Capital and Capital

Two Distinct Concepts under One Word

Thinking about the Civil War, I was working a concept over in my head. I believe that, though there is some question as to whether or not Slavery was the principle issue motivating those fighting the Civil War, it is most certainly the reason the South lost. The reason for this, is "Slavery ties up capital in the purchasing of labor, which would be available with or without the institution of slavery." Then I reformulated it, "Capital was tied up in the purchasing of things which are not Capital." I suddenly realized, that there are two concepts in play here, which are related, but not the same, yet they are both referred to by the same word: "Capital."

In one usage, Capital refers to wealth (the outcome of a previous productive cycle) which, rather than being consumed, becomes an input into the next productive cycle, whether as seed, inventory, tools and machinery, extra consumer goods (which free up labor to produce more capital), or even simply insurance against unexpected costs or losses. In this sense, Capital is simply one of the three classical Factors of Production, alongside Labor and Land.

However, in another usage, Capital refers simply to accumulated funds. This concept is related to the previous usage, because before someone can purchase additional capital goods in a money based market economy, the funds necessary to purchase them must first be accumulated. One who decides to save money rather than living check-to-check thus gains additional influence over the production structure, as the entrepreneur who most successfully anticipates his needs is the entrepreneur that is rewarded. Thus, people tend to refer to accumulated funds as "Capital", as well.

Thus, Capital and Capital are not the same thing. One use represents an accumulated claim on anything that may be bought or sold. The other represents an earlier phase's output that becomes a later phase's input. They are similar, but not the same. This accounts for the rather large gulf with regard to the accepted meaning of the word "Capitalism."

Simply put, when a person buys something, it's because he wants control over it. Whether it be a capital good, a consumer good, a slave, or a plot of land, what the buyer buys is the right of exclusive control over the object. It just happens to be a happy accident that, in purchasing a consumer good, he provides employment to his fellow man, and in purchasing a capital good, he both provides employment and creates opportunities for others. This is the nature of Adam Smith's “invisible hand”, that in pursuing his own interests, a man quite unintentionally benefits society.

However, it is not the same thing, for accumulated funds may be used to purchase anything society allows to be bought and sold. It can be used to purchase capital goods, but it can also be used to purchase other things. It can be used to purchase more expensive consumer goods (a big house, a nice car, a boat, etc.), thus turning the productive structure toward the production of these sorts of things. It can be used to purchase political influence, through the support of political campaigns or perhaps direct bribes. If the society permits Slavery, it can be used to purchase a slave, which because this can enhance the purchaser's revenue stream as surely as a wise investment in capital goods, can be miscategorized as a kind of "capital investment". He could also purchase land—physical space, that is.

These accumulated funds are a sort of potential power, a kind of authority. If it is invested in the right capital goods, society benefits from access to desired consumer goods (or more and better capital goods) at lower prices than would otherwise exist. If it is spent on durable consumer goods, society does not benefit... but if the buyer earned this money honestly, in service to the consumer, society benefited earlier, and this is the producer's proper reward. Even the employment of publicists and advertisers in service to a political cause creates something where it did not previously exist... though the benefit is questionable. But then there is another kind of purchase, the spending of these accumulated funds on things which are neither capital nor consumer goods.

For some, it refers simply to a complex of law and custom that respects property rights, allows free trade, and encourages the accumulation of wealth for the purpose of creating more wealth. This is as opposed to a system under which others have claims on the individual's wealth, such as the State, the Poor, the Family, the Sick, the robber down the road, or whoever. Any accumulation of wealth is nothing more than an attractant to these others who come to claim "their rightful share" (a bit like how lost relatives are suddenly found when someone wins the lottery), thus people decline to accumulate wealth, thus capital does not develop, thus society remains in constant poverty.

But the other definition of the word "Capitalism" refers to a society in which lawful authority to dominate other men by violence and threats of violence is up for sale. The Ruling Class is determined not by military prowess, nor by dynastic inheritance, nor by religiously derived authority, nor by any other principle. The Ruling Class is composed of those who are able to, first, accumulate capital, and second, leverage that capital into political influence, among other things. Whatever form of power is up for lawful sale opens the door for the first kind of Capitalism to become this kind of Capitalism.

