Profits vs Wages

The Ocandida Case - The Case

The Case

Era A -- The first capitalist

one day a farmer, GumLover Braque, decided he was bored with farming for 8 hours and watching DeliVision for 4 hours day in and day out
so for two years he continued to farm 8 hours a day but spent another 4 hours building a gum factory instead of watching DeliVision
by the end of 2 years he had put the equivalent of one year's standard labour (8 hours a day) into the project and the gum factory was finished
then he said to his neighbour, PoorSlob: 'why don't you come and work in my gum factory and then you won't ever have to plough these cruddy fields again? I'll pay you the same 100 dolorios that you're earning now but you'll find the work is a lot cleaner and more fun (and so it was) -- and I'll let you chew all you can bite off -- this is even better than the best of all possible worlds'
so PoorSlob took him up on the offer and began to run the gum factory -- and sure enough it produced 200 dolorios of revenue a year (catering to MerryGland tastes) from the freely available trees in Ocandida
PoorSlob took his 100 dolorios wages and GumLover received the remaining 100 dolorios as profit
GumLover supported his family on his 100 dolorios profit, gave up farming, and spent the next year building another Gum Factory
at the end of that second year, he hired VerkEthic to run the second factory -- now each of PoorSlob and VerkEthic were earning 100 dolorios a year and a total of 200 dolorios was flowing to GumLover as profit

the picture looked like this:

Era A -- The first capitalist
People	For	For both	type	Wage cost	Annual
	factory #1	factories		of 2 factories	profit %
GumLover	100	200	profit
PoorSlob	100	100	wages
VerkEthic		100	wages
Total	200	400		2 years
				= 200 dolorios	100.0%

GumLover gave up working, took his family for much longer vacations to Folderol each year, and apart from that lazed about each day watching dope operas on DeliVision

Era B -- The first workers revolt

but then, PoorSlob and VerkEthic went on strike -- they said it wasn't fair that they had to work all day and get only 100 dolorios whereas GumLover could sit around watching DeliVision and earn 200 for doing nothing
GumLover answered that he'd had to give up DeliVision for two whole years to build the first gum factory -- the opportunity was freely available to anyone else, but he'd been the only one willing to make the sacrifice and work that hard to achieve his objective -- he was entitled to the profits on the capital that he'd accumulated by his own hard work
PoorSlob and VerkEthic replied that he was entitled to some profits for sure, but not to profits so great that he earned twice what they did and did absolutely nothing -- he would have to come up with something better if this was really to be the best of all possible worlds
so GumLover agreed to pay them each 120 dolorios per year -- this was 20% more than any of their farmer friends were earning, he stressed, and they had much cleaner working conditions (not having to plough cruddy fields) and so should be happy with that

so now the picture looked like this:

Era B -- After the first workers revolt
People	For	For both	type	Wage cost	Annual
	factory #1	factories		of 2 factories	profit %
GumLover	80	160	profit
PoorSlob	120	120	wages
VerkEthic		120	wages
Total	200	400		2 years
				= 240 dolorios	66.7%

for a year it went this way: PoorSlob and VerkEthic each earned their 120 dolorios wages and GumLover pocketed the remaining 160 dolorios profits -- he had to cut down a bit on the length of his Folderol vacations but he could still sit around each day watching dope operas while PoorSlob and VerkEthic put in their 8 hours in the two gum factories

Era C - The second workers revolt

after a year, PoorSlob and VerkEthic went on strike again -- they conceded that GumLover had the right to earn some profits as compensation for his two initial years of sacrifice -- but it wasn't fair that he should earn 160 dolorios while they earned only 120 dolorios -- in the best of all possible worlds things ought to be more egalitarian, they insisted
GumLover argued and argued but eventually grudgingly agreed to pay them each 133 dolorios and he would limit his profits to only 133 dolorios too -- surely that was fair, all of them having the same earnings -- surely this was now the best of all possible worlds

so now the picture looked like this:

Era C -- After the second workers revolt
People	For	For both	type	Wage cost	Annual
	factory #1	factories		of 2 factories	profit %
GumLover	67	133	profit
PoorSlob	133	133	wages
VerkEthic		133	wages
Total	200	400		2 years
				= 267 dolorios	50.0%

in short, the two factories produced 400 dolorios revenue and it was split three ways even-steven between the PoorSlob, VerkEthic, and GumLover

