Money and Capitalism

Greedy Robber BarronsCORPORATE GREED

People today like to think of themselves as generally compassionate, we seem to desire a more compassionate and equitable society. There is general concern today that a small group of individuals and corporations are trying to aggregate all the available resources and money to themselves (which can be a concern in areas where particular resources are limited). Our concern is, that if some people have too much money, there wont be enough for others, which inevitably leads to monetary inequities creating widespread need. These feelings are then justified as we see corporations and individuals making sometimes seemingly obscene profits.

The basic assumption that contributes to this concern today is that money is tied to resources (similar to commodities) and therefore it is limited (after all gold and silver were used monetarily since the beginning of time – and these commodities are limited). The problem (with this general assumption) is, money is not exactly like other commodities, it is similar in many ways, (and is subject to the laws of supply and demand, which we will get into at another time) but also it is very different. Commodities are generally something we consume or use, where money on the other hand is something we use as a means of trade or exchange and gets its value from our human ingenuity and labor.

To grapple with the nature of money, we need to drill down a little deeper into the underling assumption we have about money, asking what exactly is it and how does it work in society?

MONEY AND TRADE

To understand money we need to go back to the very basics of trade.

Basically people start the trade process by producing something or performing a service that can be traded to get what we want or need. We trade those products or services created by our labor for someone else’s products created by their labor. Generally the harder a person works, the more and more products or services he creates that can be traded to get more of what he wants or needs.

Because “pure” trade or barter would be difficult as we try to find the right person to trade with (to get exactly what we wanted for exactly what they wanted), we use a little “voucher” called money.  Now imagine what would happen if you  found a guy who had what you needed, but he didn’t want what you had to trade (or felt what you had wasn’t of equal value because his product took much more labor than yours) you then might have to find a third party who might be willing to make a three way trade. Money, as labor (in compact tradable voucher form) solves this very basic “trade” problem.

Money simply helps make bartering or trade (in the truest sense of the word) for goods and services we produce a lot easier. Trade transactions between individuals would be a lot more difficult if we didn’t have these little “vouchers” called money which we use today to trade what we produce.

To sum it up, money is essentially labor in “compact” tradable form. Throughout history all sorts of things have been used as money, the ancients used precious stones as well as gold and silver, in early colonial America; tobacco, in prisons; cigarettes, in black markets in the old Soviet Union; vodka. Money simply gets its trade value from our human labor. So we see that money is not limited like most commodities; it is actually created and gets its trade value by individual and collective “human action“ (BTW that’s the name of Von Mises’s magnum opus http://mises.org/). Today national collective “human action” is measured in terms of money and called GNP or Gross National “Product“, which reflects the gross national output of our human labor.

THE LAW OF SUPPLY AND DEMAND

The law of supply and demand is pretty well understood today, basically when there is an abundance of goods (supply) and there are very few buyers, the prices will fall because sellers of those goods will have to bid down their prices to compete for those few buyers causing prices to retreat and go down.

When there is a lack of goods and there are many buyers, demand is created to get those goods (supply). In this environment sellers  will hold out for the best price as the many buyers “bid up “and compete for the shortage of goods so that costs rise.

To sum it up in an example it basically works like this:

There are 100 apples and only 20 buyers = prices will fall
There are 100 apples and 200 buyers = prices will rise

CAPITALISM AND THE DIVISION OF LABOR

Moving on to the principle of “the division of labor“, Adam Smith described it best (my partial abridgment) :

To take an example, therefore, of an item of slight worth or importance to manufacture; one in which the division of labor is easily understood, the trade of the needle pin-maker; a workman not educated to this business (which the division of labor has made this a particular trade), nor acquainted with the use of the machinery employed in it (the machinery also being an invention of the same division of labor), could hardly, perhaps, with his utmost ability, make one pin in a day, and certainly could not make twenty. The way which this business is now done as a peculiar trade, is divided into a number of branches, of which the greater parts are also peculiar trades.

One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head (to make the head requires two or three distinct operations), to zinc coat the pins is another; it is even a trade by itself to put them into the paper (for distribution). The important business of making a pin is, in this manner, divided into about eighteen distinct operations, to which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, yet acquainted with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day.

In a pound there are upwards of four thousand pins of a middle size. Those ten persons, therefore, could make among them nearly of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all worked separately and independently, and without any of them having been educated in this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.

Adam Smith, The Wealth of Nations 1776

So we see capitalism isn’t like the oil, to use the example of a lava lamp, where a very few rich elite capitalists are on one side trying to tip the lamp so that the oil will collect to their side (so that all the resources are aggregated to them). No, instead think of capitalism as investment of start up resources working along side the principal the division of labor (which is the engine of prosperity),  combining to produce an ever increasing abundance of lower cost (in terms of man hours) goods and services, thus increasing the value and buying power of our money (by the law of supply and demand) so we can purchase more and more things we want and need.

