Paul Andrew Bourne
ALBERT EINSTEIN - WAS HE CORRECT . . . ?
Albert Einstein, the renowned physict and pioneer in his contributions of natural phenomena to the natural sciences, in an attempt to display his academic prowess and show the scope of his ‘ideashanal’ made a sweeping position statement on economics that reads “The economic anarchy of capitalist society as it exists today is, in my view, the main cause of our evils. Production is carried on for profit, not for use” that is highly refutable, non-scientific, lacks social science insight and at best summarizes his value judgment on the topic, and at worst epitomizes the need for the education of the natural scientists on social phenomena. Despite Einstein’s depth of knowledge in natural phenomena, he extrapolated from the discipline of economics a definition of production that he uses to substantiate his bias against capitalist and forward a preference for socialism. But, was he (Einstein) correct?
According to some modern microeconomists, “Production is the arrangement of existing resources into a new relationship. This process creates a good or service. Goods are tangible items – physical things that we can touch, such as cars, shirts, and steaks; services are intangible things, such as medical examinations, transportation, and concerts” (Fred R Glahe, et al pp. 177). Those definitions have been accepted and agreed upon by academics and non-academics alike. As such, this essay will subscribe to those meanings and so whenever the term production is used throughout this paper, it will be used within the construct of the Fred R Glahe’s et al definition.
Milton Friedman a notable contemporary economist chides that, “The key insight of Adam Smith’s Wealth of Nation is misleadingly simple: If an exchange between two parties is voluntary, it will not take place unless both parties believe that they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another” (Beardshaw 1992:5, 58)
From Friedman’s position above, the market only allocates scarce resource to the production of any commodities based on buyers’ and sellers’ voluntary agreement and engagement in a process of exchange. He lamented the notion of some individuals who believed that in order for one person to benefit from a voluntary exchange another would be worse off. This position arises only when Pareto Optimality (or general equilibrium) is achieved within the broad market. Prior to the attainment of Pareto Optimality (or Nash Equilibrium), individuals are able to receive additional benefits from different combinations of choices but has soon as general equilibrium is had; an individual may gain by changing his/her allocation of goods demand if the other person does lose. He (Friedman) did not understand this simple concept that Adam Smith wrote of in his Wealth of Nation. But by man very nature (s)he takes decisions that are unilaterally beneficial. As such, it is this dynamism that affords the market mechanism the best solver of individualistic preferences of man. Therefore it is this fundamental construct that Sir Albert Einstein misunderstood. He believed that socialism was a better allocator of resources than the unregulated market because production within the latter is motivated by profiteerism. Capitalist societies organize resources based on market forces (i.e. the market mechanism dynamism) to satisfy all the participants’ wants. A free market being, households, firms, and government ‘bid up’ prices based on participants’ preferences and weighs are used to denominated prices so as to indicate preferences. Meaning, resources are offered to the highest bidder who later converts them into demand satisfiers. As such, based on Adam Smith’s argument (1723-90) “Competition in this system was the best regulator of the economy.” This means that every individual will endeavour to employ his/her capital for the greatest value. By pursuing ones own interest, (s) he frequently promotes that of the society more effectively without the initial knowledge of the process of exchange – the dynamism of the market mechanism in operation.
Furthermore Smith cited that, “Many taxes and regulations which surrounded the commerce of the country hindered its growth. Business organizations should be free to pursue profit, restricted only by the competition of other business organizations.” This suggests that less government regulations and-or interventions in the market are preferred to more of the same for the effective functioning of the allocation of scarce resources from suppliers to consumers. On the other hand, more government interventions and-or regulations of the market retards it growth. A retardation of the market mechanism hinders expansion of employment, investment, supplies and the creation of freedom.
