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Costless Diversion in Modern Oligarchy

May 13, 2017

I argue in my book Capitalism as Oligarchy that inequality isn’t a side-effect of something we happen to call ‘capitalism’ but is rather the core of what the system is. We gain a great deal of insight approaching it this way for not only does it conform to the historical fact that mankind has been materially ruled by a tiny minority for all of recorded history right down to the present day, it pierces through the confusing complexity of ‘capitalism’ and opens up a wonderful simplicity. I believe it’s crucial to see the modern system as nothing other than the current phase of ancient oligarchy.

All we need is plain common sense and a willingness to critically examine the ideologies of ‘capitalism’. I start by identifying the basic motives, risks, and dynamics that seem integral to any system of unequal power. If the system is oligarchy, then few would deny that the core motives of the empowered minority are to aggressively defend and expand its high position, what I, following political scientist Jeffrey Winters, call wealth defense, and to live luxuriously. Equally obvious are the key risks against which the propertied minority must defend itself—they arise from rival competitors for power and, existentially, from the propertyless majority. And finally, given these motives and risks, we can derive two key operating dynamics, the action processes by which the motives of the minority are achieved and through which wealth gets its meaning. I call them diversion and suppression.

I plan to present over the next several posts a few extracts of the book so as to demonstrate how these dynamics operate in our modern world. I begin with diversion, the dynamic by which the oligarchy forces the population to produce goods and services in fulfilment of its motivational desires of wealth defense and luxury consumption. We’ll discover insights into the nature of profit, the way in which the system structurally guarantees costless diversion to the oligarchic class, and how it is that the population is always a mere break-even and never a source of profit. We’ll rely heavily on the profit equation of mid 20th century economist Michal Kalecki but will interpret it in a somewhat unconventional way.

Let’s start by looking at the essential diversion flow as it has existed throughout all of civilization.

Diversion Command Issued ==> Diversion Produced

We get from this diagram two important pieces of information. The first is that diversion is ludicrously simple. The second is that it isn’t an equal exchange like we’d expect to find in ‘capitalism.’ It’s a command in the full military sense of the word. Generals don’t purchase compliance from privates, they command it; and what that means is that no units of power are lost in the process. If they were, if issuing orders entailed a cost, then power would flow downward and the two ranks would eventually meet somewhere in the middle. It’s the same with the oligarchic class; if it were to lose units of power in the process of commanding diversion, then power would flow downward to the population and oligarchy would quickly collapse. The power of diversion must be structural for oligarchy to exist and it can’t therefore encompass a ‘thing’ that’s spent or exchanged. At the macro level, diversion has to be costless—it can’t be paid for.

This simple power relation, though, is obscured in our modern world by an outer veil of money. We’ll find throughout this section that money is a key source of confusion and the problem here is that it creates an illusion of exchange.A general’s command is clearly not an exchange but it seems different for transactions involving money. When an oligarch pays money to workers for his diversion, it appears to be a proper exchange completely unlike the general’s orders. To see it’s not requires we look at the entire transaction. Here’s an example using a historically typical flow.

Diversion Purchased via Money ==> Diversion Produced ==> Money Returned via Taxation

The oligarchy in this case purchases diversion goods via a monetary payment to workers, the diversion is produced, and the monetary sums advanced are returned via taxation of the workers. If we focus only on the purchase, the transaction seems like one of exchange, but when we widen our view we can see it’s just an illusion. Money flows in a giant oligarchic loop that’s integrally tied to diversion. It starts with a command that’s issued via money and closes with its return via taxation. The key point is that money must parallel the power it represents. For oligarchy to exist, diversion must be monetarily costless.

The idea is the same when we turn to modern oligarchy with the exception being that profit takes the place of taxation. (I’m using profit here and throughout the rest of the book as a generic term for all monetary income associated with ownership. It includes corporate profit, interest, rent, and also high wages and bonuses tied to an owner-like position.) Diversion and profit are linked in modern oligarchy in what represents the most fundamental flow of the system, the diversion-profit loop.

Let’s begin exploring it by asking a most elementary question—where does profit come from? It can’t be from workers since they can spend no more than the wage received. (I ignore rising worker debt as it’s self-limiting.) Wages are a source of revenue through sales, but they’re also a cost. For the system as a whole, they must net to zero—workers are simply not profitable. A firm can’t make a profit selling only to its own workers; the consumer sector can’t make a profit selling only to consumer sector workers; US business can’t make a profit selling only to US workers; and the greater system can’t make a profit selling to workers period. This quandary isn’t solvable by charging a higher profit margin as that’s not the issue; profit can’t be generated no matter how owners manipulate pricing, the cash inflow from sales can’t be greater than the cash outlay in wages.

This is a great paradox for those whose baseline is capitalism but it makes perfect sense from the perspective of 5,000 year oligarchy. The ever pragmatic Roman senator wouldn’t consider it a profitable venture to add more slaves to his latifundium simply to grow more food for the enhanced enjoyment of his very same slaves. Slaves aren’t a source of profit, they’re merely workers. The medieval lord would likewise roar with laughter at the proposition his serfs producing strictly for themselves could be of any benefit to him. Oligarchy has never operated in the interest of laborers, be they slaves, serfs, or modern workers; they’re only “a necessary evil” whose cost is best minimized. “If wages are cut heavily,” observed philosopher Rosa Luxemburg, “capital does not worry about having to produce fewer means of subsistence for the workers, in fact it delights in this practice at every opportunity.”[2]

Luxemburg was puzzled by the mystery of profit and considered it a “blatant tautology, a dazzling circle.”[3] She recognized that profit couldn’t come from the worker and concluded it could only arise from interactions outside the system, particularly colonialism. Once the entire world was brought within it, however, the source of profit would dry up and capitalism would thereby collapse. Her insight that profit had to come from a source beyond the worker was correct but she erred in accepting the conventional monetary wisdom that capitalism’s “aim and goal in life is profit in the form of money and accumulation of capital.”[4]

A significant advance in this area was made by Polish economist Michal Kalecki. His profit equation, described by economist Hyman Minsky as a “profound insight into how a capitalist economy works,”[5] plainly shows how profit is generated in a static economy. In a closed system with no state spending,[6] it’s:

Profit = Capitalist Consumption + Investment[7]

While supporting Luxemburg’s view that profit can only arise from an ‘other’ outside the wage process, the equation shows there’s no need for colonialism or any other type of expansion. Profit is automatic whenever capitalists spend on personal consumption or investment.

This is a fantastic simplicity! Capitalists themselves are the source of the profit they crave. They crave their own spending. This isn’t a dazzling circle, though, it’s circular nonsense. Whatever it is, we have a zero-sum loop. If capitalists spend a quadrillion trillion on consumption or investment, they ‘earn’ a quadrillion trillion in profit, a net cash flow of zero. If they spend nothing, they ‘earn’ nothing, again a net cash flow of zero. We can resolve this apparent absurdity if we drop traditional notions of profit and recognize the system as oligarchy. We then get from the equation a mathematical expression of the 5,000 year historical truth that the power of the oligarchy to spend is always self-sustaining and costless.

Let’s apply this insight to the taxation example previously discussed. What, one might ask, is the source of the taxation money that perpetually finds its way into the bank accounts of the oligarchy? The answer is self-evident—it arises not from workers but from diversion spending. It’s the same with profit. Profit is the return loop of oligarchic spending and it’s a structurally guaranteed sum for the oligarchy as a class. (I’m emphasizing the core idea here and am excluding for now other sources of profit that will be discussed in this and following chapters.)

The Kalecki equation is a significant achievement but to many it will be confusing. The problem is with motivation; while the place of capitalist consumption within the equation makes perfect sense, the role of investment is obscure. Luxury consumption is a core motivation of oligarchy, but are we to believe that regardless of purpose or beneficiary so also is the mere act of investment? The answer is most definitively not, but it’s best for now to defer this question and emphasize instead the fundamental insight that oligarchic spending is self-funding. We’ll return to investment later.

To understand some of the key implications of the diversion-profit loop, we’ll need to adopt the perspective of the oligarchic class. As we found in the last chapter, the class as a unity is the owner of the market portfolio, the sum total of every corporation on the planet. [In that chapter, I explore the nature of corporate ownership and finance in the modern system and the ways in which the class should be seen as a collective entity hovering above the non-owning population.] That’s an extremely complex aggregation which will have to be simplified in a way that helps our analysis. A common simplifying method practiced by financial analysts is to categorize all output into business sectors according to what’s produced. Dow Jones,[8] for example, publishes over a hundred such sectors with names like oil and gas producers, iron and steel, coal, aerospace, automobiles, clothing and accessories, health care providers, pharmaceuticals, hotels, water, and so on and so forth.

While this is a helpful step, we’re still left with a great deal of complexity that isn’t organized in a way that suits our purpose. The goal is to understand the diversion-profit loop and that’s a two class phenomenon. Our interest isn’t in what is produced for that’s just detail; it’s rather for whom it’s produced. We’re interested in whether it’s produced for the oligarchy or for the population and we therefore need just two fundamental sectors.

All output is ultimately for the benefit of one of the two classes [the oligarchy or the population] and that will be the basis for the sectors. It’s immaterial what exactly is produced in each but we can speculate it would include things like luxury jets, yachts, mansions, fine food and wine, servants, guards, financial advisers, and exquisite clubs for the oligarchy and modest housing, basic food, mass entertainment, and cheap beer for the population. It’s also of no relevance whether output is for immediate consumption or investment; our only concern is the final beneficiary. I’ll call these sectors the diversion sector and the population sector; the first providing luxury consumption and wealth defense goods and services for the oligarchy and the second whatever living standards the general population may require.[9]

This sectorial division is realistic given the existence of the two fundamental classes. We don’t notice them in the real world because most corporations aren’t segregated in ways that make them obvious. The divide usually exists internally within corporations and isn’t therefore easily measured. Its lack of visibility, however, has no bearing on the essential point that it flows from the structural necessities of oligarchy.

Let’s proceed, then, by conceiving of the market portfolio as composed of these two sectors along with all banks, a cohort of managing executives, entrepreneurs, exploitable natural resources, and an unlimited number of workers. Hovering above it as owner is the oligarchy. The diversion-profit loop begins with the oligarchy sending money into the market portfolio to acquire diversion and ends with the return to it of monetary profit. The timing of when diversion goods are produced isn’t important; they could be generated in response to specific orders or in advance in anticipation of them. The basic idea is illustrated below.

div pr loop

We gain from this perspective the important insight that the market portfolio isn’t a profit producing entity for it has no magical power to create ‘profit’ out of thin air. What it creates is diversion goods and services and these are costless because worker wages are both an expense and a revenue netting to zero. “Workers spend what they earn, capitalists earn what they spend” is a quip that succinctly sums it up.[10] Oligarchy has no need for its workers to be profitable, the idea actually doesn’t make sense; what it has an existential need of is that they be costless.

Let’s now delve deeper into this most central flow in order to bring out some key points. We’ll do so by first working through a simple example based on the “department” scheme utilized by Kalecki.[11] Assume the oligarchy purchases a glittering new $1.5 billion luxury yacht, something like the 24 cabin, 536 foot Eclipse owned by Russian billionaire Roman Abramovich, complete with two helicopter pads, a mini-submarine, and a missile defense system. The flow of diversion and profit is presented below in Table 2 using a format we’ll return to at various times throughout the rest of the book.

Table 2: Diversion-Profit Loop—Yacht Example

$1.5 billion enters the Market Portfolio
Diversion Sector:
    Total Revenue from Yacht Sale   1.50
     Less: Wages in Diversion Sector [W]  (1.00)
         Net Profit—Diversion Sector     .50
Population Sector:
     Revenue from Diversion Sector Wages [W]   1.00
     Revenue from Population Sector Wages [w]     .75
     Less: Wage Expense in Population Sector [w]    (.75)
          Net Profit—Population Sector   1.00
Total Profit   1.50
$1.5 billion exits the Market Portfolio

In Billions

Starting from the top, the $1.5 billion yacht order enters the market portfolio in the form of payment to a yacht manufacturing firm in the diversion sector and is reflected as revenue. The firm pays wages [W] to its workers of $1.0 billion and thereby nets a profit of $.50 billion. These workers use their $1.0 billion in wages [W] to buy goods in the population sector where it’s reflected as revenue. The population sector staffs up to meet this demand and hires its own workers who are paid wages [w] of $.75 billion. These workers don’t represent a net cost to the population sector, however, as they’ll also spend their wages within the sector. Net profit in the population sector therefore ends up being equal to the wages paid in the diversion sector [W]. The combined profit of the two sectors ($.50 and $1.0 billion) equals the yacht purchase price and the diversion-profit loop is thereby closed.

