Chapter 15. The Economic Multiplier, Accumulating Capital through Capitalizing Values of Externally Produced Wealth
This is a chapter from the book, Economic Democracy; The Political Struggle for the 21st Century. Visit that link for more information about the book.
Although social-control-paradigms have always claimed otherwise, people throughout the world can, on the average, be trained to be equally-productive. All it takes is an education, training, and the opportunity. If adequate capital were equally distributed throughout the world, the reality that picking grapes is just as important to society as building automobiles would quickly become apparent.
The difference in skills hardly qualifies for the difference in pay. There are many grape pickers and other low-paid workers who are just as qualified as many production, construction, and transportation workers. Though not true of all, many high-paid workers learned on the job the same way those low-paid workers learned their skills and the work of a large share of well-paid labor is repetitious, just as simple, yet not as hard or dirty as the work of lower-paid labor.
Look at the difference in capital accumulation through the discrepancy in pay as outlined in Chapter One: A 10-times pay differential when trading between equally-productive labor nations results in a wealth accumulation advantage of 100-to-1, to be paid twice as much for equally-productive work is to accumulate four-times as much wealth in trades, and being paid 30% greater when trading will still accumulate almost twice as much wealth.
But the defeated, dependent, world’s loss of wealth is even greater than the above example. Forcing these defeated dependent societies to import a product they do not need, or which they could produce themselves if permitted the requisite technology and capital, is a sale 100% overvalued. Actually, as those societies are also being denied the benefits of the multiple use of this money (the economic multiplier) as it moves through the economy and creates more commerce, this unneeded product is, on balance, several hundred percent overvalued.
For example, if a society spends $100 to manufacture a product within its borders, the money that is used to pay for materials, labor, and other costs moves through the economy as each recipient spends it. Due to this multiplier effect, $100 worth of primary production can add several hundred dollars to the Gross Domestic Product (GDP) of that country.a If money is spent in another country, circulation of that money, and thus the wealth generated, is within that exporting country.
If imports and exports are equal in labor input and produced by equally-paid and equally-productive labor, the trades will be equal. But they are not; they are unequal to the extreme. To understand that, we must understand not only multiplication of wealth through the horizontal flow of money (the economic multiplier) but the vertical expansion of wealth in an industrial economy as a society becomes wealthy through increased efficiencies of technology, higher value production, and capitalizing those values.
Friedrich List’s Fundamental Thesis
The fundamental thesis of Friedrich List is: “Commerce emanates from manufactures and agriculture, and no nation which has not brought within its own borders both those main branches of production to a high state of development can attain … any considerable amount of internal and external commerce.”1 Further challenging laissez faire, List points out that governments should support and protect industry and this will utilize unused labor and resources to an ever higher level of production. The new manufacturing industries utilize otherwise wasted agriculture products and natural resources producing valuable products to be marketed in trade for other products, preferably cheap natural resource commodities, to also be processed into finished manufactured goods.
List points out that such importation of natural resources and local manufacturing, as a national policy, would create a wealthy and powerful nation selling only what was surplus above the needs of the population while nations allotted the role of providing those unprocessed natural resources and purchasing back their manufactured products will produce no surplus and will be poor.2 Adam Smith’s analysis is worth quoting a second time:
A small quantity of manufactured produce purchases a great quantity of rude produce. A trading and manufacturing country, therefore, naturally purchases with a small part of its manufactured produce a great part of the rude produce of other countries; while, on the contrary, a country without trade and manufactures is generally obliged to purchase, at the expense of a great part of its rude produce, a very small part of the manufactured produce of other countries. The one exports what can subsist and accommodate but a very few, and imports the subsistence and accommodation of a great number. The other exports the accommodation and subsistence of a great number, and imports that of a very few only. The inhabitants of the one must always enjoy a much greater quantity of subsistence than what their own lands, in the actual state of their cultivation, could afford. The inhabitants of the other must always enjoy a much smaller quantity…. Few countries … produce much more rude produce than what is sufficient for the subsistence of their own inhabitants. To send abroad any great quantity of it, therefore, would be to send abroad a part of the necessary subsistence of the people. It is otherwise with the exportation of manufactures. The maintenance of the people employed in them is kept at home, and only the surplus part of their work is exported…. The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began to take place which had never been thought of before, and which should naturally have proved as advantageous to the new, as it certainly did to the old continent. The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several [most] of those unfortunate countries.3
Friedrich List’s thesis restructured as an international policy for all nations to have an equal share (which the highly respected President Franklin D. Roosevelt also suggested and President Kennedy hinted at just before his assassination), would create a peaceful and wealthy world. One hundred dollars paid to a community for what were once wasted resources and labor will create, through the economic multiplier, possibly $350 worth of economic activity within a community and an even more dollars in capitalized values.
