So today on Forbes, Jeffrey Dorfman, a professor of economics at The University of Georgia, who touts himself as a "free market, libertarian" presents a quite false Sophie's choice description of labor vs capital, which plays well to the misinformed masses. Such labor vs capital silliness is is standard fare for economists.
Dorfman argues that Americans don't have high-paying jobs anymore because 1) automation is killing the middle class, and 2) lower interest rates causes a substitution of capital for labor and thus the cause for automation over workers.
Dorfman says that Americans are living in a "dumbbell economy, where most of the jobs are at either the lower or upper end of the income spectrum, with few jobs left in the middle class." Dorfman started his argument that capital in the form of automation is killing jobs and a cause of low pay and that more capital makes for fewer "middle class" jobs. In short, Dorfman is a pro-capitalist arguing against capital!
Because Dorfman is an academic economist, he is fooled by economics. As I show in Why is the Economy So Horrible? Because Academia Economics is Fake, Dorfman's false beliefs fail to surprise me.
Before the industrial era, almost all Americans were poor, barely living above bare subsistence poverty. Almost all were farmers who traded little.
Farmers had little capital. There were hand tools and maybe a few plow horses.
The few "wealthy" Americans were those involved in shipping. Ships of shipping, of course, are capital.
Under the automation of industrialism, true wages or "real" wages if said by economists rose and rose substantially. As Americans added machinery, which, of course, is capital, workers' buying power as expressed in true pay rose.
In effort to lift his specious "dumbbell" argument, Dorfman points to yard workers, retail shelves stockers, neurosurgeons and movie stars as workers whose work can't be automated while work "rules-based" work as accountants, travel agents, bank tellers, can have their work automated with computers. Yet, the dumbbells Dorfman lifts are quite like the ones President Obama has been seen lifting. Such is for the weak.
Academician economists like Dorfman claim that wages should fall when cap spending rises and wages should rise when cap spending fall.
To economists, wages vs capital is the Sophie's Choice of economics! In short, economists like Dorfman argue in favor of Luddites (and thus Socialists)!
Academician economists fail to see reality. They think only with their hollow theories, which fail to match real-world reality.
Wages and capital are interlinked. Wages are a consequence of producing wealth under efficiency. The more wealth produced and gained by each worker, the higher wages can rise.
High capital spending causes high wages. Wages rise when capital spending per worker rises.
Jobs that fetch low wages are such jobs with little capital needed to amplify the work. Yet, jobs that fetch high wages are those that take much capital to do the work.
The cap spend for yard work is tiny. Lawnmowers and leaf blowers are cheap. Many lawns can be mowed and cleaned in a day by using no-skill workers and super cheap capital.
The cap spend for neurosurgeons is much. Surgical rooms are filled with an abundance of one-of-a-kind equipment and slew of pricey technicians. A surgeon can operate only on one brain a day, maybe two.
The cap spend for movie stars is much. Movies require pricey cameras, pricey sets, pricey editing machines, and slew of pricey technicians.
The cap spend for accountants, travel agents, bank tellers is low. Computers are cheap. Pushing data through fiber optics is even cheaper.
Only in proportion as labor becomes pricier that it becomes profitable to use cheaper methods (capital) to amplify labor. Capital spending arises because of likely increasing returns to capital.
THE CHART SOCIALISTS AND POLITICIANS DON'T WANT YOU TO SEE AND THE CHART THAT SHOWS ECONOMISTS DON'T UNDERSTAND COMMERCIAL LIFE
Here, you can see, true wages and true capital spending flow in lockstep. True wages have been falling for years in lockstep with true capital spending per prime age worker, those between 25 and 54.
During the Clinton Good Times, wages rose. Wages fell thereafter. Workers enjoyed a small return to growing true wages during the final inflation of the Greenspan-Bernanke Credit Bubble, the largest bubble in American history.
In general, true prices have been falling for decades. And as a wage is a price, so too have true wages been falling. In Prices have been Falling for Years! Inflation? Major Deflation has been Underway Since 2007. So Why Does Life Seem Harder? I show you charts of prices for all kinds of goods falling and for years
The Dorfman claim that entrepreneur-adventurers ask themselves "Should they hire people or should they automate?" never has reflected commercial reality. The true question is this: Is there a dearth of workers or is there an abundance of workers?
The long-run trend in capital spending is downward as calculated in True Dollars™. And subsequently, wages in True Dollars have been falling.
This should come as no surprise as the return to capital is the source of wages. Where there is no capital spending, there can be no wages. Where there is low capital spending per capita, there are low wages. Where there is high capital spending per capita, there are high wages.
In You Are Going to Wind Up Working in a Gas Station. Capitalism is Dying, Americans, I show you a table of true wages for various occupations since 2000. You can see that wages rose during inflation of the massive Greenspan-Bernanke credit bubble and then fell substantially during deflation of that bubble precisely because more credit led to more capital spend and less credit to less capital spend.
All trade is about trading the right of ownership (property) in stuff, completed work or future payments in purchases and sales for profit. All of the names mankind uses for property (right of ownership) — capital, wealth, asset, collateral, stock — are names of property in various states — production, trade, estimation, deals of credit, potential sales.
Heed my dictum. Labor makes property. Capital makes property efficiently.
All trade gets governed by one true, infrangible law and one axiom — the Law of Prices and the Axiom of Profit. The Law of Prices holds the winning bids of purchase and sale in the face of what is on offer set the price. The Axiom of Profit holds the sum of sales must at least equal the cost of production or the producer goes to ruin.
As I explain in Poverty and Envy, there is profit and loss for everything. We calculate profit or loss by subtracting outlays from income. No one works at a loss, whether wages less living expenses for workers or income less outlays for firms. In the absence of intervention, some things would not get sold for long as the sum of sales could not yield a profit.
Entrepreneur-adventurers are smart laborers. Entrepreneur-adventurers arise because of capital.
Without capital, there is little reason to organize workers. Without capital, everyone lives at bare subsistence.
All producers get constrained by the great Axiom of Profit. Capital becomes a factor in production only if in using capital, workers can produce property in stock or in work cheaper than by producing property in those things without capital.
The capitalist buys a share of the profits from the entrepreneur-adventurer by selling cash and credit in a purchase and sale. Such a trade can arise only if the entrepreneur-adventurer can enlarge profits to cover his cost of capital and enlarge income to cover his cost of labor. In short, the permanent use of capital arises only under increasing returns whereby application of capital yields a proportional increase in output.
Little variation exists in the muscularity among individuals. Thus, little variation arises in the output owing to hand labor alone. However, with capital, variation is manifold according to various application of technology leading to degrees of efficiency.
Significant production of property to become wealth requires capital. As proportion of wealth produced by labor falls, the actual amount the laborer gets rises. More wealth produced leads to a higher living standard for those producing it. In short, capital leads to better living.
Never are workers robbed by capital. Workers gain by capital. This is so not because capitalists are generous, but because entrepreneur-adventurers only can use capital under increasing returns.
Because of capital, workers can consume more than they could ever produce absent capital. It is owing to capital that all material progress arises. Revivalist Preachers of Born-Again Socialism like Thomas Piketty simply don't understand capitalism and thus reality.
For more on this, check out Capitalism. Because without it, You Would be Living as a Bare Subsistence Savage and Elites Seek to Punish Workers with a Consumption Tax, or a Tax on Workers' Wealth.
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