Think of the area of agriculture; the old fashion way in which agriculture was done, it took a lot of lot of sweat and hard work to get food out of the ground. Food being more scarce (because it was very labor intensive) kept costs high in terms of labor time. The labor intensity of working this way did not leave you a lot of time to be productive or create anything else thus creating shortages in other area’s. Contrasting to modernity, by using investment to purchase technology and using creativity (by the division of labor principle), we can create an abundance of food in a lot less time in terms of man hours. This “created abundance” drives the price down (by the law of supply and demand) making it available to all (including the poor) at much lower prices. Because food created this way costs less in terms of man hours we are freed up spend more time being productive in other areas creating abundance in those other area’s as well. Using my illustration of the lava lamp, we’re adding more and more and more oil to the lamp creating abundance through our creativity an ingenuity, this is the beauty of capitalism it creates abundance.

Another examples of this is in the cell phone industry. I am old enough to remember when cell phones first came out and how bulky and expensive they were both to purchase and to operate, but over the course of the last let’s say 15 years the prices have come way down. The same is true with the Japanese auto industry through the 70s and early 80s, they continually found ways to increase productivity and produce better and better cars holding costs down and undercutting their American counterparts who because of managerial ineptness, lack of vision, and the comfortableness of their laborers via union contracts, are in the struggle to change and get better in order to survive to keep up.

CORPORATIONS, CAPITALISM, THE DIVISION OF LABOR, AND EXCESSIVE REGULATIONS

Now when it comes to those rascally corporations (or individual owners we used to call “robber barons”), they do this division of labor thing very, very well. They continually find creative and innovative ways to produce goods and services at cheaper and cheaper rates so they can undercut their competition thus creating abundance in the process. The whole time technology is going to continually to be driven by creative people who have ideas. Corporations are going to compete for those people as well (or human resources) with incentives like high-paying jobs and good benefit packages. Not only are corporations going to compete for them, but for the people who have the technological skills or task specific skills related to their industry, thus raising the standard of living for those people as well. A secondary result is that corporations produce thousands of jobs, both by hiring needed people, and by thousands of secondary jobs spawned through smaller businesses and corporations needed by them to produce their product or services. Corporations when they make more and more money, have to continually reinvest it in order to keep up with their competition. They need to buy the current technology (or company) to keep up. That technology is often tied to smaller innovative companies or individuals who are at the cutting edge of their particular field. Corporations pay millions (sometimes billions) of dollars to either buy up or buy the smaller companies product or service that creates good paying jobs in both cases as well.

Also keep in mind, even when the upper management of a company and high paid executives gets paid hordes of money, they eventual spend it back into the economy (whether they do it or their posterity does later) creating even more secondary jobs like luxury goods and services (the money eventually does have a “trickle down” effect spawning other good paying jobs and industries). Keep in mind also, typically those who have hordes of money don’t like to keep it idle, they find “investments” that works the money right back into the system. These “investors” generally look for places to make their money “work” by investing in bright ideas and technology which continues the abundance creating process along. These  same investors also invest internationally for the same purpose, triggering the start of prosperity in those countries.  (This even happens when they send their money offshore for sheltering to tax havens: http://www.thefreemanonline.org/featured/in-praise-of-tax-havens/ ). This same cycle is exactly what happened early on in America. We borrowed money in the form of investment, to purchased the current technology of the time (which was created by the division of labor as well) from the Europeans and started the process here. Everywhere capitalism goes it creates this effect, think of the Asian markets today like Japan, Taiwan, Hong Kong, South Korea and China. Capitalism working via the free market, is in other words the goose that lays the golden egg!

Excessive government regulations often hinder the abundance creating process much more than they help. They often hinder by creating hurdles and limits to the abundance generating potential of the free market. Licensing laws, labor regulations, minimum wage legislation, unemployment taxes, social security taxes, union standards, federal health and safety regulations, racial quotas, anti-discrimination legislation, environmental regulations, and a well-nigh endless host of others laws, fees, prohibitions, limitations, regulations, and specifications gum up the works and choke the goose by giving it all sorts of hurdles to overcome just to lay her golden eggs.

To summarize, capitalism when it is most free, works to employ man’s creative and competitive human nature to create prosperity and increase the standard of living for everyone.  If you best want to increase the standard of living for everyone than the freer the market is, the better the mechanism (or goose) is to produce an ever lower cost abundance of goods and services available to all .

GOVERNMENT CONTROLLED THEFT

Now here’s the real kicker; I contend that much of our financial problems come from greedy politicians who seek to maintain their stranglehold on power.  With all this productivity and the increase of better goods and services at lower and lower costs (thus increasing the buying power of your money) you might start to think, hmmm if I put my money away, let’s say over the forty years of a technological explosion (where the price of goods and services continue to go down and down and down) my money should increase in value over that time (giving me more buying power). I’d say Yes! Yes! your thinking correctly. And under free circumstances you would normally be right!

