I’m behind again, and again due to travel. I’ll be pushing the schedule out a day to compensate, and plan to catch up next week with a Tuesday/Friday schedule. Thanks for bearing with me!
It’s time to turn to literature, and how writers like Balzac and Austin used wealth to signal people’s positions in stories. The two kinds of wealth mentioned are agricultural land, and interest from government bonds. While narratively interchangeable as simply wealth, from an economic position, they aren’t. In the conception of national income, government bonds can only be private wealth, canceled out by definition by public debt, and representing a transfer payment from taxpayers to debt holders.
The capital income ratio, high in the 19th century, suffered a reversal of fate from the world wars. It fell with the enormous costs of conflict, but it’s made a recovery since, though not to its original heights. But the fall and growth and recovery post-war created an illusion that capitalism wasn’t inherently rent-seeking.
The composition of the assets that make up capital has changed. Agricultural land capital has had to contend with serious newcomers in what we mean within the idea of capital: houses, buildings, businesses, financial instruments, and colonial and post colonial holdings. This fall of relative agricultural capital reflects the smaller role it plays in the economy, and the fact that technology has made buildings and what happens in them much more economically interesting. Communications and travel made foreign assets much more manageable as well.
I’m not going to summarize the summaries of Balzac and Austin. Yo, dawg.
It’s hard to calculate the value of public assets like schools, infrastructure, and government buildings — you can’t exactly go look up how much they regularly sell for on Ebay. But even without knowing that, it’s clear that private wealth far outstrips public wealth, which is largely canceled out by public debt. And that debt also represents more private wealth. But public debt is never a huge portion of private wealth — where a national debt can be as much as 1x (on in some cases close to 2x) national income, private capital can go to 7x to 8x national income.
19th Century France and Britain had far more public debt than I’d ever realized, and much more than they have now. Much of that public debt represented transfers of wealth to the already wealthy. This was unlike the form of debt I grew up with in the 20th century, where debt was seen as a way to provide services and infrastructure, like education and transit, as a great leveler of society. Debt seemed to be a great idea in an era where inflation was guaranteed to make it vanish quickly into an ever widening pool of productive progress. It was almost a reversal of the literary opening of the chapter — representing a transfer of wealth from the rich to everyone else. But in the 21st century, inflation is dipping closer to 19th century levels, and doesn’t seem to have its leveling effect anymore.
The chapter ends on the shocks of the Great Depression, and distrust of the elites who were seen to bring it on or profit from it, and the Second World War. This is where the 20th century’s “mixed economies” came in, where economies that had been laissez-faire now came under state intervention to varying degrees with nationalizations and fiscal policies all over the world, even to the extremes of the communist planned economies. The 1970s and 1980s began to bring privatization and laissez-faire again, starting us back on the road to the 19th century’s patterns of capital, even though the ingredients of capital have changed forever.
At the risk of adding tangential thoughts [sorry if this is the case] there are a couple of aspects to the principles of public debt that I’d like to offer.
The first is that public debt yields private profit. For reasons I don’t understand, most people seem to think that the U.S. Federal Reserve [i.e. Fort Knox in the traditional sense] and the U.K. Bank of England [and so on] are owned by the Governments and thus the peoples of their respective countries. They are not. They are privately owned. The structure is probably most transparent in the U.S., since the Federal Reserve includes State banks in it’s shareholders. What this means is that when these central banks borrow from their shareholders, the beneficiaries are a relatively very small number of private individuals. Of course, they also borrow from international money markets, but the principle is the same. In other words, when our Nation is in debt, then it is private individuals who benefit from the interest payments.
This is relevant because you will see that the availability and the use of capital [especially cheap capital] can have a direct financial impact upon those relatively few individuals. Individuals who are in a position to control the availability and use of that capital, should they choose to do so.
Another aspect I would like to consider would actually be the control of capital, or, perhaps a little more accurately, the control of the availability of capital. This is important in a very specific sense. When a society is relatively stable, we see it’s broader economy is also stable. It grows in value each year by [pretty much literally] the contribution of the labor of those workers who make up the economy. So: there is growth, but it is uniform and, for want of a better expression, unexciting. It’s unexciting because the wealth being generated – at a steady rate – places finite limits on the amount of additional capital available for re-investment. For a bank, this is a bad thing, because in times of positive economic growth, banks can earn greater profits if they have more capital on hand to lend out [and thus charge interest on]. So, in times of economic prosperity, banks will relax their controls around fractional lending, increase their leverage, and lend out *much* more than they have on deposit.