Land and Labor

For example, it could be used to purchase a slave. The purchase of a slave does not reward the bringing into existence of wealth that would not otherwise exist. People will reproduce, whether or not they are locked in a shed for “breeding” purposes, and so long as work is necessary to eat, they will work. Slaves need not be purchased to bring labor into existence. Even in the early days of the Virginia colony, when planters continually complained about a shortage of labor, it wasn't actually labor that was short, but rather laborers who, in a place where land was cheap and plentiful, were willing to work at the planters' preferred rates, when self-employment remained a better option. Thus, a pool of unwilling laborers was bought.

Similarly, with a land purchase, nothing is brought into existence by the seller. Outside the realm of ancient holy texts, there is no “producer” of physical space. With both slaves and land, accumulated funds, “Capital” as people call it, is wasted on something that would be there whether or not someone was around to buy it. The land's existence predates Man's. In both cases, “Capital” is wasted. So why do people spend money on these things?

However, that does not mean that our institutions of property should not be periodically reexamined, for there are things a man can buy that offer no benefit to society, outside efficient allocation of these resources, which can be achieved without permitting these things to be capitalized on an open market. Labor is one of those things. When a man buys a slave, he rewards only violence—the enslavement of other men—and is not creating labor, but only increasing his own power at the expense of others. Today, we do not allow labor to be capitalized; rather, all labor is rented from its proper, inalienable owner: the laborer itself. This allows efficient allocation on the market without dispossessing men of their birthright: liberty.

Likewise, with land, the buyer does not reward any kind of producer, but rather yet more violence—that of the conqueror. I do not believe there has ever been a spot on this earth that was homesteaded into our property system; rather, all land was made property through the violent removal of other men from that land. Efficient allocation of land does not require that the land be capitalized any more than the efficient allocation of labor does. Rather, we need simply to identify a proper, inalienable owner for the land, as well, and allow it to be rented, rather than sold outright, just as we do with labor.

In the absence of such a being, if we believe in the democratic ideal that all men are created equal and endowed by their creator with certain inalienable rights, particularly Life, then the proper nature of a land regime naturally follows. If we all have an equal right to live, that means we all have an equal right to exist. To exist, we must have physical space in which to exist. No man can have a greater right to the land than any other. While it is convenient to allow people who are better able to make use of the land greater control over the land, it does not necessarily follow that some should be a landholding over-class (however fluid)  while others can be legally deported from reality itself (or at least from solid ground) should the landowners decide they are not wanted. Thus, an equal right to Life implies an equal right to the Land.

Interestingly enough, the former, in the only religiously based land code with which I am familiar, is remarkably similar to the latter. (“You shall not sell the land forever, for you are but wanderers and sojourners  The Land belongs to God.”). In that system, the land was divided evenly among tribes, clans, and families. People could sell their land to others (allowing for efficient market allocation of land), but only temporarily. Every fifty years, land ownership was reset to their ancestral titles, and even before those fifty years were up, the original, inalienable owner had the right to reclaim his land in exchange for the prorated value of the remaining years of ownership.

Clearly, such a system is not workable in the present-day United States. We have no ancestral titles to restore. This does not, however, mean that the basic principle of a basic human right of equal access to the land should be abandoned in favor of a capitalist allocation of land, which I see as being morally equivalent to capitalist allocation of labor (Slavery). To implement an equal right to land is to implement a “social safety net” of sorts, rooted in nature, lacking the moral hazard intrinsic to the means tested programs currently used to alleviate poverty.

EDIT: Years later, this entry is an absolute mess. Did I mess up in my editing, or did something somehow happen to the files?

British Petroleum

Just some thoughts I had as I listened to the various radio stories on the big British Petroleum oil spill in the Gulf of Mexico.

There are a number of questions being asked in the media about this spill. Was it preventable? If so, whose fault was it? Does BP generally have a corporate culture that doesn't do preventative maintenance, a "fix it as it breaks" culture as one investigator in an earlier spill in Alaska put it? Is it the fault of bean counters at the top discouraging "unnecessary" maintenance? Is it the fault of lazy people closer to the problem? Is it BP's fault, or that of the subcontractor that operates the rig... or that of the manufacturer that made some crucial part? Or is it nobody's fault, they did everything they could, and it was really just an accident? Is deep water drilling just too risky? Should it even be allowed?

In my opinion, while the answers to all these questions are interesting, they are also irrelevant to anyone who is not in the business of offshore oil drilling. For no matter what the human contributions to the situation are, the solution is the same, in my opinion: make BP pay for ALL the damages caused by the incident, and for ALL cleanup efforts they are not directly engaged in, and if that bankrupts them, so be it.

