Capitalist Ink

Capitalists like to justify their control of the economy on the grounds of “efficiency,” which they define as the increased output for the same or reduced inputs; this, indeed, is the aspect of Capitalism which most impressed Karl Marx. But there are at least two problems with this claim: One, it is the wrong definition of economic efficiency, and; Two, it isn't true in any case, or at least not in all cases. Concerning the first point, the question of outputs over inputs is an engineering question, and the engineers need no help from the economists on this score. “Efficiency” in economic terms means eliminating economic rent and accounting for externalities, questions which the economists often try to avoid, since raising these issues calls the whole subject of price theory into question. “Economic rent” is an amount charged for an item over and above what is necessary to fairly compensate the labor and capital involved in producing and distributing the item. For example, let's say that some widget can be sold for $10, a price which gives decent returns to capital and a fair wage to labor. But, suppose that the producer can sell it for $20, perhaps because of government control (patents, for example) or monopoly power. The extra $10 is an economic rent, a cost to the economy that adds nothing to the economy except an excess profit.

The search for profits is quite often an exercise in rent-seeking. For most small businesses, such rent-seeking is made impossible by the force of competition; they must take whatever price th e market offers, and do their best to make a living at that price. However, as companies become large enough to control significant segments of the market, they can become price-makers rather than price-takers,and impose significant economic rents on the economy. Two examples serve to illustrate the process: oil and ink. Most of us see the price of oil in the price of gasoline for our cars, a price that is set by supply and demand. However, the supply is controlled by a small group of suppliers, no more than five. These suppliers have not made any significant expansions to refining capacity in more than a generation. Thus, they can control the supply. They like to blame this on the government and the environmental rules governing new refineries. However, this claim doesn't pass the smell test. In the first place, many chemical industries are operate under the same or even more stringent rules, yet have managed to expand capacity to keep up with demand. Further, the large producers actually bought up small refiners and shut them down, thereby giving them greater control and pricing power. Since the cost of gasoline is a part of everything, this spreads economics rent (inefficiency) throughout the whole economy. If Clinton, McCain, and Obama really want a solution to gasoline prices, I suggest they break up the oil Oligarchy which controls those prices.

Another interesting case is ink and toner for printers. Ink is manufactured for pennies on the pound and sold for dollars on the ounce. Therefore, there is an awful lot of economic rent. Moreover, there is a huge premium for color ink and toner, even though there is no difference in manufacturing cost. How are the producers able to get away with this? Of course, the simple solution is to simply fill your own cartridges. If you purchase the ink yourself, it is a third or less of the cost of buying it from the manufacturer. And it should be an easy process. But it isn't. The manufacturers do everything they can to make the process difficult or impossible. They do not, of course, supply a fill port as a convenience to their customers. The customer is an enemy who must be looted at every opportunity; his convenience is not an issue. But beyond the design of the cartridges, the suppliers use sophisticated electronic locks to freeze out re-filled cartridges. Like all things electronic, there is usually a way around these locks, if it can be found. But the information is a closely-guarded secret. (By the way, does anybody know how to break the code for a Ricoh Aficio SP 410?)

Since all businesses depend to some extent on printers, a tremendous amount of inefficiency (economic rent) is introduced into the economy. It adds nothing to production, and steals a bit of each man's profit; it benefits a few at the expense of the many. But what is really criminal is how little attention economic rent and its measurement gets in the economic literature. The profession that should be at least reporting the truth is looking the other way.


Jesse Saturday, May 10, 2008 at 5:27:00 AM CDT  

John good stuff.

You write: "The extra $10 is an economic rent, a cost to the economy that adds nothing to the economy except an excess profit."

Would some make the argument that excess profit, at least a certain percentage, goes back into the economy in some way (buying more expensive cars, more frequently patronizing restaurants, etc.)?



John Médaille Friday, May 16, 2008 at 10:30:00 AM CDT  

Jesse, you are absolutely correct that the $10 economic rent does find its way back into the economy, because all money, unless stuffed in a mattress, finds its way back. Even the money that the bank-robber takes from the bank finds its way back to the bank as the bank-robber spends it and the shop-keepers deposit the proceeds. Nevertheless, I would not recommend bank-robbery under the title of economic development.

Profits, taxes,wages, etc. all go into the economy. The question is more about who has the right to spend such funds. The economic rent from the capitalist ink takes profits from the pockets of one business and puts it into the pockets of another, without adding any value.

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