Cleaning Up Capitalism

For about a quarter of a millennium economists, its mainstream, have confounded capitalism for market economies, have confounded protectionism for competition.

Result: those who are exposed to competition suffer from more and ever harder pressures. Inequality has risen to a level that humors kings and emperors of any history ever told. Exploitation of Nations is what we see.

Adam Smith founded today’s mainstream economics in 1776  with his paper ‘Wealth of Nations’.

We will show here that the basic model he proposed here is mathematically wrong. And will break down his whole theory.

With the defeat of this model, on which every market model of the last 250 years is built upon, every microeconomic market analysis of the past will be defeated. You’ve been mislead by economists for the last about quarter a millennium.

Before we take a look at this basic model, the basis of today’s mainstream economics, and its failure:

Understand Economics

The basic concept of Economics is quite appealing: free pursuit of self-interest will provide what we like to call the biggest cake: maximal wealth for a society. Efficiency.

Prerequisites: property rights and perfect competition.

Along with perfect competition will come freedom and equal opportunities:  In this market all have the same opportunities. Everyone is free to supply / demand what they want to.

Freedom actually is a bit weak for what Smith had to offer:

Markets, i.e. prices reflect every decision of every market participant. Equally. And prices adjust supply and demand. Not to any wishes or plans of any ruler but to our very own decentral decisions.

We see the so-called invisible hand at work.

No ruler. No constraints put on any specific market participants. Just total freedom to supply and / or demand whatever you want to.

This is more than any theory of democracy ever dared to promise.

Understand neo-liberals who reject any interference with this perfect mechanism: the price [we will disprove here].

You don’t feel so free, you don’t feel so equal

Well, there are boundaries. It’s called the world. It’s called restricted resources. They are limited.

The question is who gets what share in these resources. And the invisible hand,  i.e. the price mechanism, will make sure we, as a sum, get the most out of it.

However, you will compete for these resources. With others who want them too. ‘That’s your daily constraint. What matters to economists here is equal opportunities, is perfect competition.

Against the background that capitalism is so strongly founded on the idea of unrestricted competition, it may come as a bit of a surprise that the basic model of this theory, the very model which derives the price, and thus the true ruler in this world, as a matter or fact defines protectionism.

And not just does it define protectionism, which might serve welfare very well, no, it defines it unequally. It restricts protection to capitalists, and to capitalists only. The rest burns in competition.

All due to a mathematical error in their basic model.

Understand Mathematics in Economics

Smith was not the first one to articulate some ideas of how economies might work. Smith, however, was the first economist who formulated economics mathematically, built models.

Economics, theoretically, is part of Social Sciences. But there is nothing social about it.

To be mean: economists don’t think. Economists calculate.           

Whereas other social sciences consider their theories as constructs, as possibilities economists deliver mathematical proofs.

Economists don’t breathe in the realm of ‘maybe’. They’ve conquered the realm of ‘true is’. Mathematically true. True until its falsification.

Economists aren’t concerned with any ideological crap. They believe themselves beyond this mud.

Economics, for a long time, had been conceived in the polarity of capitalism versus communism.

Whereas communism has been perceived as both, an ideological and political decision, mainstream economics, capitalism is none of the above. Or seems to be.

Economics actually had been born out of morals – a former science. Don’t ask me if this is true because I find this hard to believe myself.

Then emancipated into Political Economics. And only last century, when economics began to govern, if not substitute politics, concealed its predominance by dropping the ‘political’ in its name.

Furthermore, it can be a bit demanding to try and talk with an economist. The problem is: they don’t talk. They, i.e. we discuss models. In mathematical terms, of course. So, if you so want, we only speak ‘mathematics’.

We’ve isolated ourselves methodologically.

Keynes once said economics is not so much a theory but actually a method. [as we’ll see: not with a basic model like this].

This theory is governing every moment of our lives. Our evolution criteria even. The existence of mankind. Humanity.

Get invested.

Story of a Horse

It’s said, Smith was horseback-riding over his fields, wondering how many workers to put on one’s fields to maximize one’s profit.

And he came to understand:  up to the point when the additional output of another worker no longer covers his wage. Mathematically, he derived the optimality condition: marginal productivity equals wage.

Price Rules

This very definition of a price decides on capitalism versus market economics, it decides on protectionism versus competition. Protection of capitalists, and of capitalists only.

