Economic Exploitation
In March, my essay provided evidence of the inherent exploitation and undemocratic constructs in our economic model burdening working people.
This essay compliments that work and will show a fundamental reason why our economic model is structurally limited by attempts to reform it.
History
Our economic model is plagued with a history of periodic recessions and depressions.
That history is recorded by the National Bureau of Economic Research (NBER). Recessions and depressions are clinically presented as normal components of the “business cycle.” The NBER does not report the chronic instability and destruction of communities and working people’s lives by the “business cycle.”.
A list of economists, psychologists and journalists attempted to rationalize the chronic crisis in our economic model. These fanciful assertions are thoroughly inadequate. As Leo Huberman chronicled in Man’s Worldly Goods, some experts actually attributed the chronic crises to radiation from the sun or the path of the planet Venus.
Despite rapid advances in technology and financial instruments, chronic crises remain inherent in our economic model. These crises are inevitably harmful to working people.
Competition is a significant component that contributes to the crises. Competition is still relevant despite the stifling dominance by a few giant corporations in most industries. That structure contains one essential component which plagues all businesses.
It is the tendency of the profit rate to fall.
Profit Rate Basis
The tendency of the profit rate to fall is the basis of why our economic model cannot be meaningfully reformed.
The owner of a business must convert the expenditures that initiate and maintain the business into a profit. Profits are what remains after a business pays all of its costs.
Simply, the profit rate shows how many cents of profits are retained from every dollar earned. It is more important than aggregate profits because it measures efficiency of a company in comparison to other businesses.
A decline in the profit rate forces businesses to close doors and decimate the lives of its employees across states and communities.
The following is a simplified explanation of why profit rates tend to fall.
Tendency Basics
The process begins by establishing a business.
The owner must allocate resources for primary expenditures (CapEx) to acquire space, plant, machinery, tools, hardware, software, technological advances, and raw materials. This includes legal registrations, licenses, permits, and financial services.
The business owner must then add another cost which are secondary expenditures.
Secondary expenditures (OpEx) consist of wages or salaries paid to the employees who do the mental or physical work with their labor power. This creates profits for the owner including extra profits. Extra profits are what remains for the owner once wages or salaries are paid to the employees.
It is imperative that the owner continually spend more resources in primary expenditures for the business. This is due to the element of competition with other business owners.
Primary Expenditures Increase
Lamentably for the owner, the cost of primary expenditures usually increases as costs for goods and services increase. These increases can be the result of monetary policy, growth of the economy (GDP), corporate price gouging, misplaced tariffs or a scarcity of certain goods.
Some products may even see a temporary drop in prices due to technological advances.
However, the vast supply of goods and services that comprise primary expenditures rises to the dismay of business owners.
Cost of living calculations also present data that strongly supports the assertion that primary expenditures for owners will never decrease in our economic model.
Primary expenditures are required to increase the amount of the product or service created by the employees.
The owner might consider borrowing funds from a financial institution to pay for primary expenditures. This can be problematic because financial institutions may decline to lend the money or advance at a glacial pace to finalize a loan.
The reason why the owner must continually increase spending on primary expenditures is directly related to the profit rate.
Profit Rate
This is the formula that explains how the owner obtains a profit rate:
Extra Profits
Profit Rate = ______________________________________ X 100
Primary Expenditures + Secondary Expenditures
.
If the total of primary and secondary expenditures is divided into the extra profit and multiplied by 100 it will provide a profit rate. (Multiplying by 100 converts a decimal into a percentage).
As previously shown, the extra profits are a result of what is left after the owner pays wages or salaries to the employees.
Example: Suppose the employees created $100 worth of total profit and are paid $40 in wages. That means the extra profit is $60.
Add the primary expenditures to the secondary expenditures and divide by the extra profit. In this example, the profit rate is
$60
Profit Rate = 60% ______________________
$50 + $50 = $100 x100
Now to show the tendency of the profit rate to fall, increase the primary expenditure to $60. Suppose there was a sale on tools at Home Depot and the owner purchased $10 worth of tools by transferring funds from the secondary expenditures to the primary expenditures.
