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Saturday, March 10, 2012

4. The Capitalist Function

The Concise Guide To Economics

by Jim Cox

4. The Capitalist Function

Socialist theory (predicated on the labor theory of value) concludes that profits are necessarily value stolen from workers by capitalists.  This conclusion is mistaken.  The function of the capitalist is as useful as is the function of the worker; profits are as warranted as wages. 
The two functions the capitalist performs in the economy are the waiting function and the risk-bearing function.  The waiting function occurs because all productive processes require time to complete.  It is the capitalist who forgoes consumption by investing in the productive enterprise.  While the worker is paid his wages as he works, the capitalist bears the burden of receiving payment only once the completed product has been sold.
The risk-bearing function is the entrepreneurial function of bearing the burden that a productive process may turn out to be counterproductive--that is, the value of the good produced may be less than the value of resources used to produce it.  While the worker is paid his wages for his work, the capitalist bears the burden of receiving payment only if the completed product is a success. 
Can either the waiting or the risk bearing function be abolished? No.  Even in a socialist economy these two functions must take place.  They are inherent in the nature of the productive process.  The closest a socialist economy could come to abolishing the capitalist function would be to force upon the workers themselves the waiting and the risking.  Notice that most workers are not too terribly interested in this option.  They freely choose to enjoy current consumption rather than holding out for the prospect of greater payment in the future and prefer to be paid for their work, specifically, rather than being paid only if the product succeeds.
In stark contrast to the mistaken socialist theory, the relation between workers and capitalists is harmonious.  A division of labor occurs wherein each party specializes in a self-chosen manner, each reaping the benefits of the efforts of the other.

Concise Guide to Economics, The

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