We noted
yesterday that for ordinary people to have the opportunity to be capital owners
and participate in society as full members a capital stake sufficient to
generate an adequate and secure income is a virtual necessity. The problem is that this almost mandates a
frontier, but what is to be done when “free” land runs out?
There is, in
fact, another frontier that, unlike the land frontier, is always being
expanded, replaced, renewed, and improved.
This is the frontier represented by commercial and industrial capital.
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| "Consumption is the purpose of production." |
Productive
capacity not tied to human labor or limited land is a frontier that, due to the
fact that people create it for people, is to all intents and purposes
unlimited. The caveat, in accordance
with Adam Smith’s first principle of
economics (“Consumption is the sole end and purpose of all production” — Adam
Smith, The Wealth of Nations, IV.8.49),
is that production (supply) must be limited to what is wanted or needed for
consumption (demand). Supply in excess
of demand, or demand in excess of supply, throws the system out of balance.
Imbalance,
however, has almost always been a characteristic of the commercial and industrial
frontier, if only because of lack of universal access. This is because throughout history commerce
and industry have typically been the domain of the already wealthy. It is they who owned the land and had the
accumulated savings believed essential to finance new capital projects.
Absent something
like the unique American frontier and Lincoln’s Homestead Act, individuals and
families with little or no accumulations of wealth have generally not been able
to gain ownership of agricultural, industrial, and commercial
capital. Most
people were left with labor alone as they became dispossessed of land. Only the discovery of America and its vast
land frontier made it possible for ordinary people to acquire capital on easy
terms, and even then, only at the expense of native people.
After the
Protestant Reformation, but before the Financial Revolution of the late
seventeenth century that was made possible by the invention of central banking
and commercial insurance, and the Industrial Revolution with new productive
technologies financed by the new financial technologies, most people had only
their labor to sell. Due to the high
demand for human labor in the pre-industrial era, however, labor alone was
generally more than sufficient to ensure that most workers and their dependents
had an adequate and secure income.
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| "Supply generates demand, and supply, demand." |
As Adam Smith pointed out, no rich man prior to the
Industrial Revolution, regardless how vast his store of wealth, could satisfy
even his most inordinate desires without employing other people. He had to compensate people for their labor
expended on his behalf or leave his desires unfulfilled. As Smith explained in The Theory of Moral Sentiments (1759),
The rich only select from the heap what is most precious and
agreeable. They consume little more than
the poor, and in spite of their natural selfishness and rapacity, thought they
mean only their own conveniency, though the sole end which they propose from
the labours of all the thousands whom they employ, be the gratification of
their own vain and insatiable desires, they divide with the poor the produce of
all their improvements. They are led by
an invisible hand to make nearly the same distribution of the necessaries of
life, which would have been made, had the earth been divided into equal
portions among all its inhabitants, and thus without intending it, without
knowing it, advance the interest of society, and afford means to the
multiplication of the species. When
Providence divided the earth among a few lordly masters, it neither forgot nor
abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that
it produces. (Adam Smith, The Theory of
Moral Sentiments, IV.1.10.)
Smith, however, simply assumed as a
given that the rich would never be able to satisfy their wants without
employing the poor. He failed to take
into account the effect of advancing technology, which is to displace human
labor from the production process, and which enabled the rich to satisfy their
wants and needs without employing the poor.
No one, after all, will freely undertake to purchase a machine unless it
can do something better or cheaper than a human being — or ordinarily employ a
human being if a machine can do the job better and cheaper.
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| "Capital is a vampire." |
In addition,
consistent with the natural right of private property, the owner of capital owns what his or her capital produces in the
same way as the owner of labor owns what his or her labor produces. At the same time, the power to produce is,
per Say’s Law of Markets, also the power to consume. “Production equals income,” as Say’s Law is often summarized, “and therefore supply
generates its own demand, and demand, its own supply.”
As the productive
capacity of capital began greatly surpassing that of labor, owners
of capital generated consumption power far in excess of their capacity to
consume. Capital owners necessarily
reinvested their excess consumption power in additional new capital.
Reinvestment of
consumption income accelerated the generation of additional excess consumption
power that was also reinvested; “Capital is dead labour, that vampire-like,
only lives by sucking living labour, and lives the more, the more labour it
sucks.” (Karl Marx, Capital. New York: The
Modern Library (ND), 257.) As a result, the disparity in both production and
consumption power between the rich and the poor expanded geometrically, with
the results that can be seen today.
At the same time,
owners of labor were increasingly hard put to sell their labor for enough to
provide even minimal subsistence for themselves and their dependents. As technology advanced and ownership of productive capital became ever more concentrated, private
charities, especially the churches, became overwhelmed by the growing number of
the poor and the degree of distress.
Consistent with New Christian principles that substitute the collective for
God, and the State for organized religion, governments began
redistributing wealth, first through taxation, then through inflation.
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| "Demand will always outrun supply." |
The real solution
to poverty, however, is not to “increase unproductive consumption,” (Jean-Baptiste
Say, Letters to Mr. Malthus. London: Sherwood, Neely, and Jones, 1821, 3.)
whereby people are empowered to consume without producing. Rather, as Leo XIII pointed out in § 46 of Rerum Novarum,
the only way to solve “the Labor Question” consistent with principles of
natural law is to turn every producer into a consumer, and
every consumer into a producer. As Say
explained,
Since the time of Adam Smith, political economists have agreed that we do not in reality buy the
objects we consume, with the money or circulating coin which we
pay for them. We must in the first place
have bought this money itself by the sale of
productions of our own. . . . It is then in strict reality with their
productions that [consumers] make their purchases; it is impossible for them to
buy any articles whatever to a greater amount than that which they have
produced either by themselves, or by means of their capitals and lands.
From these premises I had drawn a conclusion which appeared to me
evident, but which seems to have startled you.
I had said, “As each of us can only purchase the productions of others
with his own productions — as the value we can buy is equal to the value we can
produce, the more men can produce, the more they will purchase.” (Ibid., 2-3.)
The New Deal, however, tried to correct
the imbalance between supply and demand artificially by expanding the money supply. The idea was to “increase unproductive
consumption” through massive issues of new currency and demand deposits backed
by government debt instead of new productive capacity or existing inventories. This, as Say hinted would happen, only made a
bad situation worse.
Clearly, only by
making it possible for ordinary people to become productive through ownership of both labor and capital, and thereby generate their
own power to consume, would the problem be solved. The new frontier was there, ready to hand,
with the potential to make everyone a producer and a consumer.
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