Tuesday, March 19, 2013

Mazurek Dąbrowskiego, III: A Different Look at Finance


In yesterday’s posting, we noted that the key to maintaining a just economy is to focus on the future.  What can exist is always much more than what does exist.  That being the case, why waste your time on what you can’t change anyway?

Consider this fact:

Most capital wears out or becomes technologically obsolete and is replaced within five to seven years.  We do not, of course, include land, buildings, and other such long-term assets in this category.  This short lifespan applies only to other types of capital, such as machinery, equipment, and, especially, computers.

That means that the capital a company owns today is probably not the same capital the company owned ten years ago.  It was probably replaced in order to keep up efficiency and production.  Using old, outdated, or worn out equipment usually costs more money than it makes.

Thus, the first part of any Just Third Way strategy is to address how, assuming that the businesses are competitive in global markets, Poles can buy back the formerly State-owned enterprises that were sold to rich foreign investors, but without being unjust or unfair to the foreign investors.

Fortunately, this is very easy.  Businesses do not usually purchase replacement capital for cash.  A business that sets aside a cash fund to replace assets is doing a very poor job of cash management.  Cash is a tool, and therefore useless if it is not being used efficiently.  If it is not being used currently in the business, it should be paid out to the shareholders who have a right to it.

Businesses usually purchase replacement capital using productive forms of credit, and pay for the capital using the future profits generated by the capital itself.

Thus, if the commercial banks in Poland make it advantageous for companies owned by foreign investors to borrow money to finance replacement capital, the companies owned by foreign investors will likely borrow money from commercial banks in Poland to do so, especially if the Polish National Bank rediscounts (purchases) all such loans made by commercial banks.  In this way new money can be created as needed to finance new and replacement capital, and the new money will be backed by private sector hard assets, not government debt.

#30#

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