Smith didn’t stop at this point but we take a closer look at this price.           

Price is Lever

When economists talk about markets, they actually talk about prices, or the theoretical price. The price is all economists have. The price is the lever in this whole system.

It moves demand and supply; it is supposed to integrate all relevant market information. It’s kind of the sum total of all market activities, activities as in sell/buy. It synchronizes supply and demand.

The price is what Adam Smith liked to call the ‘invisible hand’. No one forcing us. None that we can see.

You might also figure prices to work like traffic lights: they tell you when it makes sense to go/produce, and when not to. In other words: when you’re out of the market place, out of work, for instance.

It decides on your life, your opportunities. Every day, and every second. It’s not about you. It’s about how many offer the same commodity as you, and how many want it. And at what condition, i.e. price. Value. It’s the price tag.

Price Equals Marginal Productivity

What now is the meaning of this equation / price definition? At first sight, if we apply it to labor, the price of labor, it looks quite ok: the last worker gets exactly his contribution to the total output.

The problem is Smith assumed decreasing marginal productivity.

Who we are – Ideologies

The idea: figure a bakery with say three sales people, and then we add a fourth sales man, maybe a fifth one, and sooner or later, these people will hinder themselves mutually, and will, with every further salesman  get less and less productive.

That’s the idea behind decreasing marginal productivity, for not to say: its ideology.

The Last One Defines The Price

So the last one is paid accordingly to his or her actual productivity, his contribution which, due to the circumstances, may no longer be as good as it could be. Still fair, maybe.

But then he’s not just paid like that, he, as a matter of fact, or actually his marginal productivity defines the wage for all others too!

And now we calculate. Say we have five salespeople, the first one having a productivity of say 10, the second a marginal productivity of 9 etc. and the fifth a marginal productivity of 6. Then everybody gets 6. And the difference between their actual productivity (10 + 9 + … + 6 = 40) less  their wage (6 times 5 people = 30) will be siphoned off by the so-called ‘producer’.

Producers’ Surpluses

Economists call the difference of average and marginal productivity times the number of input factors – basically what we just calculated above – producers’ surpluses.

Surpluses, in market economies, are a token of incomplete competition. And economists, so far, have been simply ignoring this issue.

Ideology

The assumption – we are not here to disprove an assumption, that’s impossible – of decreasing marginal productivity, however, its ideology, goes way beyond that issue.

Let’s say, we just define the price / wage by productives’ average productivity, so above everyone in our bakery will get 8 rolls instead of 6.

The problem now is: every additional productive will lower the income of this group. As does everybody inside except for the first one.

This group will destroy itself, or rather not exist in the first place. That’s the world Smith formulated.

That’s the world, today’s economists, their mainstream, still lingers in and propagates.

Inhumanity as ideological basis for a society

Decreasing marginal productivity may well reflect our economic conditions. At some point. The bakery was such an example.

But actually, decreasing marginal productivity only threatens our lives when in comes to a certain size of firms. Or, more abstractly spoken,  if the ratio of productives to means of production is no longer right. If a capital base reaches its boundaries of productivity.

Smith, however, didn’t assume decreasing marginal productivity locally, meaning for a certain range of the production. He assumed it globally, for any and every production. For two people as for twenty thousand people.

In tangible terms: in Smith’s world two people together achieve less than they achieve when being separated,       

And this assumption has only one answer: in this world, people will not come together, they will not work together.

The ideology of decreasing marginal productivity simply undermines and perverts everything we have seen since the beginning of mankind: any socialization.

Real World, opposed to that, regularly offers us increasing marginal productivity: people will achieve more by cooperating. Real world offers win-win-situations, Real world offers incentives for humans to ‘socialize’.

Actually, you’ll be dead if you’re alone.

The Reasoning of Capitalism

We remember at this point that Adam Smith, and with this perverted ideology, if not established the capitalism of the last two hundred and fifty years at least justified it.

As a matter of fact, he veiled it. Smith was a top salesman. The best!

We have a perverted ideology that provides the very basis for a perverted system. And Smith sold us this system under the title ‘Wealth of Nations’

So how do you sell a perverted ideology such as decreasing marginal productivity, define the price by a society’s marginal productivity and thus pressure down your class enemy, and on top protect your own class against any competitive pressures?

