The Ethics of Capitalism

The title is that of Chapter 30 in Henry Hazlitt’s The Foundations of Morality (1964; free download here).

Hazlitt says the basic institutions of capitalism are: (1) private property, (2) free markets, (3) competition, (4) division and combination of labor, and (5) social cooperation. They are not separate institutions but mutually dependent (303).

He mentions force and fraud elsewhere. I don’t know why he didn’t include prevention and retribution against them here.

He quotes economist P. H. Wicksteed at length (318-20) because he considers Wicksteed’s the most powerful statement he ever encountered of the thesis that the free market system is "ethically indifferent" or ethically neutral. The thesis, nevertheless, seems to him seriously questionable (320).

The habit of voluntary economic cooperation tends to make a mutualistic attitude habitual. And a system that provides us better than any other with our material needs and wants can never be dismissed as ethically negligible or ethically irrelevant (322).

Hazlitt cites Adam Smith and Ludwig von Mises regarding productivity, the following from Mises. "The division of labor extends by the realization that the more labor is divided the more productive it is. The fundamental facts that brought about cooperation, society, and civilization and transformed the animal man into a human being are the facts that work performed under the division of labor is more productive than isolated work and that man's reason is capable of recognizing this truth" (308).

He writes about mutualism in Chapter 13.

A society in which everybody act on purely egoistic motives, or one in which everybody acts on purely altruistic motives (if either is really imaginable) would not be workable. A society in which each works exclusively for his own interest, narrowly conceived, would be a society of constant collisions and conflicts. A society in which each works exclusively for the good of others would be an absurdity. The most successful society seems to be one in which each worked primarily for his own good while always considering the good of others whenever he suspected any incompatibility between the two.

“In fact, egoism and altruism are neither mutually exclusive nor do they exhaust the possible motives of human conduct. There is a twilight zone between them. Or rather, there is an attitude and motivation that is not quite either (especially if we define them as necessarily excluding each other), but deserves a name by itself.

I would like to suggest two possible names that we might give this attitude. One is an arbitrary coinage—egaltruism, which we may define to mean consideration both of self and others in any action or rule of action. A less artificially contrived word, however, is mutualism” (102).

The Is-Ought Problem

David Hume published A Treatise of Human Nature in 1739. He later wrote that the book fell dead-born from the press, but it has become one of the most famous books in philosophy. Therein he posed the is-ought problem -- how can an "ought" statement be derived from an "is" statement? It has become one of the central questions of ethical theory.

While much has been written about it, I have not investigated it much. Anyway, having thought about it off and on for many years, I eventually decided that an "ought" statement cannot be deduced from an "is" statement, but an "ought" statement can be based on an "is" statement.

Reading some of Henry Hazlitt’s The Foundations of Morality (1964; free download here), I found that Hazlitt decided similarly.

“For ethics is a "normative" science. It is not a science of description, but of prescription. It is not a science of what is or was, but of what ought to be.”

“True, it would have no claim to scientific validity, or even any claim to be a useful field of inquiry, unless it were based in some convincing way on what was or what is” (11).

“And others have even gone on to assert that there is no way of getting from an is to an ought. If the latter statement were true, there would be no possibility of framing a rational theory of ethics. Unless our oughts are to be purely arbitrary, purely dogmatic, they must somehow grow out of what is" (11-12).

“Actions or rules of action are not "right" or "wrong" in the sense in which a proposition in physics or mathematics is right or wrong, but expedient or inexpedient, advisable or inadvisable, helpful or harmful. In brief, in ethics the appropriate criterion is not "truth" but wisdom” (52).

Two Worlds at Once

The above is a shortened title of an essay by Steven Horwitz that I think is well worth reading. The longer title is ‘Two Worlds at Once: Rand, Hayek, and the Ethics of the Micro- and Macro-cosmos’. It was published inThe Journal of Ayn Rand Studies, Vol. 6, No. 2 (Spring 2005): 375–404. It also appears on the author’s webpage here. 

