Capitalism self-defeating?

I'm no economist but I think there are some fundamental issues like the meaning of "money" which need to be considered.

Money like Money ?

Interest isn't the reason (or perhaps 'sole reason' is more accurate) for inflation - if the company can't make a profit within the current market price after all it's outgoings (including interest), then it eitherwise : doesn't take the loan, folds, changes products, or increases prices (which last carries the possibility of decreased sales).

The main inflationary factor is the market - or more importantly, scarcity in the market. Any time there is a glut - prices go down (despite any interest that may be owed by individual companies - so inflation is not tied directly to interest), any time there is a scarcity, prices go up (inflation). Any time there are too many competitor companies, prices go down...any time there are too many competitor consumers, prices go up.

Of course as prices go up, people demand higher wages to pay for the increased cost of living, which in turn makes it necessary to increase the price of the product....which in turn can make it necessary to increase the wages...etc.

It can be, but it's not the only way. You work and create a service or product, and in exchange you get paid.

Some businesses take out loans, while others start small and grow to decent sizes on the pure profits they made.

Only in accounting.

If I pick up a piece of wood in a forest, and transform it into a wonderfully carved piece of art, and then trade my work of art with an artist for a beautiful painting - where is my debt?

When it all comes down to it, wealth is ones assets, and money, is representative of assets - hence a person with a lot of money, is wealthy.

When you pay for something, you are still bartering, without the haggling (though many still do a summarised form of haggling for more expensive products)

Your whole thesis collapses because you fail to recognize the value-added process. If you and your friends go out and cut down some trees, and then your neighbors can cut them into planks, they have added value to the original product through their labor, expertise and specialized tools. If they have a neighbor who is a carpenter and joiner, he can use the wood to make furniture, which he then sells profitably, becuase he has added value with his labor, skills and specialized tools. The acquisition of the tools needed to cut down the trees, to cut them into planks, and to make furniture from them is a part of capitalization. The acquisition of the land on which the timber stands, or the right to cut the timber is capitalization. The acquisition of the land for the sawyers is capitalization. The acquisition of land for a carpenter's workshop and the building of the workshop are capitalization. These things may either be provided by the people who themselves will do the work, or by a capitalist who makes a contract to get what he or she considers a decent return on the investment.

The trees have no capital value unless and until they are cut down. Thereafter, value is added to the raw material at each step in the process using labor, skill and specialized tools. Obviously, the provision of the tools is also an example of the value added concept.

In your example you say that trees have no capital value unless they are cut down. I see that, but after the land is purchased and then trees are planted for future exploitation would you not consider that also part of the value-added process?

Scarcity of sugar causes the price on sugar to go up. But that doesn't mean the price of electricity goes up, so that's not inflation.
Inflation happens when the introduction of new money debases the value of already existing money. Raising interest rates counters this, as it will cause less money to be in circulation, thereby increasing the value of each unit of currency.

But doesn't this run irrespective of inflation and deflation? The price of the wooden chairs may be the same from one year to another, but in the meantime, inflation can have lowered the purchasing power of that amount, so the same work is worth less.

The Reserve Bank of Australia disagrees with you - they have bananas on their list of products that they watch to determine inflation.

It's not about just one product.

Besides - if electricity was scarce it's price would go up too. And if you are talking energy - have a look at what's happened to the price of petrol over the last decade. The price of petrol going up, drives up the price of every single thing we will purchase in stores. Have a look also at the price of steel going through the roof - which drives up the price of everything with steel in it (that's a lot of things). The same with gold - which drives up the price of everything with gold in it (cabling, jewellery, electrical connections etc). The same with Copper - which drives up the price of everything with copper in it (electrical wires, pots & pans etc). etc.

Yes, to determine, not control. And when inflation gets too high, they can increase the interest rate, which drives prices down. That's a bad time to borrow money, which makes fewer people do it, so more money goes to the central bank that it gives out. That stabilizes the prices, but then they have to let up. The interest rate is lowered, and more people take out loans, increasing the money supply again. The application of interest enables those who make the adjustments to control the flow of money. Central banks do it to keep the value of their national currency stable in the international economy. If the global economy is flooded with a certain type of currency, that currency starts to lose value respective to other currencies. Too much productivity in a nation can make this happen, and a balance is maintained by encouraging new growth by lowering interest rates and discouraging it by raising them.
I am not saying that products don't matter, but money is a trade commodity of it's own, and it is the regulation of it's supply and demand that maintains it's value.

