus that was converted into money. As the Swiss say, “money has no smell.”

Karl Marx and his followers believe that surplus was derived from the exploitation of workers and, therefore, was evil. Based on this assumption, Marx developed his concept of Communism, an ideology that would eliminate private property and thusly would eliminate the need or desire to exploit workers in order to obtain a surplus. But communism has proven to be exceedingly difficult to implement in the real world. Jozef Stalin and Mao Zedong both failed miserably in their attempts to impose Communism on their recalcitrant populations, killing tens of millions in the process.

Today’s progressives such as Bernie Sanders and Elizabeth Warren are but pale imitators of those Communist tyrants but their thinking and their social democratic beliefs are based on the same Marxian concepts. Just like Stalin and Mao they believe that surplus is evil because it is based on exploitation. The so-called Fight for Fifteen ($15 minimum wage) is based on the Marxian concept of the Labor Theory or Value where it is the labor performed that has value and not the supply or demand of the product.

In this line of thought, any profit or wealth (an accumulation of profits) is evil and unjustifiable. And because such wealth is evil and unjustifiable, progressives believe that the confiscation and appropriation of such wealth is justifiable and good. Clearly this concept should be applied to narcissistic one-percenters, but it would also apply to the equity in your middle-class home, your modest savings account and your 401(k). To Marxian thinking any wealth or surplus is evil. Obviously great wealth represents great evil but even a little wealth or savings is also evil. Confiscatory taxes on wealth and profits are therefor justified not only for paying the costs of government but also for transfer payments to exploited workers and other deserving groups (as determined by the progressives).

In my previous essay, I showed that surplus, however, is not evil. Instead, it is actually essential. Civilization is built on surplus. Not just our Western civilization. All civilizations. Any civilization. Surplus is an essential tool or building block in the construction of a civilization. And just as any tool can be employed for good or evil depending on who wields it, surplus can be used for good or ill. But if surplus is a tool (and not just a tool but an essential tool) then it cannot be inherently evil. It is just part of life.

But if surplus (and thus wealth) is not inherently evil then the progressive justification for confiscatory taxes is false. Confiscatory taxes are not just poor economic policy but, instead, a falsity. And if confiscatory taxes are a falsity, then the imposition of such taxes is, itself, evil.

So we must consider that if surplus is not inherently evil, what valid reasons would justify government to appropriate surplus from the citizens that produced it? The Enlightenment concept of taxes is very different from Marxian dogma. Within the social contract, citizens agree that the government needs funds in order to operate and to pay for the costs of fulfilling its obligations under the social contract. This is the reason why the Articles of Confederation were rejected and the US Constitution ratified.

Government has a role to play in building civilization and appropriates surplus through taxes in order to provide the necessary governance and to promote the general welfare of the country it governs. In the United States we have three levels of government and each has its own role to play in building our civilization and each has certain powers to appropriate surplus to fund its necessary functions.

In the United States, the Constitution defines the powers of the Federal government and how and for what uses it may appropriate the surplus generated by citizens but leaves the citizens of the states and local communities free to choose what the needs of those communities are and how to fund those needs (so long as they do not violate the Constitution). Authoritarian governments such as monarchies, empires, and dictatorships (unlike representative republics such as the United States) simply appropriate surplus by force for any use decided upon by the ruler. Because the Constitution defines the uses for which government can appropriate surplus the likelihood of misappropriation of surplus is much less likely.

It is the obligation of government to assure that the social contract functions for all citizens as the citizens intended. The Constitution is an important part of the social contract but it is not the social contract. The social contract is between the citizens of America and the Constitution is our formal cession of natural rights to the federal government so that it has sufficient powers to enforce the social contract.

The Constitution empowers the federal government to expropriate surplus produced by citizens but only for constitutionally approved uses. The states and local communities have more flexibility in the uses expropriated surplus may be applied to but less power to expropriate. Yet even within these constraints the various government bodies within the United States often waste this treasured surplus or use it inappropriately. Many people think America is going in the wrong direction, which is another way of saying that surplus appropriated by government has not been used to fulfill the obligations of the social contract.

Left-wing economist Joseph Stiglitz in his book, The Price of Inequality(2012), lists many of the failures of the social contract to live up to its obligations to citizens. But in his Marxian malaise he presumes that because surplus is evil that all inequality in the distribution of surplus is “unfair”. Next we will investigate how to differentiate between “fair” and “unfair” surplus.

