by Louis O. Kelso
Potential Plenty in Poverty’s Midst
The outstanding paradox of industrial societies today — the shadow side from their very beginning — is that they are eminently efficient in building the industrial power to produce wealth but singularly deficient in building the economic power to consume it. Karl Marx and Friedrich Engels described this “inherent seed of destruction” in their Communist Manifesto of 1848, and predicted that it would eventually spell the downfall of capitalism. It is not clear that history has proved their prophecy wrong. Capitalism, instead of destroying itself entirely, has changed. While it has undergone great erosion in its private property structure — always at great social cost in terms of strife and strain — the original structural weakness Marx and Engels noted still exists. Our economy — and all other free market industrial economies — is still flawed by a curious imbalance between industrial power to produce and economic power to consume.
The poverty which haunts our economy now is the historic defect in modern guise. In his first annual economic report as president, Lyndon B. Johnson reported to Congress in January on the subject of “wasting potential.” He said “. . . men, machines and materials that lie idle today could readily add about $30 billion more to our $600 billion gross national product.”
California’s Governor Edmund Brown, in his first economic report, transmitted to the Legislature in March of this year cited these facts about one of the richest states in the Union:
“Increasing numbers of Californians do not share in the fruits of our economic abundance. Hard core groups of the unemployed and the poverty-stricken must walk in the shadows of our ever-higher economic plateaus.
“More than 6.5 million Californians in families of four or larger have a ‘bare subsistence’ annual income of less that $4,000, according to some estimates, and half this number struggle with a ‘poverty’ income of less than $2,000.
“Our challenging task is to resolve the ancient paradox of poverty and plenty; unemployment amid general prosperity; idleness amid the highest levels of production in our history.”
Such pronouncements are commonplace now; yet despite them, our political leaders understate the real paradox. Poverty should not be measured in terms of comparative incomes, or of unused plant capacity, or of unused manpower. It should be measured in terms of (1) the capacity of our economy physically to produce more goods and services, and(2) our unsatisfied economic needs.
Poverty should be measured in terms of the goods and services our economy could turn out if we properly organized our know-how, resources and manpower to produce the “welfare state” in the best sense of the term, i.e., a state where every household can produce and enjoy affluence. This kind of state is the sort that men of good will fervently desire to live in, although as yet the world has not enough imagination to realize that the good life is possible for more than a privileged few.
No one knows the limits of our industrial power to produce goods and services. Certainly we have the resources, know-how and manpower to quickly double the output of any industry we wish to expand. Once doubled, we could double the capacity again, and then again. We do not know how far we could expand our output. We do know that we are physically able to produce a high level of affluence for all of our people. There is no lack of physical resources, know-how or manpower. The limitations are institutional. By unleashing our productive potential the poverty we could eliminate would not be merely the poverty of the 20 per cent referred to by President Johnson in his “war on poverty” program, or the 30 per cent referred to by Leon Keyserling. It would be the poverty of the 90 per cent who have needs that not only could we satisfy but which we would delight in satisfying. For nothing would give our professional and managerial talents more pleasure than a chance to exercise their ingenuity and skills in the exciting task of doubling and tripling our physical capacity to produce the goods and services so sorely needed by the majority of their countrymen.
Such a program would be entirely feasible ifin the course of increasing our output of goods and services we could simultaneously create out of the production process itselfthe economic power of people having unsatisfied needs to buy and pay for what they desire to consume.
This is the point the anti-poverty program entirely misses: poverty in a private property economy is the result of low productiveness. To empower those whose incomes are low to enjoy affluence, means must be found to raise their productiveness.
The Two Factors of Production
There are only two ways for a human being to be economically productive, because there are only two factors which produce wealth. One is the human factor, which we call labor. This includes manual workers, trained workers, skilled workers, executives, professional workers and entrepreneurs — in short, all workers, whether they work with brain power or muscle power. The other is the non-human factor, which we call capital. It includes everything ownable that is external to man, which is engaged, under prevailing business methods, in the production of goods and services for market.
Each of these two factors, labor and capital, produce wealth in exactly the same sense — ethically, politically and economically. The fact that capital requires the cooperation of labor is irrelevant. Labor can also produce little or nothing in an industrial economy without the cooperation of capital.
