Saturday Apr 10

Winter 2020

Chronic Economic Crises Demand A Transition to a Moral Economy

Bruce T. Boccardy

Trump Gone, Economy Still Here

Fine.

Rational people can take solace that a seriously damaged man is mercifully leaving the office of president. The unprecedented corruption, crimes and cruelty of Trump and his cabal of miscreants, all well documented, is officially kaput. However, the underlying economic model that Mr. Trump and his cult of stonyhearted Republican enablers pandered to is still in process. It is always there despite well intentioned attempts to rationalize or ignore the results that continue to plague all working people. Largely ignored was that prior to the pandemic, the National Bureau of Economic research (NBER) reported that the economy was tanking in the important numbers affecting working people. 

Chronic Crises

Why is it that every four to seven years the economic model here results in so-called “downturns.” Tens of millions of working people losing their jobs, and often their homes, with the accompanying personal and social immiseration?  The recoveries do not ameliorate the conditions significantly until the next crisis or war.  Occasionally, these downturns metastasize into a larger scale that threatens the whole model.  There was one such crisis in 2008-2009. Presently there is another one precipitated by the Covid-19 pandemic. 

The economic malaise afflicting the country must not minimize the tragic loss of life and future morbidity of millions of Americans during the pandemic. Moreover, there is compelling evidence that much of this suffering could have been prevented but for the abominable decisions of the morally vacuous dunderheads inside the Trump administration.  That said, understanding the underlying process of the economic model here may help to build smarter and fairer remedies.

Business Model

The primary purpose of the United States business model is to return a profit to the private owner. No profit, no business.

What are the conditions that business owners are compelled to follow? Why do these crises occur without exception, albeit in somewhat different details, from the same underlying conditions? 

The answer is in the structure of the business model and its inherent limitations. This structure makes it inevitable for a crisis to periodically occur. For businesses to grow they rely on private profits. In order to understand the complete process, the components of a typical business must be identified.

Business Components

There are three basic components that comprise a business.

The first is investment in building, materials, machinery, tools, technology, utilities and anything that is physically essential to produce the product or service. Some parts of this investment are more important than others. This essential investment does not change its value in the production of a product or service. A $10 wrench is still a $10 wrench after it is used to create a product. 

The second component is investment in what business owners must pay employees in wages and salaries to maintain themselves. Importantly, this investment does change its value in the process of producing a product or service.  The owner is purchasing the efforts of the employees to create profits for the business.  Wages and salaries create products and services that must be sold at prices above what it takes to pay employees to maintain themselves.

The third component is the profit obtained from the first two investments.  Profits are pivotal to the production process of this model, because it allows business owners to take that excess created value and do whatever they please with it. The owners can purchase limos, yachts, mansions or politicians.  However, business owners are still largely constricted by the demands of keeping the businesses profitable. In order for the business to be successful, it must compete to a degree with other businesses. This competition takes different forms depending on the historical development of the economic model, but a form of competition is present.

Exploitation Example

As a simplified example, the owner of a small computer company invests $100 an hour for the building, materials, machinery, technology, and utilities to create one computer. The owner then calculates that it costs $20 an hour to pay an employee to work for a seven-hour day to maintain a family or lifestyle. At the point the owner must sell the computer on the open market. The owner must charge an amount above what has been spent already to produce the computer.

The conclusion here is that one computer was created for $100 plus $20 which equals a total of $120 invested by the owner. The owner must now sell the computer for $150 each to obtain a profit of $30 on each computer.

However, if the employee created a product that is worth $150, it is inescapable that the employee is not being compensated for the value that was created in the seven-hour work day. A $120 investment in wages and salaries does not equal $150 of created value.

This is the moral equivalency of exploitation of the employee.

It appears that the computers now being sold by the owner have somehow increased to a “new” value.  Actually, it is not a “new” value at all. What was created was a profit above what it takes to maintain the employee.  While it appears that the employee is being paid for working seven hours, this is not really the case either. The owner must calculate the amount paid to the employee against how much is required for profits. 

For the sake of simplicity, 100% is the “exploitation” rate in this example.  The employee works the same number of hours to maintain a family or themselves as is required to provide a profit for the owner. This example would be 3.5 hours for each totaling the seven-hour workday.  Calculating the ratio of the profit amount to the wages and salaries, results in a 100% exploitation rate.

Importantly, this exploitation rate is incomplete because the owner must calculate the profit rate based on the total amount of the investment, not just comparing profit amounts to wages and salaries. The owner must include all the investment in building, materials, machinery, tools, technology and utilities to calculate the final profit rate.  The demands of competition with other businesses require an ever-increasing share of the total investment in the building, materials, machinery, tools, technology and utilities for the business to survive.

Company Crisis

As stated above, in order to compete with other computer companies, the company must spend an increasing amount of the profits on the building, materials, machinery, tools, technology and utilities. The costs for these investments are very expensive.  These investments increase the productivity of the employees; more products are created in the same amount of working time. Better machines create more products in less time. There is no other choice for the owner if the business is to survive.  This is profoundly important in the production process. Remember, it is wages and salaries alone which are paid to maintain the employees who assemble the computers for a profit.  However, the result of this process is that the average profit rate tends to fall. That is a serious problem for the business owner.

Two Year Plan

There are measures that the owner must try to do to keep the business profitable.

The computer owner begins in a given year by investing $50,00 in total expenditures. $30,000 is spent for the building, materials, machinery, tools, technology, and utilities. $20,00 is spent on wages and salaries to maintain the employees. The computers are sold for a price that brings in $20,000 of profit.

