Originally Posted by Brian Rush

Control of capital property is control of all wealth-production (labor is useless without something to apply that labor to in order to produce wealth), and so leads to the kind of economic tyranny that we see today. This puts capital property into a separate logical category from personal or commercial property. My ownership of a computer does not in any way prevent you from owning a computer, too. (It prevents you from owning that particular computer, but big deal.) My ownership of all the resources in the county, however, prevents you from making a living here except by working for me.

Unfortunately, this difference is less than it seems. As I pointed up up-thread (using a computer example, no less!) the line between capital good and consumption good is blurry. The exact same object can fulfill both roles depending upon use. Furthermore, one could just as easily conceive of a situation where access to consumption goods was entirely dependent on others and would cause deprivation for those unable to afford the requisite goods. Yet, personal property is universally recognized. The crucial distinction is not the ends to which the goods are to be employed, but the means by which they are acquired.

The reason land and capital ownership arose late is because until there was an economic need for such forms of ownership, asserting such ownership required a person to be extremely mean. Even when the need arose, the actual development of such property systems frequently involved force and brutality rather than a peaceful transition. Ultimately, though, I come to a similar conclusion, that many property titles are of dubious origin and that revoking them is not necessarily "theft." The proper solution in many cases is to treat such property as unowned and then have it be homesteaded by its current users (i.e. feudal land to the peasants, state owned or subsidized capital to the workers).

Originally Posted by Brian Rush

It's common, I find, among libertarians to exaggerate the effectiveness of non-organized, non-standard resistance. A guerrilla military is, as part of the definition, weaker and less capable than its opponent (otherwise it would not be necessary to adopt guerrilla tactics). It can continue to exist, and to inflict casualties on the enemy, but it can never defeat the enemy in the sense of destroying his forces and seizing controlled territory.

The actual difference is that libertarians factor in deterrence. The goal of military defense is to make invasion appear unprofitable, not to stop an invasion cold. A militia system can do this quite well. See, for example, Switzerland during WWII.

Thinking about it more, though, you might be right about the South. The willingness of average Southerners to fight a guerrilla war in defense of the privileges of their elite was probably limited and perhaps the lack of ready-made nationalistic institutions would have made for a shorter and less bloody conflict, and potentially no conflict at all.

Originally Posted by Brian Rush

I'm just saying that trying to cripple the power of megacorps by cutting out their access to subsidized goods transport is cutting off our collective nose to spite their private faces.

I'm certainly not saying that such transport isn't desirable, or that people shouldn't be able to build means for easy travel or even that they wouldn't have done so absent the subsidies. However, the cost isn't properly distributed to the real users. Highway deterioration is almost exclusively caused by large trucks, yet, gas tax revenue from small vehicles are considerably higher than their percentage of the costs of road maintenance. If we actually charged heavy vehicles a road use fee proportional to their effect on road upkeep, it would break up the big national retail chains in short order. Your family car trip to the Grand Canyon, however, would proceed without incident.

Originally Posted by Odin

Hey, Kurt, where would Popper be on your Political Archetypes chart? True Left because he was the great critic of Totalitarianism and deference to authority?

Either that or upper-left, but I think your guess is probably the correct one.

Originally Posted by Kurt Horner

Unfortunately, this difference is less than it seems. As I pointed up up-thread (using a computer example, no less!) the line between capital good and consumption good is blurry. The exact same object can fulfill both roles depending upon use.

Did you see my response to The Grey Badger? The line's not that blurry. I used two examples where personal property used for capital purposes (e.g. my own computer), or very inexpensive capital property (e.g. the computer I use at work), can create the illusion of nearly or totally capital free wealth creation, but it's not reality. My wealth creation as an insurance broker depends on the massive capital investment of the insurance companies that generate the final product I sell, while my wealth creation as a writer (should that ever finally happen) depends on the masive capital investment of the publishing company that prints and markets my books. There is a bit of crossover in that personal property can be used as capital property (and vice-versa), but in the scale of the economy it's trivial and does not materially change the calculation.

Furthermore, one could just as easily conceive of a situation where access to consumption goods was entirely dependent on others and would cause deprivation for those unable to afford the requisite goods.

Sure, but any such scenario will require control of capital property, too -- otherwise nobody can exert that kind of control over consumer products. For example, the only way to completely control the food supply is to completely control the land where food is grown.

The actual difference is that libertarians factor in deterrence. The goal of military defense is to make invasion appear unprofitable, not to stop an invasion cold. A militia system can do this quite well. See, for example, Switzerland during WWII.

Switzerland has a genuine militia army, though, what the Second Amendment calls a "well-regulated" militia. It's not just an armed populace, it's an actual well-drilled, disciplined army that fights in conventional fashion, consisting of the entire military-age male population. Add the highly defensible, mountainous nature of the terrain, and this is a daunting prospect for an invader.

The U.S. no longer has a substantial militia force, although it has lots of guns in private possession. We rely for our organized defense on a professional miltiary.

I submit that it's not enough to "make an invasion unprofitable." You also have to deal with the possibility of a hyper-aggressive nut job, or an aggressor whose ability to calculate profits and costs leaves something to be admired. In that case, the ability to actually defeat the enemy in the field becomes important. The less territory the enemy actually occupies, and the shorter the time he occupies it, the less damage he will do. Russia suffered terrible things at the hands of Hitler's forces in World War II, but if the Red Army had actually lost that war instead of winning it far worse things would have happened. (You may know that Hitler's plan was to completely depopulate European Russia and turn it into a colony to breed a huge generation of Germans who would then conquer the world under Hitler's successor.)

I'm certainly not saying that such transport isn't desirable, or that people shouldn't be able to build means for easy travel or even that they wouldn't have done so absent the subsidies. However, the cost isn't properly distributed to the real users. Highway deterioration is almost exclusively caused by large trucks, yet, gas tax revenue from small vehicles are considerably higher than their percentage of the costs of road maintenance. If we actually charged heavy vehicles a road use fee proportional to their effect on road upkeep, it would break up the big national retail chains in short order. Your family car trip to the Grand Canyon, however, would proceed without incident.

Setting aside the retail chains, though, is it in our interest to have goods available at decent prices from around the country? Would you want to pay a surcharge for your computer or your clothes or your car because you don't live near where these things are produced?