From the standpoint of the owners of capital and its good managers, labor is simply a cost. Therefore it is inconsistent to believe that the purpose of new capital formation, as we often hear from misguided industrialists, is to provide employment. To the extent that it actually does this — from the standpoint of the capital owners and management — employment is an unfortunate side effect.
A private property economy — defined in terms of its distribution principle — is one in which wealth is distributed to those who produce it in proportion to their relative contributions to production. It follows that a private property economy can do little for its members who do not produce.
This fact is now being dramatically demonstrated to the nation by the exodus of workers from automated industries; those who are economically productive only through their labor power naturally fare badly when the economy no longer requires that labor power. Nor can a private property economy justify distributing wealth to those who have contributed nothing to its production.
Of course many economists assert that it is impossible to tell what the relative contributions of capital and labor are to any industrial process. When I hear this objection raised from time to time, I reply that I am aware of this difficulty and also of the fact that you must be an economistto be so confused. The income statements they prepare set forth these relative contributions, if we would only read them carefully.
True, we can force accountants to distort the truth in order to conform to the distorted economic mythology of a world that does not yet understand the nature of a private property economy. We can hang $2 to $20 worth of welfare costs onto every actual $l of labor cost and call the whole amount “labor contribution” even though the welfare distribution adds nothing to the value of the labor input.
We can impose a corporate income tax and refuse to allow our income tax statements to reflect that this is a tax strictly on the wealth produced by capital. That is, we can understate by more than fifty per cent from by this means alone the productive output of capital.
We can, by ill-conceived and deceptive tax laws, force our financial statements to falsify real life depreciation and special allowances to “create employment” while actually eliminating it, and to give capital owners an unform of inflation insurance.
Although accountants cannot expose these social distortions unless their clients are willing to face the underlying realities, I repeat that they have no difficulty in distinguishing capital and labor contributions in income statements.
The value — and the only true value — of a productive contribution, whether it is the wages of a worker or the return on a capital investment, is value arrived at through the interaction of supply and demand under reasonably free competition. Of course, a moment’s reflection will remind the reader that we by no means have an entirely free market economy. If, for example, labor were competitively evaluated — if the employed really competed on the basis of price and quality with the unemployed — wages would be but a fraction of their current levels.
The Logic of Technology
The function of technology is to “save” labor, not to make more labor work. In other words, technology shifts the burden of production from the human factor to the non-human factor. Automation merely accelerates this process; its function is to save labor wholesale, so to speak.
Automation eradicates toil on a broad front; for each new skill “created” by the increasing sophistication of capital instruments, other skills — sometimes many other skills — are made worthless. This is entirely within the logic of technology, however inconvenient to the people concerned.
Automation dramatizes a principle which was relatively inconspicuous when labor played a larger role in producing wealth. This principle is that labor, competitively evaluated, produces subsistence. Affluence is the product not of labor but of capital. Instead of increasing, labor’s productivity has actually been diminishing since the beginning of the Industrial Revolution.
Thus it is apparent that our efforts to make people more productive through “creating jobs” is directly opposed to the realities of technology and the increasing surpluses of workers. There is only one other logical alternative: making it possible for people to acquire ownership of the other factor of production, the factor which produces affluence, i.e., capital. Not only is this solution in harmony with the realities of an age where production is increasingly automated, it is the logical and practical way to cure capitalism’s fatal flaw — the dark paradox of poverty in the midst of what we myopically call plenty.
The Production-Consumption Equation
You will remember our assertion that we could easily double, triple and quadruple our capacity to produce goods and services ifwe could simultaneously create out of the production process itselfthe economic power of those having unsatisfied needs to buy and pay for what they reasonably want to consume. Put into everyday language, this simply means that we could eliminate poverty if the purchasing power generated from production could be translated into consumer purchasing power.
This process is not to be confused with the crude attempts of government and labor unions to forcibly redistribute income, through progressive taxation, coercive bargaining, profit “sharing,” fringe benefits, etc.
The aim of these expedientsis, of course, to get purchasing power into the pockets of the lesseconomically productive. The objective is well-intended but the meansare entirely inconsistent with a private property society.
Private property in a factor of production, whether human or non-human, is the right of the owner to receive all of the wealth (net income) that the thing owned produces. This is a functional definition of private property in the economic sense. Unless the owner of labor power, or the owner of an equity capital interest, has the right to receive all the wealth produced by the thing owned, he does not have his full right of private property. The laborer would have every reason to feel ill-used if the wealth produced by his labor were withheld from him; to the degree it was withheld, he would be a victim of pilferage. That the 52 per cent federal corporate income tax and the 4 per cent state tax levied solely on the wealth produced by capital is equally an invasion of private property should be similarly recognized.
