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#