Originally Posted by Mikebert

A Capitalist economy is one in which investment decisions (ideally) seek to maximize the return to Capital. That is growth in capital is the "goal" of a capitalist economy.

A Socialist or collectivist economy is one in which investment decisions (ideally) seek to maximize the return to Labor.

Except that, in many versions of socialism, returns to labor are maximized by removing the separation between labor and capital ownership (and still maximizing capital returns). Your definitions would turn a large number of self-identified socialists into "pro-capitalists."

Originally Posted by Mikebert

A free market capitalist believes that letting capital grow spontaneously will give the most prosperous (fastest growing) economy. Built into their belief in markets is that tradable capital is far more important to prosperity than any other kind. If this is true, then the "market solution" to the question of how to invest will the one that generates the most prosperity.

A liberal capitalist believes that letting market-tradable capital grow spontaneously does not give the best results. Liberals believe in pruning the growth in market-tradable capital through high levels of taxation and using the proceeds to invest in non-market trading capital like public infrastructure, education and social maintenance functions.

A socialist wishes to do away with capitalism all together at some scale. Capital (profits) are allocated (ideally) in such a way as to maximize the productivity of Labor, in sort of the same way parents invest in the education and development of their children to maximize their success (productivity) in life. Profit is also allocated for social maintenance functions.

I can't tell where I fit in your proposed schema. My views could be characterized as either the "market" one or the "socialist" one, depending on emphasis and wording. I would even accept many elements of the "liberal" one as practical stop gap measures.

Originally Posted by Kurt Horner

I can't tell where I fit in your proposed schema. My views could be characterized as either the "market" one or the "socialist" one, depending on emphasis and wording. I would even accept many elements of the "liberal" one as practical stop gap measures.

Well, you say you favor market economics but not large concentrations of wealth. If you mix capitalism with free markets you will naturally get huge concentrations of wealth unless you design in some mechanism to prevent concentrations from happening.

Originally Posted by Kurt Horner

Sorry, but the real situation was the reverse

The article is very interesting. I withdraw my earlier statements.

This assumes that capital goods in the capitalist economy are predominantly subject to market exchange, when in fact, they are the type of good most insulated from such forces.

Equity (i.e. Capital) is exchanged on the stock market. I am not talking about capital goods, I am talking about the means of production. A great deal of Capital (e.g. business know how, brands, market knowledge etc.) does not consist of capital goods.

Only because we've created institutions whose existence is independent of the persons involved which transfers effective ownership of capital goods not just from those using them (workers) to those purchasing them (stockholders) but even further removed to those managing them (executives).

The institutions came AFTER accumulations of capital had already occurred. With wealth comes power and with power comes self-dealing. You cannot avoid such institutions once you allow concentrations of wealth.

As such, the managers have strong incentive to maximize capital intensity, and re-invest earnings rather than paying dividends (which would disperse the returns from capital much more widely).

The fraction of capital that is re-invested has not changed significantly over the last 150 years.

I'm not sure what you're trying to prove here. Obviously one can accumulate wealth by spending their resources on the creation of capital.

That is the main way to accumulate substantial wealth. Very few (e.g. sports and entertainment stars) can achieve great wealth purely from the sale of one's own labor. A larger, but still small, number (e.g. surgeons) can obtain substantial wealth that way. The vast majority of the wealthy have obtained their wealth from capital accumulation.

However, doing this by passively purchasing shares of giant, immortal institutions and holding those shares until desired retirement is not the only way to do so.

I said nothing about purchasing shares of giant immortal institutions. You can do exactly the same thing by buying shares of MANY very small institutions. What institutions are involved is irrelevant. You can also do it by starting your own company. The process is the same.

I used stocks as my example because a well-diversified portfolio of stocks gives the average economy-wide rate of capital accumulation directly. Of course, by buying an individual stock, or starting your own company, you can experience much larger potential gains (or losses). Real fortunes come from such ventures. An investor in a business that happens to be wildly successful will make a fortune that when reinvested in a diversified portfolio will be immortalized, unless some external factor like income or estate taxes whittles it away.

Since in every industry some business is always going to do the best over some interval, there will always be fortunes created, which if diversified, will become immortalized.

This will occur unless you ban stock markets and any sort of market exchange of equity. That is you can start a business, and you can liquidate a business, but you are not allowed to sell the business. Is this what you advocate?

Originally Posted by Mikebert

Equity (i.e. Capital) is exchanged on the stock market. I am not talking about capital goods, I am talking about the means of production. A great deal of Capital (e.g. business know how, brands, market knowledge etc.) does not consist of capital goods.

I most definitely disagree with the characterization of either business know-how or market knowledge as "capital," and I'll have to think about brands. I don't think I would consider brands capital, either, although it's not as obviously miscategorized as the other two. The only possible justification for calling knowledge capital is if you are defining capital as "anything useful in the production of wealth," in which case labor becomes capital, also, and the term loses its distinctive meaning.

The institutions came AFTER accumulations of capital had already occurred.

I understand what you are saying here, but I disagree with this as well, on the grounds that you need to go back further in history to find the causative beginnings. Capitalism did not emerge ex nihilo. It was built on a millennia-old base of economic privilege that had other mechanisms and sources initially. The pattern was set down in ancient times, with titled warrior-nobility building great wealth on a base of slavery (or, later, serfdom). The idea of some being entitled to become excessively wealthy and powerful and to command the labor of others for their own gain began with that. What applied in an agrarian and feudal economy was carried over into the earlier forms of commercial and industrial economy, the privileged nobility being among the first to enjoy the financial fruits of the new economic style. The first corporations were established by royal charters and enjoyed privileged access to markets and/or materials, amounting in some cases to monopoly. This obviously represented the antithesis of a free market. By the time free-market ideals arose as part of the Enlightenment and the birth of liberalism, this pattern was well entrenched, and the commercial elite was already wealthy and powerful. So the assertion that capitalist inequity arose from a free-market base is historically inaccurate, and the idea that it could do so is theoretically non-self-evident (although it might be true).

Since in every industry some business is always going to do the best over some interval, there will always be fortunes created, which if diversified, will become immortalized.

That depends on what you mean by a "fortune." Obviously some businesses will do better than their competitors; obviously variation in wealth will result naturally from variation in ability, enterprise, ambition, and luck. But the question is how far this will be enabled to proceed.

This will occur unless you ban stock markets and any sort of market exchange of equity. That is you can start a business, and you can liquidate a business, but you are not allowed to sell the business. Is this what you advocate?

