A Problem with the Economy

Imagine a small island with ten people living on it.

One of the island inhabitants, Bill, owns a mill. He invested $10k in it. Everyone works at the mill. The mill makes $11k profit (surplus value) every year out of which wages and dividends are paid. Everyone is paid $1k in wages, including Bill, but he gets an extra $1k in dividends because he invested his money in the mill instead of buying a second-hand Lamborghini, which is what he really wanted to do. Everyone is happy.

Then, the technology changes. Someone invents a better way of milling. So, Bill is in a dilemma. He owns a house worth $20k so he takes the plunge and borrows $20k from the bank secured on his home. He tears down the old mill and builds a new one. He takes the risk and, this time, it works for him.

But things have changed. This mill produces twice as much product with a lot less labour. So, now a senior technician is needed at $1.5k, a junior technician at $1k and 4 porters at $500. Meaning there are three people unemployed on the island and average wages have fallen.

For a time, this is good for Bill. His revenue from the mill is $22k. He pays $2k to the bank  in interest for the loan. He pays out $4.5k in wages. So, he is rich. He has $15.5k when he used to have $2k. Great! But, no one is happy and everyone hates Bill.

It gets worse.

Other people in other places buy the same technology and set up as competitors. The price of the goods falls by 50%. This is good for the islanders because their, reduced, incomes go further. However, the mill is now only making $11k gross profit. Out of this Bill pays, $2k to the bank for the loan, $1.5k to the senior technician (hard to find guys with these skills), $1k to the junior technician (also hard to find) and $500 to each of the unskilled porters, leaving Bill with $5.5k. Not as rich as he briefly was but richer than he used to be.

However, as more competitors crowd into the market place, some on islands with much lower wages, the price of the product continues to fall.

Bill works out that there are 3 unemployed people on the island and they all want work so it doesn’t matter if one of the porters quits as it would be easy to find a replacement. So, he reduces the porters’ wages to $400. Then to $300. Then to $200. It’s only a fifth of what they used to make but, hey, it’s better than it is for the 3 unemployed. Anyway, the prices of a lot of stuff has gone down, which helps a little.

Everyone now hates Bill even more. He feels under big pressure because of increasing competition, falling prices and the risk of defaulting on the bank loan. Some of the islanders are unemployed and some are on lower wages. All of the islanders are miserable because of the social problems that have been caused by the new economic circumstances. Bill is looking forward to a time when the mill can be fully automated and he won’t have to pay anyone. In the meantime, he is thinking of relocating, with his mill, to a lower wage island.

Questions:

1. Whose fault is all of this? Are you a conspiracy theorist – must there always be someone to blame?

2. What is to prevent the price of the product falling so far that no one can make any profit from any of these mills?

3. What happens when there are less than, say, 10% of the workforce in employment? If hardly anyone works, how can anyone buy anything?

4. Suggest possible solutions to the problem. Use your imagination. Give:

(i) a hierarchical solution involving regulation, rules and prohibitions

(ii) an individualist solution in which everyone takes responsibility for themselves

(iii) an egalitarian solution in which everyone shares everything

(iv) a fatalistic solution where, maybe everyone becomes a criminal, I don’t know, I can’t be bothered.

(v) or better still, some kind of mixture of all, or some, of these

 

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