Wednesday, August 26, 2015

Past and Future Savings, I: Outside the Parameters of the Question


We got into a discussion last week with someone who insisted that the whole concept of future savings and thus of Capital Homesteading is a scam: you can’t promise to deliver what doesn’t exist.  To that, of course, we answer, “Why not?  People do it all the time.”

For example, you need your lawn mowed, and I need $10.00.  I say to you, “I will get your lawn mowed if you will give me $10.”  You say, “Sure.  Go to it — but you don’t see a cent until the lawn is mowed.”

You didn’t have a mowed lawn, and I didn’t have $10, and yet something of value was created: a contract to mow the lawn for $10.  According to the individual who insisted this idea of future savings is a scam, you cheated me, and I cheated you.  Everybody is worse off, and dishonest to boot.

But is that the case?  Suppose I can’t mow your lawn right now for some reason, but I still need at least $1 right now.  I take the contract to a friend who trusts me and who has $9.  I say, “If you give me $9 right now, I will give you this contract, which is worth $10, and I will give you $10 for it next week, after I mow the lawn.”

I then go and find someone who mows the law for $8, pay him out of the $9 I got from my friend, collect $10, and hand it over to my friend to redeem the contract.  The guy who mowed the lawn got $8 he wouldn’t otherwise have had, I have $1, my friend has his $9 back plus $1, and you have your lawn mowed.  Wealth has been increased by $10 out of future savings.

Tell us again — just who got scammed here?  No one.  If my friend had been a bank, he wouldn’t even have needed to have $9 on hand.  He could have issued his own promissory note, to be cancelled when I redeemed the contract, and wealth would still have increased $10 out of future savings, or (more descriptively) out of future production.  If the lawn owner paid with a $10 IOU to be redeemed at a specified date out of future income, no one needed any past savings to create wealth.  We necessarily conclude that existing savings are not essential to finance anything.  All you need is an operational credit system and people who are “creditworthy.”

This is why someone else asked for a little clarification, because didn’t somebody somewhere have to save the $10 that was paid to mow the lawn?  The answer?  Not necessarily!  As our “someone else” commented,

“This is something I need to understand better myself so I can explain it to others. Starting simply . . . exchange in a past savings paradigm would be the baker trading several loaves of his bread for a pair of shoes from the cobbler.  Both have already produced the items so are past savings.  Exchange in a future saving model would be the baker getting the shoes from the cobbler in exchange for the same amount of bread but the bread isn't baked yet so the baker gives the cobbler a promissory note and the cobbler can come in and get his loaves of bread at a future date. Is this close?”

Bringing in a cobbler and baker might make the illustration clearer, as it is closer to the situation that prevailed throughout most of the world until about the middle of the nineteenth century.  What most people think of as “money” — coin and banknotes — were actually quite rare, and most people, except in cities, could go for years at a time without seeing a single penny.

Did that mean that they had a “moneyless economy”?  By no means.  They simply used different forms of money to carry out exchanges of marketable goods and services.

All exchange involves a contract.  A contract consists of offer, acceptance, and consideration.  “Consideration” is the thing or things of value being exchanged — the “inducement to enter into a contract,” as the law books tell us.  Since “money” is defined as “anything that can be accepted in settlement of a debt” (“all things transferred in commerce”), another way of saying “money” is “the medium of exchange.”  In that sense, all money is a contract, and all contracts are money.  We can engage in exchange (commerce), then, with anything that has value.

Another word for contract is “promise.”  We can make and keep a promise in a deal — enter into and fulfill a contract — virtually instantaneously, or we can make a promise to keep (enter into a contract to fulfill) at some future time.

In the former case we are dealing with the present value of things that the parties to the contract own right then and there.  In the latter case, we are dealing with the present value of things that the parties to the contract reasonably expect to have in their possession at the time the contract falls due.

When we are dealing with the present value of things that the parties to the transaction have in their possession, we are using “past savings” — unconsumed production, that is, things that have been produced but not consumed.  A financial instrument involving past savings is known by the general term “mortgage.”

When we are dealing with the present value of things that the parties to the transaction do not have in their possession, we are using “future savings” — existing unconsumed production that does not belong to the parties to the contract but that they reasonably expect to acquire, or what the parties to the contract reasonably expect to produce in the future, but that does not yet exist.

Some people raise the issue that things have to exist somewhere, even if only to be able to produce the things the parties to the contract promised to deliver.  They insist that this means no production can take place without existing savings.

We’re not quite sure what the correct term is for this logical fallacy, but it adds in elements that are outside the parameters of the contract.  Yes, something must exist somewhere out of which production can be, well, produced.  That is absolutely correct.

The problem is that none of what is necessary to fulfill the contract might belong to the parties to the contract.  Suppose I promise Fred to dig a ditch for $95, and Fred doesn’t have $95 and I don’t have a shovel.  Fred’s friend Bill, however, has $95, and my friend Jack has a shovel.  How much past savings is involved in the deal?

The answer is zero.  Yes, the $95 and the shovel exist, but the $95 does not belong to Fred, and the shovel does not belong to me.  They are outside the parameters of the contract — the question was, "How much past savings is involved in the deal?".  It is irrelevant to the terms of the contract that Bill has $95 and Jack has a shovel.  These are outside the deal, not in it.

When Fred and I enter into a contract for me to dig him a ditch for $95, Fred doesn’t care how I dig the ditch as long as I do, and I don’t care where Fred gets $95 as long as he pays me.  Fred trusts me to dig the ditch, and I trust Fred to pay me $95.  Neither of us has past savings, but that does not stop us from going ahead.

What do we do, however, if nobody has $95, and nobody has a shovel?  We’ll look at that tomorrow.

#30#

No comments: