A literal muse today.

SimpleStacker unleashed the creative demon within, so here we are. This is my comment to their excellent “meaning-of-capitalism” reflection earlier today (#1457033):

I'm toying with an idea to explain this insanity. I think it's

1. Wittgenstein's "what would it look like if the Earth went around the sun"?
2. extreme lack of empathy, in its deep meaning of: seeing the world through someone else's eyes. (Which is ironic, because it's the very left-wingy and weak-minded people who scream about this quality the most).

For 1:
when a normie looks at the news or what Elon Musk is up to, or what a successful businessman in their area seems to be doing, it looks like they are "endlessly accruing personal wealth" for no obvious reason... extravagant houses, flashy cars, nice vacations. Always more, always bigger stacks. (My fav Icelandic-village example here is the left-wing anger against heli-skiing... objectively unnecessary, but extremely expensive and "wasteful" -- at least if you care about kerosine consumption and CO2 emissions, but for some reason can't care about adrenaline thrill, extreme awe, or the entrepreneurial skill of assembling resources we have into a service others value highly) Never can they assess that there's a different mindset/theory/framework that equally well (=better) explain the facts.

For 2: the most important thing I ever got from endless exercises in Game Theory class (or other econ modelling) was to flip the game and assess optimal strategy from the other party's point of view. It's an underappreciated way in which I believe those trained in economics are, if anything, more capable of understanding where another human is coming from. And it's a way to understand that the game doesn't end after a single capitalist tries to extort/grab their share via trade... but that it's a competitive, continuous process.
And if you do, you see the endless personal wealth being productive: build larger plants, offer more and wider services, better supply the world with services. For the "conspicuous consumption" and the flashy stuff, I've never understood the hatred... let them. It's the most obvious and harmless redistribution of wealth there is?

It reminded me of an unpublished piece I had gathering digital dust somewhere — congrats, @siggy47, I know I've promised original material for a while. (And looking at it now, for the life of me I can't grasp why the editors passed on this: freakin' excellent piece of entertaining and educational economics writing):

A Tale of the Wages on a Fishing BoatA Tale of the Wages on a Fishing Boat

The chant is familiar to most of us: Workers of the world, unite! You have nothing to lose but your chains.

But closing the ideological pamphlets and stepping down from our soapbox into the real world of economic production, why should we unite? And economically speaking, what is the “we” that’s supposedly uniting? Plus, the modern world isn’t exactly jam-packed with chattels and fetters to lose, or at least, the minimum chains there are, are put there by nature (or the divine) in that man must eat and toil for his sustenance.

The greatest trick the (Communist) devil ever pulled was to think that there was an affinity between “workers” of this business or the other. It always struck me as weird to think that the factory line worker in the industrial part of town had anything economically meaningful in common with the barista worker of a downtown, hipster café — or even a similar business across town or across the country or the globe.

Surely, when inside one company, I’m combining forces with other people of that company. My affinity/affiliation is with those other people uniting to achieve the thing the company set out to do — the coworkers, the bosses, and, by extension, the owners. Even the word “company” (#1429046) supports this notion; we are here together, we are doing things as one. (Etymologically, the word derives from the Latin words for “with” and “bread,” so “bread fellow, messmate”). What solidarity or unity is there to speak of between a messmate of this table and another table way over there? Surely I'm beholden, if anything, to my messmate of this table?

Read in every odd newspaper opinion column or overheard in your local pub, we learn that capital oppresses the workers, that workers aren’t paid a living wage. It’s unfair that their bosses make more than they do, that the owners of their company banks more in a year from company profits/dividends than workers take home in a decade.
But they have different roles, take on different risks, and stand to win or lose different things.

One of the first production functions that economics students are presented with is Q=K+L; capital mixed with labor creates output. While there’s plenty of nuance here — with real-life capital or labor not being uniform blobs, with capital meaning tools and (labor-enhancing) equipment rather than financial assets (#1416952), and other relevant scaffolding (institution, property, rule of law) — the core insight is important:

Capital and labor are complementary, not antagonistic.

---

There are precious few production functions involving merely L. (Plus, there’s lots to be said about the role of the entrepreneur in arranging the production or coming up with the idea.)

