Spending capital (spawned from Why does the US lack sick leave?)

[Loren Pechtel]

It can't be altered by force, but government policy certainly can help along. And I don't agree that something like that will impoverish my descendants - but that's the subject for another thread.

The problem is that to a large degree productivity and thus the standard of living is a matter of the amount of capital per worker.

When there is little capital the standard of living is low. America 100 years ago. Third-world sweatshops now.

As the amount of capital rises workers will have more equipment and will be able to produce more in the same amount of time. There are also effects like education but that is really just an effect of this, it's just education is something the worker invests in rather than the capitalist. If he can't expect to recoup his investment he's not going to do it.

When you divert money from the capitalists to the people you raise the standard of living *NOW*. You lower the capital, though, basically *permanently* lowering the standard of living in the future.

Lets try some economics that you will probably find quite surprising: What's better, $10k now or 40 years down the road you get $10k every year for all eternity and inflation-protected?

[B.S. Lewis]

Good idea to split from the Productivity thread, IMO - it was piling up with nothing but snide replies.

When there is little capital the standard of living is low. America 100 years ago. Third-world sweatshops now.

This is really it. In past threads you have said that what third-world nations lack is technology. I always thought you meant technological knowledge, which would be silly, because technology is easy to copy. But if you meant that they lack the money to purchase technology, then I agree.

Of course, it matters very little how much capital exists in a country per worker; it's how much capital the country owns per worker. Third-world nations have lots of capital in them, but they don't own any of it.

Re: your economics riddle, it depends on the return rate of investment today.

[B.S. Lewis]

Here's why I don't see the so-called "developing world" doing any serious "developing" anytime soon:

Like Loren says, most advanced goods (cars, electronics) require a lot of capital in order to produce -- especially if you are going to make them in sufficient quantity and quality to compete with rich nations. For instance, even if you have the capital to make 400 cars per year it does you no good, because no one is going to buy one of your cars over a car from a well-established brand. So there is a pretty high bar just to get off the ground. Third world countries can't currently clear this bar, i.e., they can't afford that much capital. But it seems like a pretty nasty circular thing, because the only way to make enough money to afford this capital would be to already have the capital and be producing with it. About the only thing that you can make, using purely your natural resources, is crops; but there is virtually no export market for crops, because mechanized agriculture means that first world nations can produce their own crops many times over.

This wouldn't explain why oil-rich countries fail to develop, however. Or countries with significant specialty crops like coffee.

This all came from my head, so if my economics ignorance is showing, please point out where and how.

[Bonniedundee]

The problem is that to a large degree productivity and thus the standard of living is a matter of the amount of capital per worker.

When there is little capital the standard of living is low. America 100 years ago. Third-world sweatshops now.

As the amount of capital rises workers will have more equipment and will be able to produce more in the same amount of time. There are also effects like education but that is really just an effect of this, it's just education is something the worker invests in rather than the capitalist. If he can't expect to recoup his investment he's not going to do it.This rests on dodgy assumptions and the same kind of shrot-term, here and now thinking you accuse others of.


Capital means tools and machinery, in our modern world everything is built to be bigger and more capital intensive, this isn't due to any independent efficiency of this method but more because of state subsidies and interventions that make this more efficient today.
There are some economies of scale due to larger facilities but these are more than cancelled out by the distribution costs and the necessary marketing costs made inevitable by the large scale production these larger facilities produce.

In a free society tools and machinery will be made on smaller scales and just as efficient in overall terms, without the states interference at least, they can be made to be multi-purpose and labour intensive and sure they'd produce less but they'd be producing for local markets and for actual demand so they'd have far lower distribution and marketing costs.

And without coercion you'd be far more likely to really satisfy needs and wants.

http://members.tripod.com/kevin_carson/sitebuildercontent/sitebuilderfiles/Chapter2.pdf
http://members.tripod.com/kevin_carson/sitebuildercontent/sitebuilderfiles/chapter1.pdf

[Loren Pechtel]

Good idea to split from the Productivity thread, IMO - it was piling up with nothing but snide replies.



This is really it. In past threads you have said that what third-world nations lack is technology. I always thought you meant technological knowledge, which would be silly, because technology is easy to copy. But if you meant that they lack the money to purchase technology, then I agree.

Of course, it matters very little how much capital exists in a country per worker; it's how much capital the country owns per worker. Third-world nations have lots of capital in them, but they don't own any of it.

It matters not who owns the capital.

The third world nations have nothing like the US level of capital per worker, nor have they had it for long enough for lots of people to invest in education.

