                      C.2 Why is capitalism exploitative?

   For anarchists, capitalism is marked by the exploitation of labour by
   capital. While this is most famously expressed by Proudhon's "property
   is theft," this perspective can be found in all forms of anarchism. For
   Bakunin, capitalism was marked by an "economic relationship between the
   exploiter and exploited" as it meant the few have "the power and right
   to live by exploiting the labour of someone else, the right to exploit
   the labour of those who possess neither property nor capital and who
   thus are forced to sell their productive power to the lucky owners of
   both." [The Political Philosophy of Bakunin, p. 183] This means that
   when a worker "sells his labour to an employee . . . some part of the
   value of his produce will be unjustly taken by the employer."
   [Kropotkin, Anarchism and Anarchist-Communism, p. 52]

   At the root this criticism is based, ironically enough, on the
   capitalist defence of private property as the product of labour. As
   noted in [1]section B.4.2, Locke defended private property in terms of
   labour yet allowed that labour to be sold to others. This allowed the
   buyers of labour (capitalists and landlords) to appropriate the product
   of other people's labour (wage workers and tenants) and so, in the
   words of dissident economist David Ellerman, "capitalist production,
   i.e. production based on the employment contract denies workers the
   right to the (positive and negative) fruit of their labour. Yet
   people's right to the fruits of their labour has always been the
   natural basis for private property appropriation. Thus capitalist
   production, far from being founded on private property, in fact denies
   the natural basis for private property appropriation." [The Democratic
   worker-owned firm, p. 59] This was expressed by Proudhon in the
   following way:

     "Whoever labours becomes a proprietor -- this is an inevitable
     deduction from the principles of political economy and
     jurisprudence. And when I say proprietor, I do not mean simply (as
     do our hypocritical economists) proprietor of his allowance, his
     salary, his wages, -- I mean proprietor of the value his creates,
     and by which the master alone profits . . . The labourer retains,
     even after he has received his wages, a natural right in the thing
     he was produced." [What is Property?, pp. 123-4]

   In other words, taking the moral justification for capitalism,
   anarchists argue that it fails to meet its own criteria ("With me who,
   as a labourer, have a right to the possession of the products of Nature
   and my own industry -- and who, as a proletaire [wage labourer], enjoy
   none of them." [Proudhon, Op. Cit., p. 65]). Whether this principle
   should be applied in a free society is a moot point within anarchism.
   Individualist and mutualist anarchists argue it should be and,
   therefore, say that individual workers should receive the product of
   their toil (and so argue for distribution according to deed).
   Communist-anarchists argue that "social ownership and sharing according
   to need . . . would be the best and most just economic arrangement."
   This is for two reasons. Firstly, because "in modern industry" there is
   "no such thing" as an individual product as "all labour and the
   products of labour are social." [Berkman, What is Anarchism?, pp.
   169-70] Secondly, in terms of simple justice need is not related to the
   ability to work and, of course, it would be wrong to penalise those who
   cannot work (i.e. the sick, the young and the old). Yet, while
   anarchists disagree over exactly how this should be most justly
   realised, they all agree that labour should control all that it
   produces (either individually or collectively) and, consequently,
   non-labour income is exploitation (it should be stressed that as both
   schemes are voluntary, there is no real contradiction between them).
   Anarchists tend to call non-labour income "surplus-value" or "usury"
   and these terms are used to group together profits, rent and interest
   (see [2]section C.2.1 for details).

   That this critique is a problem for capitalism can be seen from the
   many varied and wonderful defences created by economists to justify
   non-labour income. Economists, at least in the past, saw the problem
   clear enough. John Stuart Mill, the final great economist of the
   classical school, presented the typical moral justification of
   capitalism, along with the problems it causes. As he explains in his
   classic introduction to economics, the "institution of property, when
   limited to its essential elements, consists in the recognition, in each
   person, of a right to the exclusive disposal of what he or she have
   produced by their own exertions . . . The foundation of the whole is,
   the right of producers to what they themselves have produced." He then
   notes the obvious contradiction -- workers do not receive what they
   have produced. Thus it "may be objected" that capitalist society
   "recognises rights of property in individuals over which they have not
   produced," for example "the operatives in a manufactory create, by
   their labour and skill, the whole produce; yet, instead of it belonging
   to them, the law gives them only their stipulated hire [wages], and
   transfers the produce to someone who has merely supplied the funds,
   without perhaps contributing to the work itself." [Principles of
   Political Economy, p. 25] With the rise of neoclassical economics, the
   problem remained and so did need to justify capitalism continued to
   drive economics. J. B. Clark, for example, knew what was at stake and,
   like Mill, expressed it:

     "When a workman leaves the mill, carrying his pay in his pocket, the
     civil law guarantees to him what he thus takes away; but before he
     leaves the mill he is the rightful owner of a part of the wealth
     that the day's industry has brought forth. Does the economic law
     which, in some way that he does not understand, determines what his
     pay shall be, make it to correspond with the amount of his portion
     of the day's product, or does it force him to leave some of his
     rightful share behind him? A plan of living that should force men to
     leave in their employer's hands anything that by right of creation
     is theirs, would be an institutional robbery -- a legally
     established violation of the principle on which property is supposed
     to rest." [The Distribution of Wealth, pp. 8-9]

   Why should the owners of land, money and machinery get an income in the
   first place? Capitalist economics argues that everything involves a
   cost and, as such, people should be rewarded for the sacrifices they
   suffer when they contribute to production. Labour, in this schema, is
   considered a cost to those who labour and, consequently, they should be
   rewarded for it. Labour is thought of a disutility, i.e. something
   people do not want, rather than something with utility, i.e. something
   people do want. Under capitalism (like any class system), this
   perspective makes some sense as workers are bossed about and often
   subject to long and difficult labour. Most people will happily agree
   that labour is an obvious cost and should be rewarded.

   Economists, unsurprisingly, have tended to justify surplus value by
   arguing that it involves as much cost and sacrifice as labour. For
   Mill, labour "cannot be carried on without materials and machinery . .
   . All these things are the fruits of previous production. If the
   labourers possessed of them, they would not need to divide the produce
   with any one; but while they have them not, an equivalent must be given
   to those who have." [Op. Cit., p. 25] This rationale for profits is
   called the "abstinence" or "waiting" theory. Clark, like Mill,
   expressed a defence of non-labour income in the face of socialist and
   anarchist criticism, namely the idea of marginal productivity to
   explain and justify non-labour income. Other theories have been
   developed as the weaknesses of previous ones have been exposed and we
   will discuss some of them in subsequent sections.

   The ironic thing is that, well over 200 years after it came of age with
   Adam Smith's Wealth of Nations, economics has no agreed explanation for
   the source of surplus value. As dissident economists Michele I. Naples
   and Nahid Aslanbeigui show, introductory economics texts provide "no
   consistent, widely accepted theory" on the profit rate. Looking at the
   top three introductions to economics, they discovered that there was a
   "strange amalgam" of theories which is "often confusing, incomplete and
   inconsistent." Given that internal consistency is usually heralded as
   one of the hallmarks of neoclassical theory, "the theory must be
   questioned." This "failure . . . to provide a coherent theory of the
   rate of profit in the short run or long run" is damning, as the
   "absence of a coherent explanation for the profit rate represents a
   fundamental failure for the neoclassical model." ["What does determine
   the profit rate? The neoclassical theories present in introductory
   textbooks," pp. 53-71, Cambridge Journal of Economics, vol. 20, p. 53,
   p. 54, p. 69 and p. 70]

   As will become clear, anarchists consider defences of "surplus value"
   to be essentially ideological and without an empirical base. As we will
   attempt to indicate, capitalists are not justified in appropriating
   surplus value from workers for no matter how this appropriation is
   explained by capitalist economics, we find that inequality in wealth
   and power are the real reasons for this appropriation rather than some
   actual productive act on the part of capitalists, investors or
   landlords. Mainstream economic theories generally seek to justify the
   distribution of income and wealth rather than to understand it. They
   are parables about what should be rather than what is. We argue that
   any scientific analysis of the source of "surplus value" cannot help
   conclude that it is due, primarily, to inequalities of wealth and,
   consequently, inequalities of power on the market. In other words, that
   Rousseau was right:

     "The terms of social compact between these two estates of men may be
     summed up in a few words: 'You have need of me, because I am rich
     and you are poor. We will therefore come to an agreement. I will
     permit you to have the honour of serving me, on condition that you
     bestow on me that little you have left, in return for the pains I
     shall take to command you.'" [The Social Contract and Discourses, p.
     162]

   This is the analysis of exploitation we present in more detail in
   [3]section C.2.2. To summarise it, labour faces social inequality when
   it passes from the market to production. In the workplace, capitalists
   exercise social power over how labour is used and this allows them to
   produce more value from the productive efforts of workers than they pay
   for in wages. This social power is rooted in social dependence, namely
   the fact that workers have little choice but to sell their liberty to
   those who own the means of life. To ensure the creation and
   appropriation of surplus-value, capitalists must not only own the
   production process and the product of the workers' labour, they must
   own the labour of the workers itself. In other words, they must control
   the workers. Hence capitalist production must be, to use Proudhon's
   term, "despotism." How much surplus-value can be produced depends on
   the relative economic power between bosses and workers as this
   determines the duration of work and the intensity of labour, however
   its roots are the same -- the hierarchical and class nature of
   capitalist society.

C.2.1 What is "surplus value"?

   Before discussing how surplus-value exists and the flaws in capitalist
   defences of it, we need to be specific about what we mean by the term
   "surplus value."
   To do this we must revisit the difference between possession and
   private property we discussed in [4]section B.3. For anarchists,
   private property (or capital) is "the power to produce without labour."
   [Proudhon, What is Property?, p. 161] As such, surplus value is created
   when the owners of property let others use them and receive an income
   from so doing. Therefore something only becomes capital, producing
   surplus value, under specific social relationships.

   Surplus value is "the difference between the value produced by the
   workers and the wages they receive" and is "appropriated by the
   landlord and capitalist class . . . absorbed by the non-producing
   classes as profits, interest, rent, etc." [Charlotte Wilson, Anarchist
   Essays, pp. 46-7] It basically refers to any non-labour income (some
   anarchists, particularly individualist anarchists, have tended to call
   "surplus value" usury). As Proudhon noted, it "receives different names
   according to the thing by which it is yielded: if by land, ground-rent;
   if by houses and furniture, rent; if by life-investments, revenue; if
   by money, interest; if by exchange, advantage, gain, profit (three
   things which must not be confounded with the wages of legitimate price
   of labour)." [Op. Cit., p. 159]

   For simplicity, we will consider "surplus value" to have three
   component parts: profits, interest and rent. All are based on payment
   for letting someone else use your property. Rent is what we pay to be
   allowed to exist on part of the earth (or some other piece of
   property). Interest is what we pay for the use of money. Profit is what
   we pay to be allowed to work a farm or use piece of machinery. Rent and
   interest are easy to define, they are obviously the payment for using
   someone else's property and have existed long before capitalism
   appeared. Profit is a somewhat more complex economic category although,
   ultimately, is still a payment for using someone else's property.

   The term "profit" is often used simply, but incorrectly, to mean an
   excess over costs. However, this ignores the key issue, namely how a
   workplace is organised. In a co-operative, for example, while there is
   a surplus over costs, "there is no profit, only income to be divided
   among members. Without employees the labour-managed firm does not have
   a wage bill, and labour costs are not counted among the expenses to be
   extracted from profit, as they are in the capitalist firm." This means
   that the "economic category of profit does not exist in the
   labour-managed firm, as it does in the capitalist firm where wages are
   a cost to be subtracted from gross income before a residual profit is
   determined . . . Income shared among all producers is net income
   generated by the firm: the total of value added by human labour applied
   to the means of production, less payment of all costs of production and
   any reserves for depreciation of plant and equipment." [Christopher
   Eaton Gunn, Workers' Self-Management in the United States, p. 41 and p.
   45] Gunn, it should be noted, follows both Proudhon and Marx in his
   analysis ("Let us suppose the workers are themselves in possession of
   their respective means of production and exchange their commodities
   with one another. These commodities would not be products of capital."
   [Marx, Capital, vol. 3, p. 276]).

   In other words, by profits we mean income that flows to the owner of a
   workplace or land who hires others to do the work. As such returns to
   capital are as unique to capitalism as unemployment is. This means that
   a farmer who works their own land receives a labour income when they
   sell the crop while one who hires labourers to work the land will
   receives a non-labour income, profit. Hence the difference between
   possession and private property (or capital) and anarchist opposition
   to "capitalist property, that is, property which allows some to live by
   the work of others and which therefore presupposes a class of . . .
   people, obliged to sell their labour power to the property-owners for
   less than its value." [Malatesta, Errico Malatesta: His Life and Ideas,
   p. 102]

   Another complication arises due to the fact that the owners of private
   property sometimes do work on them (i.e. be a boss) or hire others to
   do boss-like work on their behalf (i.e. executives and other managerial
   staff). It could be argued that bosses and executives are also
   "workers" and so contribute to the value of the commodities produced.
   However, this is not the case. Exploitation does not just happen, it
   needs to be organised and managed. In other words, exploitation
   requires labour ("There is work and there is work," as Bakunin noted,
   "There is productive labour and there is the labour of exploitation."
   [The Political Philosophy of Bakunin, p. 180]). The key is that while a
   workplace would grind to a halt without workers, the workers could
   happily do without a boss by organising themselves into an association
   to manage their own work. As such, while bosses may work, they are not
   taking part in productive activity but rather exploitative activity.

   Much the same can be said of executives and managers. Though they may
   not own the instruments of production, they are certainly buyers and
   controllers of labour power, and under their auspices production is
   still capitalist production. The creation of a "salary-slave" strata of
   managers does not alter the capitalist relations of production. In
   effect, the management strata are de facto capitalists and they are
   like "working capitalist" and, consequently, their "wages" come from
   the surplus value appropriated from workers and realised on the market.
   Thus the exploitative role of managers, even if they can be fired, is
   no different from capitalists. Moreover, "shareholders and
   managers/technocrats share common motives: to make profits and to
   reproduce hierarchy relations that exclude most of the employees from
   effective decision making" [Takis Fotopoulos, "The Economic Foundations
   of an Ecological Society", pp. 1-40, Society and Nature, No.3, p. 16]
   In other words, the high pay of the higher levels of management is a
   share of profits not a labour income based on their contribution to
   production but rather due to their position in the economic hierarchy
   and the power that gives them.

   So management is paid well because they monopolise power in the company
   and can get away with it. As Bakunin argued, within the capitalist
   workplace "administrative work . . . [is] monopolised . . . if I
   concentrate in my hands the administrative power, it is not because the
   interests of production demand it, but in order to serve my own ends,
   the ends of exploitation. As absolute boss of my establishment I get
   for my labours [many] . . . times more than my workers get for theirs."
   [Op. Cit., p. 186] Given this, it is irrelevant whether those in the
   hierarchy simply control (in the case of managers) or actually own the
   means of production. What counts is that those who do the actual work
   are excluded from the decision making process.

   This is not to say that 100 percent of what managers do is
   exploitative. The case is complicated by the fact that there is a
   legitimate need for co-ordination between various aspects of complex
   production processes -- a need that would remain under libertarian
   socialism and would be filled by elected and recallable (and in some
   cases rotating) managers (see [5]section I.3). But under capitalism,
   managers become parasitic in proportion to their proximity to the top
   of the pyramid. In fact, the further the distance from the production
   process, the higher the salary; whereas the closer the distance, the
   more likely that a "manager" is a worker with a little more power than
   average. In capitalist organisations, the less you do, the more you
   get. In practice, executives typically call upon subordinates to
   perform managerial (i.e. co-ordinating) functions and restrict
   themselves to broader policy-making decisions. As their decision-making
   power comes from the hierarchical nature of the firm, they could be
   easily replaced if policy making was in the hands of those who are
   affected by it. As such, their role as managers do not require them to
   make vast sums. They are paid that well currently because they
   monopolise power in the company and can, consequently, get away with
   deciding that they, unsurprisingly, contribute most to the production
   of useful goods rather than those who do the actual work.

   Nor are we talking, as such, of profits generated by buying cheap and
   selling dear. We are discussing the situation at the level of the
   economy as a whole, not individual transactions. The reason is obvious.
   If profits could just explained in terms of buying cheap in order to
   sell dear then, over all, such transactions would cancel each other out
   when we look at the market as a whole as any profit will cancel any
   loss. For example, if someone buys a product at, say, 20 and sells it
   at 25 then there would be no surplus overall as someone else will have
   to pay 20 for something which cost 25. In other words, what one
   person gains as a seller, someone else will lose as a buyer and no net
   surplus has been created. Capitalists, in other words, do not simply
   profit at each other's expense. There is a creation of surplus rather
   than mere redistribution of a given product. This means that we are
   explaining why production results in a aggregate surplus and why it
   gets distributed between social classes under capitalism.

   This means that capitalism is based on the creation of surplus rather
   than mere redistribution of a given sum of products. If this were not
   the case then the amount of goods in the economy would not increase,
   growth would not exist and all that would happen is that the
   distribution of goods would change, depending on the transactions made.
   Such a world would be one without production and, consequently, not
   realistic. Unsurprisingly, as we noted in [6]section C.1, this is the
   world of neoclassical economics. This shows the weakness of attempts to
   explain the source of profits in terms of the market rather than
   production. While the market can explain how, perhaps, a specific set
   of goods and surplus is distributed, it cannot explain how a surplus is
   generated in the first place. To understand how a surplus is created we
   need to look at the process of value creation. For this, it is
   necessary to look at production to see if there is something which
   produces more than it gets paid for. Anarchists, like other socialists,
   argue that this is labour and, consequently, that capitalism is an
   exploitative system. We discuss why in the [7]next section.

   Obviously, pro-capitalist economics argues against this theory of how a
   surplus arises and the conclusion that capitalism is exploitative. We
   will discuss the more common arguments below. However, one example will
   suffice here to see why labour is the source of a surplus, rather than
   (say) "waiting", risk or the productivity of capital (to list some of
   the more common explanations for capitalist appropriation of surplus
   value). This is a card game. A good poker-player uses equipment
   (capital), takes risks, delays gratification, engages in strategic
   behaviour, tries new tricks (innovates), not to mention cheats, and can
   make large winnings. However, no surplus product results from such
   behaviour; the gambler's winnings are simply redistributions from
   others with no new production occurring. For one to win, the rest must
   lose. Thus risk-taking, abstinence, entrepreneurship, and so on might
   be necessary for an individual to receive profits but they are far from
   sufficient for them not to be the result a pure redistribution from
   others.

   In short, our discussion of exploitation under capitalism is first and
   foremost an economy-wide one. We are concentrating on how value (goods
   and services) and surplus value (profits, rent and interest) are
   produced rather than how they are distributed. The distribution of
   goods between people and the division of income into wages and surplus
   value between classes is a secondary concern as this can only occur
   under capitalism if workers produce goods and services to sell (this is
   the direct opposite of mainstream economics which assumes a static
   economy with almost no discussion of how scarce means are organised to
   yield outputs, the whole emphasis is on exchanges of ready made goods).

   Nor is this distribution somehow fixed. As we discuss in [8]section
   C.3, how the amount of value produced by workers is divided between
   wages and surplus value is source of much conflict and struggle, the
   outcome of which depends on the balance of power between and within
   classes. The same can be said of surplus value. This is divided between
   profits, interest and rent -- capitalists, financiers and landlords.
   This does not imply that these sections of the exploiting class see eye
   to eye or that there is not competition between them. Struggle goes on
   within classes and well as between classes and this applies at the top
   of the economic hierarchy as at the bottom. The different sections of
   the ruling elite fight over their share of surplus value. This can
   involve fighting over control of the state to ensure that their
   interests are favoured over others. For example, the Keynesian post-war
   period can be considered a period when industrial capitalists shaped
   state policy while the period after 1973 represents a shift in power
   towards finance capital.

   We must stress, therefore, that the exploitation of workers is not
   defined as payment less than competitive ("free market") for their
   labour. Rather, exploitation occurs even if they are paid the market
   wage. This is because workers are paid for their ability to labour
   (their "labour-power," to use Marx's term) rather the labour itself.
   This means that for a given hour's work (labour), the capitalist
   expects the worker to produce more than their wage (labour power). How
   much more is dependent on the class struggle and the objective
   circumstances each side faces. Indeed, a rebellious workforce willing
   to take direct action in defence of their interests will not allow
   subjection or its resulting exploitation.

   Similarly, it would be wrong to confuse exploitation with low wages.
   Yes, exploitation is often associated with paying low wages but it is
   more than possible for real wages to go up while the rate of
   exploitation falls or rises. While some anarchists in the nineteenth
   century did argue that capitalism was marked by falling real wages,
   this was more a product of the time they were living through rather
   than an universal law. Most anarchists today argue that whether wages
   rise or fall depends on the social and economic power of working people
   and the historic context of a given society. This means, in other
   words, that labour is exploited not because workers have a low standard
   of living (although it can) but because labour produces the whole of
   the value created in any process of production or creation of a service
   but gets only part of it back.

   As such, it does not matter if real wages do go up or not. Due to the
   accumulation of capital, the social and economic power of the
   capitalists and their ability to extract surplus-value can go up at a
   higher rate than real wages. The key issue is one of freedom rather
   than the possibility of consuming more. Bosses are in a position, due
   to the hierarchical nature of the capitalist workplace, to make workers
   produce more than they pay them in wages. The absolute level of those
   wages is irrelevant to the creation and appropriation of value and
   surplus-value as this happens at all times within capitalism.

   As an example, since the 1970s American workers have seen their wages
   stagnate and have placed themselves into more and more debt to maintain
   an expected standard of living. During this time, productivity has
   increased and so they have been increasingly exploited. However,
   between 1950s and 1970s wages did increase along with productivity.
   Strong unions and a willingness to strike mitigated exploitation and
   increased living standards but exploitation continued. As Doug Henwood
   notes, while "average incomes have risen considerably" since 1945, "the
   amount of work necessary to earn those incomes has risen with equal
   relentlessness . . . So, despite the fact that productivity overall is
   up more than threefold" over this time "the average worker would have
   to toil six months longer to make the average family income." [After
   the New Economy, pp. 39-40] In other words, rising exploitation can go
   hand in hand with rising wages.

