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Author Topic: Capital, savings, class and Marx
Stephen Gordon
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posted 22 June 2004 01:41 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
A couple of times now, I've intervened on discussions about how to define classes to ask how pension funds and pensioners fit in. I keep hoping that someone will click onto the link between savings and capital, but it hasn't happened yet. Hence, this thread.

Some things that should be kept in mind:

- Investment comes from savings.
- Capital is accumulated investment, or, equivalently, accumulated savings.
- Profit (interest) is the part of income that is allocated to the owners of capital.

In Marx' original model, there is a clean distinction between capitalists and workers because it makes the assumption that workers are paid subsistence wages. Since workers who are living on subsistence wages cannot save, they cannot accumulate capital for themselves. Only capitalists will have incomes high enough to make saving possible, so all capital accumulation is done by people who own capital already.

What makes the distinction important is that it defines the 'objective interests' for each class. Aside from the minimal condition of keeping their workers alive (the subsistence wage), capitalists see no reason to increase the workers' share of output. And as for the workers, they see no reason to leave anything for capitalists.

But suppose now that for some reason (at this point it doesn't really matter why) workers are able to save for their retirement.

Here's a little numerical example, where I suppose that a worker starts her career earning $25,000 at age 25, gets a 1% increase each year after that, and retires at age 65 with an income of $38,000. During her working life, she contributes 8% of her income to a pension fund. She earns a 5% return on her savings. After she retires, her pension fund pays her $28,000 a year - 75% of her maximum salary - until she dies at the age of 80. The example has been calibrated such that when she dies, her assets have been run down to zero. (I'm guessing that this is how pension funds calibrate things. The unused contributions of those who die young would be used to finance the pensions of those who live longer.)

When she retires, her assets will total almost $300,000, of which only about one-third comes from her original contributions. The rest is accumulated interest. And she'll continue to accumulate interest during retirement. By the time she dies, the pension fund will have paid out over $400,000, of which less than 25% would have come from her original contributions.

So what are the objective interests of a 25-year-old person? As a worker, she'd like to strip the capitalist clean. But as a future capitalist, she sees that there might be compelling reasons to preserve a system that will allow her to earn a 300% cumulative return on her savings that can be used to finance her retirement.

One of the most compelling features of Marx' model was that the worker-capitalist distinction could be used to make predictions about how they would behave: workers would try to overthrow capitalists, and capitalists would try to resist. But if savings are possible, workers will also have an incentive to preserve capitalism.

If a person can be a both worker and a capitalist during her lifetime, without any change in her 'objective interests' or in how she behaves, the class distinction becomes an almost meaningless notion.

[ 22 June 2004: Message edited by: Oliver Cromwell ]


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Mr. Magoo
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posted 22 June 2004 01:49 PM      Profile for Mr. Magoo   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
True, but "No war but Class War" looks nifty on a sign.
From: ø¤°`°¤ø,¸_¸,ø¤°`°¤ø,¸_¸,ø¤°°¤ø,¸_¸,ø¤°°¤ø, | Registered: Dec 2002  |  IP: Logged
robbie_dee
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posted 22 June 2004 02:29 PM      Profile for robbie_dee     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
One of the most compelling features of Marx' model was that the worker-capitalist distinction could be used to make predictions about how they would behave: workers would try to overthrow capitalists, and capitalists would try to resist. But if savings are possible, workers will also have an incentive to preserve capitalism.

If a person can be a both worker and a capitalist during her lifetime, without any change in her 'objective interests' or in how she behaves, the class distinction becomes an almost meaningless notion.


No. To suggest that someone is "both a worker and a capitalist" simply because they attempt to save a small nest-egg, or for that matter, participate in a pension plan, is facile and misleading.