Re: your economics riddle, it depends on the return rate of investment today.

That's not the intention. I picked two things that were of similar value--I was showing how eating capital now has a permanent effect in the future.

[Loren Pechtel]

This rests on dodgy assumptions and the same kind of shrot-term, here and now thinking you accuse others of.

Nope, you're utterly off target here.

Capital means tools and machinery, in our modern world everything is built to be bigger and more capital intensive, this isn't due to any independent efficiency of this method but more because of state subsidies and interventions that make this more efficient today.
There are some economies of scale due to larger facilities but these are more than cancelled out by the distribution costs and the necessary marketing costs made inevitable by the large scale production these larger facilities produce.

Almost everything is much more efficiently produced with good tools. It's not so much the scale as the minimum scale at which better tools can be used.

You can put a car together by hand or you can put a car together on an assembly line. The latter is far cheaper--but it requires an operation big enough to support an assembly line and a demand for enough cars to keep the assembly line running. That's why we don't have assembly lines for airplanes.

In a free society tools and machinery will be made on smaller scales and just as efficient in overall terms, without the states interference at least, they can be made to be multi-purpose and labour intensive and sure they'd produce less but they'd be producing for local markets and for actual demand so they'd have far lower distribution and marketing costs.

Sorry, but this is fantasyland. Big scale operations occur because it's more efficient. If it weren't the distribution headaches would mean that even big companies would go with decentralized production.

[laughing dog]

The notion that diverting money from capitalists necessarily reduces the standard of living in the future depends crucially on the following assumptions:
a) the diverted funds would have been invested in capital, and
b) the diverted funds are used for purposes that have a lower rate of return than the uses from which they were diverted,
c) the growth in standards of living are best measured by income per person, and
d) the growth in productivity depends primarily on the growth in output per worker.

All assumptions are empirically testable. Most economic research suggests that the the largest portion of the growth in productivity is due to technological improvements.

[gargoyle]

It takes very little capital to transform a society. But the capital has to be in the hands of every citizen - distributed widely amongst the poorest in the nation - not concentrated in the hands of the wealthy elites.

[B.S. Lewis]

It matters not who owns the capital.

If a country owns the capital that is within it, then for it's work it gets (1) jobs and (2) stuff.

If a country doesn't own the capital that is within it, then for it's work it gets (1) jobs.

The third world nations have nothing like the US level of capital per worker, nor have they had it for long enough for lots of people to invest in education.

No, probably not, even if you include foreign capital. I wasn't intending to say that they did, because I have no idea if they do. My only point was that a high percentage of their capital is foreign-owned.

It takes very little capital to transform a society.

It took very little capital for the very first countries that developed. Nowadays, it probably takes much more, because would-be developing nations must compete with the businesses in already-developed nations (see post #3).

[coloradoatheist]

It takes very little capital to transform a society. But the capital has to be in the hands of every citizen - distributed widely amongst the poorest in the nation - not concentrated in the hands of the wealthy elites.

Actually it takes a lot of capital over time, hence why it took the US 50-80 years to get over the initial problems and it will occur in places like China and India. However I agree with you that capital has to get into people's hands. There is a book and I'll try and find it that the growth in the US occured because of the loan process with private property in the US. Businesses in the US start out with getting money from their own property (collateral and savings) and that's not done in third world.

Mike

[Loren Pechtel]

The notion that diverting money from capitalists necessarily reduces the standard of living in the future depends crucially on the following assumptions:
a) the diverted funds would have been invested in capital, and
b) the diverted funds are used for purposes that have a lower rate of return than the uses from which they were diverted,

True but that should be self-evident. The rich have a higher savings/investment rate than the workers.

c) the growth in standards of living are best measured by income per person, and

Income is a proxy for productivity. Unless somehow the productivity isn't being directed to what people want (unlikely in a capitalist system) increasing productivity is going to lead to a higher standard of living.

d) the growth in productivity depends primarily on the growth in output per worker.

And what else would it depend upon?????

More workers simply means more consumers and has no effect on the standard of living even though it might raise the GNP.

All assumptions are empirically testable. Most economic research suggests that the the largest portion of the growth in productivity is due to technological improvements.

And this is supposed to be a rebuttal? Where do those technological improvements come from but invested capital?

[laughing dog]

And this is supposed to be a rebuttal? Where do those technological improvements come from but invested capital? Ideas. :rolleyes:

[Bonniedundee]

Nope, you're utterly off target here.Says the guy who doesn't understand the basics of the political theory he(wrongly.) claims to support.




