Tag Archives: economics

3 economic myths most people still believe in.

Unlearning Economics has a brief but succint list of estabilished economic myths and why they are wrong.

  • Rich countries did not get rich through free trade, but through the use of protectionism and other state interventions such as capital controls and subsidies.[…]
  • Money did not arise as a solution to the ‘double coincidence of wants[…]
  • Peasants did not freely move from their land into 12+ hour days in factories because it was ‘better than the alternative.[…]

Worth a read.

What are the economics of piracy?

In this part of the series, we’re going to look at the arguments TweakGuide has presented to point out how the economics of piracy adversely affect the PC Gaming ecosystem. This is basically the first “offensive” so to speak, which sets the stage as it is used to interpret the data which the author has gathered in the later sections.

In the spirit of criticism, I will use the same headers as the author to point out the weaknesses of each of his arguments.

Economic Loss

The author rightly notes that the oft cited argument of “One download = One lost sale” is totally bogus and that any economic loss is impossible to calculate but then spends the rest of the section arguing that economic loss exists. He does this by completely ignoring all the possible positive aspects of file-sharing an by taking the old business models as basically good and immutable.

With this, the author shows that he does not really understand the economics of free and how it affects the gaming market. This is the standard way that old-school publishers are treating the internet and free distribution: As if it doesn’t, or shouldn’t exist and thus the old ways of doing things should continue working. Take for example the idea he proposes, in that because someone did pirate the game, it means that they would be willing to pay something for it and thus the publisher is losing some money down the road from discount sales. Of course someone’s judgement of the value of a game is not made before they play it (barring marketing and hype) and it can very well be adjusted downwards once they spend even a few minutes doing so. Anyone who has had the feeling of being ripped of with a nice-looking box and fancy ads and getting a polished turd as a game should know what I mean. As such, it should be perfectly acceptable for someone to decide that the game is worthless after downloading it.

Discount sales on the other hand are precisely the kind of old-school thinking that the industry is unwilling to discard because they were so profitable. In a time of instant zero-cost distribution and overhyped multiplayer gaming, companies should not expect people would wait for months or years on end in order to play a game they can’t afford at its overinflated prices. This is totally missing the dynamics of gaming. People want to play the same stuff their friends are playing now and if they can’t afford it (or think the price is a rip-off) they will select the closest candidate. Barring price-ranges in their budget, the nearest option is free. Instead of recognising this and offering the game at lower prices that everyone could afford, or even doing a pay-what-you-want scheme which would allow people to pay what they can, they keep acting as if people have no other option. In fact, with the current technology, discount is not anymore used as a way to sell excess stock as it was in brick-and-mortar shops or generally physical goods, but rather as a boost to their normal sales, as a perpetual value machine. By sticking to the old methods, that worked for other industries and other business models in different technologies, in short, by trying to fit a square piece in a round hole, the gaming publishers are asking to be out-competed by those who do recognize how things work. And they have. Of course this natural evolution of business models is a form of “economic loss” for those who use the old ones. It’s also their damn fault.

Next the author argues that while economic loss cannot be accurately calculated, by comparing the two markets we can get a better indication of such a loss. I won’t go into the details as this is explored on another section in more detail but I will say that the comparison will be flawed. The customer base of those two is not the same and the purchasing habits are neither. Whatever the analysis shows, it’s going to be pure correlation, not an indication.

Finally the author points out that a potential harm from piracy comes from the support costs they have for supporting unauthorized copies. At this point, I’m surprised he didn’t count the cost of DRM measures as an “economic loss” for the publisher as well. You see all these costs come about because the gaming companies refuse to recognize that the value of their product in a zero-cost distribution environment does not lie in the content but in the service. If they accepted that their product can be received for free and worked with that in mind, then this wouldn’t have been an issue in the first place. If they didn’t try to punish unauthorized file-sharing with buggy DRM and hidden security measures, they wouldn’t have a problem. If they worked the price of support in their price and sold it as a service instead (i.e. require a valid serial before allowing someone to post a support question or something like that) this wouldn’t have been an issue. If they open-sourced their games and allowed the community to find bugs and patch them, this wouldn’t have been a problem. You can see once again that this issue only exists because the companies refuse to recognise the environment they are in and embrace solutions to work with it.

The Free Rider Problem

Here the author argues that there is an ethical dimention to piracy in the form of allowing some to have all the benefits and none of the costs and that even file-sharers recognise that. Ironically he points out that even though file-sharers have to deal with the same problem, they have figured out ways around it. Passwords, subscriptions, bandwidth caps and share ratios are all implemented in order to naturally and without centralized intervention curb any free riding.

You see, these methods did not just spring up randomly one day. It evolved. The methods and tools by which people file-shared kept changing until one was found that was better than anything else. In the current time, it’s the BitTorrent protocol which crowdsources bandwidth and automatically punishes those who do not contribute accordingly. It’s not perfect but it’s better than anything else, which is why it has proliferated so well.

Do you notice however the big difference between the way File Sharers have solved their problem and the way Gaming Comanies still fight with it? The first ones have changed their methods when they reached their limits and couldn’t anymore rely on universal goodwill, while the gaming companies have persisted in what they have always done and insisted that everyone should become a better person or they’ll take their ball and go home.

