This post is a reference post for the common myth which exists among both capitalists and socialists alike.

It usually goes like this with socialist asking question:

Why is that an owner creates a shoe, pays only $15 to a worker who made that shoe and sells it for $50 in the market, reaping a profit of $35 without actually putting his labor in making the shoe? This is clear exploitation.

And I haven’t really seen the so-called ‘capitalists’ actually giving a satisfactory answer to it. They know that he deserved it, but just can’t tell precisely how. Here is the reason how he earns it.

An entrepreneur, who one day decides to setup a shoe factory, cannot just walk into a garden and say “let there be a shoe factory” and get that factory. It requires years of effort. He first have to buy a land, where the factory will stand. Then, he hires builders to build him a factory which again takes some time to be built. Then he has to buy the machines, raw material, it takes about a year and a half before the first shoe from his factory is produced. Then has to start marketing his shoe because he has to sell it, and approximately it takes about another 6 months before his first shoe is sold after it has been manufactured.

Now here is the thing, the construction workers who built his factory, or the guy who sold him the land, isn’t going to wait till he starts earning money to receive the payment. They need their payment then and there itself. Similarly the workers who actually produce the shoes don’t wait for six months till that shoe is sold to receive the payment, they need their payments pretty much on time.

So if you consider the payment received by the worker(presuming he is paid for every shoe he makes) as a sale of that shoe from worker to the entrepreneur, he is getting the precise price for the shoe, which in the above example is $15.

If everyone who contributed in starting of that business waits till the actual sale of shoes are done and profit starts pouring, if everyone delays their payments, they all will get the exact price of their labor from the share of the shoe.
That is out of those $50 some $48 will be given as a payment to the people, and the entrepreneur will get some $2 which is precisely the price of his labor.

BUT this is not what happens.

What happens is that the land owner who gives the property(actually sells the property) to the entrepreneur wants to receive the payment NOW than later. That means the entrepreneur has to arrange for that capital to buy the land before can start the production and wait till the profit starts pouring in that’s when he will get his investment back. If he waits till the actual profit comes in, he will get much more value for his land.

Then, the construction workers who build the factory don’t wait till the profit to come in, so they also need to be paid right NOW rather than later, which means he needs more capital to build that factory. If the construction workers are ready to wait till the profits starts to come, they will get a much bigger share of the sales of shoes.

Then the raw materials supplier, lets say some leather worker, they want the money for their material at the time product is supplied, rather than when the profits are made, so add that capital too. If the raw materials supplier waits till the profits come, he will get much more share from the profit of the shoe then the price of the raw material.

That is followed by the actual shoe makers who put their skill in the manufacturing of the shoe, who again don’t wanna wait till the profits come in. They want their payments there itself, so entrepreneur needs more capital to pay them. If they wait till the shoe is sold, they will also get their so called “deserved” share as socialists demand. But they don’t wait.

So basically the entrepreneur has to arrange all this capital from somewhere. Capital is not just pieces of paper, its actual labor.

That means if I have a million dollars, I have actually done the labor worth that much. And not just that, I SAVED that much money. Take not of the fact that I could have used that money just when I earned it. But NO, I didn’t I kept on saving it, I delayed my own pleasure.

So when I started my own shoe making business, paid everyone at time because nobody was ready to wait, it was actually my YEARS of SAVINGS which I invested, and on the top of that I delayed the pleasure of those savings for two more years(that’s when the profits starts to pour) I totally deserve the $35 I earn. But its not the actual profit, its just the money which goes in my pocket. I spent somewhere around $20 per shoe for buying the land, buying the raw materials, buying the building. Then I spent $15 per shoe in giving the raw materials and letting the worker use my factory and buying the shoe back.

At the end when I finally sold the shoe to customer, I earned $15 per shoe which I totally deserved it.

Now had I taken a loan from someone, like some investor or something, the WAITING time(the waiting time to delay his pleasure of his money) is passed on to someone else, in which case, he takes the maximum profit.

Now as you can see a worker is equally free to buy raw materials in his backyard and produce that shoe, and if he can sell it for $50, he is fully entitled to enjoy the profit.

So if shoe workers want ownership of the factory, they gotta either pay their equal share of investment when the land was bought, and the factory was built, and wait till the shoe is actually sold and its profit acquired, and this is what happens in capitalist market, and its called a co-operative.

AMUL Co-Op
AMUL is given as the best example of a socialist style co-operative, well lets see how it fits as a Capitalist establishment I have explained.

No single person has done any investment in AMUL, all the milkmen bring and deliver their milk, which they produce from their own cows and buffaloes which they bought, and took care of by their own money. This is all investment done by milkmen themselves, the AMUL establishment, just takes the milk from them, packs it, and delivers it. After paying for the packaging and delivery price, whatever earnings are made, they are equally given according to the share of the milkmen.

SO, it looks like milkmen are earning a fair share of their effort, but their effort is MUCH MORE than a shoe maker. These milkmen are investors. The shoe makers are NOT! If all the shoe makers brought shoes made in their own home, and its marketed and delivered just like AMUL milk, then they also will get their fair share like AMUL milkmen get.