Gaining Wealth through the Vertical Building of Industrial Capital and the Horizontal Flow of Money
That $100 worth of formerly exported raw material can be processed ever finer and manufactured into ever more complicated products and services until the costs of the original raw materials are barely detectable in the product or service value (high-value-added products). Money spent building new industry to produce new products or services of continually higher values are continually spent horizontally for products and services that continually increase the economic activity of a newly industrializing nation. The high price received for that high value added product circulates within the economy and multiplies the economy to an ever-higher level.
It requires the proper balance of industry, resources, and agriculture to maintain those increased production values that in turn maintain land, industry, store, office, and home values. The natural resources necessary to maintain the economic balance of industrial nations are primarily in the undeveloped, impoverished, world. Thus the centuries-long effort to control the countryside and maintain the flow of resources to developed world industries at a fraction of its value.
The industrial/agricultural ratio of a nation or region can vary greatly depending on the abundance or lack of natural resources. The scarce resources in the wealthy highly-industrialized Japan and abundant resources in the poor nations cheaply providing Japan’s factories with their raw materials dramatically outlines the true cause of wealth in Japan and poverty in those who provide those resources. The poor nations provide the resources and purchase manufactured products. Japan buys the low-value resources and sells high-value manufactured products.
Because the developing world has little industry to utilize their labor and resources to produce high-value consumer products and they are paid a low price for their labor and resources, there is almost no vertical industrialization, little horizontal movement of money, and thus little wealth.
When one adds up both the vertical and horizontal multiplication of wealth in an industrialized country, one has to seriously question the advice given to developing nations by the imperial-centers-of-capital that their successful future depends on continued mining and harvesting of raw material and forgoing manufacturing because that is their “comparative advantage.”
The small savings on importing any item must be laid against the entire vertical and horizontal gain to the region when manufacturing their own consumer products. Industrial development multiplies consumer buying power and profits from consumer spending further multiplies profits which further multiplies investments, further multiplying profits and consumer spending, and all continually multiplying capitalized values.
Accumulation of Capital through Creation of Scarcity
Wealth can be accumulated by open destruction of a defeated nation’s wealth to make a commodity scarce and the world dependent upon the monopolized source.
Adam Smith describes just such a destruction of a peaceful and happy society’s wealth and their impoverishment for the accumulation of capital by a few. Spices and silk from the East brought overland comprised the majority of trade between Europe and the East for centuries and efforts to control that trade resulted in many battles, large and small. Muslims shutting off the overland trade routes to the East forced the search for a new route by sea.
Nutmeg and cloves grew wild and plentiful on the Molluca Islands that made them, like air, of high desirability but valueless. Natives made an easy living picking the spicy blossoms and leaves. If all traders had access to those spices, the European market (mostly nobles and wealthy traders, no commoners because they had no money) would become quickly flooded, and the price would collapse.
To create capitalized value for spice traders, it was necessary to monopolize those spice trees and keep spice prices high. So the Dutch burned every spice tree they could not control.4 The other side of the coin of the immense wealth accumulated by a few Dutch traders through monopolization of the spice trade was the impoverishment and depopulation of the Molluca Islands.
The Molluca Island spice monopoly gives a quick lesson in how value is transferred from defeated nations to the powerful through capitalized value of entitled (monopolized) property. If those islanders had kept title to their islands and spice trees and a free market existed, it is they who, eventually, would have, through furnishing spices to the world, become wealthy. If all traders had access to those spices in those early years, there would have been much more, and cheaper, spices in the world, the islanders would have profited immensely, and they would have quickly learned the mechanics of gaining wealth through trade.
