C.2 Where do profits come from?

As mentioned in the last section, profits are the driving force of capitalism. If a profit cannot be made, a good is not produced, regardless of how many people "subjectively value" it. But where do profits come from?

In order to make more money, money must be transformed into capital, i.e., workplaces, machinery and other "capital goods." By itself, however, capital (like money) produces nothing. Capital only becomes productive in the labour process when workers use capital ("Neither property nor capital produces anything when not fertilised by labour" - Bakunin). Under capitalism, workers not only create sufficient value (i.e. produced commodities) to maintain existing capital and their own existence, they also produce a surplus. This surplus expresses itself as a surplus of goods, i.e. an excess of commodities compared to the number a workers' wages could buy back. Thus Proudhon:

"The working man cannot. . . repurchase that which he has produced for his master. It is thus with all trades whatsoever. . . since, producing for a master who in one form or another makes a profit, they are obliged to pay more for their own labour than they get for it." [What is Property, p. 189]

In other words, the price of all produced goods is greater than the money value represented by the workers' wages (plus raw materials and overheads such as wear and tear on machinery) when those goods were produced. The labour contained in these "surplus-products" is the source of profit, which has to be realised on the market. (In practice, of course, the value represented by these surplus-products is distributed throughout all the commodities produced in the form of profit -- the difference between the cost price and the market price).

Obviously, pro-capitalist economics argue against this theory of how a surplus arises. However, one example will suffice here to see why labour is the source of a surplus, rather than (say) "waiting", risk or capital (these arguments, and others, will be discussed below). A good poker-player uses equipment (capital), takes risks, delays gratification, engages in strategic behaviour, tries new tricks (innovates), not to mention cheats, and earns large winnings (and can even do so repeatedly). But no surplus product results from such behaviour; the gambler's winnings are simply redistributions from others with no new production occurring. Thus, risk-taking, abstinence, entrepreneurship, etc. might be necessary for an individual to receive profits but are far from sufficient for them not to be the result a pure redistribution from others (a redistribution, we may add, which can only occur under capitalism if workers produce goods to sell).

Thus, in order for a profit to be generated within capitalism two things are required. Firstly, a group of workers to work the available capital. Secondly, that they must produce more value than they are paid in wages. If only the first condition is present, all that occurs is that social wealth is redistributed between individuals. With the second condition, a surplus proper is generated. In both cases, however, workers are exploited for without their labour there would be no goods to facilitate a redistribution of existing wealth nor surplus products.

The surplus value produced by labour is divided between profits, interest and rent (or, more correctly, between the owners of the various factors of production other than labour). In practice, this surplus is used by the owners of capital for: (a) investment (b) to pay themselves dividends on their stock, if any; (c) to pay for rent and interest payments; and (d) to pay their executives and managers (who are sometimes identical with the owners themselves) much higher salaries than workers. As the surplus is being divided between different groups of capitalists, this means that there can be clashes of interest between (say) industrial capitalists and finance capitalists. For example, a rise in interest rates can squeeze industrial capitalists by directing more of the surplus from them into the hands of rentiers. Such a rise could cause business failures and so a slump (indeed, rising interest rates is a key way of regulating working class power by generating unemployment to discipline workers by fear of the sack). The surplus, like the labour used to reproduce existing capital, is embodied in the finished commodity and is realised once it is sold. This means that workers do not receive the full value of their labour, since the surplus appropriated by owners for investment, etc. represents value added to commodities by workers -- value for which they are not paid.

So capitalist profits (as well as rent and interest payments) are in essence unpaid labour, and hence capitalism is based on exploitation. As Proudhon noted, "Products, say economists, are only bought by products. This maxim is property's condemnation. The proprietor producing neither by his own labour nor by his implement, and receiving products in exchange for nothing, is either a parasite or a thief." [Op. Cit., p. 170] It is this appropriation of wealth from the worker by the owner which differentiates capitalism from the simple commodity production of artisan and peasant economies. All anarchists agree with Bakunin when he stated that:

"what is property, what is capital in their present form? For the capitalist and the property owner they mean the power and the right, guaranteed by the State, to live without working. . . [and so] the power and right to live by exploiting the work of someone else . . . those . . . [who are] forced to sell their productive power to the lucky owners of both." [The Political Philosophy of Bakunin, p. 180]

Obviously supporters of capitalism disagree. Profits are not the product of exploitation and workers, capitalists and landlords get paid the value of their contributions to output, they say. A few even talk about "making money work for you" (as if pieces of paper can actually do any form of work!) while, obviously, human beings have to do the actual work (and usually for money). However, all agree that capitalism is not exploitative (no matter how exploitative it may look) and present various arguments why capitalists deserve to keep the products others make. This section of the FAQ presents some of the reasons why anarchists reject this claim.

Lastly, we would like to point out that some apologists for capitalism cite the empirical fact that, in a modern capitalist economy, a large majority of all income goes to "labour," with profit, interest and rent adding up to something under twenty percent of the total. Of course, even if surplus value was less than 20% of a workers' output, this does not change its exploitative nature. These apologists of capitalism do not say that taxation stops being "theft" just because it is around 10% of all income. However, this value for profit, interest and rent is based on a statistical sleight-of-hand, as "worker" is defined as including everyone who has a salary in a company, including managers and CEOs (income to "labour" includes both wages and salaries, in other words). The large incomes which many managers and all CEOs receive would, of course, ensure that a large majority of all income does go to "labour." Thus this "fact" ignores the role of most managers as de facto capitalists and exploiters of surplus value and ignores the changes in industry that have occurred in the last 50 years (see section C.2.5 - Aren't Executives workers and so creators of value?).