To the extent to which "retirement" is something actually available to people, there are a variety of sources they can draw upon to pay for it. Private savings is one, and you've nicely detailed a model of it above. Family support and public charity (particularly when one is no longer capable of working) are another. Both of these were what were generally available at the time Marx wrote. And at that time, "retirement" for most people did not exist. Living to an advanced age often meant destitution, because few working people could possibly have much in terms of savings, and charity was minimal and tied to a person's absolute inability to work. The consequence of that whole "subsistence wage" thing was that most people therefor worked til they dropped.

The blatant inadequacy of private savings and public charity to provide for most people who lived to an advanced age prompted the invention of something new - the pension. It was with the emergence of widespread pension programs that "retirement" finally became something that was actually available to a large number of people.

If we want to discuss capital, savings, class and Marx in a way that's at all relevant to what our economy actually looks like today, pensions - both public and private - are the institution we really need to talk about. You start out your post above stating your interest in pensions and pensioners, but then you procede to conflate organized, usually collective pension plans with disaggregated, individualized private savings. Both are a form of savings and investment, but differ considerably in matters of function and control. Pension plans aggregate capital from individual savings, forced or voluntary. As such, they acquire considerable capital market power. At the same time, they separate ownership of those savings, or more often, ownership of an entitlement to future payments that is somewhat loosely tied to those savings, from actual control over how those savings are invested as capital in the interim.

Let me flesh this out with a bit more history. The first major pension schemes developed were private ones. Some craft unions funded modest benefits out of their treasury, for both aged workers and (more commonly) the sick or injured. Some larger corporations, particularly the railroads, also began offering retirement benefits. These tended to be construed more as a gratuity for long, loyal service, than as an entitlement as part of the wage-bargain. Nonetheless, they laid the groundwork for the modern private pension system.

It is true that the second type of pension did play a role in binding workers to the survival of the capitalist state. But this had little to do with their concern for the investment performance of their "forced savings" through the pension system. Rather, it was because it bound them to their employer as their primary source of sustenance in case of illness, injury or the (mis?)fortune of living to an advanced age. This is one element of a 20th century phenomenon described as "welfare capitalism" where first employers, and then also the state, offered a significant segment of the working class a set of social benefits in exchange for their not starting a revolution. Part of "welfare capitalism" included paying workers a wages significantly greater than the bare minimum necessary for them to survive another day. Many workers were even able to build a nest egg of private savings from these higher wages. But the scope of this increased monetary income, and any private savings (and investment) that flowed from it, pales in comparison to the substantial nonwage benefits system erected over that same time period.

In the early part of the 20th century, neither the employer system nor the union system were ever that comprehensive. Both came under tremendous strain during the Depression. That's when the state got involved. Once again, however, the new public pension schemes that emerged were conceived of less as a savings/investment vehicle than they were as a social welfare program. The pay as you go model of CPP in Canada and Social Security in the US is explicitly one of intergenerational transfer (one generation of workers pays for a different generation of retirees) rather than individually-tied full-funding. Does this also give workers a vested interest in the survival of the capitalist state? Yes, but only because it is a source of income, not because they really benefit from the deeper relations of power and politics on the investment side.

Now let's bring an element of class struggle back into focus here. Control over pensions was a subject of considerable conflict between unions, employers and the state, particularly in the years following WWII. Generally, that struggle was over the size of the benefit awarded and the proportion of workers eligible, rather than the potential investment of funds used to provide that benefit. If anything, the unions favored that, as much as possible, retirement benefits be paid for by the state, financed through the tax system. To the extent that the benefits would come from the employer, they preferred that pension funds be invested in low-yield but safe instruments like government bonds, which incidentally would also offer a pool of capital to the government to help fund other welfare state provisions they were lobbying for.

Some unions, like the UMWA, fought for trusteeship of their employment-based pension funds in order to gain control over the capital and deploy it directly for their political or organizational ends. In the US, this scared the hell out of the capitalists and their allies in Congress, and prompted the passage of the Taft-Hartley Act in part to stop them. Nonetheless, in the last 25 years unions on both sides of the border have taken a renewed interest in how their pension plans are invested and have begun bargaining more agressively for control, in part to set a different political agenda for that investment. Unions and social activists have also taken interest in the extent to which public pensions are funded through investment rather than taxation, and seeking to set more explicitly political agendas for that investment. Does this make them capitalists? Maybe. But it is a very different vision of capitalism, based in part on democratic worker ownership of the means of production through the pension fund.

