CLASSICAL LIBERALISM
By Noah Nissani
Copyright 1997 -- Authorized free distribution of non-modified
copies for non-commercial purposes.
Chapter II POLITICAL ECONOMY -- Part I
Contents:
Introduction
Historical Antecedents
Free-Market Economy
Supply-Demand Law
Marginal Cost
Relative Efficiency
Surplus Value
Saving and Investment
INTRODUCTION
The period spanning from 1687 to 1789 saw the birth of three
modern sciences: Physics, economics and chemistry. Modern
physics began with Sir Isaac Newton's (1642-1727) book,
"Philosophiae Naturalis Principia Mathematica" (Mathematical
Principles of Natural Philosophy), published in 1687. Modern
economics emerged with Adam Smith's (1723-90) book, "An Enquiry
into the Nature and Causes of the Wealth of Nations", published
in 1776. Alchemy was transformed into chemistry with Antoine
Laurent Lavoisier's (1743-94) "Treatise of Chemistry", published
in 1789. In all three cases, the transition was not an
evolutionary, but rather a gigantic leap that involved basic
concepts, ways of thinking and scientific method, changing
primitive science into modern science.
Newton introduced the basic concepts of force, mass, gravitation
and inertia, which constitute the fundamentals of classical
physics up to our days. He established the laws that govern the
movement of bodies on earth's surface as well as in stellar
space. He also invented, simultaneously with but independently
of Gottfried Wilhelm von Leibniz (1646-1716), the infinitesimal
calculus needed for his physical investigation. Any later
physical theory, e.g., the Theory of Relativity or the Theory of
Quantum Mechanics, had to show, within the boundaries of
ordinary experience, results similar to Newton's. As a personal
note, Elhanan Leibowitz and myself became convinced of the
acceptability of our tensorial expression for the relativistic
gravitational energy, only after we succeeded in obtaining
values concordant with Newton's for the total gravitational
energy in the surrounding of a star, and for the velocity of a
free-falling body.(1)
Aristotle's theory that four primary elements -- air, water,
earth, and fire -- are the building blocks of matter, prevailed
unchallenged for more than two millennia (Aristotle, "Physics",
Book II, Part 1). It was the "theoretical" basis of the medieval
alchemy, and of the alchemists' obsessive search for the
philosopher's stone capable of transmuting ordinary metals into
gold, the elixir of immortality and the panacea for all illness.
Although Robert Boyle (1627-91) dismissed this speculative
theory in his book "The Skeptical Chymist" (1661), it was not
definitely invalidated until Joseph Priestley (2) (1733-1804)
and Henry Cavendish (1731-1810) demonstrated that air and water
are compounds in themselves. With his discovery of oxygen
(1774), Priestley showed that air is a mixture of gases and
therefore cannot be a primary element. Soon afterwards,
Cavendish showed that water also cannot be considered a primary
element, since it is a compound of oxygen and hydrogen. Finally,
in 1789, only fifteen years after Priestley's discovery of the
oxygen, Lavoisier established the bases and scientific methods
of modern chemistry.
In this general atmosphere of rational criticism and replacement
of speculative theories by scientifically based ones, Adam
Smith's book appeared founding modern economics.
Historical Antecedents
I will risk asserting that the first historical testimony of the
inherent dangers of a centralized economy is found in the Bible.
The previous chapter deals with the Biblical description of the
liberal regime that ruled the Israelite tribes during the period
of the Judges (app. 12th & 11th centuries BC.), which the Bible
defines as the reign of God (1 Samuel 8:7). As counterpart the
Bible also provides a detailed description of a totalitarian
regime with a centralized economy, which seemingly acting for
the welfare of the people, ultimately enslaves them.
As the Bible tells us, Joseph foresaw seven years of abundance
followed by seven years of famine. Following Joseph's advice,
the excess crops produced during the seven years of abundance,
were gathered by government, thus saving the Egyptian people
from starvation during the subsequent seven years of shortage.
The famine also affected Canaan, causing Joseph's father and
brothers to move to Egypt, where they were heartily received,
and settled in the land of Goshen (Genesis chapters 41, to 47).
This government intervention in Egyptian economy has a sad
epilogue revealed in verses 13 to 25 of Chapter 47: The
Egyptians became slaves of Pharaoh, who "moved them into the
cities, from one end of the borders of Egypt to the other end"
(Genesis 47, 21) (3).