To get a better picture of the nature of exploitation within modern capitalism we have to compare workers wages to their productivity. According to the World Bank, in 1966, US manufacturing wages were equal to 46% of the value-added in production (value-added is the difference between selling price and the costs of raw materials and other inputs to the production process). In 1990, that figure had fallen to 36% and (using figures from 1992 Economic Census of the US Census Bureau) by 1992 it had reached 19.76% (39.24% if we take the total payroll which includes managers and so on). In the US construction industry, wages were 35.4% of value added in 1992 (with total payroll, 50.18%). Therefore the argument that because a large percentage of income goes to "labour" capitalism is fine hides the realities of that system and the exploitation its hierarchical nature creates.

We now move on to why this surplus value exists.

C.2.1 Why does this surplus exist?

It is the nature of capitalism for the monopolisation of the worker's product by others to exist. This is because of private property in the means of production and so in "consequence of [which] . . . [the] worker, when he is able to work, finds no acre to till, no machine to set in motion, unless he agrees to sell his labour for a sum inferior to its real value." [Peter Kropotkin, Kropotkin's Revolutionary Pamphlets, p. 55]

Therefore workers have to sell their labour on the market. However, as this "commodity" "cannot be separated from the person of the worker like pieces of property. The worker's capacities are developed over time and they form an integral part of his self and self-identity; capacities are internally not externally related to the person. Moreover, capacities or labour power cannot be used without the worker using his will, his understanding and experience, to put them into effect. The use of labour power requires the presence of its 'owner'. . . To contract for the use of labour power is a waste of resources unless it can be used in the way in which the new owner requires . . . The employment contract must, therefore, create a relationship of command and obedience between employer and worker." [Carole Pateman, The Sexual Contract, pp. 150-1]

So, "the contract in which the worker allegedly sells his labour power is a contract in which, since he cannot be separated from his capacities, he sells command over the use of his body and himself. . . The characteristics of this condition are captured in the term wage slave." [Ibid., p. 151] Or, to use Bakunin's words, "the worker sells his person and his liberty for a given time" and so "concluded for a term only and reserving to the worker the right to quit his employer, this contract constitutes a sort of voluntary and transitory serfdom." [The Political Philosophy of Bakunin, p. 187]

This domination is the source of the surplus, for "wage slavery is not a consequence of exploitation - exploitation is a consequence of the fact that the sale of labour power entails the worker's subordination. The employment contract creates the capitalist as master; he has the political right to determine how the labour of the worker will be used, and - consequently - can engage in exploitation." [Carole Pateman, Op. Cit., p. 149]

So profits exist because the worker sells themselves to the capitalist, who then owns their activity and, therefore, controls them (or, more accurately, tries to control them) like a machine. Benjamin Tucker's comments with regard to the claim that capital is entitled to a reward are of use here. He notes that some "combat. . . the doctrine that surplus value -- oftener called profits -- belong to the labourer because he creates it, by arguing that the horse. . . is rightly entitled to the surplus value which he creates for his owner. So he will be when he has the sense to claim and the power to take it. . . Th[is] argument . . is based upon the assumption that certain men are born owned by other men, just as horses are. Thus its reductio ad absurdum turns upon itself." [Instead of a Book, pp. 495-6]

In other words, to argue that capital should be rewarded is to implicitly assume that workers are just like machinery, another "factor of production" rather than human beings and the creator of things of value. So profits exists because during the working day the capitalist controls the activity and output of the worker (i.e. owns them during working hours as activity cannot be separated from the body and "[t]here is an integral relationship between the body and self. The body and self are not identical, but selves are inseparable from bodies." [Carole Pateman, Op. Cit., p. 206]).

Considered purely in terms of output, this results in, as Proudhon noted, workers working "for an entrepreneur who pays them and keeps their products." [quoted by Martin Buber, Paths in Utopia, p. 29] The ability of capitalists to maintain this kind of monopolisation of another's time and output is enshrined in "property rights" enforced by either public or private states. In short, therefore, property "is the right to enjoy and dispose at will of another's goods - the fruit of an other's industry and labour." [P-J Proudhon, What is Property, p. 171] And because of this "right," a worker's wage will always be less than the wealth that he or she produces.

The size of this surplus, the amount of unpaid labour, can be changed by changing the duration and intensity of work (i.e. by making workers labour longer and harder). If the duration of work is increased, the amount of surplus value is increased absolutely. If the intensity is increased, e.g. by innovation in the production process, then the amount of surplus value increases relatively (i.e. workers produce the equivalent of their wage sooner during their working day resulting in more unpaid labour for their boss).

Such surplus indicates that labour, like any other commodity, has a use value and an exchange value. Labour's exchange value is a worker's wages, its use value their ability to work, to do what the capitalist who buys it wants. Thus the existence of "surplus products" indicates that there is a difference between the exchange value of labour and its use value, that labour can potentially create more value than it receives back in wages. We stress potentially, because the extraction of use value from labour is not a simple operation like the extraction of so many joules of energy from a ton of coal. Labour power cannot be used without subjecting the labourer to the will of the capitalist - unlike other commodities, labour power remains inseparably embodied in human beings. Both the extraction of use value and the determination of exchange value for labour depends upon - and are profoundly modified by - the actions of workers. Neither the effort provided during an hours work, nor the time spent in work, nor the wage received in exchange for it, can be determined without taking into account the worker's resistance to being turned into a commodity, into an order taker. In other words, the amount of "surplus products" extracted from a worker is dependent upon the resistance to dehumanisation within the workplace, to the attempts by workers to resist the destruction of liberty during work hours.

Thus unpaid labour, the consequence of the authority relations explicit in private property, is the source of profits. Part of this surplus is used to enrich capitalists and another to increase capital, which in turn is used to increase profits, in an endless cycle (a cycle, however, which is not a steady increase but is subject to periodic disruption by recessions or depressions - "The business cycle." The basic causes for such crises will be discussed later, in sections C.7 and C.8).

C.2.2 Are capitalists justified in appropriating a portion of surplus value for themselves (i.e. making a profit)?