The fact that people free ride is something to be expected under a Capitalist system where wealth is power. Naturally people have an incentive to save as much money as possible, in every way possible. Capitalism is notorious for making ethical considerations and all human values irrelevant for the sake of Greed. And this is considered as good. Supposedly, everyone being greedy works out for the best and we don’t really need extra ethical values to guide us as rational self-interest will guide us to practically the same results. To claim that some people are bad because they do what the system itself compels them to do is simply misguided. If you want to change this behaviour, you’re far better off dismantling the system which promotes it, rather than try to play the losing game of having people embrace a particular ethic when it goes against their material self-interest. It’s a losing game because those people are simply going to be naturally selected against. Someone who avoids free-riding when he can because of ethical reasons, is simply going to be at an economical disadvantage to someone who does, and will lose out in future opportunities and success. And in Capitalism, everyone want to be successful. Unfortunately, if your problem is free riding, your only solution is to embrace a system which minimizes the incentive to do it. If you want to minimize it while staying within Capitalism, then your only solution is to evolve and make it systematically impossible or unnecessary.

The Economies of Scale

In this section, the author displays a stunning degree of misunderstanding of how economics works. First of all, economies of scale simply means that larger companies can produce the same products at a lower per-unit cost than smaller companies. Now, not only is this primarily related to actual physical production but it has also been shown to be wrong. We actually have diseconomies of scale.

Nevertheless, the funny thing is that even if this were true, it would run counter to the argument of the author, which is that big projects require bigger prices to cover the costs. Under an economy of scale, the big software companies would produce the same quality game as a smaller company at a lower cost, or they would produce a higher quality product at the same cost. And yet what we routinely see is that big companies produce high quality products and yet charge a higher cost (usually more than double the amount of an indie game.) Something does not fit.

Of course things are completely reversed to what the author claims they are. We do in fact have the standard diseconomies of scale in game production as we have everywhere else. You quickly start running into diminishing returns the more you increase the budget for a game and the size of a company which then requires state intervention in order to make it profitable to do so. Let me say it again: The only reason why big budget games even exist, is because the state grants them special privileges in order to do so. Namely, copyrights. Now one may say that if this what it takes to have ultra-high quality games, then it’s good because having ultra-high quality games is also good. To this one can counter that the drawbacks of having state intervention and special rules to promote one type of content are far greater than the benefits of having luxury games for the few who can afford them. In short, this discussion will take us on the road to challenge the validity of copyrights (which of course the author took for granted) which we’ll do in another section.

It is in fact interesting that the author chose to bring up state-subsidized roads and transportation in order to make his point during the free rider section, claiming :

The classic example is for Government services such as roads, hospitals, welfare and defence. Every citizen can access and hence directly or indirectly benefit from these services, but if left solely up to voluntary contributions, most individuals would likely not pay much if anything for them, citing a range of excuses. Therefore the Government enforces involuntary contributions from all applicable citizens in the form of taxes. If it didn’t, many of these essential services could not be adequately provided as the costs of provision would outweigh the voluntary contributions.

One can easily call into question the necessity for any of those services when we consider that first the state subsidized many of them (often at the behest of corporate lobbying) and then the rest of the system morphed around them. For example, the subsidy of roads made car ownership far more viable, resulting in most people now owning a car. Where it not for the state subsidy of roads, most people would not have one and would rather rely on other means of transport (i.e. living closer to work or public transport). That is to say that without government intervention, life would not come to a halt, but would rather work with it. One can easily argue that Govt intervention unnecessarily skewed the evolution of such means towards corporate ownership and power while perpetuating its own (unnecessary) existence. In short, it provided far more drawbacks than benefits. Similarly, the State-provided laws on copyrights made Big Budget games, monopolistic OS companies and consumer-hostile attitudes possible and taking copyrights away does not mean that gaming and computers will stop, but rather that they will take another form.

Finally, I have to challenge the argument of the author that if companies could sell more games, they would lower their prices sooner and therefore piracy keeps the prices high. This claim is absolutely nonsensical. Companies who’s high-cost games keep selling have no incentive to lower their prices as…they keep selling. Whether they cover their costs is irrelevant as their primary focus is profit, not consumer value (unless it affects their primary focus).  To put it simply: High demand will keep a high price. As the demand drops, so will companies drop their prices in order to increase it. As such, if anything, pirating a super-expensive game instead of buying is more likely to help discount the prices sooner and bring them to the point where they are affordable to the pirate. Therefore piracy brings up a positive result in that it helps prices move towards their appropriate equilibrium sooner.

Furthermore, if someone pirates a game because he can’t afford it, this has absolutely no change to the argument he’s making. If one cannot afford it at his current price, we won’t buy it anyway. The end result (in regard to this particular argument) for the company is going to be the same. As such, the solution would in fact be to start at a lower price or to find some way with which people can pay what they can afford compared to their income (because 50$ for the upper-middle class is not the same as 50$ for the lower-middle class). I will counter the argument that low cost games are also pirated in another installment.

Piracy & Marketing

Here the author finally brings up one pro-piracy argument, in that it increases the exposure and then spends considerably effort marginalizing it. While it is true that file-sharing increases word-of-mouth awareness of a game, he puts forth that this will result in increased piracy and not in increased sales although of course the results are inconclusive.

