As some of you
may have noticed, we put the blog on “autopilot” for two days last week to
attend the annual ESOP Association conference in Washington, DC . . . which was
really handy, since we’re in Arlington.
It would have been handier if the Metro system was in good shape and
operating in a more . . . user-friendly fashion, but at least we attended some
very interesting and even informative sessions.
Mostly. There was a comment made in one of the
sessions to which we wanted to respond, but couldn’t get a question in, and we
couldn’t raise it later due to having to rush off to the next session. We had to get our Continuing Professional
Education sheet stamped to get credit, and you can’t do that too easily after a
session starts.
The comment?
“Capital is finite” — in the context meaning that financing for new capital
formation is limited.
On the
contrary! Once you understand money and
credit, financing for feasible new capital is the only thing that is not limited!
Why? Because
money and credit is a measure, not a commodity. And we say “money and credit is,” instead of “money and credit are” because — as Henry Dunning Macleod
pointed out more than a century ago, “Money and Credit are essentially of the
same nature; Money being only the highest and most general form of Credit.” (Henry
Dunning Macleod, The Theory of Credit.
Longmans, Green and Co., 1894, 82.)
To say, then,
that “capital” (meaning “financial capital,” as was clearly meant) “is finite”
is the same as saying we can’t measure length because inches, feet, and yards
(and rods, furlongs, miles, and leagues) are finite. Gasp!
We can’t go from New York to San Francisco because we’ve already
measured our trip from Chicago to New Orleans, and we don’t have enough miles!
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| "Stop marching, guys. We've used up all our miles for today." |
Obviously, that
is nonsense — once we understand that a “mile” is a measure of distance, not
our capacity to go a mile. Yes, we could
say that our vehicle is only good for 5,000 miles a year, or we only have
enough gas to go that far, but that’s not the same as saying that, if our
vehicle can go that far and we can afford to fuel it (and ourselves) that we
can’t go because we’ve run out of miles with which to measure.
It is no
different for a dollar, pound, peso, or whatever. Dollars, pesos, and pounds are not themselves
wealth. They are the means by which
wealth is measured. In accounting this
is called “the money measurement principle.”
If you can assign a value to something, then you must account for
it. If you cannot assign a value, then
(obviously) you can’t account for it.
Even intangibles
can be valued, such as a patent, trademark, and even “goodwill” of the
business, meaning the good opinion that people have of the business that causes
people to buy from that business instead of another — this can be
measured. How do you measure “goodwill”?
By taking the fair value of the company per an arm’s length appraisal and
comparing it with what a bona fide purchaser will pay for it. If a purchaser will pay more, then the
company has positive goodwill. If a
purchaser will pay less, then the company has negative goodwill . . . and a
serious PR problem. . . .
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| An attractive, but not very edible salad. |
Thus, if you
have something of value, and you can measure that thing in terms of your local
currency unit, then there is nothing to stop you from doing so. Having a granary full of wheat that is worth
$1,000 does not make that grain worth less (or worthless) simply because the
wealth is not in the form of $1,000 worth of currency . . . and the wheat
tastes better, too.
So do you have
$1,000 of wealth when you have grain worth $1,000? Or are you poor because you can’t fold that
wheat and put it in your pocket?
Obviously the
answer is that the wheat represents real wealth, while the currency is worth
pretty much nothing in and of itself.
Its value lies in what you can redeem the currency for, i.e., what backs the currency. If the currency represents $1,000 worth of
wheat on deposit somewhere, and you present the currency for redemption, you must
receive $1,000 worth of wheat, or whoever made the promise or contract the
currency represents was lying or a thief.
So, in the sense
that “capital” signifies “financial capital,” i.e., “money and credit,” there is never any justification for
saying that “capital is finite.” If
something has financial value, it can be measured and embodied in a contract. This contract can be offered and used to
exchange wealth among producers and consumers — nobody else has the right to be
a party to such a contract without having some kind of private property stake
in there, somewhere.
#30#