The exorbitant privilege of capital

Why we need to rethink capital’s relationship with labor

The robber barons

Capital has an exorbitant privilege. With capital we are able to undertake productive investments and reap a potentially infinite amount of rewards. However, capital is not the only factor of production: for those investments to succeed, we also need labor. Unfortunately the rewards received by labor are infinitesimal and declining. In the majority of the industrialized world, the share of national income received by labor has been dropping over the past decades as a result of a myriad of factors like globalization, deregulation of labor markets, and the neutering of the power and influence of unions. The root of this privilege goes back to the origins of capital and its historic process of accumulation.

Where does capital come from? One source is from capital itself. Any increase in the value of an asset provides the owner with additional income which can then be reinvested into other capital assets. Similarly, some assets like stocks and bonds provide a regular stream of income in the form of interest payments or dividends.  Additionally, physical capital like robots or other types of automated equipment can also produce additional capital without human input. However, the main source of capital is labor. Your work, as an employee of any firm, contributes to the profits of the firm through which the firm is then able to accumulate further capital. No amount of capital will make a firm thrive in the absence of labor which is why the two are not perfect substitutes. But capital’s exorbitant privilege comes from the fact that, unlike labor, it can generate infinite returns. Let’s see how this process takes place in practice. Continue reading

The Spectrum Fallacy

Why all of something good isn’t better than just some of it

The economic rise of China since the 1980s has been one of the most, if not the most, impressive feats of economic progress ever. It has eradicated poverty by the hundreds of millions, created an industrial sector that has dwarfed anything ever seen in human history, and despite the country’s size and maturity, continues to grow at a pace that any Western democracy and even most developing economies can only dream of. This has been largely been achieved by the Chinese government’s adoption of market policies. China is now the world’s greatest trading nation and also a massive receptor and supplier of foreign investment. Capitalism works, and it follows that China is the perfect example of why countries should liberalize their economies and embrace free markets unconditionally.

Except it doesn’t follow.

If you were tempted to draw this apparently obvious conclusion, congratulations, you are a victim of what I like to call the Spectrum Fallacy, possibly the most pernicious flaw of logical argumentation in policy circles. What is the Spectrum Fallacy? It is the flawed premise that just because something is demonstrably better than something else, more of that something is necessarily better than only some of it. It is very similar to a well known logical fallacy, the false dilemma. Like the false dilemma, the spectrum fallacy assumes that there is a false choice, that one must necessarily choose between two mutually exclusive options (statist communism or laissez-faire capitalism). However, here we are assuming not that there are more choices but that either of these two choices can be better when they are applied less extremely across the spectrum of possibilities. Continue reading