It is worthwhile noticing that these versicles have very little
to do with the Jewish people's history, hence they are somewhat
outside of the main narrative line of the Bible. Furthermore,
they destroy Joseph's image as a wise ruler, which seems to be
opposed to the general tendency of the story. Therefore, one
cannot escape the feeling that they are present as a warning of the
danger implied in even the best intentioned government
intervention in economy, which is in accordance with the
(classical) liberal tendency of the Bible.
Philosophical debates on the issue of common versus private
ownership are found in the Greek classics. In Plato's book "The
Republic", Socrates argues in favor of totally common ownership,
including sharing of women and children: "Yes; and where there
is no common but only private feeling a State is disorganized
--when you have one half of the world triumphing and the other
plunged in grief at the same events happening to the city or the
citizens?".. "Such differences commonly originate in a
disagreement about the use of the terms 'mine' and 'not mine,'
'his' and 'not his.'" (Plato, "The Republic", Book V:215).
"..the possession of women and the procreation of children,
which will all follow the general principle that friends have
all things in common, as the proverb says."(O.c., Book 4:58).
Socrates is, therefore, a precursor of Karl Marx and other
totalitarian ideologists that imagine a different society, and
believe they are capable of changing God's creation by decree.
Liberal thinking, in contrast, sees legislators function as
searching for the laws of society, as physicists do it for
nature's laws. "Fatal is the illusion which legislators fall
into when they pretend their talent and desire can change the
nature of things or supplant nature by sanctioning and decreeing
creations" (Bernardino Rivadavia, first president of Argentina,
1826 -- Cited in "The Bases", pag. 86, of Juan Bautista Alberdi.
The latter was the most outstanding Argentinian liberal
ideologist.) Note that these prophetic words were said over
twenty years before the appearance of Karl Marx's "The Communist
Manifesto" (1848).
This liberal attitude regarding legislator's function has been
misunderstood, leading to the false idea that liberals are
conservative-minded individuals who oppose all change. On the
contrary, liberals have always had a clear idea of the desired
characteristics of man and society, and liberal ideas have
deeply transformed the world. The main difference between
Liberalism and Totalitarianism, resides in the partition of
functions between government and people. "A people having
sovereign power should do for itself all it can do well, and
what it cannot do well, it must do through its ministers" ("The
Spirit of the Laws", 1, 2, 2, (1748), Charles Louis de Secondat
Baron the Montesquieu (1689-1755).) In accordance with this
liberal principle, transformation of society should be carried
out by the people, and not by government decrees. Indeed, the
liberal revolution, which generated far reaching changes in
society, was more an outcome of the authorities' abstention than
of their intervention.
Aristotle, in contrast, was a precursor of Adam Smith in
economics, and of Montesquieu in politics. In Aristotle's book
"Politics", II, V, we read: "Property should be in a certain
sense common (4), but, as a general rule, private; for, when
everyone has a distinct interest, men will not complain of one
another, and they will make more progress, because everyone will
be attending to his own business."
In modern ages, before Adam Smith, economics closely resembled
medieval alchemy. Like alchemists, who were looking for the
philosopher's stone that could turn ordinary metals into gold,
economists focuses on searching for the unique source of the
wealth and prosperity of nations. Mercantilism, which prevailed
during the 17th and part of the 18th centuries, equated bullion
reserves with the wealth of the nations. It advocated,
therefore, government restriction of imports and promotion of
exports. Traces of this perspective are reflected in the
increased customs taxes and export subsidies during the last
half of the 19th and the beginning of the 20th centuries.
In the bloody first half of the 20th century, these restrictions
on free international trade granted privileged access to raw
material and markets, to those European nations that owned large
colonies such as England and France. It was no doubt, a
short-term economic advantage for these European nations, to the
detriment of others less favored with colonial possessions, such
as Germany and Italy. This inequality was probably one of the
causes of the two world wars. How unfortunate that tens of
millions men needed to die in order to convince the world to
renounce colonialism and to return to the international
free-market.
In the 18th century, the French economist Francois Quesnay
(1694-1774) founded a new school of economists, the physiocrats.
