THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, December 2, 2020

The Formation of Capital


Today we start to give a brief look at an alternative to the Vast Keynesian Conspiracy that has wrecked global economies and left the world in a seemingly hopeless situation.  As we shall see, however, it doesn’t have to be this way, and it could be fixed quite easily . . . if only the powers that be didn’t gain so much power at everyone else’s expense from the present system.

Dr. Harold G. Moulton


It all started (in the current phase, at least) in the 1930s.  The Keynesian New Deal somewhat after the First World War and the economic order that emerged following the Second World War presented a serious challenge to a society that had drifted away from acknowledging the importance of the dignity of each human being and instead focused on the collective.

Nevertheless, even in economics and finance there were sound, natural law-based alternatives available to the new order.  The most cogent argument against the Keynesian economics that underpinned the New Deal and similar programs was that presented by the Brookings Institution under the direction of Dr. Harold Moulton, president of Brookings from 1928 to 1952.

In 1934 and 1935, Brookings published the findings of a study funded by the Maurice and Laura Falk Foundation (1931-1964) of Pittsburgh, Pennsylvania, Distribution of Wealth and Income in Relation to Economic Progress.  Moulton “foreshadowed” (his word) the study in a series of articles published in the Journal of Political Economy in 1918, which presented the theoretical framework and tentative analysis.

Jean-Baptiste Say


Results of the study were contained in four volumes, which, without mentioning Say’s Law of Markets, broke it down into its component parts.  The first two volumes, America’s Capacity to Produce (Harold G. Moulton, America’s Capacity to Produce.  Washington, DC: The Brookings Institution, 1934) and America’s Capacity to Consume, (Harold G. Moulton, America’s Capacity to Consume.  Washington, DC: The Brookings Institution, 1934) came out in 1934.  The Formation of Capital (Harold G. Moulton, The Formation of Capital.  Washington, DC: The Brookings Institution, 1935) and Income and Economic Progress (Harold G. Moulton, Income and Economic Progress.  Washington, DC: The Brookings Institution, 1935) followed in 1935.

As Moulton explained, “The purpose of the investigation as a whole is to determine whether the existing distribution of income in the United States among various groups in society tends to impede the efficient functioning of the economic system.”  Not limiting the study to the cause of business depressions, Moulton concluded that the fact of such depressions “suggests that there must be some basic maladjustment which seriously impedes the operation of the economic machine by means of which the material wants of society are supplied.” (Moulton, The Formation of Capital, op. cit., 1.)

As the result of an exhaustive study of the productive and consumptive capacity of the United States in the early 1930s, Moulton decided there was sufficient capacity for both to keep the economy in equilibrium.  Imbalance had to be due to other factors.  As he summarized the issue,

John Maynard Keynes


The fact that business enterprises seldom produce at full capacity, and that the greatest problem of business managers appears to be to find adequate markets for their products, has raised in the minds of many business men and economists the question, Is not the primary difficulty a lack of purchasing power among the masses?  This leads at once to the correlative question, What is the bearing of the distribution of income upon the demand for the products of industry?  Concretely, if a larger percentage of our annual income were somehow made available to the purchasers of consumption goods, would not business managers find it profitable to utilize existing capital equipment more fully, thereby giving to the masses of people higher standards of living, and at the same time promoting a steadier and more rapid rate of economic progress? (Ibid., 1-2.)

After examining evidence from the early 1830s down to the early 1930s, Moulton decided that the maladjustment between production and consumption had two principal causes.  One, how new capital is financed, and, two, how income is distributed.

With respect to how new capital is financed, Moulton noted that mainstream economists, especially Keynes, insisted that new capital can only be financed by restricting consumption below production levels (“saving”).  Assuming that new capital formation requires previous reductions in consumption, however, creates an “economic dilemma”:

The dilemma may be summarily stated as follows: In order to accumulate money savings, we must decrease our expenditures for consumption; but in order to expand capital goods profitably, we must increase our expenditures for consumption. . . . [W]hen the managers of modern business corporations contemplate the expansion of capital goods they are forced to consider whether such capital will be profitable. . . . Now the ability to earn interest or profits on new capital depends directly upon the ability to sell the goods which that new capital will produce, and this depends, in the main, upon an expansion in the aggregate demand of the people for consumption goods. . . . if the aggregate capital supply of a nation is to be steadily increased it is necessary that the demand for consumption goods expand in rough proportion to the increase in the supply of capital. (Ibid., 28-29.)

In short, no producer will invest in additional capital until and unless there is an increase in consumption sufficient to warrant and justify the investment.  Thus, instead of a decrease in consumption prior to new investment in order to provide the financing, what Moulton found for the preceding century was an increase in consumption accompanying every period of significant investment in new capital.  As he concluded,

The traditional theory that an expansion of capital construction and consumptive output occur alternatively . . . finds no support whatever in the facts of our industrial history. . . . We find no support whatsoever for the view that capital expansion and the extension of the roundabout process of production may be carried on for years at a time when consumption is declining.  The growth of capital and the expansion of consumption are virtually concurrent phenomena. (Ibid. 47-48.)

And that raises another question . . . that we will address in the next posting on this subject.