Adam Smith: relative inequality is absolute poverty

[moorobot]

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So I guess if I offered a job for a dollar a day people would jump at the opportunity since there's a big stock of people, right?

[/ QUOTE ] LOL-this happens right now: it's called capital flight to third world countries.

[Riddick]

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Not at all. These things do not contradict each other in any way. Like all right wing lunatics who read Smith you see just one side of his point and not the others.

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I didn't say they contradicted each other. I actually read and understand both points, and clearly he elaborates on the former, which you snipped, with the immediately following latter, which I filled in.

[hmkpoker]

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So I guess if I offered a job for a dollar a day people would jump at the opportunity since there's a big stock of people, right?

[/ QUOTE ] LOL-this happens right now: it's called capital flight to third world countries.

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Civilization has to start somewhere. I was referring to the national economy (though there's really no distinction).

[GMontag]

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[GMontag's nonsensical post]

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Staying within the bounds of Wealth of Nations, revenue becomes capital accumulation .

From Wealth of Nations , Chapter entitled "Capital Accumulation":

"Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaing an additional number of productive hands (i.e. capital accumulation employs more laborers), or enables some other person to do so, by lending it to him for an interest, that is for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so that capital of a society, which is the same with that of all the individuals who compose it, can be increased only in the same manner.

So, yes, it is EXACTLY what Smith is saying.

Or you can view capital accumulation in a subjectivist way a la Jevons:

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It was William Stanley Jevons (1871: Ch. VII) who first conceived of capital as being characterized as time. More specifically, capital is "the aggregate of those commodities which are required for sustaining labourers of any kind or class engaged in work...The single and all-important function of capital is to enable the laborer to await the result of any long-lasting work, -- to put an interval between the beginning and the end of an enterprise" (Jevons, 1871: p.223). Thus, for Jevons, capital is merely a subsistence fund that goes into maintaining the labor inputs working on the production of goods whose fruit will only emerge in a later time.

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So please. Stay out of economics discussions from now on.

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Brilliant post. Bravo. I especially like the part where you snip my post so it isn't as obvious that you completely fail to address the main point, and that your "rebuttal" of the side point didn't invalidate my point in any way. Misdirection at its finest.

Obviously money saved from revenue becomes capital. But only an idiot would think that meant that revenue and capital are the same thing. If Smith had meant capital, he would have said capital. Instead he said revenue. The demand for labor increases with the rate of inflow (i.e. revenue), not with the total amount saved up (i.e. capital).

And let me reiterate my main point, which, again, you completely failed to address:

Capital accumulation by itself does not and cannot stimulate the demand for labor. Only increased consumption, and hence increased demand for products, can do that. There can be no demand for labor without a demand for the products of that labor. In short, the entire premise for the supply-side economics that you are promoting, is a load of crap.

[Borodog]

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[GMontag's nonsensical post]

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Staying within the bounds of Wealth of Nations, revenue becomes capital accumulation .

From Wealth of Nations , Chapter entitled "Capital Accumulation":

"Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaing an additional number of productive hands (i.e. capital accumulation employs more laborers), or enables some other person to do so, by lending it to him for an interest, that is for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so that capital of a society, which is the same with that of all the individuals who compose it, can be increased only in the same manner.

So, yes, it is EXACTLY what Smith is saying.

Or you can view capital accumulation in a subjectivist way a la Jevons:

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It was William Stanley Jevons (1871: Ch. VII) who first conceived of capital as being characterized as time. More specifically, capital is "the aggregate of those commodities which are required for sustaining labourers of any kind or class engaged in work...The single and all-important function of capital is to enable the laborer to await the result of any long-lasting work, -- to put an interval between the beginning and the end of an enterprise" (Jevons, 1871: p.223). Thus, for Jevons, capital is merely a subsistence fund that goes into maintaining the labor inputs working on the production of goods whose fruit will only emerge in a later time.

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So please. Stay out of economics discussions from now on.

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Brilliant post. Bravo. I especially like the part where you snip my post so it isn't as obvious that you completely fail to address the main point, and that your "rebuttal" of the side point didn't invalidate my point in any way. Misdirection at its finest.

Obviously money saved from revenue becomes capital. But only an idiot would think that meant that revenue and capital are the same thing. If Smith had meant capital, he would have said capital. Instead he said revenue. The demand for labor increases with the rate of inflow (i.e. revenue), not with the total amount saved up (i.e. capital).

