I keep running into the same faulty arguments that hinge on the same devious argument. They heap all kinds of wealth formation under the title "capital formation" and so deliberately mislead people. Now:
Does define most forms of wealth, for simplicity sake, as capital; but he did that to simplify his argument. The word capital is also misused in finance and accounting (deliberately) to refer to financial wealth. To use that simplification in formal economics however is misleading. Capital, strictly speaking is:
"wealth that is used in production, including wealth that is in the course of exchange."
That meaning excludes wealth that is used to generate rents, financial wealth, labor and "nature's bounty"; land and mineral resources. Usually those selling capitalism use the later definition for the sales, but the former definition for the reality.
And there is a reason for that.
Actual Capital is "Good" Rent not so
I was going to dissect some articles I read recently to illustrate the point. But the essential point is that there is a reason that our tax system is supposed to include various deductions and exemptions. I call "Capital, strictly speaking", I usually refer to as Actual Capital, is good for the economy. But it is often a cost. Financial capital is wealth that can be used to buy Apartment buildings, Factories, or yachts. Incentivizing actual capital is like hanging a carrot in front of a Donkey you want to pull a load. Actual capital is the Carrot. A capitalist needs to invest in labor and capital goods to deserve to be called a capitalist. All else is speculation, rent seeking and rent collecting.
We should tax unearned income and non-capital wealth diversion. We should be letting actual capital ride the economy, and not taxing labor. If we did that and invested in infrastructure our economy would improve.
Infrastructure Investment
An Article by Don Boudreaux, cites a paper from 2000 on American Economic expansion by Doug Irwin. He was trying to make the point that import Tariffs had nothing to American economic expansion. He cites Irwin's three conclusions:
- (i) late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth;
- (ii) tariffs may have discouraged capital accumulation by raising the price of imported capital goods;
- (iii) productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff.
Tariffs might have had nothing to do with the economic growth of the 19th century, but government investment in utilities and infrastructure did. The government subsidized (directly or indirectly) the expansion of Canals, Railroads and infrastructure; and that in turn drove investment in production. The Jury is still out whether whether tariffs contributed to our expansion. But the "capital formation" was directly tied to these investments in infrastructure. For example US Steel (Carnagie) got it's start in order to supply quality steel or a railroad bridge planned over the Mississipi river. The civil war funded the arms industry. Capital formation in other countries was often drawn out of the economy. In the USA it was profitable.
Further Reading & Sources
- http://www.henrygeorge.org/cap.htm
- Tariffs Did NOT Fuel American Economic Growth
- http://www.henrygeorge.org/def2.htm
- https://holtesthoughts.blogspot.com/2015/09/georgist-definitions-of-labor-capital.html
- Disambiguating Capital from Simple Wealth
- Piketty, Capital Versus Unearned wealth
- The Trouble with Capitalism
- Lincoln the Marxist
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