On the Social Benefits of Taxation II

On The Social Benefits of Taxation II                                               

Taxation has historically been considered to be a burden on the productive capacity of an economy.  However, it is easy to show that taxation can increase the efficiency of an economy by rendering inefficient producers unprofitable, and so eliminating them.  What is eliminated from a particular market by proper taxation are the most marginal producers, and the least avid consumers.    Under judicious taxation, as a result of this increase in efficiency in the use of resources, the services of government can largely be provided for for free.  That is, resources which would be applied in some inefficient productive process, and so largely wasted, may be applied more efficiently in providing economically useful government services. And many of the services provided by government, by eliminating many of the costs of transaction and overhead that producers would otherwise bear, also act to increase the efficiency of the private productive economy.*  Inadequate taxation, and the necessary reduction in economically useful services purchased with these taxes, far from increasing the competitiveness of an economy, decreases it, and nations with an inadequate public sector are at a competitive disadvantage with respect to foreign producers in countries with more robust public sectors. Further, even with the light tax burden, the citizens of countries with small public sectors are less provided for, and are a greater burden to the industry of that country, than countries with a larger government service sector. 

We show this in Diagram 1.  Where the marginal benefits attained at higher cost are forgone, the resources which would have been spent to obtain those marginal benefits are instead available to be expended more efficiently in other sectors of the economy.

In the diagram, the tax wedge is the difference between the price paid, P’, and the income received by the producer, P*.  The total tax revenue, the pale green block in each market defined by: Q’ x (P’ – P*) is the welfare received by government.  The lower brighter green triangle is the producer surplus; the upper brighter green triangle the consumer surplus. In each particular market, with the application of a tax wedge the ratio of social welfare obtained to costs, that is resources expended, increases from about two to one, roughly the ratio of the all the greenish areas to all the pinkish areas in each market, to almost four to one, the ratio of the solid green areas to the solid pink area. Although we have drawn the diagram for two particular and identically composed markets, it is apparent that for a wide variety of supply and demand diagrams, and thus for a wide variety of economic sectors, the application of a tax wedge will result in a large increase in economic efficiency. By implication, the opportunity costs of the small amount of marginal benefits forgone are huge.  Indeed, we may expect this improvement to be even better than it initially appears, since we would expect the most marginal producers to be those most eager to externalize much of their costs in order to remain competitive.  Pressure to externalize costs is thus also reduced on the more efficient producers. The economic results from failing to apply a tax wedge in a market are, apparently without exception, far inferior

Historically, of course, this relatively small region of forgone welfare has been labeled “deadweight loss,” the "Harperger Triangle," whose existence has been considered a counter-argument to the efficiency and usefulness of taxation. Indeed, the very pejorative “deadweight loss,” has been used by those ideologically opposed to any government intervention in an economy as a justification for their position. However, their argument, and the economics profession as a whole, has totally over-looked the high opportunity costs involved in the creation of these marginal benefits.  Taking these costs into consideration inverts the conclusion:  The gain in freed resources, in almost any reasonable scenario, totally outweighs any gain involved in wastefully spending these resources for these relatively small benefits.  Indeed, in the scale of economic activity, these resources are much more wisely spent elsewhere.  And the tax wedge causes this to happen.  Far from being a burden, taxation in a market, and at what is traditionally considered a rather high level of taxation, can yield much closer to optimal economic results. .

I leave it to those ideologically opposed to government intervention to find those exceptions. I do observe that the apparent requirement for monotonicity in the supply and demand curves would seem to make finding these exceptions difficult. 

One interesting argument, though, which remains, is the argument from liberty.  This argument would seem to suggest that the wanton destruction of scarce resources is, somehow, ‘liberating.’ Indeed, we might almost define a wealthy individual as a person who has the power to inefficiently consume and waste and destroy large quantities of such resources. Indeed, the production of costly rich boy toys, of little to no benefit to the rest of society, can be considered a "Harberger Triangle" which could, and should, be taxed away. (Even the game Monopoly(TM) has a "Luxury Tax," though totally inadequate to the needs of its little society.)

