The Basic Faults with Capitalism

The Occupy Movement against capitalism does not appear to express anything other than a general discontent that cannot find a definition. There should be much more to it than that because there are real faults with capitalism. The most reported these days is dishonesty at the top where executives take home bonuses equal to several lifetimes of earnings by the average worker while these same executives excuse themselves from responsibility for the fate of the corporations they lead. They do so by incredibly munificent contracts, approved by compliant boards of directors, that do not connect compensation to performance. Since they are legally binding documents the duplicity should be dealt with by the courts although they seem to be still awaiting organized complaints. The more serious and pervasive fault with capitalism is the neglect of rights – real rights that is, not rights conceived by idealists or socialists for their authors’ purpose. Of the latter there are prominent examples that have in common the theme that everyone is responsible for everyone else, more or less. In the business world this manifests as a claim that the business provides a livelihood for its employees. Social democratic governments expect it and labour unions demand it. Businesses, on the other hand, do not readily accept that they automatically took on responsibility for their employees livelihoods when they went into business. Many simply do not believe that they are an instrument of their government’s social policy. Therefore, the claims by unions do not generate an immediate solution but often produce a heated contest that degenerates into quarrel and ill will. That is because the claimed rights are contentious, arguable and consequently lacking in force. Labour strife, when it occurs, is actually a power struggle, a contest of wants between unions and management until a balance is struck. Despite its drama, news story potential and the rhetoric of the Occupy Movement it is not the kind of rights neglect that indicts the capitalist system.  For a clear example of that we need to look back a century and a half.

Slavery

In 1833 Great Britain abolished slavery throughout its empire and thirty-two years later so did the United States of America. This happened despite the economic lurch that resulted, particularly in the USA. The change was not made by the capitalist system which, characteristically, would not make such a disruptive and unprofitable change. The motivation came from people whose morality could no longer abide holding people and their children in perpetual bondage. They effected the change through their politicians on the authority of moral conviction. In truth, however, morality is chosen and no doubt there were many in the 19th century who did not have a compatibility problem between their morality and slavery. Yet, slavery was wrong regardless of anyone’s morality. Why? It was and is wrong because any person who is capable of objective reasoning can see that every person came into this world through the same natural process and consequently all have the same basic status as human beings. Having equal status plus the faculties to be self determining confers onto every person the right of autonomy. That is, every person owns himself/herself and no one can assume ownership over another person by right.

The firmness of this principle provided a solid reason for politicians to face the travesty of slavery in the 19th century and the capitalist system had to yield. However, two other fundamental rights went largely unnoticed and their disregard stayed in the system. The first right was a person’s ownership of what he/she created and it is universal in scope. It applies to any creation that brings into being something of value or changes a value. To be fair, governments have protected valuable works of art, literature and inventions, although companies today regularly require employees to sign away all rights to what they invent on the job, which is unfair. The reasoning behind the right is simple and hard to refute. When something is brought into existence the creator is the person who changed the materials from one form into another or, in the case of intangible creations, from one condition to another. The business owner probably has a valid claim to part equity for supplying the necessities of the factory such as the lighting, heat, power, tools and direction but none of these by themselves would have produced the creation in any length of time. To fully understand this idea it is vital to identify exactly what was created. For example, if a worker on an automotive assembly line adds external mirrors to the car he has changed the configuration of the car from one not having outside mirrors to one that does but he did not create the mirrors themselves. Therefore, what he owns is the difference in value of the car having the mirrors from one that does not, less the value of the mirrors. This means that the assembly person has equity in the finished product and the business owner must buy this equity if he intends to sell the product. A fair price would be a proportion of the value of the finished product at the factory door.

Wage Structure

This does not happen in the present world where the almost universal basis for remuneration is time. Unless the employee is just the counterweight on a tilt this is fiction. A company does not keep a person on its premises so that he spends his time there but rather for what he creates of value in line with the company’s purpose. Logically, justly and by right of ownership as presented above, he should be paid for the total value of his creations in the work period whatever it is: an hour, day, week, etc. The capitalist system claims full ownership of whatever the worker creates of value which is a travesty of justice and rights. If the system was just it would pay the worker for three things.

  • Affiliation– compensation for committing certain hours of the week exclusively to the designated job, maintaining confidentiality, and upholding the company’s good name and reputation. It should be paid on a weekly basis regardless of absence from work on excusable leave.
  • Production– compensation for the job role based on an agreed amount for each unit of production. It would be proportional to the amount of production.
  • Responsibility– compensation for taking the responsibility for mistakes and omissions and possibly for quantity and quality of production. It should be based on time on the work premises if this responsibility is not borne when away from the job and on a full time basis if it is.

The enormous commitment that goes with affiliation to the company usually goes unnoticed. Yet, a person is required to be present on the company’s premises and working almost all the time for half the waking hours of the day or often more. The commitment will bind him to a particular place and exclude any other optional activity, including other means of earning money except with sacrifice of leisure time after working a full day. It is life-orienting and to a significant extent life-consuming and the employer is the beneficiary. In the present system the commitment is taken for granted. It should not be.