In fact there’s quite a lot of evidence that points to the fact that increased awareness does help, but only if one understand and embraces the economics of free. In short if one recognizes that it’s the scarce goods that increase in value and not the infinite (such as a digital copy of the game.) We again are left with pointing out that it’s the whole business model is flawed in focusing on the infinite content and not the scarce goods around it. What could the scarce goods be? Other than the classic paraphernalia surrounding any title, I can only think of hardware and providing a service (such as multiplayer or professional support). What one needs to remember is that if one does not need to spend money on games, they can spend it on other things and for a gamer, this is likely to be game-related. This is how collector’s editions sell in the first place.

Furthermore, the more people that play and have an interest in a game, the more valuable the community as a whole becomes. Game developers are notoriously bad at understanding this and they keep treating their communities like shit at worst, or as junkies to ignore once they stop giving you money at best. This can be seen by how often big-budget companies take away popular options from their games and stop supporing them once they don’t sell anymore. If companies understood that there’s value in loyal users, then they would be able to monetize it. Hell, stuff like facebook and twitter should have made it painfully obvious that there’s power in sheer numbers, even if those numbers are free –  and the more loyal and excited your customer is, the more willing they are to buy the extras and even provide you with free value.

As a case in point, I don’t even have to try a working example of this other than Valve’s Team Fortress 2, which 2 years later, with lots of free patches adding loads of new content, low costs and short discounts down to $2.5 has created basically a phenomenon. TF2 related art, jokes, videos and other content is everywhere. People talk about it all the time and inviting their friends to play. And Valve has given them a reason to do so. Achievements, guaranteed future support and content, low prices, promotions and events. A totally different  model than the “share and forget” of everyone else. And guess what, it’s super successful.

Finally, word of mouth does work. I will use World of Goo as an example since I am more familiar with it. As the author mentions, it had huge piracy when it was first launched. This generated enormous word-of-mouth advertisement so that when they offered it with a pay-what-you-want model, they made what some estimate at $100.000. It’s not a stretch to imagine that many of those who bought it where pirates who wanted to reward the developers. Take another example, Heroes of Newerth is an upcoming DotA clone still in development. They’ve been giving out their betas for free for a year now and have practically zero copy-protection. They have thus generated enormous buzz and community around them (20k people online for multiplayer often) and can basically guarantee a very successful launch for an indie game. Another similar example is the League of Legends, a similar game which is being given out for free and people can purchase extra perks (i.e more characters and stuff). Also working quite well. Do you know which didn’t work at all? Demigod, which is the exact same type of game, only it was big-budget, had a closed beta which you could get in only via an expensive pre-order and was sold in the usual old-business-model style. Naturally people pirated it rather than pay its huge price, even though they missed its basic functionality: multiplayer. In fact this by itself would point out how much people download games not because they have a lot of value for them, but because it’s low enough cost to not be an issue. Where Demigod to cost 10$ instead, they would have probably turned all those pirates into legitimate customers and ensured its continued success. Rather, they are left with a dying game, horribly outcompeted by 2 indie self-published studios who understand their market.

In conclusion

The basic argument the author is missing when discussing the economics of piracy is that people’s budget is zero-sum. They have only a limited amount of money to spend on luxuries like games and it’s unlikely that they will go over it just because of hype. As is natural again, everyone demands the highest quality for the lowest price they can get. If piracy where to become impossible tomorrow, PC game sales (in number of $$) would not increase. Prices would not drop. People would still spend approximately the same amount of money on PC games. They would either decrease their standard of quality so that they can play more, or stop playing so many so that they can play higher-quality games.

Practically, this would mean that there would be a far smaller community of gamers around each title, far less excitement, far less creativity and game communities would die sooner or be forced to die for the sake of sequels. The gaming culture as a whole would suffer as people would turn their interests in things they can afford, such as IRL sports, television or whatever. This means a diminishing pool of gamers, allowing less and less games to be created.

Piracy has existed since the dawn of personal computing and yet games never stopped being created. The only thing that has stagnated is quality during the time-window of late ’90s – early ’00s where the byte-size and low bandwidth limitations put a natural limit to internet and sneakernet piracy. Creativity and novelty in games actually started peaking again once piracy become trendy once more, as it was in the time of Amiga games. Sure, gaming will evolve but this is nothing to fear as the alternative, that is, to have a lot of high-budget titles also require a decrease in creativity, reduced consumer rights and increasing limitations and lock-ins in order to make it possible. In short, it requires us gamers to become the game industry’s bitches.

Personally, I prefer gaming evolution to consumer slavery.

Quote of the Day: Scientific Boobytrap

Quoth Michael Greer

There’s a boobytrap hidden inside the scientific method. The fact that you can get some fraction of nature to behave in a certain way under arbitrary conditions in the artificial setting of a laboratory does not mean that nature behaves that way left to herself. If all you want to know is what you can force a given fraction of nature to do, this is well and good, but if you want to understand how the world works, the fact that you can often force nature to conform to your theory is not exactly helpful.

And this is exactly the boobytrap that economics dive into head first. In fact it’s even worse than that since economics is not even interested in setting up artificial conditions at all. Rather, they are content to think of fantastical, often impossible examples of societies and then simply build an economic theory from that.

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The Kudos economy and some criticism.

