peristaltor | "As Is Erroneously Taught"

Hey, LJ, remember me? Been off ranting less with keys lately and more with my voice. More work, less of an audience. I decided to come back here because this rant, which has stewed quite long enough without my attentions, just won't work well on that other format.

For this one, I need to get back to good Ol' Henry George, the original leftist, the guy people listened to before Karl Marx got in any way known, let alone popular. (That was a subject that worked well in the other medium.) When last I considered George, I dredged up a bit of history regarding a misreading of Malthus, one that George so effectively skewered that it has pretty much dropped off the map of excuses capitalists use to deny wage increases. There was plenty in George's Progress and Poverty like this, simple, common-sense (by today's rational, at least) observations that paint a very different picture that the unfair and inaccurate rationals of the time that were, as George noted, "as is erroneously taught." Here are some good examples:

Capital does not supply the materials which labor works up into wealth, as is erroneously taught; the materials of wealth are supplied by nature. But such materials partially worked up and in the course of exchange are capital.

Capital does not supply or advance wages, as is erroneously taught. Wages are that part of the produce of his labor obtained by the laborer.

Capital does not maintain laborers during the progress of their work, as is erroneously taught. Laborers are maintained by their labor, the man who produces, in whole or in part, anything that will exchange for articles of maintenance, virtually producing that maintenance.

Capital, therefore, does not limit industry, as is erroneously taught, the only limit to industry being the access to natural material. But capital may limit the form of industry and the productiveness of industry, by limiting the use of tools and the division of labor.

(Henry George, from an online copy of Progress and Poverty, 1887, Book I, Chapter 5, paragraphs 4-7.)

The fact that he got quite a bit right, though, does not excuse him from occasionally getting things wrong.

Mind you, I am not blaming George for getting the following wrong. He set down to read all of the influential political economy works available and taught at that time. He did. What he missed, therefore, was probably not in those works. Having read just a few of them myself, I can attest this is true with those few works I've read.

So, what did he get wrong? Here's a passage I noted for discussion:

In short, when we come to analyze production we find it to fall into three modes—viz:

ADAPTING, or changing natural products either in form or in place so as to fit them for the satisfaction of human desire.
GROWING, or utilizing the vital forces of nature, as by raising vegetables or animals.
EXCHANGING, or utilizing, so as to add to the general sum of wealth, the higher powers of those natural forces which vary with locality, or of those human forces which vary with situation, occupation, or character.

(George, ibid, Book III, Chapter 3, paragraph 25.)

That sounds about right to me. To make the stuff in our economic life, one has to pull it from the ground either by mining or growing it, or move it from where it is abundant to where it is scarce and in demand. Continuing: "In each of these three modes of production capital may aid labor—or, to speak more precisely, in the first mode capital may aid labor, but is not absolutely necessary; in the others capital must aid labor, or is necessary." (Ibid, paragraph 26.)

Okie-dokily. One can wander into a forest to pick mushrooms stark naked, or without any capital assisting the gather—one of George's early examples from the book. No capital proves necessary here to allow labor to produce from nature. A plow helps in growing, a fence with animal husbandry; these are capital produced from former labor. "Exchanging" means moving, and here a basket, back-pack, cart, ship, rail car or whatever is pretty much necessary for larger loads. Onward, this time to the confusion:

Now, while by adapting capital in proper forms we may increase the effective power of labor to impress upon matter the character of wealth, as when we adapt wood and iron to the form and use of a plane; or iron, coal, water, and oil to the form and use of a steam engine; or stone, clay, timber, and iron to that of a building, yet the characteristic of this use of capital is, that the benefit is in the use. When, however, we employ capital in the second of these modes, as when we plant grain in the ground, or place animals on a stock farm, or put away wine to improve with age, the benefit arises, not from the use, but from the increase.

(Ibid, paragraph 26.)

Ah, here we have an expanded definition of "capital," something George warned about himself. "Capital" can refer to seed for a crop or un-aged wine. So far, okay. Go on. "And so, when we employ capital in the third of these modes, and instead of using a thing we exchange it, the benefit is in the increase or greater value of the things received in return." (Ibid.) Yes, that makes sense. Trade something abundant in your neck of the woods for something scarce, and both traders should gain some value.

Carefully moving on:

Primarily, the benefits which arise from use go to labor, and the benefits which arise from increase, to capital. But, inasmuch as the division of labor and the interchangeability of wealth necessitate and imply an averaging of benefits, in so far as these different modes of production correlate with each other, the benefits that arise from one will average with the benefits that arise from the others, for neither labor nor capital will be devoted to any mode of production while any other mode which is open to them will yield a greater return. That is to say, labor expended in the first mode of production will get, not the whole return, but the return minus such part as is necessary to give to capital such an increase as it could have secured in the other modes of production, and capital engaged in the second and third modes will obtain, not the whole increase, but the increase minus what is sufficient to give to labor such reward as it could have secured if expended in the first mode.

(Ibid, paragraph 27, with emboldened confusion.)

Uhhh . . . what?