Creation of scarcity through open destruction of commodity production is a well recognized principle of neo-liberal economics. In America during the Great Depression cattle and pigs were slaughtered and buried and paying farmers to not produce is standard practice yet today. Though many of the world’s forests were cleared by burning and more natural gas has been flared off in oil fields than has been consumed, oil, coal, timber, and other natural resources are not openly destroyed to produce scarcity. But wasteful consumption of those resources when plentiful and cheap, and waste for war, do produce scarcity. (The continued flaring of natural gas the burning underground coal mines with no attempt to put them out is a waste that our grand children will pay for.) That contradiction of waste of plentiful resources can only be corrected through a democratic, cooperative, coordinated social policy as addressed below.
Residual-Feudal Exclusive Property Titles: A monopoly on what nature produced
Titles can take many forms. Colonial conquest gained title to lands and the wealth it produced. The conquerors were “entitled” to do what they wished with their new property and, of course, they wished to transfer all wealth to themselves. Monopolization of natural wealth and the wealth-producing-process through exclusive titles were specifically designed to claim the wealth produced. This subtle monopolization is exposed in Section B through outlining the superefficient capitalism efficiency increases through conditional title to what is a part of nature as opposed to exclusive title.
Those parts of nature not built by men or women are land (natural resources only need to be discovered), technology (techniques also only need to be discovered so they too are a part of nature), and money (which is a social technique discovered 5,000 years ago).b
Capitalizing Values through Underpaying the Weak on the Periphery of Empire
Due to being underpaid for equally-productive labor, resources on the periphery are harvested, and sold to the imperial centers for far less than full value. With that cheap labor, products are manufactured cheaply but primarily for export; those underpaid workers do not have the buying power to purchase what they produce. With their citizens lacking buying power, these nations do not develop industry and wholesale and retail infrastructure for local distribution.
Consumer products could be sold within the low-paid producing region if the value of both the industries and products produced were priced relative to the wages paid to build the industry and products. But high wages in the developed world and low wages in the developing world create invisible borders which channel those products to imperial centers. This is graphically demonstrated by current wages paid in the developing world being typically under 2% (never over 5%) a product’s sales value in the developed world, even before the 1997-98 currency collapses on the periphery reduced their wages by half.5
Theoretically, over time, distribution within the developing world at low prices could develop. But the large buying power in the imperial center and the low buying power on the periphery dictate there will be a limited horizontal flow of money on the periphery and thus a limited development of a balanced regional economy outside the imperial-centers-of-capital.
It is impossible for the developing world to capitalize their wealth without owning their own resources, owning and running their own factories, being paid equally for equally-productive labor, and selling on established markets. Nor can they develop social capital without the broad-based local buying power that title to their own productive wealth and equally-paid labor would create.
It is consumer purchasing power (adequate wages, adequate commodity prices, and profits from efficient industry and efficient traders) that determines who ends up with the world’s products for a quality life, others have no money. Consumer purchasing power and capitalized values are both derived from title to natural resources, title to industrial capital, title to distribution mechanisms, and adequately paid labor as well as efficient industries. High-capitalized values require mass markets and mass markets develop only from adequately paid labor.
The common thread of a society that is productive and profitable and a high living standard is sharing both work and wealth while using and sharing the increased efficiencies of technology. A society with equally-paid labor and properly-paid capital will have more real (consumer) wealth. Properly-paid labor and capital means elimination of monopolies which means capitalized values will be far lower even as use-values are far more broadly distributed and utilized.
Accumulating Capital through Capitalized Values of Internally Produced Wealth
Although the above accumulation of capital from the wealth of other nations through inequalities of external trade is little known, the accumulation of capital through appropriation of wealth produced by internal labor has been written about (and challenged) so many times that we will address it very briefly.
Capitalized values are largely appropriated labor values multiplied between 10-to-20 times (current interest rates determine expected profit rates which determine capitalized value). Simpler, more just, and quicker methods of capital accumulation are outlined in the subchapters “The Creation of Money,” “Accumulation of Capital through Democratic-cooperative-(superefficient)-capitalism” in Chapter 26.” Chapters 24 through 27 on a modern land, technology, money, and communications commons reduces the current accumulated capital by perhaps half even as economic efficiency increases equal to the invention of money, the printing press and electricity.