This is coming pretty close to what I meant earlier by "decentralized socialism." It's occurred to me that much of the benefit of socialism without the concurrent inefficiency could be achieved by eliminating the publicly-traded corporation, replacing it with a publicly owned corporation. Thus, a person could start a business, liquidate it, or sell it intact (not in shares) to another sole-proprietor owner, or sell it to the public, but not convert it into a publicly-traded corp. Upon sale to the public, a corporation would continue to be privately managed and run, but all profits would be distributed to the people in the form of negative taxes, rather the way oil revenue is distributed in Alaska today. Privately-owned business would continue to exist, but only at the relatively harmless level of the sole proprietorship or simple partnership.

The flaw in command socialism comes with the central planning aspect, which attempts to respond to a chaotic input system (the consumer market) with an inherently clumsy, linear/centralized response mechanism (the government bureau). A decentralized system of multiple independent decision-makers is (perhaps paradoxically) more efficient, presenting a chaotic response mechanism for the chaotic input system. A decentralized socialist system would preserve this feature of a market economy.

In the course of this discussion, however, I've begun toying with the idea of simply eliminating the publicly traded corporation altogether without replacing it with anything. I'm not entirely convinced of that, though. A lot depends on whether the economies of scale and opportunities for accomplishing big things presented by big corporations are worth preserving, assuming we can strip them of the tyrannical aspects. I hope this conversation will continue a while longer. I'm finding it gives me food for thought.

Originally Posted by Mikebert

Equity (i.e. Capital) is exchanged on the stock market. I am not talking about capital goods, I am talking about the means of production. A great deal of Capital (e.g. business know how, brands, market knowledge etc.) does not consist of capital goods.

It is disputable whether these things are capital at all, but rather aspects of labor.

Originally Posted by Mikebert

The institutions came AFTER accumulations of capital had already occurred. With wealth comes power and with power comes self-dealing. You cannot avoid such institutions once you allow concentrations of wealth.

Alas, the era of non-intervention is a myth. Concentrations of wealth and power derived from aristocracy segued directly into the modern economy. Crucial institutions (notably patents, trade restrictions, currency regulation and land "ownership" not resulting from homesteading) predate the advent of industrialization and colored the types of firms that could arise. The ability of market forces to break up old patterns of power is large but not enough to overcome the immense weight of history.

Originally Posted by Mikebert

The fraction of capital that is re-invested has not changed significantly over the last 150 years.

I tried to find some data in that regard, but couldn't locate any. Nonetheless, there is a clear preference among current firms to re-invest first, go into debt second and raise funds externally last. Whether and how those relative preferences have shifted over time is unclear without any numbers.

Originally Posted by Mikebert

An investor in a business that happens to be wildly successful will make a fortune that when reinvested in a diversified portfolio will be immortalized, unless some external factor like income or estate taxes whittles it away.

This is not actually possible without someone leaning on the scale. ROI should reflect changes in purchasing power and living standards with no additional profits. In order for the hypothetical investor to have any wealth for consumption they must cut into their returns, thereby reducing the fortune's size relative to the overall economy. I suppose that if the fortune were sufficiently huge it would take decades to whittle it down to size, but that presumes that a large fortune would collect in the first place, which is precisely the thing you're trying to prove.

Since your theory requires a person to hit upon a good investment once and never take risks again (a psychologically dubious theory) the initial hit will have to be quite large. Otherwise, the big fortune doesn't last long enough to have the socially pernicious effects that you're expecting.

The fact that, in the real world, some fortunes consistently and conspicuously do outperform the overall market is not because certain wealthy persons are smarter than the rest of us, or because capital markets somehow reward sloth. Rather, this is because such large concentrations of wealth are being created by means other than wise investment, which, in turn, allow for collections of wealth beyond what would apply in an actual free economy.

Originally Posted by Mikebert

This will occur unless you ban stock markets and any sort of market exchange of equity. That is you can start a business, and you can liquidate a business, but you are not allowed to sell the business. Is this what you advocate?

Of course not, and, per above, such a policy is not necessary. You can't enjoy a fortune without spending it.

Originally Posted by Brian Rush

Setting aside the retail chains, though, is it in our interest to have goods available at decent prices from around the country? Would you want to pay a surcharge for your computer or your clothes or your car because you don't live near where these things are produced?

What does the fact that you want bananas for free have to do with anything? If you're not in a place where you can pick your bananas off a tree yourself, you're going to have to pay to get them to you; and that is going to cost more or less depending on how far away you are from those trees.

All the subsidized system holding sway now does is help you get bananas easier at the expense (borne only in miniscule part by you, the banana-demander) of excess tons of pollution dumped into atmosphere and waterways. If someone should pay for crapping things up, it makes much more sense -- from the standpoint of locating responsibiliy as close as possible to decision-making -- that you, the one whose desire for bananas necessitates the costs, be the one to bear them.

It sucks to have to pay for stuff, I know.

Originally Posted by Brian Rush

The first corporations were established by royal charters and enjoyed privileged access to markets and/or materials, amounting in some cases to monopoly. This obviously represented the antithesis of a free market.

Corporations arose in the 19th century. The charters were for companies.

Also a charter does not grant a monopoly in the world market. The Dutch East India (VOC)company did not gain a monopoly on East India trade because they had gotten a charter from the Dutch government. They got it by seizing it by force from the Portugese.

And the Dutch government could not control whom they sold to. Dutch traders traded with whomever they pleased. For example they would trade with the enemy during wartime, which the Dutch government did not particularly like.

That depends on what you mean by a "fortune." Obviously some businesses will do better than their competitors; obviously variation in wealth will result naturally from variation in ability, enterprise, ambition, and luck. But the question is how far this will be enabled to proceed.

That is precisely the question. In a free market capitalist economy, there are no restrictions and so fortunes will happens. It's the nature of the beast, Capital grows, and so large concentrations of wealth will appear spontaenously.

Upon sale to the public, a corporation would continue to be privately managed and run, but all profits would be distributed to the people in the form of negative taxes, rather the way oil revenue is distributed in Alaska today.

If the company is privately managed there would be no net profits. There would be gross profits but after deductions of sales and administration costs there would be no profit left. Instead there would be very rich CEOs and executives, just like today, only even worse.