If the spill is genuinely their fault, this is a no-brainer. Clearly, an organization responsible for a deep water oil rig takes on an enormous trust, and if they violated that trust by not doing everything they could to prevent such a spill, I think losing the business is getting off light, considering the magnitude of the disaster. A bankruptcy sale would result in the transfer of many such operations out of the hands of an organization that, in the event they're just not doing proper maintenance, clearly cannot be trusted at that level, and into the hands of other organizations that deserve a chance to prove themselves in exchange for some help reimbursing those affected by the incident.

Of course, if they can actually afford to pay out and continue doing business, and choose to continue offshore drilling in spite of the payout, clearly the value of the oil is greater than the risks involved.

If it's the fault of a contractor, BP is still the responsible party. If any part of the blame needs to be shifted off to the contractor, BP can do that themselves by suing the contractor, and getting some of the money from them that needs to be paid out to the various wronged parties. BP should not be able to wriggle out of its responsibilities by offering up the contractor as a scapegoat, able to go bankrupt with minimal damage to BP. For even if BP did EVERYTHING "right" from the perspective of the industry...

That only proves that there was one initial decision that turned out to be a very, very bad decision: the decision to drill at that location in the first place. I honestly don't care what the government has to say about it. Just because it's legal, it doesn't make it right, and people, even ginormous multinational corporations, should take responsibility for the consequences of their actions, even the unforeseen ones, even the unforeseeable ones... and if others are caught in those consequences and the responsible party attempts to dodge that responsibility--well, if that isn't a reason for having courts and governments, I don't know what is. We'd be genuinely better off without one, otherwise.

In the end, the bankruptcy of BP would send precisely the message to drillers and potential drillers that needs to be sent. For it is the companies involved in drilling and pumping who have the most direct interest in consulting scientists, engineers, and technicians, along with their accountants and lawyers, to figure out what the actual risks of drilling are relative to potential profits. Are the profits great enough to fund an insurance policy designed to handle just such a possibility while still being genuinely profitable? Was BP just a bad company, or are the risks simply too great, as revealed by this incident? The spill itself changes the information that goes into such considerations. And when justice is done, and done consistently, the consequences to the bottom line and the consequences to society become nearly synonymous... and the firms who will do the business become the most trustworthy assessors of risk.

Either way, the consequences to BP will be evaluated by BP, and by other companies according to the actual knowable facts. If companies don't believe they can get away with taking enormous risks (and this goes for drilling, the financial industry... everything, really), if they can't expect their pet politicians to shield them from the consequences, they WON'T take those risks. Mark my words: the Gulf oil spill and the recent financial crises are directly related to a common root cause.

Because the alternative is to let the politicians make the decision on this. They might consult scientists, engineers and technicians, but regardless of the answers they get from them, they will also be consulting pollsters and campaign strategists. The answer they will come up with will ultimately balance not risks to society (measured in financial risk to the firm in an environment where the courts can be expected to require reinbursement of wronged parties) against benefits to society (measured by how much more than production and risk management consumers are willing and able to pay for their product... demand), but rather which hurts their chances at the polls least: allowing drilling and therefore risking the ire of the environmental movement and the people affected, directly or indirectly; or banning it and losing the rather large financial contributions to their political campaigns oil companies provide.

Most likely (almost definitely, barring a deafening roar from the electorate), they'll try a third option: engage in some ineffective rhetoric, create a new bureaucracy or some new rules that fool people into thinking they are doing something about the problem but don't actually address the problem, and go home laughing.

Honestly, if that's all the government is good for, I'd rather live in a world where there's nobody to stop a more direct form of reprisal by the wronged parties.

The Evils of Capitalism

I swear, I do some of my best work on forums having nothing to do with my best subject. Over on the Off Topic forum of the El Goonish Shive forums (EGS is a webcomic), somebody comes in posting about "Net Neutrality." Someone else posts something about capitalism and the free market being essentially the same thing, and his absolute trust in free markets, as opposed to the other guy's distrust of markets. And this is what falls out of my brain. I'm calling it:

The Evils of Capitalism

And this is where you get it wrong, and lead folks like blort down the wrong road. The Free Market is nothing more than the notion than the notion that society allocates resources best when it does so via an unregulated market. This is true, so far as it goes. But Capitalism is more specific to the current era, and carries with it baggage accumulated thanks to a property regime that, in my opinion, is wrong in places, and results in concentrations of wealth that must, ultimately, turn into concentrations of power via government. Capitalism is its own worst enemy (and Adam Smith himself predicted this very phenomenon): under Capitalism, a John D. Rockefeller can make a fortune providing a plethora of petroleum products for the consumer at prices lower than ever before seen, thus creating opportunities for more innovation and more fortunes, overall a good thing. But then the big money can then turn around and use that fortune to cement his own and his people's position, by acquiring rent collecting opportunities--ramming legislation through that limits potential competitors more than himself is but one of the tools.