   Finally, we must stress that we are critiquing economics mostly in its
   own terms. On average workers sell their labour-power at a "fair"
   market price and still exploitation occurs. As sellers of a commodity
   (labour-power) they do not receive its full worth (i.e. what they
   actually produce). Even if they did, almost all anarchists would still
   be against the system as it is based on the worker becoming a
   wage-slave and subject to hierarchy. In other words, they are not free
   during production and, consequently, they would still being robbed,
   although this time it is as human beings rather than a factor of
   production (i.e. they are oppressed rather than exploited). As Bookchin
   put it:

     "To the modern mind, labour is viewed as a rarefied, abstract
     activity, a process extrinsic to human notions of genuine
     self-actualisation. One usually 'goes to work' the way a condemned
     person 'goes' to a place of confinement: the workplace is little
     more than a penal institution in which mere existence must a penalty
     in the form of mindless labour . . . We 'measure' labour in hours,
     products, and efficiency, but rarely do we understand it as a
     concrete human activity. Aside from the earnings it generates,
     labour is normally alien to human fulfilment . . . [as] the rewards
     one acquires by submitting to a work discipline. By definition,
     these rewards are viewed as incentives for submission, rather than
     for the freedom that should accompany creativity and
     self-fulfilment. We commonly are 'paid' for supinely working on our
     knees, not for heroically standing in our feet." [The Ecology of
     Freedom, p. 308]

   Almost all anarchists seek to change this, combat oppression and
   alienation as well as exploitation (some individualist anarchists are
   the exception on this issue). Needless to say, the idea that we could
   be subject to oppression during working hours and not be exploited is
   one most anarchists would dismiss as a bad joke and, as a result,
   follow Proudhon and demand the abolition of wage labour (most take it
   further and advocate the abolition of the wages system as well, i.e.
   support libertarian communism).

C.2.2 How does exploitation happen?

   In order to make more money, money must be transformed into capital,
   i.e., workplaces, machinery and other "capital goods." By itself,
   however, capital (like money) produces nothing. While a few even talk
   about "making money work for you" (as if pieces of paper can actually
   do any form of work!) obviously this is not the case -- human beings
   have to do the actual work. As Kropotkin put it, "if [the capitalist]
   locks [his money] up, it will not increase, because [it] does not grow
   like seed, and after a lapse of a twelve month he will not find 110 in
   his drawer if he only put 100 into it. [The Place of Anarchism in
   Socialistic Evolution, p. 4] Capital only becomes productive in the
   labour process when workers use it:

     "Values created by net product are classed as savings and
     capitalised in the most highly exchangeable form, the form which is
     freest and least susceptible of depreciation, -- in a word, the form
     of specie, the only constituted value. Now, if capital leaves this
     state of freedom and engages itself, -- that is, takes the form of
     machines, buildings, etc., -- it will still be susceptible of
     exchange, but much more exposed than before to the oscillations of
     supply and demand. Once engaged, it cannot be disengaged without
     difficulty; and the sole resource of its owner will be exploitation.
     Exploitation alone is capable of maintaining engaged capital at its
     nominal value." [System of Economical Contradictions, p. 291]

   Under capitalism, workers not only create sufficient value (i.e.
   produced commodities) to maintain existing capital and their own
   existence, they also produce a surplus. This surplus expresses itself
   as a surplus of goods and services, i.e. an excess of commodities
   compared to the number a workers' wages could buy back. The wealth of
   the capitalists, in other words, is due to them "accumulating the
   product of the labour of others." [Kropotkin, Op. Cit., p. 3] Thus
   Proudhon:

     "The working man cannot . . . repurchase that which he has produced
     for his master. It is thus with all trades whatsoever. . . since,
     producing for a master who in one form or another makes a profit,
     they are obliged to pay more for their own labour than they get for
     it." [What is Property, p. 189]

   In other words, the price of all produced goods is greater than the
   money value represented by the workers' wages (plus raw materials and
   overheads such as wear and tear on machinery) when those goods were
   produced. The labour contained in these "surplus-products" is the
   source of profit, which has to be realised on the market (in practice,
   of course, the value represented by these surplus-products is
   distributed throughout all the commodities produced in the form of
   profit -- the difference between the cost price and the market price).
   In summary, surplus value is unpaid labour and hence capitalism is
   based on exploitation. As Proudhon noted, "Products, say economists,
   are only bought by products. This maxim is property's condemnation. The
   proprietor producing neither by his own labour nor by his implement,
   and receiving products in exchange for nothing, is either a parasite or
   a thief." [Op. Cit., p. 170]

   It is this appropriation of wealth from the worker by the owner which
   differentiates capitalism from the simple commodity production of
   artisan and peasant economies. All anarchists agree with Bakunin when
   he stated that:

     "what is property, what is capital in their present form? For the
     capitalist and the property owner they mean the power and the right,
     guaranteed by the State, to live without working . . . [and so] the
     power and right to live by exploiting the work of someone else . . .
     those . . . [who are] forced to sell their productive power to the
     lucky owners of both." [The Political Philosophy of Bakunin, p. 180]

   It is the nature of capitalism for the monopolisation of the worker's
   product by others to exist. This is because of private property in the
   means of production and so in "consequence of [which] . . . [the]
   worker, when he is able to work, finds no acre to till, no machine to
   set in motion, unless he agrees to sell his labour for a sum inferior
   to its real value." [Peter Kropotkin, Anarchism, p. 55]

   Therefore workers have to sell their labour on the market. However, as
   this "commodity" "cannot be separated from the person of the worker
   like pieces of property. The worker's capacities are developed over
   time and they form an integral part of his self and self-identity;
   capacities are internally not externally related to the person.
   Moreover, capacities or labour power cannot be used without the worker
   using his will, his understanding and experience, to put them into
   effect. The use of labour power requires the presence of its 'owner'. .
   . To contract for the use of labour power is a waste of resources
   unless it can be used in the way in which the new owner requires . . .
   The employment contract must, therefore, create a relationship of
   command and obedience between employer and worker." So, "the contract
   in which the worker allegedly sells his labour power is a contract in
   which, since he cannot be separated from his capacities, he sells
   command over the use of his body and himself. . . The characteristics
   of this condition are captured in the term wage slave." [Carole
   Pateman, The Sexual Contract, pp. 150-1]

   Or, to use Bakunin's words, "the worker sells his person and his
   liberty for a given time" and so "concluded for a term only and
   reserving to the worker the right to quit his employer, this contract
   constitutes a sort of voluntary and transitory serfdom." [The Political
   Philosophy of Bakunin, p. 187] This domination is the source of the
   surplus, for "wage slavery is not a consequence of exploitation --
   exploitation is a consequence of the fact that the sale of labour power
   entails the worker's subordination. The employment contract creates the
   capitalist as master; he has the political right to determine how the
   labour of the worker will be used, and -- consequently -- can engage in
   exploitation." [Pateman, Op. Cit., p. 149]

   So profits exist because the worker sells themselves to the capitalist,
   who then owns their activity and, therefore, controls them (or, more
   accurately, tries to control them) like a machine. Benjamin Tucker's
   comments with regard to the claim that capital is entitled to a reward
   are of use here. He notes that some "combat. . . the doctrine that
   surplus value -- oftener called profits -- belong to the labourer
   because he creates it, by arguing that the horse. . . is rightly
   entitled to the surplus value which he creates for his owner. So he
   will be when he has the sense to claim and the power to take it. . .
   Th[is] argument . . is based upon the assumption that certain men are
   born owned by other men, just as horses are. Thus its reductio ad
   absurdum turns upon itself." [Instead of a Book, pp. 495-6] In other
   words, to argue that capital should be rewarded is to implicitly assume
   that workers are just like machinery, another "factor of production"
   rather than human beings and the creator of things of value. So profits
   exists because during the working day the capitalist controls the
   activity and output of the worker (i.e. owns them during working hours
   as activity cannot be separated from the body and "[t]here is an
   integral relationship between the body and self. The body and self are
   not identical, but selves are inseparable from bodies." [Carole
   Pateman, Op. Cit., p. 206]).

   Considered purely in terms of output, this results in, as Proudhon
   noted, workers working "for an entrepreneur who pays them and keeps
   their products." [quoted by Martin Buber, Paths in Utopia, p. 29] The
   ability of capitalists to maintain this kind of monopolisation of
   another's time and output is enshrined in "property rights" enforced by
   either public or private states. In short, therefore, property "is the
   right to enjoy and dispose at will of another's goods - the fruit of an
   other's industry and labour." [P-J Proudhon, What is Property, p. 171]
   And because of this "right," a worker's wage will always be less than
   the wealth that he or she produces.

   The surplus value produced by labour is divided between profits,
   interest and rent (or, more correctly, between the owners of the
   various factors of production other than labour). In practice, this
   surplus is used by the owners of capital for: (a) investment (b) to pay
   themselves dividends on their stock, if any; (c) to pay for rent and
   interest payments; and (d) to pay their executives and managers (who
   are sometimes identical with the owners themselves) much higher
   salaries than workers. As the surplus is being divided between
   different groups of capitalists, this means that there can be clashes
   of interest between (say) industrial capitalists and finance
   capitalists. For example, a rise in interest rates can squeeze
   industrial capitalists by directing more of the surplus from them into
   the hands of rentiers. Such a rise could cause business failures and so
   a slump (indeed, rising interest rates is a key way of regulating
   working class power by generating unemployment to discipline workers by
   fear of the sack). The surplus, like the labour used to reproduce
   existing capital, is embodied in the finished commodity and is realised
   once it is sold. This means that workers do not receive the full value
   of their labour, since the surplus appropriated by owners for
   investment, etc. represents value added to commodities by workers --
   value for which they are not paid nor control.

   The size of this surplus, the amount of unpaid labour, can be changed
   by changing the duration and intensity of work (i.e. by making workers
   labour longer and harder). If the duration of work is increased, the
   amount of surplus value is increased absolutely. If the intensity is
   increased, e.g. by innovation in the production process, then the
   amount of surplus value increases relatively (i.e. workers produce the
   equivalent of their wage sooner during their working day resulting in
   more unpaid labour for their boss). Introducing new machinery, for
   example, increases surplus-value by reducing the amount of work
   required per unit of output. In the words of economist William
   Lazonick:

     "As a general rule, all market prices, including wages, are given to
     the particular capitalist. Moreover, in a competitive world a
     particular capitalist cannot retain privileged access to process or
     product innovations for any appreciable period of time. But the
     capitalist does have privileged access to, and control over, the
     workers that he employs. Precisely because the work is not perfectly
     mobile but is dependent on the capitalist to gain a living, the
     capitalist is not subject to the dictates of market forces in
     dealing with the worker in the production process. The more
     dependent the worker is on his or her particular employer, the more
     power the capitalist has to demand longer and harder work in return
     for a day's pay. The resultant unremunerated increase in the
     productivity of the worker per unit of time is the source of
     surplus-value.

     "The measure of surplus-value is the difference between the
     value-added by and the value paid to the worker. As owner of the
     means of production, the industrial capitalist has a legal right to
     keep the surplus-value for himself."
     [Competitive Advantage on the Shop Floor, p. 54]

   Such surplus indicates that labour, like any other commodity, has a use
   value and an exchange value. Labour's exchange value is a worker's
   wages, its use value their ability to work, to do what the capitalist
   who buys it wants. Thus the existence of "surplus products" indicates
   that there is a difference between the exchange value of labour and its
   use value, that labour can potentially create more value than it
   receives back in wages. We stress potentially, because the extraction
   of use value from labour is not a simple operation like the extraction
   of so many joules of energy from a ton of coal. Labour power cannot be
   used without subjecting the labourer to the will of the capitalist -
   unlike other commodities, labour power remains inseparably embodied in
   human beings. Both the extraction of use value and the determination of
   exchange value for labour depends upon - and are profoundly modified by
   - the actions of workers. Neither the effort provided during an hours
   work, nor the time spent in work, nor the wage received in exchange for
   it, can be determined without taking into account the worker's
   resistance to being turned into a commodity, into an order taker. In
   other words, the amount of "surplus products" extracted from a worker
   is dependent upon the resistance to dehumanisation within the
   workplace, to the attempts by workers to resist the destruction of
   liberty during work hours.

   Thus unpaid labour, the consequence of the authority relations explicit
   in private property, is the source of profits. Part of this surplus is
   used to enrich capitalists and another to increase capital, which in
   turn is used to increase profits, in an endless cycle (a cycle,
   however, which is not a steady increase but is subject to periodic
   disruption by recessions or depressions - "The business cycle." The
   basic causes for such crises will be discussed later, in sections
   [9]C.7 and [10]C.8).

   It should be noted that few economists deny that the "value added" by
   workers in production must exceed the wages paid. It has to, if a
   profit is to be made. As Adam Smith put it:

     "As soon as stock has accumulated in the hands of particular
     persons, some of them will naturally employ it in setting to work
     industrious people, whom they will supply with materials and
     subsistence, in order to make a profit by the sale of their work, or
     by what their labour adds to the value of the materials . . . The
     value which the workmen add to the materials, therefore, resolves
     itself in this case into two parts, of which one pays their wages,
     the other the profits of their employer upon the whole stock of
     materials and wages which he advanced. He could have no interest to
     employ them, unless he expected from the sale of their work
     something more than what was sufficient to replace his stock to
     him." [The Wealth of Nations, p. 42]

   That surplus value consists of unpaid labour is a simple fact. The
   difference is that non-socialist economists refuse to explain this in
   terms of exploitation. Like Smith, David Ricardo argued in a similar
   manner and justified surplus value appropriation in spite of this
   analysis. Faced with the obvious interpretation of non-labour income as
   exploitation which could easily be derived from classical economics,
   subsequent economists have sought to obscure this fact and have
   produced a series of rationales to justify the appropriation of workers
   labour by capitalists. In other words, to explain and justify the fact
   that capitalism is not based on its own principle that labour creates
   and justifies property. These rationales have developed over time,
   usually in response to socialist and anarchist criticism of capitalism
   and its economics (starting in response to the so-called Ricardian
   Socialists who predated Proudhon and Marx and who first made such an
   analysis commonplace). These have been based on many factors, such as
   the abstinence or waiting by the capitalist, the productivity of
   capital, "time-preference," entrepreneurialism and so forth. We discuss
   most rationales and indicate their weaknesses in subsequent sections.

C.2.3 Is owning capital sufficient reason to justify profits?

   No, it does not. To understand why, we must first explain the logic
   behind this claim. It is rooted in what is termed "marginal
   productivity" theory. In the words of one of its developers:

     "If each productive function is paid for according to the amount of
     its product, then each man get what he himself produces. If he
     works, he gets what he creates by working; if he provides capital,
     he gets what his capital produces; and if, further, he renders
     service by co-ordinating labour and capital, he gets the product
     that can be separately traced to that function. Only in one of these
     ways can a man produce anything. If he receives all that he brings
     into existence through any one of these three functions, he receives
     all that he creates at all." [John Bates Clark, The Distribution of
     Wealth, p.7]

   Needless to say, this analysis was based on the need to justify the
   existing system, for it was "the purpose of this work to show that the
   distribution of income to society is controlled by a natural law, and
   that this law, if it worked without friction, would give to every agent
   of production the amount of wealth which that agent creates." In other
   words, "what a social class gets is, under natural law, what it
   contributes to the general output of industry." [Clark, Op. Cit., p. v
   and p. 313] And only mad people can reject a "natural law" like gravity
   -- or capitalism!

   Most schools of capitalist economics, when they bother to try and
   justify non-labour income, hold to this theory of productivity.
   Unsurprisingly, as it proves what right-wing economist Milton Friedman
   called the "capitalist ethic": "To each according to what he and the
   instruments he owns produces." [Capitalism and Freedom, pp. 161-162] As
   such, this is one of the key defences of capitalism, based as it is on
   the productive contribution of each factor (labour, land and capital).
   Anarchists as unconvinced.

   Unsurprisingly, this theory took some time to develop given the
   theoretical difficulties involved. After all, you need all three
   factors to produce a commodity, say a bushel of wheat. How can we
   determine that percentage of the price is due to the land, what
   percentage to labour and what percentage to capital? You cannot simply
   say that the "contribution" of each factor just happens to be identical
   to its cost (i.e. the contribution of land is what the market rent is)
   as this is circular reasoning. So how is it possible to specify
   contribution of each factor of production independently of the market
   mechanism in such a way as to show, firstly, that the contributions add
   up to 100 percent and, secondly, that the free market will in fact
   return to each factor its respective contribution?

   This is where marginal productivity theory comes in. In neo-classical
   theory, the contribution of a specific factor is defined as the
   marginal product of that factor when the other factors are left
   constant. Take, as an example, a hundred bushels of wheat produced by X
   acres of land being worked by Y workers using Z worth of capital. The
   contribution of land can then be defined as the increase in wheat that
   an extra acre of land would produce (X+1) if the same number of workers
   employed the same capital worked it. Similarly, the contribution of a
   worker would be the increase that would result if an addition worker
   was hired (Y + 1) to work the same land (X) with the same capital (Z).
   The contribution of capital, obviously, would be the increase in wheat
   produced by the same number of workers (X) working the same amount of
   land (Y) using one more unit of capital (Z+1). Then mathematics kicks
   in. If enough assumptions are made in terms of the substitutability of
   factors, diminishing returns, and so forth, then a mathematical theorem
   (Euler's Theorem) can be used to show that the sum of these marginal
   contributions would be a hundred bushels. Applying yet more assumptions
   to ensure "perfect competition" it can be mathematically proven that
   the rent per acre set by this perfect market will be precisely the
   contribution of the land, that the market wage will be the contribution
   of the worker, and the market interest rate will be the contribution of
   capital. In addition, it can be shown that any monopoly power will
   enable a factor owner to receive more than it contributes, so
   exploiting the others.

   While this is impressive, the problems are obvious. As we discuss in
   [11]section C.2.5, this model does not (indeed, cannot) describe any
   actual real economy. However, there is a more fundamental issue than
   mere practicality or realism, namely that it confuses a moral principle
   (that factors should receive in accordance with their productive
   contributions) with an ownership issue. This is because even if we want
   to say that land and capital "contribute" to the final product, we
   cannot say the same for the landowner or the capitalist. Using our
   example above, it should be noted that neither the capitalist nor the
   landowner actually engages in anything that might be called a
   productive activity. Their roles are purely passive, they simply allow
   what they own to be used by the people who do the actual work, the
   labourers.

   Marginal productivity theory shows that with declining marginal
   productivity, the contribution of labour is less than the total
   product. The difference is claimed to be precisely the contribution of
   capital and land. But what is this "contribution" of capital and land?
   Without any labourers there would be no output. In addition, in
   physical terms, the marginal product of, say, capital is simply the
   amount by which production would decline is one piece of capital were
   taken out of production. It does not reflect any productive activity
   whatsoever on the part of the owner of said capital. It does not,
   therefore, measure his or her productive contribution. In other words,
   capitalist economics tries to confuse the owners of capital with the
   machinery they own. Unlike labour, whose "ownership" cannot be
   separated from the productive activities being done, capital and land
   can be rewarded without their owners actually doing anything productive
   at all.

   For all its amazing mathematics, the neo-classical solution fails
   simply because it is not only irrelevant to reality, it is not relevant
   ethically.

   To see why, let us consider the case of land and labour (capital is
   more complex and will be discussed in the next two sections). Marginal
   productivity theory can show, given enough assumptions, that five acres
   of land can produce 100 bushels of wheat with the labour of ten men and
   that the contribution of land and labour are, respectively, 40 and 60
   bushels each. In other words, that each worker receives a wage
   representing 6 bushels of wheat while the landlord receives an income
   of 40 bushels. As socialist David Schweickart notes, "we have derived
   both the contribution of labour and the contribution of land from
   purely technical considerations. We have made no assumptions about
   ownership, competition, or any other social or political relationship.
   No covert assumptions about capitalism have been smuggled into the
   analysis." [After Capitalism, p. 29]

   Surely this means that economics has produced a defence of non-labour
   income? Not so, as it ignores the key issue of what represents a valid
   contribution. The conclusion that the landlord (or capitalist) is
   entitled to their income "in no way follows from the technical premises
   of the argument. Suppose our ten workers had cultivated the five acres
   as a worker collective. In this, they would receive the entire product,
   all one hundred bushels, instead of sixty. Is this unfair? To whom
   should the other forty bushels go? To the land, for its 'contribution'?
   Should the collective perhaps burn forty bushels as an offering to the
   Land-God? (Is the Land-Lord the representative on Earth of this
   Land-God?)." [Op. Cit., p. 30] It should be noted that Schweickart is
   echoing the words of Proudhon:

     "How much does the proprietor increase the utility of his tenant's
     products? Has he ploughed, sowed, reaped, mowed, winnowed, weeded? .
     . . I admit that the land is an implement; but who made it? Did the
     proprietor? Did he -- by the efficacious virtue of the right of
     property, by this moral quality infused into the soil -- endow it
     with vigour and fertility? Exactly there lies the monopoly of the
     proprietor, though he did not make the implement, he asks pay for
     its use. When the Creator shall present himself and claim farm-rent,
     we will consider the matter with him; or even when the proprietor --
     his pretended representative -- shall exhibit his power of
     attorney." [What is Property?, pp. 166-7]

   In other words, granting permission cannot be considered as a
   "contribution" or a "productive" act:

     "We can see that a moral sleight-of-hand has been performed. A
     technical demonstration has passed itself off as a moral argument by
     its choice of terminology, namely, by calling a marginal product a
     'contribution.' The 'contribution = ethical entitlement' of the
     landowner has been identified with the 'contribution = marginal
     product' of the land . . . What is the nature of the landowner's
     'contribution' here? We can say that the landlord contributed the
     land to the workers, but notice the qualitative difference between
     his 'contribution' and the contribution of his workforce. He
     'contributes' his land -- but the land remains intact and remains
     his at the end of the harvest, whereas the labour contributed by
     each labourer is gone. If the labourers do not expend more labour
     next harvest, they will get nothing more, whereas the landowner can
     continue to 'contribute' year after year (lifting not a finger), and
     be rewarded year after year for doing so." [Schweickart, Op. Cit.,
     p. 30]

   As the examples of the capitalist and co-operative farms shows, the
   "contribution" of land and capital can be rewarded without their owners
   doing anything at all. So what does it mean, "capital's share"? After
   all, no one has ever given money to a machine or land. That money goes
   to the owner, not the technology or resource used. When "land" gets its
   "reward" it involves money going to the landowner not fertiliser being
   spread on the land. Equally, if the land and the capital were owned by
   the labourers then "capital" and "land" would receive nothing despite
   both being used in the productive process and, consequently, having
   "aided" production. Which shows the fallacy of the idea that profits,
   interest and rent represent a form of "contribution" to the productive
   process by land and capital which needs rewarded. They only get a
   "reward"
   when they hire labour to work them, i.e. they give permission for
   others to use the property in question in return for telling them what
   to do and keeping the product of their labour.

