Capital vs. Money

I've just put Mark Thoma's Economist's View blog on my blogroll, which is long overdue, as I've linked to discussions there with some frequency. One interesting thing is that someone recently referred to the people there as “left wing”, despite the fact that a goodly number of them, including me, would have been called "conservative" before The Movement took over. I continute to comment on “right wing” folks, as so many of them are lost in libertarian utopianism, or else they feel constrained to follow some sort of party line, presumably because that’s who pays the bills. In matters of this nature, it's important to remember the quote from Upton Sinclair:

"It is difficult to get a man to understand something when his salary depends on not understanding it."

There's just been a little comment thread on Economist's View about the opacity of the econojargon use of the word "utility." I've also already quibbled with the economics jargon inherent in the phrase "rent-seeking behavior," and what I'm about to say is another part of the general critique of how words are used, or mis-used in economics.

Generally speaking, I find that economists don’t often distinguish between money and capital. For example, they write about flows of international capital, when they’re actually talking about money flowing from one country to the other. Sometimes this makes it hard to get at the actual real economics of a situation. For example, it is often said that the U.S. is importing a huge amount of capital from China. On the other hand, a financial instrument is also often called “capital.” Since what is actually happening is that the U.S. is importing a lot of consumer goods from China (though China is actually adding only marginally to their value, having itself imported most of the goods, with only the final assembly being done by Chinese labor), and paying for those consumer goods with U.S. Treasury bonds. Now consumer goods are rarely called “capital” while bonds often are, so it looks like the “capital flow” is going the other way. But actually, neither part of the flow looks much like what is often called “capital,” i.e. something used to assist in the production of other goods and services.

Then there is the matter of “transfer payments.” This is a phrase that seems to have been invented to describe certain sorts of governmental payments, ostensibly those without a corresponding exchange of goods and services. Often, Social Security or Veteran’s benefits are named as an example. Huh? Both of those, in fact, require an earlier service (paying Social Security taxes or serving in the military). On the other hand, paying interest on the Federal debt is not considered a transfer payment, despite the fact that on a cash flow basis, it removes money from taxpayers, and transfers it to bond holders. One can argue that there was a previous exchange for the bond, but that argument isn’t used for Social Security, is it?

If you look at the details, there is a pretty clear distinction that can be made between a sort of “capital investment” that pays returns by actually increasing the amount of wealth in the world (a factory, an apartment building, a road, someone’s education), and one that merely gives someone the right to a future transfer of money. Moreover, you’d think that libertarians would be sensitive to the notion that some of those monetary transfers absolutely require governmental power and some do not. A government bond is intrinsically based on the taxing power of government, for example, while a secured personal loan does not. (Obviously some loans require government as an enforcer of contracts, but that’s usually considered kosher in libertarian circles, and besides, something like pawning your watch doesn’t even need that).

Now it so happens that most intellectual property requires a pretty agressive government policy. IP is basically a government-mandated monopoly, and a the enforcement of IP can get pretty obtrusive, such as raiding warehouses, issuing subpoenas to third parties, etc. It’s not something we’d put up with without a pretty hefty social return (the idea is to pay for the effort of creating IP in the first place, yes?), but a lot of people seem to view copyrights especially as some sort of “natural” property, and some of those argue for copyright in perpetuity. This is not the sort of mistake that Ayn Rand would make (and indeed, she did not).

There are some very good reasons for wanting to have a lot of “store of value” items around in an economy. Personal savings are a good thing, and I do not want to be poor in my old age. I also think it’s a decent thing to have a certain amount of personal, family wealth passed down from generation to generation. Still, having such things is an invitation for the “accumulation of great wealth,” and I don’t think that the existence of truly massive multi-generational fortunes has much to recommend it. The history of it doesn’t look that good, frankly, and I’m included the effects on its supposed “beneficiaries.”

In other words, I’d like to see some more attempts by economists to separate “productive” investment from “transfer payments.” Currently, I don’t see much effort being made to even make the distinction. I understand that it’s a hard problem, but that’s no excuse for pretending that it doesn’t exist.