You can put a car together by hand or you can put a car together on an assembly line. The latter is far cheaper--but it requires an operation big enough to support an assembly line and a demand for enough cars to keep the assembly line running. That's why we don't have assembly lines for airplanes.
You are almost there, large scale production means the company must produce as much as possible to keep unit costs down, but this means it has too much to sell naturally so it needs to advertise, market and distribute widely, this would destroy any savings made by large scale production, hence the state steps in to pay most fo the distribution costs and to find foreign markets for products and to do lots more besides.

Sorry, but this is fantasyland. Big scale operations occur because it's more efficient. If it weren't the distribution headaches would mean that even big companies would go with decentralized production.
Incorrect it is the state support which makes these business competitive, the distribution costs and advertising if fully paid for by the company would completely outdo any advantage gained by the large scale production.

[Nitrousoxide]

You are almost there, large scale production means the company must produce as much as possible to keep unit costs down, but this means it has too much to sell naturally so it needs to advertise, market and distribute widely, this would destroy any savings made by large scale production, hence the state steps in to pay most fo the distribution costs and to find foreign markets for products and to do lots more besides.

Wait wait wait. You're just making suff up now.

The government does help large buisness, I'll grant that, but it doesn't do it by paying for DISTRIBUTION COSTS or ADVERTISING. What it does is provide regulation which makes it more difficult for new buisness to spring up. The barriers to entry help to keep the goods from being sold in perfect competition.

Where you came up with this notion of the government actually paying for advertisement or distribution is beyond me.

[Bonniedundee]

Where you came up with this notion of the government actually paying for advertisement or distribution is beyond me.I meant just distribution, but I wouldn't be surprised if it helped with advertsing too. In fact I'd say its more than likely, one way or the other, but I don't know much about that.

The state pays transport subsidies for many large companies, it builds roads and transport networks often to help them, this was the impulse behind many of the major road and transport building of the 20th century and the state does not charge a pay as you go charge to use these roads, which would hit large companies very badly, instead they pay for the upkeep of roads and infastructure out of taxation.

http://members.tripod.com/kevin_carson/sitebuildercontent/sitebuilderfiles/Chapter2.pdf

[Nitrousoxide]

I meant just distribution, but I wouldn't be surprised if it helped with advertsing too. In fact I'd say its more than likely, one way or the other, but I don't know much about that.

The state pays transport subsidies for many large companies, it builds roads and transport networks often to help them, this was the impulse behind many of the major road and transport building of the 20th century and the state does not charge a pay as you go charge to use these roads, which would hit large companies very badly, instead they pay for the upkeep of roads and infastructure out of taxation.

http://members.tripod.com/kevin_carson/sitebuildercontent/sitebuilderfiles/Chapter2.pdf


And what sort of tax is used to pay for these roads?

The gas tax, that's right. By using the roads, the companies use fuel. The fuel they use is taxed in such a way so as to closely approximate the amount owed to the state for use of the road.

Sure, it doesn't get it EXACTLY correct in that some gas tax money which is taken from driving on country roads goes to major highways, but it gets fairly close. It avoids monopolies too, a definite negative which private roadways are subject to.

[Bonniedundee]

The gas tax, that's right. By using the roads, the companies use fuel. The fuel they use is taxed in such a way so as to closely approximate the amount owed to the state for use of the road.Business expenses are tax deductible.

It avoids monopolies too, a definite negative which private roadways are subject to.The state creates monopolies, non-state monopolies are extremely rare.

[Bonniedundee]

Loren tell us what is capital?

[Loren Pechtel]

You are almost there, large scale production means the company must produce as much as possible to keep unit costs down, but this means it has too much to sell naturally so it needs to advertise, market and distribute widely, this would destroy any savings made by large scale production, hence the state steps in to pay most fo the distribution costs and to find foreign markets for products and to do lots more besides.


Incorrect it is the state support which makes these business competitive, the distribution costs and advertising if fully paid for by the company would completely outdo any advantage gained by the large scale production.

Asserting this doesn't make it so. And where are these huge subsidies you claim??


Lets take a look at my employer as I know a fair amount about how they have grown.

We build, sell and install cabinets.

When I started working for them we were making 40 boxes a day. We were doing 800 boxes a day before the housing slowdown. That's a 20x increase in output over about 15 years.

On the installation end our manpower has increased something close to 20x as there are no economies of scale possible here. We've done a few changes to make things easier to install but the effect is fairly minor.

I would say our sales force has tripled in that time. We go after bigger projects now. It doesn't take twice the effort to sell a project that's twice as big.