To use an analogy, the right of private property functions in the production-distribution area of the economic system much like wiring functions in an electric system; it connects input with out-take. And in a free market economy, these quantities are equal.
Cooperatives in a Private Property Economy
Keeping in mind the main points in the foregoing discussion — the declining productivity of the human factor of production, the rising productivity of the non-human factor, our virtually unlimited physical capacity to produce both the intermediate capital goods and the ultimate consumer goods and services which the majority of our citizens need, our failure to utilize this enormous industrial potential because the economic productiveness of the great majority of people is too low to enable them to buy and pay for what they would like to consume, and last, but certainly not least, the nature of a private property economy — let us draw some conclusions relevant to cooperatives.
First, it should be mentioned that the remarks which follow mainly apply to cooperatives engaged in activities in which fixed assets (the non-human factor of production) play an important and increasing role. They do not, for example, have the same implications for marketing cooperatives in which management and financial working capital are the principal ingredients.
If we remember that the non-human factor of production is the real source of affluence, the success of the “producer” cooperative will increasingly depend upon its engaging in activities in which the non-human factor plays a major role.
The analysis alone makes it clear that the kind of business corporation required by a private property economy is one which will distribute to its shareholders virtually all its net income each year, after depreciation and operating reserves only, and with no retention for new capital formation.
The cooperative is precisely this kind of corporation. Contractual or legal limitations imposed upon the standard business corporation requiring it to pay out all of its net income, and freeing it from the corporate income tax, or what is the same thing, giving it a tax deduction for dividends paid out of net income, can bring the business corporation more closely into line with the cooperative, thus enabling it to cease being the main contributor to the paradox of poverty amidst plenty.
Many of the historically important attributes of the cooperative are merelyhistorical. I do not believe they are necessary functional attributes of the cooperative which can take its maximum position in the private property welfare economy of tomorrow.
Some of these incidental characteristics are: thinking of the cooperative as a “saving” mechanism rather than a “profit making” mechanism; limiting stockholdings or membership to those who patronize or use the services of the cooperative; limiting participation on any theory other than one aimed at preventing the concentration of ownership of productive power; prohibiting voting power in proportion to equity interest; tying dividends or refunds to patronage rather than to equity interest when the dividend really represents the wealth produced by capital; aversion to permanent equity interests of cooperative stockholders or members, etc.
Although competitors are quick to hurl socialistic and communistic epithets at cooperatives, it is my opinion that the cooperative is the most private-property oriented of all business corporations. If modified to conform to the implicit requirements of a private property economy — that is, if the cooperative made a determined effort to build productive power through private ownership of capital — its opportunities for broader application and expansion are virtually unlimited.
While the idea of limiting the concentration of ownership of the cooperative is sound and unassailable, methods other than limiting its members or stockholders to patrons in many cases would be desirable.
Thus visualized, the cooperative would become the combined effort of private owners of the two factors of production to produce goods or services and to fully distribute the resulting income in accordance with relative contributions to the productive process. If the changes I recommended for business corporations were also made, obviously the difference between the cooperative and the business corporation would be greatly diminished. Both types of enterprise would be building the power to consume simultaneously with the power to produce, thus supplying the logical piece which is missing in traditional capitalism.
Finally, let me note that there is one area in which the cooperative has already introduced important innovations which will have to be followed by the business corporation if it too is to be fully effective in generating the economic power to consume the goods and services produced within the framework of a private property economy.
This area is the financing of new capital formation. Methods must be found which will make it possible for those without capital to purchase it, pay for it out of the wealth it produces, and thereafter to employ it in their lives. In other words, the techniques would make it possible to finance new capital formation from future savings instead of out of past savings. Cooperatives like Valley Nitrogen Producers at Helm, California — one of the principal producers of agricultural chemicals in the West — have made great strides in this direction. The business corporation has yet to take even the first step. But this is the direction in whichboth must move if we are going to be able to accept the affluence, freedom and leisure which technology is offering to bestow upon us all.
— Originally published in THE COOPERATIVE ACCOUNTANT published by the National Society of Accountants for Cooperatives, Winter, 1964, Vol. XVII, No. 4
