A Curious Post About Capitalism

Recently, I read a very fascinating blog post about capitalism.  This author broke down the functions of capitalism as follows:

• Capital formation:In capital formation the firm consumes financial assets (usually cash) and builds real assets that it will later use for production or extraction. Capital formation thus takes two forms:
• Productive capital formation, such as technical innovation, the building of customer relationships and goodwill, channels to market, facilities or machinery, organizational and human capital. (i.e. computer programmers, fashion design, genetic research) 
• Extractive capital formation, such as the acquisition of monopoly licenses or exclusivities, financial muscle, commodity stocks, control over suppliers or distributors, land, and all IP assets. (i.e. investment banking, finance, patent attorneys, government corruption)
  
• Production: Production is what an industrial, agricultural, or service firm does. Resources come in, labor and and devices are applied, and goods or services come out. The goal of production is to sell the goods or services at a profit, while minimizing the share paid to suppliers and labor, and the running cost of devices. (i.e. factory workers, fruit pickers, fishermen)
• Extraction: Extraction is what a landlord, bank, media company, utility, mining company, or retailer does. These firms have a productive function, but their dominant mode of business is to extract rents from assets that they own, while rationing those assets so as to command the maximum price.

All three functions are important for a functional capitalistic company.   Each firm generally has a function of each.  Without capital formation, there wouldn't be any production.  Without some kind of production, there would be nothing to exchange for extraction.  Without extraction, there would be no cash for capital formation.

Capital formation is important to generate assets to get profits, either through Production or Extraction.  Think of this step as setting up the system for producing an in-demand good or service.  The best jobs (or at least the best paying ones) in capitalism are usually in capital formation. These jobs tend to present a lot of variation and intellectual vigor which many of us want. 

Productive capital formation is about R&D, innovation, bright ideas, making what previously didn’t exist or wasn’t possible. Productive capital is seen as a beacon of hope and progress for humanity, and great store is set by it wittingly or unwittingly.  The best economies should have a society's smartest citizens in productive capital formation.  America has so many smart people working in these capacities and continuously attracts smart immigrants to instill vigor into our economy.  Generally, politicians refer to productive capital formation when they speak about how great capitalism is.  This is the positive story of capitalism since productive capital formation leads to superior goods and services, which can lead to a dominant market position (ex: Apple and the iPod). 

Extraction capital formation is the use of law, finance, asymmetric bargaining position, and government corruption to gain an advantage over the rest of the market.  This is the ugly sister of productive capital formation.  All the obscene money is made in extractive capital formation (aka Wall Street bonuses for guys who just push money around).  Don't get me wrong, as individuals, we would all want to be on the dominant side of extraction capital formation.  Everyone (every company) professes love of openness and competition, but seeks extractive rights and market distortion.  A good example of this is the American Airlines government-provided windfall in mid to late 20th century.  American Airlines, whose main hub is the Dallas-Fort Worth International Airport, got the federal government to ban a bunch of flights from Love Airport, where their weaker competitor Southwest Airlines had operations.  Another example is...musician=productive capital formation; record label that sues copyright infringers=extraction capital formation.  Let me emphasize that while some extraction capital formation practices are evil, many are not.  Extraction capital formation is a necessary step in functional capitalism.

Production is boring.  When you think of production...think of being in an assembly line or picking vegetables for 12 hours a day or doing people's nails for a job.  It is generally very low paying and not that much fun.  Marxist schools of thought have yielded an excellent analysis of production, almost 200 years ago. Human labor is alienated and subjugated to competitively-driven cost minimization. The root cause is the separation of personal, inner productive capital from labor as the artisan economy gave way to the industrial. Their solution has been to re-apportion the means of production to the people. But here’s the problem: Production is boring. Everyone feels for the proletariat, but no-one wants to be the proletariat (cause it really sucks). 

Communist attempts to regulate the relations of production, despite good intentions, have been on the whole backward – denying or fighting the separation of production from productive capital, the reduced need for and correspondingly fading status of labor, and the creative destruction needed to move to more modern forms of economy better fitting the aspirations and wishes of people as both consumers and professionals. Trade unions are a case in point. A union holds an extractive right, a quasi-formal monopoly over a specific domain of production. As such, it conflicts with efficiency. 

Left wing politics should not advocate for this kind of backwards thinking.  I will definitely be an evil, conservative Republican if the Democrats are ever this stupid.  Current left-wing ideology focuses on how we should give production a bigger piece of the pie.  This is a super losing argument.  I am thinking about being evil, conservative Republican since a lot of Democrats focus on this.  In lieu of this retardedness, the Left should advocate for workers and the poor to own a piece of capital.  This is will be least distortive to the economy and give some semblance of a rising tide lifting all boats.

You might also be asking, why do we care so much about manufacturing if it just provides boring jobs that no one wants to do?  Well, cause its relatively low skill and doesn't require much education.  It provides jobs to the masses, who are otherwise unqualified to do the cool capital formation jobs.