Capital

This entry is a follow-up to the Suplus (http://sustainableforum.blogspot.com/2008/05/surplus.html) posting.

Thinking about the relationship between manufacturing and economic well-being brought forward in my mind that I had left out the capital markets that can provide profits from a company in one area to investors in another area. In other words, there are two ways to make money: labor invested on raw materials to make something more valuable to generate wealth, or capital invested in an organization can allow someone to share in the profits of the other person's labor.

This leads me to two points; that a reduction in industrial investment in an area will likely result in a more uneven distribution of wealth, and that much of the capital in today's market is disconnected with the activities of the companies receiving the investment beyond profits.

The first point I think proceeds as a natural progression in one of two ways. Assume that there is a business owner and a large number of workers in the business in an area. The workers are paid for their labor from the difference in value between the business's inputs and outputs. The owner makes a profit from the margin between the value generated and the labor expenses. Add an investor to this, which allows the owner to improve the business's operations earlier than might otherwise be possible, allowing for a share of the profits to be directed to the investor. If all these people have a connection, they are likely to work towards providing a better quality of life in the area, because it is likely that the owner and investor rose from the ranks of the workers by their talent and ambition. They are therefore personnaly invested in the area. In this scenario, the owner and investor likely make more profits than the workers, but everyone improves their situation.

Remove the connection between the investor and the better interests of the area. The investor is now primarily interested in receiving as much profit as can be achieved. The workers are paid less, or the jobs are outsourced, because there is no connection between the ranks anymore. The owner, as a member of the community resists at first, but at the threat of the removal of capital to continue operations gives in to pressures to remove jobs from the area, or to squeeze more work out of the local workforce for less pay. As a result of this action, the profits do go up, so the owner is rewarded for this action, making it justifiable to do it again in the future, when investor pressure is turned up again. Owners and investors profit much more in this system, with the workers suffering.

The second main point I would make in this post is that we, for the most part, live in the second scenario right now. The most impersonal organization is the collection of many people, where the will of the group is reduced to the lowest common denominator. One example of such a group would be a mutual fund. A large number of people provide a small share of their earnings to a large pool of money, with return on this investment as the only measure of success. In essence, the downfall of an economy can be traced to the success of the masses and the attempt to share the weath of capital investing to small investors.

There are two reasonable solutions to this situation in my mind - investing in sustainable mutual funds (those that support businesses that partake in conscientious practices) or by supporting, either through private investing or through purchase of their products, local private businesses. These are not perfect options, and each has its costs, but the benefits are significant and deserve consideration.