The company board would have to be public. The board would need to provide management with the objective. What are they trying to manage the company to do? Do they wish to maximize returns to the public owners, even if it means outsourcing and the like? Or do they wish management to have the company make quality products at a fair price while paying good salaries and wages to their employees (in which case profits will suffer).

Originally Posted by Kurt Horner

This is not actually possible without someone leaning on the scale. ROI should reflect changes in purchasing power and living standards with no additional profits.

Huh? Any first mover will gain outsize profits until competitors can learn to copy his formula (if they ever do). Often this takes quite a bit of time, duirng which the fortune is made. For example, Ford developed a cheaper way to make cars in 1914. Ten years later his competitors were using similar methods, but they still couldn't match his costs.

Look at Toyota cars. Toyota doesn't really have a cost advantage anymore, especially wrt to newer entrants. They have a price advantage. Used Toyotas sell for more than similar cars from other makers and that means new Toyotas can sell for more than corresponding competitor models. Toyota doesn't use more costly inputs for their cars than do other makers for their cars, they simply know how to make cars better than just about anyone anyone else.

In order for the hypothetical investor to have any wealth for consumption they must cut into their returns, thereby reducing the fortune's size relative to the overall economy. I suppose that if the fortune were sufficiently huge it would take decades to whittle it down to size,

Fortunes do not whittle down in a free market capitalist economy. If the investment does not grow the capital, the investment is not made. That is what capitalism is about. Are you saying that in the sort of economy you envison we would be in a permanent depression? There would be no opportunities for profit?

The fact that, in the real world, some fortunes consistently and conspicuously do outperform the overall market is not because certain wealthy persons are smarter than the rest of us, or because capital markets somehow reward sloth.

No, capital markets reward enterprise and luck.

Rather, this is because such large concentrations of wealth are being created by means other than wise investment, which, in turn, allow for collections of wealth beyond what would apply in an actual free economy.

You appear to believe that free market economies contain some sort of leveling mechanism that prevents accumulation of large fortunes. I don't see it.

There are no barriers to entry for blogs. There are millions of blogs, all equally available to a reader by just typing in the url. The vast majority of these bloggers are poor, (they have essentially no readers outside of the blogger's friends and aquaintances). On the other end of the scale they are a handful of bloggers who have vast fortunes of hundreds of thousands of readers. What means other than freely-made choice, causes readers to visit the rich bloggers (making them still richer) and not the poor bloggers?

Of course not, and, per above, such a policy is not necessary. You can't enjoy a fortune without spending it.

There are many fortunes that are too large to be spent, and which are not spent. One could tax away the excess wealth without affecting the owner's spending at all. And yet I suspect that the owner would resent the tax, and feel that he is being deprived the enjoyment of his never-to-be-spent wealth.

The value of great wealth is not in terms of what the money will buy, as it will never be spent by the accumulating capitalist. The value is in keeping score, as Ted Turner put it.

Originally Posted by Mikebert

Corporations arose in the 19th century. The charters were for companies.

That the roots of the corporation lie in the royal charters is generally recognized.

That is precisely the question. In a free market capitalist economy, there are no restrictions and so fortunes will happens. It's the nature of the beast, Capital grows, and so large concentrations of wealth will appear spontaenously.

This doesn't answer the question. As I've pointed out earlier, the government interferes at all levels of the economy and if it didn't we wouldn't even have an economy. So the designation of certain areas of interference and noninterference as "free market" is somewhat arbitrary. It amounts to saying, "This government interference doesn't count, that government interference does."

It's Kurt's contention, and I agree with him, that there has never been such a thing as a free-market economy. As such, to say that "In a free market capitalist economy, there are no restrictions and so fortunes will happens" is to assert an unknowable.

The technical points about publlcly-owned corporations are answerable but that would divert us into irrelevant details. I'd prefer to deal with the larger question of whether it's even a desirable idea first.

Originally Posted by Kurt Horner

Except that, in many versions of socialism, returns to labor are maximized by removing the separation between labor and capital ownership (and still maximizing capital returns). Your definitions would turn a large number of self-identified socialists into "pro-capitalists.".

It depends on how the system works. It seems you are talking about worker-owned entreprises. What happens when a worker gets injured or becomes too old to work? Do these "socialist" systems discard old/broken workers to die? I've never heard of one that did.

If they don't, if there is some sort of pension, then that restores the separation between labor and capital ownership.

Originally Posted by The Rani

And maybe NOT having all that transportation subsidized would throw things in favor of smaller, local businesses, rather than those giant corporations that we all despise so badly.

Of course it would. Whether or not that's desirable is exactly what's being asked. I'm not coming down on either side of the question as an advocate at this point, by the way.

Justin raised the point about subsidized transport encouraging pollution. He's right insofar as our method of energy production is polluting. All energy production is polluting to some extent, but some are much worse than others. If using more energy for transport means building more solar panels in the desert rather than burning more coal, is it worth it? How about if it means building a few extra nuclear power plants?

Again, I'm not saying one way or the other, just pointing out that the equation isn't simple.

Originally Posted by Brian Rush

It's Kurt's contention, and I agree with him, that there has never been such a thing as a free-market economy.

I also agree. Free market is more of a relative term. Some economies are more free than others. What I am saying is you do not get rid of concentrations of wealth by moving in the free direction.

To see this it is best to look at a proxy economy that is free. Let's use blogging. And lets us define blogoshere wealth as influence, as measured by number of readers.

It is very easy to set up a blog. It costs very little for somebody who already has internet connections as all of us do. So the blogosphere is very free in terms of who can participate; there are essentially no barriers to entry. There are many many blogs and so there is lots and lots of competition. And yet all that competition didn't prevent a handful of bloggers from becoming very influential. Some of this appears to reflect a first mover effect, the first blog to occuppy a niche and give readers something they want gets loyal readers that will stick with thje blog as long as the product continues to be perceived as good. That is, the first mover effect is lasting. The huge numbers of new political blogs that appearred after Daily Kos first became a major blog have not caused Kos readership to dwindle away as freely-choosing readers choose someone else.

And it's not like the blog aristocracy has prevented new bloggers from becoming successful, if they have something new to offer New sites such as 538 continue to appear and become successful.

In other words "blog fortunes" arise spontaneously out of what looks very much like a free market blogosphere.

Originally Posted by Mikebert

Huh? Any first mover will gain outsize profits until competitors can learn to copy his formula (if they ever do). Often this takes quite a bit of time, duirng which the fortune is made.