He maintained that agriculture is the unique source of wealth,
since it creates new material, whereas industry and commerce
only transform and distribute them. It seems that the
physiocrats grew out of an atavistic reminiscence of the
primeval human experience, when passing from the recollection of
fruits to their cultivation. This cultural revolution has
certainly had a lasting influence, which is currently evidenced
in differential status of agriculture vis-a-vis other economic
fields. It is perhaps one of the causes that agriculture is the
most subsidized economic activities in Western world.
It was against this prescientific background that Smith's
scientific work appeared, and established the fundamentals of
modern economics. The attempt to examine the unique cause of
a nation's wealth, which characterized Smith's predecessors, was
replaced by rational analysis of free-economy's complexity. The
latter is characterized as possessing internal regulating
mechanisms that make it the most appropriate means of providing
for the people's welfare. It also suits human nature, and even
human selfishness contributes to general welfare and prosperity.
After more than two centuries, Smith's work, like Newton's and
Lavoisier's in physics and chemistry, continues serving as the
basis for current political economy.
Adam Smith's assertion that human selfishness also contributes
to general welfare through the mechanism of free-market
competitiveness, has been misunderstood by some detractors of
Liberalism. It was been argued that Liberalism promotes
anti-social behavior and lack of concern for the poor. Nothing
could be farther from liberal ideology than this fallacy. The
fact is that human nature is not simple. Every individual
possesses a complex set of contradictory qualities such as
selfishness and altruism, in varying proportions. Capitalists
are neither more egocentric nor more generous than workers, and
liberals are no less concerned than socialists with the
disadvantaged strata of society. Most of classical liberals were
from a religious background. This motivated them to consider all
human possessions, including one's own body, as a temporary
deposit by God, which must be administered according to God's
will. According to this liberal approach, capital is a source of
power that should be used by capitalists, just as political
power should be used by politicians, for the benefit of society.
No politician is completely devoid of personal ambition, and
most capitalists act with some degree of idealism.
Nearly one century after the publication of Adam Smith's book,
Karl Marx (1818-83) published "The Capital" (1867), in which
"scientific socialism" is offered as an alternative to
free-economy theory. Marx's main claim was that surplus value,
i.e., the excess of price over cost, is actually what
capitalists steal from workers. Private ownership of the means
of production is the cause as well as the result of this
robbery, constituting a vicious cycle that perpetuates
exploitation and misery of the working class. Therefore, in
order to create a more just society, social ownership must
replace private enterprise. Nevertheless, Marx acknowledges that
surplus value will also be required in a socialized economy, in
order to allow for development of new factories. What Marx fails
to explain is why government employees would handle surplus
value more efficiently than capitalists. Today, after the
universal collapse of the Marxist regimes, the hundreds of
millions of violent deaths and subjugation of people in the
process of imposing them, and the aftermath of misery, crime,
prostitution and ecological disaster left behind them, Marx's
fallacies have become self-evident.
Today the liberal economy confronts a less "scientific" and more
instinctive, or perhaps demagogic, adversary. We will call it
the "dog's curve thinking", i.e., an instinctive way of thinking
similar to the path followed by a dog when running after prey.
Let's assume a dog that pursuing a rabbit, runs at any time
toward the place where the rabbit is. Given the path of the
rabbit, the place where the dog was at the beginning of the
pursuit, and the respective velocities of each animal, it is a
known exercise for students of calculus to find the path
followed by the dog. The instinctive behavior of dogs differs
from the more rational behavior of a military pilot who, when
intercepting an enemy aircraft, flies toward a point ahead of
the enemy's current position.
There are numerous examples of dog's curve thinking on
economical issues: One of them is in the very basis of the
Marxist "scientific" socialism. Contrasting the wealth of
capitalists with the misery of workers in the 19th century, it
was clear, according to dog's logic, that transferring ownership
of factories from capitalists to workers will improve the fate
of the latter. Universal experience has shown the catastrophic
outcome of this "scientific-dog's thinking".
As a contemporary example of "dog's logic" there is the
assumption that it is possible to favor the poor by subsidizing
products by means of money taken from the rich. The fallacy in
this case is double. On the one hand subsiding disturbs the
competitive process, and hence retards the improvement of tools
and means of production, which is the only real way to increase
the purchasing power of salaries. On the other hand, there is
no chance that it would reduce the living standard of the rich. In
practice, the money is taken from the part of capital gains that
would otherwise be diverted to the creation of new jobs and
improvement of means of production. Therefore, this populist policy
retards the raising of the living standard of the masses, and
increases unemployment.
