14 October 2015

Unleash prosperity by giving full rein to capital accumulation

As the health of America’s economy remains mired in the doldrums, a new organisation débuts to refresh the winds of forward movement: the Committee to Unleash Prosperity.

An inaugural press release announces that the Committee ‘was founded to combat America’s “growth gap” by promoting an agenda that will revitalize America’s economy.

In the past decade and a half, under both Republican and Democratic presidents, U.S. economic growth has diminished to roughly 2% annually—a significant decrease from its Post-World War II average of 3.5%.

This subpar growth rate has come at tremendous cost to American families, household incomes, employment opportunities, investment, and poverty levels. Above all, the lack of growth has led some to doubt the attainability of the American Dream and to wonder if our current economic climate is the new norm.

The Committee has six main objectives: (1) a broad-based, low rate, flat tax; (2) limited government spending; (3) decreased regulation; (4) sound money; (5) free trade; and (6) rule of constitutional law. Given the aim of unleashing prosperity, the Committee has effectively laid out a programme for capital accumulation.

But, as a necessary first step toward economic growth, the state must be constrained to its constitutional duties — a programme which would have won the approval of Calvin Coolidge, the last American president whose adherence to limited government and low taxes encouraged the longest period of exceptional economic performance: average real growth of 4.82 per cent during his tenure. As he wrote in his second ‘State of the Union’ address delivered to Congress:

Nothing is more likely to produce that public confidence which is the forerunner and the mainstay of prosperity, encourage and enlarge business opportunity with ample opportunity for employment at good wages, provide a larger market for … products, and put our country in a stronger position to be able to meet the world competition in trade, than a continuing policy of economy.

The vision offered by capital accumulation

The source of prosperity in the West, noted Ludwig von Mises — the foremost economist of the twentieth century — was the initiation of capital accumulation. ‘The historical period in which the smooth working of the market economy was again and again interrupted through expansionist ventures was an epoch of continuous economic progress,’ he wrote in his magnum opus, Human Action. ‘The steady advance in the accumulation of new capital made technological improvement possible. Output per unit of input was increased and business filled the markets with increasing quantities of cheap goods.’1

Savings and investment are the sources of new capital, which investors and entrepreneurs employ to satisfy consumer wants with better methods of industrial production or with the introduction of new goods and services. But additional capital equipment cannot come into existence if surplus earnings, either of individuals or corporations, are taxed away by government to fund present demands, usually in the form of redistributionist policies to combat the bugbear of ‘income inequality’.

If the United States is to enjoy capital formation and the ensuing prosperity the Committee wants the country to unleash, then it needs limited government, restrained from tampering with the spontaneous order of the market, as a first step; low taxes and minimal regulation — and the end of cronyism which feeds on favouritism — are corollaries of the minarchist state. But will Americans support a suspension of their entitlement culture?

The seductive illusion of government intervention

Modern governments in the post-Keynesian era create only the illusion of general prosperity, by taxing those who have (wealth creators) and redistributing to those who have not (wealth eaters). The importance of saving surplus earnings for investment purposes was deemed ridiculous by the Depression chimera that too-much savings was a major cause of unemployment. Reflating the work rolls through government spending and make-work projects was championed as the easy route to riches for all.

But genuine prosperity can only be assured by actual employment and an increase in real wage rates — both of which are dependent upon capital accumulation above the level of employment. Job opportunities and greater productivity result, in addition to fueling entrepreneurial incentive. But the threat of intervention dissipates incentive: whether through punitive income taxes, capital gains taxes, or corporation and dividend taxes, or the equally damaging loss of confidence which constant interference engenders. The Manhattan Institute reports that GDP for 2015 is projected to be less than 2 per cent, with investment a negligible 0.6 per cent.

Moreover, if capital is consumed and not replenished, then previous accumulations — in the form of factories, equipment, and the other means of production — wear out, are depleted, or become obsolete through change in technology or consumer wants. Production stagnates, while entrepreneurs and innovation go without the necessary tools for growth. Employment stalls and prices rise.

In addition, capital accumulation can falter if governments promote, through loose monetary policy, goods and services which do not satisfy consumer needs: what von Mises termed ‘malinvestment’. Any capital thus dedicated to specious demand is wasted, as it is not fungible and cannot be rededicated to more useful purposes. The Committee to Unleash Prosperity is wise, then, to target low taxation and a stable currency as necessary conditions for capital accumulation.

‘The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology’, states Human Action.

The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers’ stone to make it last.2

The task before the Committee is to demonstrate to a sceptical populace, beguiled by government legerdemain, that capital accumulation is the true philosophers’ stone of prosperity. ‘What determines the course of a nation’s economic policies is always the economic ideas held by public opinion,’ cautioned von Mises. ‘No government, whether democratic or dictatorial, can free itself from the sway of the generally accepted ideology.’3

Enlightening people about the true source of wealth and prosperity

The trouble is that for many Americans the generally accepted ideology is the welfare state; those Americans who receive more from government than what they pay in taxes, nearly 50 per cent of whom pay no income taxes at all. For them, self-interest militates against reform away from redistribution toward individual effort. ‘‘In the days of laissez faire people looked upon government as an institution whose operation required an expenditure of money which must be defrayed by taxes paid by the citizens,’ wrote von Mises.

Today the majority of the citizens look upon government as an agency dispensing benefits ...expect[ing] to receive from the treasury more than they contribute to its revenues. The state is in their eyes a spender, not a taker. These popular tenets were rationalized and elevated to the rank of a quasi-economic doctrine by Lord Keynes and his disciples. Spending and unbalanced budgets are merely synonyms for capital consumption [emphasis added].4

This is the dilemma of democratic government: when states, formerly charged with maintaining the rights of private property, weaken to popular appeals to redistribute wealth through confiscatory taxation, dressed up in the language of ‘fairness’ or ‘equality’ or the more brutally honest ‘soak the rich’ mentality — social justice in the form of the ‘clientele’ state. It was a contest foreseen by the legendary French economist, Frédéric Bastiat:

‘…when plunder is organised by law for the profit of those who make the law, all the plundered classes try somehow to enter — by peaceful or revolutionary means — into the making of laws,’ he wrote in his classic pamphlet on spoliation.5 ‘According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: either they may wish to stop lawful plunder, or they may wish to share in it.’

It is the pre-eminent political contest facing the United States. Do Americans want to continue spending to-day the profits of capitalism, or will they choose to save for to-morrow and reap the benefits of capital investment? Upon the answer rests the American Dream and the ultimate success of the Committee to Unleash Prosperity.

ENDNOTES

1. Ludwig von Mises, Human Action: A Treatise on Economics [1949], 4th rev. ed., Bettina Bien Greaves, ed. (San Francisco: Fox & Wilkes, 1996), 561.

2. Human Action, 575.

3. Human Action, 850.

4. Human Action, 849-50.

5. Frédéric Bastiat, The Law [1850], Dean Russell, trans. (London: Institute of Economic Affairs, 2001), 26-27.