   As Proudhon put it, "[w]ho is entitled to the rent of the land? The
   producer of the land, without doubt. Who made the land? God. Then,
   proprietor, retire!" [Op. Cit., p. 104] Much the same can be said of
   "capital" (workplaces, machinery, etc.) as well. The capitalist, argued
   Berkman, "gives you a job; that is permission to work in the factory or
   mill which was not built by him but by other workers like yourself. And
   for that permission you help to support him for the rest of your life
   or as long as you work for him." [What is Anarchism?, p. 14]

   So non-labour income exists not because of the owners of capital and
   land "contribute" to production but because they, as a class, own the
   means of life and workers have to sell their labour and liberty to them
   to gain access:

     "We cry shame on the feudal baron who forbade the peasant to turn a
     clod of earth unless he surrendered to his lord a fourth of his
     crop. We called those the barbarous times, But if the forms have
     changed, the relations have remained the same, and the worker is
     forced, under the name of free contract, to accept feudal
     obligations." [Kropotkin, The Conquest of Bread, pp. 31-2]

   It is capitalist property relations that allow this monopolisation of
   wealth by those who own (or boss) but do not produce. The workers do
   not get the full value of what they produce, nor do they have a say in
   how the surplus value produced by their labour gets used (e.g.
   investment decisions). Others have monopolised both the wealth produced
   by workers and the decision-making power within the company. This is a
   private form of taxation without representation, just as the company is
   a private form of statism.

   Therefore, providing capital is not a productive act, and keeping the
   profits that are produced by those who actually do use capital is an
   act of theft. This does not mean, of course, that creating capital
   goods is not creative nor that it does not aid production. Far from it!
   But owning the outcome of such activity and renting it does not justify
   capitalism or profits. In other words, while we need machinery,
   workplaces, houses and raw materials to produce goods we do not need
   landlords and capitalists.

   The problem with the capitalists' "contribution to production" argument
   is that one must either assume (a) a strict definition of who is the
   producer of something, in which case one must credit only the
   worker(s), or (b) a looser definition based on which individuals have
   contributed to the circumstances that made the productive work
   possible. Since the worker's productivity was made possible in part by
   the use of property supplied by the capitalist, one can thus credit the
   capitalist with "contributing to production" and so claim that he or
   she is entitled to a reward, i.e. profit.

   However, if one assumes (b), one must then explain why the chain of
   credit should stop with the capitalist. Since all human activity takes
   place within a complex social network, many factors might be cited as
   contributing to the circumstances that allowed workers to produce --
   e.g. their upbringing and education, the contribution of other workers
   in providing essential products, services and infrastructure that
   permits their place of employment to operate, and so on (even the
   government, which funds infrastructure and education). Certainly the
   property of the capitalist contributed in this sense. But his
   contribution was less important than the work of, say, the worker's
   mother. Yet no capitalist, so far as we know, has proposed compensating
   workers' mothers with any share of the firm's revenues, and
   particularly not with a greater share than that received by
   capitalists! Plainly, however, if they followed their own logic
   consistently, capitalists would have to agree that such compensation
   would be fair.

   In summary, while some may consider that profit is the capitalist's
   "contribution" to the value of a commodity, the reality is that it is
   nothing more than the reward for owning capital and giving permission
   for others to produce using it. As David Schweickart puts it,
   "'providing capital' means nothing more than 'allowing it to be used.'
   But an act of granting permission, in and of itself, is not a
   productive activity. If labourers cease to labour, production ceases in
   any society. But if owners cease to grant permission, production is
   affected only if their authority over the means of production is
   respected." [Against Capitalism, p. 11]

   This authority, as discussed earlier, derives from the coercive
   mechanisms of the state, whose primary purpose is to ensure that
   capitalists have this ability to grant or deny workers access to the
   means of production. Therefore, not only is "providing capital" not a
   productive activity, it depends on a system of organised coercion which
   requires the appropriation of a considerable portion of the value
   produced by labour, through taxes, and hence is actually parasitic.
   Needless to say, rent can also be considered as "profit", being based
   purely on "granting permission" and so not a productive activity. The
   same can be said of interest, although the arguments are somewhat
   different (see [12]section C.2.6).

   So, even if we assume that capital and land are productive, it does not
   follow that owning those resources entitles the owner to an income.
   However, this analysis is giving too much credit to capitalist
   ideology. The simple fact is that capital is not productive at all.
   Rather, "capital" only contributes to production when used by labour
   (land does produce use values, of course, but these only become
   available once labour is used to pick the fruit, reap the corn or dig
   the coal). As such, profit is not the reward for the productivity of
   capital. Rather labour produces the marginal productivity of capital.
   This is discussed in the [13]next section.

C.2.4 Is profit the reward for the productivity of capital?

   In a word, no. As Proudhon pointed out, "Capital, tools, and machinery
   are likewise unproductive. . . The proprietor who asks to be rewarded
   for the use of a tool or for the productive power of his land, takes
   for granted, then, that which is radically false; namely, that capital
   produces by its own effort -- and, in taking pay for this imaginary
   product, he literally receives something for nothing." [What is
   Property?, p. 169] In other words, only labour is productive and profit
   is not the reward for the productivity of capital.

   Needless to say, capitalist economists disagree. "Here again the
   philosophy of the economists is wanting. To defend usury they have
   pretended that capital was productive, and they have changed a metaphor
   into a reality," argued Proudhon. The socialists had "no difficulty in
   overturning their sophistry; and through this controversy the theory of
   capital has fallen into such disfavour that today, in the minds of the
   people, capitalist and idler are synonymous terms." [System of
   Economical Contradictions, p. 290]

   Sadly, since Proudhon's time, the metaphor has become regained its
   hold, thanks in part to neo-classical economics and the "marginal
   productivity" theory. We explained this theory in the [14]last section
   as part of our discussion on why, even if we assume that land and
   capital are productive this does not, in itself, justify capitalist
   profit. Rather, profits accrue to the capitalist simply because he or
   she gave their permission for others to use their property. However,
   the notion that profits represent that "productivity" of capital is
   deeply flawed for other reasons. The key one is that, by themselves,
   capital and land produce nothing. As Bakunin put it, "neither property
   nor capital produces anything when not fertilised by labour." [The
   Political Philosophy of Bakunin, p. 183]

   In other words, capital is "productive" simply because people use it.
   This is hardly a surprising conclusion. Mainstream economics recognises
   it in its own way (the standard economic terminology for this is that
   "factors usually do not work alone"). Needless to say, the conclusions
   anarchists and defenders of capitalism draw from this obvious fact are
   radically different.

   The standard defence of class inequalities under capitalism is that
   people get rich by producing what other people want. That, however, is
   hardly ever true. Under capitalism, people get rich by hiring other
   people to produce what other people want or by providing land, money or
   machinery to those who do the hiring. The number of people who have
   became rich purely by their own labour, without employing others, is
   tiny. When pressed, defenders of capitalism will admit the basic point
   and argue that, in a free market, everyone gets in income what their
   contribution in producing these goods indicates. Each factor of
   production (land, capital and labour) is treated in the same way and
   their marginal productivity indicates what their contribution to a
   finished product is and so their income. Thus wages represent the
   marginal productivity of labour, profit the marginal productivity of
   capital and rent the marginal productivity of land. As we have used
   land and labour in the [15]previous section, we will concentrate on
   land and "capital" here. We must note, however, that marginal
   productivity theory has immense difficulties with capital and has been
   proven to be internally incoherent on this matter (see [16]next
   section). However, as mainstream economics ignores this, so will we for
   the time being.

   So what of the argument that profits represent the contribution of
   capital? The reason why anarchists are not impressed becomes clear when
   we consider ten men digging a hole with spades. Holding labour constant
   means that we add spades to the mix. Each new spade increases
   productivity by the same amount (because we assume that labour is
   homogenous) until we reach the eleventh spade. At that point, the extra
   spade lies unused and so the marginal contribution of the spade
   ("capital") is zero. This suggests that the socialists are correct,
   capital is unproductive and, consequently, does not deserve any reward
   for its use.

   Of course, it will be pointed out that the eleventh spade cost money
   and, as a result, the capitalist would have stopped at ten spades and
   the marginal contribution of capital equals the amount the tenth spade
   added. Yet the only reason that spade added anything to production was
   because there was a worker to use it. In other words, as economist
   David Ellerman stresses, the "point is that capital itself does not
   'produce' at all; capital is used by Labour to produce the outputs . .
   . Labour produces the marginal product of capital." [Property and
   Contract in Economics, p. 204] As such, to talk of the "marginal
   product" of capital is meaningless as holding labour constant is
   meaningless:

     "Consider, for example, the 'marginal product of a shovel' in a
     simple production process wherein three workers use two shovels and
     a wheelbarrow to dig out a cellar. Two of the workers use two
     shovels to fill the wheelbarrow which the third worker pushes a
     certain distance to dump the dirt. The marginal productivity of a
     shovel is defined as the extra product produced when an extra shovel
     is added and the other factors, such as labour, are held constant.
     The labour is the human activity of carrying out this production
     process. If labour was held 'constant' is the sense of carrying out
     the same human activity, then any third shovel would just lie unused
     and the extra product would be identically zero.

     "'Holding labour constant' really means reorganising the human
     activity in a more capital intensive way so that the extra shovel
     will be optimally utilised. For instance, all three workers could
     use the three shovels to fill the wheelbarrow and then they could
     take turns emptying the wheelbarrow. In this manner, the workers
     would use the extra shovel and by so doing they would produce some
     extra product (additional earth moved during the same time period).
     This extra product would be called the 'marginal product of the
     shovel, but in fact it is produced by the workers who are also using
     the additional shovel . . . [Capital] does not 'produce' its
     marginal product. Capital does not 'produce' at all. Capital is used
     by Labour to produce the output. When capital is increased, Labour
     produces extra output by using up the extra capital . . . In short,
     Labour produced the marginal product of capital (and used up the
     extra capital services)."
     [Op. Cit., pp. 207-9]

   Therefore, the idea that profits equals the marginal productivity of
   capital is hard to believe. Capital, in this perspective, is not only a
   tree which bears fruit even if its owner leaves it uncultivated, it is
   a tree which also picks its own fruit, prepares it and serves it for
   dinner! Little wonder the classical economists (Smith, Ricardo, John
   Stuart Mill) considered capital to be unproductive and explained
   profits and interest in other, less obviously false, means.

   Perhaps the "marginal productivity" of capital is simply what is left
   over once workers have been paid their "share" of production, i.e. once
   the marginal productivity of labour has been rewarded. Obviously the
   marginal product of labour and capital are related. In a production
   process, the contribution of capital will (by definition) be equal to
   total price minus the contribution of labour. You define the marginal
   product of labour, it is necessary to keep something else constant.
   This means either the physical inputs other than labour are kept
   constant, or the rate of profit on capital is kept constant. As
   economist Joan Robinson noted:

     "I found this satisfactory, for it destroys the doctrine that wages
     are regulated by marginal productivity. In a short-period case,
     where equipment is given, at full-capacity operation the marginal
     physical product of labour is indeterminate. When nine men with nine
     spades are digging a hole, to add a tenth man could increase output
     only to the extent that nine dig better if they have a rest from
     time to time. On the other hand, to subtract the ninth man would
     reduce output by more or less the average amount. The wage must lie
     somewhere between the average value of output per head and zero, so
     that marginal product is greater or much less than the wage
     according as equipment is being worked below or above its designed
     capacity." [Contributions to Modern Economics, p. 104]

   If wages are not regulated by marginal productivity theory, then
   neither is capital (or land). Subtracting labour while keeping capital
   constant simply results in unused equipment and unused equipment, by
   definition, produces nothing. What the "contribution" of capital is
   dependent, therefore, on the economic power the owning class has in a
   given market situation (as we discuss in [17]section C.3). As William
   Lazonick notes, the neo-classical theory of marginal productivity has
   two key problems which flow from its flawed metaphor that capital is
   "productive":

     "The first flaw is the assumption that, at any point in time, the
     productivity of a technology is given to the firm, irrespective of
     the social context in which the firm attempts to utilise the
     technology . . . this assumption, typically implicit in mainstream
     economic analysis and [is] derived from an ignorance of the nature
     of the production process as much as everything else . . ."

     "The second flaw in the neo-classical theoretical structure is the
     assumption that factor prices are independent of factor
     productivities. On the basis of this assumption, factor
     productivities arising from different combinations of capital and
     labour can be taken as given to the firm; hence the choice of
     technique depends only on variations in relative factor prices. It
     is, however, increasingly recognised by economists who speak of
     'efficiency wages' that factor prices and factor productivities may
     be linked, particularly for labour inputs . . . the productivity of
     a technology depends on the amount of effort that workers choose to
     supply."
     [Competitive Advantage on the Shop Floor, p. 130 and pp. 133-4]

   In other words, neo-classical economics forgets that technology has to
   be used by workers and so its "productivity" depends on how it is
   applied. If profit did flow as a result of some property of machinery
   then bosses could do without autocratic workplace management to ensure
   profits. They would have no need to supervise workers to ensure that
   adequate amounts of work are done in excess of what they pay in wages.
   This means the idea (so beloved by pro-capitalist economics) that a
   worker's wage is the equivalent of what she produces is one violated
   everyday within reality:

     "Managers of a capitalist enterprise are not content simply to
     respond to the dictates of the market by equating the wage to the
     value of the marginal product of labour. Once the worker has entered
     the production process, the forces of the market have, for a time at
     least, been superseded. The effort-pay relation will depend not only
     on market relations of exchange but also. . . on the hierarchical
     relations of production -- on the relative power of managers and
     workers within the enterprise." [William Lazonick, Business
     Organisation and the Myth of the Market Economy, pp. 184-5]

   But, then again, capitalist economics is more concerned with justifying
   the status quo than being in touch with the real world. To claim that a
   workers wage represents her contribution and profit capital's is simply
   false. Capital cannot produce anything (never mind a surplus) unless
   used by labour and so profits do not represent the productivity of
   capital. In and of themselves, fixed costs do not create value. Whether
   value is created depends on how investments are developed and used once
   in place. Which brings us back to labour (and the social relationships
   which exist within an economy) as the fundamental source of surplus
   value.

   Then there is the concept of profit sharing, whereby workers are get a
   share of the profits made by the company. Yet profits are the return to
   capital. This shatters the notion that profits represent the
   contribution of capital. If profits were the contribution of the
   productivity of equipment, then sharing profits would mean that capital
   was not receiving its full "contribution" to production (and so was
   being exploited by labour!). It is unlikely that bosses would implement
   such a scheme unless they knew they would get more profits out of it.
   As such, profit sharing is usually used as a technique to increase
   productivity and profits. Yet in neo-classical economics, it seems
   strange that such a technique would be required if profits, in fact,
   did represent capital's "contribution." After all, the machinery which
   the workers are using is the same as before profit sharing was
   introduced -- how could this unchanged capital stock produce an
   increased "contribution"? It could only do so if, in fact, capital was
   unproductive and it was the unpaid efforts, skills and energy of
   workers' that actually was the source of profits. Thus the claim that
   profit equals capital's "contribution" has little basis in fact.

   As capital is not autonomously productive and goods are the product of
   human (mental and physical) labour, Proudhon was right to argue that
   "Capital, tools, and machinery are likewise unproductive . . . The
   proprietor who asks to be rewarded for the use of a tool or for the
   productive power of his land, takes for granted, then, that which is
   radically false; namely, that capital produces by its own effort - and,
   in taking pay for this imaginary product, he literally receives
   something for nothing." [What is Property?, p. 169]

   It will be objected that while capital is not productive in itself, its
   use does make labour more productive. As such, surely its owner is
   entitled to some share of the larger output produced by its aid. Surely
   this means that the owners of capital deserve a reward? Is this
   difference not the "contribution" of capital? Anarchists are not
   convinced. Ultimately, this argument boils down to the notion that
   giving permission to use something is a productive act, a perspective
   we rejected in the [18]last section. In addition, providing capital is
   unlike normal commodity production. This is because capitalists, unlike
   workers, get paid multiple times for one piece of work (which, in all
   likelihood, they paid others to do) and keep the result of that labour.
   As Proudhon argued:

     "He [the worker] who manufactures or repairs the farmer's tools
     receives the price once, either at the time of delivery, or in
     several payments; and when this price is once paid to the
     manufacturer, the tools which he has delivered belong to him no
     more. Never can he claim double payment for the same tool, or the
     same job of repairs. If he annually shares in the products of the
     farmer, it is owing to the fact that he annually does something for
     the farmer.

     "The proprietor, on the contrary, does not yield his implement;
     eternally he is paid for it, eternally he keeps it."
     [Op. Cit., pp. 169-170]

   While the capitalist, in general, gets their investment back plus
   something extra, the workers can never get their time back. That time
   has gone, forever, in return for a wage which allows them to survive in
   order to sell their time and labour (i.e. liberty) again. Meanwhile,
   the masters have accumulated more capital and their the social and
   economic power and, consequently, their ability to extract surplus
   value goes up at a higher rate than the wages they have to pay (as we
   discuss in [19]section C.7, this process is not without problems and
   regularly causes economic crisis to break out).

   Without labour nothing would have been produced and so, in terms of
   justice, at best it could be claimed that the owners of capital deserve
   to be paid only for what has been used of their capital (i.e. wear and
   tear and damages). While it is true that the value invested in fixed
   capital is in the course of time transferred to the commodities
   produced by it and through their sale transformed into money, this does
   not represent any actual labour by the owners of capital. Anarchists
   reject the ideological sleight-of-hand that suggests otherwise and
   recognise that (mental and physical) labour is the only form of
   contribution that can be made by humans to a productive process.
   Without labour, nothing can be produced nor the value contained in
   fixed capital transferred to goods. As Charles A. Dana pointed out in
   his popular introduction to Proudhon's ideas, "[t]he labourer without
   capital would soon supply his wants by its production . . . but capital
   with no labourers to consume it can only lie useless and rot."
   [Proudhon and his "Bank of the People", p. 31] If workers do not
   control the full value of their contributions to the output they
   produce then they are exploited and so, as indicated, capitalism is
   based upon exploitation.

   Of course, as long as "capital" is owned by a different class than as
   those who use it, this is extremely unlikely that the owners of capital
   will simply accept a "reward" of damages. This is due to the
   hierarchical organisation of production of capitalism. In the words of
   the early English socialist Thomas Hodgskin "capital does not derive
   its utility from previous, but present labour; and does not bring its
   owner a profit because it has been stored up, but because it is a means
   of obtaining a command over labour." [Labour Defended against the
   Claims of Capital] It is more than a strange coincidence that the
   people with power in a company, when working out who contributes most
   to a product, decide it is themselves!

   This means that the notion that labour gets its "share" of the products
   created is radically false for, as "a description of property rights,
   the distributive shares picture is quite misleading and false. The
   simple fact is that one legal party owns all the product. For example,
   General Motors doesn't just own 'Capital's share' of the GM cars
   produced; it owns all of them." [Ellerman, Op. Cit., p. 27] Or as
   Proudhon put it, "Property is the right to enjoy and dispose of
   another's goods, -- the fruit of another's industry and labour." The
   only way to finally abolish exploitation is for workers to manage their
   own work and the machinery and tools they use. This is implied, of
   course, in the argument that labour is the source of property for "if
   labour is the sole basis of property, I cease to be a proprietor of my
   field as soon as I receive rent for it from another . . . It is the
   same with all capital." Thus, "all production being necessarily
   collective" and "all accumulated capital being social property, no one
   can be its exclusive proprietor." [What is Property?, p. 171, p. 133
   and p. 130]

   The reason why capital gets a "reward" is simply due to the current
   system which gives capitalist class an advantage which allows them to
   refuse access to their property except under the condition that they
   command the workers to make more than they have to pay in wages and
   keep their capital at the end of the production process to be used
   afresh the next. So while capital is not productive and owning capital
   is not a productive act, under capitalism it is an enriching one and
   will continue to be so until such time as that system is abolished. In
   other words, profits, interest and rent are not founded upon any
   permanent principle of economic or social life but arise from a
   specific social system which produce specific social relationships.
   Abolish wage labour by co-operatives, for example, and the issue of the
   "productivity" of "capital" disappears as "capital" no longer exists (a
   machine is a machine, it only becomes capital when it is used by wage
   labour).

   So rather that the demand for labour being determined by the technical
   considerations of production, it is determined by the need of the
   capitalist to make a profit. This is something the neo-classical theory
   implicitly admits, as the marginal productivity of labour is just a
   roundabout way of saying that labour-power will be bought as long as
   the wage is not higher than the profits that the workers produce. In
   other words, wages do not rise above the level at which the capitalist
   will be able to produce and realise surplus-value. To state that
   workers will be hired as long as the marginal productivity of their
   labour exceeds the wage is another way of saying that workers are
   exploited by their boss. So even if we do ignore reality for the
   moment, this defence of profits does not prove what it seeks to -- it
   shows that labour is exploited under capitalism.

   However, as we discuss in the [20]next section, this whole discussion
   is somewhat beside the point. This is because marginal productivity
   theory has been conclusively proven to be flawed by dissident economics
   and has been acknowledged as such by leading neo-classical economists.

C.2.5 Do profits represent the contribution of capital to production?

   In a word, no. While we have assumed the validity of "marginal
   productivity" theory in relation to capital in the previous two
   sections, the fact is that the theory is deeply flawed. This is on two
   levels. Firstly, it does not reflect reality in any way. Secondly, it
   is logically flawed and, even worse, this has been known to economists
   for decades. While the first objection will hardly bother most
   neo-classical economists (what part of that dogma does reflect
   reality?), the second should as intellectual coherence is what replaces
   reality in economics. However, in spite of "marginal productivity"
   theory being proven to be nonsense and admitted as such by leading
   neo-classical economists, it is still taught in economic classes and
   discussed in text books as if it were valid.

