The Mutualist Cost-Principle

Difficulty    

This Text Can Be Found in the Book,
The Evolution of Consent: Collected Essays (Vol. I)


This was composed for a speech given to the UNT Students for Liberty
on October 4, 2012 in Denton, Texas.

_______________________________________

Introduction

The cost-principle, in various forms, is the main tenant of the original forms of anarchism in both the Americas and in Europe. The cost-principle states that everyone should live at their own cost, and not at the expense of others; that prices should not rise above, or fall below, the cost of production, but should remain in equilibrium at the cost of production.

Josiah Warren, the father of the cost-principle, is an often unspoken name in libertarian circles, though his role in the development of the strain of thought known as individualist anarchism, and anarchism as a whole, is often seen by historians as a founding figure. Although Pierre-Joseph Proudhon, Josiah’s contemporary in France, is often more discussed than Josiah Warren himself is, both had major impacts on the development of the economic theories of anarchism in their own countries, particularly American individualist anarchism, which was sired largely by Josiah Warren, and French mutualist anarchism, as mainly fathered by Proudhon.

Though each of these two men had different visions of society—one based in the frontiers of America, and the other in the factories and farms across France—they had both come to the same crucial conclusions amidst the problems of their times. Their realizations were almost simultaneous, as one would expect from the conditions of the commonly-rooted problems of recently-introduced industrial capitalism.

Both Proudhon and Warren, though lovers of liberty, were influenced by early, pre-Marxist, socialism; Proudhon especially by Charles Fourier, and Warren by Robert Owen. Owen was a Welshman who experimented in America, and Fourier a Frenchman. Interestingly enough, these two socialists, Owen and Fourier, were also contemporaries, with similarities also arising from the circumstances of their times.

Proudhon and Warren, followers of these socialists’ teachings, would learn the limits of socialism, however, and would look down upon compulsion in association and in the sharing of possessions. Though they would remain participants in the struggle of labor to own its product, they would do so without the need for a regimentation, or order, to mold society to. Anarchism, then, unlike the common politic of the times, was a socio-economic philosophy based on the desires of the people. Instead of trying to force people into models of economic and political structure that they did not choose, it invited people to make their own models of society through contract.

Like all libertarians, mutualists generally adhere to some form of non-aggression, though some don’t use the term, because they feel it is used too heavily by vulgar libertarians, who use free market terminology to protect their unfairly gained property. Though mutualists differ from other libertarians in our view of rightful claim to rights, mutualists do oppose such acts of aggression as theft, vandalism, assault, and fraud on person and rightfully-owned property. What distinguishes mutualism from other forms of libertarianism is that we are also socialists, though laissez-faire ones. Mutualists are socialists, not because we oppose money and markets, but because, in accordance with the cost-principle, we oppose profit, rent, interest, and taxes, which are viewed as gains from monopoly and lack of competition.

Proudhon, for instance, felt that socialism, the sharing of resources, if left voluntary, was beneficial enough to humanity that it would be inclined to set itself up by individuals combining their own interests under the free market. He felt that freedom was the grounds upon which equality and cooperation was based. Never did Proudhon, in promoting his vision of libertarian socialism, promote the coercive destruction of capitalism. He instead says,

I protest that when I criticized […] the complex of institutions of which property is the foundation stone, I never meant to forbid or suppress, by sovereign decree, ground rent and interest on capital. I think that all these manifestations of human activity should remain free and voluntary for all: I ask for them no modifications, restrictions or suppressions, other than those which result naturally and of necessity from the universalization of the principle of reciprocity which I propose.[i]

To Proudhon and Warren, the aim of the labor movement should not be based on any kind of pre-arranged system to be forced on society, such as living in communes and sharing everything, but on the laborer gaining the full product of his or her labor value and doing with it as they please, so far as it does not restrict others from the same ability. To both Proudhon and Warren, this did not require compulsive action by the hand of a benevolent government; quite oppositely, it required the ability of the worker to have complete control and ownership over their own rights, labor, land, and capital. If society was naturally inclined to reciprocity, though, why wasn’t it already a reality? What was getting in the way of its establishment? This is a question that the anarchists, in particular, would get to the heart of.