The 'argument from liberty' would seem, for example, to be the argument against higher gasoline taxes in the United States. The case shown here is that a higher gasoline tax, with money more efficiently spent on public transit, would free up resources for everyone, as the European experience seems to show.  And in the US, the situation is even worse, since the production of oil and oil products is subsidized, and the price kept depressed.  The reality is, however, that the production of real resources cannot be subsidized.  While the notional price may be kept down, this can only be done by higher taxes on the real value of other economic necessities.

This is simple physics. And by the triangle inequality, such taxation of one necessity to subsidize the production of another has its own cost, and the net result is a reduction in the total real value of resources available to society.  Society is the poorer as a result.

There does remain the issue of determining the balance between efficiency and quantity of production in any particular market required for the proper functioning of an economy.  Considerations of scale indicate that, contrary to what is shown in the diagrams, the first unit of anything is seldom the most efficiently produced.  Rather, there is an optimum scale of production, that which minimizes the average cost, (This ignores issues of demand.) and we must consider this to be true for an entire economy as well as for a particular production process.  While with this consideration the improvement in economic efficiency would not be as great, it must still be expected to be impressive.

Further, it should be easier to tax economic wants as opposed to economic needs.  (Although see problem three, below.) A more efficient economy, however, needs less, and is more capable of servicing wants.  

 “Deadweight loss” is also found in other market situations.  It would seem that, at the least, these other situations also need to be re-examined.

For example, the most marginal producers and the least avid consumers in a particular market can also be eliminated when the costs of production are increased by the costs of meeting a regulation. (It is cheaper just to make the cost of not doing nasty things marginally cheaper.  The nasty thing tax will restrict supply of benefits by forcing the internalization of costs. We accepted the pollution of our wor(ld)k for the individual benefits they provided. But with great inequality, for most of society (>85%) the benefits of for the individual outweigh the costs to societ(ies)y (value to the individual) (benefits)These kinds of regulation also can increase economic efficiency.  Unlike the cost to the producer imposed by a tax, however, the government does not directly recover the costs imposed by such regulation. These costs are instead spent meeting the requirements of the regulation. In Diagram 2, P* is the price retained by the producer, which is the price P’ paid by the consumer, minus the cost to the producer of meeting the regulation.

Instead of the tax wedge, we have the revenue in the area Q’ x (P’ – P*), revenue which with a tax wedge would be going to the government, going instead to pay for meeting the regulation.  The benefits are reaped by other sectors of society. A regulation against pollution, for instance, benefits the consumers of an otherwise contaminated resource.  As such, it essentially represents a rightward shift in the supply curve for this resource.  (Similarly, an increase in pollution of a resource represents a leftward shift in the supply curve of that resource.)   This increase in economic efficiency does provide compensation to the economy at large for the cost of the regulation. 

Further, the purpose of regulation is to attain some benefit for the economy which cannot be captured in some unregulated market, and which is presumably greater than the cost of the regulation.  While one might hope, and expect, that the benefit to society of the regulation would be at least equal to its cost, it can be seen that, because of the increase in economic efficiency, society can gain even when the direct benefits from the regulation are substantially lower than its cost to the producer.  (For the same reason, although one can hope, and the government should of course try, to make sure that the direct benefits to society of its expenditures are equal to the costs, even when the direct benefits of government expenditure are below their costs, there can still be a net gain to society, if these resources are not too thoroughly wasted.)  Certainly, in the provisioning of an economy’s necessities, the inefficient application of scarce resources may be necessary. However, even in these situations, alternative and more efficient means of supply may be found.   

Interestingly, however, applying a tax wedge, or imposing regulation, or other forms of government intervention, such as price ceilings or price floors, are not the only ways to increase economic efficiency.  Monopolies also eliminate much inefficient production of goods and services, as shown.

Monopolies produce at quantity Q_M, (Diagram 3) the quantity where the increase in cost for producing another unit equals the increase in revenue for selling another unit.

