The problem, of course, is that economics is defined as “a social science concerned with the production, distribution, and consumption of goods and services.” Socialism (and its evil twin capitalism . . . unless you’re a capitalist, then socialism is the evil twin), however, assumes that all production is due to labor — “productivity” is, after all, defined as “output per labor hour” — so the only problems that need to be addressed are distribution and consumption, mostly consumption. As George Bernard Shaw declared in his final debate with G.K. Chesterton, socialism is concerned with redistributing income, because nothing else exists.
But why, then, have capital at all if labor produces everything? According to Keynes, the purpose of capital is to provide the “environment” within which labor can become productive, i.e., “create jobs.” Thus, the more capital there is, the more jobs should be created!
For some strange reason, however, it doesn’t seem to work out that way. As more capital is added, jobs start to decrease! As this amazing paradox works its bizarre magic, you can actually end up with an environment in which there are no jobs at all!
The paradox is easily resolved, however, the moment we realize that capital is productive in the same way as labor. By that we mean that capital doesn’t merely provide the “environment” within which labor becomes productive but can — and does — produce marketable goods and services in tandem with, or independent of direct human input (labor).
That being the case, it necessarily follows that as capital becomes more efficient and cost effective than human labor, human labor will be displaced by capital . . . which leads to a problem. Say’s Law of Markets ceases to function.
To summarize, Say’s Law is that production equals income, therefore supply (production) generates its own demand (income), and demand, its own supply. Reading an expanded explanation of Say’s Law (as in Say’s Letters to Mister Malthus), we realize that Jean-Baptiste Say simply assumed that if your labor was displaced by advances in technology, you would purchase the new technology to generate income, instead of being limited to labor alone.
Both sides of Say’s Law are essential, because you have to take both production and consumption into consideration. Focusing only on either production or consumption is a disaster for an economy, given Adam Smith’s first principle of economics from The Wealth of Nations: “Consumption is the sole end and purpose of all production.”
This is because there is a fundamental difference between production and consumption, even though they are two sides of the same economic equation. Consumption is just what it sounds like: something gets consumed or used up.
Production, however, is the opposite of consumption because something is brought into existence, not taken out of it. What confuses matters these days is the tendency of many people who should know better to use “investment” to describe virtually every expenditure that yields some benefit, direct or indirect.
Strictly speaking, investment refers to financing the production of marketable goods and services — some activity reasonably intended to generate a profit directly, in and of itself. Education is therefore not an investment, nor is eating a meal or gambling.
That is, in most cases. For tax purposes in the United States, education is considered personal consumption and is not deductible, unless it is required to retain current employment or professional status, whereupon it is a business expense and is deductible. In theory, education required to qualify you for a specific job is an investment but is treated as a business expense, depending on circumstances, while a general “good education” that will presumably get you an unspecified “good job” is — and should be — personal consumption, not investment.
Speculation is not investment, although deciding whether a specific project is investment or speculation can at times be difficult. For example, the Medieval scholastics considered taking a profit on a rise in the value of goods held for resale (investment in inventory) to be legitimate, as it was incidental to the purpose for which the goods were held. There were exceptions made in, e.g., the case of famine that drives up the price of food, or the death of an important person that drives up the price of black cloth. In such cases it was considered unjust to charge a market-determined price, although one that was higher than normal would be permitted if not deemed exorbitant. On the other hand, they considered holding goods in hope of a rise in the price, or — especially — trying to corner the market for a good to drive up the price to be illegitimate.
What about renting land, tools, or anything else? For renting, the rules are a little different. Since the item rented is not “consumed by its use,” the actual item loaned is returned. What the renter purchases, and for which he owes a fee, is the “usufruct,” which is legal language for “use and enjoyment of the fruits.”
It does not matter whether the item rented is used for a productive purpose. It is the usufruct that the renter buys, not the item itself. This, by the way, is why interest is not the “rent” of money. The proper use of money is to be spent; money is “consumed by its use.” The actual money loaned is not returned, except by coincidence. Thomas Aquinas gave a example of legitimate rental being charged for money, where it has been borrowed for a “secondary use,” e.g., for show. This might be a wedding reception where the father of the bride wants to impress the guests and borrows bags of gold and silver coins to display on the table with the gifts and the dowry. Because the actual money is returned, a rental fee is due to the lender; it is not used as money, but for a secondary purpose. (IIa IIae Q. 78, a. 1, 6.)
Which brings us to the discussion on the various types of money, which we will look at in the next posting on this subject.