Thus interest springs from the power of increase which the reproductive forces of nature, and the in effect analogous capacity for exchange, give to capital. It is not an arbitrary, but a natural thing; it is not the result of a particular social organization, but of laws of the universe which underlie society. It is, therefore, just.

(Ibid, paragraph 28.)

"Just?!?" Just, just, just hold the fucking phone, George.

Here, I believe, George has stumbled upon a bit of information not covered in Smith, Locke, Hume, Ricardo or the rest. We are talking here about interest from investment and where it comes from. Okay, okay, let's review how monetary interest is generated: from bank lending. Why? Because bank lending creates money. Only as long as lending expands can the money supply increase.*

This is never, ever discussed in the classical political economy texts.

It is also never, ever discussed in the more modern neo-classical texts.

It is the biggest blind spot in all of economics, whether it refers to itself as political economy, social economy, or just plain "scientific" economics.

Back to that passage, especially the last. Let's do some parsing.

"Thus interest springs from the power of increase which the reproductive forces of nature. . . ." I would agree with that. After all, "capital" derives fro the Latin "kaput," meaning "head," as in a head of cattle. When we plant or graze or put wine away, the reproductive power of nature is being harnessed.

So, when a bank lends a farmer or herder or wine producer some money for seed stock, the interest paid back to that banker comes "from the power of increase which the reproductive forces of nature."

Continuing, ". . . and the in effect analogous capacity for exchange. . . ." Here I have some little trouble. After all, yes, when one exchanges products scarce in one region for products common there, one does increase the relative value of products. One does not, though, necessary tap the "reproductive forces of nature." One only engages in a form of arbitrage. Yes, life in a bleak region might be difficult without such imports of scarce items; but trade does not involve the reproductive forces.

Here I think George might be conflating capital represented by money with actual capital, physical goods created with labor and previous capital. It is damned common conflation, this. Ah, but without knowing of the pecuniary increase that bankers execute with their legal monopoly on monetary creation through lending, how would George know of this? It's even in the words! Just as "capital" is from the Latin kaput, "pecuniary"—"of, relating to, or consisting of money"—derives from the Latin word pecu . . . or cow.

So, without that bit of important information, George is stuck trying to massage definitions to work out a bit of insight that comes only by tangling definitions. Massage, tangle; what's the difference? Which leads us to the mangled and tangled conclusion: "It is not an arbitrary, but a natural thing; it is not the result of a particular social organization, but of laws of the universe which underlie society. It is, therefore, just."

Sorry, George, but "laws of the universe" are not the laws of "a particular social organization." Banking as we know it are of the latter variety. Therefore, they may be "just" within that social organization; but not without. This is why usury—what you term "interest," a mere blip in the conscious of most in our society—was outright banned in many previous civilizations. This is why the Jubilee—a complete wiping out of debt, often followed by the death of certain lenders—was practiced as the only way to prevent complete debt slavery within the society.

Happily, I've evidence that George learned this particular lesson, albeit later in life than the publication of his landmark Progress and Poverty. Consider this passage:

. . . it is the business of government to issue money. This is perceived as soon as the great labor saving invention of money supplants barter. To leave it to every one who chose to do so to issue money would be to entail general inconvenience and loss, to offer many temptations to roguery, and to put the poorer classes of society at a great disadvantage. These obvious considerations have everywhere, as society became well organized, led to the recognition of the coinage of money as an exclusive function of government. When in the progress of society, a further labor-saving improvement becomes possible by the substitution of paper for the precious metals as the material for money, the reasons why the issuance of this money should be made a government function become still stronger. The evils entailed by wildcat banking in the United States are too well remembered to need reference. The loss and inconvenience, the swindling and corruption that flowed from the assumption by each State of the Union of the power to license banks of issue ended with the war, and no -one would now go back to them. Yet instead of doing what every public consideration impels us to, and assuming wholly and fully as the exclusive function of the General Government the power to issue money, the private interests of bankers have, up to this, compelled us to the use of a hybrid currency, of which a large part, though guaranteed by the General Government, is issued and made profitable to corporations. The legitimate business of banking – the safekeeping and loaning of money, and the making and exchange of credits, is properly left to individuals and associations; but by leaving to them, even in part and under restrictions and guarantees, the issuance of money, the people of the United States suffer an annual loss of millions of dollars, and sensibly increase the influences which exert a corrupting effect upon their government.

(Henry George, The Complete Works of Henry George, "Social Problems", p. 178, Doubleday Page & Co, New York, 1904.)

Exactly. We need public banks. We need interest to go to funding public works and services, not to private gatherers of wealth. It looks like George was able to correct his mis-interpretation of money as capital later in life.

Oh, speaking of public banking, have I pointed out recently that Ellen Brown has a new podcast? NB: If you would like to subscribe to the RSS feed, please ignore their web site's address; it doesn't work. Here's the address that does. Stick that into your podcast gatherer. It should work just fine. Let me know if it doesn't. I need to write Ms. Brown and tell her of the snafu in her web site.

*On this point, only a few disagree, one of them Steve Keen. His math is, however, pretty opaque and difficult to appreciate when one (like myself) has not mastered it.