   We will discuss each issue in turn.

   The theory is based on a high level of abstraction and the assumptions
   used to allow the mathematics to work are so extreme that no real world
   example could possibly meet them. The first problem is determining the
   level at which the theory should be applied. Does it apply to
   individuals, groups, industries or the whole economy? For depending on
   the level at which it is applied, there are different problems
   associated with it and different conclusions to be drawn from it.
   Similarly, the time period over which it is to be applied has an
   impact. As such, the theory is so vague that it would be impossible to
   test as its supporters would simply deny the results as being
   inapplicable to their particular version of the model.

   Then there are problems with the model itself. While it has to assume
   that factors are identical in order to invoke the necessary
   mathematical theory, none of the factors used are homogenous in the
   real world. Similarly, for Euler's theory to be applied, there must be
   constant returns to scale and this does not apply either (it would be
   fair to say that the assumption of constant returns to scale was
   postulated to allow the theorem to be invoked in the first place rather
   than as a result of a scientific analysis of real industrial
   conditions). Also, the model assumes an ideal market which cannot be
   realised and any real world imperfections make it redundant. In the
   model, such features of the real world as oligopolistic markets (i.e.
   markets dominated by a few firms), disequilibrium states, market power,
   informational imperfections of markets, and so forth do not exist.
   Including any of these real features invalidates the model and no
   "factor" gets its just rewards.

   Moreover, like neo-classical economics in general, this theory just
   assumes the original distribution of ownership. As such, it is a boon
   for those who have benefited from previous acts of coercion -- their
   ill-gotten gains can now be used to generate income for them!

   Finally, "marginal productivity" theory ignores the fact that most
   production is collective in nature and, as a consequence, the idea of
   subtracting a single worker makes little or no sense. As soon as there
   is "a division of labour and an interdependence of different jobs, as
   is the case generally in modern industry," its "absurdity can
   immediately be shown." For example, "[i]f, in a coal-fired locomotive,
   the train's engineer is eliminated, one does not 'reduce a little' of
   the product (transportation), one eliminates it completely; and the
   same is true if one eliminates the fireman. The 'product' of this
   indivisible team of engineer and fireman obeys a law of all or nothing,
   and there is no 'marginal product' of the one that can be separated
   from the other. The same thing goes on the shop floor, and ultimately
   for the modern factory as a whole, where jobs are closely
   interdependent." [Cornelius Castoriadis, Political and Social Writings,
   vol. 3, p. 213] Kropotkin made the same point, arguing it "is utterly
   impossible to draw a distinction between the work" of the individuals
   collectively producing a product as all "contribute . . . in proportion
   to their strength, their energy, their knowledge, their intelligence,
   and their skill." [The Conquest of Bread, p. 170 and p. 169]

   This suggests another explanation for the existence of profits than the
   "marginal productivity" of capital. Let us assume, as argued in
   marginal productivity theory, that a worker receives exactly what she
   has produced because if she ceases to work, the total product will
   decline by precisely the value of her wage. However, this argument has
   a flaw in it. This is because the total product will decline by more
   than that value if two or more workers leave. This is because the wage
   each worker receives under conditions of perfect competition is assumed
   to be the product of the last labourer in neo-classical theory. The
   neo-classical argument presumes a "declining marginal productivity,"
   i.e. the marginal product of the last worker is assumed to be less than
   the second last and so on. In other words, in neo-classical economics,
   all workers bar the mythical "last worker" do not receive the full
   product of their labour. They only receive what the last worker is
   claimed to produce and so everyone bar the last worker does not receive
   exactly what he or she produces. In other words, all the workers are
   exploited bar the last one.

   However, this argument forgets that co-operation leads to increased
   productivity which the capitalists appropriate for themselves. This is
   because, as Proudhon argued, "the capitalist has paid as many times one
   day's wages" rather than the workers collectively and, as such, "he has
   paid nothing for that immense power which results from the union and
   harmony of labourers, and the convergence and simultaneousness of their
   efforts. Two hundred grenadiers stood the obelisk of Luxor upon its
   base in a few hours; do you suppose that one man could have
   accomplished the same task in two hundred days? Nevertheless, on the
   books of the capitalist, the amount of wages would have been the same."
   Therefore, the capitalist has "paid all the individual forces" but "the
   collective force still remains to be paid. Consequently, there remains
   a right of collective property" which the capitalist "enjoy[s]
   unjustly." [What is Property?, p. 127 and p. 130]

   As usual, therefore, we must distinguish between the ideology and
   reality of capitalism. As we indicated in [21]section C.1, the model of
   perfect competition has no relationship with the real world.
   Unsurprisingly, marginal productivity theory is likewise unrelated to
   reality. This means that the assumptions required to make "marginal
   productivity" theory work are so unreal that these, in themselves,
   should have made any genuine scientist reject the idea out of hand.
   Note, we are not opposing abstract theory, every theory abstracts from
   reality is some way. We are arguing that, to be valid, a theory has to
   reflect the real situation it is seeking to explain in some meaningful
   way. Any abstractions or assumptions used must be relatively trivial
   and, when relaxed, not result in the theory collapsing. This is not the
   case with marginal productivity theory. It is important to recognise
   that there are degrees of abstraction. There are "negligibility
   assumptions" which state that some aspect of reality has little or no
   effect on what is being analysed. Sadly for marginal productivity
   theory, its assumptions are not of this kind. Rather, they are "domain
   assumptions" which specify "the conditions under which a particular
   theory will apply. If those conditions do not apply, then neither does
   the theory." [Steve Keen, Debunking Economics, p. 151] This is the case
   here.

   However, most economists will happily ignore this critique for, as
   noted repeatedly, basing economic theory on reality or realistic models
   is not considered a major concern by neoclassical economists. However,
   "marginal productivity" theory applied to capital is riddled with
   logical inconsistencies which show that it is simply wrong. In the
   words of the noted left-wing economist Joan Robinson:

     "The neo-classicals evidently had not been told that the
     neo-classical theory did not contain a solution of the problems of
     profits or of the value of capital. They have erected a towering
     structure of mathematical theorems on a foundation that does not
     exist. Recently [in the 1960s, leading neo-classical economist] Paul
     Samuelson was sufficiently candid to admit that the basis of his
     system does not hold, but the theorems go on pouring out just the
     same." [Contributions to Modern Economics, p. 186]

   If profits are the result of private property and the inequality it
   produces, then it is unsurprising that neoclassical theory would be as
   foundationless as Robinson argues. After all, this is a political
   question and neo-classical economics was developed to ignore such
   questions. Marginal productivity theory has been subject to intense
   controversy, precisely because it claims to show that labour is not
   exploited under capitalism (i.e. that each factor gets what it
   contributes to production). We will now summarise this successful
   criticism.

   The first major theoretical problem is obvious: how do you measure
   capital? In neoclassical economics, capital is referred to as machinery
   of all sorts as well as the workplaces that house them. Each of these
   items is, in turn, made up of a multitude of other commodities and many
   of these are assemblies of other commodities. So what does it mean to
   say, as in marginal productivity theory, that "capital" is varied by
   one unit? The only thing these products have in common is a price and
   that is precisely what economists do use to aggregate capital. Sadly,
   though, shows "that there is no meaning to be given to a 'quantity of
   capital' apart from the rate of profit, so that the contention that the
   'marginal product of capital' determines the rate of profit is
   meaningless." [Robinson, Op. Cit., p. 103] This is because argument is
   based on circular reasoning:

     "For long-period problems we have to consider the meaning of the
     rate of profit on capital . . . the value of capital equipment,
     reckoned as its future earnings discounted at a rate of interest
     equal to the rate of profit, is equal to its initial cost, which
     involves prices including profit at the same rate on the value of
     the capital involved in producing it, allowing for depreciation at
     the appropriate rate over its life up to date.

     "The value of a stock of capital equipment, therefore, involves the
     rate of profit. There is no meaning in a 'quantity of capital' apart
     from the rate of profit."
     [Collected Economic Papers, vol. 4, p. 125]

   Looking at it another way, neo-classical economics seeks to
   simultaneously solve the problems of production and income
   distribution. It attempts to show how the level of employment of
   capital and labour is determined as well as how national income is
   divided between the two. The latter is done by multiplying the
   quantities of labour and capital by the equilibrium wage and interest
   rate, respectively. In the long term, equilibrium conditions are
   governed by the net marginal productivity of each factor, with each
   supplied until its net marginal revenue is zero. This is why the market
   rate of interest is used as capital is assumed to have marginal
   productivity and the existing market interest reflects that.

   Yet in what sense can we say that capital has marginal productivity?
   How is the stock of capital to be measured? One measure is to take the
   present value of the income stream expected to accrue to capital
   owners. However, where does this discount rate and net income stream
   come from? To find a value for these, it is necessary to estimate a
   national income and the division of income between labour and capital
   but that is what the analysis was meant to produce. In other words, the
   neo-classical theory requires assumptions which are, in fact, the
   solution. This means that value of capital is dependent on the
   distribution of income. As there is no rationale offered for choosing
   one income distribution over another, the neo-classical theory does not
   solve the problem it set out to investigate but rather simply assumes
   it away. It is a tautology. It asks how the rate of profit is
   determined and answers by referencing the quantity of capital and its
   marginal revenue product. When asked how these are determined, the
   reply is based on assuming a division of future income and the
   discounting of the returns of capital with the market rate of interest.
   That is, it simply says that the market rate of interest is a function
   of the market rate of interest (and an assumed distribution of income).

   In other words, according to neoclassical theory, the rate of profit
   and interest depends on the amount of capital, and the amount of
   capital depends on the rate of profit and interest. One has to assume a
   rate of profit in order to demonstrate the equilibrium rate of return
   is determined. This issue is avoided in neo-classical economics simply
   by ignoring it (it must be noted that the same can be said of the
   "Austrian" concept of "roundaboutness" as "it is impossible to define
   one way of producing a commodity as 'more roundabout' than another
   independently of the rate of profit . . . Therefore the Austrian notion
   of roundaboutness is as internally inconsistent as the neoclassical
   concept of the marginal productivity of capital." [Steve Keen,
   Debunking Economics, p. 302]).

   The next problem with the theory is that "capital" is treated as
   something utterly unreal. Take, for example, leading neoclassical
   Dennis Robertson's 1931 attempt to explain the marginal productivity of
   labour when holding "capital" constant:

     "If ten men are to be set out to dig a hole instead of nine, they
     will be furnished with ten cheaper spades instead of nine more
     expensive ones; or perhaps if there is no room for him to dig
     comfortably, the tenth man will be furnished with a bucket and sent
     to fetch beer for the other nine." ["Wage-grumbles", Economic
     Fragments, p. 226]

   So to work out the marginal productivity of the factors involved, "ten
   cheaper spades" somehow equals nine more expensive spades? How is this
   keeping capital constant? And how does this reflect reality? Surely,
   any real world example would involve sending the tenth digger to get
   another spade? And how do nine expensive spades become nine cheaper
   ones? In the real world, this is impossible but in neoclassical
   economics this is not only possible but required for the theory to
   work. As Robinson argued, in neo-classical theory the "concept of
   capital all the man-made factors are boiled into one, which we may call
   leets . . . [which], though all made up of one physical substance, is
   endowed with the capacity to embody various techniques of production .
   . . and a change of technique can be made simply by squeezing up or
   spreading out leets, instantaneously and without cost." [Contributions
   to Modern Economics, p. 106]

   This allows economics to avoid the obvious aggregation problems with
   "capital", make sense of the concept of adding an extra unit of capital
   to discover its "marginal productivity" and allows capital to be held
   "constant" so that the "marginal productivity" of labour can be found.
   For when "the stock of means of production in existence can be
   represented as a quantity of ectoplasm, we can say, appealing to
   Euler's theorem, that the rent per unit of ectoplasm is equal to the
   marginal product of the given quantity of ectoplasm when it is fully
   utilised. This does seem to add anything of interest to the argument."
   [Op. Cit., p. 99] This ensures reality has to be ignored and so
   economic theory need not discuss any practical questions:

     "When equipment is made of leets, there is no distinction between
     long and short-period problems . . . Nine spades are lumps of leets;
     when the tenth man turns up it is squeezed out to provide him with a
     share of equipment nine-tenths of what each man had before . . .
     There is no room for imperfect competition. There is no possibility
     of disappointed expectations . . . There is no problem of
     unemployment . . . Unemployed workers would bid down wages and the
     pre-existing quantity of leets would be spread out to accommodate
     them." [Op. Cit., p. 107]

   The concept that capital goods are made of ectoplasm and can be
   remoulded into the profit maximising form from day to day was invented
   in order to prove that labour and capital both receive their
   contribution to society, to show that labour is not exploited. It is
   not meant to be taken literally, it is only a parable, but without it
   the whole argument (and defence of capitalism) collapses. Once capital
   equipment is admitted to being actual, specific objects that cannot be
   squeezed, without cost, into new objects to accommodate more or less
   workers, such comforting notions that profits equal the (marginal)
   contribution of "capital" or that unemployment is caused by wages being
   too high have to be discarded for the wishful thinking they most surely
   are.

   The last problem arises when ignore these issues and assume that
   marginal productivity theory is correct. Consider the notion of the
   short run, where at least one factor of production cannot be varied. To
   determine its marginal productivity then capital has to be the factor
   which is varied. However, common sense suggests that capital is the
   least flexible factor and if that can be varied then every other one
   can be as well? As dissident economist Piero Sraffa argued, when a
   market is defined broadly enough, then the key neoclassical assumption
   that the demand and supply of a commodity are independent breaks down.
   This was applied by another economist, Amit Bhaduri, to the "capital
   market" (which is, by nature, a broadly defined industry). Steve Keen
   usually summarises these arguments, noting that "at the aggregate level
   [of the economy as a whole], the desired relationship -- the rate of
   profit equals the marginal productivity of capital -- will not hold
   true" as it only applies "when the capital to labour ratio is the same
   in all industries -- which is effectively the same as saying there is
   only one industry." This "proves Sraffa's assertion that, when a
   broadly defined industry is considered, changes in its conditions of
   supply and demand will affect the distribution of income." This means
   that a "change in the capital input will change output, but it also
   changes the wage, and the rate of profit . . . As a result, the
   distribution of income is neither meritocratic nor determined by the
   market. The distribution of income is to some significant degree
   determined independently of marginal productivity and the impartial
   blades of supply and demand . . . To be able to work out prices, it is
   first necessary to know the distribution of income . . . There is
   therefore nothing sacrosanct about the prices that apply in the
   economy, and equally nothing sacrosanct about the distribution of
   income. It reflects the relative power of different groups in society."
   [Op. Cit., p. 135]

   It should be noted that this critique bases itself on the neoclassical
   assumption that it is possible to define a factor of production called
   capital. In other words, even if we assume that neo-classical economics
   theory of capital is not circular reasoning, it's theory of
   distribution is still logically wrong.

   So mainstream economics is based on a theory of distribution which is
   utterly irrelevant to the real world and is incoherent when applied to
   capital. This would not be important except that it is used to justify
   the distribution of income in the real world. For example, the widening
   gap between rich and poor (it is argued) simply reflects a market
   efficiently rewarding more productive people. Thus the compensation for
   corporate chief executives climbs so sharply because it reflects their
   marginal productivity. Except, of course, the theory supports no such
   thing -- except in a make believe world which cannot exist (lassiez
   fairy land, anyone?).

   It must be noted that this successful critique of neoclassical
   economics by dissident economists was first raised by Joan Robinson in
   the 1950s (it usually called the Cambridge Capital Controversy). It is
   rarely mentioned these days. While most economic textbooks simply
   repeat the standard theory, the fact is that this theory has been
   successfully debunked by dissident economists over four decades go. As
   Steve Keen notes, while leading neoclassical economists admitted that
   the critique was correct in the 1960s, today "economic theory continues
   to use exactly the same concepts which Sraffa's critique showed to be
   completely invalid" in spite the "definitive capitulation by as
   significant an economist as Paul Samuelson." As he concludes: "There is
   no better sign of the intellectual bankruptcy of economics than this."
   [Op. Cit., p. 146, p. 129 and p. 147]

   Why? Simply because the Cambridge Capital Controversy would expose the
   student of economics to some serious problems with neo-classical
   economics and they may start questioning the internal consistency of
   its claims. They would also be exposed to alternative economic theories
   and start to question whether profits are the result of exploitation.
   As this would put into jeopardy the role of economists as, to quote
   Marx, the "hired prize-fighters" for capital who replace "genuine
   scientific research" with "the bad conscience and evil intent of
   apologetics." Unsurprisingly, he characterised this as "vulgar
   economics." [Capital, vol. 1, p. 97]

C.2.6 Does interest represent the "time value" of money?

   One defence of interest is the notion of the "time value" of money,
   that individuals have different "time preferences." Most individuals
   prefer, it is claimed, to consume now rather than later while a few
   prefer to save now on the condition that they can consume more later.
   Interest, therefore, is the payment that encourages people to defer
   consumption and so is dependent upon the subjective evaluations of
   individuals. It is, in effect, an exchange over time and so surplus
   value is generated by the exchange of present goods for future goods.

   Based on this argument, many supporters of capitalism claim that it is
   legitimate for the person who provided the capital to get back more
   than they put in, because of the "time value of money." This is because
   investment requires savings and the person who provides those had to
   postpone a certain amount of current consumption and only agree to do
   this only if they get an increased amount later (i.e. a portion, over
   time, of the increased output that their saving makes possible). This
   plays a key role in the economy as it provide the funds from which
   investment can take place and the economy grow.

   In this theory, interest rates are based upon this "time value" of
   money and the argument is rooted in the idea that individuals have
   different "time preferences." Some economic schools, like the Austrian
   school, argue that the actions by banks and states to artificially
   lower interest rates (by, for example, creating credit or printing
   money) create the business cycle as this distorts the information about
   people's willingness to consume now rather than later leading to over
   investment and so to a slump.

   That the idea of doing nothing (i.e. not consuming) can be considered
   as productive says a lot about capitalist theory. However, this is
   beside the point as the argument is riddled with assumptions and,
   moreover, ignores key problems with the notion that savings always lead
   to investment.

   The fundamental weakness of the theory of time preference must be that
   it is simply an unrealistic theory and does not reflect where the
   supply of capital does come from. It may be appropriate to the
   decisions of households between saving and consumption, but the main
   source of new capital is previous profit under capitalism. The
   motivation of making profits is not the provision of future means of
   consumption, it is profits for their own sake. The nature of capitalism
   requires profits to be accumulated into capital for if capitalists did
   only consume the system would break down. While from the point of view
   of the mainstream economics such profit-making for its own sake is
   irrational in reality it is imposed on the capitalist by capitalist
   competition. It is only by constantly investing, by introducing new
   technology, work practices and products, can the capitalists keep their
   capital (and income) intact. Thus the motivation of capitalists to
   invest is imposed on them by the capitalist system, not by subjective
   evaluations between consuming more later rather than now.

   Ignoring this issue and looking at the household savings, the theory
   still raises questions. The most obvious problem is that an
   individual's psychology is conditioned by the social situation they
   find themselves in. Ones "time preference" is determined by ones social
   position. If one has more than enough money for current needs, one can
   more easily "discount" the future (for example, workers will value the
   future product of their labour less than their current wages simply
   because without those wages there will be no future). We will discuss
   this issue in more detail later and will not do so here (see
   [22]section C.2.7).

   The second thing to ask is why should the supply price of waiting be
   assumed to be positive? If the interest rate simply reflects the
   subjective evaluations of individuals then, surely, it could be
   negative or zero. Deferred gratification is as plausible a
   psychological phenomenon as the overvaluation of present satisfactions,
   while uncertainty is as likely to produce immediate consumption as it
   is to produce provision for the future (saving). Thus Joan Robinson:

     "The rate of interest (excess of repayment over original loan) would
     settle at the level which equated supply and demand for loans.
     Whether it was positive or negative would depend upon whether
     spendthrifts or prudent family men happened to predominate in the
     community. There is no a priori presumption in favour of a positive
     rate. Thus, the rate of interest cannot be account for as the 'cost
     of waiting.'

     "The reason why there is always a demand for loans at a positive
     rate of interest, in an economy where there is property in the means
     of production and means of production are scarce, is that finance
     expended now can be used to employ labour in productive processes
     which will yield a surplus in the future over costs of production.
     Interest is positive because profits are positive (though at the
     same time the cost and difficulty of obtaining finance play a part
     in keeping productive equipment scarce, and so contribute to
     maintaining the level of profits)."
     [Contributions to Modern Economics, p. 83]

   It is only because money provides the authority to allocate resources
   and exploit wage labour that money now is more valuable ("we know that
   mere saving itself brings in nothing, so long as the pence saved are
   not used to exploit." [Kropotkin, The Conquest of Bread, p. 59]). The
   capitalist does not supply "time" (as the "time value" theory argues),
   the loan provides authority/power and so the interest rate does not
   reflect "time preference" but rather the utility of the loan to
   capitalists, i.e. whether it can be used to successfully exploit
   labour. If the expectations of profits by capitalists are low (as in,
   say, during a depression), loans would not be desired no matter how low
   the interest rate became. As such, the interest rate is shaped by the
   general profit level and so be independent of the "time preference" of
   individuals.

   Then there is the problem of circularity. In any real economy, interest
   rates obviously shape people's saving decisions. This means that an
   individual's "time preference" is shaped by the thing it is meant to
   explain:

     "But there may be some savers who have the psychology required by
     the text books and weigh a preference for present spending against
     an increment of income (interest, dividends and capital gains) to be
     had from an increment of wealth. But what then? Each individual goes
     on saving or dis-saving till the point where his individual
     subjective rate of discount is equal to the market rate of interest.
     There has to be a market rate of interest for him to compare his
     rate of discount to." [Joan Robinson, Op. Cit., pp. 11-12]

   Looking at the individuals whose subjective evaluations allegedly
   determine the interest rate, there is the critical question of
   motivation. Looking at lenders, do they really charge interest because
   they would rather spend more money later than now? Hardly, their
   motivation is far more complicated than that. It is doubtful that many
   people actually sit down and work out how much their money is going to
   be "worth" to them a year or more from now. Even if they did, the fact
   is that they really have no idea how much it will be worth. The future
   is unknown and uncertain and, consequently, it is implausible that
   "time preference" plays the determining role in the decision making
   process.