Other examples of "dog's logic" are: imposing taxes on imports
and subsidizing exports in order to preserve local jobs;
increasing salaries at the expense of capital gain; etc.. In
practice, all of these measures contradict their intended
purpose. The fallacy inherent in some of these examples of "dog's
logic" will be clarified in the following sections.
FREE-MARKET ECONOMY
Economics is currently divided into "macro- and
micro-economics". Macro-economics deals with the laws governing
the economy of states as a whole, while micro-economics deals
with the economic behavior of individuals, firms or specific
branches. This primer deals only with macro-economics, known as
"political economy" until the 1930's.
The laws of macro-economics are statistical in nature, i.e.,
they only establish relations between average values, and say
nothing about individual cases. They are similar to the laws of
statistical physics, e.g., the laws of ideal gases, which
establish the relation between temperature and molecular average
velocity, but reveal nothing about the velocity of any given
molecule.
Statistical physics deals with the laws of "ideal gases", rather
than those of "real gases", since the behavior of the latter is
too complicated to deal with, and the results obtained after the
simplification involved in their idealization are approximated
enough for practical purposes. The same principle can be applied
to the laws of macro-economics. Even though these laws are
assumed to be exact for "ideal societies", they provide useful
insight into real societies.
This chapter is based on the ideas espoused by economists of the
18th and 19th centuries, whose prominent representatives where
Adam Smith, Jean Baptist Say (1767-1832), author of "A Treatise
on Political Economy" (1803), David Ricardo (1772-1823),
"Principles of Political Economy and Taxation" (1817), and John
Stuart Mill (1806-73), "Principles of Political Economy" (1848).
In the next chapter later contributions as those of John Maynard
Keynes (1883-1946), "General Theory of Employment, Interest and
Money" (1936), and Milton Friedman, "A Theory of the Consumption
Function" (1957), will be considered.
The following sections deal with laws that establish relations
between the average values of salaries, prices and profits. In
order to determine these relations, let's assume an idealized
society characterized by a totally free competitiveness in a
quasi-static isolated market of great dimensions. The
competitiveness must be free of external and internal
disturbances such as government and monopolist constraints.
Isolated market means that there is no interaction with any
external market, although many free-interacting free-markets may
combine to form one isolated unity. The number of people and
enterprises in each sector must be large enough to allow for
reliable statistical results. It must also exist, with all its
sectors, for a long enough period to reach a quasi-static state,
i.e., a state in which the changes are slow enough to allow for
passage from a static state to another static state, similar to
the series of static pictures that make up a film. These
conditions are similar to the ones required for a gas to be
considered an ideal gas. However, no society meets all of these
requirements, as there is no ideal gas. Nevertheless, the
conclusions reached when considering such idealized gas or
society are useful for understanding real ones.
* Supply-Demand Law
Everyone has heard about the law of supply and demand, which
determines prices in a free-market. When demand exceeds supply,
prices rise. When supply exceeds demand, prices drop. When the
demand for a given product exceeds its supply, the rise in price
stimulates its production and thereby increases the supply. At
the same time the high price discourages potential buyers, the
demand decreases and the price drops. Ultimately, a balance is
achieved between supply and demand, stabilizing the price of the
merchandise.
The above supply versus demand mechanism is right, but there is
more to the story. In order to understand the behavior of
free-market, three additional concepts must be introduced:
marginal cost, relative efficiency, and surplus value.
* Marginal Cost
From here on, unless specified otherwise, the word "production"
refers to the entire process, including transport and marketing,
from raw material to the delivery of the finished product to the
user. "Factory" refers to all intermediate agents between raw
material as it is provided by nature and the final consumer. For
simplicity's sake, taxes and subsidies (negative taxes) will
generally be omitted when considering prices (P), salaries and
gains.