Sure, if the land had not trees before, and if the land is preserved for the anywhere from 30 to 70 years necessary to produce valuable timber. It's not a static thing. As well, i was attempting to produce a simple version for general consumption, not an exhaustive review of the value added process in all its detail. It's pretty easy to raise objections on that basis.

Which leads me to Cyracuse's question. Certainly price inflation will affect the price of the items which are produced by the valued added process. The effect is not instantaneous. But as prices rise, the amount charge for your labor (if it is skilled) will increase as well, as will the price of raw materials, rents, utilities and the eventual price of the finished product. As with JLN's post, yours is quibbling over details, and avoiding the point i was making about the value added process. Capitalism isn't self-defeating, at least not in the terms you describe. I have no brief to be a booster for capitalism, but you haven't given this sufficient thought.

Basically, what i'm saying is that you have oversimplified the description of the monetary system. Inflation isn't created because banks make loans. In fact, if governments carry high rates of debt, and reduce the money supply available for loans, that can create inflation. I brought up the value added process to point out that monetary values in capitalism aren't the product of the manipulate of financial instruments. Although those may affect prices and wages, what determines the health of any particular economy is the value of its production. If all it produces is raw materials, it can still produce a comfortable living for its people, but they really start to make money when the add value to the raw materials before selling them. Things like inflation are annoyances in a productive economy, but it's silly to suggest that financial instruments are self-defeating aspecgts of capitalism. That only happens when the financial instruments are fraudulent, when they represent theft, intentional or otherwise--like trading in sub-prime mortgages.

Here's the simplest terms i can provide you. The value of an ecomony is determined by its productiveness, and the intelligence of the policies of the government and financial institutions. Inflation is a symptom of economic change, not the cause of it.

O.K. points taken. I do suspect sometimes that fraud (ethical if not legal) is involved where financial activities have to do only with the production of profits but not of goods.

While that happens to be true in modern times, it isn't necessarily true by the definition of money. Money can consist of coins that are actually worth their face value in metal. When that's the case, money is backed by equity, not debt. Although this kind of money is perfectly consistent with capitalism, we don't have it these days because it's wasteful. Why dig for gold at great cost in labor and environmental damage, only to re-bury it in Fort Knox and under people's mattresses? Fiat money saves us hundreds of billions of dollars of such waste.


True. But at the same time, banks invest the greater part of your cash into projects that, on average, turn a profit. This profit is what backs the cash that your bank pays you as interest. A capitalist economy can work with fiat money, with zero inflation. It's just not as efficient as an economy with fiat money and with low, stable, and positive inflation. That is why we have inflation. How much of it is right? That's a matter of debate between economists. (In my own capacity as an armchair economist, I like about four percent core inflation a year.)


Are you aware that inflation is presently quite low, and that deflation is currently a much greater threat to the world economy? Your post, it turns out, amounts to shouting "fire" in Noah's flood. The world economy is indeed having serious problems, but they're the opposite of the ones you imagine.

Perhaps--but the production of services can be economically healthy and non-fraudulent, too.

Do you mean that they give out new loans? They do not invest money. They have an excess reserve that allows them to create more money.

I am probably sounding a lot more certain that what I am about this. It just seems to me that the creation of money out of nothing, and the application of interest to that money is inherently fraudulent. It seems to transfer true wealth to those who control the monetary system, while increasingly putting everyone else in debt.

Jeeze, you've picked up nothing here. Money is not being created out of nothing. It is the expression of the value of the goods and services produced.

Try telling that to a homeowner with a mortgage.


Then perhaps you would benefit from reading up about banking in a macroeconomics textbook. Matters of fact are rarely discovered by introspecting one's feelings about them.

Like Jerome Daly?