 This quantity maximizes their profit.  (This is different from a competitive market, where the sum of production of all firms would be where the Marginal Cost, or the Supply curve, intersects the Demand curve.) With monopoly, the striped areas are the costs (Red striped) and benefits (Green striped) forgone by society. These resources which would otherwise be consumed, these costs, may be more efficiently applied to other sectors of the economy. The solid areas are costs borne (Red) and benefits provided (the Greens) under monopoly.  The light green regions are monopoly profits which, since a monopoly is a part of society, does count as an increase in social welfare. We may expect something similar with monopsonies, and to a somewhat lesser extent, with oligopolies, and oligopsonies. With oligopolies and oligopsonies, we would expect a greater elimination of inefficient production when they are collusive, and a less but a still significant degree of elimination when they are competitive. With oligopolies, although some inefficient producers may be protected because of the higher prices resulting from the reduced quantity produced, (See: anamecon.blogspot.com/2012/02/oligopoly-and-economy.html) a reduced quantity is produced, and those firms which remain in production limit their production to their most efficient processes. The so called deadweight region of forgone costs and forgone production lies between the kink in the demand curve, the equilibrium point for oligopolistic producers, and what would be the competitive equilibrium which would result from the production of many small firms. 

To return to monopolies, the great majority of benefits accrue to the owners of the monopoly, typically a small minority of the members of society.  The consumer benefits, on the other hand, are much less, and much reduced from the competitive case. Indeed, by comparing the tax wedge in a competitive market with the monopoly case, we find the social welfare under monopolies is exactly the same as social welfare under a government tax wedge, where the wedge is such that the marginal cost to producers equals their marginal revenue.  The competitive case results in a more equitable distribution of benefits between consumers and producers. Of course, consumer benefits per se are also much less under taxation, the same as under monopoly, and the producer surplus much less. However, the government spreads much of its income widely. It is, in its way, both a consumer and a producer. It re-distributes consumption, and capitalizes production, both directly, through capital investments, and indirectly, through subsidy of production, and creation and maintenance of infrastructure. And all of its expenditure, purported to be for the public benefit, does, one way or another, enrich various sectors of the economy.

One problem with the tax wedge, however, because it favors the more efficient producers, it also favors the economic drift toward concentration of ownership, and the creation of oligopolies and eventually monopolies. Narrowly held monopolies cannot be expected to spread their profits.  Neither can monopolists be expected to spend their profits to provide services which increase the efficiency of the larger economy.   Monopolies once formed, and where not widely owned, further to aggravate the natural tendency of economies to concentrate wealth and power, a concentration which leads to economic instability and collapse. This is especially so because the power concentrated in monopolies tends to translate into political power.  And the monopolist must be expected to use this power to further his power, mitigating the impact of the tax wedge on his revenue.  

A second problem is that producers which escape taxation will eventually displace those producers which are subject to taxation. The result will be a reduction in both taxes collected and in economic efficiency.  This problem must be considered especially acute in open economies, where tax paying domestic producers can be expected to be displaced by non-taxpaying (and hence often less efficient) foreign producers.  The interesting implication here is that, while a nation’s economy may be producing less and consuming more, as an increased share of what is consumed is imported, (much of what is considered production actually either enables consumption, or is a form of consumption,) that economy need not be any better off for this increase in consumption.  Because of the decrease in economic efficiency, fewer consumables will be efficiently used, and more of this consumption will be squandered.

A third problem is, of course, the politics of taxation.  Nobody likes to be taxed, and the powerful, more than others, are capable of avoiding it. (This also bears on the second problem.) This first suggests that the markets which serve the wealthy will be the least efficient, even though these are the markets where an economy can most easily bear the loss of marginal producers.  (Marginal producers may be needed in the production of an economy’s necessities.)  And this further suggests that a disproportionate share of an economy will be dedicated to servicing the wealthy, even at the expenses of the necessities of that economy, such as maintenance of infrastructure.  A recent study has shown(1), for instance, that in the United States today, no policies are enacted by the government which are not also approved by the wealthy elite.  An implication of this is that the tax burden upon this elite can only be expected to diminish, and thus that the burden of taxation on the rest of economy and the population can only increase.**

One final consideration.  As an economy increases in efficiency, it inherently becomes less stable, and more vulnerable to collapse. An efficient economy becomes dependent on its efficiency in order to be productive enough to sustain itself.  The greater the efficiency, the greater its dependence.  A reduction in efficiency will result in a reduction of production, perhaps sufficient enough that that economy can no longer sustain itself. 

A particular consideration regarding improvements in efficiency brought about by regulation and the tax wedge, where these increases in efficiency are already established, is that removing or even merely reducing these factors will result in a reduction of that efficiency, and a resulting reduction in the productive capacity of that economy.  That economy may no longer be able to sustain itself. With a critical reduction in production, cascades may result, and the possibility of sectoral and even general collapse.  Great care, therefore, should be exercised in the reduction of the size of tax wedges, or the elimination of any regulation. 

*Efficiency is a multiplicative factor in production, not an additive one. Although unlike thermodynamic efficiency, economic efficiency may be greater than 1, it is also subject to diminishing returns, at least where matters of the production of real goods and services are concerned.

**This statement assumes that the wealthy are actually taxed at all, which my studies indicate is not, in any real sense, the case. Taxation of the wealthy is merely nominal.  Real taxation of the wealthy is only against their future consumption, a future which, for almost all of the wealthy, is ever receding.  However, a merely nominal rate of taxation is not without real consequences for an economy.

(1)Testing Theories of American Politics:  Elites, Interest Groups, and Average Citizens   Martin Gilens and Benjamin I. Page  https://scholar.princeton.edu/sites/default/files/mgilens/files/gilens_and_page_2014_-testing_theories_of_american_politics.doc.pdf

The Evolution of Power and Society in Late Capitalism

Power is the ability to impose consequences, on the world, and on people. It is the ability to impose positive consequences, or negative consequences. Usually, these consist of rewards, for behavior pleasing to the powerful, or punishments, for behavior displeasing to the powerful. Of course, consequences may also be applied arbitrarily, but this wastes power. Power may also be applied inefficiently, which is also wasteful of power.  

In today’s world, the wealthy and many political leaders have the most power, and thus the ability to impose the most consequence.  The power of other institutions to influence the evolution of society and the economy has been significantly reduced.  While there are also other indicators of this, the reduced influence of these institutions can be seen in the combination of diminished material income, and increased dependency upon capital for such income as they retain. 

In a democracy, political leaders are expected to represent the will of people, and the interest of the people and the wealthy do not coincide. While both the wealthy and the people desire order and security, the wealthy and the people are always in competition for wealth and power. Since the people are dispersed, and the difference between what they have and what they need is less, unless they unite in will and action, they are at a decisive disadvantage to wealth.  The most important and unified instrument of the will and action of the people is their government.  Where the government is the strongest and most coherent agent of the wealth and power of the people, the wealthy will always seek to overcome, corrupt and capture it, that they may use it to help gather the wealth and power of the people to themselves.  On the other hand, seldom does an established government seek to take the wealth and power of the wealthy from them, since these tend to be regarded by the government and the people as legitimately acquired, and generally supposed to be applied to the benefit of the people.   

The wealthy are not monolithic.  However, they all share the same desire to enhance their own personal wealth.  While some are less principled in seeking and achieving this goal than others, none is so principled as to willingly give any substantial portion of his wealth and income to the people.  And so, few can afford to allow the unprincipled behavior of other wealthy to go without answer. Where some of wealthy still act as a check of the unprincipled behavior of other wealthy, the efforts of the wealthy to seize control of the government may be mitigated.  However, where the rewards for unprincipled behavior become substantially greater than the rewards for more responsible behavior, the ability and inclination of those wealthy who might be regarded as responsible, must be expected to decrease.   The pressure on the government to first pass laws and adopt policies allowing for its corruption, and then laws which further its corruption, thus increases, along with the degree of control of the government by the wealthy.  Efforts to oppose this process by interest groups from among the people are also increasingly repressed.     It should be noted that the effective transfer of control of government is an enormous transfer of wealth and power from the people to the wealthy, a transfer which usually goes unremarked. 

 As wealth becomes concentrated, and its influence on politics increases, the political leaders lose effective power, however, and become mere agents of the wealthy in the application of their power.  As this happens, political leaders, through the government, increasingly impose the will of the wealthy upon the people, whose interests they, and the government no longer represent.  Interestingly, even those interests the people once had in common with the wealthy, order and security, no longer completely serve the people, since they now also serve to enable the oppression of the people by the wealthy.  Once their government is captive of the wealthy, so long as the people are orderly and seek security, the wealthy and their captive government, through commerce and law, will strip the people of their property and rights. In this respect, an important instrument of positive power becomes degraded, as the people increasingly perceive their desires for order and security to be in, the net, harmful to themselves. 