The following classic example explains marginal cost:
Let us assume that corn is produced at its lowest cost per pound
in a given geographic area, and that as one moves away from that
area, corn crop per acre decreases and its cost of production
rises. A high market price of corn provides an incentive for
farmers to grow it in the regions where its production cost is
lower than its current price. The resulting increase in supply
will reduce corn's price, leaving farmers in a marginal area
without profits. This mutual regulation mechanism between corn
market price and the radius of its cultivation area, tends to
maintain the latter within the marginal region where cost
statistically equals price (P). The production cost that equals
the market price will be named "marginal cost" (M). Therefore,
P=M is an identity,(5) independently of the actual existence or
not of such a farmer that grows corn at its marginal cost.
In practice, production cost is more influenced by variable
means and systems of production, than by fixed geographic
factors. Free-market competitiveness leads to a continuous
seeking of more efficient tools and techniques, which in turn
reduce prices. Consequently, enterprises that fail to maintain
production cost below the continuously lowering marginal cost
are pushed out of the market.
* Relative Efficiency
Relative efficiency (RE) is the difference between marginal
cost, and cost of producing a product (C) in a given factory,
i.e., RE=M-C=P-C. Hence, RE varies from one factory to another
and is the source of capital profits. Enterprises that produce
at the highest relative efficiency, i.e., at the lowest
production cost, tend to increase their profits by price
reduction and consequent sales increases.
Therefore, the presence of factories with varied relative
efficiency in a competitive market causes a continuous decline
in prices, and forces the least efficient enterprises to either
improve their efficiency or disappear from the market. Thus,
relative efficiency leads to a continuous searching for new
methods and products, with the consequent reduction of costs and
prices, improvement of salary/prices ratio, and a raise in
workers' standard of living.
As an example of this process, let's examine changes in bread
production from the beginning of the industrial revolution to
the present. Bread production begins with repeated plowing and
raking of the soil until it is ready for sowing. For thousands
of years, from time man moved from gathering to cultivating
food, up to the 19th century, plowing was done with one-colter
plow, drawn by an ox, a horse, or a donkey, sometimes together
with farmer's wife. Afterwards, the wheat seed was sown and
scattered by hand. Superficial plowing, irregular seed
distribution, low seed quality, and lack of efficient resources
to counteract pests and weeds yielded very poor crops at best,
if they were not completely destroyed by drought or locust.
The hardest task, however, was gathering the crops by reaping
the wheat spikes with a sickle or scythe, binding the spikes in
sheaves, and carrying the sheaves to the threshing floor. Then
the wheat grains were separated from the straw and the chaff by
beating with a flail or by trampling on it. Afterwards, the
straw and chaff were removed from the grain by the wind, through
continuous flinging in the air with pitchforks. Finally, the
grain was sacked and carried to the windmill to be milled into
flour, and the flour was kneaded by hand and baked.
This meager pound of bread, which required an investment of so
many man-hours, was had to be shared with the workhorse, with
the smith who made and repaired the work tools, as well as with
many other material or spiritual service providers, the
government, and the landowner (6). It is not surprising,
therefore, that the remaining bread could not provide sufficient
sustenance for the farmer's family. Many children died when the
birth of a new baby weaned and forced them to share the scarce
bread with their older and stronger siblings. Hence, despite the
high birth rate, an average of nearly two children per family
survived to adulthood.
Furthermore, the large amount of manpower required for food
production prevented the development of other areas of economic
activity, and created an agricultural mono-economy. As a result,
temporary adverse climatic conditions and agricultural plagues
caused famines, which had catastrophic consequences. These
factors, together with the primitive state of medicine, whose
accelerated development began simultaneously to the expansion of
liberal ideas in the 19th century, explain why the world
population remained quasi-static for thousands of years.
The industrial revolution replaced the one-share plow,
hand-forged by the town's smith and drawn by a horse, with the
multiple-share plow, manufactured by a metallurgic factory and
pulled by a tractor. Today, deeper and more effective plowing is
carried out by one man, who comfortably sits protected from sun
and rain, and does the work that once required the effort of
nearly thirty men. Concomitantly, the improved quality of seed,
and effective means of counteracting plagues and weeds, have led
to a multiple increase in the yield of crops per acre. Finally,
gathering, the once complex and difficult operation described
above, is presently carried out by the harvester, a machine with
long blades that simultaneously reaps the wheat spikes,
separates the grains from the straw and chaff, and puts them in
sacks. Today, only one or two men are needed to gathering tens
of acres of wheat -- one at the steering wheel, and the other
controlling the correct functioning of the whole process.