Kudos Burgerville
Image by daftgirly via Flickr

William Gillis writes an interesting post about the differences between Capitalist and Communistic ownership rights and gives a different perspective of how market theorists misunderstand the criticisms Anarcho-communists are directing at Private Property. It’s a bit thick to parse but I think it’s worth a read especially on how he takes the distinction between property and possession to a different dimension and the 2 pointed critiques of Private Property.

Of course there are some parts I have to disagree, for one:

Obviously however, just because such differing economic approaches might make better software for a fraction of the energy Microsoft spends doesn’t mean that it can do things like move goods between locations to satisfy demand efficiently or signal all the costs of one consumption versus another. Without the capacity to assign value to spatial/physical relationships (as with the realm of actors and objects) one can’t concretely mediate between those relationships

This particular part is, I believe, making the mistake merging two different concepts of a capitalist economy. Production and distribution. William accepts that socialized production seems to be much more efficient than the capitalist mode of production but he then proceeds to criticize the former for not achieving efficient distribution. But this is something unrelated to the productive process so I assume he’s attempting to criticize an explicitly Communist (or moneyless) way of distribution (as opposed to collectivist or syndicalist which might still retain money).

The problem is here again some of the assumptions of free market theory. The assumption that free markets satisfy demands and the assumption that the price mechanism passes along the correct signals. Unfortunately none of these assumptions are right as  the markets can only satisfy effective demand and the signals ignore externalized costs and don’t provide enough information. By not basing transactions on prices, but simply on pure supply & demand (as would be the case in a communist society) both of these issues are avoided for demand is based on people’s needs and the productive process and democratic control of it ensure that the supply is analogous to the costs.

The second criticism I have is directed towards this sentence

Anti-capitalists often disingenuously blur the distinction between wealth and coercive power — wealth and/or disequilibria in wealth do not inherently have to grant any capacity for social control — but it’s certainly true that direct pursuits of power and wealth share the same form.

I don’t think it’s disingenuous at all as anti-capitalists are criticizing actually existing capitalism and not theoretical market constructs with wildly different parameters on production and money. In actually existing capitalism as well as in any market based system where money is arbitrary (ie not tied to labour-hours or something as solid) and private property the dominant form of property, the accumulation of wealth is very much a measure of coercive power as it directly limits the options of those who do not get to have any. But no anti-capitalists will consider that wealth is power when in a system which has been specifically setup so as to ensure that wealth is not power. The only problem is that all conceptions of a propertarian economy have not managed to avoid this problem.

Which brings us to the interesting part of Williams conception of a market economy. It looks like something taken out of the Algebraist to tell the truth and I can’t but worry that it’s as much of a fictional concept. You see the idea looks workable, in a theoretically constructed society around the concept of a reputation market, and I do think that if we did get such a system then I (or most communists I assume) really wouldn’t have any issue with it. Nevertheless my main criticism would again lead to ask: How do we get there?

If a labour-time-tied money system is already a difficult concept to grasp and put into practice or even move towards a situation where it can be put into practice, an even more extravagant concept based on reputation just strikes me as half-way impossible. I would be far more interested to see a viable process by which such a system might become a reality until which point, I cannot consider the actual criticisms made by William against anti-capitalists to hold much water, as they were based on comparing them to a utopian construct. Unfortunately I believe such a practice ends up diverging attention from practical issues and solutions (ie criticism of capitalism and ways to fix things) and gives some ammo for market theorists who would twist and grasp any concept in order to prove that “Free Market (Capitalism) works!”

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What role does Capital play during production?

"The production of surplus value," f...
Image via Wikipedia

I’m a cautious fan of Steve Keen’s post-Keynesian economics ever since I was introduced to him via the AFAQ. A fan because he takes an empirical criticism to contemporary economics and cautious because he still supports the capitalist system and dismisses the LTV. So when I stumbled upon his reasoning for this dismissal [pdf] I felt that there are some flaws in the logic that I should point out.

The basic argument that Keen pursues in his refutation of the LTV is to concentrate on Marx’s own arguments on why Capital does not add any surplus value during the productive process, point out logical contradictions and use this as a proof that capital does add part of the surplus value created in production. First of all, I want to point out that I find this reasoning fallacious. The flaws in Marx’s reasoning might invalidate the proof of the LTV as Marx argued for it, but it just leaves us back in a situation where we again need to figure out what adds the surplus value in production. What it doesn’t do, is constitute a proof for the validity of the STV or even proof that labour isn’t the only thing that adds to the surplus value created in production. But this is the non-sequitur that Keen does as soon as he has pointed out the Marxian inconsistencies.

Of course I can imagine that for Keen, this follows from other theories of value such as Sraffa’s, but still this criticism makes it appear that all those other theories cannot stand unless Marx’s theory of value is countered and labour is shown not to be the only source of surplus value. However I believe that even though Marxian theory might be flawed, there are other argumentation paths that can point out the truth of the LTV, and I’m going to posit one now. I’m going to try and show what the actual purpose of Capital is.

A Primal Example

Lets take a tool-less society of humans (I know, completely unrealistic but stick with me). No tools (and thus capital at all) exists in the current society but nevertheless people can still create some basic commodities (trinkets to exchange, food to eat etc). Now lets take a person in this society which manages to discover the way to make a stone hammer from raw material. Lets say it takes him 20 hours to build it once he’s figured out how (Obviously he will have to do in in his free time, which assumes looking for food does not take up all of his productive life.)