Lets understand this thoroughly. If any highly-subsidized product, food for example, is sold to another country for lets say $100 when it actually cost $200 to produce, the multiplier factor still creates possibly $400 of economic activity in the exporting country while subtracting the same $400 within the economy of the importing country. Likewise you can destroy an economy by simply giving them free food.
- In this process, the U.S. consumer expenditure multiplier may be about 3.5 but the industrial investment multiplier in 1986 was just under six. That year there were 108.5-million employed in the United States and 18.4-million of them were employed in basic industry, just under a multiplier of six (Statistical Abstract of the U.S., 1990, p. 734, chart 1295).) With the American Economy 30% services and 70% industrial 40 years ago and 80% services and 20% industrial today that is an ever changing figure. Back to text
- Social techniques and discovered secrets of nature are both targets for monopolization: insurance, money, and the communications spectrums are three of many possible examples. Back to text
- Friedrich List, The National System of Political Economy (Fairfield, NJ: Auguatus M. Kelley, 1977), p.260. Back to text
- List, National System, especially p. 260, Chapter XIX, see also Chapters XII, XVII, XX -XXV. Back to text
- Adam Smith, Wealth of Nations, Modern Library edition (New York: Random House, 1965), pp. 413, 426, 642. Back to text
- Ibid, pp. 600-02. Back to text
- Jack Epstein, “Dickens Revisited,” The Christian Science Monitor, August 24, 1995, pp. 1, 8; Amy Kaslow, “The Price of Low-Cost Clothes: U.S. Jobs,” The Christian Science Monitor, August 20, 1995, p. 4; Christopher Scheer, “Illegals Made Slaves to Fashion,” The Nation, September 11, 1995, pp. 237-38. Back to text
- Full Table of Contents
- Chapter 1. The Secret of Free Enterprise Capital Accumulation
- Chapter 2. The Violent Accumulation of Capital is Rooted in History
- Chapter 3. The Unwitting hand Their Wealth to the Cunning
- Chapter 4. The Historical Struggle for Dominance in World Trade
- Chapter 5. World Wars: Battles over Who Decides the Rules of Unequal Trade
- Chapter 6. Suppressing Freedom of Thought in a Democracy
- Chapter 7. The World Breaking Free frightened the Security Councils of every Western Nation
- Chapter 8. Suppressing the World’s break for Economic Freedom
- Chapter 9. “Frameworks of Orientation”: Creating Enemies for the Masses
- Chapter 10: The Enforcers of Unequal Trades
- Chapter 11. Emerging Corporate Imperialism
- Chapter 12. Impoverishing Labor and eventually Capital
- Chapter 13. Unequal Trades in Agriculture
- Chapter 14. Developing World Loans, Capital Flight, Debt Traps, and Unjust Debt
- Chapter 15. The Economic Multiplier, Accumulating Capital through Capitalizing Values of Externally Produced Wealth
- Chapter 16. Japan’s Post-World War II Defensive, Mercantilist, Economic Warfare Plan
- Chapter 17. Southeast Asian Development, an Accident of History
- Chapter 18. Capital Destroying Capital
- Chapter 19. A New Hope for the World
- Chapter 20. The Earth’s Capacity to Sustain Developed Economies
- Chapter 21. The Political Structure of Sustainable World Development
- Chapter 22. Equal Free Trade as opposed to Unequal Free Trade
- Chapter 23. A Grand Strategy for World Peace and Prosperity
- Chapter 24. Adjusting Residual-Feudal Exclusive Property Rights, as per Henry George, Produces a Modern Land Commons
- Chapter 25. Restructuring Residual-Feudal Exclusive Patent Laws Produces a Modern Technology Commons
- Chapter 26. A Modern Money Commons
- Chapter 27. A Modern Information Commons
- Chapter 28. Wi-Fi Empowering the Powerless
- Conclusion: Guidelines for Sustainable World Development
- Appendix I. Expansion and Contraction of Cultures
- Appendix II: A Practical Approach for Developing Poor Nations and Regions
This is a chapter from the book, Economic Democracy; The Political Struggle for the 21st Century. Visit that link for more information about the book.