In a word, no. As we will attempt to indicate, capitalists are not justified in appropriating surplus value from workers. No matter how this appropriation is explained by capitalist economics, we find that inequality in wealth and power are the real reasons for this appropriation rather than some actual productive act. Indeed, neo-classical economics reflects this truism. In the words of the noted left-wing economist Joan Robinson:

"the neo-classical theory did not contain a solution to the problems of profits or of the value of capital. They have erected a towering structure of mathematical theorems on a foundation that does not exist." [Contributions to Modern Economics, p. 186]

If profits are the result of private property and the inequality it produces, then it is unsurprising that neo-classical theory would be as foundationless as Robinson argues. After all, this is a political question and neo-classical economics was developed to ignore such questions. Here we indicate why this is the case and discuss the various rationales for capitalist profit in order to show why they are false.

Some consider that profit is the capitalist's "contribution" to the value of a commodity. However, as David Schweickart points out, "'providing capital' means nothing more than 'allowing it to be used.' But an act of granting permission, in and of itself, is not a productive activity. If labourers cease to labour, production ceases in any society. But if owners cease to grant permission, production is affected only if their authority over the means of production is respected." [Against Capitalism, p. 11] This authority, as discussed earlier, derives from the coercive mechanisms of the state, whose primary purpose is to ensure that capitalists have this ability to grant or deny workers access to the means of production. Therefore, not only is "providing capital" not a productive activity, it depends on a system of organised coercion which requires the appropriation of a considerable portion of the value produced by labour, through taxes, and hence is actually parasitic. Needless to say, rent can also be considered as "profit", being based purely on "granting permission" and so not a productive activity. The same can be said of interest, although the arguments are somewhat different (see section C.2.6).

Another problem with the capitalists' "contribution to production" argument is that one must either assume (a) a strict definition of who is the producer of something, in which case one must credit only the worker, or (b) a looser definition based on which individuals have contributed to the circumstances that made the productive work possible. Since the worker's productivity was made possible in part by the use of property supplied by the capitalist, one can thus credit the capitalist with "contributing to production" and so claim that he or she is entitled to a reward, i.e. profit.

However, if one assumes (b), one must then explain why the chain of credit should stop with the capitalist. Since all human activity takes place within a complex social network, many factors might be cited as contributing to the circumstances that allowed workers to produce -- e.g. their upbringing and education, the government maintained infrastructure that permits their place of employment to operate, and so on. Certainly the property of the capitalist contributed in this sense. But his contribution was less important than the work of, say, the worker's mother. Yet no capitalist, so far as we know, has proposed compensating workers' mothers with any share of the firm's revenues, and particularly not with a greater share than that received by capitalists! Plainly, however, if they followed their own logic consistently, capitalists would have to agree that such compensation would be fair.

Therefore, as capital is not autonomously productive and is the product of human (mental and physical) labour, anarchists reject the idea that providing capital is a productive act. As Proudhon pointed out, "Capital, tools, and machinery are likewise unproductive. . . The proprietor who asks to be rewarded for the use of a tool or for the productive power of his land, takes for granted, then, that which is radically false; namely, that capital produces by its own effort - and, in taking pay for this imaginary product, he literally receives something for nothing." [Op. Cit., p. 169].

Of course, it could be argued (and it frequently is) that capital makes work more productive and so the owner of capital should be "rewarded" for allowing its use. This, however, is a false conclusion, since providing capital is unlike normal commodity production. This is because capitalists, unlike workers, get paid multiple times for one piece of work (which, in all likelihood, they paid others to do) and keep the result of that labour. As Proudhon argued:

"He [the worker] who manufactures or repairs the farmer's tools receives the price once, either at the time of delivery, or in several payments; and when this price is once paid to the manufacturer, the tools which he has delivered belong to him no more. Never can he claim double payment for the same tool, or the same job of repairs. If he annually shares in the products of the farmer, it is owing to the fact that he annually does something for the farmer.

"The proprietor, on the contrary, does not yield his implement; eternally he is paid for it, eternally he keeps it." [Op. Cit., pp. 169-170]

Therefore, providing capital is not a productive act, and keeping the profits that are produced by those who actually do use capital is an act of theft. This does not mean, of course, that creating capital goods is not creative nor that it does not aid production. Far from it! But owning the outcome of such activity and renting it does not justify capitalism or profits.

Some supporters of capitalism claim that profits represent the productivity of capital. They argue that a worker is said to receive exactly what she has produced because (according to the neo-classical answer) if she ceases to work, the total product will decline by precisely the value of her wage. However, this argument has a flaw in it. This is because the total product will decline by more than that value if two or more workers leave. This is because the wage each worker receives under conditions of perfect competition is assumed to be the product of the last labourer in neo-classical theory. The neo-classical argument presumes a "declining marginal productivity," i.e. the marginal product of the last worker is assumed to be less than the second last and so on.

In other words, in neo-classical economics, all workers bar the mythical "last worker" do not receive the full product of their labour. They only receive what the last worker is claimed to produce and so everyone bar the last worker does not receive exactly what he or she produces. It looks like the neo-classical claim of no exploitation within capitalism seems invalidated by its own theory.

This is recognised by the theorists. Because of this declining marginal productivity, the contribution of labour is less than the total product. The difference is claimed to be precisely the contribution of capital. But what is this "contribution" of capital? Without any labourers there would be no output. In addition, in physical terms, the marginal product of capital is simply the amount by which production would decline is one piece of capital were taken out of production. It does not reflect any productive activity whatsoever on the part of the owner of said capital. It does not, therefore, measure his or her productive contribution. In other words, capitalist economics tries to confuse the owners of capital with the machinery they own.

Indeed, the notion that profits represent the contribution of capital is one that is shattered by the practice of "profit sharing." If profits were the contribution of capital, then sharing profits would mean that capital was not receiving its full "contribution" to production (and so was being exploited by labour!). Moreover, given that profit sharing is usually used as a technique to increase productivity and profits it seems strange that such a technique would be required if profits, in fact, did represent capital's "contribution." After all, the machinery which the workers are using is the same as before profit sharing was introduced -- how could this unchanged capital stock produce an increased "contribution"? It could only do so if, in fact, capital was unproductive and it was the unpaid efforts, skills and energy of workers' that actually was the source of profits. Thus the claim that profit equals capital's "contribution" has little basis in fact.