And let me reiterate my main point, which, again, you completely failed to address:

Capital accumulation by itself does not and cannot stimulate the demand for labor. Only increased consumption, and hence increased demand for products, can do that. There can be no demand for labor without a demand for the products of that labor. In short, the entire premise for the supply-side economics that you are promoting, is a load of crap.

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Reading for comprehension: It's fun AND easy! To wit:

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Whatever a person saves FROM his revenue he ADDS TO his capital . . .

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ACCUMULATED CAPITAL generates the demand for labor, as only it can, because only accumulated capital can pay wages during roundabout production processes prior to the realization of profit at sale in the market. Demand for labor goes up with revenue? If that were the case, I could pay out now no more than I take in now, meaning I have gained no productivity at all, and there can be no increase in roundaboutness, meaning we'd all be picking berries.

[GMontag]

Hmm, I didn't see this reply before I went on vacation.

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[GMontag's nonsensical post]

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Staying within the bounds of Wealth of Nations, revenue becomes capital accumulation .

From Wealth of Nations , Chapter entitled "Capital Accumulation":

"Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaing an additional number of productive hands (i.e. capital accumulation employs more laborers), or enables some other person to do so, by lending it to him for an interest, that is for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so that capital of a society, which is the same with that of all the individuals who compose it, can be increased only in the same manner.

So, yes, it is EXACTLY what Smith is saying.

Or you can view capital accumulation in a subjectivist way a la Jevons:

[ QUOTE ]
It was William Stanley Jevons (1871: Ch. VII) who first conceived of capital as being characterized as time. More specifically, capital is "the aggregate of those commodities which are required for sustaining labourers of any kind or class engaged in work...The single and all-important function of capital is to enable the laborer to await the result of any long-lasting work, -- to put an interval between the beginning and the end of an enterprise" (Jevons, 1871: p.223). Thus, for Jevons, capital is merely a subsistence fund that goes into maintaining the labor inputs working on the production of goods whose fruit will only emerge in a later time.

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So please. Stay out of economics discussions from now on.

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Brilliant post. Bravo. I especially like the part where you snip my post so it isn't as obvious that you completely fail to address the main point, and that your "rebuttal" of the side point didn't invalidate my point in any way. Misdirection at its finest.

Obviously money saved from revenue becomes capital. But only an idiot would think that meant that revenue and capital are the same thing. If Smith had meant capital, he would have said capital. Instead he said revenue. The demand for labor increases with the rate of inflow (i.e. revenue), not with the total amount saved up (i.e. capital).

And let me reiterate my main point, which, again, you completely failed to address:

Capital accumulation by itself does not and cannot stimulate the demand for labor. Only increased consumption, and hence increased demand for products, can do that. There can be no demand for labor without a demand for the products of that labor. In short, the entire premise for the supply-side economics that you are promoting, is a load of crap.

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Reading for comprehension: It's fun AND easy! To wit:

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Whatever a person saves FROM his revenue he ADDS TO his capital . . .

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Riddick's original post *directly equated* revenue and accumulated capital, so he could say that an increase in revenue was *always* the same thing as an increase in accumulated capital, which is quite obviously nonsense.

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ACCUMULATED CAPITAL generates the demand for labor, as only it can, because only accumulated capital can pay wages during roundabout production processes prior to the realization of profit at sale in the market.

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You've never actually been involved in any sort of real business, have you? I'm having trouble believing that anyone with actual experience would be making such assinine statements.

No, accumulated capital is not the only thing that can pay wages during production. Current revenue does just fine. This isn't rocket science. Current revenue pays for your current production and operating costs. Your current production becomes your future revenue, which then pays for your future production, etc.

Also, by far the majority of manufacturing today is done on contract, not on speculation. Often those contracts include at least partial up-front payments. So your current revenue already would include some realization of profit.

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Demand for labor goes up with revenue? If that were the case, I could pay out now no more than I take in now, meaning I have gained no productivity at all, and there can be no increase in roundaboutness, meaning we'd all be picking berries.

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Did you even try to think before you wrote this? You'd only gain no productivity if it costs you exactly as much to pay wages and operating costs as you will recieve in revenue when the production is finished and sold. In other words, you'd gain no production only if your revenue doesn't increase. If instead you are able to sell your product for more than it cost to make, as is the case with all businesses that are actually making a profit, your revenue will be increasing constantly along with your demand for labor.