Greedy Politicians

So the question naturally arises, why does it seem that things are getting worse or that prices remain stagnant? (As long as I remember, standard television prices have generally seemed to remained flat over the course of 50 years:  http://www.tvhistory.tv/tv-prices.htm ). The reason that we generally haven’t seen our money have more buying power* (so that our dollar is buying more and more lower cost goods and services that come into the economy as a result of capitalism an the division of labor), is because THE GOVERNMENT has been basically printing money (by borrowing on the future) spending more and more. Many times politicians buy power and money to themselves (with this money), through cronyism, kickbacks, special favors and the purchasing of votes via welfare, agricultural subsidies, union favoritism, funding of special interest groups, corporate special interest groups, and pork barreling just to name a few.

By slow manipulation the US Government has been injecting this money into the economy, stealing the increase by controlled inflation! (there are other factors to it like the manipulation of interest rates and the whole fractional reserve lending system protected by the Federal Reserve as well)  Think of the Weimar Republic (WR) ( http://en.wikipedia.org/wiki/Weimar_Republic#Economic_problems ) and the inflationary problems it created by first borrowing and then printing and spending more and more money. If you had a lot of money in the bank then, lets say 50,000 German marks, it eventually became worthless because it was no longer  just tied to “human labor” as we have mentioned above, but to government interventionism and the toying with the money supply. This policy wiped out the poor and middle class in a short amount of time. The  WR ultimately became a legal counter fitter devaluing the value of the currency (money). We really should be able to place our money in the bank and over the course of  many years its buying power should increase, especially during an explosion of technology. Think of how that principal alone would encourage a savings culture instead of debt culture which is one of our root problems today (debt is a form of slavery).

Keynesian/interventionist (http://en.wikipedia.org/wiki/Keynesian_economics) government controlled inflation (controlled by Federal Reserve system)  (for more on the FR see the link below) has tried to work to flatten out the effects of government created hyper inflation. The out-of-control government spending since at least the 1960s (and to a lesser degree back to the turn of the 20th century) has been a means to neutralize capitalism’s multiplying cost saving effect and make it virtually invisible to the common working man. It’s an insidious means of stealing the people’s wealth which they created through their hard work and ingenuity. This policy will eventually reach a critical mass and wipe out the poor and middle class over the course of time here as well.

To summarize, Government controlled inflation over the last few generations has actually worked to neutralize capitalism’s multiplying cost saving effect, thus stealing the peoples increase (more buying power with our dollars).

CAPITALISM AND COMPASSION

Ultimately I believe the kind of capitalism I have sought to explain here, when it works most free from government monetary manipulation, excessive regulations, and socialism’s insatiable appetite for confiscatory taxes (collected taxes which often rewards political loyalty, idleness, and laziness, taking from the producer to give to the non-producer)  is the most compassionate system. Especially when it comes to people who can’t take care of themselves and the people who are truly poor. In a truly free market there is so much abundance (in this kind of free capitalistic society) that is very easy for people to give to individuals and nations in need (it‘s easier to give out of abundance than need). Besides compassion is always better left to those in society who truly care, the family, the extended family, the church, local charities, and capitalistic philanthropists who can discern true need from laziness and the abuses inevitably created by a socialistic system of giveaways thereby lessening collective productivity which creates need and lack that “trickles down” inevitably to the poor. (Free market compassion always works best when there is sound money and taxes are very low, this allows those who care  most to take care of those who are truly needy)

You might ask should we give to those in need anyway, even when we lack? Of course we should, but taking into consideration the propensity of man to be self-serving and self-interested (this is his nature) it makes it a lot easier for him to part with his abundance rather than his lack (especially in times of desperation). America when she practiced this kind of capitalism best (however imperfectly) has proved this kind of compassion,  often by being the leader in feeding the third world.

Lar

*except in some area’s like communication – think of how much a phone call was in those old black-and-white movies.

For more on the Federal Reserve, its history,  how it works, and how it cooperates with government to create inflation, see this excellent 42min video: http://video.google.com/videoplay?docid=6507136891691870450

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One Response

  1. Excellent explaination of general economics. “Im from the government, and I’m here to help,” is the scariest sentence in the English language when you understand basic economics, human nature and enlighten that with the Christian concept of man’s sin. For all those who are skeptical, even hateful, regarding “evil” captitalists and their “excessive” profits, how much kinder and gentler do you think a government beauracrat will be when he operates under his idea of the “general good.” If profit in the hands of individual businessmen has the potential to do damage to the general population it is beyond imagination what havoc can be brought by a swarm of “well intentioned” (and unelected, unacountable) “civil servants” who are only trying to enforce the fine print of legislation that even our Congressmen admit they don’t read or understand.

    That government is inherently inefficient and incapable of providing good service should be understood by anyone who has ever stood in line at any government operation, say the DMV.

    For those who hold particular delusions about government health care, I’d like to remind everyone that the three largest blocks of manpower on the planet are, in order of the largest number of workers, 1. the Chinese railroad; 2. the Indian railroad; and 3. the English government health care system. For perspective, China has approximately 1.3 billion people, India has approximately 1.1 billion people and England has approximately 50 million people. So it takes an awful lot of people to deliver “free” health care to England’s 50 million citizens. How many do you think it will take for the United States to provide that service to our 300 million, and at what expense? If that doesn’t scare you, you’re already at room temperature.

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