The decrease in the amount of manpower required for food
production increased the salary/food-price ratio, increasing the
worker's buying power, and enabling them to purchase new
products. This new buying power, which equals the salaries of
the workers displaced from agriculture combined with the
associate landowner profits, provides for the salaries and
profits in the industries that supply the new merchandise. This
is an example of the internal equilibrating forces operating in
free-market -- the new tools that cause unemployment, they also
free acquisition power, which in turn creates new jobs for the
displaced workers (7).
* Surplus Value
Surplus value (SV), an expression coined by Marx, expresses the
difference between market price and cost of production. Given
the quantitative equivalence of marginal cost and market price,
surplus value and relative efficiency are also quantitatively
equivalent, i.e., SV=P-C=M-C=RE. Whereas "relative efficiency"
refers to improvement of methods and tools, which ultimately
results in reduced prices and increased standard of living,
"surplus value" refers to the source of the envy-causing
capitalist gains.
The surplus value that remains after income tax is deducted,
generates new capital, which attempts to find lucrative
investments. Part of it is invested in construction of new
factories in industrial branches with good prospects of profits,
i.e., branches in which there are enterprises marketing with
high surplus values. This results in increased supply and
consequent reduction of price, marginal cost, and surplus value.
Another part of the new capital generated by the surplus value
is reinvested in enhancing the relative efficiency and
consequent gains of the enterprise, through development of new
merchandise and methods of production, which ultimately results
in lower prices and new commodities. Therefore, part of the
surplus value makes more commodities accessible to more people,
and will be referred to henceforth as the "positive part" or
"part A". Of these new commodities, two categories deserve
special mention on light of their transcendental social
relevance: medicines, and new tools for agriculture and other
food industries.
There are two other less positive but unavoidable components of
surplus value. The first, which will be named "B", is wasted in
faulty investments. Although capitalists aim toward complete
success in their investments, some inevitable fail and result in
capital loss. The amount of this loss is an inverse function of
the capacity and personal involvement of the decision-makers.
Finally, another component of surplus value, which will be
referred to as "C", is enjoyed by capitalists and their families
and allows them a standard of living above to that of the
majority of the population. Thus, the prospects for a high
standard of living in capitalist societies stimulates the youth
to risk the instability and danger associated with
entrepreneurship. This component of surplus value, which
capitalists and their families enjoy, may be seen as the wage
for their work in enterprise management and investment planning.
Furthermore, the continuous increase in the salary/prices ratio
enables workers to put aside an increasing proportion of their
salary for future use. This workers' saving is directly or
indirectly invested in industry and commerce through shares or
bank deposits. As a result, an increasing portion of surplus
value returns to the workers in the form of dividends or
interests.
The sum of parts "B" and "C" will be referred as the negative
part of surplus value. The relation between the positive and
negative parts of the surplus value, i.e., A/B+C, is one of the
discriminant factors for evaluating any economic system. As Karl
Marx pointed out, surplus value is not limited to capitalist
economy, but is also necessary as a source of new jobs and
merchandise in a socialist regime.
The differences between surplus-value in capitalist and
socialist regimes can be described as follows:
1) In socialists regimes, the element of competitiveness is
eliminated, and salaries and prices are determined by
bureaucratic decision. Hence, surplus value is no longer the
result of relative efficiency, i.e., of the constant improvement
of means and methods of production that entails reduction of
prices and rising of the living standard of the people. Hence,
the standard of living of the population in a socialist society
remains lower that it would have been in a capitalist regime.
2) The decision-makers in socialist regimes are bureaucratic
employees with less personal involvement and incentive than
their capitalist counterpart, which increases the possibility of
wrong decisions, i.e., the negative part "B" of surplus value.
3) Part "C", i.e., the part of surplus value that benefits
capitalists and their families, is now replaced by salaries and
bribery of a hypertrophic bureaucracy.
4) As a dubious compensation, factories constructed by means of
surplus value are now bookkeeping as pertaining to the people.
In sum, in a free-market economy, relative efficiency and
surplus value are two sides of the same coin. Though
conceptually different, they are mathematically equivalent and
measured by the difference between price and cost of production.
