Putting the capital back in capitalism
I: Inter-temporal capital structure
Unique to Austrian economic theory is the recognition of capital as a structure that adapts to cyclical changes in consumer demand. The capital structure is essentially a value-distribution chain for the entire economy, consisting in early-stage capital goods (those goods not immediately serviceable to the satisfaction of consumer demand but used to manufacture those that are) to late-stage consumer goods – that is, from capital formation to manufacturing to retail inventory. Mainstream economics treats capital as a fixed, homogenous stock and therefore sees any increase in investment spending to enlarge that stock as necessarily positive for economic growth. Whereas for Austrian economists there is malinvestment: investment into the wrong areas of the capital structure based on consumer preferences for saving versus consumption which change over time.
Central to the Austrian conception of this inter-temporal capital structure is thus the concept of consumer time preference. When consumer time preference is on average high, consumers favor present consumption over saving for the future. When consumer time preference is low, they favor saving over spending, deferring consumption several years or even decades into the future.
Just as capital is not a fixed structure, neither is the rate of this time preference constant. It is in fact the latter that informs the former, over time. Just as any phenomenon in nature, general time preference moves in a cyclical nature – what would, in a free market, drive a “natural” business cycle. Viewed as a long-term average, it is also higher or lower in different cultures.
The process of civilization economically is the long-term reduction in time preference, since the advancement in both the quality and quantity of goods necessitates greater and greater deferral of consumption to fund more roundabout, capitally intensive production processes; which also is the self-reinforcing cycle of having more material wealth to facilitate more deferral of consumption.
Interest rates are the mediating power of all business-cycle activity. High interest rates are the result of high time preference, when consumers in general prefer consumption over saving; when the pool of savings in the economy is as a result low enough that profitable investment projects consist mainly in less costly and less time-consuming production methods of consumer goods. The higher financing costs from the higher rates draws entrepreneurs away from investing into more capitally intensive projects, bringing about a consolidation of the capital structure to match a less future-orientated consumer. Conversely, low interest rates coordinate investment with demand on the basis of low time preference, making it profitable for entrepreneurs to invest in more roundabout production processes, lengthening the capital structure, of which the end products consumers who having saved sufficiently will be able to afford. In a free market, this saving is what permits entrepreneurs the resources for the lengthier investment projects that produce a more capitally intensive finished output.
II: Central banking is central planning
Interest rates are the central foundation of the market economy; absolutely critical for the maintenance of sustainable economic growth. When a central bank manipulates rates higher or lower to artificially control the business cycle, in so doing assuming far more power than any government to direct the economy, all it does is distort the price signaling, conveyed by interest rates, between producers and consumers, bringing about nothing but perpetual financial crises, as per the Austrian Theory of the Business Cycle in the post above, which are then blamed on capitalism.
Indeed, to get the public to buy into any alleged necessity for a ruling clique to keep the reins on human freedom, all the failures of state economic interference must be projected onto capitalism. In Ayn Rand’s words:
One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary.
The practice of central banking, which is the centralized authority over the supply of money in the economy and thereby the manipulation of interest rates in coordination with the monetary expansion or contraction, precludes the labeling of any such economy under its control as a free market, if capitalist at all. Capitalism is the freedom to trade based on the principle of voluntary exchange to mutual benefit. The distortion of price signaling by any kind of state intervention into the economy is necessarily by force and so necessarily in violation of free-market principles; which principles if practiced fully would mean laissez-faire capitalism: the complete leaving alone of individuals to deal with one another on any terms not involving the initiation of force.
The fraud of central banking is the force by which the government guarantees exclusive monopoly privilege on the circulation of currency to a central bank, which may either be an arm of the government or a private corporation such as the United States Federal Reserve. In a free market, currency would be supplied by competing institutions, just as any other good or service. Money is the one fundamental good that mediates the exchange of all others. It is thus the most important good to be left in private hands to produce. This would mean money backed by real economic values, by commodities such as precious metals or other stable stores of value, not by fictitious paper value guaranteed fundamentally by the ability of the government to collect taxes.
It is through tax revenue that the government guarantees its loans from the central bank; which loans consist in money created out of thin air for the purpose of collecting interest on ever-increasing debt; which is literally interest on that which is stolen from the people in the form of purchasing power lost through inflation – the inflation of the monetary unit they are forced to use.
The economy, in all its deliberately mismanaged malfunctioning, marches on in the shadow of a certain maxim attributed to the House of Rothschild, the fountainhead power of private central banking and of the “money lenders of the Old World,” perhaps fictitiously but certainly representative of the reality: “Let us control the money of a nation, and we care not who makes its laws.”
(Classical Liberalism 2.0, 2018)