Capitalist societies over time have evolved and continue to form many monopolist organizations. As such, many individuals have been advocating state-intervention in order that the less privileged and the poor may continue to survive within this market form. That is, because the poor would be unable to effectively bid for such commodities as education, health care, legal services and security; peoples including Albert Einstein have been advocating for socialism and-or other forms of government intervention in the market to solve an issue of distribution deficiency. But this still does not detract from the efficient allocation of resources by that market type. Socialism on the other hand at the other end of the continuum does have countless monopolists. Then, does that keep socialism pure for a widespread acceptance by all societies?
Refutation of Albert Einstein’s postulation
The arguments that I have forwarded to this point now lay the foundation for the critique of Einstein’s position. This brings me to the issue of contention with the personal thoughts of the renowned physict on economics. His view on production was that “The economic anarchy of capitalist society as it exists today is, in my view, the main cause of our evils. Production is carried on for profit, not for use.” Based on economists’ view, profit is a cost which is derived from the efficient allocation of scarce resources. As such, in order for firms to make a profit within this market form, households’ demand must be adequately met and resources efficiently allocated for the competing ends.
Continuing, Einstein’s biases saw him making the statement that, “As a solitary being, he attempts to protect his own existence and that of those who are closest to him, to satisfy his personal desires, and to develop his innate abilities” in reference to peoples in the capitalist societies in order to substantiate his unjustifiable position that will give rise to all arguments in support of socialism. He did not comprehend the dynamism of the market mechanism and how it allocates scarce resources within the scope of individualism. Despite the fact that the free market is propelled by individualistic ends and choices, one must understand that resource allocations and choices are done within the construct of voluntarism. As such, profits are only had when items are provided efficiently, timely, effectively and based on peoples’ demand backed by their money power in an open auction system. Einstein did not cease there but he wrote that “Is it advisable for one who is not an expert on economic and social issues to express views on the subject of socialism?” I will forward economists’ position, and compare those with that of Einstein’s views.
The astute and witty physict, Sir Albert Einstein, committed the carnal sin by offering a view on a subject that he knew little of. By his own validation, Einstein should not have offered a position statement on this discipline without understanding the area’s constructs and technicalities. As such, this opens a critique of the distinguished gentleman’s position.
Within this market structure, man will from the limited resources available to him/her, produce products and-or services because a demand exists and not because of a social partnership. Continuing, let us assume that individualism exists in the free market, this market form which is translated into profits, then within this culture, production will therefore be executed only if households, firms, government and any other agents indicate by way of showing their desire for the commodities through ‘bidding up’ prices and vice versa as an indication of the strengthen of their effective demand. Meaning that if a use does not exists in this market for an item, producers providing an item for sale will absorb losses which given their primary objective will cease producing a given product. On the other hand, consumers are equally individualistic and as such will only pay a voluntary price which will maximize their preferences given a budgetary constraint – income. As such, making for a Pareto equilibrium price between both parties that will clear the market while satisfying each individualistic end. Therefore, trading takes place within the context of benefits from the transaction that was discharged between supplier and consumer.
With early civilization when man was a hunter for the purpose of the satisfaction of his own wants, individualism abounds and so did co-operation. Man would repeat that process for every time a need arose. During this period, if (s)he was a poor hunter, (s)he would find it extremely difficult to produce or have anything to consume in order to fulfill the need for food. He/she later began gathering because of past experiences in order to meet future demands. The process further expanded to the stage where (s)he would trade addition (or surplus) commodities to willing parties. Because man is innately selfish according to sociologists, (s)he transacts business only to a willing party who has the same individualistic position. When this was first instituted by Goldsmith, they discovered that depositors would only repay a portion of their stock of gold and so they (Goldsmith) would lend the surplus to outsider borrows and by so doing were able to garn profits. The concepts of profit according to individuals who support socialism are evilous but profits are only generated on production for consumption. Profits cannot be made on unsold stock but on production that has been sold to use in further production or is directly consumed by households. In both case production is for consumption. This position again was not understood by Einstein, otherwise he would not have made the statement that, “Production is carried on for profit, not for use.” Production is useless if not consumed. In that, suppliers are in the business to produce commodities only because there is a demand – with the end being consumption.