I can't address the increase in support personnel as I have no idea of how many there were back then to compare.

The main thing I'm looking at, though, is the factory. I would say our factory personnel have increased maybe 4x.

To the best of my knowledge there is no subsidy of any kind we get from being large. I am aware of one (whether it still applies or not I don't know) we get for being small!

Our only advertising is we put our name/address/phone on a production label that remains on the cabinet after installation. (It's in a hidden location, once everything's done you'll normally never see it.)

[Loren Pechtel]

Where you came up with this notion of the government actually paying for advertisement or distribution is beyond me.

There are some cases where they do. It's a pretty tiny percentage of the total spent on such things, though.

It's normally done by governments (sometimes state, sometimes the federal) that consider it a good deal to increase sales and thus improve economic conditions.

I do agree that it should go but it's by no means what makes companies large.

[Bonniedundee]

Asserting this doesn't make it so. And where are these huge subsidies you claim??

Loren you can read right? Well I have answered your questions above in respose to NitrousOxide and I told you in the other thread where I made a large post on this, I'm not inclined to do it again, particularly for you.

Feel free to use the search function.

[Loren Pechtel]

I meant just distribution, but I wouldn't be surprised if it helped with advertsing too. In fact I'd say its more than likely, one way or the other, but I don't know much about that.

The state pays transport subsidies for many large companies, it builds roads and transport networks often to help them, this was the impulse behind many of the major road and transport building of the 20th century and the state does not charge a pay as you go charge to use these roads, which would hit large companies very badly, instead they pay for the upkeep of roads and infastructure out of taxation.

Reality check time: *FUEL* taxes. Which the companies pay when they fuel the trucks that use the road.

http://members.tripod.com/kevin_carson/sitebuildercontent/sitebuilderfiles/Chapter2.pdf

Got something better than somebody's personal webpage???

[Loren Pechtel]

And what sort of tax is used to pay for these roads?

The gas tax, that's right. By using the roads, the companies use fuel. The fuel they use is taxed in such a way so as to closely approximate the amount owed to the state for use of the road.

Sure, it doesn't get it EXACTLY correct in that some gas tax money which is taken from driving on country roads goes to major highways, but it gets fairly close. It avoids monopolies too, a definite negative which private roadways are subject to.

Actually, no. That's what it's supposed to be but in reality they collect more gas tax than they spend on roads, the extra props up the state budgets.

[Bonniedundee]

Reality check time: *FUEL* taxes. Which the companies pay when they fuel the trucks that use the road.Reality check, business expenses are tax deductible, at least in the UK and Australia and I'd expect they were in the US.

According to this IRS document for 2006 fuel taxes count as part of the cost for fuel of a business and are therefore tax deductible.

http://www.irs.gov/pub/irs-pdf/p535.pdf

I very much doubt the people like Ralph Borsodi or E.F Schumacher who wrote so much of subsidised distribution costs would be wrong about something so simple to prove or disprove.

http://en.wikipedia.org/wiki/Ralph_Borsodi
http://en.wikipedia.org/wiki/E._F._Schumacher

Got something better than somebody's personal webpage??? It is a summary of many of the books available of this subject, if you were to read you'd realise this.

So try and play the I know better than these authors one with me, because I have had much experience with you Loren and you seem to know very little about economics, libertarian or much else.

So either critique the actual works summarised or keep quite. :wave:

[Pastor's Nightmare]

Here's why I don't see the so-called "developing world" doing any serious "developing" anytime soon:

Like Loren says, most advanced goods (cars, electronics) require a lot of capital in order to produce -- especially if you are going to make them in sufficient quantity and quality to compete with rich nations. For instance, even if you have the capital to make 400 cars per year it does you no good, because no one is going to buy one of your cars over a car from a well-established brand. So there is a pretty high bar just to get off the ground. Third world countries can't currently clear this bar, i.e., they can't afford that much capital. But it seems like a pretty nasty circular thing, because the only way to make enough money to afford this capital would be to already have the capital and be producing with it. About the only thing that you can make, using purely your natural resources, is crops; but there is virtually no export market for crops, because mechanized agriculture means that first world nations can produce their own crops many times over.

This wouldn't explain why oil-rich countries fail to develop, however. Or countries with significant specialty crops like coffee.

This all came from my head, so if my economics ignorance is showing, please point out where and how.

I can relate to this thought process since I use to hold many of these thoughts. However, there are some important points to keep in mind. Lets illustrate this with automobile manufacturing.