While it is true that the value invested in fixed capital is in the course of time transferred to the commodities produced by it and through their sale transformed into money, this does not represent any actual labour by the owners of capital. Anarchists reject the ideological sleight-of-hand that suggests otherwise and recognise that (mental and physical) labour is the only form of contribution that can be made by humans to a productive process. Without labour, nothing can be produced nor the value contained in fixed capital transferred to goods. As Charles A. Dana pointed out in his popular introduction to Proudhon's ideas, "[t]he labourer without capital would soon supply his wants by its production . . . but capital with no labourers to consume it can only lie useless and rot." [Proudhon and his "Bank of the People", p. 31] If workers do not get paid the full value of their contributions to the output they produce then they are exploited and so, as indicated, capitalism is based upon exploitation.

So, in and of themselves, fixed costs do not create value. Whether value is created depends on how investments are developed and used once in place. In the words of the English socialist Thomas Hodgskin:

"Fixed capital does not derive its utility from previous, but present labour; and does not bring its owner a profit because it has been stored up, but because it is a means of obtaining a command over labour." [Labour Defended against the Claims of Capital]

Which brings us back to labour (and the social relationships which exist within an economy) as the fundamental source of profits. Moreover the idea (so beloved by pro-capitalist economics) that a worker's wage is the equivalent of what she produces is one violated everyday within reality. As one economist critical of neo-classical dogma put it:

"Managers of a capitalist enterprise are not content simply to respond to the dictates of the market by equating the wage to the value of the marginal product of labour. Once the worker has entered the production process, the forces of the market have, for a time at least, been superseded. The effort-pay relation will depend not only on market relations of exchange but also. . . on the hierarchical relations of production - on the relative power of managers and workers within the enterprise." [William Lazonick, Business Organisation and the Myth of the Market Economy, pp. 184-5]

But, then again, capitalist economics is more concerned with justifying the status quo than being in touch with the real world. To claim that a workers wage represents her contribution and profit capital's is simply false. Capital cannot produce anything (nevermind a surplus) unless used by labour and so profits do not represent the productivity of capital.

Other common justifications of profit are based on claims about the "special abilities" of a select few, e.g. as "risk taking" or "creative" ability, and are equally unsound as the one just outlined.

As for risk taking, virtually all human activity involves risk. To claim that capitalists should be paid for the risks associated with investment is to implicitly state that money is more valuable that human life. Afterall, workers risk their health and often their lives in work and often the most dangerous workplaces are those associated with the lowest pay (safe working conditions can eat into profits and so to reward capitalist "risk", the risk workers face may actually increase). In the inverted world of capitalist ethics, it is usually cheaper (or more "efficient") to replace an individual worker than a capital investment.

Moreover, the risk theory of profit fails to take into account the different risk-taking abilities of that derive from the unequal distribution of society's wealth. As James Meade puts it, while "property owners can spread their risks by putting small bits of their property into a large number of concerns, a worker cannot easily put small bits of his effort into a large number of different jobs. This presumably is the main reason we find risk-bearing capital hiring labour" and not vice versa [quoted by David Schweickart, Op. Cit., pp. 129-130]. Needless to say, the most serious consequences of "risk" are usually suffered by working people who can lose their jobs, health and even lives. So, rather than individual evaluations determining "risk", these evaluations will be dependent on the class position of the individuals involved. Risk, therefore, is not an independent factor and so cannot be the source of profit. Indeed, as indicated, other activities can involve far more risk and be rewarded less.

As for the "creative" spirit which innovates profits into existence, it is true that individuals do see new potential and act in innovative ways to create new products or processes. However, as discussed in the next section, this is not the source of profit.

C.2.3 Why does innovation occur and how does it affect profits?

There is a given amount of surplus value in existence within the economy at any one time. How this surplus is created by or divided between firms is determined by competition, within which innovation plays an important role.

Innovation occurs in order to expand profits and so survive competition from other companies. While profits can be generated in circulation (for example by oligopolistic competition or inflation) this can only occur at the expense of other people or capitals (see C.5 - Why does Big Business get a bigger slice of profits? and C.7 - What causes the capitalist business cycle? - respectively). Innovation, however, allows the generation of profits directly from the new or increased productivity (i.e. exploitation) of labour. This is because it is in production that commodities, and so profits, are created and innovation results in new products and/or new production methods. New products mean that the company can reap excess profits until competitors enter the new market and force the market price down by competition. New production methods allow the intensity of labour to be increased, meaning that workers do more work relative to their wages (in other words, the cost of production falls relative to the market price, meaning extra profits).

So while competition ensures that capitalist firms innovate, innovation is the means by which companies can get an edge in the market. This is because innovation means that "capitalist excess profits come from the production process. . . when there is an above-average rise in labour productivity; the reduced costs then enable firms to earn higher than average profits in their products. But this form of excess profits is only temporary and disappears again when improved production methods become more general." [Paul Mattick, Economics, Politics and the Age of Inflation, p. 38]

In addition, innovation in terms of new technology is also used to help win the class war at the point of production for the capitalists. As the aim of capitalist production is to maximise profits, it follows that capitalism will introduce technology that will allow more surplus value to be extracted from workers. As Cornelius Castoriadis argues, capitalism "has created a capitalist technology, for its own ends, which are by no means neutral. The real essence of capitalist technology is not to develop production for production's sake: it is to subordinate and dominate the producers." [Workers' Councils and the Economics of a Self-Managed Society, p. 13]

Therefore, technological improvement can also be used to increase the power of capital over the workforce, to ensure that workers will do as they are told. In this way innovation can maximise surplus value production by trying to increase domination during working hours as well as by increasing productivity by new processes.

