How to Think About Human Society: Tips 27-28

27. Don’t forget about capital:

One of the most important, and unfortunately, one of the most neglected, aspects of economic theory is the study of the role of capital in the economy. Since the very beginning of human history, all economic progress has been driven by capital accumulation, or the employing of presently available effort and resources in order to improve the efficiency of future production rather than in order to increase present consumption. As an example, imagine a tribe of prehistoric men. They spend all of their time gathering berries in order to sustain themselves. Now, imagine that one member of the tribe decides to work very hard to accumulate as many berries as he possibly can for a week. Imagine that he does not consume all of the berries that he gathered that week, but rather saves some of them to sustain himself for the next week. The next week, freed temporarily from the necessity of constantly gathering berries, he uses his time and labor to gather the relevant materials and assembles a flint hand axe for himself. Thus, using the berries he saved the last week, he uses them to invest in the creation of a hand axe, which then allows him to be more productive, allowing him to hunt game and clear away brush from his path far easier, which allows him to fulfil his future consumption and production needs more efficiently.

 In this example, we assumed that the prehistoric man has the requisite technological knowledge necessary to craft a flint hand axe. We could, more unrealistically, also assume that he has the technological knowledge necessary to build a wooden house. In order to build the house though, much more saving is needed for this more complicated investment. Trees must be felled, bindings made, the house assembled, and to do all this, certain tools such as axes must be made in sufficient quantities. If the prehistoric man, once the hand axe had been made, used it to improve his output of food production, but just went back to his old pattern of consuming everything he had produced, than there is no way that the house could be built, even if he has the technical knowledge in his head. Furthermore, eventually the hand axe would wear out, and unless the man again saved some of his produced food to enable him to repair or replace the axe, he would eventually lose the use even of the axe. When this happens, this is known as capital consumption, the opposite of capital accumulation. Indeed, the availability of capital very often is a more important factor for economic growth than technological progress. It is not the lack of knowledge of how to build a tractor in India that prevents Indian farmers from substituting their hand tools for tractors, this knowledge can be learned easily enough by training a few engineers in western schools. It is the scarcity of capital that disallows this.     

In a complex exchange economy, everyone can participate in saving and investment and the capital thus accumulated tends to benefit everyone in the economy, even those who don’t save themselves. A man who has saved enough resources to have a piece of machinery built for himself needs someone to operate that machinery for him. A person hired to do so may or may not be a saver himself, but in either case he too benefits from the saving of the machine owner. The machine owner’s saving allowed that machine to be built, and the existence of more machines makes the laborer’s (in this case a machine operator) labor more productive and hence more valued. A laborer who works in a structure of production where, due to a relatively greater supply of capital goods (tools), his labor can bring into existence 100 tons of refined plastic will tend to receive a higher wage than a laborer who works in a structure of production where, due to a relatively smaller supply of capital goods, his labour can bring into existence only 10 tons of refined plastic, even if the laborer himself does not own the plastic. This is because entrepreneurs compete for scarce labour and, the more productive the labourer; the higher entrepreneurs can profitably bid for their labour services. Thus, savers, workers, and consumers alike all benefit from more saving and investment, capital accumulation, in the economy.      

Thus, from the flint hand axe to the factory equipment of the industrial revolution, capital accumulation has raised the standards of living of successive generations of humans and their descendants. Security of property rights is a factor that has proved a good inducement to capital accumulation throughout history. There are a couple of reasons for this. Firstly, someone will not save his resources for future production if he is uncertain whether those resources will be his in the future. Thus, whether it was medieval peasants faced with expropriation by marauding Viking bands, or modern businessmen faced with expropriation by socialistic nation-states, the threat of expropriation always induces less capital accumulation, while its opposite, the sanctity of property under a regime of freedom, induces more. Second, with greater economic freedom comes greater opportunities to invest capital. In the 19^th century, capital accumulated in Europe could be freely invested all around the world and in a whole plethora of different production processes. With greater opportunity for profit comes greater inducement to accumulate and invest capital and greater benefits for the consumer as a result of investing that capital. Thirdly, with the sound monetary regime that would exist under a property-respecting regime and its consequent lack of significant price inflation, there would be no particular inducement to consume monetary resources faster due to their value getting sucked up by money-printing governments over time, nor would capital-squandering business cycles be set in motion. The same can be said for taxes such as the capital gains tax and estates tax, for these particular taxes serve as direct deterrents to capital accumulation. Throughout history, governments have mostly intervened in favour of capital consumption, not capital accumulation. Inflation, taxes on capital, threats of expropriation, and siphoning savings into government consumption through government bonds, social security plans, and public pension schemes are all examples of this.  Thus, we could reasonably expect greater capital accumulation, and thus more rapid material economic progress, under a regime that respects property rights and economic freedom more. This is a factor that simply cannot be ignored by anyone who wants to rationally assess the desirability of policies that could result in less capital accumulation or capital consumption.   

