June 22, 2009
Exploitation (Part 1)
Posted in Economy, Politics tagged Capital, Capitalism, Communism, Economy, Labor, Profit, Socialism at 3:40 pm by Arlanjio
It is unfortunate that the word exploitation, especially its negative connotation, is often, shall I say, exploited to demonize the very foundation of capitalism, the political-economic system that has brought unprecedented wealth and advance to modern societies.
The classic reasoning is that workers produce the products that capitalists sell for higher prices than what cost them to compensate their laborers. The difference, conventionally called profit, is therefore somehow unjustly extracted from the workers. The same can be said to land-lords who collect rent, or “wealthy” people who collect interests on their deposits. In each case, the capitalist simply extracts benefits without lifting a finger.
While this argument is extremely capable of stirring up emotions of many, entire nations at times, it has a major flaw in that it blatantly disregard a fundamental economic principal: capital, just as any scarce resource, has a cost. No one in his right mind expects the raw material or the capital equipment needed to produce a product to come freely. However, by condemning profit, many in reality, expect the capital to purchase such things and to pay for the labor, before even a penny is made, to be dirt cheap, if not completely free.
What is capital and why does it have a cost? Capital is simply the excess of what people produce. When I receive my pay checks every month, I make sure I have some left-over after spending the money on necessities as well as non-necessities. I put the left-over into a bank or an investment account, and voila, I have just become an evil, wealthy capitalist. The money is used for exactly what was described, generating a profit, rent or interest, without my lifting of a finger.
Capital has a cost because I have a number of choices available for this excess money. Let us look at a simple example. Suppose I have enough money to help a friend who wants to be a handyman. He needs to purchase a few pieces of state-of-the-art tools and thinks he can make a load of money. This is what he thinks, but for me, I run a real risk of losing my money, because the time needed for him to be profitable is going to be longer than the 30-day return period for the tools, and because in order to get the best equipment, he is unwilling to go to cheapo places like Costco which offer a life-time return policy. I have several options with my money:
- Loan the money to my friend. If he succeeds, he may treat me a nice dinner, but if he does not, I will loose all of my money in exchange of possibly a few pieces of tools that I do not know how to use and have no interest of learning,
- Hide the money under my mattress, or better yet, spend part of it to buy a safe and a gun to safeguard the rest,
- Spend the money right away on things I don’t need, or
- Give it to a charity who actually helps poor people.
It is not difficult to see that Options 2, 3, 4, or a combination of them is far more enticing than Option 1, absent a reward for that option, because all others do come with rewards. Safeguarding my money ensures something is available should I lose my job and spending it right away gives me instant gratification. Giving it to charity to help the poor makes me feel good. Of course, helping a friend has a similar effect but what if he is not even a close friend, just a friend’s brother-in-law who I hardly know? Why would I forgo all other rewards and hand my hard-earned money to someone I am not even sure to be reliable? I do not think I am alone, most reasonable people will not do such a thing.
Absent a profit, the incentive of giving away money to purchase capital equipment, things that are necessary before a business can operate on its own, is greatly diminished, if not completely eliminated. Likewise, absent rental income, there will be no incentive of owning and maintaining a secondary property. If not for a promise of at least a potential reward for capital, little capital will exist.
Just a labor commands a cost, so does capital. Without which few people are willing to provide either. Incidentally, when people refuse to pay the proper cost for either, they must resort to force. They enslave others for labor and confiscate others’ properties for capital. The difference is that the latter is often done in the name of some romantically utopian causes, such as sharing, helping the poor, fairness, etc. The sad truth is that many people, even many who enjoy the fruits of capitalism, believes in them.