The Somebody

When Benjamin Tucker, an individualist anarchist, self-described socialist, and proponent of mutual credit and the cost-principle, was challenged to describe “the Somebody” who steals from the working poor, this lengthy quote is what he had to say:

What are the ways by which men gain possession of property? Not many. Let us name them: work, gift, discovery, gaming, the various forms of illegal robbery by force or fraud, usury. Can men obtain wealth by any other than one or more of these methods? Clearly, no. Whoever the Somebody may be, then, he must accumulate his riches in one of these ways. We will find him by the process of elimination.

Is the Somebody the laborer? No; at least not as laborer; otherwise the question were absurd. Its premises exclude him. He gains a bare subsistence by his work; no more. We are searching for his surplus product. He has it not.

Is the Somebody the beggar, the invalid, the cripple, the discoverer, the gambler, the highway robber, the burglar, the defaulter, the pickpocket, or the common swindler? None of these, to any extent worth mentioning. The aggregate of wealth absorbed by these classes of our population compared with the vast mass produced is a mere drop in the ocean, unworthy of consideration in studying a fundamental problem of political economy. These people get some wealth, it is true; enough, probably for their own purposes: but labor can spare them the whole of it, and never know the difference.

Then we have found him. Only the usurer remaining, he must be the Somebody whom we are looking for; he, and none other. But who is the usurer, and whence comes his power? There are three forms of usury; interest on money, rent of land and houses, and profit in exchange. Whoever is in receipt of any of these is a usurer. And who is not? Scarcely any one. The banker is a usurer; the manufacturer is a usurer; the merchant is a usurer; the landlord is a usurer; and the workingman who puts his savings, if he has any, out at interest, or takes rent for his house or lot, if he owns one, or exchanges his labor for more than an equivalent, – he too is a usurer. The sin of usury is one under which all are concluded, and for which all are responsible. But all do not benefit by it. The vast majority suffer. Only the chief usurers accumulate: in agricultural and thickly-settled countries, the landlords; in industrial and commercial countries, the bankers. Those are the Somebodies who swallow up the surplus wealth.

And where do the Somebodies get their power? From monopoly. Here, as usual, the State is the chief of sinners. Usury rests on two great monopolies; the monopoly of land and the monopoly of credit. Were it not for these, it would disappear. Ground-rent exists only because the State stands by to collect it and to protect land-titles rooted in force or fraud. Otherwise the land would be free to all, and no one could control more than he used. Interest and house-rent exist only because the State grants to a certain class of individuals and corporations the exclusive privilege of using its credit and theirs as a basis for the issuance of circulating currency. Otherwise credit would be free to all, and money, brought under the law of competition, would be issued at cost. Interest and rent gone, competition would leave little or no chance for profit in exchange except in business protected by tariff or patent laws. And there again the State has but to step aside to cause the last vestige of usury to disappear.[ii]

Benjamin Tucker had been influenced by previous anarchists who followed the cost-principle, a cornerstone of mutualism, given to the mutualist and individualist schools of anarchism first by Josiah Warren, but soon after by Pierre-Joseph Proudhon (under different terms). This principle of equitable commerce, stated also as cost-the-limit-of-price, says that each individual should live at their own costs and, thus, prices should not rise above or go below the cost of manufacture. Prices that are at cost include wages, salaries, benefits, etc. Prices over cost include profit, rent, interest, and taxes. These are prices that would not be paid in a free market, but are enforced by gunpoint or by state-protected privilege. The clearest of these forms of oppression is taxes, as taxes are taken forcefully against one’s will. The others are a bit harder to understand, so let’s start at the bottom of this mess.

Cost and Privilege

As a young worker, one must labor to survive. In order to labor, one must find employment. One can be self-employed, but without land and capital one will not have the productive capacity to compete with other providers in most markets. Most workers, then, find employment at firms that they did not help start. Upon doing so, workers will receive wages, salaries, and/or benefits. If they save, and refrain from pleasures, they may one day be able to be self-employed and/or own their own homes. Upon employment, however, the boss, who may also labor and gain wages or salary in this manner, also gets another form of income. This income is called profit. As made clearer by Francis Dashwood Tandy in Voluntary Socialism,

By profit is usually meant, the difference between the price which a merchant pays for goods, and the price at which he sells them. But this is not a sufficiently accurate definition for economic purposes. Such profit is composed largely of rent, interest, taxes, wages and the necessary expenses of business. Economically speaking, profit is that which is left between the cost and the price, after the factors above mentioned have been deducted.[iii]

