Productive and Non-productive Uses of Capital

Capital formation by the accumulation of huge wealth by a few has great benefits and great faults. Is there any alternative that might provide the benefits and avoid the faults?

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Of the many uses of capital, this post comments on three. Perhaps they are the most important, and perhaps there are others lying under the surface which are more relevant to the operations of a socio-economic system. But for the time being, here are the three that appear to be most relevant to a Just Deserts economic system and the transition to one from some other form of arrangements.

The first one is the one that is most beneficial. It involves the extraction of produced benefits before they are allocated into consumption uses in order to produce infrastructure and facilities, both of which are essential for building up an economy. Without capital for production, the economy cannot flourish, and might not even be able to survive. There are timing effects. Capital might have to be collected for a period of time before something can be built, providing the building time is short. It might be quite inefficient to try and build something on a pay-as-you-go plan, so in order to cut down inefficiencies, possibly large enough to tilt the project to a negative overall benefit, capital must be collected and stored, and then used over a short time. Some projects might be possible with shorter collection periods and others need longer ones. The variety indicates that there needs to be, in any effective socio-economic system, a means of collecting capital that is protected from the demands of consumers.

The method that has been predominant for the last couple of centuries has been the concept of private ownership. There is no restrictions inherent in this method of protecting capital from consumption that limits the usage of the capital, so there is necessarily a great danger involved in this method. If something is to be done, it appears necessary to come up with alternative means of collecting and more importantly, protecting capital from the demand of consumption, as well as restricting its use to socially beneficial means.

The second use is the one which is most detrimental to a Just Deserts economic system. That is corruption, of its many varieties and types. There is simply no solution to the corruption problem other than outlawing private ownership of huge amounts of wealth. Normally corruption produces advantages with a huge multiplier, meaning the amount of wealth spent on corruption is returned ten or a hundred or even a thousand times as the benefits of the corrupt politician’s actions. Wealth caps stop that by making personal contributions to funding corruption impossible and by making the collection of the benefits of being corrupted also impossible. The first barrier to corruption can be overcome by having a body of capital that is not individually owned used to provide the funding benefits, but this has two objections. One, transparency is easier with large collections of capital with widely diverse ownership, so the diversion of money for corruption is easier to trace. Second, once the corruption is finished, how do benefits flow back to those few individuals who seek to benefit from it? If secrecy is in vogue, there is some possibility here, so transparency is necessary. Since there is a tax on wealth, wealth can no longer legally be hidden. So, multiple barriers to corruption exist.

A third use of capital is one which is closely related to corruption. That is debt for consumption. Capital formation for productive use may involve debt, in that the productive use of capital should produce benefits, and some slice of them can be used to replenish the productive capital fund that was used to generate the facility involved. Debt for consumption can be a variant of charity, in which some individuals who temporarily lose the ability to be productive need to have funds for consumption until they can regain their ability to be productive. This debt can be paid back, probabilistically. But debt for consumption that does not go to preserve productive human capital, or other infrastructure for that matter, but instead goes to uses which are not going to lead to production with the possibility of repayment in the future, is a misguided use of capital, and in fact, a means of enriching those with capital. Debt is really a lien on the possessions or future income of the debtor. This only serves as part of the general feedback loop which allows those in possession of large amounts of wealth to gain possession of an even larger fraction of available wealth.

Consumption should only be funded with current production, averaged out over fluctuations, and taken only after the necessary slice for the generation of useful capital is done. Otherwise it is simply an invisible transfer of benefits from the future to present day use. If private capital is allowed to grow excessive, in other words, large enough to substantially fund consumption, then the feedback effects will occur, based on the inevitability of the demand for current consumption. Debt is a means for transferring consumption from the future to the present, or a means for selling possessions for future ownership in return for current consumption.

Thus, of the three uses of capital that were called out here, two are very detrimental to an economy, and one is very useful. Those who promote private ownership of large amounts of capital emphasize the beneficial one, and those who promote the opposite emphasize the other two. Like most things, there are good and bad uses of it. If the tenor of the times is such that the first use is lionized, and great praise heaped upon those who do it, perhaps the bad two uses would only occupy a small fraction of the total use of the total capital accumulated. If the tenor of the times emphasizes the other, indirectly, then they might become the principal uses. A novel socio-economic system has to be able to function well in either condition, so private accumulation of huge amounts of wealth cannot happen in such a system.

Without private ownership of large wealth accumulations, how is capital to be accumulated for the main beneficial use? Wealth is generated by production, and is allocated into capital formation and consumption. But what social organization, what arrangement, what agency or mechanism will there be to best use accumulated capital, and how much of it should be taken from annual production? What are the pitfalls that some simple ideas on this might fall into?

One is the barrier against the demands for current consumption. Current consumption gives immediate satisfaction, and this is reinforced in the human brain very strongly. Whatever allows more current consumption seems to be desirable by those whose consumption will be affected. The concept of private ownership has become so embedded in modern industrial societies that it provides a very strong barrier, and that barrier is enforced by the existence of overwhelming corruption to preserve it. There are other mechanisms used to preserve this arrangement, such as the ownership of almost all mass media by those whose private ownership of huge wealth might be at risk. The same goes for the control of educational institutions via donations and other forms of legal and illegal corruption. These mechanisms are only natural, as the collections of large wealth can spin off portions for use in protection of the barriers against reduction or confiscation.

Can some agency utilize the same barriers to preserve a public holding of capital? The use of the mass media as propaganda organs for the preservation of exorbitant wealth is not something that is done publicly, but in secret. It would not be possible for some public agency to be given the role of mass media owner so that it could preserve the capital it collected against being diverted, more and more, into current consumption. This would be open and obvious to everyone, and the propaganda effect, if it could ever be orchestrated, would simply not work.

Could politicians be bribed to not divert capital needed for infrastructure and productive facilities into current consumption? If financial details become transparent so that wealth taxes can be implemented, it will be difficult to keep such bribery secret. If it is not secret, but written into laws that the salaries of politicians will be reduced if they divert funds from capital formation, then who writes these laws? They would simply be rewritten, unless there was some public mechanism necessary to prevent it. This typically means a constitution. Who is going to approve a constitution that requires sacrifices in current consumption? Perhaps during very good times it could be approved, and harsh requirements put in so that in lean times it could not be changed. Then what would prevent it from being ignored in some expedient way, such as a novel financial instrument which effectively diverts capital formation money into current consumption, perhaps for military expenses at first, then for war recovery, and so on, making it permanent, and then, after the necessary number of decades of reduced capital formation, the inevitable collapse happens.

Perhaps a different approach is needed. Instead of a public agency holding capital formation funds, there might be private funds, individually small, put into different agencies, much like stock agencies and hedge funds in modern America. These private funds would be constitutionally free from taxation, as the taxation occurs before benefits are diverted, by individuals, into them. Managers would not be exempt from the wealth cap, but might be replaced if they do not properly utilize the funds entrusted to their care. So, a stock market plus a wealth cap might be one idea worth considering.

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