Building Blocks - Part III

July 17, 2018

As noted previously, Joseph Stiglitz (left-wing economist and Nobel Prize winner) and other progressives delight in pointing out the shortcomings of the American economic and political system. And, in all honesty, they actually have quite a lot of things to point out. The American system is not perfect. No system designed and implemented by humans can be. And there is nothing wrong (and arguably laudable) about pointing out a system’s defects and suggesting remedies and reforms to improve the system’s operation. Unfortunately, because the progressive left, mired in wrong-headed Marxian economic thinking, does not understand what drives the free market economy their recommendations for reform do not address the real problems that affect our political/economic system.

Their list of complaints is long, very long. Inequality is one of their principal bugaboos. In his book, The Price of Inequality (2012), Stiglitz states, “our growing inequality –especially the amounts seized by the upper one percent – is a distinctly American ‘achievement’.” The use of the word “seize” is notable. Seize means to take possession of forcibly (although it has other less apt meanings as well). Stiglitz expounds the Marxist concept that surplus is “seized” through exploitation or other non-legitimate methods. I wonder if Mr. Stiglitz believes that Steve Jobs “seized” his fortune? Or Bill Gates? Or Jeff Bezos? Or the many other inventors and entrepreneurs that make the gadgets and supply the services that make up our modern day life.

It is indeed true that some surplus can be generated by nefarious means. But this unjustifiable and often illegal surplus does not represent all surplus and I believe that it represents a relatively small percentage of the total surplus generated by the free market economic system. The social contract defines the rules by which surplus can be legitimately created and the citizens constitute a government to enforce those rules. Illegal surplus is the surplus generated by violating those rules.

There are three main ways that people and organizations create non-legitimate surplus; monopoly, fraud/theft and capture.

Monopoly is where a person or company controls all of or an overwhelming majority of a product or service. A monopoly gives its owner the ability to control the price of the product or service and to reap excess profit (surplus) because of the lack of competition. Monopoly is illegal in the United States and the government has the power to block or break up attempts at monopoly. There are, of course some exceptions such as copyright laws to protect intellectual property rights and patent protection for newly invented products.

Fraud is where a person or organization attempts to gain excess profits by adulterating the product or service in order to reduce costs compared to the competition's costs. The adulterated products not only are a fraud that deceives consumers but also a danger to the public (such as the case of lead in toys for small children). The theft of intellectual capital allows the thief to avoid the research and development costs needed to create great products (significant because knowledge represents the most important part of our accumulated surplus). Fraudulent actions and thievery to create illegal surplus are subject to criminal as well as civil penalties.

Capture is different than the other abuses to create unjustifiable surplus. Rather than trying to illegally increase prices (monopoly) or reduce costs (fraud/theft), capture is where a person or organization (sometimes an entire industry) try to change the laws such that their efforts to maximize profits does not violate the law (even though they violate the spirit of the social contract).

While the government actively seeks to prevent fraud and monopoly government often colludes with attempts of capture (because it is government that is being captured and the people in the government who benefit). This is the most insidious method of trying to obtain unjustifiable surplus because it becomes engrained into the system and is difficult to root out. At the extreme, citizens will claim, “the system is rigged against us” (because it is).

Many people accuse Wall Street and big corporations of trying to capture government for their own benefit (a 77,000 page tax code is proof of that). But other interests can also attempt to capture government. Unions often use monopolistic practices to try and control the price of labor. America spends more per pupil than any other country on the planet but high priced teachers do not result in better academic results. Unions also try to capture government in order to rewrite the labor laws in their favor.

It is a natural human impulse to try and orient the environment in which you live in your own favor. We have been doing that ever since our prehistoric ancestors wandered the savannahs of Africa. But as long as you play by the rules (and don’t try to tilt the field to your advantage by rewriting the rules) that’s okay. That’s the beauty of the economic freedom available in the American free market economic system. We don’t care about a person’s motives as long as they play by the rules.

People being what they are, the social contract envisioned by Enlightenment philosophers will always be subjected to constant attempts of capture and of people trying to tilt the playing field in their favor. But if people “being what they are” is what makes life in the free market social contract occasionally hard for some; people “being what they are” is what makes socialism so abhorrent. The free market social contract has a tendency toward chaos and needs constant reform to stay on track. Socialism tends toward static order and resists (usually with force) any attempt at change.

The discontent that is running amuck in the United States is evidence that the Enlightenment social contract envisioned by the Founders is not functioning very well. This need is echoed by the progressive left as they shout for more equality but it also reverberates from Trump supporters in their calls to “drain the swamp.” We need reform that addresses the causes of our current problems and not resort to the favorite political choices of paper over the problem, mandate the desired outcome and kick the can down the road.