Economic historian Christopher Meissner, in his excellent broad economic history of the world One From the Many (#960480), explains how much of the “Golden Age of growth” in the postwar decades stemmed from a cooperative equilibrium between workers and owners: The coordination between workers exercising wage restraint and owners investing long-term made everyone wealthier. Nothing could more clearly indicate the complementary nature between labor and capital.

Let’s illustrate with a fishing vessel. It’s an elementary production process, well-known to industrialized and preindustrial societies alike.
Involved in this simple fishing company we have three roles — captain, worker (fisherman), and owner — and one major asset (the boat). (We could also consider the fishing stock, or fishing grounds, or quotas a tradeable capital asset but let’s ignore that for now.)

All the value generation comes from spoils: the catch. The resale value of the fish is what bankrolls the entire venture (another etymologically related word!). No fish, no boat, no worker salary, no captain bonus or owner dividend, no proceeds with which to pay for boat maintenance.

The boat was already created from some previous process of labor and capital, its market value often a large multiple of the daily/annual catch.
Right off the bat (boat?!), then, we see that the worker and his “boss,” the captain (and, his ultimate boss, the owner) are incentive-aligned: They all benefit when there’s more fish caught and they all suffer when there’s less. Of what economic relevance is whatever happens on another boat, what opinions on a fair wage are peddled by a union of workers or a councilman in the next fjord, village, sea, or nation?

What the literature on principal-agent problems indicates is that they’re not proportionately incentive-aligned. The worker, at least to fit the story in the modern workplace, is contracted at a fixed, pre-arranged salary, which the captain and/or owner forecasts be competitive; the owner is a residual claimant in that he or she receives what’s left after salaries and boat upkeep is paid for. If the worker-fisherman isn’t as good at catching fish as presumed, the owner suffers; if the captain lowballs the worker-fisherman, the latter will find better options on the next boat (or, per efficiency wages, the captain will receive a less-than-ideal worker).

(Observations of unfair differences in income usually suffer from a selection bias: It’s merely the outcome of successful ventures. A full, honest accounting would include the myriad of businesses that merely muddle along, paying salaries for a while but never accrue much wealth for their owners.)

There is a way to turn the entire ship into owner-operators, with varying degrees of payoff roughly in proportion to responsibility or seniority (a proxy for skill or experience). Historically, that’s how long-term ventures on the high seas were structured, going back to Ancient times (I highly recommend William Goetzmann’s chapters in Money Changes Everything on Roman and Athenian finance).

Famously, Herman Melville’s whalers in Moby-Dick all had fractional shares of the (net) proceeds — the “lay” — which turned all the sailors on the ship into incentive-aligned owners.Famously, Herman Melville’s whalers in Moby-Dick all had fractional shares of the (net) proceeds — the “lay” — which turned all the sailors on the ship into incentive-aligned owners.

Wages are remuneration to labor, which is merely one portion of the risk- and profit-sharing venture that is a company. Technically speaking, they are range-bound: They can’t sustainably fall below a worker’s next-best option, and they can’t rise above what that worker produces for the company (i.e., the value of the fish). The salary, thus, equilibrates around what economists call their discounted marginal value product. Yes, it gets harder — both for you and your employer — to assess exactly what that value is when (unexpected) inflation jots nominal prices around, but it doesn’t change the fact that your market-based remuneration is non-arbitrary.

In small organizations, or simple enough production lines, it’s easier for most people to see this reality: No matter what the local legislator, columnist, union boss, or political activist says, a fisherman’s salary can’t be higher than the retail value of the fish he catches. If your café or pizza joint doesn’t have any customers, the contractual “salary” won’t remain earned for very long — no matter the words spoken about minimum wages or a living wage or human dignity in an evil, capitalist society.

Economics teaches us to look through simple heuristics or loose affiliations like “worker solidarity” and inspect each and every agent’s risks and rewards. All that the modern workplace is, as bewildering and magnificent as it is, is a collection of such fishing ventures. As workers, owners, or managers, we bring different skills, roles, and assets to the table; we expose ourselves to different types of risk, and we receive different types of payoff in return.

What should be imminently clear is that my interests as a worker are not directly misaligned with my bosses or my company’s owners: We are trying to do the same thing, whether catching fish, selling products, making cars, or creating content online.
In Mark Baum’s words from the culminating speech in The Big Short, “When the hell did we forget all that?”