Profit, then, is a return on privilege, and not on labor. Cost is based on labor. It is true that many returns on capital are just, but these just returns do not incur profits, they instead increase wages and productivity for all. These two forms of capital—those which increase wages, and which incur profits— can be separated into categories of competitive and monopolistic capital. Monopolized capital incurs profit, while competitive capital increases the productive capacity of the economy as a whole. Profit can occur for different reasons. It can be tied to privileges given by the state, such as licensing, subsidies, patent protection, zoning laws, union regulation, etc. as well as privileges given by other monopolies, such as bankers and landlords. The return on capital, above the cost of labor, is known as profit or economic interest. The return on labor is wages, and is based on cost.

The monopolist employer, still, pays the toll of much larger monopolies. Unless he or she is her own provider, every employer also has a landlord. Similar to the unproductive income of profit, the landlord makes an idle flow of cash from owning land and collecting rent. Most capitalists have to face this fee as well as workers.

Even the landlord must pay fees to even more privileged monopolies. Most land is either inherited, whereupon taxes are still paid, or it is purchased. Some land is purchased by legitimate means of saving one’s wages or salary, and this form of ownership should be commended and respected to some degree. Aside from this legitimate form, though, land may also be purchased from saving the illegitimate profits of capital or the rent of more land. Most landlords, however, own their land by means of loan and credit, and pass the charges of its use down in their rent.

The unjust banker, or usurer, gains a particular form of price above cost known as monetary interest. The central banks merely monetize the labor of others, and make a return. The smaller banks loan the money of others to make their interest. So far as the monopolist is banker, the return on money is unjust, and the intensity of this injustice can be measured by the interest that is acquired. This interest is paid merely for having the state-protected privilege of issuing money, as money, as IOU, belongs properly to those whose labor it is monetizing, and there is no money rightly-owed to any banker for the opportunity costs of lending; it’s not their labor being monetized or lent. There are wages owed to the banker, but interest, by its nature, is unjust. Opportunity costs deserve wages, but there are no opportunity costs to the banker in monetizing people’s labor for them, aside from the opportunity cost of not working somewhere else. In such a scenario, the banker is also subject to the supply and demand of the labor market, and no banker is “too big to fail.”

In a mutualist society, mutual credit would be available without interest. Mutual credit would allow almost everyone to be their own employer and landlord (if not individually, then cooperatively), because as long as everyone pays their loan back (which is possible in interest-free money systems, but not in interest-bearing monies) they can all receive a loan and receive a bill for absolutely no opportunity costs. This is why mutual credit is called free money. Mutual banks of issue would out-compete interest-bearing banks. State banking must go.

We have still not come to the pinnacle of this pyramid scheme. Atop this leviathan rests the monopoly on law and violence, known as the state, which forbids all, other than its own choosing, from creating money, issuing property titles, or creating laws. The banks are controlled by the government, and, like us, must pay tribute known as taxes. Taxes are a price paid over cost, but what is being bought by taxes is a particularly special service, and the foundation of all human actions under a system of law: rights. The state holds the monopoly on rights and, with this power, extracts profits from the populace.

Thus it is, that the anarchists, through a long chain of reasoning, have come to oppose such unearned incomes as those of capitalists, who benefit from a monopoly on capital through profit; landlords, who benefit from a monopoly on land through rent; usurers, who benefit from the monopoly on credit through interest; and the state, who benefits from a monopoly on rights through taxes. Profit, rent, interest, and taxes are prices above cost.

Cost and Price

Price is the amount, in currency, exchanged for a good or service. It is a service or item’s exchangeable value. According to Josiah Warren, prices should reflect the effort of creating a similar good or service. This effort is cost. Pierre-Joseph Proudhon states that, under implementation of the cost-principle, “[e]very product will be paid for with a product that costs the same sum of labor and expense.” He says also that, in his day,

When you buy a pair of shoes, you buy the day of a shoemaker. When a cobbler buys shoes, he buys back his own day. Thus if his day is worth fifty sous on the market, and he gains only forty at the workshop, how do you want him to pay his own goods?[iv]

All work is not valuable, however. As quoted by Alan Ritter, Proudhon clarifies:

The superior worker, who understands and executes faster than another, and who turns out more products of better quality, will receive a larger reward, because he surpasses the common measure. With all the more reason, so will the worker who combines management skill and leadership talent with manual ability. He will be able to earn the equivalent of one and a half, two, three or even more standard daily wages.[v]

The cost-principle is highly tied to the concept of individual sovereignty or self-ownership. According to mutualists, all prices that stray from cost are due to a lack of self-ownership, which is due to some form of monopoly, or property infringement. This reasoning comes from the fact that all parties in a free transaction take into account the costs of buying and selling. What is cost, though? According to Josiah Warren, cost is “the endurance of whatever is disagreeable.”