Here is the abstract:

Although both Rand and Hayek supported capitalism, their ethical systems were distinctly different. This paper explores these differences and how they apply to the institution of the family. It concludes that Rand's ethical system matches very well with what Hayek sees as necessary in the "Great Society" of the macro-cosmos, but that our understanding of the institution of the family seems better suited to a more altruistic ethical code. The challenge for a Hayekian ethics that pays attention to institutional contexts is how to ensure that the complex process of making those distinctions is learned as children pass into adulthood. [end]

Horwitz does not use “altruistic” to mean what Rand meant by it. The following is Horwitz’s definition.

“For the purposes of this analysis, I will define an act as altruistic if it is intended to benefit another and any benefits that might accrue to the actor are not the reason for undertaking the act. Contrast this to acts of exchange, which may well benefit another, and can even be intended to benefit another, but are normally assumed to have as their motivating cause that they benefit oneself first and foremost” (382).

A Brief History of Logic

The Preface of George Englebretsen’s book Something To Reckon With: The Logic of Terms gives a brief history of logic. Major topics are Aristotle’s categorical (term) logic and criticisms of it, mathematical logic introduced by Gottlob Frege, Fred Sommers’ new term logic, and the skirmishes between advocates of term and mathematical logic. Of course, the aim of mathematical logic is to explain the logic of mathematical reasoning, whereas term logic, especially that of Fred Sommers, is to explain the logic of natural (everyday) language.

Fred Sommers wrote the Forward of Englebretsen’s book. I had thought that a contradictory statement said something about its utterer, and still do, but Sommers gives a different perspective.  “Note that a contradictory sentence such as ‘some man is not a man’ transcribes as a sentence of the form ‘+X+(-X)’, which literally says nothing.”  The notation he used is his.

I read the book a few years ago and plan to reread it. The way statements expressed in Sommers’ logical syntax combine arithmetically is very cool. 

Interest as Cost of Immediacy

Interest is often justified as a reward for deferred consumption or waiting. That is clearly based on the perspective of the recipient of interest, the lender. On the “flip-side of the coin”, what is the perspective of the borrower and payer of interest?  Isn’t it the cost of not waiting or immediacy? Doing a Google search, I found a few sites that used the phrase “cost of not waiting”, but it seems rarely used by economists.  Doing a Google search for both “cost of not waiting” and “wages,” I got only two hits. One was a website of the American Economic Association. However, the “cost of waiting” therein wasn’t about wages. A search for both “cost of immediacy” and “wages” gave a few more hits. Again the connections were coincidental; the “cost of immediacy” was about the speed of execution of investment trades.

Eugene Böhm-Bawerk constructs an example to justify income to an entrepreneur-capitalist and criticize the labor theory of value in his Positive Theory of Capital (Chapter XII). He imagines building an engine over a 5-year period, employing 5 workers. Worker #1 works the first year, #2 the second year, and so on.  They are equally skilled and work the same number of hours. He values the finished engine at $5,500. Assuming the entire value comes from labor, one might say that each worker merits $1,100. Böhm-Bawerk says that can’t be correct, because the different workers wait different times between completing their individual labors and the end of the 5 years. How about $1200 for worker #1, $1150 for worker #2, $1100 for worker #3, $1050 for worker #4, and $1000 for worker #5? That seems okay, unless each worker demands payment upon finishing his work. Enter the capitalist, who pays each worker $1000 upon completion of his work, and retains $500 at the end. The $500 is the capitalist’s interest, the factor cost of capital. Böhm-Bawerk does not describe $200 as worker #1’s “cost of immediacy”, $150 as worker #2’s “cost of immediacy”, and so forth. However, the phrase surely fits.

For an entrepreneur who borrows to enable a project, the fit is not as good because it is not inevitable that the project will eventually be done by waiting. On the other hand, for borrowing to buy consumer goods or a home to live in, “cost of immediacy” is very apt.

It also fits the interest and/or fees for the borrower (not the lender) of a payday loan. This is not to liken the lender to an employer. The borrower is not an employee of the lender, but a customer. The lender is not paying a wage to the borrower.