   In most economies, particularly capitalism, the saver and lender are
   rarely the same person. People save and the banks use it to loan it to
   others. The banks do not do this because they have a low "time
   preference" but because they want to make profits. They are a business
   and make their money by charging more interest on loans than they give
   on savings. Time preference does not enter into it, particularly as, to
   maximise profits, banks loan out more (on credit) than they have in
   savings and, consequently, make the actual interest rate totally
   independent of the rate "time preference" would (in theory) produce.

   Given that it would be extremely difficult, indeed impossible, to stop
   banks acting in this way, we can conclude that even if "time
   preference" were true, it would be of little use in the real world.
   This, ironically, is recognised by the same free market capitalist
   economists who advocate a "time preference" perspective on interest.
   Usually associated with the "Austrian" school, they argue that banks
   should have 100% reserves (i.e. they loan out only what they have in
   savings, backed by gold). This implicitly admits that the interest rate
   does not reflect "time preference" but rather the activities (such as
   credit creation) of banks (not to mention other companies who extend
   business credit to consumers). As we discuss in [23]section C.8, this
   is not due to state meddling with the money supply or the rate of
   interest but rather the way capitalism works.

   Moreover, as the banking industry is marked, like any industry, by
   oligopolistic competition, the big banks will be able to add a mark up
   on services, so distorting any interest rates set even further from any
   abstract "time preference" that exists. Therefore, the structure of
   that market will have a significant effect on the interest rate.
   Someone in the same circumstances with the same "time preference" will
   get radically different interest rates depending on the "degree of
   monopoly" of the banking sector (see [24]section C.5 for "degree of
   monopoly"). An economy with a multitude of small banks, implying low
   barriers of entry, will have different interest rates than one with a
   few big firms implying high barriers (if banks are forced to have 100%
   gold reserves, as desired by many "free market" capitalists, then these
   barriers may be even higher). As such, it is highly unlikely that "time
   preference" rather than market power is a more significant factor in
   determining interest rates in any real economy. Unless, of course, the
   rather implausible claim is made that the interest rate would be the
   same no matter how competitive the banking market was -- which, of
   course, is what the "time preference" argument does imply.

   Nor is "time preference" that useful when we look at the saver. People
   save money for a variety of motives, few (if any) of which have
   anything to do with "time preference." A common motive is,
   unsurprisingly, uncertainty about the future. Thus people put money
   into savings accounts to cover possible mishaps and unexpected
   developments (as in "saving for a rainy day"). Indeed, in an uncertain
   world future money may be its own reward for immediate consumption is
   often a risky thing to do as it reduces the ability to consumer in the
   future (for example, workers facing unemployment in the future could
   value the same amount of money more then than now). Given that the
   future is uncertain, many save precisely for precautionary reasons and
   increasing current consumption is viewed as a disutility as it is risky
   behaviour. Another common reason would be to save because they do not
   have enough money to buy what they want now. This is particularly the
   case with working class families who face stagnating or falling income
   or face financial difficulties.[Henwood, Wall Street, p. 65] Again,
   "time preference" does not come into it as economic necessity forces
   the borrowers to consume more now in order to be around in the future.

   Therefore, money lending is, for the poor person, not a choice between
   more consumption now/less later and less consumption now/more later. If
   there is no consumption now, there will not be any later. So not
   everybody saves money because they want to be able to spend more at a
   future date. As for borrowing, the real reason for it is necessity
   produced by the circumstances people find themselves in. As for the
   lender, their role is based on generating a current and future income
   stream, like any business. So if "time preference" seems unlikely for
   the lender, it seems even more unlikely for the borrower or saver.
   Thus, while there is an element of time involved in decisions to save,
   lend and borrow, it would be wrong to see interest as the consequence
   of "time preference." Most people do not think in terms of it and,
   therefore, predicting their behaviour using it would be silly.

   At the root of the matter is that for the vast majority of cases in a
   capitalist economy, an individual's "time preference" is determined by
   their social circumstances, the institutions which exist, uncertainty
   and a host of other factors. As inequality drives "time preference,"
   there is no reason to explain interest rates by the latter rather than
   the former. Unless, of course, you are seeking to rationalise and
   justify the rich getting richer. Ultimately, interest is an expression
   of inequality, not exchange:

     "If there is chicanery afoot in calling 'money now' a different good
     than 'money later,' it is by no means harmless, for the intended
     effect is to subsume money lending under the normative rubric of
     exchange . . . [but] there are obvious differences . . . [for in
     normal commodity exchange] both parties have something [while in
     loaning] he has something you don't . . . [so] inequality dominates
     the relationship. He has more than you have now, and he will get
     back more than he gives." [Schweickart, Against Capitalism, p. 23]

   While the theory is less than ideal, the practice is little better.
   Interest rates have numerous perverse influences in any real economy.
   In neo-classical and related economics, saving does not have a negative
   impact on the economy as it is argued that non-consumed income must be
   invested. While this could be the case when capitalism was young, when
   the owners of firms ploughed their profits back into them, as financial
   institutions grew this became less so. Saving and investment became
   different activities, governed by the rate of interest. If the supply
   of savings increased, the interest rate would drop and capitalists
   would invest more. If the demand for loans increased, then the interest
   rate would rise, causing more savings to occur.

   While the model is simple and elegant, it does have its flaws. These
   are first analysed by Keynes during the Great Depression of the 1930s,
   a depression which the neo-classical model said was impossible.

   For example, rather than bring investment into line with savings, a
   higher interest can cause savings to fall as "[h]ousehold saving, of
   course, is mainly saving up to spend later, and . . . it is likely to
   respond the wrong way. A higher rate of return means that 'less' saving
   is necessary to get a given pension or whatever." [Robinson, Op. Cit.,
   p. 11] Similarly, higher interest rates need not lead to higher
   investment as higher interest payments can dampen profits as both
   consumers and industrial capitalists have to divert more of their
   finances away from real spending and towards debt services. The former
   causes a drop in demand for products while the latter leaves less for
   investing.

   As argued by Keynes, the impact of saving is not as positive as some
   like to claim. Any economy is a network, where decisions affect
   everyone. In a nutshell, the standard model fails to take into account
   changes of income that result from decisions to invest and save (see
   Michael Stewart's Keynes and After for a good, if basic, introduction).
   This meant that if some people do not consume now, demand falls for
   certain goods, production is turned away from consumption goods, and
   this has an effect on all. Some firms will find their sales failing and
   may go under, causing rising unemployment. Or, to put it slightly
   differently, aggregate demand -- and so aggregate supply -- is changed
   when some people postpone consumption, and this affects others. The
   decrease in the demand for consumer goods affects the producers of
   these goods. With less income, the producers would reduce their
   expenditure and this would have repercussions on other people's
   incomes. In such circumstances, it is unlikely that capitalists would
   be seeking to invest and so rising savings would result in falling
   investment in spite of falling interest rates. In an uncertain world,
   investment will only be done if capitalists think that they will end up
   with more money than they started with and this is unlikely to happen
   when faced with falling demand.

   Whether rising interest rates do cause a crisis is dependent on the
   strength of the economy. During a strong expansion, a modest rise in
   interest rates may be outweighed by rising wages and profits. During a
   crisis, falling rates will not counteract the general economic despair.
   Keynes aimed to save capitalism from itself and urged state
   intervention to counteract the problems associated with free market
   capitalism. As we discuss in [25]section C.8.1, this ultimately failed
   partly due to the mainstream economics gutting Keynes' work of key
   concepts which were incompatible with it, partly due to Keynes' own
   incomplete escape from neoclassical economics, partly due the
   unwillingness of rentiers to agree to their own euthanasia but mostly
   because capitalism is inherently unstable due to the hierarchical (and
   so oppressive and exploitative) organisation of production.

   Which raises the question of whether someone who saves deserve a reward
   for so doing? Simply put, no. Why? Because the act of saving is no more
   an act of production than is purchasing a commodity (most investment
   comes from retained profits and so the analogy is valid). Clearly the
   reward for purchasing a commodity is that commodity. By analogy, the
   reward for saving should be not interest but one's savings -- the
   ability to consume at a later stage. Particularly as the effects of
   interest rates and savings can have such negative impacts on the rest
   of the economy. It seems strange, to say the least, to reward people
   for helping do so. Why should someone be rewarded for a decision which
   may cause companies to go bust, so reducing the available means of
   production as reduced demand results in job loses and idle factories?
   Moreover, this problem "becomes ever more acute the richer or more
   inegalitarian the society becomes, since wealthy people tend to save
   more than poor people." [Schweickart, After Capitalism, p. 43]

   Supporters of capitalists assume that people will not save unless
   promised the ability to consume more at a later stage, yet close
   examination of this argument reveals its absurdity. People in many
   different economic systems save in order to consume later, but only in
   capitalism is it assumed that they need a reward for it beyond the
   reward of having those savings available for consumption later. The
   peasant farmer "defers consumption" in order to have grain to plant
   next year, even the squirrel "defers consumption" of nuts in order to
   have a stock through winter. Neither expects to see their stores
   increase in size over time. Therefore, saving is rewarded by saving, as
   consuming is rewarded by consuming. In fact, the capitalist
   "explanation" for interest has all the hallmarks of apologetics. It is
   merely an attempt to justify an activity without careful analysing it.

   To be sure, there is an economic truth underlying this argument for
   justifying interest, but the formulation by supporters of capitalism is
   inaccurate and unfortunate. There is a sense in which 'waiting' is a
   condition for capital increase, though not for capital per se. Any
   society which wishes to increase its stock of capital goods may have to
   postpone some gratification. Workplaces and resources turned over to
   producing capital goods cannot be used to produce consumer items, after
   all. How that is organised differs from society to society. So, like
   most capitalist economics there is a grain of truth in it but this
   grain of truth is used to grow a forest of half-truths and confusion.

   As such, this notion of "waiting" only makes sense in a 'Robinson
   Crusoe" style situation, not in any form of real economy. In a real
   economy, we do not need to "wait" for our consumption goods until
   investment is complete since the division of labour/work has replaced
   the succession in time by a succession in place. We are dealing with an
   already well developed system of social production and an economy based
   on a social distribution of labour in which there are available all the
   various stages of the production process. As such, the notion that
   "waiting" is required makes little sense. This can be seen from the
   fact that it is not the capitalist who grants an advance to the worker.
   In almost all cases the worker is paid by their boss after they have
   completed their work. That is, it is the worker who makes an advance of
   their labour power to the capitalist. This waiting is only possible
   because "no species of labourer depends on any previously prepared
   stock, for in fact no such stock exists; but every species of labourer
   does constantly, and at all times, depend for his supplies on the
   co-existing labour of some other labourers." [Thomas Hodgskin, Labour
   Defended Against the Claims of Capital] This means that the workers, as
   a class, creates the fund of goods out of which the capitalists pay
   them.

   Ultimately, selling the use of money (paid for by interest) is not the
   same as selling a commodity. The seller of the commodity does not
   receive the commodity back as well as its price, unlike the typical
   lender of money. In effect, as with rent and profits, interest is
   payment for permission to use something and, therefore, not a
   productive act which should be rewarded. It is not the same as other
   forms of exchange. Proudhon pointed out the difference:

     "Comparing a loan to a sale, you say: Your argument is as valid
     against the latter as against the former, for the hatter who sells
     hats does not deprive himself.

     "No, for he receives for his hats -- at least he is reputed to
     receive for them -- their exact value immediately, neither more nor
     less. But the capitalist lender not only is not deprived, since he
     recovers his capital intact, but he receives more than his capital,
     more than he contributes to the exchange; he receives in addition to
     his capital an interest which represents no positive product on his
     part. Now, a service which costs no labour to him who renders it is
     a service which may become gratuitous."
     [Interest and Principal: The Circulation of Capital, Not Capital
     Itself, Gives Birth to Progress]

   The reason why interest rates do not fall to zero is due to the class
   nature of capitalism, not "time preference." That it is ultimately
   rooted in social institutions can be seen from Bhm-Bawerk's
   acknowledgement that monopoly can result in exploitation by increasing
   the rate of interest above the rate specified by "time preference"
   (i.e. the market):

     "Now, of course, the circumstances unfavourable to buyers may be
     corrected by active competition among sellers . . . But, every now
     and then, something will suspend the capitalists' competition, and
     then those unfortunates, whom fate has thrown on a local market
     ruled by monopoly, are delivered over to the discretion of the
     adversary. Hence direct usury, of which the poor borrower is only
     too often the victim; and hence the low wages forcibly exploited
     from the workers. . .

     "It is not my business to put excesses like these, where there
     actually is exploitation, under the aegis of that favourable opinion
     I pronounced above as to the essence of interest. But, on the other
     hand, I must say with all emphasis, that what we might stigmatise as
     'usury' does not consist in the obtaining of a gain out of a loan,
     or out of the buying of labour, but in the immoderate extent of that
     gain . . . Some gain or profit on capital there would be if there
     were no compulsion on the poor, and no monopolising of property; and
     some gain there must be. It is only the height of this gain where,
     in particular cases, it reaches an excess, that is open to
     criticism, and, of course, the very unequal conditions of wealth in
     our modern communities bring us unpleasantly near the danger of
     exploitation and of usurious rates of interest."
     [The Positive Theory of Capital, p. 361]

   Little wonder, then, that Proudhon continually stressed the need for
   working people to organise themselves and credit (which, of course,
   they would have done naturally, if it were not for the state
   intervening to protect the interests, income and power of the ruling
   class, i.e. of itself and the economically dominant class). If, as
   Bhm-Bawerk admitted, interest rates could be high due to institutional
   factors then, surely, they do not reflect the "time preferences" of
   individuals. This means that they could be lower (effectively zero) if
   society organised itself in the appropriate manner. The need for
   savings could be replaced by, for example, co-operation and credit (as
   already exists, in part, in any developed economy). Organising these
   could ensure a positive cycle of investment, growth and savings
   (Keynes, it should be noted, praised Proudhon's follower Silvio Gesell
   in The General Theory. For a useful discussion see Dudley Dillard's
   essay "Keynes and Proudhon" [The Journal of Economic History, vol. 2,
   No. 1, pp. 63-76]).

   Thus the key flaw in the theory is that of capitalist economics in
   general. By concentrating on the decisions of individuals, it ignores
   the social conditions in which these decisions are made. By taking the
   social inequalities and insecurities of capitalism as a given, the
   theory ignores the obvious fact that an individual's "time preference"
   will be highly shaped by their circumstances. Change those
   circumstances and their "time preference" will also change. In other
   words, working people have a different "time preference" to the rich
   because they are poorer. Similarly, by focusing on individuals, the
   "time preference" theory fails to take into account the institutions of
   a given society. If working class people have access to credit in other
   forms than those supplied by capitalists then their "time preference"
   will differ radically. As an example, we need only look at credit
   unions. In communities with credit unions the poor are less likely to
   agree to get into an agreement from a loan shark. It seems unlikely, to
   say the least, that the "time preference" of those involved have
   changed. They are subject to the same income inequalities and pressures
   as before, but by uniting with their fellows they give themselves
   better alternatives.

   As such, "time preference" is clearly not an independent factor. This
   means that it cannot be used to justify capitalism or the charging of
   interest. It simply says, in effect, that in a society marked by
   inequality the rich will charge the poor as much interest as they can
   get away with. This is hardly a sound basis to argue that charging
   interest is a just or a universal fact. It reflects social inequality,
   the way a given society is organised and the institutions it creates.
   Put another way, there is no "natural" rate of interest which reflects
   the subjective "time preferences" of abstract individuals whose
   decisions are made without any social influence. Rather, the interest
   rate depends on the conditions and institutions within the economy as a
   whole. The rate of interest is positive under capitalism because it is
   a class society, marked by inequality and power, not because of the
   "time preference" of abstract individuals.

   In summary, providing capital and charging interest are not productive
   acts. As Proudhon argued, "all rent received (nominally as damages, but
   really as payment for a loan) is an act of property -- of robbery."
   [What is Property, p. 171]

C.2.7 Are interest and profit not the reward for waiting?

   Another defence of surplus value by capitalist economics is also based
   on time. This argument is related to the "time preference" one we have
   discussed in the [26]last section and is, likewise, rooted in the idea
   that money now is different than money later and, as a consequence,
   surplus value represents (in effect) an exchange of present goods for
   future ones. This argument has two main forms, depending on whether it
   is interest or profits which are being defended, but both are based on
   this perspective. We will discuss each in turn.

   One of the oldest defences of interest is the "abstinence" theory first
   postulated by Nassau Senior in 1836. For Senior, abstinence is a
   sacrifice of present enjoyment for the purpose achieving some distant
   result. This demands the same heavy sacrifice as does labour, for to
   "abstain from the enjoyment which is in our power, or to seek distant
   rather than immediate results, are among the most painful exertions of
   the human will." Thus wages and interest/profit "are to be considered
   as the rewards of peculiar sacrifices, the former the remuneration for
   labour, and the latter for abstinence from immediate enjoyment." [An
   Outline of the Science of Political Economy, p. 60 and p. 91]

   Today, the idea that interest is the reward for "abstinence" on the
   part of savers is still a common one in capitalist economics. However,
   by the end of the nineteenth century, Senior's argument had become
   known as the "waiting" theory while still playing the same role in
   justifying non-labour income. One of the leading neo-classical
   economists of his day, Alfred Marshall, argued that "[i]f we admit [a
   commodity] is the product of labour alone, and not of labour and
   waiting, we can no doubt be compelled by an inexorable logic to admit
   that there is no justification of interest, the reward for waiting."
   [Principles of Economics, p. 587] While implicitly recognising that
   labour is the source of all value in capitalism (and that abstinence is
   not the source of profits), it is claimed that interest is a
   justifiable claim on the surplus value produced by a worker.

   Why is this the case? Capitalist economics claims that by "deferring
   consumption," the capitalist allows new means of production to be
   developed and so should be rewarded for this sacrifice. In other words,
   in order to have capital available as an input -- i.e. to bear costs
   now for returns in the future -- someone has to be willing to postpone
   his or her consumption. That is a real cost, and one that people will
   pay only if rewarded for it:

     "human nature being what it is, we are justified in speaking of the
     interest on capital as the reward of the sacrifice involved in
     waiting for the enjoyment of material resources, because few people
     would save much without reward; just as we speak of wages as the
     reward of labour, because few people would work hard without
     reward." [Op. Cit., p. 232]

   The interest rate is, in neo-classical economic theory, set when the
   demand for loans meets the supply of savings. The interest rate stems
   from the fact that people prefer present spending over future spending.
   If someone borrows 200 for one year at 5%, this is basically the same
   as saying that there would rather have 200 now than 210 a year from
   now. Thus interest is the cost of providing a service, namely time.
   People are able to acquire today what they would otherwise not have
   until sometime in the future. With a loan, interest is the price of the
   advantage obtained from having money immediately rather than having to
   wait for.

   This, on first appears, seems plausible. If you accept the logic of
   capitalist economics and look purely at individuals and their
   preferences independently of their social circumstances then it can
   make sense. However, once you look wider you start to see this argument
   start to fall apart. Why is it that the wealthy are willing to save and
   provide funds while it is the working class who do not save and get
   into debt? Surely a person's "time preference"
   is dependent on their socio-economic position? As we argued in the
   [27]last section, this means that any subjective evaluation of the
   present and future is dependent on, not independent of, the structure
   of market prices and income distribution. It varies with the income of
   individual and their class position, since the latter will condition
   the degree or urgency of present wants and needs.

   So this theory appears ludicrous to a critic of capitalism -- simply
   put, does the mine owner really sacrifice more than a miner, a rich
   stockholder more than an autoworker working in their car plant, a
   millionaire investor more than a call centre worker? As such, the
   notion that "waiting" explains interest is question begging in the
   extreme as it utterly ignores inequality within a society. After all,
   it is far easier for a rich person to "defer consumption" than for
   someone on an average income. This is borne out by statistics, for as
   Simon Kuznets has noted, "only the upper income groups save; the total
   savings of groups below the top decile are fairly close to zero."
   [Economic Growth and Structure, p. 263] Obviously, therefore, in modern
   society it is the capitalist class, the rich, who refrain from
   expending their income on immediate consumption and "abstain."
   Astonishingly, working class people show no such desire to abstain from
   spending their wages on immediate consumption. It does not take a
   genius to work out why, although many economists have followed Senior
   in placing the blame on working class lack of abstinence on poor
   education rather than, say, the class system they live in (for Senior,
   "the worse educated" classes "are always the most improvident, and
   consequently the least abstinent." [Op. Cit., p. 60]).

   Therefore, the plausibility of interest as payment for the pain of
   deferring consumption rests on the premise that the typical saving unit
   is a small or medium-income household. But in contemporary capitalist
   societies, this is not the case. Such households are not the source of
   most savings; the bulk of interest payments do not go to them. As such,
   interest is the dependent factor and so "waiting" cannot explain
   interest. Rather, interest is product of social inequality and the
   social relationships produced by an economy. Lenders lend because they
   have the funds to do so while borrowers borrow because without money
   now they may not be around later. As those with funds are hardly going
   without by lending, it does not make much sense to argue that they
   would spend even more today without the temptation of more income
   later.

   To put this point differently, the capitalist proponents of interest
   only consider "postponing consumption" as an abstraction, without
   making it concrete. For example, a capitalist may "postpone
   consumption" of his 10th Rolls Royce because he needs the money to
   upgrade some machinery in his factory; whereas a single mother may have
   to "postpone consumption" of food or adequate housing in order to
   attempt to better take care of her children. The two situations are
   vastly different, yet the capitalist equates them. This equation
   implies that "not being able to buy anything you want" is the same as
   "not being able to buy things you need", and is thus skewing the
   obvious difference in costs of such postponement of consumption!