If we assume a market economy in this society and that person wanted to trade the hammer for something else, the would obviously do so for something of equal value, ie something which took approximately the same amount of time to create. Why? Because if either party tried to get more, then a better option would be to build whatever it is you’re looking for, yourself.

For the same of simplicity, lets assume that this corresponds to 20$. Now at this point, we can’t realistically talk about any productivity of capital since none was used in this process. The whole 20$ of exchange value is a result of the surplus value created by only by labour.

Now lets assume that with a stone hammer available, someone can build another stone hammer in 15 hours only. The hammer is now being used as a mean of production, Capital. Does this prove that the capital contributes value to the surplus value created? To see if this is the case, we need to look at two different examples.

1. Let’s assume that the first hammer is not sold while the second hammer is created in order to be traded, seeing as there would be a demand for it. We can safely assume that the second hammer will be sold at the price of 20$ again, for the same reason as before. If it wasn’t, then someone would simply build his own. At 20$ though, a hammer that was made in 15 hours gives a 5$ profit (seeing as in those extra 5 hours, one can work on building more hammers to sell.) Does this show that the hammer provides 5$ of to the final surplus value created? We’ve already seen that the same hammer, and thus the same value can be created with no capital at all, and thus its “contribution” is not actually necessary at all. The only evidence of capital’s contribution is the price difference between the hours worked and the fair price requested for it.

But there is one simple problem. The price of the hammer will not stay at 20$ for long. As soon as the second and third hammer has been sold, others will figure out that there is a profit to be made in selling hammers and will use their new hammers to build them within 15 hours as well. A price war will occur until the price now stabilizes at around 15$, which will correspond to the time required to build it. So what has just happened? Where has Capital’s contribution disappeared to?

What happened is that once new novel capital was created, there was an immediate disequilibrium between the Socially Necessary Labour Time (SNLT), that is, the average time required to build the commodity with the new technology level, and the current price which still corresponds to the old SNLT. So what was the role of Capital in this case? Reducing the SNLT. It doesn’t provide surplus value, it doesn’t contribute anything, it simply makes the productive process faster.

But one would ask: What about the initial profit that the first builder made between making the first hammer and until the price stabilized to 15$? To jump to the conclusion that this was capital’s contribution is wrong. Not only because the capital’s contribution was in fact the original worker’s in the first place, as the hammer was nothing more than crystallized labour-power, but also because there are far more fitting explanations for the initial profit, the most simple one being: Reward for the intellectual labour required to build novel capital, ie a return for innovation. It’s only natural to assume that the first prototype of the hammer took far more effort to build than any subsequent copies. But this labour lost can never be captured simply through selling, for once it’s been designed, it’s not difficult for others to copy the idea anymore, so that’s basically labour-time lost. However, the time between the creation of novel capital and the reset of the SNLT is exactly which provides the opportunity for the creative labour investment to be returned.

So it all ties perfectly together in showing how labour is the only thing that created the surplus value (realized via the exchange value) while capital’s purpose was simply to reduce the SNLT and allow humans to produce more stuff in less time. However this does not change the fact that the average exchange value of whatever is produced is tied directly and only to the labour-time extended to replicate a commodity. This is in fact the process by which human production achieves an exponential rate since each new piece of capital frees up more time and thus allows more commodities and new capital to be built, and so on.

But now, lets take the second example, in which I’ll try to take a society that approaches our a bit more.

2. Let’s now assume that we have a similar situation of creating novel capital, but in this case, within a society which is  wildly unequal. Some people have hoarded all the land for themselves, which means that there are a lot of people who do not have the capability of feeding themselves without working for others. Let’s also assume that the same hammer was created by one of those who own the land. Again, the hammer’s fair price is once more the same 20$ since anyone with free 20 hours would be able to make it. However now there’s a problem: Most don’t have the capacity to extend these 20 hours as their whole productive power is spent in the time they need to work for others. If they took this time off, they would starve1 and thus even though the capital is as costly as before to make, it is external circumstances which make it unfeasible for others to trade for it in a fair price.

Now our wannabe-capitalist knows that most people can’t afford it and thus there is a market only for other capitalists (ie, those who make stone idols or other stone commodities). He knows that those will build in in 20 hours themselves if he tries to sell it at a higher price, so his max is 20$ again. However, now he has another way to make more money. Rather than use the hammer himself to make new hammers to sell as in example 1, he now hires one of those people who don’t have another choice (remember, everything is hoarded already by the few, much like the current system) to use his hammer and make new hammers. He gives them a wage of 10$ per hammer created (which is enough money to live and be productive for one day and something extra to give incentive for people to work for him) which means that he starts with a profit of 10$ which eventually drops to 5$ once the hammers have become distributed and the SNLT has dropped to 15 hours.

Now according to opponents of LTV, the 5$ of profit is now considered the productivity of capital and thus belongs to the person who created and owns the capital that the worker’s use. But there is a problem as we’ve seen in example 1: The only way that the productivity of capital can even exist when the SNLT has moved to 15 hours is if the new hammers are being produced via wage-labour. And this can only exist in a situation where all other resources have been hoarded and people are being passively coerced (ie starvation, homelessness) into wage-labour.