At the same time, though, today the system of government-provided social insurance pensions, supplemented by private employer-provided defined benefit plans, is itself under attack. In its place, defined contribution / individual account style retirement plans are being peddled. But this is more about redistributing investment risk (onto pensioners) than it is about extending any real control over capital. The extent to which workers have "choice" it is to buy stock in their own employer (which mainly just helps entrench current management) or between pre-packaged instruments put together by the financial services industry. Whoopie. The fact is, most workers have neither the time, nor the expertise, nor the size of an initial investment necessary to really "play the market" with any degree of success. IMO, they're the ones getting played.

[ 22 June 2004: Message edited by: robbie_dee ]

[ 22 June 2004: Message edited by: robbie_dee ]


From: Iron City | Registered: Apr 2001  |  IP: Logged
Stephen Gordon
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posted 22 June 2004 07:02 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
I would agree with much of this. Personally, I think the world would be a much better place if CEOs shared union presidents’ sensibilities about just who was paying their salaries and why.

But this is more an argument about financial market reform – one that would not be out of place in the pages of The Economist, by the way - than for the abolition of capitalism.

And it's not really an argument about class, is it? If a garage mechanic learns the principles of portfolio management and applies them correctly, does he change classes?


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robbie_dee
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posted 22 June 2004 07:25 PM      Profile for robbie_dee     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
If a garage mechanic learns the principles of portfolio management and applies them correctly, does he change classes?

Only if he has the size of portfolio to match. What I am suggesting moves somewhat towards a wealth-based definition of class, rather than a strictly owner vs. laborer divide. But not completely. There's a big difference between owning a share of General Motors, and owning a controlling interest in General People with lots of money, and their hired-gun top managers (who usually also have a lot of money), occupy a different class than somebody who owns a $200,000 home, or has $400,000 in his 401k.

[ 22 June 2004: Message edited by: robbie_dee ]


From: Iron City | Registered: Apr 2001  |  IP: Logged
Stephen Gordon
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Babbler # 4600

posted 22 June 2004 07:40 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
It's probably useful to take into account the source of those large fortunes. Bill Gates is richest man in the world, but I don't get the impression that most people (that is, most people outside the IT community) begrudge him his fortune. Although he was certainly lucky, it's not as if he didn't do any work.

I'm much less sanguine about inherited fortunes, though; could do with fewer Paris Hiltons. My preferred redistribution instrument would be inheritance taxes.


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robbie_dee
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posted 22 June 2004 08:03 PM      Profile for robbie_dee     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
But this is more an argument about financial market reform – one that would not be out of place in the pages of The Economist, by the way - than for the abolition of capitalism.

Maybe today it would be published in the Economist, but not so five years ago when people like Dennis Kozlowski and Ken Lay were considered captains of industry rather than crooks. I think the financial crises of the last couple of years caught the business press reeling, but I don't doubt they'll recover their exuberence soon. I believe the incentive to cheat is inherent in the system and these moments of contrition and/or efforts at reform are fleeting, although not always entirely unproductive.

You bring up Bill Gates as an example. I don't doubt he worked hard. I don't doubt he was also lucky. I don't doubt that there are many others out there, no matter how hard they work, could never find themselves in Bill Gates' position. As to whether others begrudge him his fortune, I don't know - what about the owners of Netscape? The DOJ Antitrust division? Those toiling for him today in Silicon Valley sweatshops?

Gates may have got his first break through luck and/or merit, but that's not all that's kept him at the top.

[ 22 June 2004: Message edited by: robbie_dee ]


From: Iron City | Registered: Apr 2001  |  IP: Logged

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