The most common reason why this takes time is because many of these clever techniques are patented. It's very easy to make profits if you can legally block other people from competing.

Originally Posted by Mikebert

Fortunes do not whittle down in a free market capitalist economy. If the investment does not grow the capital, the investment is not made.

Yes, but that is true of all investments, which is why a diverse portfolio will only keep pace with overall economic development -- and that assumes total, continuous reinvestment. If you make consumption expenditures, you fall behind. The only way to restock the fortune is to periodically pick another good investment while avoiding bad ones. You have to be smarter than the market -- or you have to cheat.

Originally Posted by Mikebert

Are you saying that in the sort of economy you envision we would be in a permanent depression? There would be no opportunities for profit?

No, all I'm saying is that a diverse portfolio cannot yield above-market returns, and if you wish to live off your fortune, you can't even do that.

Originally Posted by Mikebert

You appear to believe that free market economies contain some sort of leveling mechanism that prevents accumulation of large fortunes. I don't see it.

Of course you don't see it -- because you don't see any free market economies in the world we live in.

Originally Posted by Mikebert

There are no barriers to entry for blogs. There are millions of blogs, all equally available to a reader by just typing in the url.

Assuming you know the url. Favorable word of mouth places a huge constraint on the spread of a particular blog. The fortunes of most bloggers are not financial, though, and don't easily translate into them. In fact, bloggers don't really sell anything, so I'm not sure how useful this analogy is.

Originally Posted by Mikebert

There are many fortunes that are too large to be spent, and which are not spent.

Yep, but you need to describe a convincing mechanism for how such fortunes form in the first place. So far your argument is that such fortunes just inevitably do so (due to luck or skill*) and then are preserved by diverse investment in the capital markets. I have noted that their preservation by capital markets alone is dubious and their formation is similarly suspect.

* Both of these explanations require one to explain the existence of extremely profitable windfalls for one to luck into or discover through profit-finding skill (in other words, you're just sticking another tortoise under the pile). The skill explanation also serves as a convenient legitimating ideology. ("He's rich, therefore he must be skilled.")

Originally Posted by Mikebert

It depends on how the system works. It seems you are talking about worker-owned entreprises. What happens when a worker gets injured or becomes too old to work? Do these "socialist" systems discard old/broken workers to die? I've never heard of one that did.

If they don't, if there is some sort of pension, then that restores the separation between labor and capital ownership.

I suppose it would, but that presumes a pension internal to the workplace as the means of providing such insurance. Such services could easily be provided in entirely separate organizations not tied to any particular economic enterprise (insurance, mutual aid societies, etc.). In fact, the whole trend in our society of bundling multiple social services into one's present employment circumstances is likely an artifact of the centralized nature of the system.

Originally Posted by Kurt Horner

The most common reason why this takes time is because many of these clever techniques are patented. It's very easy to make profits if you can legally block other people from competing.

In a world without patents, there is no disclosure. It is not so easy to copy a successful competitor. Ford was first to employ mass production methods in the auto industry. A decade later his competitors had emulated what Ford did, but they were not able to do it as well. This is why GM and Chrysler became marketing-based companies; they simply never became as good at building cars as Ford. In the 1980's Japanese car companies became the new Ford. They simply know how to build better cars than their competitors can so they can sell them for more.

Yes, but that is true of all investments, which is why a diverse portfolio will only keep pace with overall economic development -- and that assumes total, continuous reinvestment. If you make consumption expenditures, you fall behind.

Fall behind what?

The only way to restock the fortune is to periodically pick another good investment while avoiding bad ones. You have to be smarter than the market -- or you have to cheat.

No you don't. The average return provides more than enough to keep one's fortune intact and provide a good living. Where did you get this idea?

Yep, but you need to describe a convincing mechanism for how such fortunes form in the first place. So far your argument is that such fortunes just inevitably do so (due to luck or skill*) and then are preserved by diverse investment in the capital markets. I have noted that their preservation by capital markets alone is dubious and their formation is similarly suspect.

Assume a business owns a certain amount of capital, call it R, which is uses along with labor and resources to generate a profit, call it E. Some of these profits are paid out to the owners of the R and dividends, call this D. The rest of the profits are reinvested into the company, growiing the amount of R in the company. That is we can write:

change in R = E - D = retained earnings

The value of R is incremented each year by the quantity E -D. From this we can write the following for the value of R in a given year i

Ri = R0 + sum of E-D for all years between year 0 and year i

I have done this for a broad based stock index using E and D values for the years 1871 down to the present. I assume that an estimate for R0 can be obtained by the market value of the index in 1871. See this article for details.

http://www.safehaven.com/article-5541.htm

Now it so happens that the rate at which R grows over time is about 2%. The rate at which the stock market index rises (in real terms) over the long haul is also 2%. This follows because the market-determined index value (P) is simply the stock markets attempt to place a value on R in the present environment. R represents the "fundamental value" of the stock index, while P is simply the value at which the market currently prices R.

Therefore, one can value the stock market in terms of the ratio P/R. When P/R rises to a high value, well above 1.0, the market is overvalued and is due for a lengthy correction period. Thus the stock market moves in long ~18 year secular bull and bear market periods defined when P/R is rising from very low to very high values and then back down to very low values. I first wrote abut this idea in May 1997 when I projected the end of the secular bull market at a Dow around 9000-12500. The Dow peaked at 11,700 in Jan 2000.

I wrote a few more updates and called a peak in fall 1999, and got out of stocks (prematurely by 9 months as it turned out).

I applied P/R again in fall 2002 to argue that the market had fallen enough.

I bought heavily last November 20, again based on the idea that the market had fallen enough for the current position in the secular bear market to make stocks a good long-term buy. P/R has much more to fall before this secular bear market (and 4T) is done, but it has a decade or more in which to do it.

P/R does a better job of describing the behavior of the stock market over the long term than any other tool of which I am aware. Given the now demonstrated efficacy of the tool, I can now say that it "works". The reason why it works, I suspect, is because it describes something real about how the market and the economy work.

Now cumulative retained earnings is almost the same thing as equity or "book value". A company should be worth its book value, so its not surprising that P/R works. However, the actual book value is an accounting quantity that makes use of nominal dollars. In practice companies sell for much more than their book values. This happens because retained profits are not piled up as dollars in a safe (and so lose value with inflation).