   Thus Proudhon's comments that the loaning of capital "does not involve
   an actual sacrifice on the part of the capitalist" and so "does not
   deprive himself. . . of the capital which be lends. He lends it, on the
   contrary, precisely because the loan is not a deprivation to him; he
   lends it because he has no use for it himself, being sufficiently
   provided with capital without it; be lends it, finally, because he
   neither intends nor is able to make it valuable to him personally, --
   because, if he should keep it in his own hands, this capital, sterile
   by nature, would remain sterile, whereas, by its loan and the resulting
   interest, it yields a profit which enables the capitalist to live
   without working. Now, to live without working is, in political as well
   as moral economy, a contradictory proposition, an impossible thing."
   [Interest and Principal: A Loan is a Service]

   In other words, contra Marshall, saving is not a sacrifice for the
   wealthy and, as such, not deserving a reward. Proudhon goes on:

     "The proprietor who possesses two estates, one at Tours, and the
     other at Orleans, and who is obliged to fix his residence on the one
     which he uses, and consequently to abandon his residence on the
     other, can this proprietor claim that he deprives himself of
     anything, because he is not, like God, ubiquitous in action and
     presence? As well say that we who live in Paris are deprived of a
     residence in New York! Confess, then, that the privation of the
     capitalist is akin to that of the master who has lost his slave, to
     that of the prince expelled by his subjects, to that of the robber
     who, wishing to break into a house, finds the dogs on the watch and
     the inmates at the windows."

   Given how much income this "abstinence" or "waiting" results in, we can
   only conclude that it is the most painful of decisions possible for a
   multi-millionaire to decide not to buy that fifth house and instead
   save the money. The effort to restrain themselves from squandering
   their entire fortunes all at once must be staggering. In the
   capitalist's world, an industrialist who decides not to consume a part
   of their riches "suffers" a cost equivalent to that of someone who
   postpones consumption of their meagre income to save enough to get
   something they need. Similarly, if the industrialist "earns" hundred
   times more in interest than the wage of the worker who toils in their
   workplace, the industrialist "suffers" hundred times more discomfort
   living in his palace than, say, the coal miner does working at the coal
   face in dangerous conditions or the worker stuck in a boring McJob they
   hate. The "disutility" of postponing consumption while living in luxury
   is obviously 100 times greater than the "disutility" of, say, working
   for a living and so should be rewarded appropriately.

   As there is no direct relationship between interest received and the
   "sacrifice" involved (if anything, it is an inverse relationship), the
   idea that interest is the reward for waiting is simply nonsense. You
   need be no anarchist to come to this obvious conclusion. It was
   admitted as much by a leading capitalist economist and his argument
   simply echoes Proudhon's earlier critique:

     "the existence and height of interest by no means invariably
     correspond with the existence and the height of a 'sacrifice of
     abstinence.' Interest, in exceptional cases, is received where there
     has been no individual sacrifice of abstinence. High interest is
     often got where the sacrifice of the abstinence is very trifling --
     as in the case of [a] millionaire -- and 'low interest' is often got
     where the sacrifice entailed by the abstinence is very great. The
     hardly saved sovereign which the domestic servant puts in the
     savings bank bears, absolutely and relatively, less interest than
     the lightly spared thousands which the millionaire puts to fructify
     in debenture and mortgage funds. These phenomena fit badly into a
     theory which explains interest quite universally as a 'wage of
     abstinence.'" [Eugen von Bhm-Bawerk, Capital and Interest, p. 277]

   All in all, as Joan Robinson pointed out, "that the rate of interest is
   the 'reward for waiting' but 'waiting' only means owning wealth . . .
   In short, a man who refrains from blowing his capital in orgies and
   feasts can continue to get interest on it. This seems perfectly
   correct, but as a theory of distribution it is only a circular
   argument." [Contributions to Modern Economics, p. 11] Interest is not
   the reward for "waiting," rather it is one of the (many) rewards for
   being rich. This was admitted as much by Marshall himself, who noted
   that the "power to save depends on an excess of income over necessary
   expenditure; and this is greatest among the wealthy." [Op. Cit., p.
   229]

   Little wonder, then, that neo-classical economists introduced the term
   waiting as an "explanation" for returns to capital (such as interest).
   Before this change in the jargon of economics, mainstream economists
   used the notion of "abstinence" (the term used by Nassau Senior) to
   account for (and so justify) interest. Just as Senior's "theory" was
   seized upon to defend returns to capital, so was the term "waiting"
   after it was introduced in the 1880s. Interestingly, while describing
   exactly the same thing, "waiting" became the preferred term simply
   because it had a less apologetic ring to it. Both describe the
   "sacrifice of present pleasure for the sake of future" yet, according
   to Marshall, the term "abstinence" was "liable to be misunderstood"
   because there were just too many wealthy people around who received
   interest and dividends without ever having abstained from anything. As
   he admitted, the "greatest accumulators of wealth are very rich
   persons, some [!] of whom live in luxury, and certainly do not practise
   abstinence in that sense of the term in which it is convertible with
   abstemiousness." So he opted for the term "waiting" because there was
   "advantage" in its use to describe "the accumulation of wealth" as the
   "result of a postponement of enjoyment." [Op. Cit., pp. 232-3] This is
   particularly the case as socialists had long been pointing out the
   obvious fact that capitalists do not "abstain" from anything.

   The lesson is obvious, in mainstream economics if reality conflicts
   with your theory, do not reconsider the theory, change its name!

   The problems of "waiting" and "abstinence" as the source of interest
   becomes even clearer when we look at inherited wealth. Talking about
   "abstinence"
   or "waiting" when discussing a capitalist inheriting a company worth
   millions is silly. Senior recognised this, arguing that income in this
   case is not profit, but rather "has all the attributes of rent." [Op.
   Cit., p. 129] That such a huge portion of capitalist revenue would not
   be considered profit shows the bankruptcy of any theory which see
   profit as the reward for "waiting." However, Senior's argument does
   show that interest payments need not reflect any positive contribution
   to production by those who receive it. Like the landlord receiving
   payment for owning a gift of nature, the capitalist receives income for
   simply monopolising the work of previous generations and, as Smith put
   it, the "rent of land, considered as the price paid for the use of
   land, is naturally a monopoly price." [The Wealth of Nations, p. 131]

   Even capitalist economists, while seeking to justify interest, admit
   that it "arises independently of any personal act of the capitalist. It
   accrues to him even though he has not moved any finger in creating it .
   . . And it flows without ever exhausting that capital from which it
   arises, and therefore without any necessary limit to its continuance.
   It is, if one may use such an expression in mundane matters, capable of
   everlasting life." [Bhm-Bawerk, Op. Cit., p. 1] Little wonder we
   argued in [28]section C.2.3 that simply owning property does not
   justify non-labour income.

   In other words, due to one decision not to do anything (i.e. not to
   consume), a person (and his or her heirs) may receive forever a reward
   that is not tied to any productive activity. Unlike the people actually
   doing the work (who only get a reward every time they "contribute" to
   creating a commodity), the capitalist will get rewarded for just one
   act of abstention. This is hardly a just arrangement. As David
   Schweickart has pointed out, "Capitalism does reward some individuals
   perpetually. This, if it is to be justified by the canon of
   contribution, one must defend the claim that some contributions are
   indeed eternal." [Against Capitalism, p. 17] As we noted in [29]section
   C.1.1, current and future generations should not be dominated by the
   actions of the long dead.

   The "waiting" theory, of course, simply seeks to justify interest
   rather than explain its origin. If the capitalist really did deserve an
   income as a reward for their abstinence, where does it come from? It
   cannot be created passively, merely by the decision to save, so
   interest exists because the exploitation of labour exists. As Joan
   Robinson summarised:

     "Obviously, the reward of saving is owning some more wealth. One of
     the advantages, though by no means the only one, of owning wealth is
     the possibility of getting interest on it.

     "But why is it possible to get interest? Because businesses make
     profits and are willing to borrow."
     [Collected Economic Papers, vol. 5, p. 36]

   This is the key. If ones ability and willingness to "wait" is dependent
   on social facts (such as available resources, ones class, etc.), then
   interest cannot be based upon subjective evaluations, as these are not
   the independent factor. In other words, saving does not express
   "waiting", it simply expresses the extent of inequality and interest
   expresses the fact that workers have to sell their labour to others in
   order to survive:

     "The notion that human beings discount the future certainly seems to
     correspond to everyone's subjective experience, but the conclusion
     drawn from it is a non sequitor, for most people have enough sense
     to want to be able to exercise consuming power as long as fate
     permits, and many people are in the situation of having a higher
     income in the present than they expect in the future (salary earners
     will have to retire, business may be better now than it seems likely
     to be later, etc.) and many look beyond their own lifetime and wish
     to leave consuming power to their heirs. Thus a great many . . . are
     eagerly looking for a reliable vehicle to carry purchasing power
     into the future . . . It is impossible to say what price would rule
     if there were a market for present versus future purchasing power,
     unaffected by any other influence except the desires of individuals
     about the time-pattern of their consumption. It might will be such a
     market would normally yield a negative rate of discount . . .

     "The rate of interest is normally positive for a quite different
     reason. Present purchasing power is valuable partly because, under
     the capitalist rules of the game, it permits its owner . . . to
     employ labour and undertake production which will yield a surplus of
     receipts over costs. In an economy in which the rate of profit is
     expected to be positive, the rate of interest is positive . . . [and
     so] the present value of purchasing power exceeds its future value
     to the corresponding extent. . . This is nothing whatever to do with
     the subjective rate of discount of the future of the individual
     concerned. . ."
     [The Accumulation of Capital, p. 395]

   So, interest has little to do with "waiting" and a lot more to do with
   the inequalities associated with the capitalist system. In effect, the
   "waiting" theory assumes what it is trying to prove. Interest is
   positive simply because capitalists can appropriate surplus value from
   workers and so current money is more valuable than future money because
   of this fact. Ironically, therefore, the pro-capitalist theories of who
   abstains are wrong, "since saving is mainly out of profits, and real
   wages tend to be lower the higher the rate of profit, the abstinence
   associated with saving is mainly done by the workers, who do not
   receive any share in the 'reward.'" [Robinson, Op. Cit., p. 393]

   In other words, "waiting" does not produce a surplus, labour does. As
   such, to "say that those who hold financial instruments can lay claim
   to a portion of the social product by abstaining or waiting provides no
   explanation of what makes the production process profitable, and hence
   to what extent interest claims or dividends can be paid. Reliance on a
   waiting theory of the return to capital represented nothing less than a
   reluctance of economists to confront the sources of value creation and
   analyse the process of economic development." [William Lazonick,
   Competitive Advantage on the Shop Floor, p. 267] This would involve
   having to analyse the social relations between workers and
   managers/bosses on the shop floor, which would be to bring into
   question the whole nature of capitalism and any claims it was based
   upon freedom.

   To summarise, the idea that interest is the "reward" for waiting simply
   ignores the reality of class society and, in effect, rewards the
   wealthy for being wealthy. Neo-classical economics implies that being
   rich is the ultimate disutility. The hardships ("sacrifices") of having
   to decide to consume or invest their riches weighs as heavily on the
   elite as they do on the scales of utility. Compared to, say, working in
   a sweatshop, fearing unemployment (sorry, maximising "leisure") or not
   having to worry about saving (as your income just covers your
   out-goings) it is clear which are the greatest sacrifices and which are
   rewarded accordingly under capitalism.

   Much the same argument can be applied to "time-preference" theories of
   profit. These argue that profits are the result of individuals
   preferring present goods to future ones. Capitalists pay workers wages,
   allowing them to consumer now rather than later. This is the providing
   of time and this is rewarded by profits. This principle was first
   stated clearly by Eugen von Bhm-Bawerk and has been taken as the basis
   of the "Austrian" school of capitalist economics (see [30]section
   C.1.6). After rejecting past theories of interest (including, as noted
   above, "abstinence" theories, which he concluded the socialists were
   right to mock), Bhm-Bawerk argued that profits could only by explained
   by means of time preference:

     "The loan is a real exchange of present goods against future goods .
     . . present goods invariably possess a greater value than future
     goods of the same number and kind, and therefore a definite sum of
     present goods can, as a rule, only be purchased by a larger sum of
     future goods. Present goods possess an agio in future goods. This
     agio is interest. It is not a separate equivalent for a separate and
     durable use of the loaned goods, for that is inconceivable; it is a
     part equivalent of the loaned sum, kept separate for practical
     reasons. The replacement of the capital + the interest constitutes
     the full equivalent." [Capital and Interest, p. 259]

   For him, time preference alone is the reason for profit/interest due to
   the relative low value of future goods, compared to present goods.
   Capital goods, although already present in their physical state, are
   really future goods in their "economic nature" as is labour. This means
   that workers are paid the amount their labour creates in terms of
   future goods, not current goods. This difference between the high value
   of current goods and low value of future goods is the source of surplus
   value:

     "This, and nothing else, is the foundation of the so-called 'cheap'
     buying of production instruments, and especially of labour, which
     the Socialists rightly explain as the source of profit on capital,
     but wrongly interpret . . . as the result of a robbery or
     exploitation of the working classes by the propertied classes." [The
     Positive Theory of Capital, p. 301]

   The capitalists are justified in keeping this surplus value because
   they provided the time required for the production process to occur.
   Thus surplus value is the product of an exchange, the exchange of
   present goods for future ones. The capitalist bought labour at its full
   present value (i.e. the value of its future product) and so there is no
   exploitation as the future goods are slowly maturing during the process
   of production and can then be sold at its full value as a present
   commodity. Profit, like interest, is seen as resulting from varying
   estimates of the present and future needs.

   As should be obvious, our criticisms of the "waiting" theory of
   interest apply to this justification of profits. Money in itself does
   not produce profit any more than interest. It can only do that when
   invested in actual means of production which are put to work by actual
   people. As such, "time preference" only makes sense in an economy where
   there is a class of property-less people who are unable to "wait" for
   future goods as they would have died of starvation long before they
   arrived.

   So it is the class position of workers which explains their time
   preferences, as Bhm-Bawerk himself acknowledged. Thus capitalism was
   marked by an "enormous number of wage-earners who cannot employ their
   labour remuneratively by working on their own account, and are
   accordingly, as a body, inclined and ready to sell the future product
   of their labour for a considerably less amount of present goods." So,
   being poor, meant that they lacked the resources to "wait" for "future"
   goods and so became dependent (as a class) on those who do. This was,
   in his opinion the "sole ground of that much-talked-of and
   much-deplored dependence of labourer on capitalist." It is "only
   because the labourers cannot wait till the roundabout process . . .
   delivers up its products ready for consumption, that they become
   economically dependent on the capitalists who already hold in their
   possession what we have called 'intermediate products.'" [Op. Cit., p.
   330 and p. 83]

   Bhm-Bawerk, ironically, simply repeats (although in different words)
   and agrees with the socialist critique of capitalism which, as we
   discussed in [31]section C.2.2, is also rooted in the class dependence
   of workers to capitalists (Bakunin, for example, argued that the
   capitalists were "profiting by the economic dependence of the worker"
   in order to exploit them by "turn[ing] the worker into a subordinate."
   [The Political Philosophy of Bakunin, p. 188]). The difference is that
   Bhm-Bawerk thinks that the capitalists deserve their income from
   wealth while anarchists, like other socialists, argue they do not as
   they simply are being rewarded for being wealthy. Bhm-Bawerk simply
   cannot bring himself to acknowledge that an individual's psychology,
   their subjective evaluations, are conditioned by their social
   circumstances and so cannot comprehend the class character of
   capitalism and profit. After all, a landless worker will, of course,
   estimate the "sacrifice" or "disutility" of selling their labour to a
   master as much less than the peasant farmer or artisan who possesses
   their own land or tools. The same can be said of workers organised into
   a union.

   As such, Bhm-Bawerk ignores the obvious, that the source of non-labour
   income is not in individual subjective evaluations but rather the
   social system within which people live. The worker does not sell her
   labour power because she "underestimates" the value of future goods but
   because she lacks the means of obtaining any sort of goods at all
   except by the selling of her labour power. There is no real choice
   between producing for herself or working for a boss -- she has no real
   opportunity of doing the former at all and so has to do the latter.
   This means that workers sells their labour (future goods) "voluntarily"
   for an amount less than its value (present goods) because their class
   position ensures that they cannot "wait." So, if profit is the price of
   time, then it is a monopoly price produced by the class monopoly of
   wealth ownership under capitalism. Needless to say, as capital is
   accumulated from surplus value, the dependence of the working class on
   the capitalists will tend to grow over time as the "waiting" required
   to go into business will tend to increase also.

   An additional irony of Bhm-Bawerk's argument is that is very similar
   to the "abstinence" theory he so rightly mocked and which he admitted
   the socialists were right to reject. This can be seen from one of his
   followers, right-"libertarian" Murray Rothbard:

     "What has been the contribution of these product-owners, or
     'capitalists', to the production process? It is this: the saving and
     restriction of consumption, instead of being done by the owners of
     land and labour, has been done by the capitalists. The capitalists
     originally saved, say, 95 ounces of gold which they could have then
     spent on consumers' goods. They refrained from doing so, however,
     and, instead, advanced the money to the original owners of the
     factors. They paid the latter for their services while they were
     working, thus advancing them money before the product was actually
     produced and sold to the consumers. The capitalists, therefore, made
     an essential contribution to production. They relieved the owners of
     the original factors from the necessity of sacrificing present goods
     and waiting for future goods." [Man, Economy, and State, pp. 294-95]

   This meant that without risk, "[e]ven if financial returns and consumer
   demand are certain, the capitalists are still providing present goods
   to the owners of labour and land and thus relieving them of the burden
   of waiting until the future goods are produced and finally transformed
   into consumers' goods." [Op. Cit., p. 298] Capitalists pay out, say,
   100,000 this year in wages and reap 200,000 next year not because of
   exploitation but because both parties prefer this amount of money this
   year rather than next year. Capitalists, in other words, pay out wages
   in advance and then wait for a sale. They will only do so if
   compensated by profit.

   Rothbard's argument simply assumes a class system in which there is a
   minority of rich and a majority of property-less workers. The reason
   why workers cannot "wait" is because if they did they would starve to
   death. Unsurprisingly, then, they prefer their wages now rather than
   next year. Similarly, the reason why they do not save and form their
   own co-operatives is that they simply cannot "wait" until their
   workplace is ready and their products are sold before eating and paying
   rent. In other words, their decisions are rooted in their class
   position while the capitalists (the rich) have shouldered the "burden"
   of abstinence so that they can be rewarded with even more money in the
   future. Clearly, the time preference position and the "waiting" or
   "abstinence" perspective are basically the same (Rothbard even echoes
   Senior's lament about the improvident working class, arguing that "the
   major problem with the lower-class poor is irresponsible
   present-mindedness." [For a New Liberty, p. 154]). As such, it is
   subject to the same critique (as can be found in, say, the works of a
   certain Eugen von Bhm-Bawerk).

   In other words, profit has a social basis, rooted in the different
   economic situation of classes within capitalism. It is not the fact of
   "waiting" which causes profits but rather the monopoly of the means of
   life by the capitalist class which is the basis of "economic
   dependence." Any economic theory which fails to acknowledge and analyse
   this social inequality is doomed to failure from the start.

   To conclude, the arguments that "waiting" or "time preference" explain
   or justify surplus value are deeply flawed simply because they ignore
   the reality of class society. By focusing on individual subjective
   evaluations, they ignore the social context in which these decisions
   are made and, as a result, fail to take into account the class
   character of interest and profit. In effect, they argue that the
   wealthy deserve a reward for being wealthy. Whether it is to justify
   profits or interest, the arguments used simply show that we have an
   economic system that works only by bribing the rich!

C.2.8 Are profits the result of entrepreneurial activity and innovation?

   One of the more common arguments in favour of profits is the notion
   that they are the result of innovation or entrepreneurial activity,
   that the creative spirit of the capitalist innovates profits into
   existence. This perspective is usually associated with the so-called
   "Austrian" school of capitalist economics but has become more common in
   the mainstream of economics, particularly since the 1970s.

   There are two related themes in this defence of profits -- innovation
   and entrepreneurial activity. While related, they differ in one key
   way. The former (associated with Joseph Schumpeter) is rooted in
   production while the former seeks to be of more general application.
   Both are based on the idea of "discovery", the subjective process by
   which people use their knowledge to identify gaps in the market, new
   products or services or new means of producing existing goods. When
   entrepreneurs discover, for example, a use of resources, they bring
   these resources into a new (economic) existence. Accordingly, they have
   created something ex nihilo (out of nothing) and therefore are entitled
   to the associated profit on generally accepted moral principle of
   "finders keepers."

   Anarchists, needless to say, have some issues with such an analysis.
   The most obvious objection is that while "finders keepers" may be an
   acceptable ethical position on the playground, it is hardly a firm
   basis to justify an economic system marked by inequalities of liberty
   and wealth. Moreover, discovering something does not entitle you to an
   income from it. Take, for example, someone who discovers a flower in a
   wood. That, in itself, will generate no income of any kind. Unless the
   flower is picked and taken to a market, the discoverer cannot "profit"
   from discovering it. If the flower is left untouched then it is
   available for others to appropriate unless some means are used to stop
   them (such as guarding the flower). This means, of course, limiting the
   discovery potential of others, like the state enforcing copyright stops
   the independent discovery of the same idea, process or product.

   As such, "discovery" is not sufficient to justify non-labour income as
   an idea remains an idea unless someone applies it. To generate an
   income (profit) from a discovery you need to somehow take it to the
   market and, under capitalism, this means getting funds to invest in
   machinery and workplaces. However, these in themselves do nothing and,
   consequently, workers need to be employed to produce the goods in
   question. If the costs of producing these goods is less than the market
   price, then a profit is made. Does this profit represent the initial
   "discovery"? Hardly for without funds the idea would have remained just
   that. Does the profit represent the contribution of "capital"? Hardly,
   for without the labour of the workers the workplace would have remained
   still and the product would have remained an idea.

   Which brings us to the next obvious problem, namely that
   "entrepreneurial" activity becomes meaningless when divorced from
   owning capital. This is because any action which is taken to benefit an
   individual and involves "discovery" is considered entrepreneurial.
   Successfully looking for a better job? Your new wages are
   entrepreneurial profit. Indeed, successfully finding any job makes the
   wages entrepreneurial profit. Workers successfully organising and
   striking to improve their pay and conditions? An entrepreneurial act
   whose higher wages are, in fact, entrepreneurial profit. Selling your
   shares in one company and buying others? Any higher dividends are
   entrepreneurial profit. Not selling your shares? Likewise. What income
   flow could not be explained by "entrepreneurial"
   activity if we try hard enough?

