"From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce."
That's all very well, but if someone doesn't own any capital or land, how is he or she supposed to produce a marketable good or service when the value of the labor that he or she does own is declining in value as an input to production in competition with advancing technology and cheaper labor elsewhere? As most people firmly believe, it is impossible to finance the acquisition of capital without first cutting consumption and accumulating money savings. This is the basic premise what developed into the Currency School of finance, and which Thomas Malthus, David Ricardo, Karl Marx, and others accepted without question, and which was countered by the work of Adam Smith, Henry Thornton, Jean-Baptiste Say, John Fullarton, Henry Dunning Macleod, and Harold Moulton, among others, and which developed in the Banking School of finance.
The most common solution to the conundrum presented by assuming that new capital formation cannot be financed except by cutting consumption and accumulating money savings is to redefine essential principles of the natural moral law, and claim that God or the State mandates the change. Thus, in an effort to break the monopoly that the rich enjoy over existing accumulations of savings as a result of their monopoly over ownership of capital, private property, freedom of association (liberty/contract), and even the pursuit of happiness are redefined in order to allow the State to take over private property, money creation, and individual lives in an effort to make the economy work.
Because no redefinition can really change a natural right such as life, liberty, property, or the pursuit of happiness, however, all such efforts by the State to control the economy necessarily cause bigger problems than the ones they are trying to solve. Not only that, but remedies, effective or not, take longer to benefit people, if they ever do.
As a case in point, the first Great Depression lasted for five years (1893-1898), and was characterized by very little action on the part of the state or federal governments, despite the rising demands that the government "do something," preferably printing more money in the hope that this would spur new investment and create jobs. The second Great Depression, characterized by massive government action and intrusion into the economy, lasted for ten years (1930-1940), and was ended not by the government, but by the Second World War. If the pattern holds, the current Great Depression (2007-date), characterized by ever-increasing government efforts to control the economy, may go on for fifteen or twenty years, at which time there will be no economy left to "stimulate."
The problem is that when you rely exclusively on existing accumulations of savings to finance new capital formation, the only ways that those who don't own capital can get capital is either for the rich to voluntarily divest themselves of their wealth, or for the State to redefine essential natural rights and redistribute — and the first is unlikely, while the second is unjust.
The situation seems hopeless — which it is, if we insist on remaining within the paradigm defined by reliance on existing accumulations of savings as the sole source of financing for new capital formation. There is, however, a way out, which we will describe tomorrow in the final posting in this series.
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