Instead companies usually reinvest retained earning in capital goods, aquisitions, and other sorts of capital purchases. That is, they buy real things or more R (in the case of aquisitions) and since the dollar value of real things rises due to inflation, the dollar value of R rises with inflation. Thus, when R is calculated, E and D are first put expressed in terms of constant dollars and then added to R. Thus, R is sort of a "real book value"

The rate of return on capital in business is then E/R, and it about 5% over the long term. See this article for more detail

http://www.safehaven.com/article-5912.htm

Now economic growth is probably best expressed in terms of growth in GDP per person. Obviously doubling GDP by doubling the population does not reflect actual growth.

I argue that GDP per capita rises because people have more R to work with. Double R and you double output per person. If this were true, the GDP per capital should track R over time, and indeed it does. Both grow at close to 2% annually.

Thus, investments in business equity (5% average return) outperform the long-term growth economic growth rate (2%). Indeed the risk-free return from debt must eventually be equal or less than this growth rate. A good deal of our current problems today stems from Reaganomics: a deliberate policy of controlling inflation by hold real interest rates above 2% in order to suppress inflaiton generated by 1980's tax cuts.

But the return from enterprise MUST necessarily be higher (on average) than the rate from lending. Otherwise nobody would engage in enterprise. And indeed it is, its about 5% compared to longer term growth of 2%.

Thus, engaging in business provides an average return that is 3% higher than the rate of economic development. This is why businessmen engage in business in the first place, otherwise why not just be an employee and collect the 2% return due to economic growth.

What do I mean by collecting a return as employee?

Well I am a chemical engineer. I decided to become a chem E in fall 1980 (I was a chemistry major at the time) when I did a paper for my technical writing class. I found that the starting salary for Chem Es was $19,500. PhD's started at about 50% more. The average starting salary for chem Es in 2003 was $52 K and PhD's about 50% more. If I put this salary into 1980 dollars, it comes to $24,500. Starting chemical engineers made 26% more in 2003 than they did in 1980. That is, starting salaries for the same job at the same level rose at a 1% annual rate. In addition, chemical engineers continued to received health benefits that rose at more like a 5% rate in real terms, so total compensation probably has risen at about 2%.

Obviously many occupation have not done as well as chemical engineers, but I don't think these occupations would be realistic alternatives to engaging in business. Anyone savvy enough to be a successful businessman can be an employee in an occupation (e.g. business administration) with good economics like chemical engineering.

So if businessmen did not earn a return from their business enterprise considerably better than the ~2% available from working as an employee they would not engage in business. Since they do, the average return from business must be higher than the rate of long term economic growth, which it is, as I discussed above.

This will always be true for any economic system that allows for private business. Nobody will engage in business unless the rewards are greater than simply working for someone else.

The return to investors comes from the 5% average return to enterprise. Even of you take out one-fifth of the return to live on, you will still grow your fortune relative to per capita GDP. If this were not true, people would stop investing, Asset prices would fall, which then would generate the necessary higher returns for investment. Investment return is largely determined by the price you pay for the return-generating asset, not by its "quality". If you don't understand this read my article on secular trend theory cited above.

Originally Posted by Kurt Horner

I suppose it would, but that presumes a pension internal to the workplace as the means of providing such insurance.

No it doesn't. It simply means that the retired/nonworking persons would be investors (i.e, owners of capital). Whether is was insurance of "mutual aid organizations" doesn't matter. The non working people would be receiving the fruits of other people's labor.

Originally Posted by Kurt Horner

Assuming you know the url.

There are search engines.

Favorable word of mouth places a huge constraint on the spread of a particular blog.

As it does for any enterprise. What is your point?

The fortunes of most bloggers are not financial, though, and don't easily translate into them.

Of course not. The goal of bloggers is gaining influence rather than money. But like businesses, they need to keep their customers happy to keep coming back and they face competitors who would take their traffic (business) if they could.

In fact, bloggers don't really sell anything, so I'm not sure how useful this analogy is.

This seems rather disingenuous. Selling is irrelevant to the bloggers goals. If bloggers sought to sell things, they would start a business rather than a blog.

The analogy seems pretty tight:

blog <--> business
readers <--> customers
influence <--> wealth

Originally Posted by Mikebert

Assume a business owns a certain amount of capital, call it R, which is uses along with labor and resources to generate a profit, call it E. Some of these profits are paid out to the owners of the R and dividends, call this D. The rest of the profits are reinvested into the company, growiing the amount of R in the company.

However, there are natural limits to this process, and where those limits reside depends in part on government policy and law. For example, suppose there was no such thing as a corporation, that all business had to be sole-proprietor with no limitation on liability. There is a diminishing return to capital investment, a point beyond which further expansion costs more per point of production gained. Also, the larger a business becomes, the more difficult it is for one person to control. As it expanded beyond that point, the owner would run increasing risk from business liability, and face increasing chances that something would go seriously wrong. The corporation is set up to reduce business risk, and to facilitate large growth; the publicly-traded corporation is a further step in this direction, and without those institutions (or something fulfilling the same function) a business could not grow as big, nor wealth concentrate as much.

Once again, I believe this is what Kurt is arguing, not that wealth would be shared with perfect equality in the absence of such artificial wealth-enhancers, but that it would not be as extremely inequitable as it is now.

About bloggers -- there are no such natural limits on the influence of one author, in the age of the Internet where wide distribution is possible for minimal cost. That makes blogging an imperfect metaphor for economic activity. Yet even so, there is a proper parallel; imagine such an effort without the supporting mechanism of the Internet itself. That is, after all, an artificial construction, every bit as much as corporate law.

Originally Posted by Brian Rush

For example, suppose there was no such thing as a corporation, that all business had to be sole-proprietor with no limitation on liability. There is a diminishing return to capital investment, a point beyond which further expansion costs more per point of production gained. Also, the larger a business becomes, the more difficult it is for one person to control. As it expanded beyond that point, the owner would run increasing risk from business liability, and face increasing chances that something would go seriously wrong. The corporation is set up to reduce business risk, and to facilitate large growth; the publicly-traded corporation is a further step in this direction, and without those institutions (or something fulfilling the same function) a business could not grow as big, nor wealth concentrate as much.

