Last Thursday we noted that
the ability to accumulate — “save” — while an aspect of money, is only
peripheral to the principal function of money, which is to be spent, i.e., “consumed.” Money, which is anything that can be accepted
in settlement of a debt, derives from the functioning of Say’s Law of Markets.
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| Smith: the purpose of production is consumption. |
To recap, Say’s Law, derived
from Adam Smith's principle that “consumption is the sole end and purpose of
production,” is that you can’t consume what hasn’t been produced. That being the case, and except for charity,
theft, and redistribution by duly constituted authority as an expedient in an
emergency, in order to consume, you must produce, whether for your own
consumption directly, or to trade to others for what they have produced that
you want to consume.
“Money” is the medium by
means of which we carry out these trades or exchanges. All money is therefore a contract, just as
all contracts are, in a sense, money.
Credit is implicit in the
idea of money, and thus money also acts as a store of value. This allows people to put aside something for
future consumption, or to accumulate the means of future consumption.
There are thus two types of
money, determined by whether the money is based on something that exists right
now (past savings) and can be redeemed at any time, or on something that will
exist when the money becomes redeemable (future savings). Technically, past savings money is a
“mortgage,” while future savings money is a “bill of exchange.”
According to financial
historian Benjamin Anderson, the first principle of finance is to know the difference
between a mortgage and a bill of exchange.
Not knowing the difference makes for a very complicated and, frankly,
screwed up economic and financial system.
This is because today’s three
main schools of economic thought, Keynesian, Chicago/Monetarist, and Austrian,
all take for granted the disproved assumption that the only way to finance new
capital formation or even acquire existing capital is to cut consumption and
accumulate money based on past savings, i.e.,
mortgages. In a bizarre twist, because
the mainstream schools of economics do not recognize future savings money as
money, even when they use future savings, they insist they are really past
savings.
There are a number of serious
problems associated with using past savings to finance new capital
formation. We’ll look at three of the
worst (if we tried to cover them all, we’d have to write a ten volume
encyclopedia just for the short version).
One. Accumulating money savings before investing
reduces consumer demand, thereby restricting consumption. This has a triple whammy.
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| "Proletariat" is Latin for "propertyless worker." |
First, the people who most
need to become capital owners are the very ones who can’t afford to cut
consumption. Since the purpose of
capital in production is to replace human labor with something more efficient
or less costly, driving down the market value of labor, non-owning workers need
to replace the income from labor with income from capital . . . but don’t have
the means to purchase capital.
Second, cutting consumption
in order to save to invest in new capital means that there is less reason to
invest in new capital. This is because
the demand for new capital derives from consumer demand. If consumer demand falls because people are
saving instead of consuming, so does the demand for new capital.
Third, it throws a monkey
wrench into Say’s Law. Say’s Law is
based on the principle that the purpose of production is consumption. If production is diverted to reinvestment,
the system goes out of balance.
Two. As technology advances and grows
correspondingly more expensive, using past savings to finance new capital
formation assumes the existence of a class of capitalists, necessarily small,
who have the capacity to cut consumption in the required amounts. This, too, has a triple whammy.
First, since capital
ownership must be restricted to as few people as possible in order to have
people who can save the required amounts, most people are restricted to wages
and welfare for their consumption income.
Second, depending on wages
alone for income always results in “creating jobs” just to provide people with
consumption income. This increases costs
and raises prices to the consumer . . . which cuts demand and decreases the
demand for new capital and the need for new jobs. If consumer demand falls far enough, layoffs
and RIFs reduce the number of jobs.
Third, to make up for the
loss of income, government begins printing money, inflating the currency,
transferring purchasing power from producers to non-producers, and inflating
prices even more, adding to the problem.
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| Milton Friedman's Capitalist Creed: "Greed is Good." |
Three. The idea grows and spreads
that “greed is good.” Why? Because in the past savings paradigm you need a very small number of people to be
as rich as possible to invest as much as possible. Violating Adam Smith’s first principle of
economics, the idea becomes to create as many jobs as possible regardless
whether the production is needed to satisfy consumer demand.
Mere accumulation — “greed” —
becomes a virtue. This is because there
is presumably no other way to ensure that there is sufficient financial capital
in the system to finance new capital formation and create jobs . . . even (or
especially) if the jobs do not result in any marketable good or service, a pillar
of Keynesian economics with its obsession with “full employment.”
But —
What if there is another way to finance new capital? What if there is a way to make every child,
woman, and man into a capital owner without the necessity of having to
accumulate savings before purchasing the capital?
We’ll look into
that tomorrow.
#30#