Unfortunately, this is unsustainable. However, when an economy turns and goes into recession, other factors come into play. Ready availability of capital disappears, because the risk of loss due to bad debt increases considerably, so banks do not lend. This, in turn, exasperates and deepens the conditions that cause recession. Companies and individuals who would have remained solvent during a growth cycle are forced into insolvency. When that starts to happens, banks are entitled to foreclose on such debtors for “pennies on the dollar”, they write off the losses against profits and claim to be injured. But, of course, they are not. They are not harmed by [smaller, at least] recessions because the “losses” they post are actually based on the “fictional” part of the fractional loans they have made.
[ Clarification: fractional lending is permitted by banks and is what happens where they lend out $5-10$ for every $1 they have on deposit. They are allowed to lend more than they have on the basis that there would not be a day on which every creditor/depositor for the bank would go in and ask to withdraw their money.]
But now we see the other aspect of “the use of Capital”. It’s a bit like a double-edged sword [if it doesn’t get you on the down-stroke, watch out for the back-swing]. This is because, in times of growth, Capital can be artificially inflated through fractional lending, and generate vast profits for banks. In times of recession, money can also be made by foreclosing on “marginal” debtors and taking their assets in payment of the debt – assets which can then be sold for more than the fractional loan that was outstanding – i.e. the real amount of money that had been loaned.
Now we see one of the most powerful uses of large amounts of capital… When used in concert across an economy, it has the effect of concentrating wealth with those who held the wealth in the first place.
We learn something else, as well, which is that a slow, steady and unexciting economy is one which yields only minimal profit for those who hold capital. To maximize profit, the environment that is needed would be a boom-and-bust cycle of economic expansion and contraction, preferably in fairly well defined cycles. Oh, wait…
Final thought… In Quinn’s blog post, she makes a critically important reference to the amount of national debt that various countries [the UK was mentioned] have carried historically, remarking that there have been periods where the national debt has been far higher than the present day. This is crucial. Also look at the social structures and the prospects for the lowest in society through those times… One of the things that we lose, as a society, within the boom-and-bust model, is the opportunity to lift our poorest and most vulnerable out of poverty.
And still with the thought on the historic perspective on both capital and boom-and-bust, for those of you with interest, this might even go back, in a way, to Old Testament times. Think about the period where Joseph and the Israelites were held in Egypt by the Pharaoh, who had dreams of “seven years of plenty, followed by seven years of famine”… Even today, if you talk to a contemporary economist about the typical economic cycles that we see, that periodicity, [seven years] or something like it, remains…
Hey, I hope we haven’t given up on this. It’s just starting to get good.
Having said that, I think one of the frustrating thing for those of us reading for political reasons is that he’s being so cautious in getting to the big conclusions. This is for defensible reasons; perhaps more importantly, it’s because he’s legitimately interested in the history of capital and so it doesn’t feel like stalling to him.
I do think he tips his hand to his agenda here: “What, then, gives us the vague sense that social inequality today is very different from social inequality in the age of Balzac and Austen? Is this just empty talk with no purchase on reality, or can we identify objective factors to explain why some people think that modern capital has become more ‘dynamic’ and less ‘rent-seeking’?”
But… I don’t really care that much. He presents this somewhat slyly, as if the idea is utterly shocking. Maybe it’s a European thing? Maybe their reaction is that modern capital is just fundamentally different? But it doesn’t seem that way to me and so the question isn’t all that fascinating or motivating to me.
Separately, I’m finding my thought about government debt shifting in response this book. I had gotten used to thinking of it as merely an obligation, weighing down public finances until it is repaid. But of course it is also an income stream to someone, and so it nets out to zero on the national balance sheet. That’s utterly obvious, but the drumbeat of anti-debt propaganda has taken its toll. (I also blame my past as a congressional budget nerd.)
On to Chapter 4!
I’m ill with appendicitis. Will explain more later.
Oh no! Feel better!
Hello Quinn. I do hope you’re feeling better. I just wanted to ask – I thought I’d entered a post, a couple of days ago, in response to this article… I could see it was awaiting review whilst I retained my session cookie, but it hasn’t subsequently appeared. Suspect that might be because you’ve not been well, but just wondered if it saved OK.
I hope that you’re able to rest up and that you feel 100% again soon. Take Care.
It slipped by me, and I’m sorry about that. I’m still taking it easy for a bit. But I will start catching up soon, and also devoting time to finishing my book, inshallah.
Oh please don’t worry… We’re not going anywhere. As long as the site is functioning OK. Rest up, take it easy… chillax… We’ll still be here when you come back up for air…