[…]

Fatigue of mind or body is cost. Responsibility which causes anxiety is cost. To have our time or our attention taken up against our preferences—to make a sacrifice of any kind—a feeling of mortification—painful suspense—fear—suffering or enduring anything against our inclinations, is here considered cost.[vi]

All of these hindrances are what economists generally refer to as the costs of labor, including having “our time taken up against our preferences,” which is an opportunity cost of labor. It’s important to note that the cost of labor does not just include the labor of manufacturing the materials, but also the labor to extract the resources and produce them into their component parts. When a seller makes a transaction, they include their labor and materials and the cost of rent, taxes, and interest in their price. As long as no one down the line of production had to incur artificial prices from rent, taxes, and interest, all prices of material are also at voluntary cost. If added taxes, rent, profit, and interest are experienced, though, these will be factored into the sale price.

As Clarence Lee Swartz makes very clear,

The workers for wages are apt to say: ‘We borrow no money, and therefore pay no interest. How, then, does this squabble concern us?’

In Reality, it is exactly the class that has no dealing with the banks, and derives no advantage from them, that ultimately pays all the interest money that is collected. When a manufacturer borrows money to carry on his business, he counts the interest he pays as part of his expenses, and therefore adds the amount of interest to the price of his goods.[vii]

Everyone pays interest, profit, rent, and taxes in the prices they pay as consumers. These prices are not based on labor, but on privilege, and yet all suffer their consequences. Swartz blames interest for all profits. He says that,

all profits are based upon and caused by interest; and it matters not whether few or many capitalists own the capital they are using or are indebted to the banker or money lender for it. [viii]

Cost is anything that someone does not want to do. It is not idle gain. It is disutility. It is a loss of opportunity to better oneself or one’s conditions. Payment is given to offset these costs when someone has incurred them because they have performed a service or provided a good. That is the reason for payment, not simply for idleness. Payment is given in exchange for cost-value.

Value

Mutualists don’t find a contradiction in adhering to both the labor and marginal utility theories of value. Francis Dashwood Tandy, in 1896, argues that,

It should be noted that the labor value does not necessarily mean the actual amount of labor embodied in the identical article, but the amount of labor necessary to produce an article of exactly similar and equal utility [under fair conditions].[ix]

He acknowledges marginal utility value:

As the margin, or desires which are left unsatisfied, increases, the price decreases. Thus it is the ‘margin of utility’ which determines the price. [x]

The contemporary mutualist, Kevin Carson, in the first part and throughout his work, Studies in Mutualist Political Economy, has done much work on synthesizing marginal utility and labor theories of value. In regard to time-preference models, he suggests,

It will suffice for the moment to say that, although time preference no doubt holds true universally even when property is evenly distributed, the present after-effects of primitive accumulation render time-preference much steeper than it would otherwise be. Time preference is not a constant. It is skewed much more to the present for a laborer without independent access to the means of production, or to subsistence or security.[xi]

Many criticisms of mutualism look over mutualist treatment of opportunity costs, because mutualists make use of the labor theory of value; but a proper labor theory of value includes the opportunities of labor. Indeed, Kevin Carson says,

As for opportunity cost as the basis of the cost principle, it is worth bearing in mind that “the subjective utility of individuals” is not determined in a vacuum; “the highest price [a] factor could earn elsewhere” is entirely relative, and is conditional on many things, not least among them the existence of monopoly returns enforced by the state.[xii]

In the mutualist synthesis of value, the price, or exchange-value, is based on the intersubjective marginal utility, but according to the supply and demand of both the buyer and seller’s labor. Each party may have a particular use-value for a good or service the other has, but, unless both parties feel there is benefit in an exchange, it will not occur. Unless someone wants to make an exchange, there is no exchangeable labor value. There may be use-value in the labor, however.