Markets are very efficient at property allocation. The question the market cannot answer (except, perhaps, under a condition of total anarchy, and even then the market only provides the evidence; we still must use our own brains to figure out the answers) is "What do we properly regard as property?" For when this is answered incorrectly, the market will show us, with brutal efficiency, why we are wrong... but we ourselves may be so enmeshed in the system we either fail to notice, or even deny the evidence. A perfect historical example is chattel slavery. American slavery was a very different thing from Mediterranean slavery (argument lifted directly from Stanley M. Elkins Slavery).

Mediterranean slavery was a heavily regulated institution, but both church and state watching over the institution with a close eye. It was as humane as slavery could be (which isn't very, but I'm just saying), and there were many opportunities for a slave to be freed. The pressure was toward gradual elimination of slavery, and, like so many other places, when it was finally abolished, the abolition occurred bloodlessly.

Slavery under Capitalism

Contrast the American experience. Under pure Capitalism, a thing is either property, or not property. Further, in the absence of a power system preventing a thing from becoming property (whether it be a substantial religious/philosophical influence, or access to friends and relatives), some people WILL reduce just about anything to property, and gaining by doing so, influence others to do so as well. Thus it was that, while white indentured servants had to be freed at the end of their term, lest word get back to England and Europe the fate waiting for future indentured servants in the Colonies, African servants had no similar defensive power structure, and as such could safely be, and therefore were, reduced to property. And once they were property, the law made few restrictions as to how this "property" might be "used".

But People are Not Property. Reduce them to such, and you reduce both them, and yourself, from personhood. For the slave must carefully avoid thinking, lest he notice his condition and despair, thus robbing the slave (and the public) of the creative potential of a human mind. The slave master, on the other hand, must devote his energies to suppressing rebellion, causing a similar impact on his potential as it does on that of the slave. Additionally, the master must singe, and ultimately burn out, his conscience, in the process of doing so; the more his conscience complains, the more likely he is to invent even more untrue ideologies (ie. racism), distorting his thinking further, and reducing his wealth producing capabilities even more.

Make no mistake: the market, left unrestricted, punishes both master and slave (and I'm not sure which gets it worse, since at least the slave has the benefit of a market value protecting him from excessive levels of cruelty!) for this violation of correct principle... by imprisoning them within this horrible system. For while the generation of slaveholders that first cemented the slave's condition in law doubtless saw benefits, the market quickly devours those benefits by pushing them into asset prices (the purchase price of a slave is higher than that of an indentured servant). Nobody after that point gets to be a free rider; he must pay a price for his slaves at least equal to the benefit the former owner could have gotten from the slave. But why would someone willingly buy into such a system, if it isn't even all that helpful in the long run?

Making Money or Taking Money?

My answer is that the vast majority of people understand accounting far better than they understand economics; or, to put it blort's way, people are greedy. For under capitalism, people follow the money, wherever it may lead. More profits is inherently better, and believed to be so, without reservation, by the layman economist because he imagines the only way to increase profits is to improve productive efficiency. And this is true... IF we're using the definition of "profit" used by economists, which is revenues minus ALL wages, rents, and interest... even the opportunity cost of this operation to the entrepreneur, himself. But most people don't; they instinctively use the accountant's definition. For the accountant, profit is what's left over from revenues once expenses have been paid. Profit equals revenues minus what you have to pay others for.

The difference is crucial, for under the accountant's definition, there are TWO ways to increase profits. Efficiency can be improved, leading to more revenues relative to the factors used; or, more factors can be brought under the ownership of the business owner, thus dropping the opportunity cost of these assets from the balance sheet. For example, if a man rents a storefront, he can increase his profits by making his store better (increasing revenues without increasing the resources used), or taking ownership of the storefront (thus dropping the opportunity cost of the storefront from the balance sheet). If he pays another for his labor (whether weekly, monthly, or for a five-year contract, in the case of indentured servitude), he can increase his profits by increasing the revenues of his operation through greater efficiency, or he can utilize the labor of someone he doesn't have to pay, thus dropping the opportunity cost of labor off the balance sheet.