In theory, of course, in a democracy, political leaders never ‘had power,’ as they were expected to be agents of the people, in transmitting and executing their will. However, the ability of the people to control these agents, that is the power of the people over them, was always limited.  The people were always limited in how and how much they could reward their representatives.  While they could offer rewards besides the material, those material rewards they could offer were in principle limited. Further, the perceived value of these non-material rewards were always under attack by the wealthy. And in general the people could only punish their representatives by not re-electing them to their office. The people were also limited in their ability to acquire information about many of the actions of their representatives.   For these reasons, and also because there were often a variety of ways to accomplish goals, political leaders always possessed a certain amount of discretion.  That is, a certain amount of their power actually originated from their own office.  Where, however, they are ‘elected’ by the wealthy, the wealthy have much more control over them, being able to both reward and punish them more, and also being more informed as to their actions, so most of this discretion is absent. (Because the wealthy are able supply greater reward, the expectation of that reward is higher.  Thus the punishment associated with the withdrawal of that reward would be greater.) Because of this, an ‘elected’ government can be expected to become a more effective agent of the wealthy than it ever was of the people.  Since the rewards to politicians change, we would expect the people who choose to become politicians to change, also.  We would expect them to become more self interested, and less public spirited.  We would also expect them to become more authoritarian and dogmatic, and less authoritative and pragmatic.  We would also expect them to be more sectarian and divisive, and less inclusive and unifying. 

We would expect them to identify with and seek to emulate their wealthy patrons, and devalue the rest of the population, especially the poor and other groups whose interests diverge from those of their patrons. Indeed, we would expect many to become wealthy themselves. However, so far as they must maintain the appearance of serving the interests of the people, they may be expected to engage in tactics which enable this.  Since their actions no longer serve the people, but favor the wealthy, those actions must be hidden from the people and obscured.  The people must be misled, and distracted by other activities which are irrelevant to the projects of the wealthy.  In particular the wealthy are indifferent to the divisions of the people, Yet, because these divisions are a powerful distraction to the people, the wealthy are prepared to exploit and aggravate them.

In this they are aided so far as the wealthy control the media. The media serves its owners. As society is segmented, so too is the media. Through the media the attention of the people is channeled, directed, and to a large extent, molded. The real actions of the wealthy and their servants in government, and the consequences of those actions, are downplayed or even ignored.  The importance of events which distract the people is exaggerated and those events dwelt upon. The information provided by the media increasingly diverges from reality, and action based on that divergence becomes counterproductive.  However, the information provided by the media is also what the wealthy wants the people to hear.   The wealthy are aware of this process.  It is circular,  and insofar as it progresses, it is perceived by the wealthy, and at some level at to some extent perceived by the people themselves, to render the people unfit for self-government, and requiring outside control of their activities.  It is this self-perception which renders the police state increasingly palatable to the people.  It is, however, not because they see themselves as requiring greater external restraint, but because they see their neighbors as requiring greater external restraint.  This heightened level of fear also increases the motivation in the individual to arm himself.      

Different segments of society become aware of the unresponsiveness and even the oppressive nature of their government at different times. Those people long at the bottom of the economic ladder do not notice, since they are most disadvantaged in any society. However, as society is plundered, each level of society plunders the levels below it.  Awareness thus tends to progress up the economic scale, but may be uneven, depending on the institutional  and economic relationships between the levels.  This awareness erodes the belief in the legitimacy of the government by the people.

So wealth, or capital, has power so far as it is able to impose both positive and negative consequences on labor and consumers. It gives rewards to labor through increases in wages and grants of authority, and punishes labor by discharging it, or laying it off.  (Of course, capital does not always interpret its own actions this way.)     However, as society becomes increasingly unequal, the ability of the wealthy to impose positive consequences decreases,  This because the rewards to labor that the wealthy bestow come from the income consumers spend on goods and services, and this income is decreasing as the wealthy increase their share of both that income and the wealth that comes from accumulating it. Indeed, this quantity can only decrease, unless compensated for by a greater rate of growth, or transfer of income from the wealthy to the worker.  This transfer, however, is contrary to the goal of the wealthy, which is an ever increasing stream of income to themselves. 

The reward the wealthy offer to labor of accumulated wealth is decreasing, and the income from that wealth also.  And, in its reduction of everything to material worth, the intrinsic value of labor, of work for works sake, is also devalued.  The wealthy see actual work as degrading, and this is eventually understood by labor; that laborers are regarded as fools, a vision that is reinforced by the abstract forms that work takes among the wealthy, and the disproportionate rewards the give to themselves and each other for such work as they do perform.

