Tuesday, June 14, 2011

Economic Recovery, Part VI: The Formation of Capital (1)

As most modern authorities see it, the basic problem with binary economics is twofold. One, there cannot be widespread direct ownership of the means of production because ordinary people cannot afford to cut consumption and save. This is presumed to be the only way in which new capital formation can be financed. As Lord Keynes declared,

"The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (Keynes, The Economic Consequences of the Peace, 1919, 2.III.)

Two, even if the authorities agree that widespread direct ownership of the means of production is desirable, it is a) not necessary, and b) the only way for those without property to gain ownership is by taking either savings or existing capital away from current owners and redistributing the loot. Implicit in this is the belief that only the State has the power to create money.

Once we begin investigating these claims, we realize a number of important facts. Most important, concentrated ownership of the means of production is not necessary to build up "immense accumulations of fixed capital." Were that the case, the United States would never have been able to finance its incredible industrial and commercial expansion in the latter half of the 19th century.

For that matter, Great Britain a century earlier would have found such expansion impossible under these assumptions. It is noteworthy that the great British fortunes of the late 18th and early 19th century were not industrial and commercial, but agricultural. As Walter Bagehot noted in unconscious refutation of the very theories he espoused about the operation of the London money market (The English Constitution, 1867, Lombard Street, 1873), the possessors of landed capital, the aristocracy, were not the financiers (and thus owners) of the new industrial and commercial enterprises.

The traditional nobility with their power and position based on control of landed capital and human labor, and which controlled the House of Lords, were in decline by the mid-19th century. It was the new moneyed aristocracy with its power base in the industrial and commercial centers that controlled the House of Commons through the "rotten borough" system who were really in charge. The rise of the new industrial and commercial magnates in both the United States and Great Britain was a "rags to riches" epic, as talented individuals used the science of finance, not existing accumulations of savings already in the hands of the landed aristocracy, to enrich the new elite, and put themselves in control of the new industrial and commercial capital.


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