As such, the “productivity of capital” is in fact completely indistinguishable from the rate of exploitation caused by an unfair distribution of resources. The flaw in this logic in short, is that it assumes an unfair distribution of resources (ie hoarding) as a normal and appropriate situation which evolved naturally and from this starting point tries to understand capital’s relation to the production. But the hoarding of resources is not something that can happen naturally, both in theory and the history of humanity can point to this as it took very extended state and private violence in order to allow some to control most of the land.

The role of Capital then, has always been simply to reduce the SNLT required to produce any commodity. It’s role is not to contribute to surplus value, but simply to allow humans to produce the same amount of surplus value in lesser time than they would need without it. The surplus value is still created by the actual human labour and as such, all the conclusions that follow from this point still stand. To claim that capital contributes to production and therefore its owner needs to be “rewarded” for such production (even though the owner did nothing other than claim ownership) is simple apologetics for wage-slavery and exploitation.

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  1. OK, this might sound silly when used about something that needs 20 hours to create but the same principle applies to larger scale capital which requires hundreds of hours to build. However this is simply a hypothetical example where one full days work as a wage-labouring farmer provides enough food live and be productive for one day. Please bear with me. []

Why the Free Markets concept is useless

Law of Diminishing Marginal Utility
Image via Wikipedia

It is something I stumble onto extremely regularly lately, people who claim that only a free market economy would be capable of efficiently allocating resources, or maximizing the utility of most people. That any other system will by definition lead to disutility.

This is a very bold claim, and one is well justified in asking what proof we have that such a system would indeed have this result. And this is where the problems start. The most common answer, especially from proponents of the Austrian school of economics or people accepting most of their arguments, is that this is not provable. Rather, this is based on logical deductions from axioms.

This capability of the markets is then contrasted with mathematical proof. That is, the fact that free markets would lead to efficient allocation etc is as solid as saying 2+2=4.

However, if this kind of argument is espoused, then a major flaw appears. Mainly that mathematics, and other axiomatic concepts, cannot tell us anything useful in isolation from reality and empirical evidence. To give you an example, to claim that markets are axiomatically defined as always leading to pareto efficiency does not tell us anything about which system humans should organize their societies around. It simply means that the concept of the markets is separated from what is commonly referred as the markets now.

Under this kind of proof, the market can easily be, say, a communist society. But if whatever will lead to Pareto efficiency will automatically be a “free market”, as humans we still face the problem of discovering which kind of system will lead to Pareto efficiency. To turn around and say that the free markets will, and by that imply a very particular system based on particular property rights and laws, is an equivocation fallacy.

The problem of course, is not that some concepts have been turned into axioms, as by itself this practice wouldn’t lead to any normative conclusions, much like pure mathematics can’t either. The problem comes because Free Market economists have attempted to sneak descriptive concepts as axioms, something which would allow them to make claims about reality. For example, the idea that a human always acts to fulfill his strongest desire first.

But the problem with such an act, is that these descriptive facts have been conceived out of pure air. Without empirical proof, any such “axioms” introduced run the problem of having minor errors, minor facts that the original thinker didn’t know about. And as most people know, the slightest error in a purely logical edifice, can lead to a wholly wrong result.

Which is why actual science requires empirical observation, repeatability and falsification as it attempts to iron out errors of human thought or modify the facts, ever so slightly, so as to make the rest of the logical deductions from the facts, as solid and correct as possible.

Proponents of the Free Markets do not do this however. They start from a few basic premises, a few of which should have been empirically tested before being accepted, and then build based on pure logic from there. They then claim that like mathematics, the result, as long as no errors in the calculation have been found, cannot be anything but correct.

And most importantly, real empirical data that refutes the results, is not used to find errors in the premises, but rather dismissed. It is claimed that if logical results do not match the reality, then there’s some factor in reality that skews them (what it is, is not important but it’s most likely the government). But this is the problem! What exactly is the factor might be critical, as the factor might be that one of the “axioms” is wrong!

Market Anarchists would have us believe that a free markets within a very particular society would work for the best result and thus, we as humans should aim for this particular society structure. But this is not proven. It is asserted. It starts from the premise that a Free Market works in a particular way and that is based on assumption of how reality and particularly human psychology works!

So why is the concept of the Free Markets useless? If “Free Markets” is defined as being a utilitarian result, then anything that achieves this result is a “Free Market”, and to find that “anything” we’ll again need to use empirical evidence. If Free Market is logically concluded from a few premises to lead to a utilitarian result in a particular society, then unless these few premises are empirically proven, we cannot and should not trust the results, nor aim for that particular society.

In the end, the Free Market concept is useless because it tries to prescribe reality independently of any empirical evidence. And like all other such independent concepts, like mathematics or language it can either tell us nothing, or lead us to the wrong path based on equivocations.

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The best exposition of capitalist economics I've seen

Oh, I do love to read some Economics pwnage now and then. Some of these quotes are just delicious.

In many ways economics plays the role within capitalism that religion played in the Middle Ages, namely to provide justification for the dominant social system and hierarchies. “The priest keeps you docile and subjected,” argued Malatesta, “telling you everything is God’s will; the economist say it’s the law of nature.” They “end up saying that no one is responsible for poverty, so there’s no point rebelling against it.” [Fra Contadini, p. 21] Even worse, they usually argue that collective action by working class people is counterproductive and, like the priest, urge us to tolerate current oppression and exploitation with promises of a better future (in heaven for the priest, for the economist it is an unspecified “long run”). It would be no generalisation to state that if you want to find someone to rationalise and justify an obvious injustice or form of oppression then you should turn to an economist (preferably a “free market” one).

