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MUSINGS ON WHAT IS CAPITALISM:

June 24, 2016

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Adam Smith’s stated that “The profits of production must be reinvested in increasing production.”

I would assume from that that the good A. Smith may have agreed that if the profits of production go into building up wealth and not reinvested in increasing production, it is not Capitalism or a capitalist system but rather something else — perhaps something more like the royal system he lived in where the profits of production went to increasing the wealth of the entitled classes or into rent based assets.

Similarly, the debt and credit system are not Capitalism. They existed long before Capitalism developed. They proved exceptionally helpful and often assisted in increasing production but the bankers need for timely repayment is not the same as the investors wish for profit and may at times suppress production in order to satisfy the need for repayment. Also, as we have seen in the past 50 years or so, the bank based financial system encouraged the replacement of production with production-less wealth creation, thus requiring THE government to periodically step in to boost confidence by transferring public wealth in order to prop up the banks thereby making non-production based assets even more valuable. In effect, companies producing goods can fail but banks producing paper wealth cannot. I always felt that the banking system, since it often in the long run substitutes debt and credit for investment, risk and the reinvestment of the profits into increasing production is the anthesis of Capitalism.

Corporations are not Capitalism. They are a state sponsored scheme to encourage investment in production that investors would otherwise consider too risky. True, like debt and credit they may be helpful and perhaps essential in increasing production but they also have downsides. Investors having significantly limited liabilities as well as microscopic ownership interests leave operational oversight, to management, a few large investors, and various investor agents all of whom may have and often do have interests other than increasing production. They also, in the long run, substitute organizational preservation to production. Reinvestment of the profits of production in increasing production becomes a far lower priority to keeping Wall Street happy.

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