Era D - The farmers revolt

by this time, dozens of other capitalists had put in their two years of hard work (foregoing DeliVision) and gum factories were sprouting up all over Ocandida
now all the workers were earning 133 dolorios a year and all the factory owners (owning 2 factories each) were earning 133 dolorios each in annual profits
in fact, half the population were now either factory owners or factory workers and the remaining half were farmers -- so now the farmers had to grow twice as much food as before in order to feed the country but they sold their produce at ridiculously low prices so that they were still only earning 100 dolorios a year (just as before) -- but that made them mad -- they said this for sure wasn't the best of all possible worlds
so the farmers revolted and said they were damned if they were going to plough their cruddy fields for only 100 dolorios -- so in the end they raised their produce prices and earned 133 dolorios too -- it meant that food prices went up a bit, but everyone had 33% more disposable income than formerly so this was no problem

so now the picture looked like this:

Era D -- After the farmers revolt
People	% of	Individual		Annual
	population	incomes		profit %
Factory owners	17%	133	profit
Factory workers	33%	133	wages
Farmers	50%	133	farm income
Total	100%	400
				50.0%

everyone earned the same -- surely an egalitarian ideal in the best of all possible worlds

Free enterprise had raised the standard of living in Ocandida

furthermore, looking back on the last 5 years, everyone agreed that industrialization and free enterprise had been a great boon to Ocandida -- everyone's standard of living had gone up 33% -- well, not quite, because of the higher food prices -- but anyway, people were now able to save for their retirement and afford longer vacations in Folderol -- everyone agreed that the gum factories had been good for Ocandida -- and there was no end in sight because the MerryGland appetite for something to chew on continued to grow unabated

Era E - The first general populist revolt

but this rosy view of things did not persist
the farmers and workers joined forces and revolted again in the first general populist uprising in Ocandida
the populists said that PoorSlob, VerkEthic, and the other early factory workers had been simpletons -- 'equal income' wasn't the point -- the point was this: it was simply unfair that 83% of the population had to work 8 hours a day for their 133 dolorios while the other 17% could sit around watching dope operas on DeliVision
the factory owners pointed out, in rebuttal, that they had each paid their dues with two solid years of sacrifice (working 12 hours a day with no DeliVision at all) -- and the public generally conceded they were entitled to some compensation for that sacrifice, but not to the extent of 133 dolorios a year for a life of sloth in perpetuity
after all, if they'd been paid a year's wage for the time of building one factory that would have been an extra 133 dolorios -- one-time payment kaput! -- but, argued the factory owners in rebuttal, one year's working late evenings over a two-year-period without DeliVision was a lot tougher than a normal one-year-job -- certainly their sacrifice was entitled to a lot more than a 133-dolorio one-time payment -- besides, if there weren't sufficient motivation, no one would ever build a new gum factory again
the populists agreed that some motivation was necessary but it didn't have to be as big as 133 dolorios a year in perpetuity
finally the populists decided that it would be fair if the owner of a pair of factories earned 13 dolorios per year in perpetuity as compensation for his initial two years of sacrifice -- in this way, they would be paid back for their sacrifice (133 dolorios worth of work) over the next ten years and everything after that would be gravy -- and that was an awful lot of gravy, if you started young enough
the trouble was, that if only 13 dolorios out of the 400 dolorios revenues from a pair of factories went in profits to the owner, that left 387 dolorios to be divided in wages between the two factory workers -- but then average wage rates would be 194 dolorios -- in which case the owner's annuity for a 10-year payback should be 19 dolorios -- in which case the wages had to be slightly less -- they finally got a mathematician to solve the simultaneous equations involved

the final answer looked like this:

Era E -- After the first general populist revolt
People	For	For both	type	Wage cost	Annual
	factory #1	factories		of 2 factories	profit %
GumLover	10	19	profit
PoorSlob	191	191	wages
VerkEthic		100	wages
Total	200	400		2 years
				= 381 dolorios	5.0%