Two important points are illustrated here. The first is that whatever is spent on diversion is returned as profit. The second is that population sector workers are never in themselves profitable. Wages are paid out, -w, and then return, +w, and the net is zero: -w + w = 0. The population sector by itself isn’t a profit center; it’s simply costless. Its profit can only come from without, in this case the wages paid in the diversion sector. As long as there’s outside demand, a population sector profit is inescapable because productivity is such that workers can produce more than they consume. To summarize,

Population Sector Profit = W + (-w + w) = W

$1.0b + (-$.75b + $.75b) = $1.0b

Total profit is the sum of the profits in the two sectors.

Profit = Diversion Sector Profit + Population Sector Profit

Profit = (Price of Diversion Good – W) + (W – w + w)

Profit = ($1.5b – $1.0b) + ($1.0b – $.75b + $.75b)

Profit = $.5b + $1.0b = $1.5b

That profit is equal to the purchase price rests on the fact workers are costless as can be seen in the second row above. Wages (W and w) net to zero and the only thing left is the purchase price. The end result is that the diversion good, the yacht, is produced and delivered by the market portfolio and the monetary price paid is returned via profit. The oligarchy will thusly enjoy the fine noble splendor of sailing the world’s seas in princely style and without cost. Those who built it will live for another day but will never set foot on its deck. This is the nature of oligarchy; it’s a structure of costless diversion.

Many claim that ‘capitalism’ is driven by profit but this exercise shows such views to be incomplete. ‘Profit’ is actually a problematic term given that it isn’t really ‘profitable’; there’s no mysterious increment being added to the equation, only the banal return of what was spent. A yacht was produced in this case, though, and in that sense it was a ‘profitable’ expenditure. But it’s not necessary for a diversion good to be produced for profit to be issued. Any monetary order sent into the market portfolio from outside will exit as profit.

While the oligarchy as a whole has a virtually unlimited capacity to command production, individual oligarchs are constrained in two basic ways. The first is by the total volume of monetary orders entering the market portfolio from the entire class as this determines the extent of system wide profit. The second is the share of this collectively generated pool their particular portfolios are able to capture. An individual oligarch’s lifestyle is thereby a collective phenomenon tied to both class-wide spending and the way his portfolio relates to it.

The subsidiary role of the population sector is a central aspect of the game of modern oligarchy and it will be helpful to expand a bit more on this. I’ll do so by noting an important corollary to the principle that whatever monetary sum enters the market portfolio will exit as profit. It’s that no transaction completely confined within the market portfolio will be able to generate a profit over its relevant life. For there to be profit, there must be a monetary order from outside. Assuming no such infusion, the population sector is incapable of being profitable except to the extent some other inside entity like a bank or the diversion sector incurs an offsetting loss. As it can’t on its own generate a monetary profit and by definition doesn’t produce diversion, it’s of no worth to the oligarchy beyond its role in sustaining the lives of diversion sector workers. This is a key piece of the game’s logic and it does much to explain the population’s poor living conditions.

All things being equal, population prosperity is determined by the number of workers hired in the population sector. The greater are the resources devoted there, the greater is the output available for workers in both sectors and the more their wages will buy.[12] But there’s no profit to be had from this prosperity since the population sector on its own is always a breakeven. No matter how high the output, the net must be zero because wages are both an income and an expense. If the population sector were 50 percent larger in the yacht example, for instance, the profit emitted by the market portfolio would remain completely unchanged. As Kalecki’s equation requires, profit is locked at the amount spent by the oligarchy—“capitalists earn what they spend.” The wage level, as reflected in population sector output, is irrelevant. It applies both ways as well; reduced output in the population sector won’t create profit. Workers are neither a net revenue nor a net cost because they “spend what they earn.”

There are two crucial points to be taken from our discussion so far; first, the purpose of the market portfolio is costless diversion and profit is nothing other than an ‘unprofitable’ return of what was spent, and second, workers in themselves can’t generate profit.

We’re now ready to return to investment and inquire how it can be profitable according to Kalecki’s equation. We’ve already seen that everything the oligarchy spends returns to it as profit and we’re thereby free to put any categories we wish on the right side of the equation as long as they sum to total spending. Kalecki chose investment as one of his categories and it’s thusly ‘profitable.’ But we also learned the population is never profitable given it can only spend up to its wage. How can it be, then, that investment in the population sector could ever be profitable?

This confusion is resolved when we realize we’re dealing with differing perspectives. To owners sitting on the outside, the purpose of the market portfolio is diversion and the meaning of profit is that it renders it costless. But to the managers of corporations within the market portfolio, the goal isn’t diversion but rather the capture of the largest possible share of oligarchic spending.[13] The motive from within, in other words, is monetary profit.

