Narrative by Fred Lundgren
Charts & graphs by Jerome Friemel

the physics within
an economic system
Chapter One

Understanding Capitalism
Why should the economics of our political system, the very system that shapes our daily lives, be so confounding?  Why does a capitalist system seem to create economic miracles for some and a lifetime of struggle for others?  How can academia produce an endless babble of voices on the subject without discovering any concrete governing economic equations. Why is the subject understood and interpreted so differently by scholars of each successive generation?  Perhaps, just perhaps, some irrefutable laws of physics are buried within the capitalist model which have been hidden behind fully informed self-interest.  We will explore these questions and provide some surprisingly positive answers.

As children, we were told that everyone is equal and our futures would be rewarded by a "proper" education, and our determination to succeed would eventually be rewarded by achievements, so we dreamed, we studied, and we planed.  As young adults, we translated those dreams and plans into a career and family.  We employed our careers to pursue our dreams.  We sought personal rewards but seldom tried to advance the "public good"; (clergy, volunteers and some government servants excluded).  We worked to improve ourselves and our families, and we presumed the greater good would be served in the process.

How can our personal success translate into the public good?  Its obvious  that Capitalism is 180 degrees out of phase with a production for use system, (communism) or a needs based system, (socialism).  So, how can a system prosper if it is fueled mainly by self interest?  The answer is so simple yet so complex.  A capitalist system must be inclusive to be successful and it can only become "inclusive" by achieving internal economic balance which translates to the maximum level of economic opportunity for the greatest numbers of people. This equity of opportunity will naturally lead to a structural balance in the nation's economy, and this balance must exist between each major segment of the national economy for all people to prosper.  This balance can only be achieved by establishing a living wage for labor (the consuming end of the economy) and a parity price for all domestically produced raw materials, (paid for the raw product at the first point of sale).
  This foundation under the producing and consuming ends of the economy leads to structural balance across all segments of the economy which is a prerequisite to real economic growth without excessive debt expansion under the capitalist model.   The model requires all employers to pay living wages and salaries to the masses which are sufficient to allow them to consume their own production and meet basic family needs without borrowing to consume which creates perpetual debt expansion. Their incomes must be sufficient to place home ownership in reach during the employees prime working years. Under the capitalist model, home ownership is a central contributor to social stability.  Thus, capitalism benefits when wages produce more home owners and fewer renters.  This stability can only be sustained by a strong and profitable manufacturing base and high technology jobs. 

Emphasis is provided by the following humorous anecdote. A cafe waitress was watching the Nightly News while working tables. She heard the anchor read government statistics which boasted of 22 million new job in America.  She responded, "yea, I know; I've got three of them!" 

Admittedly, America faces a poverty paradox. A visit to Washington, DC offers a striking example.  Visitors to D.C. are shaken by venturing only a few  city blocks from the tourist paths when confronted by street side beggars, prostitutes, and drug dealers.

Air travel also helps us recognize the poverty paradox.  During night flights between cities, the homes and businesses below seem to sparkle like stars seen through a telescope.  It is easy for political leaders to feel self-satisfied and re-assured by the grandeur of these micro-societies.  During a day flight, its equally easy to feel confident about the future by viewing the bounty of a thousand connecting farm-factories that resemble a giant colorful quilt.  However, on the ground, just a few minutes from any airport, the poverty paradox is easily found.

The subtle paradox is found by visiting local farms.  Most of these farms are operated by retirement age couples who depend on loans, subsidies, or off-farm income, and produce food and fiber with machinery older than the couple's grown children. 

A day tour of any city is also instructive. Almost every city in America has slums with abandoned commercial buildings and homes in disrepair and "projects".   Local governments offer new, low cost, rental  units to resolve the problem.  Look anywhere in the nearest city and you will see apartment complexes popping up everywhere, housing as many people in five to fifteen acre communities in 90 days of construction as would be housed in a 100 acre subdivision with quality homes built over a period of years. On average, 50% of all residents in major cities live in apartments. Capitalism need not institutionalize a renters mentality with low paying jobs.  Instead, let's break down the issue and confront the problem.

The best way to reduce the need for public assistance, whether it be in the form of  "Section 8" housing, subsidized school lunches or even farm subsidies is with living wages. But, here is the obvious hitch! Living wages can't be paid by employers unless employers generate a sufficient profit on labor.  This is only sustainable in a strong production economy.  This is impossible in a service driven economy that imports too much production.  Today, the source of most job growth is from services. 
Regardless, we calculated a minimum living wage for both rural and urban citizens.  This "wage" achieves balance between both "ends"of the economy.
Here is the result.  The minimum wage in America must be equal in value to the Parity price of a bushel of food grain.  In other words, a $12.50 per hour minimum wage contains the same purchasing power as $12.50 for each bushel of food grain sold at the first point of market.   This primary exchange equation rests under all others and must be adjusted annually to remain consistent with changes to efficiency because the food we consume is the primary energy that fuels us and it represents almost 70% of all raw materials that flow through the economic cycle every year. This equation can be viewed in terms of money or the energy required to achieve balance. The answer is always the same.  Maintaining this equation fosters full employment and optimal levels of debt free consumption.  It is based upon the value of energy expended on both sides of the equation and is therefore irrefutable.  It will be examined in depth in future chapters.

    Arguments to the contrary fail the logic test.  We calculated a living wage for a single working mother with two children and found she must earn a minimum of $12.50 per hour to provide food, clothing and shelter for her family without public assistance. .  That number assumes a 40 hour work week which of course, gives the mother little time to raise her children.

