Thursday, June 9, 2011

Something Completely Different

Well, maybe not completely different. Just a fill in because we didn’t get today’s blog posting in the Formation of Capital series done. We still have to keep within the very broad parameters of the Just Third Way, i.e., the three principles of economic justice (participation, distribution and harmony) and the four pillars of an economically just society,

1. A limited economic role for the State,

2. Free and open markets within a just and understandable legal system as the best means of determining just wages, just prices, and just profits,

3. Restoration of the rights of private property, especially in corporate equity, and

4. Widespread direct ownership of the means of production, individually or in free association with others.

This last, the "fatal omission" in virtually all schools of economics today with the exception of binary economics, is the key to ensuring that people have the power (the "ability for doing") to conform their behavior to the precepts of the natural law.

Well, if you've been reading this blog, you know the drill.

The problem with the Big Number Four is that the typical responses take one of two tracks. One, you can't finance new capital formation without first cutting consumption and accumulating savings. This means that people who can't afford to cut consumption are permanently cut off from ownership.

Two, you can't finance new capital formation without first cutting consumption and accumulating savings. This means that the only way for people who can't afford to cut consumption to become owners is to take what somebody else already owns to redistribute to those who don't own (i.e., abolish private property— "For what property have I in that which another may by right take, when he pleases to himself? John Locke, Second Treatise on Government, § 140).

This explains why some people have claimed that the "Just Third Way" as applied in "Capital Homesteading" is impracticable, and advocates (or, in some cases, does not advocate) redistribution. Capital Homesteading does support redistribution of economic opportunity, and radically reduces the need for redistribution of existing wealth as the poor and middle class accumulate income-producing assets that generate new wealth.

Since most people can't afford to save the amount of money required to finance any meaningful amount of capital, the political and economic authorities have concluded that most people necessarily are limited to wages, not ownership, as the primary or sole source of income. The extremely short response to this concern is that financing capital is different from financing, say, a house, a car, or any other consumption item, and to realize that what exists now is not all that can exist.

The owner of capital doesn't pay for capital. Capital is expected to pay for itself. That is, if the capital you're considering purchasing won't generate sufficient income within a reasonable period of time to pay for its own acquisition (3-7 years is considered generally acceptable, depending on the type of asset), and thereafter continue to generate income for its owner, it is not "financially feasible," and should not be purchased.

That being the case, a prospective new owner of capital can locate capital that looks like it can pay for itself, and promise to deliver the purchase price to the seller at such time as the new capital starts generating profits— a credit purchase, which can be secured not with traditional collateral, but capital credit insurance and reinsurance. This allows the purchase of capital not out of past savings, but out of "future savings."

The new owner not only would not have to cut consumption to save, he or she would increase consumption once the capital is paid for. (This was, in part, Jean-Baptiste Say's explanation of "Say's Law of Markets" when Thomas Malthus expressed "alarm" at Say's theory.) This is because the purchase of capital goods is as much consumption to the seller of the capital goods as the purchase of consumption goods is to the seller of consumer goods; both are economically indifferent to the use to which the customer puts the good. Further, the new owner would save at the same time: it is an economic aphorism that "savings = investment."

Thus, increase investment (ownership of capital), and you ipso facto increase savings as the capital pays for itself. Saying that this is impracticable or even impossible is the same as saying that the power to make promises (liberty, freedom of association/contract) is impracticable or impossible— which we know is not the case.


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