What difference does it make that production is capitalist production - Essay Example

What difference does it make that production is capitalist production Introduction In order to understand capitalist production, we have to compare its major characteristics with other modes of production such as cooperative production and self employment. To offer a relevant comparison we will place each of these ways of considering production into an historical context. We will also provide an analysis on several questions such as why doesn't labor hire (often) capital (i.e. form worker cooperatives) Why aren't more workers self-employed If either of these arrangements were to prevail as the form of business organization, what difference would it make to the decisions made by business And the sub questions related to the form of organization and decision making process. By making simple assumptions and putting forwards the key elements of each theory we will try to offer a clear and efficient explanation for the numerous questions we were presented. Capitalist production, cooperative production and self-employment Capitalist Production The term "Capitalist" was first used in 1848 by Karl Marx and Frederick Engels in the Communist Manifesto in the famous sentence: "Modern Industry has converted the little workshop of the patriarchal master into the great factory of the industrial capitalist"1. According to the Houghton Mifflin Company, capitalism can be defined as follow: "An economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market."2 The capitalist production is a system where the owners of money capital - referred as capitalists - hire labor to work in the production process. The capitalists gather within a corporation where they own shares. The decision process can be made by only one of them - commonly the one that owns the largest amount of shares - or they can appoint a manager who will take the decisions regarding the production for them. The output produced as well as the fixed and circulating capital goods used in the production and the residual of the value of output over total costs, including labor costs belong to the capitalists. As the capitalist process is based on the amount of capital, if the capitalists need additional capital - more than what they own - they can borrow from lenders and retain a part of the profit from previous years to use it as capital this year. Cooperative Production Even though Karl Marx was historically the first opponent to capitalism, he's the one in the Capital3 who gave the best explanation of its mechanisms. He also provided an alternative to the capital based mode of production: cooperatives. He did not actually present this alternative as we know it today but gave the main grouds of its creation. It is why usually cooperatives are associated with socialist and communist regimes. It is Robert Owen, a Welshman, who is the known creator of the cooperative movement in the nineteenth century. The most common definition of a cooperative is an organization which is owned by and operated for the benefit of those using its services.4 In other words a group of workers gather in order to set up a production process. Each of them participates in the production process, has shares and voting rights. In a cooperative, workers make common decisions or choose a manager to take the decisions regarding the production process. As in the capitalist production, the members of a cooperative can borrow money from lenders if they can not provide a sufficient amount of capital to the production process or retain a part of the net income from previous years to use it as capital this year. The main difference between capitalist production and a cooperative one is that the owners of the cooperative participate in the production process. They are not separated from the activity which is the case in the capitalist model. And mainly, they benefit from the entire production. They are not only paid for their labor but as they own and participate to the production, the entire output and thus the income of the output is allocated among them. In the capitalist model, it is the shareholders who benefit the most of the production process. Once labor is paid, they own the output, the income of the output, the residual value of the output. Self-employment In the self-employment model, the owner of the firm is also the only worker who operates in the production process. Consequently the size of the firm is limited to one individual. He owns the capital used in the production process and he takes all the decisions regarding the production process. In comparison with the previous production models that we presented in the previous paragraphs, self-employed workers benefit from the entire output of their business, they do not have to submit their decisions to another person within the firm, they are the unique owner of the business but on the other side they have to bear all the production costs, the entire capital used in the business and the inconveniences linked to the incertainty of that kind of business. Usually, when a self-employed firm is successful, it has to hire workers in order to satisfy customers' needs, then becoming a small business. Why doesn't labor (often) hire capital (i.e. form worker cooperatives) The only thing that labor can offer in a capitalist model is work. The hire price of labor services is called wage rate and in the capitalist model, there is a market for labor services in which firms hire workers and workers find employers. The capitalists pay the workers a certain wage rate in regards of their participation in the production process and depending on their qualification. It is considered as productive labor. If labor doesn't hire capital in the production process it is simply because deprived of the only thing that labor can offer in the capitalist process their wage rate would not reach its maximum. They will have to take pay the hired capital from their wage rate. On the other side, as