In the previous posting on this subject, we closed with the comment that John Maynard Keynes did not define savings properly, and this skewed his entire analysis to the point where it really wasn’t very closely connected with reality. This is, in fact, why the eventual title of Louis Kelso’s third book was Two-Factor Theory: The Economics of Reality (1967).
|Beggars can't choose who owns.|
The simple fact is that new capital cannot be financed without savings. We all agree on that. The problem comes in when someone insists on defining “savings” exclusively as past reductions in consumption instead of also including future increases in production.
With the former, if you want to finance new capital, you must 1) reduce consumption below your income until you have accumulated enough money to purchase the capital, 2) persuade someone who has sufficient savings to lend you what you need, or 3) change the definition of private property in some fashion (usually by changing the definition of money) and redistribute purchasing power in some fashion, usually through the tax system or by inflating the currency.
Financing out of past savings means that 1) you must already own enough capital to generate income in excess of your consumption needs (capital is expensive and you cannot save enough out of labor income to purchase any meaningful capital stake), 2) make it “interesting” to a lender, which usually means giving up the lion’s share of ownership to an investor or lender, or 3) are in good with the political powers to be in line for largesse.
|"Lion's Share" = "Everything"|
We include typical corporate borrowing for new capital formation under No. 1 above, as what makes a corporation or individual “interesting” ordinarily is to have collateral that can be seized in case the loan goes into default, which means you have accumulated wealth. As they (the generalized other) say, “You need money to make money” . . . assuming that by “need money” is meant “you need to have money already,” i.e., collateral of some kind. Collateral is what empowers the already-wealthy with the ability to borrow without signing over the lion’s share of ownership.
By the way, we’re using “lion’s share” in the modern sense of the term, not the classic, Æsop’s fables sense, in which “the lion’s share” was everything, not just most everything.
|John Locke: Control = ownership|
Obviously, if you insist on financing new capital only out of past savings, then as a rule only the already-wealthy or the State (that has the coercive power to redistribute) will end up owning most of everything. And, yes, when the State redistributes, it is effectively laying claim to de facto ownership of everything, whether it is done through confiscatory taxation, or the hidden tax of inflation. As John Locke observed when addressing the issue of taxation without representation, “What property have I in that, which another may by right take, when he pleases, to himself?” (Second Treatise of Government, § 140.)
Keynes simply assumed as a matter of course that the only way to finance new capital formation was to cut consumption and accumulate money savings . . . which we know is not the case. It is also perfectly feasible to promise to pay for something tomorrow that you purchased today. Most economic activity is done on this basis, and to claim that it cannot be done borders on the delusional. The so-called credit card industry is built on the assumption that you can purchase something today and consume it, yet pay for it tomorrow.
And if it can be done for consumption that does not generate its own repayment, why can’t the same technique be used to finance capital acquisition, that does pay for itself by generating its own repayment. That is, after all, why the capital was purchased in the first place, or there would have been no point whatsoever in wanting to finance new capital in the first place.
|Marx: only labor gives value except when it doesn't|
That, by the way, is why Karl Marx’s concept of capital being “congealed” or “accumulated” labor is utter nonsense. As Marx reasoned, the capitalist was due from his or her capital only what it cost him or her in terms of labor.
If a capitalist worked for 2,000 hours and accumulated $2,000 in savings, purchasing a machine to manufacture some good or service, the capitalist was due only $2,000 of the profits. According to Marx, any further profits belonged to the workers who were mingling their labor with the capital as all of the capitalist’s accumulated or congealed labor had been paid out to the capitalist in full. Everything else was due to the workers who were adding value by adding their labor.
Marx, of course, did not consider the possibility that “value” comes not from the inputs to production, but from the utility to the consumer or user. If enormous labor and vast wealth are put into producing something of little or no utility to a buyer, then the price will reflect that, not the value of the inputs. For example, if I spend $1 million baking a cupcake, but a somebody can buy a cupcake for $1 down the street of exactly the same quality (size, taste, flavor, appearance, whatever), is my cupcake worth $1 or $1 million to the customer?
According to Marx, the value is $1 million, not $1.
Clearly, we used a ridiculous example to make a point. The value of the inputs to production are only of concern to the customer if they cause the price of what is produced to rise above what the customer is willing to pay. When that happens, a producer will either not produce the good or service anymore, or figure out a way to increase the value to the customer, or lower the cost to him- or herself.
|Worthless labor doesn't count as labor.|
(To do him justice, Marx did address the problem of producing something that has no value . . . but he did it by cheating. As he explained in Das Kapital, if labor is expended in producing something of no value, then the labor does not count as labor. But if labor is the only thing that gives value to something, then adding labor to something must make it valuable, or labor does not always give value, implying that there is something else that gives value. . . .)
The problem, of course, is that if everybody believes as Keynes did, then it is hardly likely that anyone will even think of trying to finance new capital formation without past savings, thereby locking everyone into the assumption that you need the rich (capitalism) or the State (socialism) to run the economy. It would be unthinkable to do anything else. Financing with future savings would be as insane as setting out to sail around the world on a flat Earth, or claiming that the Earth goes around the sun.
Unfortunately, most people in positions of power in politics and academia insist, all evidence to the contrary, that new capital can only be financed with past savings . . . which we shall show is not the case in the next posting on this subject.#30#