Each one generates the other, and both together raise the living
standard of the masses, by lowering costs and prices, and by
developing medicines, tools, and commodities. Although factories
established out of surplus value resources, are officially owned
by capitalists, they are a social asset that benefits the entire
population. In practice, capitalists are the administrators of
surplus value in charge of investing it in the most efficient
way. From an economic point of view, only part "C" of surplus
value, which is used for the personal benefit of business owners
and their families, is the capitalists' share of the collective
wealth.
* Saving and Investment
In every society manpower is divided into two categories --
workers that produce merchandise for current consumption, and
those that lay thegroundwork for future production. For example,
one group produces food, clothing, etc., while others build new
factories, or seek new tools and commodities. The aggregate
labor of the latter constitutes the "social saving or
investment", which is present in even the most primitive
societies, e.g., preparing of soil for future cultivation, or
planting of trees that will bear fruit in the future. From an
economic point of view, saving and investment are equivalent
concepts, which imply that those who produce merchandise for
current consumption must share it with those who are preparing
future production. They represent, therefore, a collective
renouncement to some consumption in the present, for the sake of
more or better consumption in the future.
In modern society the concepts of saving and investment are
complicated somehow by financial and bookkeeping considerations,
and although they are no longer identical, their equality
reflect a sound economy. In financial terms, saving is defined
as the difference between disposable income, i.e., salaries and
profits after income tax deduction, and consumption expenditure.
It is therefore equal to part A+B of surplus value plus the
aggregate sum put aside by workers for contingent or planned
future use, whereas investment is defined as current expenditure
for the purpose of future consumption production. Saving is the
main but not the sole financial source of investment. Taxes are
also partially invested in infrastructure or in government
enterprises, and, in a non-isolated market, foreign investment
must be considered. The line separating consumption and
investment expenditures is also not always clearly defined, as
there are gray areas such as housing construction and education.
In the present context it will simply be assumed that taxes are
the payment for government services, and they will be considered
part of consumption. Neither foreign investment nor national
investment in foreign markets will be considered, as we are
dealing with the economy of isolated markets.
Saving and investment may differ because the decisions in each
of those areas are taken by different people. Whereas savers are
entrepreneurs as well as workers, investors only are
entrepreneurs. It is therefore possible that enterprisers may
not be eager to use all disposable savings, or savers may prefer
alternative ways of preserving their money, without putting it
at disposal of entrepreneurs. Both cases result in savings that
are unproductively invested in cash, precious stones and metals,
or speculative acquisitions of stocks and real state. Investment
in the stock exchange is economically positive, since it
facilitates financing of investment by means of issuing new
stocks. Also residential construction enterprises are in need of
buyers like any other productive activity. However, the mere
transfer of shares and real state from one hand to the other
does not fit to the definition of investment as current
expenditure for the sake of future consumption production.
Furthermore, speculative saving in shares and real state causes
an artificial rise in prices over real values, and creates a
dangerously unstable economic situation which has been referred
to as a "financial bubble". It creates a false illusion of
wealth, which may reduce savings and increase consumption. As a
result, the equilibrium between consumption and investment
supplies and their respective demands is broken. The excess of
demand over supply for consumption products results in
inflation, whereas the excess of supply over demand for
investment products may result in dismissal of investment
workers. If this process is slow, workers move from investment
to consumption industries, and the market simply passes from one
state of equilibrium to another, with a different distribution
of consumption and investment expenditures. However if the
process is rapid there may be a notorious lag between workers
discharge from one sector and their absorption in the other,
because the latter may require creation of new jobs and new
investments, and a general recession may ensue. Inflation of
stocks and real estate values has preceded major economic
crises, such as the recession in the 1930's, and the recent real
estate crisis in Japan that undermined the stability of Japanese
banks.
The main causes for saving-investment disequilibrium are adverse
political conditions that discourage enterprisers from
confronting the risks inherent in promotion of new enterprises.
These adverse political conditions are generally: political
instability, high income taxes, excessive government
intervention, bureaucracy, and labor legislature. It was only
after the rise of the "laissez faire laissez passer" liberal
doctrine, that wealth became capital, i.e., enterprise replaced
cash, real state and precious metals as the preferred way of
accumulating wealth. For centuries, savings in the form of goods
that can be easily realized or transported was an understandable
precaution against political instability and totalitarian
regimes.
