Monday, May 11, 2009

How Money Trickles Up

(Money trickles up much faster than down. If not kept in check and if allowed to run wild eventually a plutocracy is born.)

A lot of people understand how businesses and even the government can trickle down money to the masses but what very few people realize is how money trickles up.

People speak all the time about billionaires and multi-millionaires but when they truly grasp how large those amounts are, they are stunned and in awe of exactly how these people make so much money.

When you look at how money trickles up the economy though, this will become less of a surprise and more of an epiphany. After diving into exactly how money trickles up it's important to note the consequences of the cycle.

There are 2 main ways money trickles up. The first is obvious and includes the profits people make on the goods they sell. The second is more mysterious and is the profit an owner makes off his employees.

1) Profit on Goods

Most companies produce goods from toys to cars to shampoo. There is the cost it takes to make the item by the company itself and the Manufacturers Suggested Retail Price which is what the product is sold for.

The difference between the two is the profit the company makes each time it sells one of it's items.

Mass production, basically creating lots of product really fast, also helps lower the price it costs for companies to make their goods.

2) Profit on Workers

To see the origin of this idea you actually have to look back at Karl Marx's writings and read about the abuse of the average worker.

What he basically states is that all companies rely on exploitation of their workers to make money.

How is it that they exploit their workers?

Here is an example of how it might be done:

I own a factory and I employ 100 people.

Those 100 people create 1,000 pairs of shoes a day(10 pairs of shoes per person per 8 working hours).

Because of their hard work I make $20,000 dollars a day($20 profit per pair of shoes).

If I paid the workers the amount they made for me, I'd be left with nothing, therefore I must exploit them. Again if I spread $20,000 dollars to my 100 workers per day, I'd be left with nothing for myself or my savings.

So what is it I do? I pay them less then they make me. I take their surplus value which is essentially the unpaid wages that my workers earned for me but that I'm personally keeping for myself.

Stanford's more elaborate explanation:

Suppose that such commodities take four hours to produce. Thus the first four hours of the working day is spent on producing value equivalent to the value of the wages the worker will be paid. This is known as necessary labour. Any work the worker does above this is known as surplus labour, producing surplus value for the capitalist. Surplus value, according to Marx, is the source of all profit. In Marx's analysis labour power is the only commodity which can produce more value than it is worth, and for this reason it is known as variable capital. Other commodities simply pass their value on to the finished commodities, but do not create any extra value. They are known as constant capital. Profit, then, is the result of the labour performed by the worker beyond that necessary to create the value of his or her wages. This is the surplus value theory of profit.

So in the end, of the $20,000 dollars in profit I made, I only give back $15,000 dollars to the workers.

It seems very unfair that after I pay back all the costs to make the shoes and I get my $20,000 dollars of profit per day, that I only give back 75% of it.

Especially because 99% of the work was preformed by the 100 workers in the factory. I barely did anything and even saying I did 1% of the total work to make 1,000 pairs of shoes is a bit of an exaggeration.

The Worker v.s the Owner

So each worker in the above plant would make $150 dollars a day (ignoring taxes on income to make the numbers easier to handle). That comes to $750 dollars a week(5 working days) or $36,000 a year.

How much am I making though? Well I'm getting $5,000 dollars a day, which comes to $25,000 dollars a week, and which leads to $300,000 dollars a year.



So as you can see from the above example, exploitation is really inevitable. If every owner paid his workers the amount they made for him, he would be left with nothing.

That is both the miracle and risk of capitalism. It can bring you great wealth but it also has to siphon it off from somewhere.


Our Daily lives

So how does this effect money trickling up?

In our daily lives we buy lots of commodities. From food to gasoline to games, we constantly give profit to companies.

Every single transaction you make is always more than the cost it took to give you that commodity or that service. So every time you buy something you're trickling money up to the top.

So you buy some cereal and the cash trickles up to the store and then to the manufacturer and then to the owner.

Each worker at that store buys cereal, which trickles up to the store, which goes to the manufacturer, which takes a slice to the executive.

Every single time someone buys something they're immediately sending money up the ladder.

When it comes time to send the money back to you, it never comes back in full, because the owner took a cut for himself.

If you continue the trend of 110%(the profit you paid for the commodity is the extra 10% I add) up and 90% down (the cash you lose to your boss is the 10% i removed) you see a fast flowing column of money trending in one direction.

You always overpay when you buy something and get underpaid when you work.


Buying Power

So why is it even important to pay good wages to our workers in the first place; a greedy owner may ask.

When all this money is getting funneled up to the owners of all these companies, they have to ask themselves who is buying their products.

It's their workers and other ordinary citizens that buy their products that allow this cycle to continue.

If people stopped buying pairs of shoes, from the above example, than the owner of the shoe factory wouldn't make anything either.

To put it plainly, Cars don't buy cars, and Food doesn't buy food, it's people that buy these things and when they are not paid good wages, the whole cycle breaks and no one is then able to benefit.



In this world where owners start abusing their workers too much and where wages aren't enough to sustain ordinary people, you get a plutocracy.

There is a huge income gap between owners and workers, while ability to become a factory owner gets harder and harder.

If this system continues too long the whole system comes crashing down because people are then unable to buy the goods they need.



So you can see how easily and readily money makes it's way up the ladder. It's now also clear about how unequally the money falls back down to the workers.

The whole system continues as long as the workers have a living wage and their buying power remains uninterrupted.

But when their buying power becomes significantly decreased and a plutocracy is born, then the whole system starts slowing to a standstill.

In the end people shouldn't complain about money trickling down to the ordinary citizen. They should be complaining about how fast the money trickles up to the owners who do such a small share of work for such a large share of profit.

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