Again, the owner must calculate the profit rate by a simple calculation. The total amount invested in the building, materials, machinery, tools, technology and utilities is divided by the profit amount. This results in the first-year profit rate of 40%.

In the following year, though, other computer companies adopt new technologies which allow them to undercut the price of computers by the first computer company. The first computer company owner must now decide how best to compete with the other computer companies.

Since profits can only be created by the work of the employees, the owner must decide how much can be paid to them. Other factors can be involved in that decision. Strong unions representing the employees is an important example as contracts with compensations are negotiated.

Here it gets dicey for the owner.  The profit rate is extremely important because if it decreases even slightly, the business would likely shut down.

To compete, the owner must now invest more resources in the company.

The owner here invests $150,000 in the building, materials, machinery, tools, technology and utilities to keep up with the other computer companies’ higher productivity from similar purchases. The owner decides that $40,000 in wages and salaries is required to maintain the employees in their lifestyles. 

Now the total amount invested is $190,000, a considerable increase from the first year. The profit amount going to the owner is $40,000. This appears to be a reasonable amount on the company’s balance sheet from the first year. There is clearly an increase in the profit amount in the second year from $20,00 to $40,000.

However, if the owner applies the same profit rate calculation as the first year, an unwelcome change occurs.  The profit rate is obtained by dividing the total amount investment in building, materials, tools, machinery, technology and utilities by the profit amount.  In the second year, the profit rate of 21%.

The owner tripled the amount invested in building, materials, machinery, tools, technology, and utilities. The owner also doubled the amount of wages and salaries for employees; yet the profit rate diminished from 40% to 21%.

The business increased its profit amount, but decreased its profit rate.

That is very ominous for the owner.  Profits can only come from the employees’ efforts.  As more is invested in the building, materials, machinery, tools, technology and utilities, less is invested in the wages and salaries of the employees to maintain themselves. Though the owner increased the amount invested in wages and salaries, it was a relative decrease because so much more had to be invested in the building, materials, machinery, tools, technology, and utilities. 

It is the diminishing of the investment in wages and salaries that tends to result in the profit rate to fall.  As the profit rate falls, probably so does the computer company.  However, this is a tendency rather than an absolute rule.

Company Options

There are measures that business owners can try to do to counteract falling profit rates.

The first option and most common is that owners will slash wages and salaries to maintain the ever-increasing investment that is required to maintain the profit rate. However, the employees’ purchasing power will then be decimated as they will be unable to purchase the very products or services they created. No purchases, no profits.

The second option could be to increase the hours of the employees without increasing pay and force speedup to create the product or service.  The owner can abolish or shorten breaks, particularly if there is no union contract. This may temporarily maintain a profit rate, but create a miserable and recalcitrant workforce ready to quit.

The third option for the owner is to simply hire more employees. Of course, that would mean investing more in wages and salaries. Certainly, hiring more employees would produce more products or services. However, the owner wants to decrease the amount paid to the employees so that it can be invested in the building, materials, machinery, tools, technology and utilities to keep up with competing companies. Hiring more employees is not the most efficient method for the owner.

Results

There is one bizarre hypothetical condition that could occur if the process of the business model is brought to its logical conclusion.

The introduction of more investment in the building, materials, machinery, tools, technology and utilities will eventually result in the need for less employees; they are replaced by the technological advances in the cost of producing the product or service.  The owner could invest in so much new technology that there would literally be no employees necessary. This might appear advantageous to the owner if no wages and salaries need to be paid. The profits could then be invested back into the building, materials, machinery, tools, technology and utilities. 

There is a problem with this for the owner. First, it is inevitable that other companies would obtain the same advanced technology. It would then be a race to undercut each other to sell products or services. This would result in prices so low that profits would all but disappear. No profits, no business.  Second, fewer or no employees would again mean fewer people to purchase the products or services produced. No purchases, no profits.

Certainly, this is a simplified representation of the basic economic model.  There are other variables that affect the development of the business model like financialization, monopolization, and of course, government bailouts, and job outsourcing. However, the process above applies to all businesses in some form of the business economic model.  It usually leads to crises as businesses produce more products or services that cannot be absorbed by employees. The result is usually chronic “downturns" with eventually tens of millions of Americans losing their jobs, their residences and their dignity. Unsurprisingly, the private sector has shamelessly relied on the government to bail them out, Libertarian myths notwithstanding.

Questions

What would a progressive democratic economic model look like and how would a transition be accomplished are essential questions that must be asked.

What legislative process would be required to ameliorate the business economic model to benefit not only employees, but the environment as well?

What type of alternative economic models would be created to compete with conventional business models and provide better results for the employees and their communities?

Is it likely that small businesses would be least affected by a transition to a more national democratic model?

In Spain, the Mondragon model presents an intriguing democratic economic model that is worth a look.

Evidence

There is a plethora of economic evidence that the business economic model is wrecking the lives of an increasing number of working-middle class and working-class Americans. The tentacles of this model cause not only massive unemployment and underemployment, but reaches into the basic components of American essentials, i.e.  healthcare, housing, education and the environment.

How businesses are organized for production and distribution is a question that all economic models must address. The primary group benefitting from the business model in the last forty years or so are a small number of those lucky enough to be in the ruling class and their hangers on. This economic model is in a slow death spiral draining the secular and spiritual goals of the nation leaving desiccated remains of vacant steel mills and hollowed out family farms. It is a symbolic jeremiad desperate for a transition to an authentic American democratic economic model.

Bruce Boccardy is economics/labor advisor for the Small Planet Institute; former president, Massachusetts Service Employees International Local 888; former labor representative, Massachusetts Joint Labor-Management Committee; former consultant for National Association of Government Employees.

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