‘Wealth of Nations’

Smith didn’t stop with maximizing firms’ profits. He reached out for more:

In his next step, Smith optimized the total output of an economy, or society respectively.

And again derived the same optimality condition he already had derived for maximizing profits: price equals marginal productivity!

This means nothing less than: we have a perfect synchronism of individual and society! Of individual and social interests! They are perfectly correlated. And now, we really understand why economists smile all the time. And they even got the mathematical proof for this.

Or had.

The holy grail

Since the beginning of mankind, we’ve seen war and destruction, dominion and oppression. And then comes a Smith and brings us the holy grail of peace, joy and happiness.

Too good to be true

Smith didn’t just maximize the total output of an economy. He this time maximized the output of a ‘producer’ – instead of his profit; then defined this ‘producer’ to be ‘representative’; and then multiplied this ‘representative’ ‘producer’ with a number n, and thus the output of a ‘representative’ ‘producer’ to get the total output of his economy.

No Conflicts of Interest

We begin to understand why there are no conflicts of interest in the world of Adam Smith. Nor of his followers.

But equating a number of ‘producers’, or their output respectively with the total output of an economy is not really the problem here.

No Competition

The problem, actually the error is: Smith defined this group of ‘producers’ as a closed group. He set its number constant, exogenously given. Not a variable of choice. Not endogenous.

And this is the end of the holy grail. It’s the end of competition.

Smith ‘assumed’, as in verbally stated the ‘assumption’ of perfect competition,

And thinking about our producers’ surpluses, possible profits, that is, we would consider them to be incentives for others to start firms and arbitrage these profits.

But now they can’t. Because that would increase the number of firms/’producers’. And this number has been fixed. No competitive pressures on ‘producers’.

Even if demand increases this will have just one effect on ‘producers’: their output will increase, as will their ‘producers’ surpluses.

So, the verbal assumption of competition that Smith made, is invalid. Is strongly violated on the mathematical implementation of his model.

Taking it One Step Further

You might think this was enough for now but Smith, in his insanity, took this whole thing even one step further.

Smith defined production technologies as a public good.

Meaning: production technologies are free for use. And of cause, can only be used by our exclusive club of ‘producers’.

Smith’s whole concept of free pursuit of egotistical interests for the good of all, his concept of providing individuals with incentives to perform, if not outperform.

All this is broken down in the most crucial moment: when it comes to the decisive factor of wealth of nations: technological progress.

According to Smith’s paradigm, we wouldn’t expect anyone to develop production technologies against the background that there will be no property rights in any technology, and thus no profits. Would we?

Topping Communism

If we now take a look at our very exclusive club of ‘producers’, we understand the following:

First, no competition. But the most surprising thing is: defining one ‘producer’ as representative doesn’t mean anything else but assuming identical producers. Producers who share the same interests. And, as a last blow to any capitalistic in the sense of competitive ideology, even share their production technologies, say: their knowledge, their abilities. For free.

To give a clearer understanding of ‘production technologies’: everything anybody does, or finds, or develops that changes anything, product, service, marketing, … so that the utility of at least one buyer is increased is considered a production technology: whatever changes the utility of what we have in no matter what way, as long as one individual, by buying confirms, or reveals his or her increased utility, is technological progress. Besides machines, which obviously increase productivity.

So, in the world of Smith, if any ‘producer’ developed a new product or a new way to produce this product, or a new way to get more productivity out of his workers – he just shared it with his ‘colleagues’. Equally. We might consider these capitalists – don’t forget we’re in a model here – even the real communists.

A Nightmare is Over

Very moving. Smith must have been dreaming. Being part of a group where there are not competitive pressures neither from the outside, such as potential competitors, nor from the inside.

The assumption of public production technologies ensures that all producers will use the same, namely the best available production technology, thus share the same output as they share the same producers’ surpluses. Of course they have all equal access to capitalmarkets, and thus to capital.

And whatever might give a  ‘producer’ any competitive advantage, i.e. any production technology, Smith declared it just public and thus no longer a threat to other producers.

We’ve learned to fight. Each other. Everybody. We should learn to form alliances instead. Turn into partners. Rather than enemies. It’s the system that sets us up.

Cooperation is big in Game Theory. A group will simply always be stronger than a single person. Not really to my liking. As I’m oppressed and abused by the german people. And may no longer leave the country. But then they’ve always been Nazis. So …