This past
Tuesday we looked at the claim that financial capital is necessarily finite,
and that new capital formation is necessarily limited by the amount of existing
savings in the system. After examining
the nature of money and credit, we concluded that this assumption — that Louis
O. Kelso and Mortimer J. Adler called “the slavery of savings” — is not merely
misleading, it is completely wrong.
Existing savings are not the
only source of financing for new capital formation.
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| The State as a "Mortall God" |
Yesterday we
examined why capital is not finite. We
concluded that because financial capital (money and credit) is just a system of
promises, if people can make promises — enter into contracts — they can
“create” all the money they need to carry out exchange. You don’t need the permission of an
all-powerful State to engage in trade and commerce. All you have to do is be productive and have
the capacity to enter into contracts.
Today we’re
going to look at how capital is not finite, that is, we’re going to outline the
basic principles of a rational financial system based on sound precepts of the
natural law — meaning common sense. So,
clear your mind of all you think you know about Say’s Law, money and credit,
banking, finance, and production. If you
don’t, you’re in for a bumpy ride.
We start with
the basic principle that the purpose of production is consumption. We then take as a given that it is impossible
to consume what has not been produced.
Consequently — all things being equal — the only way to consume is to
produce.
If you want to
consume, then, you must either produce for your own consumption, or to exchange
what you produce for what others produce that you wish to consume.
In classical
economics, there are three factors of production: labor, land, and
technology. The first we call the human
factor of production. The latter two we
call the non-human factor of technology or “capital.”
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| As technology advances, "labor" must own technology. |
As capital
advances, labor’s contribution becomes smaller.
Obviously, then, as capital takes over more and more of the share of
production, it becomes essential that people own capital as well as labor.
For example,
when people were hunters and gatherers, they needed a huge amount of land to be
able to find enough food on which to survive.
When weapons were invented, less land was needed as more animals could
be killed without as much trouble. When
crops began to be grown, even less land was needed . . . but each family had to
have enough land to grow the crops, or it wouldn’t have enough to eat. The same happened with tool-making and the
production of goods and services other than food. The more efficient capital becomes, the more
essential it is that people own capital, whether land or technology.
Land is easy to
obtain. You can occupy vacant land,
purchase occupied land, or just push the others off. Technology, however, has to be constructed. You don’t find it just lying around. You are therefore limited to making it
yourself, trading for technology that someone else has made, or stealing it.
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| Smiths were sacred because they made tools. |
The first is
impractical for most people. We simply
don’t have the expertise to manufacture our own tools. That’s why in many ancient societies the
smith was considered sacred. He made the
tools that allowed people to produce or steal wealth.
The problem is
that as all the land gets taken, and technology advances, it becomes
increasingly expensive to purchase it.
Most people simply don’t have what it takes to be able to save enough to
purchase capital.
The solution
that Louis Kelso developed was for people to purchase capital that pays for
itself out of its own future profits.
Instead of cutting consumption to save and then purchase capital, you
first purchase capital, increase production, and then save.
The promise to
pay tomorrow for what you purchase today can be embodied in a contract, and the
contract can be used as money to purchase the capital. The only requirement is that all the parties
to the contract are reasonably assured that everyone keeps all the promises
that were made. In this way capital can
pay for itself without the new owner first having to save.
We’ll get into
some of the technicalities of this on Monday.
#30#