The “cost of immediacy” is an example of “time preference”, an often used concept in economic theory. For example, a person prefers X now versus X later or X+ later, or vice-versa, where X+ is a greater quantity of X. It is typically used regarding consumption goods or capital or to explain interest, as on the Wikipedia page. For example a capitalist or a future retiree prefers $150 in 5 years versus $100 now.  Besides Böhm-Bawerk’s example, it seems rarely used concerning a worker receiving wages. 

A different sort of cost of immediacy is to pay X+ versus X, both immediate, to obtain something sooner. Some examples are:

- Paying more to deliver or receive something faster than alternative methods. FedEx was built on that desire.
- Paying a higher airfare due to booking shortly before travel. This is very common in business.
- Paying for a taxi versus waiting for a cheaper, later shuttle at an airport.

- Buying the latest high-tech phone or other thing when its price is very likely to be much lower later.

Another cost of immediacy appeared in today's news. The title should suffice. Visa, Wal-Mart Move to Speed Checkout for Customers With Chip-Enabled [Credit and Debit] Cards

Federal government debt

Time magazine’s 4/25/2016 cover story is about the U.S. federal government debt. The author James Grant says the debt is $13.9 trillion, whereas the famous National Debt Clock says it is $19 trillion. The difference is what the government owes itself, especially what the General Fund owes the Social Security Administration.

Sometimes the higher number is called "gross debt", e.g. here, and the lower number called "net debt". That doesn't mean the difference is not a debt. It's a different kind of debt that could be called "unfunded obligations.” See the above link again. However, the federal government's unfunded obligations are way more than $5 trillion. To the extent the present value of future Social Security and Medicare benefits exceed the present value of future taxes and premiums dedicated to these programs (plus $5 trillion), that is also an "unfunded obligation." That amount was estimated at $45 trillion in 2009.

Another perspective is that the lower number is debt that has been monetized, and the difference is debt that hasn't yet been monetized. When it comes time that cash is needed to pay benefits promised by Social Security and Medicare, then the debt will become monetized.

Social Security is sometimes defended by appealing to the Social Security Trust Fund. The Trust Fund is projected to be depleted about 2034. However, that does not imply that Social Security and Medicare won’t be more of a financial burden before then. They will be a greater burden as soon cash outflows exceed cash inflows, which is projected to begin around 2024. A cash-flow deficit will be used to reduce the Trust Fund balance (until it is depleted). On the other hand, the U.S Treasury will need to cover that deficit by selling more Treasury securities. In other words, non-monetized debt will be converted to monetized debt.

That gives another reason to call the Trust Fund bogus, the other being that the rest of the federal government has already spent the money Social Security and Medicare (mostly the former) loaned to the General Fund in exchange for non-marketable Treasury securities. 

Addenda: Only a few hours after posting, I see unfunded liabilities addressed here by the Mercatus Center at George Mason University. The article cites two other estimates. The first says the amount is $87 trillion. The authors add federal employees' future retirement benefits to $63 trillion for Social Security and Medicare.

The $63 trillion estimate as of 2012 versus the $45 trillion estimate as of 2009 on the Wikipedia page seems huge. On the other hand, it might be largely due to different interest rates used to calculate the present values. The 30-year Treasury rate was much lower 12/31/2012 (3.08%) than 12/31/2009 (4.60%). 

The second is $222 trillion calculated by Kotlikoff. The Mercatus link only goes to Kotlikoff's home page. His Testimony to the Senate Budget Committee showing the $222 trillion ($210 trillion later) is here. I don't know what to make of such a high number now and suspect error.

More Like a Business

The entrepreneur-builder EB in my April 2 post manages construction of a house and sells it in 8 weeks. I now suppose he borrows more money – $70,000 rather than $30,000 -- so he can pay each worker when his work is complete, and this will cost EB another $1,000 of interest.  I also make it more realistic by supposing he repeats the process. He starts a new project every 4th week, each with the same weekly cash flows.  In only the 5th week his cash flows will start a 4-week repeating cycle. 