Government intervention as a forced partner in administration of
gains but not in losses is a strong deterrent against
investment. Furthermore, the wealthier the taxpayers, less their
standard of living is affected by taxes. Hence, the demagogic
justification of income tax as taking from the rich and giving
to the poor, is incorrect. In practice tax revenue is derived
from investment, which delays job creation and increase in the
living standard of the masses. Economy is like a system of
linked tubes with the thin ones above and the thick below. No
matter where the water comes out, the thin tubes are always
emptied.
In terms of bookkeeping, factories established by saving
investment in free-marked economies are formally owned by
capitalists, and in an increasing share by workers who invest
their savings in stocks. Whereas, in a socialist regimes the
assets are registered in the name of government. In practice,
however, the only difference is the party responsible for
administration of social savings. From a social perspective, all
that matter is how efficiently savings achieve the goal of
improving the salary/prices ratio, creating new jobs, and making
more commodities accessible to more people.
-*-*-
NOTES:
(1) Nissani N., and Leibowitz E., "Experimental Facts and
Gravitational Energy in General Relativity". International
Journal of Theoretical Physics, Vol.31, No. 12, Pg. 2065, (1992)
Abstract:
It is shown that there are coordinate systems in curved
space-time wherein energy-momentum is globally conserved. These
coordinates share the experimental features of the inertial
frames of flat space. The falling of matter in a spherical
symmetry gravitational field is studied on the light of the
energy-momentum conservation valid in these coordinates. A
recently proposed tensorial expression for the gravitational
energy-momentum is used.
(2) Joseph Priestley (1733-1804) was also one of the founders of
modern Liberalism in the areas of religion and education, where
he opposed all government intervention. Among other political
philosophic works, he is the author of "An Essay on the First
Principles of Government and of the Nature of Political, Civil,
and Religious Liberty" (1771).
(3) The New King James version of the Bible translates the
Hebrew word "avadim" as "servants", while other translations use
the term "virtual slaves". It seems that "slaves" is a more
accurate translation of the Hebrew expression and fits the
context better. E.g., verse 23 says: "Indeed I have bought you
and your land this day for Pharaoh".
(4) Aristotle refers to the state, the army and such as "common
property". Hence, this expression should not be understood as
supporting what is currently referred to as mixed economy.
(5) The existence of pairs of quantities that are conceptually
different but quantitatively equal is a characteristic of
economics.
(6) Beyond a doubt the landowner is the more questionable
participant from the farmer's bread. While other forms of
ownership are warranted by the natural right of possessing the
product of one's effort, landownership is rooted in a primal act
of violence and usurpation. Furthermore, other ownership of any
other means of production, such as factories, requires constant
initiative, investment, management, and other issues which do
not concern the landowner.
Liberals have always been concerned with this dubious aspect of
private ownership. The Bible, which is the eldest source of
liberalism, prevents latifundio by establishing that land cannot
be sold forever, and that every fifty years, in the jubilee, all
land should be returned to its original owner. In modern times,
some liberals have supported agrarian reform, i.e., that land
must be possessed by whoever cultivates it. The problem with
agrarian reform lies in the fact that it is based in the notion
of economic unity, i.e., the amount of land that can be
cultivated by an ordinary farmer family. Extension of economic
unity is a function of the means of production, which have been
rapidly changing since the beginning of the industrial
revolution. What was once a satisfactory land unit, soon could
not sustain a farmer's family. Hence, the partition of land into
economic unities resulted in unexploited fertile extensions, and
transformed agriculture into an economic branch that was not
self-sustaining and required subsidies.
(7) The accuracy of this reasoning, and any other rationale that
includes economic equilibrium, is contingent on the assumption
that we only are concerned with quasi-static states. When sudden
and massive unemployment ensues, it is necessary to consider the
decline of acquisition power of the unemployed workers, and the
reacting time of each step of the economic process.
Furthermore, the transition of displaced workers from
agriculture to industry requires available capital needed to
establish new industries, as well as political and social
environment that encourages capitalists to risk investing their
money in new enterprises. It seems that the absence of one or
both conditions would explain why the industrial revolution did
not occur in the Third World.