As for your insistence that accumulated capital controls demand for labor, I find it hard to fathom the level of idiocy necessary to continually assert that, just because you have saved some money up, you can sustainably run a business making stuff without regard to how much of that stuff you can actually sell.

[Riddick]

***Layman's terms for 2+2 readers***

Assume your bankroll (your accumulated capital!) is $4000, and you play at the $1BB NL table. You always play at a level where you have at least a 40 buy-in bankroll. You want to move to the $2BB NL table. How are you going to get there? Well DUH! You need to save up until you have $8000! If your winrate (your revenue, or rate of inflow) is 10ptbb/100, you don't need to (and probably can't) increase this. So in order to accumulate $8000 total and move up in limits, you need to be consistently saving profits over time until your accumulated capital, your bankroll, has reached $8000.

***Layman's terms once again***

You own a pizza shop and employ 10 laborers. An 11th laborer is not needed. You want to open another pizza shop, but need $50,000. Daily revenue is $2000, and daily profit is $200. So without increasing your revenue, you simply operate day to day, and roughly 45 weeks later, after saving all of your daily profit, you have accumulated $50,000!!! Now you reinvest this money into a new pizza shop, for which you need to employ 10 more laborers! Your demand for labor has increased in proportion to your accumulated capital! Furthermore, since you need 10 more laborers, you must step into the labor market and compete for these laborers, driving up their wages.

Now, GMontag-

It is your belief that a firm who increases its revenue year after year, but is also increasing its net loss year after year, will increase its demand for additional laborers? Afterall, the firms demand for laborers increases in proportion to its increase in revenue, right?

You believe that a business can have a 0% rate of profit, accumulating no capital, have nothing to reinvest, yet it can still expand?

Time is completely absent from your analysis, and so your analysis is nothing but worthless nonsense. Obviously *forecasted* demand to consume a good sparks its production, but *before* consumption there must be production, and *before* production there must be accumulated capital (which can come from anywhere, a loan, an outside investment(s), inheritance, or simply past profit). In order to run a business and generate revenue, you first have to have the money to start up that business, which means you must first accumulate the money. The business doesn't just magically appear and start generating revenue. Likewise, the expansion of a business, which with it will bring the increase in demand for labor, doesn't just appear magically and start generating revenue. The expansion requires that revenue is saved as profit, and accumulated enough to be reinvested into the business.

To increase the productive capabilities of the firm in order to meet the forecasted demand, one must reinvest profit into the business. *Revenue increase is not necessary to do this* (although no one would argue that it doesn't help). If revenue remains unchanged at $x for 10 years, and profit saved from revenue also remains unchanged at $y for 10 years, then the accumulated profit 10 years can be reinvested to expand the productive capacities and subsequently increase both revenue and profit in the future.

(As a side note, plowing accumulated capital back into the firm increases the marginal productivity of labor, which the wages of labor tend towards, and so in effect it increases the wages of labor.)

So what if revenue does increase? It is your belief that when revenue increases, the owner of the firm will simply say "Hey, I have an idea, I'll hire more laborers!" But this makes no sense. He might pay his current laborers more, but if he doesn't need that nth laborer, than he isn't going to hire him simply because he has the money to do it.

And what if revenue decreases? Capital accumulation to the rescue! Simply look at the transformation that photo companies had to make to be successful in the digital age. Revenue decreased sharply for giants such as Kodak and Polaroid, threatening their existence, yet Kodak used its reinvestment of past profits to transform and is now a leader in digital photography.

We know that increased capital accumulation is the cause of the rise in standard of living for an individual. When you have $12 million in your portfolio you will live a markedly better lifestyle than when you have $2000 in your checking account. Why do you think that increased capital accumulation is not the desire of an individual who happens to be a business owner? Why do you think a firm with $30 million accumulated capital does not "live a far better lifestyle" than a firm skirting by with $10000 in accumulated capital?

We know that capital accumulation leads to increases in the productive capabilities of a firm, which leads to the firms expansion, which leads to increases in the demand for additional laborers, which raises the wages of labor through the competition for these laborers. Furthermore, we know that after enough capital accumulation, capital will be plowed back into the firm, reinvested into the workplace, which leads to both a better material condition for laborers and a rise in marginal productivity of the laborers, which leads to a fall in production costs, which leads to a fall in prices, which means more people can satisfy their want and better their lives.

This is not supply side economics. This is common sense, as any layperson can see in the top two simple examples.

