Capital is key

Some common sense wisdom from today’s Monday Morning Outlook.

If labor wants higher living standards for a lifetime and their children’s as well, public policies must protect and nurture capital so it’s as plentiful as possible.

For example, auto workers in the Detroit-area often won contracts giving them more lifetime compensation (particularly health benefits) than the companies they worked for could consistently generate. The long-term result: a city that’s a rusted skeleton of its former self, bankrupt, with fewer jobs, and lower living standards relative to the rest of the country.

Attempts to redistribute wealth in Detroit ended up redistributing the capital to other states, and to the suburbs. In fact, when looking at wealth disparity look no further than the disparity between Detroit and its surrounding suburbs.

The best way to increase capital investment is to increase the after-tax return to capital, by cutting taxes on corporate profits, dividends, and capital gains, as well as hastening the ability to write-off the cost of buying new plant and equipment.

This reminded me of a great info-graphic I saw yesterday, which accompanies a terrific article by FEE’s Lawrence Reed on the interdependence of labor and capital.

capital day

Some Quotes on Piketty and Capital

Ok, so these aren’t actually about Piketty. But I came across a few selections tonight reading through Jesus Huerta de Soto’s Money, Bank Credit, and Economic Cycles that are very relevant in light of recent discussions about Thomas Piketty’s book Capital in the Twenty-First Century and his r>g theory.

The first is from Bohm-Bawerk:

“There was and is always the choice between maintaining, increasing, or consuming capital. And past and “present” experience tells us that the decision in favor of consumption of capital is far from being impossible or improbable. Capital is not necessarily perpetual.”

The second is from Hayek:

“This basic mistake–if the substitution of a meaningless statement for the solution of a problem can be called a mistake–is the idea of capital as a fund which maintains itself automatically, and that, in consequence, once an amount of capital has been brought into existence the necessity of reproducing it presents no economic problem.”

That last one is especially relevant to Robert Solow’s review of Piketty’s book, in which he states:

“The key thing about capital in a capitalist economy is that it reproduces itself and usually earns a positive net return.”

…a statement Peter Klein has called “nonsensical from the point of view of microeconomics, entrepreneurship, uncertainty, innovation, strategy, etc.”