The cash flow for one project is obscured in EB’s combined weekly results. Still, a pattern is there and EB nets a profit of $23,000 each 4-week period after the initial 4 weeks.   This agrees with intuition since one house is finished every 4th week after the initial 4 weeks.  A skeptical reader can check my numbers fairly easily in a spreadsheet. 

Looking at the combined results and ignoring their root, one might be fooled into believing that EB exploits the workers. He nets $23,000 each 4-week period like clockwork, apparently without difficulties. Also, his banker collects $2,000 of interest every 4th week starting the 8th week.

Now suppose EB decides to save part of that $23,000 netted every 4 weeks, say, $10,000. After 32 (= 8 + 6 x 4) weeks EB has saved $70,000, so he no longer needs to borrow from the bank. He can commence making $25,000 each 4-week period, not having to pay $2,000 of interest. He becomes self-financing.

This is a rather complicated story but still simpler than real life. Regardless, it essentially describes how many successful businesses operate.  The business uses its own retained earnings to finance growth and future operations.  

Let’s now assume EB can’t work the entire year due to weather, and he wants a little vacation. Suppose he can manage building 10 houses per year rather than 13.  10 x $25,000 = $250,000, which sounds like a nice income. But hold on. With 2 projects going at once – he is done with the 1st when he starts his 3rd – and probably some advance and afterwards work for others, he could probably use an office manager.  That person could order supplies, help schedule workers, pay expenses, handle sales transactions, do bookkeeping, and so forth. Deduct $40,000.

There is also the taxman, who wants about $55,000 for income taxes, Social Security and Medicare. I can imagine Obama saying to EB, “You didn’t build that!”

Passive Capitalists

Socialists especially resent passive capitalists who provide financing. They allegedly contribute nothing to a productive process, being nothing but parasites on wage earners.

George Reisman in Capitalism (Chapter  11, Part C) argues to the contrary. Similar to paying wages, it is businessmen who pay dividends and interest to passive capitalists, not wage-earners. The dividends and interest are a deduction from the businessman’s revenues or gross income, not a deduction from wages. The payment of dividends and interest is not from exploitation, because the passive capitalist is a source of gain to the businessman. The former provides the latter with a source of assets that can be put to a productive purpose.

Moreover, the recipients of passive income need not be passive at all. While their efforts don’t contribute directly to the businessman’s products – they are passive in that way – they may expend considerable intellectual labor evaluating and deciding where and with whom to deploy their capital. “Anyone who has attempted to manage a portfolio of stocks and bonds or investments in real estate should know there is no limit to the amount of time and effort that such management can absorb, in the form of searching out and evaluating investment possibilities[.]”

The author of After Capitalism writes, “Let us ask the ethical question. Why should I receive interest on my savings? I put money in a bank. There is no question of risk here. My savings account is fully insured by the federal government. There is no question of entrepreneurial activity on my part. I have not the slightest idea what the bank does with my money” (p. 42).

First, I believe he should send all interest he receives, minus any income tax thereon, to the federal government, where he believes it belongs in his vision of Economic Democracy.  More seriously, let’s address his myopia. A savings or checking deposit is a liability of the bank. Deposits appear on the liability side of a bank’s balance sheet, along with accounts payable and other debts due to the bank borrowing.  In effect a depositor loans money to the bank. What does the bank do with it? It can pay wages or other expenses or make loans to businesses, consumers, or other parties. Generally it makes loans at an interest rate higher (with more risk) than what it pays on deposits (often zero for checking). The difference is commonly called the "spread" or "net interest spread," the main source of profits and paying other expenses.  A depositor is much more passive than the bank or other investment manager that Mr. Reisman refers to, but still makes a small addition to the amount of capital in the economy.

Bank of America and Wells Fargo are two of the largest banks in the USA. The following numbers as a percent of assets are from their most recent balance sheets at financials.morningstar.com.