This means the wealthy must increasingly rely on negative consequences to exert their power. In particular, they must increasingly use force to contain and restrain the activities of labor.  Further, these negative consequences must continually escalate, to compensate for the negative consequences of the diminishing reward schedule given labor. 

It is intrinsic to capital and the wealthy that they devalue the other rewards that a society has to offer its members, since this relatively enhances the value of the rewards they offer society, and so enhances their power. They do this through their control of the media, through their control of government, and directly by how they invest their capital. (And of course, they also spend resources exaggerating the value of the rewards, and diminishing the apparent costs of those rewards, that they offer.)  It is necessarily part of their strategy to corrupt and co-opt the social, intellectual, and spiritual institutions that otherwise would provide these rewards, and which otherwise might provide a countervailing authority to their exercise of power.  Doing so, they necessarily corrupt and devalue the rewards that these institutions themselves provide.  But this process is part and parcel of capital’s decapitalization and plundering of society.  All institutions require both wealth and income to sustain themselves.  Where the wealth and income of these institutions can remain independent of capital, they can remain an independent and countervailing force.  Therefore, capital seeks to both erode and co-opt the sources of wealth and income that support these institutions.  Once the sources of wealth and income of these opposing institutions are co-opted, they may be withdrawn, and the institutions destroyed. Institutions that are dependent on income from the government, thus become vulnerable when the wealthy gain effective control of that government.  Indeed, it is evidence of capital’s control of government that they are able to do this.  And even where these institutions are not destroyed, they will be rendered compliant to the interests of capital, since the only other source of income is increasingly capital itself. 

 Further evidence of the control of the government by capital is that the government is set to tasks which, while beneficial to the wealthy, are either of no benefit to the people, or damaging to the wealth and income of the people.  Further, tasks which might be beneficial to the people are attacked and diminished, especially if they cost the wealthy income.    Most importantly, while war may be beneficial to the people, despite its costs to the people, and on occasion also be necessary, war need not be either of these.  However, whether or not war is either beneficial to the people or necessary, it is always a great source of profit to the wealthy.  When war is fought for profit, however, its goal is not victory, but perpetuation, and the maximization of that profit.  Since without victory, there can be no profit from the capture of foreign resources, all profit must be taken from the people.  What also must be taken from the people is the stream of resources from which that profit is derived.  These resources could otherwise be spent to the benefit of the people, and instead are effectively destroyed.  

So, the question arises, why hasn’t capital captured the government before now?

The first reason is the fact that the activities of government are, of themselves, not particularly profitable.  This is because, ordinarily, the discount rate for government investment is much lower than that of private capital.  One could say that, ideally, and in the limit, government is in the business of the preservation of resources, and the discount rate goes to zero.  Thus, a government responsive to the needs of its society will maintain its infrastructure.  When government is captured by capital, however, the discount rate goes up, public assets are sold at a discount, and infrastructure is allowed to decay. (The discount rate goes up because capital is effectively taking its profits from government in reduced taxation.) The second reason is that it is often much more difficult for a private entity to capture the return on these kinds of investments, than it is for the larger society.  (For these reasons together, education tends to be relegated to the public sphere.)

So taken together, these reasons imply that ordinarily capital will seek greater profits elsewhere.  And as long as it can do so, that is where its efforts will lie.  And as long as it has access to an expanding base of resources, capital will remain dispersed. That is, as long as access to resources expanded faster than the profit rate, capital would remain dispersed. But in recent times, this has ceased to happen, and return to real capital has declined.

However, the acquisition of resources and their modification and distribution throughout society, the provisioning of society, is merely an instrument to capital’s actual goal of acquiring a society’s wealth through ever greater monetary profits. Where greater profit can be obtained through manipulation of an economy, rather than providing for it, this is where capital will next turn.  Since this is process is essentially the wealthy transferring assets from the people to themselves without any substantial compensation, it can be expected to be resisted by the government. Thus, the government must be captured by the wealthy before it can be done efficiently.