The question a corporate CEO, a banker, an entrepreneur, or a finance executive must ask before any investment outlay, therefore, is whether it’s likely to be ‘profitable’ from this perspective—will it capture profit? As we’re concerned with the system as a whole, the question reduces to whether an investment will be profitable for the market portfolio. We’ll find that the profitability of investment is determined strictly by class beneficiary and that only investment in goods and services that will be bought by the oligarchy can be profitable.

Let’s consider an example in which we contrast two investments that differ only in whether the beneficiary is the oligarchy or the population. The assumption in both is that financing starts from inside the market portfolio; should an oligarch seek to play the role of entrepreneur or bank, he would need to travel inside to do so. We look first at a diversion sector investment.

Table 3: Profitability of Diversion Sector Investment

   Stage 1   Stage 2   Total
Bank financing of $10 billion
Diversion Sector:
   Sale of New Investment       20      20
   Bank Loan to Pay Wages        10      (10)        0
   Investment Wages Paid       (10)         0     (10)
       Net Profit: Diversion Sector          0       10      10
Population Sector:
   Revenue: Diversion Sector       10        0      10
   Net Wages Pop Sector         0        0        0
       Net Profit: Pop Sector       10        0      10
Net Profit from Investment       10      10      20

In Billions

Table 3 shows the outcome of a $10 billion bank financed investment in the diversion sector which will lead to a product consumed by the oligarchy. The financing covers the wage expense to produce the investment and the final product is sold for $20 billion. I break the transaction into two stages—the first being the period during which the investment is produced and the second when the loan is repaid and the resulting output sold. We find that the investment yields a total market portfolio profit equal to the sales price of $20 billion and that it’s divided equally between the two stages. Stage 1 yields a profit of $10 billion because diversion sector wages are paid from the bank loan and those wages are spent in the population sector. Whatever additional wages are paid in the population sector to service these workers net to zero. Stage 2 produces a profit of $10 billion as well which is the net between the $20 billion sales price coming from outside the market portfolio less the repayment of the bank loan.

Using the exact same assumptions, let’s now consider in Table 4 below an investment in the population sector.

Table 4: Unprofitability of Population Sector Investment

   Stage 1   Stage 2   Total
Bank financing of $10 billion
Diversion Sector:
   Net Profit: Diversion Sector           0         0       0
Population Sector:
   Sale of Investment           0       20     20
   Bank Loan to Pay Wages         10      (10)       0
   Investment Wages Paid        (10)         0    (10)
   Investment Wages Revenue         10         0     10
   Net Wages: Population Sector           0      (20)    (20)
       Net Profit: Pop Sector         10      (10)       0
Net Profit from Investment         10      (10)       0

In Billions

Just as in the diversion case, the population sector reports a profit in stage 1 since the bank loan is used to pay wages to the investment workers which are then spent within the population sector. The final product is similarly sold for $20 billion in stage 2 but the proceeds come not from outside the market portfolio but from wages paid by population sector firms. The rechanneling of $20 billion in wages so that workers can buy the new product means that population sector firms experience a $20 billion reduction in revenue from their base business and their wage expense therefore exceeds income by this amount. Since the sales proceeds come at the expense of the population sector itself, i.e. it’s an intra-sector transfer, total revenue nets to zero and stage two therefore reports a $10 billion loss as the bank loan, the source of stage 1 profit, is repaid. The profit over the life of the transaction is zero.

What we find here is a vital fact that applies to all population sector investment and to consumer loans as well—they can’t create profit in the market portfolio. They can only offer illusionary timing difference stage 1 profits that must always be reversed in stage 2. We can reduce this to the following equation.

Profit on Investment = [Stage 1: Financing] + [Stage 2: (Sales Price – Financing) – Offset]

Stage 1 will always yield a profit in the population sector as the investment wages are spent. Stage 2 will yield a profit only to the extent the sales price isn’t offset by a reduction in revenue elsewhere. There’s no offset for diversion sector investment since the sales price comes from the oligarchy sitting outside the market portfolio, but there’s always one when dealing with the population sector and it serves to eliminate the stage one profit. Illusionary Stage 1 timing difference profits are routine aspects of loans and investments in the population sector and their contribution to bubbles and crashes will be explored in chapter eleven (The Grand Casino).

