Say's Law and Snails

Last week somebody "shared" a posting that popped up on our FaceBook page. It was a relatively moderate rant about how in Beverly Hills they (allegedly) now have vending machines selling caviar, truffles, and escargot (snails). We say "allegedly" because we didn't verify.  We don't really care whether or not Beverly Hillians or Hillbillies use vending machines, or get their possum grits, fish eggs and fungus fresh out of Irene Ryan's cauldron.

We just don't see how what the rich choose to consume is relevant. What worries us is what they choose not to consume and reinvest in new capital formation. It's reinvestment of excess income, not conspicuous consumption, that's the problem.

Actually, the more money the rich spend on consumer items the better for everyone. This increases demand, which means that (in accordance with Say's Law of Markets) what ordinary people produce by means of their labor and capital will find a market, and their income will increase. Rich people don't produce caviar, truffles or escargot (they may be a variety of snail or other type of slug, but that's a different issue), they consume them — and benefit the producers, who are generally not affluent. Effluent, maybe, depending on what they're growing those mushrooms in.

So far this is consistent with Adam Smith's "invisible hand" argument he set out in The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). There's a problem, however. As technology advances and replaces human labor in the production process, the income from production goes to the owners of capital, not the owners of labor. This creates an imbalance between supply and demand that Keynes thought could be corrected by inflating the currency to stimulate demand artificially and that today's economists think can be accomplished by encouraging consumers and government to go into debt to meet their daily living needs . . . to be paid off with cheap, inflated currency. So what if it ultimately results in State control of the economy for political rather than economic ends, and national as well as individual bankruptcy?

On the contrary, as economists (at least some of them) have known for the past two centuries or more, the only way to counteract the effect of labor-displacing technology is to find some way for owners of labor to become owners of capital to supplement and, in some cases, replace entirely what they produce by means of their labor.

Unfortunately, this is impossible in a system based on the belief that the only way to finance new capital is by cutting consumption and accumulating money savings, something only the rich can do. It's far better, as Louis Kelso pointed out, to finance new capital by monetizing the present value of the future marketable goods and services to be produced by the new capital, making the capital "self-liquidating," and thus open to ownership by anyone, whether or not they have existing savings or the ability to reduce consumption.

That is what "Capital Homesteading" is intended to do.

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