I’ve always said that economics is as much of a science as theology.

The weakness of economics is even acknowledged by some within the profession itself. According to Paul Ormerod, “orthodox economics is in many ways an empty box. Its understanding of the world is similar to that of the physical sciences in the Middle Ages. A few insights have been obtained which stand the test of time, but they are very few indeed, and the whole basis of conventional economics is deeply flawed.” Moreover, he notes the “overwhelming empirical evidence against the validity of its theories.” It is rare to see an economist be so honest.


This produces a market for economic ideology in which those economists who supply the demand will prosper. Thus we find many “fields of economics and economic policy where the responses of important economic professionals and the publicity given economic findings are correlated with the increased market demand for specific conclusions and a particular ideology.” [Edward S. Herman, “The Selling of Market Economics,” pp. 173-199, New Ways of Knowing, Marcus G. Raskin and Herbert J. Bernstein (eds.), p.192]

What an insight! The popular economics themselves are decided through market forces, i.e. those who better pander to the ruling class are the most succesful.

Read the rest of the thing. Hell read the whole of this Anarchist FAQ. The Anarchists as usual, hit the nail right on the head.

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Can market exchange create new value?

free lunch
Image by arbeer.de via Flickr

A very common argument from economists and generally free market proponents is that the only thing that creates value are market interactions.  The basic idea they try to promote is that the Capitalist system is not a zero sum game as one person’s gain does not need to come from another person’s loss. You can see an example of this argument from this latest post on Techdirt.

Too many people, it seems, assume that “there is no free lunch” means that the market is entirely static. That is, they believe it’s a zero sum game. If I do x, then y loses out. So, if I am offered free internet service or a free lunch, then whoever provided that is out the same. But that’s simply not true. Economics is not a zero sum game, but is built around economic growth — where the sum of economic activity can be greater than the parts. If I do a transaction with you, and in the end, we’re both better off (i.e., we both got more value than we gave up), then the amount of overall value in the world increased. It might not be a “free” lunch (the economic transaction cost me something), but new utility is created above and beyond what was there before.

(Emphasis mine)

I will not argue on the liberal use of vague concepts and examples that seem valid (eg Why “Free Internet” and not “Free Apples”? Because the argument sounds more plausible that way) but I will point out the black hole in the end.

What the author is telling us in effect is that when you and I trade commodities, new utility is created. So if I give you an apple and you give me an orange, new utility has been created out of thin air. What this utility is, the author does not deem worthy to mention so your guess is as good as mine.

We can safely assume that the author is rather talking about utility in the economic sense, which can roughly translate as satisfaction. In that case however, new utility has not been created but rather the individual utility of each person has been increased. But this kind of utility does not affect the cumulative value of the world, it only affects the individual. The amount of value in the world remains constant.

It is this kind of fallacious reasoning that leads to events such as the rise and fall of Iceland, where their “value” skyrocketed simple because the traders agreed upon themselves that their stuff was worth more. What they basically did was trade amongst themselves and with each trade, they were creating “new utility”. By the logic above, that is perfectly normal and acceptable. The result of which was that Iceland’s “wealth” ballooned to such an extraordinary degree and then popped at the slightest disturbance.

But the reality is that utility, and by that I mean objective value of any single commodity can only be created through one of two ways. Human Labour and Natural Phenomena. The only way to create a new car is to build it. The only way to create a new microchip is to build it etc. It is funny that the author quotes someone else who goes very close to this but fails to grasp it

A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects.

But of course the extra value that is created in the kitchen does not come from simply possesing lots of inexpensive ingredients. By this reasoning, the best cooks would be the ones who could trade their material best and get the biggest array of them, or trade for the ones that gives them personally the largest amount of satisfaction. After all it’s the trading that would “create new utility” and thus “value” isn’t it?

But that of course is patently absurd. The extra value that is created in the kitchen does not lie in the ingredients. It lies in the amount of labour the cook will put in his cooking. And if we take into account the skill of the cook, then we can speak about the SNLT to be more accurate. The more labour the cook puts into his cooking, the more value the end result will have.

It is understandable that economists would be avert to recognise where the value comes from, but this dooms them to simply a series of equivocations.

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The value of naturally occuring commodities

Despite their apparent natural beauty, the sec...
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One common vector of argumentation that I see many critics of the LTV take, is to attempt to move the discussion away from commodities created via human labour and to commodities that are naturally occuring on Earth, and then claim that the LTV cannot explain how they can have value. They will bring up diamonds, rocks or simply breathable air to make their point and occasionally change to another commodity if their previous example didn’t work so well.

The obvious trend in all of this of course is that they will avoid using a human made commodity for their argument by any means necessary. Even when you specifically bring up cars or bicycles and other such examples, they will be summarily ignored and the discussion will be shifted once more to natural ones.

The critic then is attempting to use a strawman claim in order to make a Reductio ad absurdum and hopefully confuse the LTV proponent long enough to finish them off with Marginalism. What the critic here fails to grasp is that the LTV is explicitly related to commodities created through human labour. It was never intended to say that human labour is what creates the objective value in everything in the universe, but rather that it is what creates the objective value in everything human-made.

