Tuesday, August 2, 2011

The Binary Bridge of Asses, Part I

Binary economists claim that widespread direct ownership of capital, individually or in free association with others, restores the functioning of Say's Law, puts the economy back into equilibrium and, in and of itself, promotes sustainable economic growth. This creates something of a pons asinorum (Latin for "bridge of asses") for most economists. A pons asinorum is a proposition that, until it is understood and accepted, prevents further progress in the area of study.

The term pons asinorum is applied to Euclid's Fifth Proposition in Book I of his Elements of Geometry. This is that the angles opposite the equal sides of an isosceles triangle are equal. This proposition is considered the first real test of the intelligence of the student and a bridge to the harder propositions that follow. It is a problem or challenge that represents a critical test of ability or understanding.

When we apply the term to the principle of economic growth in binary economics we immediately get into a difference of opinion. John Stuart Mill regarded David Ricardo's "Law of Rent" as the pons asinorum of economics. Ricardo's idea (related to his labor theory of value) was that the rent of a plot of land is equal to the economic advantage obtained by putting the site to its most productive use, relative to the advantage obtained by using "marginal" (rent-free) land for the same purpose, given the same inputs of labor and capital.

Ricardo's definition of "marginality" is important, and explains a lot of problems associated with trying to understand his economics from a binary perspective. In Ricardo's lexicon, "marginal" does not mean an enterprise that produces or is capable of producing marketable goods or services that covers production costs and no more. To Ricardo, "marginal" meant free, or use of capital (in binary economics, land is one form of capital) at no cost.

Thus, to Ricardo, the amount of income ("rent") received by a landowner is equal to the additional production realized from land that is rented over and above what is produced by the same amount of land that is not rented (i.e., that cost the tenant nothing), assuming that the costs of (other) capital and labor are the same for both plots of land. In that case, the landlord will appropriate the "excess" rent — as is his or her right of private property.

From the perspective of binary economics there is at least one serious problem associated with Ricardo's Law of Rent. What happens when there is no "free land" available, that is, land for which the tenant did not have to cut consumption and accumulate money savings to occupy and put into production? Conceivably, in that case the landlord can charge any rent he or she likes for rented land (or lower wages paid to those who work with his or her other capital), and get away with it, the tenant (or worker) having absolutely no choice in the matter.

Ricardo, writing in the early 19th century, seems never even to have considered the possibility that "free land" might disappear — or that farmers might actually own the land they tilled, any more than factory workers might own a share in the enterprise that employs them. The disappearance of "free land" and appearance of worker ownership knock Ricardo's Law of Rent theory into a cocked hat by invalidating his basic assumptions. It also makes it impossible for the later student to understand when he or she fails to take Ricardo's assumption about "marginal" land (and the changed meaning of "marginal") into account.

The fact is that when Ricardo wrote, and until the mid-19th century in England and many other places, there was "wasteland" available for the taking in many outlying areas or wilderness. (Vide William Thornton's A Plea for Peasant Proprietorship, 1848.) By the dint of much labor someone could make this land productive so as to secure a "marginal" ("rent free") subsistence. There were also, typically, small plots of land attached to workman's cottages that would otherwise not be put to any other use, the rent of which was considered zero, coming under whatever was charged for the use of the dwelling.

Before the mid-19th century, it was quite common for factory workers and day laborers to take possession of a small piece of "rent free" land. They would manage to grow enough food to support themselves and their families after a fashion. They would then go to work in a factory or for a farmer with better land who needed extra hands to earn cash money with which to purchase whatever could not be produced from the land.

It was a brutal life, but better than subsisting on wages alone. One of Karl Marx's chief complaints in Das Kapital that he believed justified communism was the fact that landlords and factory owners were eliminating the small plots of "free land," thereby forcing the proletariat to subsist on wages alone. Even before that, tenants of marginal land risked being evicted without notice or compensation if the owner wanted the land for something else, or just wanted to get rid of squatters. Ricardo's Law of Rent does not apply to interest, that is, the return from non-landed capital, because in Ricardo's analysis non-landed capital is never "free."

Capital Homesteading, of course (like the original 1862 Homestead Act), would ensure that "free capital" (understanding land as just one form of capital) would be permanently available, and that those who labor on the land or work with other capital own it, thereby making the whole discussion of rent and interest to be paid to another moot. (In classical economics, "rent" is the return to the owner of land, while "interest" is the return to the owner of capital. "Wages" are the return to the owner of labor.)

The real problem with Ricardo's Law of Rent from the perspective of binary economics, however, is that it makes two demonstrably false assumptions, both related, and both based on a rejection of Say's Law of Markets and the real bills doctrine.

One, the only way to finance new capital formation — unless "free land" is available — is to cut consumption and accumulate money savings. The moment there is no "free land," people without savings or the capacity to save in any appreciable amounts become absolutely dependent on either the private sector wealthy elite, or the public sector bureaucrat who exercises control over the private sector. Again, because of the alleged necessity of existing accumulations of savings to finance capital formation, "capital" (a term properly including land) can never be "free," that is, available without first cutting consumption and saving.

Two, "money" is restricted to coin and banknotes. Over the years, followers of Ricardo and other Currency Principle adherents would expand the definition of money to include demand deposits — checking accounts — and some time deposits. It doesn't make any difference. The problem is that "the money supply," and thus "the supply of loanable funds" are thus construed as a commodity instead of a regulated system of promises. "The money supply" is necessarily limited by a wrong definition to the present value of existing marketable goods and services that have been withheld from consumption, and is therefore the only source that can be used to finance new capital. whether land or artifacts.

The possibility of entering into a contract to pay for new capital out of the future earnings of the capital itself is not even considered. It is as if we spoke of the supply of usable inches or the number of contracts into which people are allowed to enter, based solely on the numbers of inches or contracts that were already in use. Within Ricardo's framework, as well as that of any other economist who adheres to the Currency Principle, Say's Law of Markets will not operate, and the real bills doctrine is, consequently, nonsense.

Thus, Mill was right — but not for the reasons he supposed. Ricardo's Law of Rent is a sort of pons asinorum of economics . . . but it is one that you must reject before you can make any real progress! Acceptance of Ricardo's Law of Rent necessarily entails accepting his labor theory of value, his Currency Principle, the assumption of concentrated ownership of capital, and a false distinction between ownership of labor and ownership of capital that accepts as a given that "labor" can never own "capital" because they are different factors of production, and one factor of production cannot own another factor of production.

Ricardo's assumptions directly contradict basic principles of binary economics. Accepting them makes it virtually impossible for economists trapped by the "slavery of past savings" to grasp the concept of "binary growth," and why Say's Law of Markets and its application in the real bills doctrine can operate within the binary framework, but not outside of it.

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