Labor does not occur voluntarily unless it ensures a return, allowing the worker to consume more for themselves, or it reduces their costs in some way. Similarly, value is not exchangeable until it provides some sort of benefit, some reduction of labor, or of nourishment, to consumers. Consumers want to buy more for lower prices, and producers want to sell more for higher ones; both in order to reduce costs for themselves. A producer will not sell items at a price that is below cost under free conditions, nor will a consumer buy for a price over cost. Cost, on the side of the producer, means the toll of labor, and for a consumer, it means the disutility of producing for oneself, or buying a product. Excluding influence by the state, utility is determined by labor.

Consumers want to reduce their labor through purchase, and laborers want to reduce their labor by gaining the right (payment) to become consumers. The thing that gets in the way of this organic relationship between consumptive value and productive value is the state, when it externalizes costs onto others, often by way of exclusion of resources. Surely, differences in labor value are accentuated by privileges granted by the state; a worker who maintains their own land tenure may retain more of their labor than a sharecropper. This being so, a homesteader may spend more casually, while a serf needs to be frugal. The products of their labor may be the same, like results to like efforts, but one maintains the title to their labor while the other does not, one feeds their own, while the other feeds a class of parasites, resulting in a subjectivity of their labor’s value— a split between casual and frugal spending—, despite the objectivity of its outcomes. If labor value is determined, as Tandy asserts, by the consumer’s ability to make a duplicate under fair conditions, a price above cost, measured in abstract terms of marginal utility, is derived from unfair conditions of monopoly, particularly in regard to money and credit. Labor value cannot be properly apportioned under dire conditions. Prices that stray from cost are the culprit for the working poor.

According to the philosophy of mutualism, and in accordance with the cost-principle, prices should be limited to their costs, not by the state or authority, but by the lack of it; the state is the largest monopoly, and externalizes the most costs. The cost-principle, instead, relies on the sovereignty of the individual, and the internalization of costs. The complete ownership of individuals over their selves leaves people to make their own choices regarding the utility of labor, both in terms of consumption and production. Mutualism depends on a completely free price system, where value is decided by supply and demand alone, through the choices of free buyers and sellers.

Conclusion

A price, amount paid, will be at cost when all of the labor that went into producing a good or service is completely voluntary. I say this because both parties consider the value of their labor in a transaction. Neither will trade something they worked hard to acquire for something they wouldn’t work as hard for. If a person is not considering the cost of the loss of their labor in a transaction, either in product or in currency, it is due to monopolistic privilege, which suggests that a price has been paid over cost to the individual in another market, and that prices are not being completely internalized somewhere. In other words, they are trading unearned income, and that is why they don’t concern themselves with its cost. Privilege allows costs to be externalized onto others, without contribution of labor. This allows the privileged to make decisions without regard to the cost of labor, creating purely materialistic systems of value. This is not freedom.

Taxes and the government would find themselves necessarily absent in a free society. Government, afterall, is compulsive subjugation and involuntary absorption into a group, and taxes and subsidization are its application in the economy. Instead, people in a free society would pay voluntary prices at cost for the service of providing law and order, would associate voluntarily to cooperate in providing these services, or they would provide them for themselves. Law and order is not absent in anarchy, just freely ascribed to as equals.

In absence of the state and taxes, restrictions on banking would be lifted, interest levels would approach zero, and any price attached to a loan would be little more than compensation for opportunity costs of the transaction, and payment for services from the bank. Even these charges, however, would be scarcely found, as competition to provide credit would be fierce. The banks themselves, being under economic competition, would likely take a more mutual and cooperative model of democratic assembly for decision-making, with customers and employees of the bank having considerable say in the banks’ policies. Having no interest to deal with, everyone would have fair access to credit loans to buy land, capital, or to go to school.


References

[i] Pierre-Joseph Proudhon4

[ii] Benjamin Tucker, 88.

[iii] Francis Dashwood Tandy, 84.

[iv] Pierre-Joseph Proudhon1

[v] Pierre-Joseph Proudhon3 (quoted by Alan Ritter)

[vi] Josiah Warren

[vii] Clarence Lee Swartz, 65.

[viii] Ibid., 88.

[ix] Francis Dashwood Tandy, 84.

[x] Ibid., 81.

[xi] Kevin A. Carson, 86.

[xii]Kevin A. Carson, 76.

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