$60
Profit Rate = 55% _________________
$60 + $50 x 100
The profit rate is now 55%. This is a significant drop despite the profit amount remaining the same. The owner did what owners must do which is to increase primary expenditures by transferring funds from the secondary expenditures.
The owner’s increased spending on primary expenditures in the form of new tools or machines may maintain the extra profits. The new tools and machines may even increase the production of each employee. The product or service may then be sold as less expensive. This is wonderful for the owner, but the crisis remains driven by competition.
Temporary Remedy
It is essential to realize that other business owners are all trapped in this business model. It is clear that unless the business owner increases primary expenditures, the tendency is for the profit rate to fall.
Competition from other businesses drives the accumulation of primary expenditures and a decreasing of secondary expenditures. This decrease results in cuts to employees’ wages or salaries or losing their jobs. A falling rate of profit means outside investment is less likely to occur signaling a crisis in production.
The owner must either increase primary expenditures to increase profit rates to compete with other businesses or increase secondary expenditures to allow employees to maintain themselves and their families.
The owner cannot do both. It is an inherent contradiction.
The predicable remedy for the owner is to freeze or offer insufficient wages or salaries in order to maintain extra profits for the business. Unless there is a militant union to fight with the employees, owners will predictably deny the employees requests for fair compensation.
The tendency of a profit rate to fall leads to the eventual closing of the business or the business moving to a location without employee rights, union rights, or environmental regulations.
Real Remedy
Thus, our business model results in chronic exploitation, deprivation and immiseration that cannot be eliminated by reform. Working people’s lives and their families are severely damaged, often forever.
The organization, production, and distribution of goods and services must be transformed into a democratic model. Our present model cannot change without a transformation to democracy in the basic relations of the economy.
One version of this model can be seen in the Mondragon Corporation in Spain. It is a highly successful, conglomerate created in 1956 by a Roman Catholic priest. It is based on democratic principles that are agreed on by the employees.
Economist Richard Wolff wrote that the important questions of what and how we produce are fundamental to the economy of any country. “Where” to produce as also a question within the organization of an economy. The employees who create the profits must have a voice in the production process. A democratic construct can vary according to the model selected but must begin at the ground level.
Transition to Democratic Economic Model
There are several methods that might serve as a guide to how such a transition may be realized in our economic model.
1. New companies may be based on the principles of worker cooperatives.
2. When a company fails, it must first offer the employees an option to purchase it.
3. Owners who are retiring must offer the employees an opportunity to purchase the business.
A transition to a democratic economic model must begin by political parties actually representing working peoples’ interests. Some progressives assert that democratic socialists must win elections as the way to dominate governments at local, state and federal levels.
They assert that democratic socialism may be realized by means of evolution, not necessarily revolution.
If constructive critics are able to dominate the government that power could then be utilized for a transition to a democratic socialist model with American characteristics. Since U.S. history is replete with democratic goals and objectives, a transition would be less problematic.
Implementing such a democratic model will be met with an avalanche of ruthless, corporate propaganda designed to frighten and deceive working people.
Progressives have historical lessons to learn from the failures of countries that attempted a form of socialism to replace the miserable economic conditions inherent and inevitable in our economic model.
There are many forms of socialism that can be realized.
The former USSR. is a Petrie dish of such failures. Government must work to organize economic production democratically from the ground up, not from the top down that doomed the Soviet model to largely failure.
The government under democratic socialist control will transition to a new economic model that will facilitate the positive development of various components of our culture. The voice of working people will make the economic decisions rather than a handful of spiritually vapid wealthy oligarchs. These oligarchs ignore Christian, Jewish, Islam and Buddhism literature that advocate for various forms of democratic socialism.
Polls from the Wall Street Journal, CNN, Gallup and Fox News demonstrate that Americans are increasingly discontented with our economic model.
Working people can and must do better for themselves and their families.
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