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Sunday, October 11, 2015

Disambiguating Capital from Simple Wealth

To the modern wealthy, as Piketty notes, [See Capital Versus Unearned Wealth] all wealth that is not paid in labor compensation is Capital. Effectively, and in modern Newspeak this is true. But the reality is that Actual Capital as a moral and effective mover of general prosperity is not synonymous with all wealth. This conflation of arrogated wealth in the hands of an elite and actual capital is...

The Verbal Sleight of hand of the Supply Side movement

James Galbraith starts the Third chapter of his book "The Predator State" by repeating a truism of the Supply Side Movement:

"Americans do not save enough! That is an unchallenged principle, conservative in origin..."

Then he notes:

"Those who do save occupy a special place in the pantheon of market heroes"...implying that; "savings should not be taxed."

This assertion was the basis of "supply side economics", and he does an excellent job of tracing it to the writings of Art Laffer, Jude Wanniski and Paul Craig Robert - and the Wall Street Journal. He notes that their purpose was:

"to eliminate taxes on savings that is on capital income."

Galbraith goes on to point out some well known errors in Supply Side Thinking in that chapter, focusing on the question of whether savings is a matter of "rational choice" or simply a function of surplus and budgets, i.e. the poor can barely afford to eat and thus the wealthy, by definition, are the only ones who can afford to save.

The Sleight of Hand of confusing Wealth and Capital

But even there this is a place where definitions matter. If we had a stricter definition of capital, we'd note that capital, is really "wealth reused for production"(1) or "wealth in the course of production"; but not all wealth should be called capital!

Deliberately confusing mere wealth from speculation, rents on properties and interest on those rents -- with capital deliberately confuses the issue. It is designed to confuse the unearned wealth of the wealthy, and financiers, with Capital so the wealthy and connected can justify their monopoly on wealth.

Definition of Actual Capital

However, as I mentioned in my first paragraph I'm partial to Henry George's Definitions of Capital, (see: Georgist Definitions of Labor, Capital and Land). This becomes clear when one understands that definition.

Henry George defines wealth as:

"as natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion to fit them for the gratification of human desires." [P & P Ch2]

And then defines Capital as:

"Capital is ... [that] part of wealth—that [is] devoted to aid production." and therefore "Capital is "wealth in the course of exchange." [GeoDef]

I call this actual capital to differentiate it from more specious definitions

Disambiguating simple wealth from Capital

Progressives understood the principle that people shouldn't pay taxes on capital on the very simple metaphor that while money is on the table and being put to use, no one should be taking it off the table.

But Not All Wealth is Capital! It makes sense If we don't want to be bamboozled by con artists, once we get our definitions straight which is how so many unsound supporters of various political/economy theories get rooked. I'm not sure most people, even the folks who argued with the Supply Siders, caught on to the sleight of hand substitution of "general wealth" for actual "capital." But that is what they were doing.

Yes, don't tax actual capital investment -- at all -- in actual capital, meaning plant, equipment, raw materials, tools, work vehicles, etc.... But if you don't tax wealth at all, you shift the burden of taxation from labor and actual capital to unearned wealth and speculation. Thus the Supply siders talked about "incentive to work, save and invest" as invest, but by deliberately conflating capital with general wealth it was a sleight of hand. And with their implicit class arguments, it was an abusive sleight of hands; "We need the 'Job Creators'" was their argument, implying "we don't need labor except at slave wages."

Effective Savings comes from Capital Investment

If supply siders had truly wanted more savings they'd not tax labor compensation at all.

  1. First, labor effectively spends most of it's gross income in the costs of living.
  2. If laborers are compensated above their basic needs they deposit their money in banks and trust it to capitalists
  3. so in theory any saving they have are readily converted to capital investments.

  4. Labor compensation is a compensation for energy and thought expended in production, so it's not fair to tax it unfairly.
  5. If they truly wanted more effective savings the tax system they would have gone even further and enabled capital formation for laborers, skilled workers, artisans and other productive people, let them mix their own capital with labor (Lincoln).
  6. Effective savings is Actual Capital. Improved home, shelter, tools for transport and production; those are the kind of wealth that make life better for folks. Enabling people to invest in actual capital is indeed the supply side of the ledger because letting people invest in actual capital is effective savings.

Why The Ambiguity?

Many writers use capital and wealth interchangeably. This confuses the subject. I think that Galbraith would agree with the Georgist definition. There is a simple reason that we have to constantly invest in capital goods just to keep them functioning and so actual capital should be as protected as wage income from oppressive taxation and rents. Capital goods are consumed or used up by their use in production and so an enterprise of any kind, due to simple entropy/thermodynamics is like a friend called his boat; "a hole one pours money [resources] into." It is actual capital that is the "goose that lays the golden egg" that folks defending misallocation of wealth deliberately conflate with general wealth.

For More see:

Because of that Capital, like all wealth, is actually derived from production, not the other way around.

Supply Side was An Authoritarian Con

Galbraith notes, legitimately, that the Supply Side Arguments were "myths" (actually they are hierarchy enhancing myths). His father would have called them "innocent frauds." Since the folks who argued these ideas were deliberately shilling for wealth and not for actual capital I think of them as just frauds. But he's more diplomatic. To me they are just cons shilling for hierarchy, a bullying society, and dominance. One can also draw that narrative if one reads the rest of his argument in Chapter 3 where he talks about market failure versus the claims for public benefit from not taxing "savings." But the real problem came from their verbal sleight of hand. They were like the fellows who spun the invisible cloth the Emperor wore - they were cons.