Since 50% of all marriages end in divorce, many women will be forced to face this situation during their child bearing years.  On a personal note, the narrator is married to a real estate agent who specializes as an apartment and townhouse locator. As such, she is painfully familiar with the silent frustration of disenfranchisement that faces a million working people in the Houston metro;  all made worse by subtle class and racial profiling, low wages, long hours, and endless hard physical labor. In too many cases, this constant struggle leads to broken homes.

Thus, the narrator is familiar with the precise monetary requirements for occupancy in hundreds of apartments and townhouses in the area.  So, don't make any "conservative" judgements about the minimum wage or reductions to public assistance until we find a home for our hypothetical apartment seeker, who happens to be a single working mother with two children.

Since mom must house two children, the occupancy rules won't allow her to squeeze the family into a one bedroom apartment.  So, she must rent, at a minimum, a two bedroom apartment. The cost of two bedroom apartments start at $500.00 per month and the mothers gross salary must be a minimum of 3.5 times her rent to qualify.  Now, get our your calculator.  That means she must earn $1,750.00 per month by working 40 hours per week at $12.50 per hour just to qualify  In this example, our single mother was approved because apartment leasing agents generously, (but unrealistically), calculate the earnings multiple from an applicants gross income rather than net income.

Realistically, our single mother only takes home $1,500.00 per month before child care. Now, lets assume that one child is in the second grade and the other child is two years old. Child care for two must be found for one child full time and the other child after school. This demands at least $100.00 to $125.00 per week. So, our single mother is now earning $1,100.00 per month before rent. Utilities are costing another $200.00 per month. Transportation and mandatory insurance is costing at least another $200.00 per month. A metro bus is out of the question because of the kids. That leaves $200.00 per month before any food, medicine, clothing, or essential household items. The untold masses face similar arithmetic, if not similar circumstances, almost every month in America.

Opponents of parity priced labor and raw materials argue such pricing will translate directly into higher priced finished goods and the gains of  labor will be washed out. WRONG!  We will show how a parity price structure reestablishes the accurate foundation under the values of all goods and services so they may pass through the various stages of production, distribution, and consumption without creating non repayable capital debt.  We will prove this system fosters price stability because it reduces interest driven inflation by reducing debt and interest formation at every stage of the economic cycle.  We prove it to be the best system for so-called "price discovery", because it yields honest values based upon state of the art efficiency.   

The narrator submits this offering to those self proclaimed 'conservatives" who consider it a civic duty to reduce welfare programs while objecting to any minimum wage so their businesses can pay poverty wages and demand cheap services at every turn. These conservatives reflect a particularly offensive brand of hypocrisy, and if the shoe fits, wear it!

Those among you so effected need not despair, since capitalism, regardless of its' price structure, will always be driven by incentives produced by an inequitable distribution of income.  Therefore, a capitalist economy will always be divided into economic classes.  Proper attention to the pricing of labor and raw materials will lessen the need for public and private debt expansion by reducing welfare and subsidies, thus lowering taxes and interest as a percentage of National Income.
Parity pricing quietly removes the exploitation from capitalism without removing the incentives toward upward mobilization.  A Capitalist system that grows without an accurate pricing structure will always remain out of balance. To function properly, it must be guided by a certain level of self discipline and government oversight, otherwise it tends to force too many citizens into poverty while allowing unworthy citizens to reward themselves with ill gotten luxuries.
History demonstrates that a functional dynamic can be maintained (regardless of the price structure) as long as the majority of citizens in the middle class believe their labors are gradually moving them further from the lower classes and closer to the upper classes.  When this model reaches full employment, with low interest and a moderate growth rate we are told that the country is "Prosperous". Well, before we jump to that conclusion, lets examine the fruits of our imbalanced economy.

Did you know?
Bill Gates is giving away more money than the net worth of the poorest 100 million Americans.

From 1977 to 1999, the top 20% of Americans increased their incomes by almost 50% while the bottom 20% saw their incomes decrease by almost 10%.

If average worker pay had risen at the same rate as average CEO pay during the 1990's, worker pay would average $110,399.00 annually; instead it is $29,267.00.

The richest 10% of Americans own approximately 90% of all stocks and bonds.

The richest 1% of Americans control 40% of all Assets. This percentage increased from 20% in 1980.

Average CEO pay jumped almost 500% during the 1990s. Top CEO's now earn over 400 times more than their blue collar workers.

The ratio of the average CEO's compensation to the average worker compensation in 1974 was 35 to 1. Today the average is 150 to 1.

An increase in the minimum wage will help 12 million workers. Over 58% of these workers are women and 3/4th's of this group are over the age of 20. More than 670,000 of this class live and work in my home state of Texas.

Surprisingly, 65% of all minimum wage workers nationwide are white. Approximately 50% of all minimum wage workers are full time workers.

In 1979, a single mother of two who worked full time at the minimum wage could earn enough to lift her family above the poverty line. Today, the same mother finds herself 20% below the poverty line. Therefore, workers who earn the minimum wage have 20% less buying power than they had 20 years ago.

Since 1998, 500,000 US manufacturing jobs have been lost to other countries that offer cheaper labor.

Today, only 13.9% of the American workforce belongs to a Union, a sharp decrease from 35% in the mid 1950s.

From Reagan's first term, (1983) to Clinton's second term, (1996), labor productivity increased at a rate more than three times the increase in hourly compensation.

"The Nature Of Wealth" audits this strange hodge podge of wealth and poverty, and offers a detailed plan for broad based prosperity that adheres to natures economic laws, laws that operate in parallel with the laws of energy.


Updated December 29, 2014
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