Last week — last
year, in fact — we looked at how, if everybody who consumes, produces, and
everybody who produces, consumes, things would work a lot better in the world. That’s because Say’s Law of Markets has four
things going for it that most people don’t look at. And they are?
• One, capital is productive, and is
productive in the same way that labor is productive.
This is just the
first principle of reason applied to economics: “That which is true is as true,
and is true in the same way, as everything else that is true.” Deny that capital is productive in the same
way as labor, and you get into a mess of contradictions you’ll never be able to
get out of . . . not the least of which is the fact that you can’t have
different kinds of truth. You can have
different truths, obviously, but not different kinds of truth, e.g.,
some that are half true or one third true, or some that are true today and the
day after, but not the rest of the week.
• Two, all things being equal, the only
way to consume is to produce.
• Three, money is anything that can be
accepted in settlement of a debt.
• Four, new capital formation can be
financed with future as well as past savings.
All of these
things seem obvious, but modern economics as a whole has dedicated itself to
denying them as a fundamental principle.
This has led to an extremely distorted understanding of money, credit,
banking, and finance, which in turn has led to making the underlying problems
even worse.
And what is the
main problem?
People who are
unable to produce, and therefore are unable to consume. Remember: all other things being equal, the
only way to consume is to produce. When
people cannot produce, something must be done to meet their consumption needs,
or what was a simple economic problem (how people can consume) turns into a
major political problem (how to keep order in society when people are
starving).
Thus, what should
be the major, if not sole focus of government — how to assist people in
becoming and remaining productive (thereby growing in virtue and all that other
good stuff) — becomes transformed . . . twisted, if you will. Governments implement policies that try to
guarantee that most if not all people have sufficient effective demand to
enable them to consume when they do not or cannot produce.
This in turn
requires ever-increasing levels of State interference not only in the economy,
but in every aspect of life as people (many of whom are absolutely convinced
they are doing the right thing) struggle either to redistribute enough wealth
while permitting others to retain enough to finance new capital to create jobs,
or retain enough while permitting others to redistribute enough to keep people
alive.
It becomes easy
to see why Aristotle and Aquinas emphasized that a seemingly small error in the
beginning leads to gigantic errors in the end . . . and here we have not one
small error, but four rather significant ones.
Consequently, here’s what happens:
When labor is the
sole factor of production . . . everybody starves to death. If you think that’s an exaggeration, you try
stripping yourself buck naked and run around trying to scrounge up enough to
eat using absolutely no technology at all, not even something to keep your hair
out of your eyes. Assuming you live long
enough to let it grow that much.
More
realistically, when labor is the predominant factor of production, most people
can sell their labor for enough to generate an income sufficient to maintain
them and their dependents in reasonable comfort. Of course, it also gives some people with
pointy sticks and guns the incentive to try and get something for nothing, and
turn other people into slaves, but that’s a discussion for another day.
As technology
advances, the effect is to reduce the role of labor and decrease its value as a
factor of production relative to technology.
True, advancing technology also spurs economic growth in general, which
creates new jobs and increases the demand for, and thus the real value of labor
overall.
. . . up to a
point.
And that
point? When the added value of the
general economic growth spurred by advancing technology is less than the cost
of the labor required for new jobs, or other new technology costs less than
creating new jobs, labor will decrease in value in both relative and absolute
terms to technology. Real income to
labor will decrease at the same time the demand for labor declines, while real
income to owners of capital will increase at the same time that the demand for
new technology grows.
. . . up to a
point.
And that point? When the decrease in real income to labor is
such that overall demand decreases enough to render new capital formation
financially unfeasible, i.e., new
capital won’t pay for itself out of future profits because future profits are
either insufficient to repay the debt, or there aren’t any profits because the
owners of capital can’t meet the costs of production out of sales to a
diminished customer base.
So what
happens? Governments try to encourage
new capital formation in order to create jobs by messing with the tax system,
and to increase effective demand to make the new capital financially feasible by
messing with the monetary system.
Producers get favorable tax treatment to form new capital, and punitive
tax treatment to redistribute the income from capital. The government creates massive amounts of
debt-backed money to stimulate or increase effective demand, which
redistributes demand by inflating the currency, decreasing effective demand and
discouraging production.
Yes, this is all
contradictory, but it works.
. . . up to a
point.
And that point? When producers no longer produce more value
than the government redistributes by inflating the currency, or taxes away too
much of other people’s profits for redistribution. At that point, people lose faith in the
currency and have no confidence in the financial or economic system. Everything goes belly-up until a dictator
steps in to restore order.
Obviously, what
is needed is a solution that can make ordinary people productive again without
massive government interference . . . which doesn’t work, anyway. We’ll look at a possible solution tomorrow.
#30#
