Prudence has successfully resisted the temptation to counter the many ignorant statements uttered by the impressively ignorant Alexandria Ocasio-Cortez, of late an elected representative in the U. S. House of Representatives. She has a college degree… in economics.
One recent evening she purported to explain – obviously only to those more ignorant than herself – what “capitalism” is. In the process she confused it with “free-market economy,” and then jumped to explaining how one might have a “mixed” economy where the “state” doesn’t own the means of production but “workers’ cooperatives” do. Neither the origins of the means of production that workers’ cooperatives will “own,” nor the means of managing their cooperative labor, were revealed during her explanation.
To the likes of Ms. Cortez the Marxist concept of capitalism is not a solution to the human condition, but the cause of suffering and injustice. Unfortunately, modern capitalists are proving many of Marx’s theories. Thanks to the vapid connivance of ostensibly democratically elected governments (crony-capitalism), international banks virtually direct public policy and national economic decision-making. Most “workers” – wage-earners, are relatively comfortable and not about to revolt against anonymous masters, but not all. The obscene concentrations of economic and productive power run the risk of collapsing the edifices of international capitalism. There’s plenty for social justice warriors to despise.
On the other hand… socialism cannot destroy debt – only productive surplus does and can do that. It is not possible, at least human nature will not allow, a financially complex society to grow without practical amounts of debt. Not to be pejorative, “debt” is merely paying for a product or “good” over time. No, that sounds too simple. “Debt” is only true and practical when a financing agent has judged a borrower likely to pay back the loaned cash with interest, oftentimes with the financier holding a chattel interest in the good for which it has loaned the purchase price, because of two factors: 1) The financed “good,” or product or house or car or medical procedure has sufficient desirability, utility or comfort value for the borrower as to make its value or worth obvious (and its potential loss undesirable enough) and valued by the borrower; and 2) The borrower or beneficiary of the good’s utility or comfort is, by test of available income over time, able to make periodic payments on a timely, contracted (promised) basis.
In the ideal case, then, debt is simply a tool that is “rented,” as it were, the value of which is clear enough to cause timely, interest-bearing, repayment. The manufacturer of the good (debt properly employed should always, as in every single time, be employed to facilitate the transfer of a “hard, or manufactured, good” and not a temporary expense) obtains immediate payment, enabling additional future manufacture, while the customer of the good obtains the use and facility of the good immediately upon need when it may be too costly to afford a single cash exchange for it.
Much is misunderstood about “productive surplus.” It’s “margin,” which is to say, revenue that exceeds the cost of manufacture. “Oh, well, that’s profit for a capitalist,” some will say, “and you shouldn’t “overcharge” poorer customers or else you should share it with your exploited workers.” But margin isn’t simply “profit,” and the “exploited” workers are paid according to their productive capacity and value to the production of the goods the manufacturer makes and sells. Margin provides “working capital;” what does it actually do?
Working capital means cash in the bank, and it serves to improve efficiency within the manufacturer’s operations by enabling investment in better manufacturing equipment, often by being committed to pay off equipment acquisition debt, which shifts that portion of margin to cost-of-goods but which can reduce the costs elsewhere with more productive equipment (which is also a good result for the people who make that new equipment). Working capital enables the company to train its workers to higher skill levels and greater productivity, yielding higher pay. It also enables the company to hire more employees as production increases and, let’s hope, quality and sales also increase.
Productive surplus destroys debt; it’s the only engine that can. In the presence of productive surplus, debt is a useful and valuable tool for growth and for improving overall living standards. But what happens to “profits?”
Profits belong to shareholders, who are, in fact, the owners of the company. Socialists feel as though no one person or small group should “own” a means of production, but that it should automatically “belong to” or be controlled by, the workers, to whom all the profits should be distributed. History, the bane of socialists’ existence, teaches that humans are good at some things, bad at others, and one of those “others” is collective decision-making or, the corollary, collective self-leadership, an oxymoron that socialists insist on believing in. Let’s start at the beginning.
A person has an idea for a widget/product/thingy that other people will want to have because it makes, ummm… it makes baking cakes, breads and muffins easier and more efficient with fewer bad results. The person has no factory but he (let’s say it’s a he) learned in trade school (paid for from taxes that derive from profits) how to work with metal as well as how to apply himself to a problem and how to concentrate and to research the things he doesn’t know. First he figures that being able to have a baking oven that has even, steady heat would lead to uniformly baked goods, so he tries various kinds of pipes and shapes and pressures to provide even gas flames that won’t make hot spots within the oven. Aha! He gets it and finds a way to generate even heat, cobbles together a metal stove and burns his first cake to a crisp, as the whole oven became a hot-spot. Hmmmnn.
Our inventor/entrepreneur realizes he must regulate the heat to achieve one temperature and hold it there within very narrow limits… The process goes on for weeks and months, absorbing every spare hour and weekend until he has a metal box of a specific shape with special gas burners, elaborate temperature sensors and controls, insulation and directions for installation, use and cleaning. But he has just the one. If he sells it for more than it costs to make he’ll have a brief profit but it takes so long for him to make just one that he’ll go hungry before he can get the next pulse of “profits” from selling the second one, assuming that he quits his 9 to 5 job and works on the oven business full time.
He has some savings that he has been slowly accumulating to provide for his family if something happened to him, and he’s been careful to leave them intact. His idea is good and he’s proven that it’s the best oven design potentially on the market. How to get it there? He needs capital, of which he has only a little. He and his wife decide to take the risk, pledging their savings and their house(!) to secure a loan that will allow for several key things needed for producing 10 ovens per week, and selling them, at a margin that will allow for repaying the loan with interest (which employs people at the bank), insuring against the risks and liabilities manufacturers face, making payroll (and benefits!) for the 5 people they must hire to make and market the ovens (including payroll for himself, the owner/inventor, and to invest in an inventory of parts and gizmos needed to assemble ovens such that orders for ovens can be filled promptly. And, oh, yes, they have to lease some suitable – or nearly suitable – space for manufacturing and testing, on which there is a large deposit. Everything is at stake.
With much struggle and worried nights things get done. The first 10 ovens are produced, tested and packaged for shipping. The sales “department” of one former kitchenware sales rep, has secured an order for 4 of them, one of which is to a small mom-and-pop bakery not far away. The owner/inventor goes to their small shop, attached to their house, to oversee installation by the plumber/gas-fitter, and personally teaches the operation to the new owners, who took a risk of buying an expensive new oven based on its description and manufacturer’s test results. They agree to let the inventor/capitalist advertise their success with it – for a fee. It performs as advertised and they start to do more business thanks to the creative new pastries their new oven bakes to perfection (damn those wood-fired stone ovens).
Well, the advertising kicks in and the sales department manages to sell the rest of the first ten and the next ten and things start humming at the “Great Perfection Oven Company.” Soon, a major catalog sales company makes an offer to carry the oven at a discount to them which, if they can prepay for a certain number and sell at least 10 a month, the harried owner/inventor agrees to provide, even though he’ll make less margin per oven. The advantage is that with that new revenue he can afford two more production employees and more leased space and increased advertising. And on it goes…
Within a couple of years he and his wife celebrate the pay-off of the first loan that had put their house and savings at risk. The business has grown to employ 40 employees and a large commercial bakery has approached them with a request for a production-size version of the “Perfection Oven” with its now-patented gas burners (patenting cost over $30,000) and the inventor/owner commences to design just such an oven which will require more manufacturing equipment and changes to one of their production lines… and so on.
Ms. Ocasio-Socialist, do you think he doesn’t “own” this business? He and his wife are the only share-holders. Do you know what else “margin” dollars must do? They have to provide long-term benefits like pension contributions to trusted, valued employees: the ones who help the company succeed and be profitable. They have to create a reserve fund in case other threats to the company materialize, cutting into profits, challenging its patents, creating knock-offs and look-alike ovens that sap Perfection Oven sales and margins, as well as changes in tax laws or state-mandated benefits, paid leave laws and new health-care coverages… not to mention changes in OSHA and EPA regulations that could hamper production or require costly new changes to production facilities, unionization, higher fuel costs for delivery of both raw materials and finished goods (ovens). Lots of future risks that must be insured against, sometimes with simple cash reserves. THEN there are profits.
Ms. Cortez, do you, with your costly economics degree, understand any of this?