The production pay is actually the company buying out the equity of the worker in what he created in the workplace. Theoretically it would be calculated by a formula worked out between the company and the worker on hiring or on assignment to a new role. Practically, it would probably rely on precedents or on formulas developed between the company and an employee organization, that is, a labour union playing a new role. Their old role was to militate for equal pay for all workers classified by credentials. When a worker is paid for his production, however, pay will be proportional to the amount of production which of course is anathema to unions but is the provision required by fundamental rights. Accordingly, when a worker is absent production pay will be zero.

The responsibility payment would conform to a mutually agreed formula that accounts for the burden that responsibility puts upon a person- the greater the burden, the more the pay. What is often not realized is that a requirement to perform in accordance with a standard puts responsibility and stress on a person, so the beneficiary should pay a commensurate reward.

The total pay should correlate with the real reason the person is retained by the company. Furthermore, the breakdown of compensation should apply to all ranks from the lowest to the highest. At the executive level it makes it easier to calculate appropriate compensation and harder to concoct a case for robbing the till, as concerned people have witnessed in the past decade.

Justice

The capitalist system does not insist on innate justice. For example, when a book in a bookstore sells for 20 dollars the author, who created the content out of thin air, will get 1 dollar and other people will get 19. In most businesses there are a few people, sometimes only one, who are making the business successful, such that if they were absent for a week the business would immediately start to decline. They are not the most highly paid; in fact are not exceptionally paid because compensation is not proportional to the value of what they create on the job. The person most highly paid is rewarded more by position than by contribution. Otherwise, how can one person make 325 times the contribution of the average worker to justify getting 325* times the compensation unless possibly he is claiming all the reward for the achievements of his subordinates?  Management and investors love the situation where a few key individuals make the business prosper while getting ordinary wages. The name of the game is entrepreneurism and its ethic is to purchase what someone has created for the lowest possible price and sell it at the highest. It is glorified as a successful formula that supports capitalism which brings prosperity. Indeed it propels capitalism along like a wind powered grinding wheel. All over the planet people have their daily lives oriented and disciplined to produce things of value for the market. They do it for personal rewards, mostly money, but also to reward people who already have money, so much that they can afford to invest some in businesses. If justice is to apply then the division of profit between the business owners and those who actually created the products from which the profits were made must properly account for the equities of both. Owners want a return on their investment to reward them for risking their capital in the first place while workers want a fair profit on all that they created. Ideally, a balance is struck by negotiation. In any event the dual equity situation implies a cooperative approach by both parties in optimizing the functions of the company for their mutual gain. It also implies that an increase or decrease in profits results in more or less compensation to both parties. For the workers this also predicates a change in their numbers. This proposed change in the equity structure suggests a new model for the economic system: the capitalists provide the means by which people can create things of value to a market for their own profit while the capitalists receive a reasonable return on their investment. In its implementation the business owners and associate workers are partners in achieving maximum profit for both, usually over the long term. With the paycheques of workers tied to the company’s fortunes they are more likely to support management’s efforts and even participate when called upon. It is also up to each partner to arrange for his own financial security through insurance, investment of savings and alternative livelihood.

Second fundamental right

The second neglected right is based in the principle that every person has an equal claim on all that Nature provided. It follows therefore that all the people of a country have an equal share in Nature’s bounty. Consequently, when a group of people extract mineral or fuel wealth from beneath the ground it is not ownerless. They must buy out the equity of everyone else before selling the material in a market. The present capitalist system does not do this. It might be argued that the businesses that exploit natural resources do pay taxes; however, these are taxes on profit or for services actually provided (roads, etc.). If they bought the value of the resource in the ground from its owners (everybody) then their profit would be less and so would their income tax. Including land in this right implies that every citizen of a country, from infants to the elderly, is entitled to an equal portion of land, measured by value. Consequently, when a person, family or group farm more than their aggregate entitlement they must pay compensation to the landlord which is everybody else. If this right of collective ownership of the country’s natural resources, including agricultural land, was implemented in the economic system then every person would have some income as an entitlement for being a citizen. How many completely destitute people would there then be in the world? What would happen to the economic circumstances of the average person in countries rich in oil or mineral resources?

Summary

The failure of the capitalist system to include the fundamental rights of people to ownership of what they create and to an equal share in all that Nature provided has produced continuing and widening deviation from deserved rewards in the economic system. Although not well articulated, this phenomenon has been sensed by many, to the point of demonstrating in the streets, and needs to be redressed. This is not required because of a vague complaint or for the implementation of economic or social ideology. Like slavery, it is a matter of fundamental rights.  Indeed, the basic faults with capitalism can be traced to neglect of rights and the attendant injustice.

 

* USA 2010, average CEO income of 299 Fortune 500 companies/average national income

Filed under: Uncategorized | December 5th, 2012