   In other words, the term becomes meaningless unless it is linked to
   owning capital and so any non-trivial notion of entrepreneurial
   activity requires private property, i.e. property which functions as
   capital. This can be seen from an analysis of whether entrepreneurship
   which is not linked to owning capital or land creates surplus value
   (profits) or not. It is possible, for example, that an entrepreneur can
   make a profit by buying cheap in one market and selling dear in
   another. However, this simply redistributes existing products and
   surplus value, it does not create them. This means that the
   entrepreneur does not create something from nothing, he takes something
   created by others and sells it at a higher price and so gains a slice
   of the surplus value created by others. If buying high and selling low
   was the cause of surplus value, then profits overall would be null as
   any gainer would be matched by a loser. Ironically, for all its talk of
   being concerned about process, this defence of entrepreneurial profits
   rests on the same a static vision of capitalism as does neo-classical
   economics.

   Thus entrepreneurship is inherently related to inequalities in economic
   power, with those at the top of the market hierarchy having more
   ability to gain benefits of it than those at the bottom.
   Entrepreneurship, in other words, rather than an independent factor is
   rooted in social inequality. The larger one's property, the more able
   they are to gather and act on information advantages, i.e. act in as an
   entrepreneur. Moreover the ability to exercise the entrepreneurial
   spirit or innovate is restricted by the class system of capitalism. To
   implement a new idea, you need money. As it is extremely difficult for
   entrepreneurs to act on the opportunities they have observed without
   the ownership of property, so profits due to innovation simply becomes
   yet another reward for already being wealthy or, at best, being able to
   convince the wealthy to loan you money in the expectation of a return.
   Given that credit is unlikely to be forthcoming to those without
   collateral (and most working class people are asset-poor),
   entrepreneurs are almost always capitalists because of social
   inequality. Entrepreneurial opportunities are, therefore, not available
   to everyone and so it is inherently linked to private property (i.e.
   capital).

   So while entrepreneurship in the abstract may help explain the
   distribution of income, it neither explains why surplus value exists in
   the first place nor does it justify the entrepreneur's appropriation of
   part of that surplus. To explain why surplus value exists and why
   capitalists may be justified in keeping it, we need to look at the
   other aspect of entrepreneurship, innovation as this is rooted in the
   actual production process.

   Innovation occurs in order to expand profits and so survive competition
   from other companies. While profits can be redistributed in circulation
   (for example by oligopolistic competition or inflation) this can only
   occur at the expense of other people or capitals (see sections [32]C.5
   and [33]C.7). Innovation, however, allows the generation of profits
   directly from the new or increased productivity (i.e. exploitation) of
   labour it allows. This is because it is in production that commodities,
   and so profits, are created and innovation results in new products
   and/or new production methods. New products mean that the company can
   reap excess profits until competitors enter the new market and force
   the market price down by competition. New production methods allow the
   intensity of labour to be increased, meaning that workers do more work
   relative to their wages (in other words, the cost of production falls
   relative to the market price, meaning extra profits).

   So while competition ensures that capitalist firms innovate, innovation
   is the means by which companies can get an edge in the market. This is
   because innovation means that "capitalist excess profits come from the
   production process. . . when there is an above-average rise in labour
   productivity; the reduced costs then enable firms to earn higher than
   average profits in their products. But this form of excess profits is
   only temporary and disappears again when improved production methods
   become more general." [Paul Mattick, Economics, Politics and the Age of
   Inflation, p. 38] Capitalists, of course, use a number of techniques to
   stop the spread of new products or production methods in order to
   maintain their position, such as state enforced intellectual property
   rights.

   Innovation as the source of profits is usually associated with
   economist Joseph Schumpeter who described and praised capitalism's
   genius for "creative destruction" caused by capitalists who innovate,
   i.e. introduce new goods and means of production. Schumpeter's analysis
   of capitalism is more realistic than the standard neo-classical
   perspective. He recognised that capitalism was marked by a business
   cycle which he argued flowed from cycles of innovation conducted by
   capitalists. He also rejected the neo-classical assumption of perfect
   competition, arguing that the "introduction of new methods of
   production and new commodities is hardly compatible with perfect and
   perfectly prompt competition from the start . . . As a matter of fact,
   perfect competition has always been temporarily stemmed whenever
   anything new is being introduced." [Capitalism, Socialism and
   Democracy, p. 104]

   This analysis presents a picture of capitalism more like it actually is
   rather than what economics would like it to be. However, this does not
   mean that its justification for profits is correct, far from it.
   Anarchists do agree that it is true that individuals do see new
   potential and act in innovative ways to create new products or
   processes. However, this is not the source of surplus value. This is
   because an innovation only becomes a source of profits once it actually
   produced, i.e. once workers have toiled to create it (in the case of
   new goods) or used it (in the case of new production techniques). An
   idea in and of itself produces nothing unless it is applied. The reason
   why profits result from innovation is due to the way the capitalist
   firm is organised rather than any inherent aspect of innovation.

   Ultimately, entrepreneurialism is just a fancy name for decision making
   and, as such, it is a labour income (labour refers to physical and
   mental activities). However, as noted above, there are two types of
   labour under capitalism, the labour of production and the labour of
   exploitation. Looking at entrepreneurialism in a workplace situation,
   it is obvious that it is not independent of owning or managing capital
   and so it is impossible to distinguish profits produced by
   "entrepreneurial" activity and profits resulting from a return on
   property (and so the labour of others). In other words, it is the
   labour of exploitation and any income from it is simply monopoly
   profit. This is because the capitalist or manager has a monopoly of
   power within the workplace and, consequently, can reap the benefits
   this privileged position ensures. The workers have their opportunities
   for entrepreneurialism restricted and monopolised by the few in power
   who, when deciding who contributes most to production, strangely enough
   decide it is themselves.

   This can be seen from the fact that innovation in terms of new
   technology is used to help win the class war at the point of production
   for the capitalists. As the aim of capitalist production is to maximise
   the profits available for capitalists and management to control, it
   follows that capitalism will introduce technology that will allow more
   surplus value to be extracted from workers. As Cornelius Castoriadis
   argues, capitalism "does not utilise a socially neutral technology for
   capitalist ends. Capitalism has created capitalist technology, which is
   by no means neutral. The real essence of capitalist technology is not
   to develop production for production's sake: It is to subordinate and
   dominate the producers." [Political and Social Writings, vol. 2, p.
   104] Therefore, "innovation" (technological improvement) can be used to
   increase the power of capital over the workforce, to ensure that
   workers will do as they are told. In this way innovation can maximise
   surplus value production by trying to increase domination during
   working hours as well as by increasing productivity by new processes.

   These attempts to increase profits by using innovation is the key to
   capitalist expansion and accumulation. As such innovation plays a key
   role within the capitalist system. However, the source of profits does
   not change and remains in the labour, skills and creativity of workers
   in the workplace. As such, innovation results in profits because labour
   is exploited in the production process, not due to some magical
   property of innovation.

   The question now arises whether profits are justified as a reward for
   those who made the decision to innovate in the first place. This,
   however, fails for the obvious reason that capitalism is marked by a
   hierarchical organisation of production. It is designed so that a few
   make all the decisions while the majority are excluded from power. As
   such, to say that capitalists or managers deserve their profits due to
   innovation is begging the question. Profits which are claimed to flow
   from innovation are, in fact, the reward for having a monopoly, namely
   the monopoly of decision making within the workplace, rather than some
   actual contribution to production. The only thing management does is
   decide which innovations to pursue and to reap the benefits they
   create. In other words, they gain a reward simply due to their monopoly
   of decision making power within a firm. Yet this hierarchy only exists
   because of capitalism and so can hardly be used to defend that system
   and the appropriation of surplus value by capitalists.

   Thus, if entrepreneurial spirit is the source of profit then we can
   reply that under capitalism the means of exercising that spirit is
   monopolised by certain classes and structures. The monopoly of decision
   making power in the hands of managers and bosses in a capitalist firm
   ensure that they also monopolise the rewards of the entrepreneurialism
   their workforce produce. This, in turn, reduces the scope for
   innovation as this division of society into people who do mental and
   physical labour "destroy[s] the love of work and the capacity for
   invention" and under such a system, the worker "lose[s] his
   intelligence and his spirit of invention." [Kropotkin, The Conquest of
   Bread, p. 183 and p. 181]

   These issues should be a key concern if entrepreneurialism really were
   considered as the unique source of profit. However, such issues as
   management power is rarely, if ever, discussed by the Austrian school.
   While they thunder against state restrictions on entrepreneurial
   activity, boss and management restrictions are always defended (if
   mentioned at all). Similarly, they argue that state intervention (say,
   anti-monopoly laws) can only harm consumers as it tends to discourage
   entrepreneurial activity yet ignore the restrictions to
   entrepreneurship imposed by inequality, the hierarchical structure of
   the capitalist workplace and negative effects both have on individuals
   and their development (as discussed in [34]section B.1.1).

   This, we must stress, is the key problem with the idea that innovation
   is the root of surplus value. It focuses attention to the top of the
   capitalist hierarchy, to business leaders. This implies that they, the
   bosses, create "wealth" and without them nothing would be done. For
   example, leading "Austrian" economist Israel Kirzner talks of "the
   necessarily indivisible entrepreneur" who "is responsible for the
   entire product, The contributions of the factor inputs, being without
   an entrepreneurial component, are irrelevant for the ethical position
   being taken." ["Producer, Entrepreneur, and the Right to Property," pp.
   185-199, Perception, Opportunity, and Profit, p. 195] The workforce is
   part of the "factor inputs" who are considered "irrelevant." He quotes
   economist Frank Knight to bolster this analysis that the entrepreneur
   solely creates wealth and, consequently, deserves his profits:

     "Under the enterprise system, a special social class, the
     businessman, direct economic activity: they are in the strict sense
     the producers, while the great mass of the population merely
     furnishes them with productive services, placing their persons and
     their property at the disposal of this class." [quoted by Kirzner,
     Op. Cit., p. 189]

   If, as Chomsky stresses, the capitalist firm is organised in a fascist
   way, the "entrepreneurial" defence of profits is its ideology, its
   "Fhrerprinzip"
   (the German for "leader principle"). This ideology sees each
   organisation as a hierarchy of leaders, where every leader (Fhrer, in
   German) has absolute responsibility in his own area, demands absolute
   obedience from those below him and answers only to his superiors. This
   ideology was most infamously applied by fascism but its roots lie in
   military organisations which continue to use a similar authority
   structure today.

   Usually defenders of capitalism contrast the joys of "individualism"
   with the evils of "collectivism" in which the individual is sub-merged
   into the group or collective and is made to work for the benefit of the
   group. Yet when it comes to capitalist industry, they stress the
   abilities of the people at the top of the company, the owner, the
   entrepreneur, and treat as unpeople those who do the actual work (and
   ignore the very real subordination of those lower down the hierarchy).
   The entrepreneur is considered the driving force of the market process
   and the organisations and people they govern are ignored, leading to
   the impression that the accomplishments of a firm are the personal
   triumphs of the capitalists, as though their subordinates are merely
   tools not unlike the machines on which they labour.

   The ironic thing about this argument is that if it were true, then the
   economy would grind to a halt (we discuss this more fully in our
   critique of Engels's diatribe against anarchism "On Authority" in
   [35]section H.4.4). It exposes a distinct contradiction within
   capitalism. While the advocates of entrepreneurialism assert that the
   entrepreneur is the only real producer of wealth in society, the fact
   is that the entrepreneurialism of the workforce industry is required to
   implement the decisions made by the bosses. Without this unacknowledged
   input, the entrepreneur would be impotent. Kropotkin recognised this
   fact when he talked of the workers "who have added to the original
   invention" little additions and contributions "without which the most
   fertile idea would remain fruitless." Nor does the idea itself develop
   out of nothing as "every invention is a synthesis, the resultant of
   innumerable inventions which have preceded it." [Op. Cit., p. 30] Thus
   Cornelius Castoriadis:

     "The capitalist organisation of production is profoundly
     contradictory . . . It claims to reduce the worker to a limited and
     determined set of tasks, but it is obliged at the same time to rely
     upon the universal capacities he develops both as a function of and
     in opposition to the situation in which he is placed . . .
     Production can be carried out only insofar as the worker himself
     organises his work and goes beyond his theoretical role of pure and
     simply executant," [Political and Social Writings, vol. 2, p. 181]

   Moreover, such a hierarchical organisation cannot help but generate
   wasted potential. Most innovation is the cumulative effect of lots of
   incremental process improvements and the people most qualified to
   identify opportunities for such improvements are, obviously, those
   involved in the process. In the hierarchical capitalist firm, those
   most aware of what would improve efficiency have the least power to do
   anything about it. They also have the least incentive as well as any
   productivity increases resulting from their improvements will almost
   always enrich their bosses and investors, not them. Indeed, any gains
   may be translated into layoffs, soaring stock prices, and senior
   management awarding itself a huge bonus for "cutting costs." What
   worker in his right mind would do something to help their worst enemy?
   As such, capitalism hinders innovation:

     "capitalism divides society into a narrow stratum of directors
     (whose function is to decide and organise everything) and the vast
     majority of the population, who are reduced to carrying out
     (executing) the decisions made by these directors. As a result of
     this very fact, most people experience their own lives as something
     alien to them . . . It is nonsensical to seek to organise people . .
     . as if they were mere objects . . . In real life, capitalism is
     obliged to base itself on people's capacity for self-organisation,
     on the individual and collective creativity of the producers.
     Without making use of these abilities the system would not survive a
     day. But the whole 'official' organisation of modern society both
     ignores and seeks to suppress these abilities to the utmost. The
     result is not only an enormous waste due to untapped capacity. The
     system does more: It necessarily engenders opposition, a struggle
     against it by those upon whom it seeks to impose itself . . . The
     net result is not only waste but perpetual conflict." [Castoriadis,
     Op. Cit., p. 93]

   While workers make the product and make entrepreneurial decisions every
   day, in the face of opposition of the company hierarchy, the benefits
   of those decisions are monopolised by the few who take all the glory
   for themselves. The question now becomes, why should capitalists and
   managers have a monopoly of power and profits when, in practice, they
   do not and cannot have a monopoly of entrepreneurialism within a
   workplace? If the output of a workplace is the result of the combined
   mental and physical activity (entrepreneurialism) of all workers, there
   is no justification either for the product or "innovation" (i.e.
   decision making power) to be monopolised by the few.

   We must also stress that innovation itself is a form of labour --
   mental labour. Indeed, many companies have Research and Development
   groups in which workers are paid to generate new and innovative ideas
   for their employers. This means that innovation is not related to
   property ownership at all. In most modern industries, as Schumpeter
   himself acknowledged, innovation and technical progress is conducted by
   "teams of trained specialists, who turn out what is required and make
   it work in predictable ways" and so "[b]ureau and committee work tends
   to replace individual action." This meant that "the leading man . . .
   is becoming just another office worker -- and one who is not always
   difficult to replace." [Op. Cit., p. 133] And we must also point out
   that many new innovations come from individuals who combine mental and
   physical labour outside of capitalist companies. Given this, it is
   difficult to argue that profits are the result of innovation of a few
   exceptional people rather than by workers when the innovations, as well
   as being worked or produced by workers are themselves are created by
   teams of workers.

   As such, "innovation" and "entrepreneurialism" is not limited to a few
   great people but rather exists in all of us. While the few may
   currently monopolise "entrepreneurialism" for their own benefit, an
   economy does not need to work this way. Decision making need not be
   centralised in a few hands. Ordinary workers can manage their own
   productive activity, innovate and make decisions to meet social and
   individual needs (i.e. practice "entrepreneurialism"). This can be seen
   from various experiments in workers' control where increased equality
   within the workplace actually increases productivity and innovation. As
   these experiments show workers, when given the chance, can develop
   numerous "good ideas" and, equally as important, produce them. A
   capitalist with a "good idea," on the other hand, would be powerless to
   produce it without workers and it is this fact that shows that
   innovation, in and of itself, is not the source of surplus value.

   So, contrary to much capitalist apologetics, innovation is not the
   monopoly of an elite class of humans. It is part of all of us, although
   the necessary social environment needed to nurture and develop it in
   all is crushed by the authoritarian workplaces of capitalism and the
   effects of inequalities of wealth and power within society as a whole.
   If workers were truly incapable of innovation, any shift toward greater
   control of production by workers should result in decreased
   productivity. What one actually finds, however, is just the opposite:
   productivity increased dramatically as ordinary people were given the
   chance, usually denied them, to apply their skills and talents. They
   show the kind of ingenuity and creativity people naturally bring to a
   challenging situation -- if they are allowed to, if they are
   participants rather than servants or subordinates.

   In fact, there is "a growing body of empirical literature that is
   generally supportive of claims for the economic efficiency of the
   labour-managed firm. Much of this literature focuses on productivity,
   frequently finding it to be positively correlated with increasing
   levels of participation . . . Studies that encompass a range of issues
   broader than the purely economic also tend to support claims for the
   efficiency of labour managed and worker-controlled firms . . . In
   addition, studies that compare the economic preference of groups of
   traditionally and worker-controlled forms point to the stronger
   performance of the latter." [Christopher Eaton Gunn, Workers'
   Self-Management in the United States, pp. 42-3] This is confirmed by
   David Noble, who points out that "the self-serving claim" that
   "centralised management authority is the key to productivity" is
   "belied by nearly every sociological study of work." [Progress without
   People, p. 65]

   During the Spanish Revolution of 1936-39, workers self-managed many
   factories following the principles of participatory democracy.
   Productivity and innovation in the Spanish collectives was
   exceptionally high (particularly given the difficult economic and
   political situation they faced). As Jose Peirats notes, industry was
   "transformed from top to bottom . . . there were achieved feats
   pregnant with significance for people who had always striven to deny
   the reality of the wealth of popular initiatives unveiled by
   revolutions." Workers made suggestions and presented new inventions,
   "offering the product of their discoveries, genius or imaginings." [The
   CNT in the Spanish Revolution, vol. 2, p. 86]

   The metal-working industry is a good example. As Augustine Souchy
   observes, at the outbreak of the Civil War, the metal industry in
   Catalonia was "very poorly developed." Yet within months, the
   Catalonian metal workers had rebuilt the industry from scratch,
   converting factories to the production of war materials for the
   anti-fascist troops. A few days after the July 19th revolution, the
   Hispano-Suiza Automobile Company was already converted to the
   manufacture of armoured cars, ambulances, weapons, and munitions for
   the fighting front. "Experts were truly astounded," Souchy writes, "at
   the expertise of the workers in building new machinery for the
   manufacture of arms and munitions. Very few machines were imported. In
   a short time, two hundred different hydraulic presses of up to 250 tons
   pressure, one hundred seventy-eight revolving lathes, and hundreds of
   milling machines and boring machines were built." [The Anarchist
   Collectives: Workers' Self-management in the Spanish Revolution,
   1936-1939, Sam Dolgoff (ed.), p. 96]

   Similarly, there was virtually no optical industry in Spain before the
   July revolution, only some scattered workshops. After the revolution,
   the small workshops were voluntarily converted into a production
   collective. "The greatest innovation," according to Souchy, "was the
   construction of a new factory for optical apparatuses and instruments.
   The whole operation was financed by the voluntary contributions of the
   workers. In a short time the factory turned out opera glasses,
   telemeters, binoculars, surveying instruments, industrial glassware in
   different colours, and certain scientific instruments. It also
   manufactured and repaired optical equipment for the fighting fronts . .
   . What private capitalists failed to do was accomplished by the
   creative capacity of the members of the Optical Workers' Union of the
   CNT." [Op. Cit., pp. 98-99]

   More recently, the positive impact of workers' control has been
   strikingly confirmed in studies of the Mondragon co-operatives in
   Spain, where workers are democratically involved in production
   decisions and encouraged to innovate. As George Bennello notes,
   "Mondragon productivity is very high -- higher than in its capitalist
   counterparts. Efficiency, measured as the ratio of utilised resources
   -- capital and labour -- to output, is far higher than in comparable
   capitalist factories." ["The Challenge of Mondragon", Reinventing
   Anarchy, Again, p. 216]

   The example of Lucas Aerospace, during the 1970s indicates well the
   creative potential waiting to be utilised and wasted due to capitalism.
   Faced with massive job cuts and restructuring, the workers and their
   Shop Stewards SSCC in 1976 proposed an alternative Corporate Plan to
   Lucas's management. This was the product of two years planning and
   debate among Lucas workers. Everyone from unionised engineers, to
   technicians to production workers and secretaries was involved in
   drawing it up. It was based on detailed information on the machinery
   and equipment that all Lucas sites had, as well as the type of skills
   that were in the company. The workers designed the products themselves,
   using their own experiences of work and life. While its central aim was
   to head off Lucas's planned job cuts, it presented a vision of a better
   world by arguing that the concentration on military goods and markets
   was neither the best use of resources nor in itself desirable. It
   argued that if Lucas was to look away from military production it could
   expand into markets for socially useful goods (such as medical
   equipment) where it already had some expertise and sales. The
   management were not interested, it was their to "manage"
   Lucas and to decide where its resources would be used, including the
   18,000 people working there. Management were more than happy to exclude
   the workforce from any say in such fundamental matter as implementing
   the workers' ideas would have shown how unnecessary they, the bosses,
   actually were.

   Another example of wasted worker innovation is provided by the US car
   industry. In the 1960s, Walter Reuther, president of the United Auto
   Workers (UAW) had proposed to the Johnson Whitehouse that the
   government help the US car companies to produce small cars, competing
   with Volkswagen which had enjoyed phenomenal success in the U.S.
   market. The project, unsurprisingly, fell through as the executives of
   the car companies were uninterested. In the 1970s, higher petrol prices
   saw US buyers opt for smaller cars and the big US manufacturers were
   caught unprepared. This allowed Toyota, Honda and other Asian car
   companies to gain a crucial foothold in the American market.
   Unsurprisingly, resistance by the union and workforce were blamed for
   the industry's problems when, in fact, it was the bosses, not the
   unions, who were blind to a potential market niche and the industry's
   competitive challenges.