  And the final reason that we haven't previously observed capital to capture the government is that one of the most important activities of government is to counterbalance the accumulation and concentration of profit in society. The government must distribute final demand throughout the economy, in order to sustain the people and their institutions.  When government ceases to do this, the ability of the people and their institutions to sustain themselves collapses. So the final reason is that no society long survives the capture of its government by the wealthy. 

The Economic Consequences of Self-Interested Capitalism

We like to think of capitalism as an economic system different in kind, and not just degree.  It does seem to be the most efficient system to exploit its environment ever designed.  And we can conclude this because capitalism has driven its less efficient competitors out of business.

But what is capitalism’s environment?  Capitalism’s environment is two fold:  First is the physical environment.  Capitalism’s original reason was to more efficiently, and at greater scale, harvest and exploit the resources society needed from the physical environment, and provide them to society, and in a greater abundance and at a lower cost than ever before.  And this it did.

But the rest of capitalism’s environment is that same society and economy for which it provided, and still provides, and processes, resources.  However, it is becoming more difficult to extract resources from nature, and produce real goods for society.  The costs are higher.  The increase in costs is greater than the increase in society’s ability to pay, with its current infrastructure.  This means it is increasingly more difficult to extract profits.

But clearly, the capitalist will seek to go to where the profit is greatest.  When the profit is greatest exploiting the environment, by providing things society needs or wants, that is where the capitalist will go

.  

But if the capitalist can gain a greater profit, the capitalist can be expected to do what is necessary to do so, if society is not effective in preventing him from doing this. For instance, if the capitalist can effectively reduce his costs by damaging the rest of society, he must be expected to do so.  Under these circumstances, we must expect him to damage society, because the sole duty of the capitalist is to enhance and maximize his own profits.  (We address Milton Freidman’s discussion of this for corporations at: http://anamecon.blogspot.com/2012/06/milton-friedman-social-responsibility.html

 The human motivating force for capitalism is not so often discussed:  It is acting according to a narrowly defined self-interest, one that excludes the interests of any larger society.)   The first is by externalizing some of the cost of producing real benefits, real goods or services, to society. For instance, one way is by discharging pollution from the production of goods or services into the environment, and not cleaning up this pollution for society, or compensating society for the damage this pollution inflicts upon it.  Also, the capitalist may manipulate government to subsidize his production, so more is produced at greater cost and at greater profit to him than is beneficial to society. The capitalist, should either opportunity arise, must also be expected to enhance his profits through monopoly or monopsony, at the expense of the larger society.

When, however, the profit is greatest exploiting society directly, that is what the capitalist can be expected to do.  Since in the process of exploiting society directly, nothing is actually produced, these methods are all aimed at manipulating demand, with the goal of maximizing one’s own share of demand, and minimizing the share of others. 

Obviously the activity of thieves does not benefit society.  They transfer demand from others, others who are often productive individuals, to themselves, who are not productive individuals, and often to the extent of damaging the productivity of the individuals they steal from.  Where theft is made legal, as through allowing and even encouraging manipulative finance, it must be expected to proceed and grow apace. Consider the selling of credit default swaps, capital appreciation bonds to municipalities, leveraged buy-outs, and other malfeasances of Wall Street and the banking sector.

Resources are expended in this process, and indeed destroyed.  This is a consequence of the nature of debt, which can only, in real terms, be repaid by productive individuals and companies.  It is thus, in the net, the laying of debt on the productive sectors of an economy.  This hampers them, reduces their profitability, and discourages investment in them, and in consequence encouraging ‘investment,’ that is the transferring of demand, to the non-productive sectors of the economy.

Clearly, this process is destructive of the economy.  As real production is increasingly replaced by fictitious ‘production,’ we should expect the economy to be less and less capable of maintaining itself.  This would first be compensated for by importing increasing quantities of goods and material factors of production.  However, we should expect increasing poverty, decreasing investment in the real economy and infrastructure, decreasing market for real production, and eventual economic collapse.

Things are Worse than they Look

Here are a couple of neat pointers: The first goes to a article at a good blog, which points to an interactive feature at the EPI (Economic Policy Institute) website.

http://crookedtimber.org/2011/02/10/income-growth-shares-over-time/

A commenter at CT links to:

http://www.youtube.com/watch?v=akVL7QY0S8A

a lecture by Elizabeth Warren titled: “The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards, and a Shrinking Safety Net.” This is a good and informative lecture. Well worth the time.