An individual business does not have to grow to a huge size in order for concentrations of wealth to occur. An individual can invest in many small companies in a hot industry rather than a company and still get outsize returns. For example when PCs were getting started, invest in ALL the PC companies. Yes some will go bankrupt, but if that happens your loss is limited to 100%. For the successful companies your gain is way more than 100%,

For example, say you invest equally in 50 startup companies in a hot industr and after four years 25 have gone bankrupt, 15 doubled in value, 6 tripled in value, three quadrupled and one was a ten-bagger.

So 50% of your money disappears, 30% of your money doubles to 60%, 12% of your money triples to 36%, 6% of your money quadruples to 24% and 2% of your money grows to 20%. Your original investment has grown to 140% of it's initial value. Despite half of your investments being utter disasters, you still come out well ahead.

As for the liability issue, businesses can draw contracts with investors shielding them from liability in order to get them to invest in their businesses. If they don't draw up such contracts they won't get the capital they need. You don't need corporations to shield investors from liability.

Once again, I believe this is what Kurt is arguing, not that wealth would be shared with perfect equality in the absence of such artificial wealth-enhancers, but that it would not be as extremely inequitable as it is now.

I don't think so. Just because the current wealthy used corporations to generate their wealth doesn't mean that corporations are necessary. Startups need capital. They are far too risky to qualify for loans (many of them will certainly go bust). If you deny them corporations, they will find another way to raise capital. If they are successful, their investors will get rich. Successful startups don't have to get very big to create a lot of wealth for their investors Look at E-bay or Amazon. Both companies were worth billions during their early growth phases despite having few employees.

Another example is a startup biotech company. You might have a dozen employees. Suppose you get lucky and find a promising drug. You sell for $100 million and now you and your investors have large fortunes and your employees have small fortunes. Twenty other guys went broke trying to do the same thing. With great risk comes great reward. The point I am making is large fortunes are made when the business was relative small, for that is the only time when large growth can be achieved. Microsoft went public in 1986 and had its best years in the 1990's. It is a behemoth in decline now. It will never again be worth what is was at the end of the 1990's.

Also some investors will not be prudent and buy all 50 startups to gain the benefits of the new industry in the example above. They will put all their money into one company. Half of these punters will lose everything. If we start with 2500 punters, 1 should get the ten bagger twice. This lucky person would have seen a 1000-fold increase from his original investment, enough to qualify him as rich. At this point he has too much money to invest in one or even a few startups (he cannot get good terms for his money because he has more to invest than the business really needs). So he HAS to diversify. And by doing so he is more likely to keep his fortune.

As long as businesses want to grow, concentration of wealth will happen. Capitalism is this growth ethic. It is what separates a capitalist market economy from a non-capitalist market economy (i.e. what came before capitalism was invented).

Consider Ray Kroc (capitalist) and the MaCDonald Bros (entrepreneurs, but not capitalists). The brothers innovated a very successful restaurant model in 1948, which they had franchised to seven more stores by 1955, makaing themselves a decent amount of money. Ray Kroc then entered the picture and got them to make him a partner. He would now handle all the franchise deals (something the Bros were sick of doing). Kroc worked like a galley slave to open hundreds of new franchises, and grew more and more irritated with his partners who he saw as lazy and unambitious (i.e. they didn't seem to want to become billionaires).

And they didn't; Kroc bought them out for 2.7 million in 1962, leaving them to enjoy their wealth. Kroc never sold his business and settle down to enjoy his wealth. He continued to work on his vast corporate empire and a died leaving a huge fortune for his heirs and vast wealth for his stockholders. Were he a normal person, he would have taken the money and run like the McDonalds bros, but he was a capitalist.

Capitalists serve a useful societal function. Unfortunately, the vast concentrations of wealth they create as a side effect of their activities have pernicious effects. The simplest solution is to tax wealth at high rates and have stiff estate taxes to break down large fortunes. The capitalists will keep on doing what they do even if you heavily tax their excessive wealth. These guys make far more money than they can ever spend. Unlike most people, they aren't doing what they do for what the money can buy, but for the money as a way to keep score. If you tax them all the same, you don't change the score, and it won't have any impact on them.

High taxes WILL have an impact on the distant heirs of deceased capitalists (e.g. Richard Mellon Scaife). Someone who has inherited 10 or 20 million from their great grandfather's fortune has to manage it carefully so they can contine to enjoy their wealth without having to do any entrepreneurial stuff to create more. High taxes will make this harder.

Higher taxes will also have an impact on high earners, like CEOs and superstars in sports and entertainment. High taxes will mean it won't make sense to pay them as much as they earn now. This is why CEOs, top actors and star athletes made so much less 40 years ago than they do now. Despite this lower pay people still did these jobs and stiill did them well.

So there is a constituency of hundreds of thousands of heirs and high earners who stridently oppose higher tax brackets, capital gains taxes, and particularly the estate tax. It is both natural and expected for them to oppose this. But that doesn't mean we have to let them have their way.

Originally Posted by Mikebert

I also agree. Free market is more of a relative term. Some economies are more free than others. What I am saying is you do not get rid of concentrations of wealth by moving in the free direction.

To see this it is best to look at a proxy economy that is free. Let's use blogging. And lets us define blogoshere wealth as influence, as measured by number of readers.

It is very easy to set up a blog. It costs very little for somebody who already has internet connections as all of us do. So the blogosphere is very free in terms of who can participate; there are essentially no barriers to entry. There are many many blogs and so there is lots and lots of competition. And yet all that competition didn't prevent a handful of bloggers from becoming very influential. Some of this appears to reflect a first mover effect, the first blog to occuppy a niche and give readers something they want gets loyal readers that will stick with thje blog as long as the product continues to be perceived as good. That is, the first mover effect is lasting. The huge numbers of new political blogs that appearred after Daily Kos first became a major blog have not caused Kos readership to dwindle away as freely-choosing readers choose someone else.

And it's not like the blog aristocracy has prevented new bloggers from becoming successful, if they have something new to offer New sites such as 538 continue to appear and become successful.

In other words "blog fortunes" arise spontaneously out of what looks very much like a free market blogosphere.

You don't need to put blog fortunes in quotes and you don't have to convert influence & wealth... Blogs are a perfect sales platform, whether you're selling ad space like a newspaper or even better if you're reviewing & recommending products for affiliate programs.

Readership so directly corresponds to revenue that anyone who isn't monetizing their blog traffic is sitting on idle digital capital.

http://paulamooney.blogspot.com/2007...aries-and.html
Here's some outdated and horribly incomplete numbers. If I were listed I'd be somewhere around the middle of that chart - and I'm being lazy as hell. I write when I'm inspired and rarely even promote it.