   Therefore, far from being a threat to innovation, workers'
   self-management would increase it and, more importantly, direct it
   towards improving the quality of life for all as opposed to increasing
   the profits of the few (this aspect an anarchist society will be
   discussed in more detail in [36]section I). This should be
   unsurprising, as vesting a minority with managerial authority and
   deciding that the others should be cogs results in a massive loss of
   social initiative and drive. In addition, see sections [37]J.5.10,
   [38]J.5.11 and [39]J.5.12 for more on why anarchists support
   self-management and why, in spite of its higher efficiency and
   productivity, the capitalist market will select against it.

   To conclude, capitalist workplace hierarchy actually hinders innovation
   and efficiency rather than fosters it. To defend profits by appealing
   to innovation is, in such circumstances, deeply ironic. Not only does
   it end up simply justifying profits in terms of monopoly power (i.e.
   hierarchical decision making rewarding itself), that power also wastes
   a huge amount of potential innovation in society -- namely the ideas
   and experience of the workforce excluded from the decision making
   process. Given that power produces resistance, capitalism ensures that
   the "creative faculties [the workers] are not allowed to exercise on
   behalf of a social order that rejects them (and which they reject) are
   now utilised against that social order" and so "work under capitalism"
   is "a perpetual waste of creative capacity, and a constant struggle
   between the worker and his own activity." [Castoriadis, Op. Cit., p. 93
   and p. 94]

   Therefore, rather than being a defence of capitalist profit taking (and
   the inequality it generates) innovation backfires against capitalism.
   Innovation flourishes best under freedom and this points towards
   libertarian socialism and workers' self-management. Given the chance,
   workers can manage their own work and this results in increased
   innovation and productivity, so showing that capitalist monopoly of
   decision making power hinders both. This is unsurprising, for only
   equality can maximise liberty and so workers' control (rather than
   capitalist power) is the key to innovation. Only those who confuse
   freedom with the oppression of wage labour would be surprised by this.

C.2.9 Do profits reflect a reward for risk?

   Another common justification of surplus value is that of "risk taking",
   namely the notion that non-labour income is justified because its
   owners took a risk in providing money and deserve a reward for so
   doing.

   Before discussing why anarchists reject this argument, it must be noted
   that in the mainstream neo-classical model, risk and uncertainty plays
   no role in generating profits. According to general equilibrium theory,
   there is no uncertainty (the present and future are known) and so there
   is no role for risk. As such, the concept of profits being related to
   risk is more realistic than the standard model. However, as we will
   argue, such an argument is unrealistic in many other ways, particularly
   in relation to modern-day corporate capitalism.

   It is fair to say that the appeal of risk to explain and justify
   profits lies almost entirely in the example of the small investor who
   gambles their savings (for example, by opening a bar) and face a major
   risk if the investment does not succeed. However, in spite of the
   emotional appeal of such examples, anarchists argue that they are
   hardly typical of investment decisions and rewards within capitalism.
   In fact, such examples are used precisely to draw attention away from
   the way the system works rather than provide an insight into it. That
   is, the higher apparent realism of the argument hides an equally unreal
   model of capitalism as the more obviously unrealistic theories which
   seek to rationalise non-labour income.

   So does "risk" explain or justify non-labour income? No, anarchists
   argue. This is for five reasons. Firstly, the returns on property
   income are utterly independent on the amount of risk involved.
   Secondly, all human acts involve risk of some kind and so why should
   property owners gain exclusively from it? Thirdly, risk as such it not
   rewarded, only successful risks are and what constitutes success is
   dependent on production, i.e. exploiting labour. Fourthly, most "risk"
   related non-labour income today plays no part in aiding production and,
   indeed, is simply not that risky due to state intervention. Fifthly,
   risk in this context is not independent of owning capital and,
   consequently, the arguments against "waiting" and innovation apply
   equally to this rationale. In other words, "risk" is simply yet another
   excuse to reward the rich for being wealthy.

   The first objection is the most obvious. It is a joke to suggest that
   capitalism rewards in proportion to risk. There is little or no
   relationship between income and the risk that person faces. Indeed, it
   would be fairer to say that return is inversely proportional to the
   amount of risk a person faces. The most obvious example is that of a
   worker who wants to be their own boss and sets up their own business.
   That is a genuine risk, as they are risking their savings and are
   willing to go into debt. Compare this to a billionaire investor with
   millions of shares in hundreds of companies. While the former struggles
   to make a living, the latter gets a large regular flow of income
   without raising a finger. In terms of risk, the investor is wealthy
   enough to have spread their money so far that, in practical terms,
   there is none. Who has the larger income?

   As such, the risk people face is dependent on their existing wealth and
   so it is impossible to determine any relationship between it and the
   income it is claimed to generate. Given that risk is inherently
   subjective, there is no way of discovering its laws of operation except
   by begging the question and using the actual rate of profits to measure
   the cost of risk-bearing.

   The second objection is equally as obvious. The suggestion that risk
   taking is the source and justification for profits ignores the fact
   that virtually all human activity involves risk. To claim that
   capitalists should be paid for the risks associated with investment is
   to implicitly state that money is more valuable that human life. After
   all, workers risk their health and often their lives in work and often
   the most dangerous workplaces are those associated with the lowest pay.
   Moreover, providing safe working conditions can eat into profits and by
   cutting health and safety costs, profits can rise. This means that to
   reward capitalist "risk", the risk workers face may actually increase.
   In the inverted world of capitalist ethics, it is usually cheaper (or
   more "efficient") to replace an individual worker than a capital
   investment. Unlike investors, bosses and the corporate elite, workers
   do face risk to life or limb daily as part of their work. Life is risky
   and no life is more risky that that of a worker who may be ruined by
   the "risky" decisions of management, capitalists and investors seeking
   to make their next million. While it is possible to diversify the risk
   in holding a stock portfolio that is not possible with a job. A job
   cannot be spread across a wide array of companies diversifying risk.

   In other words, workers face much greater risks than their employers
   and, moreover, they have no say in what risks will be taken with their
   lives and livelihoods. It is workers who pay the lion's share of the
   costs of failure, not management and stockholders. When firms are in
   difficulty, it is the workers who are asked to pay for the failures of
   management though pay cuts and the elimination of health and other
   benefits. Management rarely get pay cuts, indeed they often get bonuses
   and "incentive" schemes to get them to do the work they were (over)
   paid to do in the first. When a corporate manager makes a mistake and
   their business actually fails, his workers will suffer far more serious
   consequences than him. In most cases, the manager will still live
   comfortably (indeed, many will receive extremely generous severance
   packages) while workers will face the fear, insecurity and hardship of
   having to find a new job. Indeed, as we argued in [40]section C.2.1, it
   is the risk of unemployment that is a key factor in ensuring the
   exploitation of labour in the first place.

   As production is inherently collective under capitalism, so must be the
   risk. As Proudhon put it, it may be argued that the capitalist "alone
   runs the risk of the enterprise" but this ignores the fact that
   capitalist cannot "alone work a mine or run a railroad" nor "alone
   carry on a factory, sail a ship, play a tragedy, build the Pantheon."
   He asked: "Can anybody do such things as these, even if he has all the
   capital necessary?" And so "association" becomes "absolutely necessary
   and right" as the "work to be accomplished" is "the common and
   undivided property of all those who take part therein." If not,
   shareholders would "plunder the bodies and souls of the wage-workers"
   and it would be "an outrage upon human dignity and personality." [The
   General Idea of the Revolution, p. 219] In other words, as production
   is collective, so is the risk faced and, consequently, risk cannot be
   used to justify excluding people from controlling their own working
   lives or the fruit of their labour.

   This brings us to the third reason, namely how "risk" contributes to
   production. The idea that "risk" is a contribution to production is
   equally flawed. Obviously, no one argues that failed investments should
   result in investors being rewarded for the risks they took. This means
   that successful risks are what counts and this means that the company
   has produced a desired good or service. In other words, the argument
   for risk is dependent on the investor providing capital which the
   workers of the company used productivity to create a commodity.
   However, as we discussed in [41]section C.2.4 capital is not productive
   and, as a result, an investor may expect the return of their initial
   investment but no more. At best, the investor has allowed others to use
   their money but, as [42]section C.2.3 indicated, giving permission to
   use something is not a productive act.

   However, there is another sense in which risk does not, in general,
   contribute to production within capitalism, namely finance markets.
   This bring us to our fourth objection, namely that most kinds of
   "risks"
   within capitalism do not contribute to production and, thanks to state
   aid, not that risky.

   Looking at the typical "risk" associated with capitalism, namely
   putting money into the stock market and buying shares, the idea that
   "risk"
   contributes to production is seriously flawed. As David Schweickart
   points out, "[i]n the vast majority of cases, when you buy stock, you
   give your money not to the company but to another private individual.
   You buy your share of stock from someone who is cashing in his share.
   Not a nickel of your money goes to the company itself. The company's
   profits would have been exactly the same, with or without your stock
   purchase." [After Capitalism, p. 37] In fact between 1952 and 1997,
   about 92% of investment was paid for by firms' own internal funds and
   so "the stock market contributes virtually nothing to the financing of
   outside investment." Even new stock offerings only accounted for 4% of
   non-financial corporations capital expenditures. [Doug Henwood, Wall
   Street, p. 72] "In spite of the stock market's large symbolic value, it
   is notorious that it has relatively little to do with the production of
   goods and services," notes David Ellerman, "The overwhelming bulk of
   stock transactions are in second-hand shares so the capital paid for
   shares usually goes to other stock traders, not to productive
   enterprises issuing new shares." [The Democratic worker-owned firm, p.
   199]

   In other words, most investment is simply the "risk" associated with
   buying a potential income stream in an uncertain world. The buyer's
   action has not contributed to producing that income stream in any way
   whatsoever yet it results in a claim on the labour of others. At best,
   it could be said that a previous owner of the shares at some time in
   the past has "contributed" to production by providing money but this
   does not justify non-labour income. As such, investing in shares may
   rearrange existing wealth (often to the great advantage of the
   rearrangers) but it does produce anything. New wealth flows from
   production, the use of labour on existing wealth to create new wealth.

   Ironically, the stock market (and the risk it is based on) harms this
   process. The notion that dividends represent the return for "risk" may
   be faulted by looking at how the markets operate in reality, rather
   than in theory. Stock markets react to recent movements in the price of
   stock markets, causing price movements to build upon price movements.
   According to academic finance economist Bob Haugen, this results in
   finance markets having endogenous instability, with such price-driven
   volatility accounting for over three-quarters of all volatility in
   finance markets. This leads to the market directing investments very
   badly as some investment is wasted in over-valued companies and
   under-valued firms cannot get finance to produce useful goods. The
   market's endogenous volatility reduces the overall level of investment
   as investors will only fund projects which return a sufficiently high
   level of return. This results in a serious drag on economic growth. As
   such, "risk" has a large and negative impact on the real economy and it
   seems ironic to reward such behaviour. Particularly as the high rate of
   return is meant to compensate for the risk of investing in the stock
   market, but in fact most of this risk results from the endogenous
   stability of the market itself. [Steve Keen, Debunking Economics, pp.
   249-50]

   Appeals to "risk" to justify capitalism are somewhat ironic, given the
   dominant organisational form within capitalism -- the corporation.
   These firms are based on "limited liability" which was designed
   explicitly to reduce the risk faced by investors. As Joel Bakan notes,
   before this "no matter how much, or how little, a person had invested
   in a company, he or she was personally liable, without limit, for the
   company's debts. Investors' homes, savings, and other personal assess
   would be exposed to claims by creditors if a company failed, meaning
   that a person risked finance ruin simply by owning shares in a company.
   Stockholding could not becomes a truly attractive option . . . until
   that risk was removed, which it soon was. By the middle of the
   nineteenth century, business leaders and politicians broadly advocated
   changing the law to limit the liability of shareholders to the amounts
   they had invested in a company. If a person bought $100 worth of
   shares, they reasoned, he or she should be immune to liability for
   anything beyond that, regardless of what happened to the company."
   Limited liability's "sole purpose . . . is to shield them from legal
   responsibility for corporations' actions" as well as reducing the risks
   of investing (unlike for small businesses). [The Corporation, p. 11 and
   p. 79]

   This means that stock holders (investors) in a corporation hold no
   liability for the corporation's debts and obligations. As a result of
   this state granted privilege, potential losses cannot exceed the amount
   which they paid for their shares. The rationale used to justify this is
   the argument that without limited liability, a creditor would not
   likely allow any share to be sold to a buyer of at least equivalent
   creditworthiness as the seller. This means that limited liability
   allows corporations to raise funds for riskier enterprises by reducing
   risks and costs from the owners and shifting them onto other members of
   society (i.e. an externality). It is, in effect, a state granted
   privilege to trade with a limited chance of loss but with an unlimited
   chance of gain.

   This is an interesting double-standard. It suggests that corporations
   are not, in fact, owned by shareholders at all since they take on none
   of the responsibility of ownership, especially the responsibility to
   pay back debts. Why should they have the privilege of getting profit
   during good times when they take none of the responsibility during bad
   times? Corporations are creatures of government, created with the
   social privileges of limited financial liability of shareholders. Since
   their debts are ultimately public, why should their profits be private?

   Needless to say, this reducing of risk is not limited to within a
   state, it is applied internationally as well. Big banks and
   corporations lend money to developing nations but "the people who
   borrowed the money [i.e. the local elite] aren't held responsible for
   it. It's the people . . . who have to pay [the debts] off . . . The
   lenders are protected from risk. That's one of the main functions of
   the IMF, to provide risk free insurance to people who lend and invest
   in risky loans. They earn high yields because there's a lot of risk,
   but they don't have to take the risk, because it's socialised. It's
   transferred in various ways to Northern taxpayers through the IMP and
   other devices . . . The whole system is one in which the borrowers are
   released from the responsibility. That's transferred to the
   impoverished mass of the population in their own countries. And the
   lenders are protected from risk." [Noam Chomsky, Propaganda and the
   Public Mind, p. 125]

   Capitalism, ironically enough, has developed precisely by externalising
   risk and placing the burden onto other parties -- suppliers, creditors,
   workers and, ultimately, society as a whole. "Costs and risks are
   socialised," in other words, "and the profit is privatised." [Noam
   Chomsky, Op. Cit., p. 185] To then turn round and justify corporate
   profits in terms of risk seems to be hypocritical in the extreme,
   particularly by appealing to examples of small business people whom
   usually face the burdens caused by corporate externalising of risk!
   Doug Henwood states the obvious when he writes shareholder "liabilities
   are limited by definition to what they paid for the shares" and "they
   can always sell their shares in a troubled firm, and if they have
   diversified portfolios, they can handle an occasional wipe-out with
   hardly a stumble. Employees, and often customers and suppliers, are
   rarely so well-insulated." Given that the "signals emitted by the stock
   market are either irrelevant or harmful to real economic activity, and
   that the stock market itself counts for little or nothing as a source
   of finance" and the argument for risk as a defence of profits is
   extremely weak. [Op. Cit., p. 293 and p. 292]

   Lastly, the risk theory of profit fails to take into account the
   different risk-taking abilities of that derive from the unequal
   distribution of society's wealth. As James Meade puts it, while
   "property owners can spread their risks by putting small bits of their
   property into a large number of concerns, a worker cannot easily put
   small bits of his effort into a large number of different jobs. This
   presumably is the main reason we find risk-bearing capital hiring
   labour" and not vice versa. [quoted by David Schweickart, Against
   Capitalism, pp. 129-130]

   It should be noted that until the early nineteenth century,
   self-employment was the normal state of affairs and it has declined
   steadily to reach, at best, around 10% of the working population in
   Western countries today. It would be inaccurate, to say the least, to
   explain this decline in terms of increased unwillingness to face
   potential risks on the part of working people. Rather, it is a product
   of increased costs to set up and run businesses which acts as a very
   effect natural barrier to competition (see [43]section C.4). With
   limited resources available, most working people simply cannot face the
   risk as they do not have sufficient funds in the first place and,
   moreover, if such funds are found the market is hardly a level playing
   field.

   This means that going into business for yourself is always a
   possibility, but that option is very difficult without sufficient
   assets. Moreover, even if sufficient funds are found (either by savings
   or a loan), the risk is extremely high due to the inability to
   diversify investments and the constant possibility that larger firms
   will set-up shop in your area (for example, Wal-Mart driving out small
   businesses or chain pubs, cafes and bars destroying local family
   businesses). So it is true that there is a small flow of workers into
   self-employment (sometimes called the petit bourgeoisie) and that, of
   these, a small amount become full-scale capitalists. However, these are
   the exceptions that prove the rule -- there is a greater return into
   wage slavery as enterprises fail.

   Simply put, the distribution of wealth (and so ability to take risks)
   is so skewed that such possibilities are small and, in spite being
   highly risky, do not provide sufficient returns to make most of them a
   success. That many people do risk their savings and put themselves
   through stress, insecurity and hardship in this way is, ironically,
   hardly a defence of capitalism as it suggests that wage labour is so
   bad that many people will chance everything to escape it. Sadly, this
   natural desire to be your own boss generally becomes, if successful,
   being someone else's boss! Which means, in almost all cases, it shows
   that to become rich you need to exploit other people's labour.

   So, as with "waiting" (see [44]section C.2.7), taking a risk is much
   easier if you are wealthy and so risk is simply another means for
   rewarding the wealthy for being wealthy. In other words, risk aversion
   is the dependent, not the independent, factor. The distribution of
   wealth determines the risks people willing to face and so cannot
   explain or justify that wealth. Rather than individual evaluations
   determining "risk", these evaluations will be dependent on the class
   position of the individuals involved. As Schweickart notes, "large
   numbers of people simply do not have any discretionary funds to invest.
   They can't play at all . . . among those who can play, some are better
   situated than others. Wealth gives access to information, expert
   advice, and opportunities for diversification that the small investor
   often lacks." [After Capitalism, p. 34] As such, profits do not reflect
   the real cost of risk but rather the scarcity of people with anything
   to risk (i.e. inequality of wealth).

   Similarly, given that the capitalists (or their hired managers) have a
   monopoly of decision making power within a firm, any risks made by a
   company reflects that hierarchy. As such, risk and the ability to take
   risks are monopolised in a few hands. If profit is the product of risk
   then, ultimately, it is the product of a hierarchical company structure
   and, consequently, capitalists are simply rewarding themselves because
   they have power within the workplace. As with "innovation" and
   "entrepreneurialism" (see [45]section C.2.8), this rationale for
   surplus value depends on ignoring how the workplace is structured. In
   other words, because managers monopolise decision making ("risk") they
   also monopolise the surplus value produced by workers. However, the
   former in no way justifies this appropriation nor does it create it.

   As risk is not an independent factor and so cannot be the source of
   profit. Indeed other activities can involve far more risk and be
   rewarded less. Needless to say, the most serious consequences of "risk"
   are usually suffered by working people who can lose their jobs, health
   and even lives all depending on how the risks of the wealthy turn out
   in an uncertain world. As such, it is one thing to gamble your own
   income on a risky decision but quite another when that decision can
   ruin the lives of others. If quoting Keynes is not too out of place:
   "Speculators may do no harm as bubbles on a steady stream of
   enterprise. But the position is serious when enterprise becomes the
   bubble on a whirlpool of speculation. When the capital development of a
   country becomes a by-product of the activities of a casino, the job is
   likely to be ill-done." [The General Theory of Employment, Interest and
   Money, p. 159]

   Appeals of risk to justify capitalism simply exposes that system as
   little more than a massive casino. In order for such a system to be
   fair, the participants must have approximately equal chances of
   winning. However, with massive inequality the wealthy face little
   chance of loosing. For example, if a millionaire and a pauper both
   repeatedly bet a pound on the outcome of a coin toss, the millionaire
   will always win as the pauper has so little reserve money that even a
   minor run of bad luck will bankrupt him.

   Ultimately, "the capitalist investment game (as a whole and usually in
   its various parts) is positive sum. In most years more money is made in
   the financial markets than is lost. How is this possible? It is
   possible only because those who engage in real productive activity
   receive less than that to which they would be entitled were they fully
   compensated for what they produce. The reward, allegedly for risk,
   derives from this discrepancy." [David Schweickart, Op. Cit., p. 38] In
   other words, people would not risk their money unless they could make a
   profit and the willingness to risk is dependent on current and expected
   profit levels and so cannot explain them. To focus on risk simply
   obscures the influence that property has upon the ability to enter a
   given industry (i.e. to take a risk in the first place) and so
   distracts attention away from the essential aspects of how profits are
   actually generated (i.e. away from production and its hierarchical
   organisation under capitalism).

   So risk does not explain how surplus value is generated nor is its
   origin. Moreover, as the risk people face and the return they get is
   dependent on the wealth they have, it cannot be used to justify this
   distribution. Quite the opposite, as return and risk are usually
   inversely related. If risk was the source of surplus value or justified
   it, the riskiest investment and poorest investor would receive the
   highest returns and this is not the case. In summary, the "risk"
   defence of capitalism does not convince.

References

   1. file://localhost/home/mauro/baku/debianize/maint/anarchy/secB4.html#secb42
   2. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc21
   3. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc22
   4. file://localhost/home/mauro/baku/debianize/maint/anarchy/secB3.html
   5. file://localhost/home/mauro/baku/debianize/maint/anarchy/secI3.html
   6. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC1.html
   7. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc22
   8. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC3.html
   9. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html
  10. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html
  11. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc25
  12. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc26
  13. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc24
  14. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc23
  15. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc23
  16. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc25
  17. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC3.html
  18. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc23
  19. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html
  20. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC5.html
  21. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC1.html
  22. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc27
  23. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html
  24. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC5.html
  25. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html#secc81
  26. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC6.html
  27. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc26
  28. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc23
  29. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC1.html#secc11
  30. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC1.html#secc16
  31. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc22
  32. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC5.html
  33. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html
  34. file://localhost/home/mauro/baku/debianize/maint/anarchy/secB1.html#secb11
  35. file://localhost/home/mauro/baku/debianize/maint/anarchy/secH4.html#sech44
  36. file://localhost/home/mauro/baku/debianize/maint/anarchy/secIcon.html
  37. file://localhost/home/mauro/baku/debianize/maint/anarchy/secJ5.html#secj510
  38. file://localhost/home/mauro/baku/debianize/maint/anarchy/secJ5.html#secj511
  39. file://localhost/home/mauro/baku/debianize/maint/anarchy/secJ5.html#secj512
  40. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc21
  41. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc24
  42. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc23
  43. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC4.html
  44. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc27
  45. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html#secc28