Now it is true that naturally occuring commodities do have a subjective value which occasionally facilitates their exchange. All of this ties perfectly to marginalism which is not at all incompatible with the LTV. However this only explains why something very useful (like air) does not need to be exchanged to get or why something useless to most people can have a far higher price than its cost (i.e. diamonds).

However it is also true that human labour does play a role in defining the exchange value of everything. Namely, since human labour is required to bring any natural commodity to the market, then the equilibrium price (around which the market prices move) is always equal to as much socially necessary labour time required to prepare a commodity for the market.

Lets get an example: The diamond which seems to be a favourite of marginalists of course.

The diamond generally has a very high exchange price which we will hear that the LTV cannot explain as no human labour went into creating a diamond. That is undeniably true. However that does not mean that no human labour went into bringing a diamond to the market. They are not just laying around you know.

The diamond has to be found and dug up (most likely in a horrible Congo mine). That requires quite a lot of labour time from people digging and searching all over the mine. Since this is generally done is inhuman conditions (to achieve low costs), this requires a strong security around the mine to protect against a miner’s uprising, defending against foreign warlords and making sure the workers cannot smuggle diamonds out. Then the gems needs to be transported to the developed nations and an expert needs to cut and prepare them for selling.

All of this is quite a substancial cost which tranlates directly to the price the diamond will fetch at the jeweler’s. This is the equilibrium price of the item around which the selling price will fluxuate depending on how high the demand for diamonds will be. Lacking passive or active coercion, the owner of a diamond will never sell one for less than this price.

We can see then, that while human labour does not play a role in the creation of the objective value of a natural commodity, it does still play a role in defining the exchange value it will achieve. When you have a natural commodity that is not abundant (like air), it is the socially necessary labour time that will define the cost of it and thus the minimum acceptable price.

There is one last point I’d like to raise. While it is true that human labour does not create the objective value in natural commodities, in an abstract sense we can consider that labour in general is what creates it. It’s simply not from humans. What I mean is that in order to have anything other than random collections of atoms in space, something needs to be happening to put them in a human usable form. That something can either be human labour or “natural labour” (Bear with me, this is a concept I am thinking of just now).

Now to give you an example let’s take human breathable atmosphere. One could say that this has a very high subjective value as everyone needs to breathe but this value can’t possibly be linked to the LTV as no human labour was extended to achieve it. And this is true. The zero human labour that is necessary to achieve a breathable atmosphere is precisely the reason why the air if free. If on the other hand our breathable oxygen was running low and we needed to run some kind of oxygen factory to increase it, then certainly all of us would be paying for it, at least via some kind of tax.

However, while the breathable atmosphere does not need human labour to get, does not mean it does not need any labour, as is obvious by looking at any planet other than the Earth. What happens in this case is simply that we have inherited as part of our ecosystem an “automated factory” in the form of plant-life that produces abundant oxygen for everyone. Unfortunately for the Capitalists, the nature of this “factory” and the atmosphere make it impossible to be capitalized (or homesteaded) and by necessity it is socialized.

Breathable air is provided to everyone according to his needs.

tl;dr version:

  • The LTV is meant  to explain the value of human-made commodities
  • Nevertheless, LTV can ties directly to the exchange value of non-abundant natural commodities as well
  • Even naturally occuring commodities require a form of “labour” to be created. This explains their objective value, even though this labour is not exerted by humans.
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I just realized I need to read Marx's Capital

I have already realized how important it is to be able to undestand Capitalism before you can argue for the need for socialism. That is because one needs to be able to show that Capitalism is flawed, breeding exploitation and inequality and against that Economists Engineers Capitalism proponents will be more than glad to argue.

One of the most classic and basic arguments I hear to this regard is that the Labour Theory of Value is obsolete and irrelevant. That Marx got it all wrong and that Neoclassical economics and especially the Austrian school have shown that it’s all about the Subjective Value. I have already made a small attempt to prove that the LTV still plays a role (imho the most important) and that have actually a dualist system with both Subjective and Objective values.

I was truly under the impression that Marx has somehow missed the subjective value of the equation and thus his argument seemed easy to refute and dismiss. That was, and I’m ashamed to admit, due to neoliberal propaganda. We’ve had it shoved into our heads by modern economists that Marx has already been proven wrong and he didn’t even get the basics right and the like.

It’s all bullshit. Marx understood very well the existence of the Subjective Value and that too was a very crucial part of his explanation of Value. I only realized this by watching an introduction to The Capital by prof. David Harvey who has been teaching the first volume of it for 40 years(!). Just from introductory session I understood that Neoclassical economics did not disprove Karl Marx, they simply ignored him.

This course is also the incentive I need to actually get down and read The Capital for myself and I believe that with the help of these lectures, I will be able to understand and digest the content much better.

I also suggest that many of you take the time to at least watch the introductory session. It clocks at around 2 hours but I believe it’s worth it at least to hear about it outside from the usual derogatory and propagandistic descriptions. Capitalism is the system that is affecting our lives day in, and day out and yet, so very few of us actually bother to understand how it works. The Capital is not a propaganda piece, it’s a attempt to find the rules that govern our current socioeconomic system, you can read it and make up your own mind on if a socialist alternative is required or not.

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