These attempts to increase profits by using innovation is the key to capitalist expansion and accumulation. As such innovation plays a key role within the capitalist system. However, the source of profits does not change and remains in the labour, skills and creativity of workers in the workplace. And we must stress that innovation itself is a form of labour -- mental labour. Indeed, many companies have Research and Development departments in which groups of workers are paid to generate new and innovative ideas for their employers. And we must also point out that many new innovations come from individuals who combine mental and physical labour outside of capitalist companies. In other words, arguments that mental labour alone is the source of wealth (or profits) are false. That this is the case can be seen from various experiments in workers' control (see the next section) where increased equality within the workplace actually increases productivity and innovation. As these experiments show workers, when given the chance, can develop numerous "good ideas" and, equally as important, produce them. A capitalist with a "good idea," on the other hand, would be powerless to produce it without workers and it is this fact that shows that innovation, in and of itself, is not the source of surplus value.

C.2.4 Wouldn't workers' control stifle innovation?

Contrary to much capitalist apologetics, innovation is not the monopoly of an elite class of humans. It is within all of us, although the necessary social environment needed to nurture and develop it in ordinary workers is crushed by the authoritarian workplaces of capitalism. If workers were truly incapable of innovation, any shift toward greater control of production by workers should result in decreased productivity. What one actually finds, however, is just the opposite: In the few examples where workers' control has been implemented, productivity increased dramatically as ordinary people were given the chance, usually denied them, to apply their skills, talents, and creativity.

As Christopher Eaton Gunn notes, there is "a growing body of empirical literature that is generally supportive of claims for the economic efficiency of the labour-managed firm. Much of this literature focuses on productivity, frequently finding it to be positively correlated with increasing levels of participation. . . Studies that encompass a range of issues broader than the purely economic also tend to support claims for the efficiency of labour managed and worker-controlled firms. . . In addition, studies that compare the economic preference of groups of traditionally and worker-controlled forms point to the stronger performance of the latter." [Workers' Self-Management in the United States, pp. 42-3]

This has been strikingly confirmed in studies of the Mondragon co-operatives in Spain, where workers are democratically involved in production decisions and encouraged to innovate. As George Bennello notes, "Mondragon productivity is very high -- higher than in its capitalist counterparts. Efficiency, measured as the ratio of utilised resources -- capital and labour -- to output, is far higher than in comparable capitalist factories." [The Challenge of Mondragon, p. 216]

The example of the Lucus workers in Britain, during the 1970's, again indicates the creative potential waiting to be utilised. The workers in Lucus created a plan which would convert the military-based Lucus company into a company producing useful goods for ordinary people. The workers in Lucus designed the products themselves, using their own experiences of work and life. The management just were not interested.

During the Spanish Revolution of 1936-39, workers self-managed many factories following the principles of participatory democracy. Productivity and innovation in the Spanish collectives was exceptionally high. The metal-working industry is a good example. As Augustine Souchy observes, at the outbreak of the Civil War, the metal industry in Catalonia was "very poorly developed." Yet within months, the Catalonian metal workers had rebuilt the industry from scratch, converting factories to the production of war materials for the anti-fascist troops. A few days after the July 19th revolution, the Hispano-Suiza Automobile Company was already converted to the manufacture of armoured cars, ambulances, weapons, and munitions for the fighting front. "Experts were truly astounded," Souchy writes, "at the expertise of the workers in building new machinery for the manufacture of arms and munitions. Very few machines were imported. In a short time, two hundred different hydraulic presses of up to 250 tons pressure, one hundred seventy-eight revolving lathes, and hundreds of milling machines and boring machines were built." [The Anarchist Collectives: Workers' Self-management in the Spanish Revolution, 1936-1939, ed. Sam Dolgoff, p. 96]

Similarly, there was virtually no optical industry in Spain before the July revolution, only some scattered workshops. After the revolution, the small workshops were voluntarily converted into a production collective. "The greatest innovation," according to Souchy, "was the construction of a new factory for optical apparatuses and instruments. The whole operation was financed by the voluntary contributions of the workers. In a short time the factory turned out opera glasses, telemeters, binoculars, surveying instruments, industrial glassware in different colours, and certain scientific instruments. It also manufactured and repaired optical equipment for the fighting fronts . . . What private capitalists failed to do was accomplished by the creative capacity of the members of the Optical Workers' Union of the CNT." [Op. Cit., pp. 98-9]

Therefore, far from being a threat to innovation, workers' control would increase it and, more importantly, direct it towards improving the quality of life for all as opposed to increasing the profits of the few. This aspect an anarchist society will be discussed in more detail in section I (What would an anarchist society look like?). In addition, see sections J.5.10, J.5.11 and J.5.12 for more on why anarchists support self-management and why, in spite of its higher efficiency and productivity, the capitalist market will select against it.

In short, rather than being a defence of capitalist profit taking (and the inequality it generates) the argument that freedom increases innovation and productivity actually points towards libertarian socialism and workers' self-management. This is unsurprising, for only equality can maximise liberty and so workers' control (rather than capitalist power) is the key to innovation. Only those who confuse freedom with the oppression of wage labour would be surprised by this.

C.2.5 Aren't Executives workers and so creators of value?

Of course it could be argued that executives are also "workers" and so contribute to the value of the commodities produced. However, this is not the case. Though they may not own the instruments of production, they are certainly buyers and controllers of labour power, and under their auspices production is still capitalist production. The creation of a "salary-slave" strata of managers does not alter the capitalist relations of production. In effect, the management strata are de facto capitalists. As exploitation requires labour ("There is work and there is work." as Bakunin noted, "There is productive labour and there is the labour of exploitation" [The Political Philosophy of Bakunin, p. 180]), management is like the early "working capitalist" and their "wages" come from the surplus value appropriated from workers and realised on the market. Or, to use a different analogy, managers are like the slave drivers hired by slave owners who do not want to manage the slaves themselves. The slave drivers' wages come from the surplus value extracted from the slaves; it is not in itself productive labour.

