Capitalization of Labor

The Marvel of Modern Finance

Since the abolition of slavery, humans ownership has been banned. People are no longer allowed to sell their labor by the lifetime. Instead they must rent themselves temporarily for a salary or wage. As Paul Samuelson says in Economics

Interestingly enough most of society’s economic income cannot be capitalized into private property. Since slavery was abolished, human earning power is forbidden by law to be capitalized. A man is not even free to sell himself: he must rent himself at a wage. [p. 52, his emphasis]

We focus here on the capitalization of labor which Samuelson says is legally forbidden. However, the statement that labor cannot be capitalized is not strictly true. Human labor is forbidden to be capitalized through direct human ownership. But through the marvel of modern finance human labor continues to be capitalized. Labor capitalization today is carried out through the ownership of businesses. The most familiar example today is the stock market where pieces of businesses are regularly bought and sold.

Labor capitalization is also present in private (non worker-owned) business that are not actively traded on a public exchange. Labor which was once sold through slave markets, is today packaged with other assets and sold as a business. By owning a business, human labor can now be owned, sold, and traded. The clever packaging of labor and assets into business ownership is the marvel of modern finance through which labor is currently capitalized. It also serves another function useful to maintaining the perception of legitimacy of the employment system, obscuring the ownership of labor. It is fairly straightforward to see that owning a slave is owning the labor of person. But intermixing the labor of many people on an interchangeable basis and combining it with other assets in a firm diverts attention from the underlying labor ownership. Owners (stockholders) of a typical business today own the labor of the employees. The value of the employees’ future labor is incorporated in the price of the business. Labor ownership is represented by the difference between the market value of a business (the number of shares outstanding times the current price) and its net asset value (assets minus liabilities). That difference, called “goodwill” is the capitalized value of labor. A few examples will clarify the issue.

First consider a business with some assets and liabilities, but no employees. What is the value of the business? In this case the answer is obvious, the business is worth its net assets value (assets minus liabilities). A business with no employees cannot produce any goods or services, and therefore had no expected future profit. This is true both under the current system of human rentals or if they were abolished.

Now consider a business with no assets or liabilities but with employees. What is the value of the business? Under the current system of human rentals the value of the business is equal to the future stream of profits discounted to its present value. This can be calculated if one assumes the future profits are known along with a risk free interest rate. With the abolition of human rentals the value of the business would be identically zero since only the members (employees) of the business could appropriate the profit.

More generally, the value of any business in the absence of human rentals is equal to its net asset value. This has significant implications for the stock market as share prices would collapse to net asset value with the abolition of human rentals. By analogy, one can imagine the impact of the abolition of slavery on the share price of a slave owning firm. The assets of the firm would be reduce by the value of the slaves, thus lowering the net asset value. Other (non-human) assets of the firm would still be owned. In a market economy the value of the slaves would already account for the expected future value of labor over their lifetime.

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