Since population sector investment is never profitable over its applicable life, we can rewrite the profit equation in the following manner:

Profit = Capitalist Consumption + Capitalist Investment

Or, in oligarchic terms,

Profit = Luxury Consumption + Wealth Defense = Diversion[14]

We’re now able to state this chapter’s central conclusion on diversion and profit in modern oligarchy. Profit is a fixed quantity arising from diversion.[15] Corporations capture their share of it by either producing output in the diversion sector for sale to the oligarchy or by producing output in the population sector for sale to the workers who produce diversion for the oligarchy. Both profit and the corporate motivation to generate output trace directly to diversion. There’s no incentive to invest in the population as a stand-alone activity except as a zero-sum effort to gain market share at the expense of competing firms. Workers are never profitable in and of themselves. We should expect, therefore, that investment in them will either be minimal or the result of uncoordinated action.

But what then of the Kalecki equation and the prominent spot it gives generic investment? Its purpose is to explain the determinants of profit in specific accounting periods and it’s not wrong. In the Table 4 population sector example, it would correctly report a $10 billion profit in the stage 1 accounting period based on the $10 billion investment, and it would then correctly report the $10 billion loss in the stage 2 accounting period based on the $10 billion “disinvestment.” What I seek to show, and what the Kalecki equation doesn’t clearly capture, is that the overall profitability of investment is determined by class beneficiary. This is made plain when we categorize investment by class and consider profitability over its relevant life.

Our political and economic discourse has generified investment into a classless ‘good.’ Undifferentiated investment is considered by many to be the most important aspect of capitalism, even its crux. To economist Hyman Minsky, it’s the “essential determinant” of the economy with all else being “secondary”[16] and to Max Weber, private investment is capitalism’s “governing principal.”[17] Investment has a formidable ideological appeal as well given its association with productivity, profitable gain, and a puritan-like abstention from consumption. Hardly a day passes in which a politician or learned economist doesn’t rise in great profundity and propose tax breaks or some other scheme to promote it.

But investment in what? Investment, like ‘jobs,’ is an empty signifier standing for nothing. It’s a mystification that raises all investment to the same level and thereby steers us away from thinking of the specifics of what needs to be produced. The solution for improving the lives of slum dwellers can then become not one of investment in sanitation, housing, food supply, clean air, and the like but rather the construction of a new five star casino hotel. The hidden reality behind it all is that it’s never about generic investment; it’s about profitable investment.

The reification of undifferentiated investment is a huge distraction from the insight that the system is driven by antagonistic power and not by some existential urge to ‘invest.’ Diversion and suppression are the key dynamics and the oligarchy can be expected to invest only when it furthers them. There’s no gain to be had from investing in population benefiting output; it yields nothing to the oligarchy while increasing the power of the population. One of the prime drives, in fact, is to disinvest in the population and we can see the success of that effort in every corner of the world.

Investment is often linked to that supposedly ultimate goal of capitalism, accumulation. But we can’t allow ourselves to get misled here either. The prime motives are luxury consumption and wealth defense, not ‘accumulation’ whatever this vague word may even mean. If we have oligarchy, then by definition the means of production have already been accumulated; the market portfolio is already owned. For the class as a whole, what matters is the accumulation of power and this is reflected not in terms of accumulated investment but in the oligarchy–population relationship. If a thousand oligarchs owned everything ten years ago and today also own everything, they accumulated nothing of real import. But if the population is poorer today via effective suppression, then the oligarchy did accumulate relative power and is thereby in a stronger position. As Jonathan Nitzan reminds us, “Power is the very essence of accumulation.”[18] And for the oligarchy as a whole, what this means is the size of its “differential power”[19] over the population.

One thing that does tend to accumulate is knowledge[20] and it’s the basis for our high level of productivity. The motives of oligarchy, however, aren’t conducive to maximizing the application of knowledge; quite the contrary, they’re focused on limiting its dispersion.

The claim, then, that capitalism is intimately tied to investment doesn’t hold water. It, along with all spending,[21] is a determinant of output and employment but the central driving forces are the motives behind oligarchy. I’ll have more to say on investment in the next chapter.

We’ve assumed so far that workers always “spend what they earn,” but what if they don’t? What if they save? Revenues then wouldn’t cover the wage expense and the market portfolio would report a reduced profit. The oligarchy would be effectively transferring ownership rights to workers, a dire malfunction since workers can’t be permitted to acquire significant ownership if oligarchy is to exist.