Thus the exploitative role of managers, even if they can be fired, is no different from capitalists. Moreover, "shareholders and managers/technocrats share common motives: to make profits and to reproduce hierarchy relations that exclude most of the employees from effective decision making" [Takis Fotopoulos, "The Economic Foundations of an Ecological Society", p. 16, Society and Nature No.3, pp. 1-40]

This is not to say that 100 percent of what managers do is exploitative. The case is complicated by the fact that there is a legitimate need for co-ordination between various aspects of complex production processes -- a need that would remain under libertarian socialism and would be filled by elected and recallable (and in some cases rotating) managers (see Section I). But under capitalism, managers become parasitic in proportion to their proximity to the top of the pyramid. In fact, the further the distance from the production process, the higher the salary; whereas the closer the distance, the more likely that a "manager" is a worker with a little more power than average. In capitalist organisations, the less you do, the more you get. In practice, executives typically call upon subordinates to perform managerial (i.e. co-ordinating) functions and restrict themselves to broader policy-making decisions. As their decision-making power comes from the hierarchical nature of the firm, they could be easily replaced if policy making was in the hands of those who are affected by it.

C.2.6 Is interest not the reward for waiting, and so isn't capitalism just?

The idea that interest is the reward for "abstinence" on the part of savers is a common one in capitalist economics. As Alfred Marshall argues, "[i]f we admit it [a commodity] is the product of labour alone, and not of labour and waiting, we can no doubt be compelled by an inexorable logic to admit that there is no justification of interest, the reward for waiting" [Principles of Economics, p. 587]. While implicitly recognising that labour is the source of all value in capitalism (and that abstinence is not the source of profits), it is claimed that interest is a justifiable claim on the surplus value produced by a worker.

Why is this the case? Capitalist economics claims that by "deferring consumption," the capitalist allows new means of production to be developed and so should be rewarded for this sacrifice. In other words, in order to have capital available as an input -- i.e. to bear costs now for returns in the future -- someone has to be willing to postpone his or her consumption. That is a real cost, and one that people will pay only if rewarded for it.

This theory usually appears ludicrous to a critic of capitalism -- simply put, does the mine owner really sacrifice more than a miner, a rich stockholder more than an autoworker working in their car plant? It is far easier for a rich person to "defer consumption" than for someone on an average income. This is borne out by statistics, for as Simon Kuznets has noted, "only the upper income groups save; the total savings of groups below the top decile are fairly close to zero." [Economic Growth and Structure, p. 263] Therefore, the plausibility of interest as payment for the pain of deferring consumption rests on the premise that the typical saving unit is a small or medium-income household. But in contemporary capitalist societies, this is not the case. Such households are not the source of most savings; the bulk of interest payments do not go to them.

To put this point differently, the capitalist proponents of interest only consider "postponing consumption" as an abstraction, without making it concrete. For example, a capitalist may "postpone consumption" of 48 Rolls Royces because he needs the money to upgrade some machinery in his factory; whereas a single mother may have to "postpone consumption" of food or adequate housing in order to attempt to better take care of her children. The two situations are vastly different, yet the capitalist equates them. This equation implies that "not being able to buy anything you want" is the same as "not being able to buy things you need", and is thus skewing the obvious difference in costs of such postponement of consumption!

Thus Proudhon's comments that the loaning of capital "does not involve an actual sacrifice on the part of the capitalist" and so "does not deprive himself. . . of the capital which be lends. He lends it, on the contrary, precisely because the loan is not a deprivation to him; he lends it because he has no use for it himself, being sufficiently provided with capital without it; be lends it, finally, because he neither intends nor is able to make it valuable to him personally, -- because, if he should keep it in his own hands, this capital, sterile by nature, would remain sterile, whereas, by its loan and the resulting interest, it yields a profit which enables the capitalist to live without working. Now, to live without working is, in political as well as moral economy, a contradictory proposition, an impossible thing." [Interest and Principal: A Loan is a Service]

He goes on:

"The proprietor who possesses two estates, one at Tours, and the other at Orleans, and who is obliged to fix his residence on the one which he uses, and consequently to abandon his residence on the other, can this proprietor claim that he deprives himself of anything, because he is not, like God, ubiquitous in action and presence? As well say that we who live in Paris are deprived of a residence in New York! Confess, then, that the privation of the capitalist is akin to that of the master who has lost his slave, to that of the prince expelled by his subjects, to that of the robber who, wishing to break into a house, finds the dogs on the watch and the inmates at the windows." [Ibid.]

In the capitalist's world, an industrialist who cannot buy a third summer home "suffers" a cost equivalent to that of someone who postpones consumption to get something they need. Similarly, if the industrialist "earns" hundred times more in interest than the wage of the coal miner who works in his mine, the industrialist "suffers" hundred times more discomfort living in his palace than the coal miner does working at the coal face in dangerous conditions. The "disutility" of postponing consumption while living in luxury is obviously 100 times greater than the "disutility" of working for a living and so should be rewarded appropriately. Of course, the difference is that proponents of capitalism feel that capitalists deserves compensation for their "restraint" in anticipation of future gain, while at the same time refusing to recognise the ambiguity of this statement.

All in all, as Joan Robinson pointed out, "'waiting' only means owning wealth." [Contributions to Modern Economics, p. 11] Interest is not the reward for "waiting," rather it is one of the rewards for being rich.

