Last time we left carpenter turned capitalist John retired, with his capital passed on to his son John Jr.
This time we take a look at John Sr’s old workshop. It’s still sitting there. John Jr. could go into that workshop and start doing carpentry. That’s one measure of the value of that workshop sitting there. Another is that he could simply sell it and let someone else worry about doing the carpentry. But there’s a third possibility. Someone, let’s call him Andre, approaches him. Andre wants to do carpentry but Andre doesn’t have any tools or workshop. Andre could, in principle build his own workshop and acquire his own tools but there’s this one John Jr. has. So he suggests John Jr. let him work in it.
There’s just one thing. By letting Andre use the workshop John Jr. is denied any other benefit he could obtain from that workshop whether selling it–intact or parted out–or working in it himself, or even selling tickets for people to come see John Sr. the Famous Plane Maker’s first workshop. Whatever would get him the most benefit, that’s what he’s denied by letting Andre work there. Reasonably, then, John Jr. can justly demand recompense for that loss either in a straight fee (Andre basically rents the facility in the same way folk rented John Sr’s planes) or he can perhaps work out some other deal, perhaps some small portion of each sale would be passed on to John Jr.
In the latter deal, John would be investing in Andre’s carpentry business. And it’s entirely valid that John be paid for this because he’s providing the means, the capital, for Andre to do his carpentry and generate an income. By investing in Andre’s business, he’s denying himself whatever other benefit he could have obtained from that capital and deserves compensation for that.
Let’s suppose Andre, as it happens turns out to be a pretty good carpenter and gets lots of business. He needs a bigger shop. He could take the time and effort to build the shop (denying himself paying work in the meantime). This is just the same thing I discussed yesterday with John Sr. and his first plane, only on a more comprehensive scale. The principle is the same. But another thing he could do is go to John Jr. and have John Jr. provide the expansion facilities. And, John goes and finds somebody who can build the expansion and pays that person. But in so doing once again, John is deprived of whatever benefit he could have gained from the resources he expends–both in the time and effort he spends and that he pays to the one doing the work–and deserves compensation for it. This can be either a straight payment up front or a portion of future sales from the carpentry business.
Andre now has a bigger shop, and more work than he can handle. So he finds Billy. Billy is a carpenter too (lots of carpenters in this town–probably have a large export business with all this carpentry, or maybe it’s just a really fast growing place with lots of new construction). Andre suggests that Billy work in his newly enlarged shop. All Billy has to do is the work that’s provided for him. He doesn’t have to go find customers. He doesn’t have to negotiate prices for work. He doesn’t have to make sure customers pay or have to deal with collections when the customers are slow in paying. He makes the pieces and gets paid for it. Andre does all that other stuff. But, since Andre is doing that, he’s not doing other things that could be making him an income. He’s losing on his personal income by doing that work that permits Billy to have an income. So, to compensate him for that, he keeps a bit of the pay from each carpentry project (and John, by providing the facilities, keeps a bit too).
Soon Andre has a dozen carpenters working for him and isn’t doing any carpentry himself. Instead, he’s doing all the things that let those carpenters focus on their carpentry. And his little bit, from each of the carpenters working for him, may add up to more than any one carpenter’s income.
Billy, sees that he’s doing the carpentry and Andre is not, and notes that Andre is making more money than him and, frustrated, decides to leave and set up in business for himself. Then he wouldn’t have to share any of his income with the “useless” manager, Andre, and the “parasitic” investor, John. There’s just one problem. Billy now has to do all the things Andre and John did. He has to provide his own tools and work space. He has to obtain his own materials. He has to find customers, deal with setting prices, and collect payment. And unless he’s better at those tasks than Andre and John were, he’s likely to find that he’s actually making less than if he were in the workshop (factory in fact) owned by John and run by Andre.
So the same principles that applied to John Sr. and his plane apply to John Jr. and his factory. And it’s entirely proper that the people providing capital, the means of production, be compensated based on whatever benefit they could obtain through alternate uses of that capital. And the people managing capital be compensated based not on the “labor” they provide but on the value they bring to the enterprise.