An Open Letter to Warren Buffett on the Subject of Class Warfare



Warren Buffett speaking to a group of students...

Warren Buffett speaking to a group of students from the Kansas University School of Business (Photo credit: Wikipedia)


This may be the best article on free market economics and or the theory underpinning capitalism I have ever read. I have nothing whatsoever to add, except that you need to read it carefully. With a hattip to RedState Eclectic


An Open Letter to Warren Buffett on the Subject of Class Warfare

Mr. Warren Buffett
3555 Farnam Street
Suite 1440
Omaha, NE 68131

Mr. Buffett:

You have been quoted time and again, without any denial on your part that I am aware of, as having said, “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”

In view of the seriousness of this statement, I have to ask you some questions.
Do you intend to be taken seriously when you speak? Do you know the meaning of the words you use? Do you know the source and implications of the doctrines you espouse?
The doctrine of class warfare is a derivative of the exploitation theory, whose best-known proponent is Karl Marx. According to the exploitation theory, profit and interest, indeed, any income other than wages, is an unjust deduction from what naturally and rightfully should be wages.
What makes possible the existence of incomes other than wages, according to Marx, is the same basic fact that makes it possible for a slave owner to gain by owning a slave. Namely, the fact that a worker is capable of producing the necessities he requires in order to have the strength and energy to work a full working day, in less than a full working day.
To use one of Marx’s own examples, a worker is capable of producing in 6 hours the food and other necessities that he requires in order to be able to work 12 hours. The 6 hours, or whatever the number of hours may be that the worker requires to produce his necessities, Marx calls “necessary labor time.” The hours that the worker works over and above the necessary labor time, Marx calls “surplus labor time.”
Just as surplus labor time is the source of the slave owner’s gain, so too, according to Marx, is it the source of the profit and interest of the capitalist. When the worker works 12 hours for a capitalist, his labor, according to Marx, adds a commodity value corresponding to 12 hours of labor to the materials and other physical means of production used up in producing the resulting products. If those materials and other means of production required 48 hours of labor in their own production, the product that results will contain those 48 hours of labor plus the 12 additional hours of fresh labor performed. It will have a value corresponding to 60 hours of labor in all.
Thus, the process of production, according to Marx, has resulted in a value added corresponding to 12 hours of fresh labor time. That value added will be divided between the wage earner and the capitalist in the form of wages on the one side and profit/interest on the other. What the capitalist must pay as wages, says Marx, is determined by the application of an allegedly universal principle of commodity valuation, namely, the labor theory of value. The capitalist will pay the wage earner a wage corresponding to the hours of labor required to produce his necessities, which by assumption is 6 hours, and will pocket the value added by the worker’s performance of 12 hours of labor. His profit/interest is what remains after deducting the worker’s wages, and corresponds exactly to the worker’s surplus labor time.
This example can easily be translated into monetary terms, simply by assuming that to every hour of labor performed in the production of a product there corresponds $1 of product value. Thus the materials and other produced means of production were worth $48 and the products that result from the application of 12 hours of fresh labor are worth $60. The 12 hours of fresh labor adds $12 of new and additional product value.
The capitalist’s profit/interest allegedly results from the fact that for the 12 hours of fresh labor added, with its corresponding additional product value of $12, the capitalist pays a wage of only $6, the sum corresponding to the labor time required to produce the necessities that enable the worker to perform his 12 hours of labor. The capitalist’s profit/interest thus represents “surplus value,” which corresponds to “surplus labor time.”
The ratio of surplus value to wages, or of surplus labor time to necessary labor time, Marx calls “the rate of exploitation.” In this illustration it is 100 percent, i.e., $6/$6 or 6 hrs./6 hrs.
A combination of greed and of forces otherwise tending to reduce profit/interest relative to capital invested, says Marx, drives the capitalists to step up the rate of exploitation. If the workers are able to work 18 hours a day on the basis of necessities produced in only 6 hours per day, then the working day will be increased to 18 hours. If the wages the capitalists pay their adult male workers are sufficient to enable them to support a wife and two replacement children, the capitalists will reduce those wages and thereby drive women and children into the factories, giving the capitalists the benefit of still more surplus labor time and surplus value. The capitalists will allegedly also strive to cheapen the worker’s diet, substituting potatoes or rice for wheat, say, thereby reducing the necessary labor time and increasing the portion of the working day that is surplus labor time. Working conditions, needless to say, will be horrific, since their improvement would generally come at the price of a reduction in surplus value.
This alleged state of affairs of subsistence, indeed, sub-subsistence wages, inhuman hours and working conditions, down to small children laboring in the mines, is the outcome of the operation of capitalism and the profit motive, says Marx, on the basis of his exploitation theory.
Class war is the result of the fact that in the light of the exploitation theory capitalists are to be regarded as the mortal enemies of the overwhelming majority of mankind, deserving to be stood against a wall and shot, which is exactly what has happened time and again, when Marxists have seized power.
Where Does This Put You, Mr. Buffett?


Continue reading George Reisman’s Blog on Economics, Politics, Society, and Culture: An Open Letter to Warren Buffett on the Subject of Class Warfare.




Of Railroads and Governments

Route of the first American transcontinental r...

Image via Wikipedia

I was reading over at Althouse the other day. Which if you don’t, you should.