That oligarchy is as old as civilization tells us that formidable safeguards have always been in place. Beyond the sound finance dogma of austerity and low wages, the oligarchy also relies on the psychological onslaught of the global half a trillion dollar a year advertising industry.[22] It’s an interesting mix—the dual passions of keeping wages low yet spending high. Consumption must be suppressed while, at the same time, encouraged with all the sophistication of modern psychological theory. The term consumer capitalism signifies a great deal more than we often realize. Consumption linked with capitalism tells us that the systemic goal isn’t the maximization of worker consumption of goods but is rather the capitalist re-consumption of the wage.

It’s easy to conceive of a thermostatic mechanism that would assure the wage is consumed. Should workers begin to save, then population sector companies would suffer reduced profit. The companies would accordingly cut back, the laid off workers would spend their savings to live, and the natural order would thusly return. How it’s accomplished, though, is unimportant; the historical record and the logic of the situation are both unequivocal—workers have never been able to save to any significant degree and they can never be permitted to do so. It’s a bedrock principle of oligarchy.

This chapter has covered some important points on modern oligarchy. We’ve found that profit is crucial but the name of the game is luxury consumption and wealth defense. These are rendered costless through the diversion-profit loop. Profit is a guaranteed sum for the oligarchy as a whole but not for the individual; what makes one a successful oligarch is that he own a portfolio that captures a sufficient percentage of the collective profit pool to render his expenditures costless.

The population’s role in the game is limited to that of pawn. Workers aren’t a source of profit and their purpose in life is tied to producing diversionary goods and services for the power and enjoyment of the oligarchy. While they’re not a cost, the game provides no incentive to expand production for them beyond that required for the sustenance of those in the diversion sector. The real world result is marginal investment in areas that would benefit the population, high levels of poverty as measured against productive capacity, rampant crime, ongoing political tensions due to ‘economic’ pressures, and environmental degradation arising from the desperation to secure a living. The situation, however, is far worse than even this would indicate. This is so because the people of the world aren’t just diversion producing pawns, they’re also the sole existential threat.

We’ll turn to suppression in a future post.

[1] This applies of course to all countries.

[2] Luxemburg (2003: 441)

[3] Luxemburg (1972: 51)

[4] Luxemburg (1972: 54)

[5] Minsky (1986: 151)

[6] We’ll address state spending and international trade in upcoming chapters.

[7] Kalecki (1969: 45). This is the short version of his equation applicable to the assumptions mentioned. Its derivation is presented in appendix one as is the expanded version of the equation.

[8] The online market data page of the Wall Street Journal provides comprehensive listings of industries and sectors., accessed on August 3, 2014.

[9] Some goods and services are used by both classes. I’ll assume there are legions of capable cost accountants at our disposal who are able to come up with reasonable methods of allocating such output into the proper sectors.

[10] This is commonly attributed to economists Joan Robinson or Nicholas Kaldor.

[11] The two sector model I’ll be using throughout the remainder of the book is inspired by Kalecki’s three “department” “scheme of reproduction” that was also used by Marx (Kalecki (1969: 80). His three departments are investment goods, capitalist consumption, and worker consumption. I eliminate the investment goods department and assign its output to the ultimate beneficiary—the oligarchy or the population. The basic logic otherwise follows Kalecki.

[12] The assumption is that given our productive capacity, each worker is capable of producing more than he or she consumes.

[13] This is an idealization since many of the CEO’s themselves are oligarchs. For purposes here, I separate the role of manager from the class position.

[14] This can be derived in the same manner as Kalecki derived his and I compare the two in appendix one.

[15] This is a simplification and we’ll bring in the complexities of the state, international trade, and speculation in upcoming chapters.

[16] Minsky (1986: 171)

[17] Weber (2011: 91)

[18] Nitzan (1998: 205). Italics in original.

[19] Nitzan (1998: 193). Nitzan is referring here and in many other places to differential power between capitalists. The same concept, though, applies to the two fundamental classes.

[20] It’s not inevitable of course and may be reversed by war, disease, or natural catastrophe.

[21] Including through the state.

[22] Plunket Research, accessed August 25, 2015.

From → Diversion, Dynamics

  1. “Let’s begin exploring it by asking a most elementary question—where does profit come from? It can’t be from workers since they can spend no more than the wage received. (I ignore rising worker debt as it’s self-limiting.) Wages are a source of revenue through sales, but they’re also a cost. For the system as a whole, they must net to zero—workers are simply not profitable. A firm can’t make a profit selling only to its own workers; the consumer sector can’t make a profit selling only to consumer sector workers; US business can’t make a profit selling only to US workers; and the greater system can’t make a profit selling to workers period. This quandary isn’t solvable by charging a higher profit margin as that’s not the issue; profit can’t be generated no matter how owners manipulate pricing, the cash inflow from sales can’t be greater than the cash outlay in wages.”

