Occupy Wall Street And Not Understanding Capitalism

by: Paulo Santos

Today, Occupy Wall Street and its “We Are The 99%” is all the rage, with a lot of political and economic commentary swirling around it. It would seem, to any casual observer, that capitalism was really on the verge of being denounced by the masses, and that inequality amongst the people has never been greater.

This state of affairs, more than anything else, reveals the great lack of understanding by the masses, as well as the political corps.

It starts with capitalism. Capitalism just stands for the defense of private ownership for the means of production and usage of these means of production for the creation of goods or services to sell for profit in free and competitive markets. Pretty much as soon as you have money, you have capitalism. This happens because money, as well as being a medium of exchange and unit of account, is also intrinsically a store of value. And as soon as you have a store of value, the making of any kind of enterprise can be financed either through direct supply of labor, or capital – which is nothing more than deferred labor you can bring to the table by paying others with your store of value. So, once you have money, you have capitalism unless the powers that be specifically forbid it through making illegal private ownership of enterprises or free markets.

In short, none of those Occupying Wall Street really wants to end capitalism.

But it doesn’t stop there. There’s also an issue with the inequality regarding the distribution of wealth that so bothers the 99%. For us to understand the issue, first we have to get back to what money is. Money is a medium of exchange. It exists to make different productions fungible, that is, equivalent amongst themselves. It makes commerce a lot easier then the alternative, bartering, where each trader would have to want exactly the wares the other trader was presenting him. Now, this also means (and is tied) that money is a store of value, in the sense that if you buy someone else’s potatoes and pay him with $5, you have potatoes while the other guy only has a future claim on someone else’s production – he has thus “stored” the value of his own production, to pay for his consumption later on, when he’ll use the $5 to buy someone else’s production. Thus, the money someone has, as long as he got it in legal, free and voluntary exchanges, is a measure of the value of the goods and services he has rendered others, but has not taken from others, yet.

Just think about it for a second – that accumulated money, or wealth, as long as it was gotten on legal, free and voluntary exchanges, is a measure of the value of goods and services physically rendered to others, but not yet gotten in return.

This has a huge implication for the debate on wealth inequality, because on one side you have people accumulating an extraordinary amount of claims on others – but at the same time, those others must be accumulating an extraordinary amount of goods and services rendered to them, where they have not yet produced something of equivalent value to pay back.

And indeed it is, while income and wealth inequality have never been higher, at the same time we can also be sure that never has the enjoyment of material well-being been as high or widespread either. Never have so many people had access to decent homes, utilities, mobile phones, cars, food, etc, as now. And what matters more? That the paper claims have never been so badly distributed, or that the physical enjoyment of those goods and services as never been so well distributed? The answer is easy. Furthermore, and this might come as a surprise to many, although income inequality can be a lot lower in Europe’s Scandinavian countries, wealth inequality is about the same, or even worse, than in the U.S. Can you guess why?

Furthermore, the inequality statistics have a deep flaw. They don’t account for the goods and services rendered by the state. And they should, because the state is a relevant spender, and its goods and services are either rendered equally, benefitting all, or are even rendered more towards the low income citizens, decreasing inequality even further. To see how this affects an income inequality statistic, just think about a scenario where citizen A makes $10,000, while citizen B makes $100,000. “Huge inequality”, you think, the poor guy is making 1/10th what the rich guy rakes in. But then progressive taxes kick in, taking $0 from A and $40,000 from the rich guy. Ok, inequality just got a bit smaller, but it’s still huge you think.

But it happens that taxes are paid to then be returned in the form of services, like roads, healthcare, schools, etc. And those services have a value so we can estimate that even if the value is distributed equally, A will in practice receive $20,000 in such services and B, also $20,000. And by now, what was originally a 1:10 inequality in income, has been reduced to $30,000 in value for A, and $80,000 in value for B. That means B is enjoying an income of just 2.66x A’s. And yet, the income inequality statistics would never pick this up, even though it’s completely realistic.

This is not to say there isn’t a problem. There are many problems, some hard to avoid – like the way the race towards increased productivity tends to concentrate wealth in fewer workers, and how that also means the economy needs and ever-expanding diversification to create new jobs to compensate for those eliminated through greater productivity. Also, it is obvious that the lower income rungs have been affected by competition from lower wage countries. And corporate governance seems deeply flawed in the Occident, with many a bad performance going without punishment, or indeed, being rewarded.

And in the end, as machines take more and more of the lower skill jobs, less and less people will be skilled enough to still be able to perform duties where machines are not able to be competitive – a trend that’s quite scary, because technological advances taking place nowadays means there will be ever fewer occupations where such remains true. Some kind of huge economic restructuring might need to happen for there to still be enough jobs for everybody – both here and abroad. My personal opinion is that the work week will need to be shortened worldwide (which can only by achieved by political compromise).

But anyway, the Occupy Wall Street movement needs to focus a little better and understand a little bit better the world it moves in. It needs clear and well defined targets in its struggle, instead of firing randomly at things it does not necessarily understand.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.