Anyway, one of her commenters came up with that old shibboleth of leftist history teachers that the land grants were a subsidy to the railroads, especially in the Nineteenth Century, and it bugged me, as it always has. So here’s a little history lesson.

One of the first land grants to a railroad was to the Illinois Central, it was one of very few east of the Mississippi River, too. You see the IC had a problem, their franchise was to build a North-South railroad in Illinois. That sounds like a pretty good idea, right. It would have been too, in about twenty years. You see, south of about Champaign or so on the Indiana-Illinois line where the IC was to build was nothing but swampy wilderness. It would have been expensive to build a railroad (it was, when they built it, too) and anyway there wasn’t anybody to serve. There is not much point in investing a bunch of money to build a railroad to serve: Nobody.

Another one of those times when American Enterprise outran rhyme or reason. So, they went looking for a solution, after all, they wanted to be big shots, too. Seems likely they talked to their lawyer, he was a sharp young fellow from Springfield who signed himself A. Lincoln. Anyway they took their problem to their Senator, a guy by the name of Stephan A. Douglas who came up with a solution.

Since most of the land was owned by the Federal Government it was arranged that some of it would be conveyed to the railroad in a checkerboard fashion, in other words, one section went to the railroad, the government kept the next, and so forth. In total, the railroad received about 25 Million Acres. Land that we won in the Revolution.

So the railroad was in the land business. Looks like a subsidy, doesn’t it? It has been portrayed that way ever since. But lets dig a little deeper, here. The railroad has 26 Million acres to sell, BUT so does the government. The government had tried to sell this land for years, with a price of $1.25 an acre for some of the best farmland in the world. But they couldn’t sell it. Why?

About the only thing it was good for was farming, and that is what America did best in those days too. But when you farm, if you want to make a living, you have to sell your crop. At the southern end of Illinois you could load a boat on the Ohio river, so that area was settled. In Chicago, you could ship your grain on the lake (in summer, anyway, in winter the canal closed). In the middle of Illinois you’re pretty much screwed, grain is far to bulky to ship by wagon and flour doesn’t ship well (in those days). You can grow all the grain you want, but it will cost you more to get it to market than it is worth. (for more on this, see my “The Free market, a Case Study“.

American are smart, the farmers knew this and wouldn’t buy the land. But look what happens, they give half of it to the IC, who starts selling it and platting towns to serve the railroad, and especially building the railroad, and what happens. The IC sells their land but, so does the government. Now because crops can get to market, that land came into its own and goes on to set production records.

So did the government subsidize the railroads, or did the railroad subsidize the government. Looks like a pretty fair deal for all to me.

So Lincoln goes on to be President, and he believes we need a Transcontinental Railroad to bind California to the Union, not to mention all that gold.

So, he’s talking one day in Council Bluffs with an engineer named Grenville Dodge, and they are talking about the Transcontinental Railroad and Dodge says it should start there, while he is pointing at Omaha. Lincoln studies it and decides he is right.

In Washington there is a surveyor from California, named Theodore Judah, who has the same dream, sort of in reverse, he convinces Congress that the transcontinental should end in Sacramento. He is backed by California money, while the Omaha end has to raise money and none of them have anywhere near enough, and there is a war on.

So Congress and Lincoln recall how the Illinois Central deal worked out and decide to do it again.

This is much tougher building though, across what was thought of as the Great American Desert and the Sierra Mountains and the Great Salt Lake and what all. So they decided to use the checkerboard pattern again, only this time for 20 miles on either side of the route. They also chartered two companies; the Union Pacific to build west from Omaha, and the Central Pacific to build east from Sacramento, thereby setting up a race of sorts. (If you find this interesting, you should read: Nothing Like It In the World by Stephen Ambrose. It’s a fascinating story.)

So all across Nebraska, Wyoming, Utah, Nevada, and California alternate sections of land were owned for twenty miles each side of the railroad and it was all for sale. The railroad wanted money (sometimes with easy terms), but the government had passed the Homestead Act, so if you built a building and farmed it for a few years you could get 125 acres free. Heckofa deal.

The Union Pacific had a problem, though. It went from Omaha, then not much more than a village to Promontory Point, Utah, which had so much reason to exist that it is now a sign showing where Mathew Brady took his picture. There was no bridge over the Missouri river at Omaha either. So they had a railroad that started from nowhere went through nothing and ended nowhere.

Being smart business men, they had already figured this out and they made sure to make a profit on building the railroad because, they sure as hell would not on running it for years. And they didn’t. The UP went broke in 1893. But by then they had had so much interference from the government that there was no way to make a profit.

So how about the government. They got rid of their good land, some sold and some homesteaded and made some money on land they had mostly bought from France in 1803.

But all that land would still be unoccupied, except by Indians and buffalo, except for a few trails across it, without the land grants.

There are a few other land grant railroads, mostly the Northern Pacific which were built. But by then it had acquired a bad smell and was pretty much abandoned.

Then in the Twentieth Century the government built roads on their own dime and tried to kill the railroad all over again, and nearly succeeded. We should thank God everyday they didn’t manage to quite do it, though.

And that is the true story of the land grant railroads. A truly symbiotic relationship between government and business, that worked for both. We shouldn’t castigate it, we should try to duplicate it, or at least keep government out of the way.

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