Monday, September 27, 2010

Freakonomics, how the economy secretly effects life.

A little known fact is that the aggregate pursuit of profit by small producers leads to the creation of large scale enterprises that have a unique division of labor, into workers on the one side and owners, managers, and the adjuncts of them on the other. This 'division of labor' eventually works its way through society as a whole, creating a 'working class' and an 'owning' or 'ruling' class. The formation of these classes makes it harder for folks to jump from one class to another, thereby undermining the idea that everyone has an equal chance in life. So amazingly, from seemingly inconsequential actions, i.e. small businessmen trying to make a profit, large scale change happens.

3 comments:

justino said...

I think that is a mistaken view of the profit and loss system. I like a Murray Rothbard quote on the drive for profits, which he called "the motive power that adjusts, estimates, and coordinates the economic system so as to maximize producer income in the service of maximizing consumer satisfactions. It is the process by which malinvestments are kept to a minimum, and good forecasts encouraged, so as to arrange advance production to be in close harmony with consumer desires at the date when the final product appears on the market."


Profit-earning enterprises are encouraged and given the means to invest more capital into their enterprises. Doing so increases the productivity of labor and consequently increases their wages. Profit-losing enterprises have their capital depleted, which diminishes their harm to the economy, as determined by consumers.

I see the expanding wealth gap as the results of government intervention. It is when government privilege is used to diminish profit of some enterprises that market patterns stagnate more and more as time passes, meaning the rich get richer and the poor get poorer.

I also do not agree that large-scale businesses are more efficient. Kevin Carson has done research to shows that almost all Fortune 500 profits are the result of government subsidy in one way or another.

John Madziarczyk said...

But increases in capital have frequently lead to losses in wages as well. Many highly skilled jobs were lost when automation replaced traditional skilled labor. Granted, the skilled artisans weren't anywhere as productive as the enterprises that replaced them, but the general tendency, until maybe very recently, seems to have been to reduce the amount of skill needed to complete various parts of jobs, which allows companies to pay the workers less since they're contributing less valuable work.

There's a school of thought out there that says that if people's skills were put to better use on the manufacturing side of things, with greater control given to people to regulate their own work as well, that productivity would increase and higher wages could be given, but there seems to be great resistance to this happening.

There's an argument out there too that capital is largely produced by workers' labor, even if management was responsible for the planning, and that workers should therefore also get some of the money that the business earns from its capital as a whole.

I think that the profit motive is only one way to accomplish what Rothbard is talking about, and that it doesn't do it perfectly. The assumption is that competition forces the profit motive to work for the benefit of society as a whole through spurring the production of better products and better services, but I would say that while some of this may happen, the pursuit of profit also introduces its own signature to business, producing bad effects as well. I think that the potential for the profit motive to really harm society increases as the businesses we're talking about get bigger and bigger and able to exert more influence over society and over people's lives as a whole.

But if this is the case, it's hard to come up with an answer that isn't in some way collective in that it's probably not possible or desirable to go back to an economy of pure small businesses.

justino said...

But increases in capital have frequently lead to losses in wages as well.

The automation that results in job losses comes about because of government intervention for the most part. I say "for the most part" because capital investments are not always successful. In the 1940s, elevator operators were commonplace before an increase in the minimum wage to about 70 cents, if I recall correctly. Within a few years, it became less costly to install automatic elevators. Well-meaning regulations drive up labor costs over productivity of that labor.

Furthermore, profits saved and reinvested into an enterprise (capital) benefit laborers proportionately more greatly than it does the owners of that capital. As a business becomes more well equipped, increases a laborer's marginal productivity and thereby his wages.

There's a school of thought out there that says that if people's skills were put to better use on the manufacturing side of things ...

I agree that decentralized worker self-management would likely prevail in a voluntary economic order. The role of worker and boss would also likely be reversed, with small unions of workers hiring their managers. Today's hierarchical corporate structures are the result of government favoritism against the common customer and worker.

The assumption is that competition forces the profit motive to work for the benefit of society as a whole ...

I would disagree. I think the profit and loss system is the product of imperfect knowledge that results in a misallocation of resources. In a hypothetical society of perfect knowledge, profits would entirely vanish. Profits (and losses) are themselves a form of information, so they are sort of self-limiting in that way.

The misdirection of resources would exist under any economic system. But with the existence of property and a fixed means of gauging that misdirection of resources(money), then that error can be corrected more quickly.

I think that the potential for the profit motive to really harm society increases as the businesses we're talking about get bigger and bigger and able to exert more influence over society and over people's lives as a whole.

The thing is that I agree. When you have a government, the wealthy and powerful are going to use for their gain. Yet, I do not see capital, per say, as a danger. I look to the monopolization of that capital into ever-concentrated sources of power as the danger. But I think that (institutionalized) exploitation can only come about by not respecting property rights of legitimate owners. The most frequent violator of property rights is the State, which is why it should be abolished.