Now, as far as the blog aristocracy, there have been some general trends toward new barriers to entry and even misinformation campaigns. Top domainers engage in arbitrage and potentially suffocate the market for memorable TLDs, but ICANN can also just invent new domain extensions as they see fit.

There may be a coming shortage in IP addresses, but even that will be fixed by re-writing the rules.

Anyway, its a great market to be involved in - its exactly the type of 'free market' I idealize so I enjoy seeing elements of the model spread to other sectors. There are some aspects of "unlimited resource" advantage, but internet wealth is still limited by the amount of $$$ spent online and/or the amount of value added.

Total sales are crashing, but people are making larger %s of their purchases online. There are even ways to make a bit less money without ever relying on actual sales (really just old-media advertising). Creative destruction eh?

Originally Posted by Mikebert

In a world without patents, there is no disclosure.

Assumption, and not a very reasonable one either. In a world without patents all you need to do to find out your competitors process is to hire one of their engineers.

Originally Posted by Mikebert

It is not so easy to copy a successful competitor. Ford was first to employ mass production methods in the auto industry. A decade later his competitors had emulated what Ford did, but they were not able to do it as well. This is why GM and Chrysler became marketing-based companies; they simply never became as good at building cars as Ford. In the 1980's Japanese car companies became the new Ford. They simply know how to build better cars than their competitors can so they can sell them for more.

All of these examples come from an industry where patents are a major part of the typical business model.

Originally Posted by Mikebert

Fall behind what?

Growth in the standard of living. If the economy gets a certain amount larger each year, so must your fortune, otherwise your share of the overall pie diminishes.

Originally Posted by Mikebert

No you don't. The average return provides more than enough to keep one's fortune intact and provide a good living. Where did you get this idea?

It does do so -- in the world we live in where all of the aggregating features of the economy are present alongside a capital market. You haven't separated out the variables, so you can't really defend your point this way. You're arguing that capital markets in and of themselves cause concentrations of wealth. Pointing to data from a world which we both agree contains policies that also cause concentrations of wealth doesn't make that point.

Originally Posted by Mikebert

change in R = E - D = retained earnings

The value of R is incremented each year by the quantity E -D. Now it so happens that the rate at which R grows over time is about 2%.

Wait, doesn't this assume that all of D is consumed? Isn't it likely that much of D becomes investment in new enterprises which would also contribute to the full value of R?

Originally Posted by Mikebert

The rate at which the stock market index rises (in real terms) over the long haul is also 2%.

Which makes sense, since stock indices track a basket of particular stocks and as a result most of the re-invested portion of D will not go into those firms.

Originally Posted by Mikebert

Instead companies usually reinvest retained earning in capital goods, aquisitions, and other sorts of capital purchases. That is, they buy real things or more R (in the case of aquisitions) and since the dollar value of real things rises due to inflation, the dollar value of R rises with inflation. Thus, when R is calculated, E and D are first put expressed in terms of constant dollars and then added to R. Thus, R is sort of a "real book value"

The rate of return on capital in business is then E/R, and it about 5% over the long term. See this article for more detail

http://www.safehaven.com/article-5912.htm

There are a couple of things to note about this (and the corresponding article).

1) One of your charts shows that dividend returns for major stocks are now less than capital accumulation. This provides the data I lacked in my previous post and shows that major corporations have increasingly moved toward re-investment and thus capital growth has centralized in particular firms.

2) The actual growth of the economy is closer to E. In order to be part of the idle rich, and maintain one's fortune you need to achieve E plus money to live on. R simply measures the portion of the economy that is aggregating in the firms in whichever stock index you're using.

Originally Posted by Mikebert

But the return from enterprise MUST necessarily be higher (on average) than the rate from lending.

Average real stock returns are about 5% for the post-war period and average real interest rates look to be about the same. This makes sense. If loans were cheaper, loan demand would increase thereby encouraging higher interest charges. If they were more expensive, loan demand would decrease, encouraging the opposite.

The long run tendency of any economy with a price system should be toward a uniform interest rate across the entire economy. Obviously, constant changes in the underlying fundamentals prevent this from ever being reached, and government policy can alter this and slow this adjustment.

Originally Posted by Mikebert

Otherwise nobody would engage in enterprise.

Only if a) all enterprise is funded by debt and b) the life of the average capital good is identical to the term of the loans used to purchase them. In practice, however, capital goods last longer than the loan used to create them, thus the owner of the capital good continues to generate returns after the loan is paid off.

Originally Posted by Mikebert

There are search engines.

Owned by companies that do a process of filtering, and whose algorithms are patented.

Originally Posted by Mikebert

The huge numbers of new political blogs that appearred after Daily Kos first became a major blog have not caused Kos readership to dwindle away as freely-choosing readers choose someone else.

Ah, but that's because Daily Kos isn't just Markos Moulitsas -- it's an entire community of bloggers and blog commenters. Past a certain point, a blog can only grow by adding to the number of people producing content. I.e. the internet adds to the number of capitalists, not the number of workers. Daily Kos today is most analogous to a worker co-op, a firm structure that is rare in the commercial economy. (Artificially rare, IMO.)

Originally Posted by Mikebert

In other words "blog fortunes" arise spontaneously out of what looks very much like a free market blogosphere.

They also collapse fairly quickly, too. FreeRepublic was once the king of conservative news commentary sites and now it has nowhere near the traffic it once did (the interface stagnated and Robinson acted like the king of his domain rather than the host of a party the way Kos did). The more free the environment the more effort required to maintain a position of prominence, and that will often mean bringing other people to help with that effort.

Originally Posted by Mikebert

It simply means that the retired/nonworking persons would be investors (i.e, owners of capital). Whether is was insurance of "mutual aid organizations" doesn't matter. The non working people would be receiving the fruits of other people's labor.

Yes, but going back to the original comment, which is that many versions of socialism still see increasing the stock of capital as the primary goal. Really, all of them do, since socialists desire prosperity and more capital equals more productivity and better goods. The crucial factor is not which one of the silly classical factors of production* is favored by an ideology but questions of ownership and control.


* Silly, because when you get right down to it, all of them are labor. Capital is just past labor that has been stored and Resources are just future labor yet to be done.