28. If you choose to make general assumptions about human nature, do not make exceptions for some groups without a good reason:

            Across centuries and millennia, philosophers have debated about whether humans are by nature ‘good’, by nature ‘evil’, or whether their ‘goodness’ or ‘evilness’ depends on their education and environment. Whichever assumption you subscribe to, if any, be sure to apply it across the board to all humans in your social analysis, unless you have a very good reason for believing that a certain group will differ significantly from the norm.

            

           An example of a line of argument that depends on different assumptions about human nature being arbitrarily assigned to different groups is the following made by supporters of government economic intervention and bureaucracy: Capitalists (usually meaning relatively high ranking people in the world of private business) are egotistical, crass, and unscrupulous, caring only about enriching themselves and willing to do anything, legal or illegal, honest or dishonest, to do so. By contrast, civil servants (bureaucrats) are altruistic, honest, and work for the ‘common good’ rather than their own personal enrichment. This being the case, it is natural that the civil servants should have the power to ‘regulate’ the businesses of the capitalists, in order to temper their ‘greed’ and ‘protect’ the consumers.

            

           Empirically, this argument is highly implausible. Monetary reward is not the only thing that motivates every private businessman, there are examples of businessmen that pursue extra-commercial objectives such as giving some of their revenue to charities or a sense of pride in the product or service they are selling as such, separate from purely monetary considerations, because they genuinely want to make other people’s lives better with their product or service. Furthermore, not all civil servants are motivated purely by ‘altruistic’ or ‘common good’ considerations, they are after all given a salary and benefits, and some may enjoy wielding power over other people for its own sake or because they enjoy forcing their own value judgements onto the unwilling populace by force.

            

           This implausibility stems from a deeper source than the actual facts of this particular case though. It stems from the arbitrarily divergent character assessments of the two groups of people. If you think that humans are generally altruistic and care about ends that are higher than material rewards, then this should apply not just to civil servants but also to businessmen. If you think that humans are generally egotistical and care mainly about material enrichment, then this should apply not just to businessmen but also to civil servants. There is no particularly convincing reason why the characteristics of these two kinds of people would diverge so sharply. Generally, future businessmen and future civil servants grow up in similar neighbourhoods, receive similar educations, and are generally both seeking some combination of material and non-material satisfactions in their professional careers. This being the case, if one assumes that humans are generally egotistical and unpleasant, then calling for one group of unscrupulous people with political power to ‘regulate’ another group of unscrupulous people with money does not follow. Similarly, if one assumes that humans are generally altruistic and kind, then the businessmen and consumers won’t need ‘regulating’ because they will already be pursuing their businesses in an honest fashion, no matter how altruistic the ‘regulators’ supposedly are.

            

           Generally though, largely baseless character assessments contribute more confusion than clarity to social thought. Better to not assume anything about human nature or human character and just examine the social institutions themselves, regardless of who is manning them, considering the incentives involved, the goals they can pursue, and the tools they have to pursue those goals. In this case, better to consider the bureaucracy as an institution and the profit-and-loss business economy as an institution, regardless of who you think will become a bureaucrat or businessman. By doing so, we see that, from the standpoint of the satisfaction of the demonstrated material desires of the consumers, the profit-and-loss business economy is superior because of a combination of the ability to calculate economically when pursuing profit, because of the material incentives to serve the consumers well, and because of the competition from other businesses tending to drive up the quality of businesses all around. By contrast, if, for whatever reason, the social thinker decides that in certain cases, the will of the bureaucrat or politician (knowing full-well that they could be either egotistical or altruistic, virtuous or vicious) should replace the demonstrated material desires of the consumers as an economic guiding force, then some amount of bureaucracy will be necessary in that area. In so doing, the argument is moved to a plane where it can be debated rationally and systematically, and away from a plane where the determining factors in the argument are conjectural, ephemeral, and largely baseless judgements of the character of occupants of different social positions.