Topic: Capitalism
Valuation of Capital Much of our economic problems and injustices stem from forced and excessive valuation of Capital.by Gene DeNardo
(libertarian)
Friday, September 18, 2009
One of the fundamental and systemic problems of our modern economy is the intervention and interference that occurs concerning the valuation of Capital. Our financial markets are controlled in manners that reinforce capital value and this abnormality imposes a burden on the remainder of the economy.
Capital is always value retained [or in a sense transferred] from work completed. This work can entail the creation of a "product" or simply labor; it is irrelevant to the production of capital. Capital represents a completed exchange; one has exchanged "value" for what was perceived as valuable.
At that moment in which the exchange transpires, a value is agreed upon. What tends to present difficulties is the belief that this value should persist into the future. There is no assurance that this will be the case. It is not a constant value and should never be controlled as if it were. The value of Capital should be freely allowed to change as the economy reinterprets its worth.
The greatest obstruction to honestly valuating Capital is the monopolization of money creation. If money cannot be freely created, valued and exchanged by all, Capital can never be certain of its true value. Neither, due to the restraint incorrect value imposes, can it travel to where it is most demanded.
Today, the Federal Reserve is responsible for this monopoly. The rabid creation of money with little or no backing wreaks havoc on the perceived value of Capital. If money is created at will by any agency and the economy is coerced into utilizing this currency, Capital, the remaining value of what has been done and produced, is at the mercy of this errant money production. Rather than seeking its natural value, it will fluctuate dependent upon how much new currency is created and where the new currency happens to be at the time.
Initially, the work and product of the past will devalue, while the new currency will capitalize. This is due to value being transferred from the real to the imagined. At some point further along, the economy recognizes that the value of the currency is imagined and people try to retain real value by purchasing as much as they can of what they perceive as "real" in comparison to the created currency. This process causes price inflation and overvaluation of Capital. When the "price" of real product gets out of hand, it consumes too great a portion of the actual productive output and recession follows with the necessary price deflation.
Due to the meddling of unbacked produced money and the corresponding inconsistent valuation of Capital, the swings between the two extremes are greatly exaggerated and the loss and gains reach dizzying levels. While times of prosperity are great, the downturns are as equally violent.
The second and equally important aspect of the problem is the "guaranteeing" of Capital value. Again, this practice relies on the erroneous belief that the value of Capital should be maintained or increase through time.
The production of Capital is a straightforward process. Although, we commonly refer to Capital as all the value that is extracted from exchange that isn't consumed, this is a bit deceptive. Much of the "new" Capital has been passed through the exchange process and can be better termed "principal Capital". Look at in this way, the growth of Capital does not appear as phenomenal as it is often made out to be.
For example, the farmer's entire grain harvest that isn't directly consumed may be considered Capital, but really only that which is above and beyond what he originally put into the field is new Capital. Nevertheless, both his original investment of grain and the resultant "excess" grain represent his future Capital.
At any moment in time, this grain has a value, but we certainly don't expect it to have the same value. There could be less or greater demand for grain in the economy or the grain itself could be considered in "better or worse" condition than when it was harvested. Or grain production itself could dynamically change affecting the "completed" grain's value. Many things can influence the value of grain. We cannot expect value or anything for that matter, to remain constant or to increase. Value is always fluctuating. Capital value is no different.
For this reason, to "insure" that Capital value will retain or grow through time, is against the natural laws of economics. Because of this, there will always be a "market" for this insurance. There will always be those individuals or firms who will put their own security up for grabs, in order to profit on other's insecurity. They will make a living or become insolvent, betting on the risk that accompanies the value of Capital. This is human nature and free market expression of this is a normal part of the advanced economy.
But to "guarantee" [in contrast to insure] that Capital will retain its value is defiant of the principles of a natural economy. And, it is particularly malicious when it is done with other people's Capital. The future value of Capital should never be guaranteed with someone else's property! Although this seems obvious, it is common practice.
Any loan, any investment, anytime the future repayment of Capital is guaranteed or "backed" by money that doesn't belong to the backer, this occurs. The FDIC, bailouts and court backed loan contracts all fall under this umbrella. It doesn't matter what it is, if the money that guarantees and reinforces the value of Capital does not come from the "insurer", then we have "socialized" the risk. Any subsidy or payment for investment also qualifies, such as "oil exploration" subsidies or drug research funding. It is ALL THE SAME. We are socializing the risk that occurs from natural risk and valuation of Capital.
Courts have mistakenly taken it upon themselves to guarantee Capital value. Contracts involving the loaning of Capital without security are evidence of this. The courts have no reason to provide recourse for the investor who has received a "promise" of repayment if there is no security or "promise" of security to back the debt, as long as the debtor has not engaged in any deception or fraud.
When a debtor is "promising" to return another's Capital with interest at some point in the future, the debtor is claiming to know the unknowable. No one knows the future of an investment or they would soon own all of the world's future wealth! When the investor agrees to this statement of fallacious knowledge, they have both agreed to a contract that has no basis in reality. The courts have no basis to back up a contract based on a false assumption.
If the debtor in such an example performs in good faith and yet the investment falters, both the debtor and the investor of Capital have experienced Capital devaluation, a natural economic occurrence. There can be no promise that Capital won't devalue. A note based on such a promise has no foundation.
It is extremely telling that we respect this truth when in comes to "corporate" investment but ignore it when it comes to investing in "commoners". We accept the possibility of loss when we invest in corporate stocks and we allow corporations that become insolvent to use the privilege of "limited liability" to release them from their creditors. Yet, we demand repayment of individual or small business loans which coincidentally almost exclusively originate from corporations. To say that a double standard applies is a bigtime understatement.
To "guarantee" the value of Capital, either through government socialization of the loss or court ordering of unsecured debtors to labor and "repay" the value, is to fight natural economic laws. But more importantly, it consumes resources and sound Capital perpetuating a value that is imaginary. Once Capital, like anything else in the universe, loses its momentary value, there is no rule, regulation or game that will truly change reality. It is what it is. By not respecting the natural laws, we are simply shifting value from one sector to the other. This is wasteful and inefficient and lends itself to advantage and privilege. In fact, that is precisely why it is done.
As we have experienced recently, this shifting valuation to compensate for diminished Capital values can endanger the overall health of the economic system. When productive return is transferred away from its source to satisfy non-existent values, great inefficiency takes place. If the process gets completely carried away, the point of no return is reached and the economy will self destruct. The productive sector is very capable, but everything has its limits.
When we allow this process to occur in any of the ways mentioned above, we allow Capital that possesses real value, to be used to satisfy fictitious value. We allow labor and product to be consumed and transferred to satisfy an imaginary worth. To quote an old saying, we are "throwing good after the bad". Of course, we aren't in truth "allowing" anything; we are being forced to accept it.
Giving Capital valuation a bit more consideration, brings us to the conclusion that there are actually two types of Capitalism. There is one that follows the false rules we have mentioned above. Due to its warped regulation and forced control, much of the economic output is utilized satisfying false demand. Capital takes on the value that is administered to it and goes where it is directed. It doesn't take much thought to picture the type of world this creates. In fact, it doesn't take much thought at all, just a bit of observation.
And, there is real Capitalism. In this version, the "worth" and value of Capital are one and the same, determined solely by demand. Capital in this world goes wherever its true value will take it. It cares little for direction or regulation. Now, that takes quite a bit more imagination.
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The views expressed in this
article are those of Gene DeNardo only and do not represent
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