Bank of America:  Deposits = 56%,  Loans = 42%

Wells Fargo:  Deposits = 68%,  Loans = 53%

Nowadays passive capitalists are the major owners of large businesses. For example, insiders – the CEO and other executives and members of the board of directors – own much less than 1% of the outstanding shares of Exxon-Mobil stock.  Mutual funds and other institutional investors own a large part of the shares. They are typically not as passive as an individual who owns shares of Exxon-Mobil in a taxable account or an IRA. Exxon-Mobil’s current dividend yield is about 3.5% of the share price, much better than a bank savings account.

Less than 1% of Apple, Inc. shares are likewise owned by insiders. The dividend yield is about 1.9%.

For both companies the CEO and other top executives, owning a tiny percent of all shares, make a poor fit to Reisman’s ‘businessmen who own the final product’. The final product is legally owned mostly by a huge number of passive capitalists.  The CEO and other top executives run the business but are more as wage-earners. By Marxist criteria, does that mean the passive capitalists exploit the CEO and other top executives? J

The CEO and other top executives steer the business. This does not undercut Reisman’s analysis of the businessman that I presented on April 12. His implicit assumption is that the businessman is sole owner and steers the business (has control). 

Who Owns the Product?

Socialist theory holds that workers collectively own the final product they participate in making, not the businessman (or entrepreneur or capitalist), and especially not passive capitalists who supply financing. The socialist argument rests on the idea that all value is strictly due to labor. On the contrary, in Capitalism, Chapter 11, Part C, George Reisman says it is the “businessmen and capitalists, for they, not the wage earners, are the fundamental producers of products” (p. 482). It is businessmen who decide what is to be produced and how, and where and to whom it will be sold. “The socialists, indeed, have so little conception of the essential role of guiding and directing intelligence in production. ... It is true that the manual worker is necessarily concerned with only a small step in his firm’s overall productive operations. For this very reason, it is absolutely impossible that he could be responsible for its products – that the products could legitimately be said to be his products” (ibid.).

Like the payment of wages, it is businessmen who pay dividends and interest to passive capitalists, not wage-earners. The dividends and interest are a deduction from the businessmen’s revenues or gross income, not a deduction from wages (p. 483).

Socialism holds that workers collectively own the final product. To be coherent it should also hold that workers (1) wait until the product is sold before being paid, and (2) bear any uncertainty of sale price of the final product.  

Reisman on Inventories and Bankruptcy

I have been reading some of George Reisman's massive book Capitalism, more than 1000 pages. It is a fine book, but I find some of the appendix to Chapter 13 puzzling. The appendix is about overproduction, inventories, expansion and depression. He aims to refute the idea that excess inventories cause depressions (or recessions). I can agree with that, but the puzzles remain.

"What is true is that an enterprise can be plunged into bankruptcy if it holds an excessive inventory that is financed by the incurrence of debt. But then the cause is not the inventory, but the debt" (p. 597).

This blaming strikes me as one-sided. Bankruptcy occurs when the value of debt exceeds the value of assets. In other words, assets minus liabilities is less than zero. Bankruptcy is thus a relationship between assets and liabilities, not one side alone.  

"The existence of assets can never be the cause of bankruptcies" (p. 599).

This makes sense only if the enterprise has no debt at all. Bankruptcy means debts exceed assets. But if there is no debt, then bankruptcy is not an issue.

Suppose on a given date a firm has assets = $120 and debt = $100; a year later assets = $80 and debt = $100. It goes from not bankrupt to bankrupt, with no change in debt. It seems right to me for this case to say the assets were the cause.

I submit that assets in the form of excess, unsold inventory can indeed lead to bankruptcy. What typically precedes bankruptcy is the inability of a firm to pay its creditors and having too much debt. The debt is often the result of acquiring assets when prices are high, that is, compared to what they can be sold at or current market values much lower.