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"Riddick's original post *directly equated* revenue and accumulated capital"

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[img]/images/graemlins/confused.gif[/img] What part of "Whatever a person saves from his revenue he adds to his capital" do you not understand??? Let's recap.

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"The demand for those who live by wages, it is evident, cannot increase but in proportion to the increase of the funds which are destined for the payment of wages." [i.e. demand for labor cannot increase but in proportion to capital accumulation]"

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The funds which are destined for the payment of wages ***to additional laborers, as per the condition layed out in the opening of the sentence*** is the accumulated capital of the firm. The revenue sitting in the cash register isn't destined for the employment of any additional laborers *until after it has been saved and accumulated to a certain point whereupon it is reinvested for expansion and then additional laborers are demanded*

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"The demand for those who live by wages [i.e. laborers], therefore, necessarily increases with the increase of revenue and stock [i.e. capital accumulation and savings] of every country, and cannot possibly increase without it."

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Again, revisiting this, notice how Smith doesn't cut it off at 'revenue', he says *and stock*. I would contend that increase in revenue is unnessecary as I've laid out above, but certainly your stock must increase for the demand of additional laborers to increase.

And again, if you see my second post, which you aptly labeled "brilliant" you will see how Smith continues later in the book to specifically expound on the increase in the demand for laborers derived purely from the increase in stock (hence the name of the chapter, profits of stock)

[Borodog]

Oh snap!

[GMontag]

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***Layman's terms for 2+2 readers***

Assume your bankroll (your accumulated capital!) is $4000, and you play at the $1BB NL table. You always play at a level where you have at least a 40 buy-in bankroll. You want to move to the $2BB NL table. How are you going to get there? Well DUH! You need to save up until you have $8000! If your winrate (your revenue, or rate of inflow) is 10ptbb/100, you don't need to (and probably can't) increase this. So in order to accumulate $8000 total and move up in limits, you need to be consistently saving profits over time until your accumulated capital, your bankroll, has reached $8000.

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Bad analogy. Poker limits are stratified. You probably can't play $1.5BB NL, and you definately can't play $1.25BB, or $1.125BB, etc. This is not true for labor. If poker was similar, you would be constantly moving up and down, or in other words *using* your bankroll, rather than just accumulating it.

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***Layman's terms once again***

You own a pizza shop and employ 10 laborers. An 11th laborer is not needed. You want to open another pizza shop, but need $50,000. Daily revenue is $2000, and daily profit is $200. So without increasing your revenue, you simply operate day to day, and roughly 45 weeks later, after saving all of your daily profit, you have accumulated $50,000!!! Now you reinvest this money into a new pizza shop, for which you need to employ 10 more laborers! Your demand for labor has increased in proportion to your accumulated capital! Furthermore, since you need 10 more laborers, you must step into the labor market and compete for these laborers, driving up their wages.

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And then either one of two things happens. Either you weren't fulfilling the demand for your pizzas, and your revenue goes up, or you were already meeting the demand for your pizzas and your revenue stays the same, your profits turn to a loss due to the extra costs of labor, and you are forced to close your new shop. So no, the sustainable demand for labor is not dependant on capital, but rather on revenue.

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Now, GMontag-

It is your belief that a firm who increases its revenue year after year, but is also increasing its net loss year after year, will increase its demand for additional laborers? Afterall, the firms demand for laborers increases in proportion to its increase in revenue, right?

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Obviously. How else is it increasing its revenue? Is it doing it by making and selling *less* product?

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You believe that a business can have a 0% rate of profit, accumulating no capital, have nothing to reinvest, yet it can still expand?

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No, in fact I specifically denied that in my last post.

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In order to run a business and generate revenue, you first have to have the money to start up that business, which means you must first accumulate the money. The business doesn't just magically appear and start generating revenue.

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Yes, capital is required to startup a business, but businesses just starting is not the typical situation for expansion.

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Likewise, the expansion of a business, which with it will bring the increase in demand for labor, doesn't just appear magically and start generating revenue. The expansion requires that revenue is saved as profit, and accumulated enough to be reinvested into the business.

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No. Expansion by and large happens incrementally. You immediately expand your business when you profit, there's no interval where you save the money inbetween.

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To increase the productive capabilities of the firm in order to meet the forecasted demand, one must reinvest profit into the business. *Revenue increase is not necessary to do this*

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If your revenue doesn't increase as a result of your investment, it was a stupid investment.