Little wonder, then, that neo-classical economists introduced the term waiting as an "explanation" for returns to capital (such as interest). Before this change in the jargon of economics, mainstream economists used the notion of "abstinence" (a term invented by Nassau Senior) to account for (and so justify) interest. Just as Senior's "theory" was seized upon to defend returns to capital, so was the term "waiting" after it was introduced in 1887. Interestingly, while describing exactly the same thing, "waiting" became the preferred term simply because it had a less apologetic ring to it. According to Marshall, the term "abstinence" was "liable to be misunderstood" because there were just too many wealthy people around who received interest and dividends without ever having abstained from anything (as he noted, the "greatest accumulators of wealth are very rich persons, some [!] of whom live in luxury" [Op. Cit., p. 232]). So he opted for the term "waiting" because there was "advantage" in its use, particularly because socialists had long been pointing out the obvious fact that capitalists do not "abstain" from anything (see Marshall, Op. Cit., p. 233). The lesson is obvious, in mainstream economics if reality conflicts with your theory, do not reconsider the theory, change its name!

Indeed, as Joan Robinson points out, the pro-capitalist theories of who abstains are wrong, "since saving is mainly out of profits, and real wages tend to be lower the higher the rate of profit, the abstinence associated with saving is mainly done by the workers, who do not receive any share in the 'reward.'" [The Accumulation of Capital, p. 393]

To say that those who hold capital can lay claim to a portion of the social product by abstaining or waiting provides no explanation of what makes production profitable, and so to what extent interest and dividends can be paid. Reliance on a "waiting" theory of why returns of capital exist represents nothing less than a reluctance by economists to confront the sources of value creation in an economy or to analyse the social relations between workers and managers/bosses on the shop floor. To do so would be to bring into question the whole nature of capitalism and any claims it was based upon freedom.

C.2.7 But wouldn't the "time value" of money justify charging interest in a more egalitarian capitalism?

More needs to be said about interest, since a more egalitarian capitalism (if such a thing could exist) would still have interest, and the greater egalitarianism could even be used as the basis of a justification for it.

Indeed, the conceptual history that supporters of capitalism present to justify interest (or the appropriation of surplus value in general) usually start in a fictional community of equals. The time preference theory of interest bases itself on such a fiction. We are presented with the argument that individuals have different "time preferences." Most individuals prefer, it is claimed, to consume now rather than later while a few prefer to save now on the condition that they can consume more later. Interest, therefore, is the payment that encourages people to defer consumption and so is dependent upon the subjective evaluations of individuals.

Based on this argument, many supporters of capitalism claim that it is legitimate for the person who provided the capital to get back more than they put in, because of the "time value of money." This is because the person who provided the machinery, tools, etc. had to postpone X amount of consumption which he could have had with his money. Capital providers will only get back X amount of consuming power later, after they have been paid back for the machinery etc. by receiving a portion, over time, of the increased output that it makes possible. Since people prefer consumption now to consumption later, they can only be persuaded to give up consumption now by the promise of receiving more later. Hence returns to capital are based upon this "time value" of money and the argument that individuals have different "time preferences."

That the idea of doing nothing (i.e. not consuming) can be considered as productive says a lot about capitalist theory. Even supporters of capitalism recognise that interest income "arises independently of any personal act of the capitalist. It accrues to him even though he has not moved any finger in creating it. . . And it flows without ever exhausting that capital from which it arises, and therefore without any necessary limit to its continuance. It is, if one may use such an expression in mundane matters, capable of everlasting life." [Eugen Bohm-Bawark, Capital and Interest, vol. 1, p. 1] Needless to say, Bohm-Bawark then went on to justify this situation.

Lets not forget that, due to one decision not to do anything (i.e. not to consume), a person (and his or her heirs) may receive forever a reward that is not tied to any productive activity. Unlike the people actually doing the work (who only get a reward every time they "contribute" to creating a commodity), the capitalist will get rewarded for just one act of abstention. This is hardly a just arrangement. As David Schweickart has pointed out, "Capitalism does reward some individuals perpetually. This, if it is to be justified by the canon of contribution, one must defend the claim that some contributions are indeed eternal." [Against Capitalism, p.17] In addition, the receiver of interest can pass the benefits of this one decision to his family after he or she dies, weakening the case for "abstinence" even more.

It was in the face of the weaknesses of the "abstinence" or "waiting" theories of capital that Bohm-Bawark suggested the "time preference" theory (namely that surplus value is generated by the exchange of present goods for future goods, as future goods are valued less than present goods due to "time preference"). Of course, this theory is subject to exactly the same points we raised in the last section. An individual's psychology is conditioned by the social situation they find themselves in. Just as "abstaining" or "waiting" is far easier to do when one is rich, ones "time preference" is also determined by ones social position. If one has more than enough money for current needs, one can more easily "discount" the future (for example, workers will value the future product of their labour less than their current wages simply because without those wages there will be no future). And if ones "time preference" is dependent on social facts (such as available resources, ones class, etc.), then interest cannot be based upon subjective evaluations, as these are not the independent factor. In other words, saving does not express "time preference", it simply expresses the extent of inequality.

Even if we ignore the problem that inequality influences the subjective "time preference" of individuals, the theory still does not provide a defence of interest. It is worthwhile quoting the noted post-Keynesian economist Joan Robinson on why this is so:

"The notion that human beings discount the future certainly seems to correspond to everyone's subjective experience, but the conclusion drawn from it is a non sequitor, for most people have enough sense to want to be able to exercise consuming power as long as fate permits, and many people are in the situation of having a higher income in the present than they expect in the future (salary earners will have to retire, business may be better now than it seems likely to be later, etc.) and many look beyond their own lifetime and wish to leave consuming power to their heirs. Thus a great many . . . are eagerly looking for a reliable vehicle to carry purchasing power into the future . . . It is impossible to say what price would rule is there were a market for present versus future purchasing power, unaffected by any other influence except the desires of individuals about the time-pattern of their consumption. It might will be such a market would normally yield a negative rate of discount . . .

