Thursday, June 23, 2011

Economic Recovery, Part XI: The Formation of Capital (6)

As we saw in yesterday's posting, the solution to the disappearance of jobs as technology advances is to have workers ' and, eventually, everybody buy the machines that are doing the productive work so that every person can receive capital income as a right of private property.

Unfortunately, from the standpoint of developing an effective solution, almost every school of economics today defines "saving" in terms of cutting current consumption. (Harold G. Moulton, George W. Edwards, James D. Magee, and Cleona Lewis, Capital Expansion, Employment, and Economic Stability. Washington, DC: The Brookings Institution, 1940, 26.) This means that currently accepted economic theory and policy embed the false assumption that financing new capital formation is impossible without existing accumulations of savings.

Hence the importance of The Formation of Capital, the third book in Brookings' series on the distribution of wealth and income in relation to economic progress. Reliance on existing accumulations of savings for financing future growth traps the economy in an inevitable "boom and bust" cycle. Income, instead of being spent on consumption to keep production and consumption in balance, is diverted into savings. With fewer customers purchasing what is produced, the financing of future capital used to produce new goods and services becomes less feasible.

Worse, from the standpoint of political and social stability, using past savings justifies maintaining, even increasing, concentrated ownership of the means of production. It also leads to expanding the role and powers of the State in a desperate effort to stabilize the economy. The rights of private property (i.e., the rights to the fruits of, and control over, what one owns) are taken from individual citizens and transferred to the State.

The logic seems flawless — if we assume as a given that new capital cannot be financed without using existing accumulations of savings. Given that assumption, economic growth and development require a class of people, necessarily small, who cannot consume all they produce. This excess is accumulated as savings. Since savings equals investment, cutting consumption adds to the amount of wealth in the economy, increases production, and, because it accrues to the current owners who re-invest rather than consume a growing portion of their capital incomes -concentrates ownership even further.

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