And key to their con is confusing the accumulation of all forms of wealth with those forms of wealth that are actual capital

Marx on Capital

Marx's definition of Capital at first would appear to agree with the cons:

"Capital is in the first place an accumulation of money and cannot make its appearance in history until the circulation of commodities has given rise to the money relation." [Marx]

Marx deliberately conflates wealth and capital to disparage capitalists. But also because Capital is more a separate usage of wealth than an actual separate form of wealth. A ship is used as capital if put into commerce. As a yacht it is but a display of ostentatiousness, although many rich folks get around the law by doing their business on yachts, (perhaps inspired by Stavros in the Bond Film "Never Say Never Again or J.P. Morgan?)

"Secondly, the distinction between money which is capital, and money which is money only, arises from the difference in their form of circulation. Money which is acquired in order to buy something is just money, facilitating the exchange of commodities. [Marx represent this as C - M - C or Commodity - Money - Commodity.] On the other hand, capital is money which is used to buy something only in order to sell it again. [Marx represented this as M - C - M.] This means that capital exists only within the process of buying and selling, as money advanced only in order to get it back again." [Marx]

The distinction between money and capital is how the money is used. Marx uses "form of circulation" to describe what should be called "financial capitalism" -- which is only "Actual Capitalism" when it is invested in sustaining and advancing actual production (see [actual]). But Marx in his Das Kapital, like Pickety in his "Capital," is using the term as it is used by the folks calling themselves "Capitalists. And Marx is referring to actual capital in his definition:

"Thirdly, money is only capital if it buys a good whose consumption brings about an increase in the value of the commodity, realised in selling it for a Profit [or M - C - M']." [Marx]

But the actual capital is not the money, nor is it the process of exchange alone. It is the entire process of securing, maintaining and refreshing the goods and services - "means of production" - which creates wealth by transforming natures bounty (raw goods, land, etc...) into durable and consumable goods. Marx understands this, but he's focused on fighting the financial power, the ownership power, over capital. Marx notes some of the history of the word.

"The word “capital” was first used in its current meaning in England around 1611, derived from “capital grant,” meaning a grant of land from the King – i.e. the head – which would be the basis of a new estate, and so meaning ”original” funds, thus carrying in its genealogy a mirror of the changing sources and origins of power, with the rise of the bourgeois revolution in England." [Marx]

We would call this "financial capital"

Adam Smith and Capital Stock

But capital was used with other meanings long before Marx got hold of it. Marx conflates money with the resources that money is used to measure. In the days before money was a readily available public good, most wealth was in the form of land. Hence "capital grant" was a feudal grant of land, and since the grant of land meant the ability to charge rents on that land, it was a source of funds to the person receiving it. This is how government officials (nobility is essentially hereditary officers of the government) got paid in feudal times.

When one reads Adam Smith he uses it paired with and interchangeably with the word "stock". For him the "capital stock" of a business was the wealth of raw materials, tools, and resources that could be used by a person to make money. He wrote:

"As Soon as stock has accumulated in the hands of particular persons, some of the will naturally employ it in setting to work industrious people, whom they will provide with materials and subsistence, in order to make a profit by the sale of their work, or by what their labor adds to the value of the materials."

Note, profit here refers to the benefits from labor; that capital stock here refers to actual capital, and that not all wealth is being considered capital but "some of" it. All agree that wealth is only capital when it is used for the profit of commerce. It is only capital when it earns its' keep. Wealth not earned through labor or real capital investment, is simply unearned rent, the product of usury or aristocratic grants and generally "unearned income."

Also note, that Adam Smith can just as easily be talking about Plantations and Factories or enslaved workers -- and he was -- as a free society. Capitalism and Liberty are not synonymous unless laborers are "valued" as human beings.

Adam Smith, Marx, Henry George, knew what they were talking about. Moderns, know too, but they want to con us into confusing Capital and Unearned Wealth.

To Reiterate from Lincoln:

"Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration." [Lincoln the Marxist!!!]

The Confusion Matters

The Confusion matters because unearned wealth not put back into productive investments is money and wealth siphoned off from society. Moreover, not all capital is equal. Surplus wealth channeled into speculation, smuggling, privateering, usury or corruption actually decreases the total good of society because money wealth can quickly become "pseudo wealth" when part of fraudulent or speculative transaction. The wealthy are prone to reckless or purely spurious spending -- which wastes, or even destroys wealth. Wealthy people also tend to revert back to Feudal War-lord origins and engage in destructive war-mongering and war-profiteering, which actually destroys wealth in the process of creating a "dross" of loot for the war-profiteer. Investments in war-ships are not the same as investments in transports for useful goods. Sufficient arms to ward off attack is not the same as sending out imperial armies to create colonies and earn profit for the conquistadors. Focusing on Actual Capital also means taxing unearned incomes, and unearned wealth, beyond what can be expected to benefit the person carrying that financial wealth. But that discussion is for another time.

The Emperor's New Clothes

Supply siders might have actually benefited people if they had got their definitions right (or intended to). As it was... well it's embarrassing. Both capital and labor are necessary, but not all wealth is capital.

At the same time, to most of the world, all wealth is capital, and most of it is owned by a few capitalists and is a source of unearned rents to a tiny sliver of the population.

Sources and Further Reading

Piketty on Capital
The Emperor's New Clothes
Related Articles:
Depreciation, Stock and Sustainability:
References to Predator State by James Galbraith
Not so Innocent Fraud
Georgist Definitions Used here!
And Lincoln's definitions! Lincoln the Marxist!!! (tongue in cheek)
Lincoln the Marxist!!! :
Social Dominance Theory
Georgist Definitions of Labor, Capital and Land
From: Progress and Poverty:
Yachts, Arms Smuggling and James Bond:
Progress and Poverty:

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