"The rate of interest is normally positive for a quite different reason. Present purchasing power is valuable partly because, under the capitalist rules of the game, it permits its owner . . . to employ labour and undertake production which will yield a surplus of receipts over costs. In an economy in which the rate of profit is expected to be positive, the rate of interest is positive . . . [and so] the present value of purchasing power exceeds its future value to the corresponding extent. . . This is nothing whatever to do with the subjective rate of discount of the future of the individual concerned. . . " [The Accumulation of Capital, p. 395]

So, interest has little to do with "time preference" and a lot more to do with the inequalities associated with the capitalist system. In effect, the "time preference" theory assumes what it is trying to prove. Interest is positive simply because capitalists can appropriate surplus value from workers and so current money is more valuable than future money because of this fact. Indeed, in an uncertain world future money may be its own reward (for example, workers facing unemployment in the future could value the same amount of money more then than in the present). It is only because money provides the authority to allocate resources and exploit wage labour that money now is more valuable. In other words, the capitalist does not supply "time" (as the "time value" theory argues), it provides authority/power.

So, does someone who saves deserve a reward for saving? Simply put, no. Why? Because the act of saving is no more an act of production than is purchasing a commodity. Clearly the reward for purchasing a commodity is that commodity. By analogy, the reward for saving should be not interest but one's savings -- the ability to consume at a later stage.

Capitalists assume that people will not save unless promised the ability to consume more at a later stage, yet close examination of this argument reveals its absurdity. People in many different economic systems save in order to consume later, but only in capitalism is it assumed that they need a reward for it beyond the reward of having those savings available for consumption later. The peasant farmer "defers consumption" in order to have grain to plant next year, the squirrel "defers consumption" of nuts in order to have a stock through winter. But neither expects to see their stores increase in size over time. Therefore, saving is rewarded by saving, as consuming is rewarded by consuming. In fact, the capitalist "explanation" for interest has all the hallmarks of apologetics. It is merely an attempt to justify an activity without careful analysing it.

To be sure, there is an economic truth underlying this argument for justifying interest, but the formulation by supporters of capitalism is inaccurate and unfortunate. There is a sense in which 'waiting' is a condition for capital increase, though not for capital per se. Any society which wishes to increase its stock of capital goods may have to postpone some gratification. Workplaces and resources turned over to producing capital goods cannot be used to produce consumer items, after all. So, like most capitalist economics there is a grain of truth in it but this grain of truth is used to grow a forest of half-truths and confusion.

Any economy is a network, where decisions affect everyone. Therefore, if some people do not consume now, production is turned away from consumption goods, and this has an effect on all. Or, to put it slightly differently, aggregate demand -- and so aggregate supply -- is changed when some people postpone consumption, and this affects others. The decrease in the demand for consumer goods affects the producers of these goods. Under capitalism, this may result in other people having to "defer consumption," as they cannot sell their goods on the market; but supporters of capitalism assume that only capitalists are affected by their decision to postpone consumption, and therefore that they should get a reward for it. Indeed, why should someone be rewarded for a decision which may cause companies to go bust, so reducing the available means of production as reduced demand results in job loses and idle factories, is not even raised as an issue by the supporters of capitalism.

Lastly, we must consider what interest actually means. It is not the same as other forms of exchange. Proudhon pointed out the difference:

"Comparing a loan to a sale, you say: Your argument is as valid against the latter as against the former, for the hatter who sells hats does not deprive himself.

"No, for he receives for his hats -- at least he is reputed to receive for them -- their exact value immediately, neither more nor less. But the capitalist lender not only is not deprived, since he recovers his capital intact, but he receives more than his capital, more than he contributes to the exchange; he receives in addition to his capital an interest which represents no positive product on his part. Now, a service which costs no labour to him who renders it is a service which may become gratuitous." [Interest and Principal: The Circulation of Capital, Not Capital Itself, Gives Birth to Progress]

Thus selling the use of money (paid for by interest) is not the same as selling a commodity. The seller of the commodity does not receive the commodity back as well as its price. In effect, as with rent and profits, interest is payment for permission to use something and, therefore, not a productive act which should be rewarded. Ultimately, interest is an expression of inequality, not exchange:

"If there is chicanery afoot in calling 'money now' a different good than 'money later,' it is be no means harmless, for the intended effect is to subsume moneylending under the normative rubric of exchange. . . [but] there are obvious differences... [for in normal commodity exchange] both parties have something [while in loaning] he has something you don't. . . [so] inequality dominates the relationship. He has more than you have now, and he will get back more than he gives." [Schweickart, Op. Cit., p.23]

Therefore, money lending is, for the poor person, not a choice between more consumption now/less later and less consumption now/more later. If there is no consumption now, there will not be any later. In addition, even in a relatively egalitarian capitalism, interest implies that the producer of new capital is not producing commodities. Would-be capitalists have "deferred consumption" and allowed a machine to be created. They then offer to let others use it for a fee, but they are not selling a commodity, they are renting the use of something. And giving permission is not a productive act (as noted above).

Therefore, providing capital and charging interest are not productive acts. As Proudhon argued, "all rent received (nominally as damages, but really as payment for a loan) is an act of property - of robbery [theft]." [What is Property, p. 171]. In other words, capitalism is based on usury, i.e. paying for the use of something. The machine owner has "deferred consumption" and so is "rewarded" with wage labourers to boss about and payment in excess of what he or she originally put forward. In addition, the commodity producers have made goods which the owner of the machine gets paid for and still has the machine! This means that the interest paid has been taken from the labour of those who use the machine, who end up with nothing at the end beyond their wages and so are still wage slaves, looking for a new boss. Little wonder Proudhon argued that "Property is theft!"

Interest is a con, pure and simple. Little wonder both social and individualist anarchists have opposed it. Ben Tucker assumed that mutual banking, besides reducing interest to zero, would also increase the power of workers in the economy, meaning that workers would be in a position to refuse to work for a capitalist unless they agreed to a hire-purchase deal on the capital they used (see section G). As for the social anarchists, they realised that free agreements between syndicates and communes would ensure suitable investment in new means of production. They also recognised the network of common influence in any advanced economy, and thus that since everyone is affected by investment decisions, all should have a say in them (see section I).