Indeed, this is what happened in the Great Recession 2007-09. For years banks had bundled mortgages (and other debt instruments) into complex securities called collateralized debt obligations (CDOs), slicing and dicing the mortgage cash flows into "tranches" in the process. The banks then sold the CDOs to other investors. Weeks and even months elapsed between acquiring the mortgages to make a CDO and selling the tranches. Most of this security creation was financed by borrowing -- selling commercial paper. When housing prices plummeted and mortgages began defaulting, the market value of the CDOs and mortgage-based assets on a bank's balance sheet (or off-balance sheet entity) plummeted. CDO buyers stopped buying, and the lenders declined making or renewing loans and even demanded loans be repaid. Many banks became bankrupt.

Sports contests

I entered the Post Newspapers NCAA basketball tourney bracket challenge again this year. In 2013-15 I did pretty well, making the top 25 among Strongsville entries each time, which got my name in the Strongsville Post. This year I did so again, and I finished at the 76th percentile locally and 77th nationally. The wider groups include a bunch of local newspapers. There were 923 local entries and over 141,000 national entries. I don't know how many for Strongsville. My decent rank was supported by picking 2 of the final 4 teams, one being North Carolina which lost in the finals. I picked champion Villanova to make it only to the Sweet 16. My worst pick was Michigan State. I picked them to make the Final Four; they lost in the first round.

I'm playing Fantasy Baseball again this year. I was lucky in drafting rookie Colorado shortstop Trevor Story, who is one of the big stories so far this very young season. He hit 4 home runs in his first 3 major league games. Of course, there are 159 games to go.

Ronald Coase

I have recently seen references to Ronald Coase. I had heard of him previously, but knew very little about him or read him. So I read one of his most famous articles, The Nature of the Firm. Insightful.

I recall Ayn Rand wrote an article very critical of some idea of his. To learn the date I did a Google search. The first hit was this from EconLog. I looked at it, since I'm a frequent reader/listener of Russ Roberts' EconTalk, and EconLog is a "sister" site of EconTalk. The date of Aug 4, 2013 was 2 days after Coase died at age 102.

Here is an interview with Coase by Reason magazine.

The Labor Theory of Value vs. The Capitalist

The root of this article is part of the book review of After Capitalism that I wrote for Amazon. Inspired by Karl Marx and the labor theory of value, the author criticizes what he calls passive capitalists, those who derive income – interest, dividends, profits -- from work that they don’t partake in.  He bases his argument on the labor theory of value (LTV).

Classical economists, the main ones being Adam Smith and David Riccardo, subscribed to the LTV to some extent. It’s obvious that labor does create things of value, but the classical economists also attributed value to land and capital.

Marx would have nothing of that and attributed all value to labor. Producing value from land requires some labor. Even the value of capital goods is all attributed to past labor. The author of After Capitalism also attributes all value to labor. However, his arguments and examples do not address different kinds of labor. He gives an example of workers growing corn, assuming the land is of uniform quality and the workers are all equally skilled. He doesn't say the workers do different kinds of work, like planting versus harvesting, so presumably they all do the same work.

Marx extended the LTV with notions of ‘abstract’ labor and ‘socially necessary’ labor. The former abstracts from the particular characteristics of all of the labor and is akin to an average, homogeneous labor. It was ‘abstraction run amok’ in my view. But it allowed him to side-step having to address different kinds of labor and different degrees of skill and efficiency, as did the author of After Capitalism.

This and the next two paragraphs are taken from my book review.  Suppose the following. An entrepreneurial builder (EB) wants to build a house. He estimates the total cost, including laborers and an architect who will be paid and interest to be paid after selling the house, to be $100,000. EB has only $20,000. Architecture documents and building materials and buying the land will cost $50,000, so he will borrow $30,000. The house is built and he sells it for, say, $125,000. He pays off the loan and interest of $31,000, leaving $94,000. How should the $94,000 be allocated between EB, the architect, excavators, carpenters, roofers, electricians, plumbers, concrete guys, etc.? (Presumably EB has first dibs for $50,000.) The LTV offers no answer. It attributes all value to labor, but doesn't answer this allocation question. Basing it on hours worked ignoring skills, quality, efficiency, etc. is absurd. The best it could do is look at market prices for these various kinds of work and allocate on that basis, but Marxist theory holds that market price and value are two very different things.

