One of the things the mainstream pundits have failed to understand in the current financial crisis is the important role that savings play in a society. They keep talking incessantly about the “credit squeeze” but hardly ever mention the “savings squeeze.”
One of the keys to rising standards of living is an increase in productive capital. Consider this simple example. Suppose a farmer, with the assistance of workers using hoes, has planted and harvested $10,000 of wheat on his farm. Assume that he pays his workers $5,000 and that all other expenses total $4,000. He pockets $1,000 in profit.
Suppose that in the following year the workers demand an increase of pay to $7,000. Obviously, the farmer cannot pay the increase because it wipes out his profit from the preceding year and his anticipated profit for the coming year. If the workers stand by their demand, the farmer will go out of business and the workers will find themselves without jobs. Even if the workers demand an increase to $6,000, the farmer will most likely close down anyway owing to the loss of his anticipated profit.
Thus, assuming annual production remains the same year after year, there is no way that the workers can secure a pay increase from the farmer.
Suppose, however, that the farmer uses his $1,000 profit to make a down payment on the purchase of a $5,000 tractor. The bank loans him $4,000 to make the purchase. The tractor enables the farmer and the workers to increase production to, say, $15,000.
Now the farmer has more money to pay the workers. The reason for this is the increase in production resulting from the purchase of the tractor. The increase in capital has helped both the farmer and the worker.
How can the workers be certain that the farmer will increase wages? Must they rely solely on his benevolence? No. Other farmers — as well as other businesses — are presumably also increasing production through the use of capital. Out of self-interest, businesses begin competing for the workers with their additional funds. If the farmer wants to keep his workers, he must match or exceed what others are offering them.
The important thing to keep in mind in all this is that it is only through the increase of productive capital that rises in people’s standards of living can take place.
Where does the bank get the $4,000 to lend to the farmer? That money doesn’t just appear in a bank by magic. Instead, that money — financial capital — comes from the savings of all the farmers and the workers. Each payday, as they save a bit of their income, they deposit those savings in a bank. Those savings provide the capital that enables the bank to loan money to the farmer to buy equipment capital — the tractor.
What happens if everyone fails to save any money? Obviously there is going to be a scarcity of capital. As much as everyone would like to believe that the federal government is a god or a magician, the truth is that government officials cannot produce savings or capital. In fact, the government, through its spending, taxation, and inflation of the currency, is the great destroyer of savings and capital. When government taxes more and inflates more, people have less to save. Conversely, when taxes are low and money is sound, people save more.
For the past several decades, the American people have been taught that the key to rising standards of living is consumption. Every time there is a “slowdown” in the economy, what counsel do federal politicians and bureaucrats give to the American people? Spend! Go the mall! Go on vacation! Just spend, spend, spend!
Despite the massive assault on savings that U.S. officials have engaged in with taxes and inflation ever since the New Deal, lots of Americans, especially the wealthy, continued saving. But ever since 9/11, it has become increasingly difficult for ordinary Americans to keep up. Income taxes, combined with rising prices, have made it almost impossible for Americans to save any portion of their income.
As the financial crisis grows deeper with each passing day, editorial boards across the nation are desperately calling on John McCain and Barack Obama to announce their plans to “fix the economy.” What they fail to understand is that there is no way to fix a system that is inherently defective — that is, one that confiscates capital and discourages savings. All that politicians can do is fight for control of the system in the attempt to put their hands on some of the remaining loot, much as vultures do to carcasses on the side of the highway.
The only real answer to this mess — the answer that, alas, the mainstream pundits still do not want to consider — is a restoration of libertarian principles to our land. That means a completely different economic paradigm, one based on the principles of economic liberty and limited government that once guided our nation. That means: no more income tax, no more capital gains tax, no more inheritance tax, no more Federal Reserve, no more paper money, no more welfare system, no more overseas empire, no more drug war, and no more interventionism. Herein lies the key to the accumulation of capital, along with rising wage rates and rising standards of living.