1.)There are thousands of parts within an automobile.
2.)A country doesn't need to start by building automobiles right away. They can start with parts.
3.)Once a country has developed expertise in building sufficient numbers of automobile parts, that country can start to make cars.
4.)Given the specialized nature of certain automobile parts and their limited complexity, it is possible to develop extremely high end parts. For instance, the best fuckin' plexi-glass windows the world has ever seen.
5.)Automobiles require many, many things... steels... plastics... fuel-injection... windows... tires... etc...
6.)A country can start by mining iron ore. Then move onto manufacturing steel. Then, specialty steel. Just make things a little better each year and move up the economic hierarchy.

The other thing to keep in mind is a country's defense industry. Developing indigenous capacity is a major goal of a country's defense spending. This also generates a vast amount of technology and expertise, which can be diversified into other areas. It isn't so inconceivable that a country capable of building the fastest super-sonic fighter jets could also convert their technology to produce commercial airlines. Similarly, a country producing tanks could also reinvest this money to build-up an automobile industry. Furthermore, countries can do what Japan did, which is build an automobile industry directly. Massive government aid into particular industries can help a country develop a great deal of expertise in that industry. Of course, such types of investment is frowned upon in free-trade agreements since it is effectively a subsidy...

In addition to this, I want to add a few points about education. India is a country, which had a literacy rate of 14% after independence. Sometime between independence, which I believe was in the late 40s and now, they've developed an extensive ability to educate people. Granted, the country's literacy rate is still around 60%, which is horrendous by western standards, but 14% to 60% is pretty good. Furthermore, the country's tertiary education is starting to get pretty good. Quite far from the standards of developed western countries, but fairly good given the starting point. Their tertiary education seems to be far better than other developing countries. One of the primary reasons appears to be the privitization of education. Surprisingly, that has improved the quantity of available education in a country, which was incapable of providing it based on a nationalized scheme. Furthermore, it is the US private educational institutions at the collegiate level, which are the best in the world.

As for countries competing with a lack of capital, there is also foreign direct investment. Many companies are willing to do this if a country is willing to give them control of the industry. For instance, an airline company might build an airport in Africa if it is given the right to control that airport for the next 30 years.

Furthermore, many companies are willing to build manufacturing operations in developing nations. The key criterion is infrastructure. The reason China attracts so much foreign capital is because they have a great deal of infrastructure. Infrastructure means

1.)Roads and expressways
2.)Power generation facilities(24 hour electricity is important)
3.)Ports capable of unloading ships quickly and efficiently
4.)Law enforcement(Protection of intellectual property as well as contract enforcement)
5.)Water supply
6.)Air transportation in some instances

China has done an extremely good task of providing these facilities. Countries generally have trouble building roads and expressways. The main problem is that roads need to be straight. And, there is invariably people in the way. If you pay people to move, that invites tons of squaters to anticipate the future path of the road and wait to get paid. Providing 24 hour electricity is a problem for many countries. Furthermore, private companies are hesitant to enter this arena since governments have a tendency to pass populist legislation making power generation a loss making activity and they expect the companies to swallow the loses. I'm not sure what the impediments to the development of ports is... I haven't studied this issue.... Most developing countries also have bad law enforcement and lack of transparent rules and regulations, which makes it difficult to plan activities. Corruption is prevalent in developing countries, which is usually associated to a legal system incapable of resolving disputes or incapable of resolving them quickly enough. Lack of lawyers is one problem and poorly written legislation is another. Water supply is usually lacking due to lack of dams and storage facilities as well as the lack of well designed sewer systems. Air transportation is generally lacking because governments are unwilling to cede control of lands. This usually stems from a gut reflex anti-colonialist or anti-western tendency as well as shear greed and lack of information. Governments, however, seem to be getting over this tendency. China has done an extremely good job of implementing all of these tasks. Despite Mao's brutal regime, he did create a very compliant population. This has made it much easier to develop a centrally planned infrastructure. Furthermore, techniques for developing non-centrally planned infrastructure are only recently developing. Developing countries seem to be using some innovating methods suggested by international corporations. For building roads, for instance, some countries have offered to give land near the roads to companies as compensation for building the roads. As the road increases the value of the land, companies can profit from the sale of the nearby land to gas stations, etc... Giving airlines control of airports for 20 some years makes it worthwhile for airlines to build airports. Giving corporations slum lands and asking them to build high rises for the poor also works since vertically build highrises can house more people than a horizontally laid out slum. Thus, the remaining land can be used for commercial projects. This seems to be attracting a non-trivial number of construction companies to India to profit on the building boom. I imagine a similar approach will be used in other countries.