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.
|"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.
|"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.
|"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.
|"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.#30#