the cooperative workers work for themselves in their production process it is very rare that they will provide a service to labor (except if we consider that the cooperative is a service company) Why aren't more workers self-employed There are several reasons that can explain why there are not more workers self-employed. The more obvious are the uncertainty of the business activities and the cost of the capital. Self-employment is less stable as it directly depends of the volume of work that the owner can provide. The output of the self-employed is also - even more than in capitalist production or cooperatives - highly linked to consumer's demands and to the market's fluctuations. The difficulty is also bearing the cost of the capital. As the self-employed worker does not have any partners in his business, he has to invest an important amount of money to have the necessary capital involved in the production process. Workers are often reluctant to switch to self-employment as they have to invest their own money and the outcome of the business is uncertain. If either of these arrangements wee to prevail as the form of business organization, what difference would it make to the decisions made by business How would it change the objectives the decision maker is trying to achieve The decision-maker will have different objectives if labor hires capital or if the workers become self-employed. First in a capitalist model, the decision-maker must consider that the hired capital will provide a higher output for the same cost, or the same output for a lower cost. In a self-employed business, the decision-maker is the owner and at the same time the only worker. He will have to set his objectives in order to gain a higher outcome than when he was employed in a cooperative or a capitalist production. How would it change the constrains limiting the available or feasible choices open to the decision-maker In a self-employed business, the main advantage the owner has is the complete freedom of choice regarding the production process. In the first case, the decision-maker has less available or feasible choices as hiring capital will lead to a higher constraint on the result of the production process. How would it change the habits, customs and norms that would influence behavior In the first case, labor is no longer in the lowest ladder position. The behavior of workers will evolve from simple workers to new capitalists within the capitalist production process as they hire capital. They will try to maximize the use of the hired capital in order to have greater benefits from the output. In the case of the self-employed worker, he will have to take the best decisions to maximize the output of his work and win a higher amount of money, but at the same time he will try to balance its activities with his free time, trying not to work much more than he used to do when he was employed. How much output the business would try to produce Assuming that the business produce only one type of product, in the first case labor when hiring capital, will be willing to produce as much output needed to keep the same wage rate once the hired capital is paid. Assuming that demand on the market of the product is always constant and proportional to the amount of output produced and that no products is left unsold, the capitalists owners of the business would be willing to produce as many output as possible, maximizing labor and hired capital. The capitalists will try to get the higher possible income with the capital that is committed to the production process. These results can be considered both for the current time period and the future. The self-employed worker has a more difficult task as he has to produce a certain amount of output to get a higher income than he used to do during his employed work and at the same time he has to consider the capacities of his capital and of his work to achieve a perfect balance between work and leisure. In this case we can consider that these results can be considered for the current time. While the business will be evolving, the self-employed worker may develop a higher quality product with new investments in capital. This will lead to a higher quality product and thus the self-employed will not need to produce as much output. How would these changes in turn affect the production technique the business would use In both cases we could consider the same approach. Our assumption is that the business at the current time is labor intensive. The largest part of the production process is made by the workers (or the self-employed worker in the case of self-employment) Thus labor represents a larger share in the production of the final output whereas labor represents a smaller share. Once the capitalists or the self-employed worker begins to earn money of the production process, we may consider that they will invest in machinery which will lead to a faster or/and higher production. This is the natural evolution that will occur in the futue. For the capitalists it means hiring skilled workers to run the machinery and dismissing the unskilled workers. The difference in the number of workers even if the new comers are more skilled, will consequently lead to a smaller amount of wages to be paid. In the case of the self worker it will help him assure a certain amount of output without scarifying all his available time for his business. How net income (value added) is distributed to owners of money capital (including lenders) and incomes retained within the business In the case of the capitalist production, if they have borrowed money the net income should first be used to repay the debt which was caused by the new acquisition of capital. Then the value added is divided into the share holders. Incomes can be retained within the business by investing in new capital. The self employed worker will keep the entire net income for himself after repaying his debt - if he has one - to the money lenders he borrowed money from. Read More