The property of the means of production.

It all comes down to the way growth is financed. Growth signifies an increase in supply, in demand and in the means of payment. Supply to the market precedes a materialised demand, as opposed to the potential demand that motivates supply. So that extra supply must be financed before the necessary extra demand, and investments that can be lengthy, or in several stages, must be made prior to any actual consumption of the end product. Supposing the extra investments in raw materials and labour are paid with credit. There is monetary creation by the banks who guarantee the payments, which goes into circulation and increases general demand. When the investments take time to reach the consumption stage, the increased general demand will be inflationary. But, if growth is prolonged, the monetary creation of the latest investments fuels demand for the end-production of previous investments. 

By the power they have to create money, banks guarantee the credit that pays for investments and become, in all but name, their owners. To avoid the control of banks, entrepreneurs have always looked for alternative financial backing, in the form of unspent incomes. Instead of circulating additional money, they use money already in circulation and disrupt the balance of supply and demand. The value supplied increases without the equivalent increase in the means of payment that allows an increased demand. However, the insufficient demand can be compensated by consumer credit. Instead of creating money for investments, banks and pseudo-banks create it for consumption. Incomes are invested and credit is consumed, an inversion that is not without consequences. 

The value of an investment is returned when its production is exchanged for money on the market. That means the credit can be paid back and renewed. The value of consumption is… consumed, and has to be produced again. That means the credit cannot be paid back and renewed. The renewal of increased investments needs renewed credit. The renewal of increased consumption needs renewed credit, plus credit to pay back the previous credit. Invested credit grows at the same rate as investments. Consumer credit grows twice as fast as consumption (1). This fatality also applies to the consumption of government debts. 

Derivatives have multiplied the possible forms of financial investments, but an entrepreneur aspiring to expand his business has always had several alternatives. He might ask his banker or supplier to grant him credit. He can sign an IOU (bonds), or sell shares of his company. Or he may be making enough profit to finance himself. In the first case, the virtual money of credit increases the money supply. The following cases concern income destined to consumption (mostly) or to the renewal of existing investments, and result in consumer credit or closed factories. As for reinvesting profits, it is the classic model of capitalism, the thrifty Protestant ethic described by Max Weber. But profit is part of added value and therefore of income. Profit is also the source of dividends, interest and commissions, which are in turn invested or consumed. 

Financing growth with unspent incomes and compensating insufficient demand with consumer credit and public debt, or exports (2), insure that the property of the means of production is private. And profit, in one form or another, is the rent received by this private property. Financial profits attract incomes, and the flow feeds market bubbles whose deflations are a mass destruction of value. A market crash is a potlatch of misappropriated consumer demand. At some point unspent incomes no longer finance extra investments. They merely increase the value of existing investments. Selling investments on the market as shares and bonds (and all their variants) puts them in the commercial sphere of buying and selling at a profit. However, company shares are never put to any use – as are most other objects of commerce – and are for ever. They change hands by the billions every day of every year, in perpetual motion. And the commercial drive tends to push their price up artificially, for as long as the input of incomes is sufficient. When it reaches its limits the bubble collapses more or less suddenly. 

The private property of the means of production and the rent it receives result in exponential borrowing, market speculation and the destruction of wealth. And consumer credit, the corollary of invested incomes, is a growth mechanism that gets quickly out of hand. This means the system is doomed to periodic failures, either in the flow of invested incomes or in the counter-flow of consumer credit. Occasionally both fail together, as they are at present. Unspent incomes are contracting and everyone has borrowed all they can. This could be resolved by considerably increasing incomes (i.e. wages), and letting the subsequent inflation reduce debts. However, for numerous reasons (3), inflation is not on the program. That is, it will not be driven by pay rises. But the monetary creation of quantitative easing will probably bring about the same result, and it will be interesting to see how that unfolds. As for building a new fail-proof system once the dust has cleared, it can only happen if there is a radical transformation of the social contract and the common weal, with fundamental modifications to the rules of property and corporate law. The world will soon be faced with the age old dilemma of war or revolution, of conservative nationalism or structural change. Will nations attack one another or will they transmute their dysfunctional institutions? 

 (1) I have studied this process at greater length in this previous piece, “The binary production of wealth” August 25, 2010 

 http://lelezard.blogspot.fr/2010/08/binary-production-of-wealth.html 

(2) Sorry but here again I refer to this preceding article, “The deceptive promise of growth” May 10, 2012. 

(3) Sorry again, “Then and now” June 16, 2012.