Our today world has evolved beyond the simplified pre-industrialized societies but still has retained production for consumption – the creation of goods and-or services for the satisfaction of consumers’ demand.
Einstein misunderstood the construct that producers themselves are also consumers. In that, in order for producers of one item to carry out the completion of another product they would need the input of other items. That is, producers are both themselves consumers and providers of resources for the satisfaction of demand. So, they are operating both in the consumer and producer market of goods and-or services. Hence production is always for consumption otherwise profits would not be possible. To the producers, profits symbolize the right niche in the production process. That is, it is a reward for having efficiently found the formulae to satisfy demand.
Sir Albert Einstein ineptitude in economics reveals the need for someone within the area to clarify his errors. As a natural scientist, an untrained social scientist, he would not have known that the consumer is king in the free market (market mechanism). In that, it is the consumers’ actions that indicate to producers the need to produce some items. This they accomplish by way of profits or losses. Meaning that consumers will sell their product in one market (the labour market), and go to the product market where they would bid for commodities. When consumers do not bid for items, producers would interpret this as signal not to produce of those items. So within the labour market there are buyers and sellers involved in the production and exchange of services for consumption and this is also the case in the product market. Although there might not be an interrelation between the two (2) markets, production in each is carried on because of consumption through the price indicator of the highest rewards (profits).
By all arguments purported so far, the naivety of Albert Einstein was clear but this offers a position statement on which we can be having this discussion today. This does not in any way suggests that this notable gentleman was not an academic within his area of specialization or that it brings the discipline of economics in disrepute but adds an avenue for clarifications any such positions held by other individuals.
Due to the advancement of man, division of labour adds further impetuous to increased production and consumption. The issue of profits once again is an indicator of the efficient allocation of production and not a drawback to either production or consumption. Einstein believed that profits suggest production and not consumption but the error is that profit in and of itself suggest a rise in bidding power for the items. Production is carried out only because there is a demand. A demand arose because a need for consumption arose initially. As such, production is carried out because of consumption. And it continuance is due to profits.
Undoubtedly economists have tended to agree that the free market is the best allocator of scarce resources. Due to the fact that this market form functions within the construct of individualism, the mode of production rises because the best price is accepted by both suppliers and consumers alike. This price is what clears the market. That is, the price states equilibrium.
Production for use is not conflicting with production for profits unless one is selling socialism. Peoples work for one reason, to consume their efforts. History has taught us that specialization is only to attain a large volume of demand. Man does not need to all produce clothes to wear clothes, but some can specialize in what they do best and trade the rewards attained for what other items they need to satisfy other wants. The labourer receives a reward for his/her services rendered, who then enters in the product market and trade some of the received rewards in this market. A producer who makes a profit does so because consumers ‘bid up’ prices on those items that they demand.
Because the capitalist societies are continuously trading using voluntarily exchange within the background of individualism, any purchase of commodities is carried out because of equal benefits. As such, profits made are as a result of voluntary exchange among the parties in the market. So there is undoubtedly conflict between production for use and production for profits even from early civilization.
In concluding, Sir Albert Einstein, the distinguished natural scientist, should be aware that capitalism and socialism are two (2) media for the allocation of scarce resources. And although profits are not the driving force behind the latter, profits in the former symbolize a satisfied consumption exchange process. He might have recognized the inequalities within the capitalist societies but the solution to this is not the abandonment of a system that best allocates resources. Einstein should be aware that all capitalist societies use the general equilibrium theory to allocate and distribute scarce resources by way of Pareto Optimality. Meaning that, resources are distributed so that in order for one person to benefit then next person must be disbenefiting. Therefore, the market mechanism utilizes efficiency as its base of operation. Hence, if inequalities do exist, then a method of redistributing resources should be found and then afterwards left to the market to allocate itself. Therefore this mechanism should not be thrown aside because of a deficiency. As such, for Einstein to purport a position for socialism because of lack of comprehension of capitalism, his naivety reduces the support he may have wanted to garner.