Ever commit yourself to something and then regret it? Im starting to feel that way about this blog post. I realized something, you see, for whatever thats worth, and I thought I might share it. But in order to explain it I first have to go over basic economic theory. Only, some people who are close to me in their politics have a very different economic theory, which doesnt yield the same insight. So I have to start by explaining the two theories and why I think the first one has more explanatory power, and then I have to show that, although politics like ours traditionally uses the second theory, it doesnt need it. I would rather just skip ahead and tell you my idea, but it doesnt make sense if you havent sat through a few economics lectures. So here goes.
Where does profit come from? Capitalist economists explain with the trade theory. Suppose your old car is getting elderly and taking up space in your garage. You reckon that if someone nicked it youd only be down $2500 all told. At the same time, I need a car for my work, doesnt have to be flash or new, but I figure even an old banger will easily net me $4000 with the use I can make of it. So I offer you $3000, which is $1000 less than what Im expecting to gain. You take it, because thats $500 more than the car is now worth to you. This is whats called a positive-sum interaction. You gain $500 in cash, and I gain $1000 worth of car. A total of $1500 has appeared out of nowhere. This $1500 is surplus value.
Economists apply this theory to all kinds of transactions, including labouring for a wage. The labourer is the seller and the employer is the buyer, and obviously the wage must be worth more to the worker than their time or theyd quit, while the labour done in that time must be worth more to the employer or theyd lay the worker off. Karl Marx disagreed. Goods dont appear out of nowhere. Goods are made from raw materials when labourers put labour into them. Therefore, the labour is the source of the surplus value (measured as the price of the product minus the cost of the materials), and the labourer is the rightful owner of that value. According to the labour theory, an employer who then takes away the goods, sells them, pockets the profit, and doles out a fraction of it back to the worker, is nothing but a thief.
Which theory works? Another parable. Mr Miggs runs a back-shed factory making plastic coat-hooks that you can stick on a door. He sells them at $5 for a packet of three, but his cost to make those three, including labour, is only 50c. According to the labour theory, hes robbing his staff of $4.50 per unit. But one day Mr Miggs buys a 3D printer, an automatic packet-sealing machine, and some drones to carry things around the factory. He sets up an automatic e-mail system to alert his courier when theres a shipment ready. In short, Mr Miggs automates his process totally, and lays off all his employees. He can now make his coat-hooks at a cost of 10c per unit. He drops his price from $5 to $4.80, which raises his sales by 2%. Not only is he selling more units, but his profit per unit has gone up from $4.50 to $4.70. The trade theory easily accommodates this scenario; the labour theory boggles. Whose labour is Mr Miggs exploiting? Where is that $4.70 coming from?
Score one for the trade theory. But I would have to query whether Mr Miggs staff, back when he was employing staff, were genuinely free agents. When your only choice is between two bad alternatives (such as: break your back working for peanuts, or watch your children starve), then technically you could count as a gain the advantage that the lesser evil holds over the greater, but that seems awfully sophistical. If someone mugs you for your wallet, they get your money and you get to stay alive its a win-win! The higher the stakes are for you, the smaller your bargaining power. The outcome might well be positive-sum, but if you cant realistically negotiate your share of the benefits, theyll be massively skewed in the other partys favour. That sounds like exploitation to me.
Actually, the higher the stakes is not a good way of putting it. A speculator might lose millions in a day in a derivatives clearinghouse, whereas a drain-layer begging for a raise is only dropping a few hundred a week if their employer decides to fire them instead. That doesnt mean the speculator is in direr straits. What constrains your bargaining power is how much youll be left with if things go sour. Back when I was taking my first semester of economics lectures, I wrote a post about what I saw as the major problems with economic theory as it is taught to university students. If I were writing it now I might moderate my tone in places, but I would not make any substantive changes. And the main point of that post is the proportionality issue Im talking about here: some people can better afford to lose millions than others can afford to lose hundreds.
Now my realization is about the destruction of value, which the labour theory also doesnt account for. If value can come out of thin air, it can also vanish into thin air. A simple example might be if you were competing with yourself. If that sounds like nonsense, think of professional sports. Their revenue comes from two sources: stadium seats and television ratings. These two are in direct competition with each other. The more people watch from the sofa, the emptier the stands are. Some portion, at least, of the advertising for either one shifts revenue around instead of increasing it. The money spent on that portion of advertising might as well be dumped into a shredder.