GumLover and the other factory owners squawked like mad -- they said incentive had been killed and no one would ever build a new gum factory again -- furthermore, they said the 10-year payback the populists talked about was wrong -- since each factory owner owned a pair of factories and each factory required one-year's labour to construct (i.e. 190.5 dolorios) the total investment for two factories amounted to 381 dolorios and an annuity of 19 dolorios would take 20 years to pay them back (not 10)
but the populists replied that each owner had only put in one year of elapsed additional time (i.e., additional half-time over a two year period) and so their personal investment was really only one year's wages -- so a 10-year payback was still the relevant figure
the owners scoffed contemptuously that the populists simply didn't understand accounting -- it was really a 20-year payback -- equivalent to a profit rate of only 5% (as clearly shown in the table above)
the populists replied: well in that case the 5% wasn't a bad return on completely risk-free capital anyway -- so there
well the factory owners were outnumbered and had to give in -- (this was before the age of expensive electoral campaigns financed by the factory owners where the funders' opinions counted more than the manipulable workers')
so the factory owners were unhappy -- 'you'll see,' they grumbled; 'there'll never be another gum factory built'
but they were wrong -- the 5% return on a risk-free basis turned out to be quite sufficient to induce more factory building-- what had really annoyed them, of course, is that they had to go back to work and leave their beloved dope operas on DeliVision -- some of them went back to work in one of their two factories (thus displacing an employee, who returned to farming); other factory owners took up farming themselves -- either way, farmers as a proportion of the population showed a slight upward blip
GumLover himself chose farming -- he no longer had the energy to work 12-hour days, so he settled down to a regular 8-hour-a-day job on a farm (191 dolorios) and merely used his 19 dolorios profit to take longer holidays in Folderol than normal workers or farmers could afford

Era F - The first mega-capitalist

after a happy old age (though slightly annoyed that he'd had to return to work) GumLover Braque died one day in an ecstasy of chewing on his own product -- he left his two factories to his son GoneMad
but, as it happened, GoneMad also inherited 2 factories from each of 9 uncles who had perished in a yachting accident after a boisterous family gathering (of the entire Braque clan) off the shores of Folderol
so GoneMad now had 20 factories -- which yielded him a total income of 191 dolorios (ten times the normal annuity of 19 dolorios for a two-factory owner)
now for the first time (since the populist uprising) a factory owner could afford not to work -- just like in the good old 'robber baron' days (Eras A to D)
GoneMad could have simply sat back, watched DeliVision, and raked in his 191 dolorios per year (actually 190.5, but who's counting?)
but instead of that, he worked incredible 16-hour days for the next 10 years and built 10 more factories -- with his 30 factories he now received total profits of 286 dolorios per year -- he lived on 191 dolorios and used the remaining 95 to pay for a worker to work half time on factory construction -- in this way, his reinvested profits yielded another factory every 2nd year -- he then reduced his own consumption and lived on almost nothing so that nearly all his revenue could be plouged back into his enterprise (the only ploughing GoneMad had ever done) -- the new factories sprung up even faster
mathematicians among our readers will have already computed that a 5% annual return (for risk-free capital) doubles itself every 14 years -- so it will be obvious that 14 years later GoneMad owned not 30 but 60 factories, and 14 years after that (some 38 years after his initial inheritance, by which time GoneMad was 58 years old) he owned 120 factories
the annual profits accruing from 120 gum factories amounted to 1,143 dolorios a year -- 952 dolorios more than GoneMad needed to live on (now that he had returned to a more comfortable lifestyle)
so GoneMad began to lend the extra dolorios out to wannabe capitalists who wanted to own gum factories but just weren't prepared to work 12-hour or 16-hour days to get there -- he charged them 4% interest, which permitted them to make a 1% spread with the 5% profits they earned from their financed factories (at absolutely no risk)
'What the heck," said GoneMad; "what do I need factories for anyway?" So GoneMad sold all his factories and simply loaned out the proceeds at 4% to wannabe capitalists
more and more gum factories sprang up (the MerryGland appetite for gum seemed inexhaustible as, at that time, seemed the tree resources of Ocandida)
by the time GoneMad Braque died at the ripe old age of 93 he was worth the equivalent of 480 gum factories (or a capital sum of 91,440 dolorios) -- his wealth having quadrupled over the intervening 35 years at 4%

Era G - Bankers and managers

over the years other people emulated the successful pattern pioneered by GoneMad Braque -- and as the century wore on, the handful (50) of mega-capitalists grew their fortunes (thanks to the arithmetic of compound interest) from GoneMad's measly equivalent of 480 gum factories up to the nice round number of 1,000 gum factories on average
so a century after GumLover had built the very first gum factory, Ocandida was sporting some 50,000 gum factories -- they were owned by some 500 capitalists (owning 100 gum factories each) whose factories in turn had been financed by 50 mega-capitalists (who owned the capital equivalent of 1,000 gum factories each)
at this point the mega-capitalists, who no longer owned any factories but merely debts from the capitalists, changed their name from 'mega-capitalists' to 'bankers' -- and the capitalists, who had no net worth (their factories being entirely financed by the bankers), changed their name from 'capitalists' to 'managers'

so now the distribution of wealth among the population of Ocandida looked like this:

Era G --Wealth in the age of bankers and managers
People	Numbers	%	Wealth per indiv		Wealth for this class
			factory	dolorios	factory	dolorios
			equiavals		equiavals
Bankers	50	0.05%	1,000	190,500	50,000	9,525,000
Managers	500	0.50%	100	19,050	50,000	9,525,000
less their debt			-100	-19,050	-50,000	-9,525,000
Factory workers	50,000	49.73%	0	0	0	0
Farmers	50,000	49.73%	0	0	0	0
	100,550	100.00%			50,000	9,525,000

while income distribution looked like this:

Era G -- Income in the age of bankers and managers
People	Numbers	%	Income	Income for this class
			per indiv
			dolorios	dolorios	%
Bankers - 4% return	50	0.05%	7,620	381,000	2.0%
Managers - 1% sprd	500	0.50%	191	95,250	0.5%
Factory workers - wages	50,000	49.73%	191	9,525,000	48.8%
Farmers - farm income	50,000	49.73%	191	9,525,000	48.8%
	100,550	100.00%		19,526,250	100.0%

Era H - The final populist revolt and the expulsion of the bankers

that's when the workers and farmers joined forces as populists and revolted for the final time --- 'the bankers make up only 0.05% of the population,' they complained, 'but they earn 2% of the national income -- no person needs to earn 7,620 dolorios per year, 40 times what the rest of us earn -- and they do nothing all day except watch dope operas on DeliVision -- furthermore, those same bankers (being only 0.05% of the population) own 100% of the national assets of this country (farms and trees being considered a free resource available to anyone) -- that's simply not fair'
but the bankers replied: 'without our financial resources, gum production in Ocandida would grind to a halt and The MerryGlands would be very mad at us -- furthermore, wasn't it true that the gum business raised all the farmers' and workers' incomes in Ocandida by 91%?' -- this was true, but the populists still argued it was excessive that the bankers be rewarded with individual incomes 40 times what they normal people made
as for the managers, there was no quarrel with their income level (which was the same 191 dolorios as the workers and farmers) but rather with the fact that they did absolutely nothing -- they merely reaped the 1% spread on the factory earnings over the interest they had to pay to the bankers -- 'they get 191 dolorios for doing diddly-squat while the rest of us have to work 8 hours a day,' said the populists
no, said the managers: 'we manage' -- but there was nothing to manage, for each gum factory was entirely run by the one factory worker in charge of it
so the country had a referendum and by an overwhelming majority expelled the 50 bankers and expropriated their assets -- the managers were allowed to remain in Ocandida as long as they gave up their nothing job of 'managing' and became farmers or workers like everyone else
this worked OK for a couple of years
but then some of the factories began to fall into disrepair -- no one bothered to fix them, for in fact no one owned them (they'd been expropriated by the state) -- no new gum factories were ever built (because there was no profit motive to build them)
for a while it didn't matter because everyone kept on earning 191 dolorios a year
but then the MerryGlanders came in (financed by a new breed of bankers) and cut down all the free trees in Ocandida -- instead of building gum factories to process them they turned them into cardboard boxes in which they packaged computer software -- and the average income in The MerryGlands rose to quadruple the Ocandida level and all the farmers and workers in Ocandida thought it was most unfair that MerryGland citizens could earn 800 dolorios while in Ocandida everyone was stuck at 191

Era I - The return to an agrarian community

then came the final blow -- the MerryGlanders gave up chewing gum (it was too hard to play computer games and chew at the same time) -- the economy of Ocandida plummeted -- today all the factories are idle, abandoned derelicts and everyone has gone back to farming, earning about 100 dolorios again, and ending up dolorous and destitute in their old age -- so much for the gum trade
'this sure isn't the best of all possible worlds,' the people cried -- 'life is a vale of tears and the source of all our sorrow has been the dolorio' -- and they went back to ploughing their cruddy fields

Your views?

The initial views expressed here are solely mine. You don't have to agree with them. However, if you'd like to explain your disagreement (or, gulp, even express concurrence) I'd welcome your comments -- though you should probably read the remaining section first.. I plan to post some of the responses (where I have permission to do so). Some responses to date may be found on the Reactions page.

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Last updated: Aug 10, 2005

Rod Anderson
rod@rodmer.com

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