Hold on. Where is EB going to find all these workers who will wait to be paid until after the house is sold for an indeterminate amount? Being realistic, each will want payment as soon as his/her work is done at a rate or amount agreed to in advance, not some distant, indeterminate amount. Nor does each laborer desire to later argue with the rest and EB about what a fair distribution is. Alternatively, if laborers want paid as soon as his/her work is done, EB will need to borrow even more money and pay more interest. The capitalist-lender can save the day, and the project can proceed. Yet Schweickart asserts an entrepreneur like EB needs only the labor of others, and not money. Hmm, how will the workers be paid?

We could refine the example, saying that the $20,000 EB starts with was half provided by a passive capitalist, who will share in half the money that's left, if any, at the end of the project after a reasonable cut for EB's work on the project.

The author does see value in entrepreneurial work -- EB's is only one example -- but his analysis of capitalism fails to recognize that passive capitalists advance money to labor long before work is done and often wait to be paid when the workers' product is eventually sold. After Capitalism portrays passive capitalist income as entirely unjustified. It also claims savings and lending have "no direct effect on production" and production doesn't need savings.

The example could also be altered to assume that some or all the workers on the project combined have enough savings and willingness to lend the $30,000 to EB. Does that alter the analysis? It does very little in my view. Regarding the loan, they would be passive capitalists like a bank would be. Workers and passive capitalists being the same people should not matter. The functions remain separable. Qua workers their role on the project is no different. They might, however, be a little more diligent since they have a little more at stake on the success of the project. If they were to loan the money to EB at an interest rate set in advance, the dollars of interest are the same, barring the project going bad and EB defaulting.

On the other hand, suppose the workers supplied the $10,000 instead of the passive partner capitalist described above. Then the workers could have a greater stake in seeing how successful the project is, since the payoff to them is directly connected to the sale price of the house. They would be taking on some risk (uncertainty).

Let us return to the first two scenarios described. The first one in which EB doesn’t borrow from the bank and the workers are not paid until after the house is sold, I will call the “no passive capitalist” (NPC) scenario. The second one in which EB borrows from the bank and pays each worker as soon as his or her work is done at a preset rate or amount, I shall call the “passive capitalist” (PC)  scenario. Incidentally, After Capitalism doesn’t use the term, but EB could be called an “active capitalist,” an obvious contrast to “passive capitalist.”

After Capitalism grants value to an entrepreneur’s labor, management, and creativity. On the other hand, it says that a passive investor gains only at the expense of the people who produce the goods and services, by expropriating “surplus value” (p. 39), the favorite Marxist idea. He ridicules the idea that passive capitalists take any risk. For passive capitalists risk is a mere cover-up for expropriating “surplus value” from workers.

Let us compare the NPC and PC scenarios. If the house is sold near or above the price expected by EB, then in retrospect it’s easy to assume that the bank took no risk. However, the view at the time the loan is made is very different. What if the project fails and EB defaults on paying some or even all of the loan plus interest? In the PC scenario, the workers assume no risk for the project’s outcome. In the NPC scenario, they have significant risk. Remuneration for their work highly depends on the sale price of the finished house. Hence, one could argue that the workers’ risk in the NPC is transformed by the passive capitalist into the passive capitalist’s risk in the PC scenario. Arguing that the workers are merely expropriated is akin to arguing that workers are entitled to free insurance! Indeed, the passive capitalist has something in common with an insurer. It collects a “premium” in the form of interest, while it loses much more if disaster strikes. If a passive capitalist were to provide money that enables a project that employs workers, and is denied any interest, then who is exploiting whom? 

Finally!

I did it -- start a blog. No foolin'. The name, Correspondence and Coherence, are the names of the two dominant theories of truth in the history of philosophy. More than twenty years ago I wrote a 3-part essay about theories of truth for Stephen Boydstun's journal Objectivity. Part 1. Part 2. Part 3. In part 3 I combine the correspondence and coherence theories into a unified one.

I have no schedule regarding how much and when I will blog, but will do so as the urge arises. My topics will most likely be from philosophy, economics, and finance.