It is very important to point out that from the economist's perspective, there IS NO PROFIT in either of those second options, the one that involves taking ownership of an asset he previously had to pay someone else for. There is, at best, a revenue neutral transferring of revenues from one person to another... but often, the effect is a net loss. The opportunity cost of a slave is the productive potential of a free man... but that does not matter to the slave master, since his revenues are up as a result of reducing a man to slavery. And if he DID buy his way into the system, while he has realized but small net gains to himself (having to pay the previous master the opportunity cost of giving up a slave), the abolition of slavery wipes his asset book clean. He goes from being a rich man to a poor man overnight... and therefore, though the slaveholders are every bit as held down by the system as the slave himself (witness the explosive economic growth in places were slavery was illegal, relative to that of the slave states), he dare not permit the institution to be abolished, because he is psychologically attached to the asset value of his slaves. It makes him "feel" rich, even though he isn't.

Political consequences of Rent Seeking

What does this have to do with Capitalism as a whole? The fact that while markets are the best way to allocate goods, it is also very efficient at entrenching evils (until such a society is overtaken from without by another society that has not entrenched that evil). People become wealthy by performing valuable services... but then can use that wealth to turn access to their profession into property. A big company may successfully petition the government to grant them a privileged position (generally protection from competitors) in exchange for a share of the loot. A particularly high paying profession may convince the government to erect barriers to entry (through state required licenses, etc.) in exchange for a share of the loot. A large developer might get preferential treatment with regard to the acquisition of land (to the point where municipal governments will deliberately create blighted areas for the purpose of seizing it to sell to a developer), in exchange for a share of the loot. Economist have a term for this sort of behavior: rent seeking. It's the effort to take control of something for purpose of requiring others to pay a toll to access it, whether customer or competitor... a thing they did not create.

And our economy is FULL of these kinds of things. Look at the health care debate, for example. A lot of people are convinced that the current costs are the result of the free market. Strictly speaking, this is true, but that is only because the market monetizes the rent seeking behavior of pretty much every participant in the health care system. Over the past century or so, enormous barriers have been erected against entry into pretty much every aspect of the health care system. There's doctor licensing (which requires far more in the way of expense than is actually necessary to acquire the necessary skill to perform basic services), centralized drug regulation (which big pharma can deal with much more easily than small pharma), tort law (which fails to recognize the inherent risk involved in medical care and medical procedures), preferential regulatory treatment of patented medicines over organic (and therefore unpatentable) alternatives, the insanely expensive nature of the legal system itself (which is, itself, caused by the cartelization of the legal profession), intense "fairness" regulation of health insurance and medical care which has the effect of shifting costs from those who incur them to others, employer health care requirements that have the effect of creating mini-monopolies over the employees of smaller firms, and mini-oligopolies over the employers of larger firms... the list goes far farther than I can even begin to go. At every point of contact, the money spent into the medical system is diverted from actual medical care, to the costs of maintaining, extending, and enjoying all the privileges granted by government... in exchange for a share of the loot.

Rent Seeking in the Communications Industry (Or, the Nexus of All Rent Seeking)

There is rent seeking in the communications industry, as well. Presently, rent seeking behaviors are likely low (in the Internet industry, at any rate), due to the fact that there are still plenty of real capital investments to be made. But when the field ultimately matures, the money that presently goes into laying new lines, sending up satellites, building towers, and such will go more and more into rent seeking behavior: efforts to control the communication system. And government will not merely support it in exchange for a share of the loot: large budget mass democracy creates a market for centralized control of media, the value of which is exactly proportional to the size of the government's budget. Centralized control over the media is the very engine of rent seeking, for everything the government does must pass muster with the electorate. The ability to saturate a market with a particular message, or to deny access to a particular message, has a value that can be measured in dollars, a value that is reaped by those larger companies that have the ability to edge out smaller competitors.

So with regard to Net Neutrality, we're between a rock and a hard place. On the one side, we've got the rent seekers, who will, if able, consolidate control over the medium of communication. On the other side, we've got government types saying they will protect us from the evil corporations (and rent seeking IS evil)... but it's every bit as likely that those very politicians are the tool of the rent seekers. In addition, the politicians AGAINST Net Neutrality might ALSO be the tools of the rent seekers. There are numerous examples throughout American history where BOTH sides of the debate were dominated largely by what we today call "Astroturf". It's entirely possible Net Neutrality is yet another example of that. That's why both sides of that debate scare me.