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If revenue remains unchanged at $x for 10 years, and profit saved from revenue also remains unchanged at $y for 10 years, then the accumulated profit 10 years can be reinvested to expand the productive capacities and subsequently increase both revenue and profit in the future.

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And here you gloss over my entire point. Just because you are making more crap does not mean that people will buy more crap. Reinvesting and making your business more productive does not necessarily correlate to increased revenue and profits. Accumulated profits are worthless without an increase in consumption and therefore demand to make the products of the labor worth something.

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(As a side note, plowing accumulated capital back into the firm increases the marginal productivity of labor, which the wages of labor tend towards, and so in effect it increases the wages of labor.)

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An increase in average productivity without a corresponding increase in aggregate consumption means there would be fewer jobs by definition. The drop in jobs and corresponding increase in competition between laborers would negate any increase in wages due to productivity. So once again, it is consumption and demand that is the controlling factor.

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So what if revenue does increase? It is your belief that when revenue increases, the owner of the firm will simply say "Hey, I have an idea, I'll hire more laborers!" But this makes no sense.

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It does make sense, and it in fact is what happens. Working as I do in manufacturing, I see it on a regular basis. Whenever we have a large spike in orders (i.e. an increase in revenue), we call up the local temp worker agency, and/or hire on another part time or full time employee (if the "spike" is long enough).

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We know that increased capital accumulation is the cause of the rise in standard of living for an individual. When you have $12 million in your portfolio you will live a markedly better lifestyle than when you have $2000 in your checking account.

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Nonsense. Its not the amount of accumulated capital, its the amount of consumption. A man with a $200,000 yearly income that spends it all and saves nothing will be living a better lifestyle than a man who has a $500,000 yearly income but spends only $60,000 yearly.

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Why do you think that increased capital accumulation is not the desire of an individual who happens to be a business owner? Why do you think a firm with $30 million accumulated capital does not "live a far better lifestyle" than a firm skirting by with $10000 in accumulated capital?

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A firm that is using that $30 million, rather than letting it sit in a bank accumulating, will be more productive.

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We know that capital accumulation leads to increases in the productive capabilities of a firm, which leads to the firms expansion, which leads to increases in the demand for additional laborers, which raises the wages of labor through the competition for these laborers.

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So essentially, you are either assuming that demand just magically appears when production and supply increases, or that there is an infinite demand already there that is not yet being met. Either assumption is idiotic and horribly unrealistic. Your argument fails.

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"Riddick's original post *directly equated* revenue and accumulated capital"

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[img]/images/graemlins/confused.gif[/img] What part of "Whatever a person saves from his revenue he adds to his capital" do you not understand???

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What part of "Money that goes directly from intake to expenses and wages is not money that is being saved." do you not understand?

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Let's recap.

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"The demand for those who live by wages, it is evident, cannot increase but in proportion to the increase of the funds which are destined for the payment of wages." [i.e. demand for labor cannot increase but in proportion to capital accumulation]"

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The funds which are destined for the payment of wages ***to additional laborers, as per the condition layed out in the opening of the sentence*** is the accumulated capital of the firm. The revenue sitting in the cash register isn't destined for the employment of any additional laborers *until after it has been saved and accumulated to a certain point whereupon it is reinvested for expansion and then additional laborers are demanded*

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And as I told you, this simply isn't true. Expansion is done incrementally. Why do you think there is such a huge temp worker industry? Its due to incremental expansion and businesses hiring additional labor that don't need an entire full-time employee.

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"The demand for those who live by wages [i.e. laborers], therefore, necessarily increases with the increase of revenue and stock [i.e. capital accumulation and savings] of every country, and cannot possibly increase without it."

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Again, revisiting this, notice how Smith doesn't cut it off at 'revenue', he says *and stock*. I would contend that increase in revenue is unnessecary as I've laid out above, but certainly your stock must increase for the demand of additional laborers to increase.

And again, if you see my second post, which you aptly labeled "brilliant" you will see how Smith continues later in the book to specifically expound on the increase in the demand for laborers derived purely from the increase in stock (hence the name of the chapter, profits of stock)

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Perhaps I'm misinterpreting your use of the word "stock" (I'm taking it to mean inventory of product in various stages of completion), but I don't see how this could possibly be true. Stock is something that businesses should reduce whenever possible. Having excess stock incurs large costs, in storage space, handling labor, and lost profits from failing to put that wealth to use. There's a reason that manufacturers that practice the just-in-time and lean techniques pioneered by Toyota are vastly out-performing traditional manufacturing firms.