    Exactly right, and I think that Marx makes essentially the same point, but with only this difference in emphasis: there is actually a ‘moment’ in the circulation of capital wherein ‘profit’ really is extracted from the ‘working class’ and nowhere else.

    As you point out, since all firms cannot possibly extract from their common worker-consumer base more than they pay out in the aggregate in wages to workers, not all firms can make a profit in this particular respect, and to the degree that any one firm relies for its profits on selling its goods and/or services to wage earners, it operates in a market sector that leaves it permanently vulnerable to insolvency or bankruptcy, one of many sectors permanently vulnerable to ‘crises’ or ‘market contractions’ that can generalize to the economy as a whole and that in fact do so recurrently.

    And yes, I also think you have the measure of the essence of what goes by the name of capitalism: it is indeed oligarchy — something that I think Marx also clearly understood, for otherwise, he would not have belabored the issue of ‘class rule,’ of the political, economic, and ideological ascendancy of the ‘ruling class’ — quite literally by force of arms if only in the last instance — over the propertiless ‘working class,’ the most numerous of all of the subordinated and propertiless classes under the ‘oligarchical rule’ that is implicit under capital.

    Nice to have found your work!

  2. Thanks for your feedback Norman and I enjoy looking at your site as well. Your point on the fragility of firms selling to workers is particularly apt. I refer to these firms as the ‘population sector’ (differentiated from the ‘diversion sector’ which produces for the oligarchy) and they are secondary in the whole scheme of things with its profit limited to the wages paid in the diversion sector.

    • Hey, Jim

      Missed your reply. Been away and then WordPress doesn’t always alert as it should . . .

      Aye! I’m taking note of the distinction you are making, between the ‘diversion sector’ and the ‘population sector.’

      Roughly, then, as I understand you, and if only in a nutshell: the circulation of and control over the issuance of ‘currency’ (i.e. ‘the currency cycle,’ so to speak) is what makes the overall fleecing operation of the ‘diversion sector’ possible; and then there are the ‘market dynamics’ as such — dynamics that are in play while the issued currency courses its way through the market between the endpoints of its ‘issuance’ and ‘recuperation’ — out of which ‘businesses,’ both large and small, attempt to realize ‘profit’ in the deployment of various ‘surplus-value extraction’ strategies.

      Point noted. I’ll re-read your post with it in mind.

      • I think you have it about right. Profit is a given on the macro scale and derives from the diversion spending of the oligarchy. A crucial point is that workers for the system as a whole are monetarily costless and produce not profit but diversion goods.

        To expand just a bit, my argument is that the system is best understood as a 5,000 year socioeconomic structure in which a small minority has been parasitically empowered to command the population into costlessly serving its core lusts of luxury and wealth defense. This is a fundamentally hostile relationship that’s well-hidden in normal understandings of ‘capitalism’.

        To properly see this, we have to consider the system on a macro scale. The oligarchic minority today maintains its power through the ownership of essentially everything. This includes the giant corporations, the banks, and the effective control of state money issuance. By means of this ownership, workers become costless. This is so because whatever is monetarily paid out in wages will return via sales.

        Kalecki’s economics is of enormous help here. We need to always keep in mind, though, that we’re dealing with a macro concept and that we can get easily confused when we descend to the micro. This is especially so when thinking about monetary profit from the perspective of the corporation for we can lose track of where it ultimately comes from and think it somehow is produced by workers when it’s demonstrably not. Workers don’t produce monetary profit; they produce diversion goods for the owners along with survival goods for themselves and they do it costlessly on the macro scale.

        I think that Marx’s concept of surplus value is therefore not particularly helpful. Exploitation ultimately derives from the macro fact that a minority class owns it all. And through that ownership can costlessly run the system for its parasitic ends.

      • Hey, Jim,

        Many thanks for the reply. I think I’m twigging to your argument, but, yes, I have to chew on it some more. As you’ve noted, we can put that down to the turn of mind that I’ve acquired. Once I manage to inhibit what needs to be bracketed, I’ll be better able to grasp your perspective.

        Another careful read and think, then, and I shall return for clarifications or confirmations, as time permits.

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