Tuesday, January 27, 2015

Why We (Don’t) Need Inflation


Yesterday’s Wall Street Journal had an interesting article on how surpluses of basic commodities, while they are bad, can be good for some brave investors (“Rout Signals ‘Buy’ to Some: As Surpluses Grow From Oil to Copper, Investors Risk Pain Now for Gains Later,” The Wall Street Journal, Monday, January 26, 2105, C1, C6.)  There are so many things wrong with just the headline, to say nothing of the article, that we hardly know where to begin.

For one thing, there’s the description of speculators as “brave investors.”  Pirates are brave, too.  So are Vikings.  The problem is that speculators, pirates, and Vikings don’t produce anything.  They make money by taking what other people produce.  This fits the definition of usury: talking a profit when no profit has been made.

Then there’s the idea that falling prices for basic commodities are somehow bad.  Correct us if we’re wrong, but don’t the laws of supply and demand dictate that, everything else being equal, a lower price for a basic commodity means that people get more for less money?  That means costs go down all around for both producers and consumers.

This is supposed to be a Good Thing.  Lower prices mean that consumers can buy more of what they need, and producers can sell more.  There may be less profit per unit, but more units are sold.  Profits should either stay the same or increase.  This is because, consistent with Say’s Law of Markets, production equals income.  Produce more, and income increases.

We think we see the problem, however.  More production resulting in lower prices is only good if more production results in more income for the people consuming the production.

If, however, as in Keynesian economics, the purpose of production changes from consumption, to savings for reinvestment, and consumers aren’t able to produce because they don’t own the means of production (i.e., labor or capital), guess what?  Production no longer equals income, goods pile up unsold to create surpluses, and new capital isn’t financed because savings out of profits aren’t being accumulated.

To bring things back into balance, two things are essential.  One, consumers must also produce enough for their own consumption, either directly, or to trade with others.  If the predominant form of production is human labor, human chattel slavery is out of the question.  A slave produces for others to consume, not himself.  As Abraham Lincoln noted in his debate with Stephen Douglas,

“That is the real issue.  That is the issue that will continue in this country when these poor tongues of Judge Douglas and myself shall be silent.  It is the eternal struggle between these two principles — right and wrong — throughout the world.  They are the two principles that have stood face to face from the beginning of time; and will ever continue to struggle.  The one is the common right of humanity and the other the divine right of kings.  It is the same principle in whatever shape it develops itself. It is the same spirit that says, ‘You work and toil and earn bread, and I’ll eat it.’  No matter in what shape it comes, whether from the mouth of a king who seeks to bestride the people of his own nation and live by the fruit of their labor, or from one race of men as an apology for enslaving another race, it is the same tyrannical principle.”  (Seventh Debate, October 15, 1858)

If the predominant form of production is capital, whether land or technology, then anyone who wants to consume must own capital.  Otherwise, people will only be able to consume by redistributing what others produce — if they are strong enough to take it, like speculators, pirates, and Vikings.

As Jean-Baptiste Say explained, we do not purchase what others produce with money — not really.  Instead, we purchase what others produce, with what we produce.  As he said,

“It is therefore really and absolutely with their produce that [people] make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.

“From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce.”  (Jean-Baptiste Say, Letters to Mister Malthus on Several Subjects of Political Economy.  London: Sherwood, Neely, and Jones, 1821, 2-3.)

The other thing necessary to bring an economy back into equilibrium is — stop diverting production from consumption to saving!  The purpose of production is consumption, not saving.  Cutting consumption means there is less incentive to produce . . . so why produce?  And if you’re not saving to finance new capital, why save?  And if you’re not saving, why restrict consumption? . . . but how can you produce if you don’t have capital?  And how can you have capital if you don’t save?

Harold G. Moulton called the paradox created by relying on past savings to finance new capital investment “the economic dilemma.”  As Moulton described it, “The dilemma may be summarily stated as follows: In order to accumulate money savings, we must decrease our expenditures for consumption; but in order to expand capital goods profitably, we must increase our expenditures for consumption.”  (Harold G. Moulton, The Formation of Capital.  Washington, DC: The Brookings Institution, 1935, 28)

So the answer to the “problem” of falling prices is, 1) make sure that everybody can own both capital and labor, and 2) finance new capital out of future savings (i.e., income from the new capital that pays for the new capital) instead of past savings.

As we’ve mentioned once or twice on this blog, Capital Homesteading is one way of achieving both of these ends with the same program.

#30#

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