August 29, 2020


Revisiting Chesterton and The Mystery of Capital (JAMES E. HARTLEY, 8/27/2020, Public Discourse)

The new conservatives have not just forgotten the lessons of de Soto; they have also forgotten their Chesterton. In St. Francis of Assisi, Chesterton notes the strange propensity of the modern mind to start at the end of the story.

Men for whom reason begins with the Revival of Learning, men for whom religion begins with the Reformation, can never give a complete account of anything, for they have to start with institutions whose origin they cannot explain, or generally even imagine. . . . We may concede to our contemporaries that in any case it is not a story that ends well. We do not insist that in their version it should begin well. What we complain of is that in their version it does not begin at all. . . . We learn about reformers without knowing what they had to reform, about rebels without a notion of what they rebelled against, of memorials that are not connected with any memory and restorations of things that had apparently never existed before.

These new conservatives are acting exactly like the enlightenment thinkers whom Chesterton chastises. Starting with the existence of a wealthy society, where teachers make $60,000 a year in a small factory town, they ask why the town is no longer vibrant. They forget to wonder why the town existed in the first place. Surely, the impressive thing is that a factory town arose in some vast, uninhabited plain and that the town provided incomes and wealth to many people who worked there--enough wealth to pay teachers $60,000 a year to educate their children.

If these conservatives had peeked backward in time for just a moment, they would have noticed something amazing: that factory whose closing occupies their attention was built when somebody moved their capital into the town and built it. Where did that capital come from? It must have come from somewhere else, and its departure deprived that former location of its use. Similarly, where did the people come from who worked in the original factory? They too left somewhere else and deprived their former hometowns of their labor.

If these conservatives want to be consistent when they complain about the modern economy, then perhaps they should advocate returning all capital to its place of origin. Let us not stop with telling existing factories' owners that they should not move their capital elsewhere: let us return the capital from the prairies and the mountains back to the coasts, and then ship it back to its countries of origin.

Presumably nobody is actually going to argue for returning all capital to its point of origin. Similarly, we can presumably agree that if a new factory were going to be built, it would be good to use the best available technology to produce better quality products. The matter in question is whether an existing factory's owner has a moral obligation to continue operating a factory even if a better opportunity comes along. Does the government have the right to prevent the factory owner from moving capital elsewhere if the result would be the demise of the factory town?

It sounds nice to insist that the factory owner should forgo more profitable opportunities in order to keep the workers employed. But, as Joseph Schumpeter noted, what is to stop someone else from coming along and opening a second, new factory that can produce the same (or a better) product at a lower price? Once that new factory has opened, the old factory with the higher costs will close. The effect on the workers at the old factory is exactly the same, whether that factory and its owner leave town altogether, or whether the new factory puts the old one out of business.

Can we rescue the argument by insisting that in some cases the factory owner does have the legal and moral right to move capital to more productive opportunities, but only in extreme cases involving significant technological improvements? Perhaps. If we could predict the future, that might be a possible argument. Are 1970s Japanese cars only slightly better than the cars made in Detroit? Is the iPod a small or large improvement over the Walkman? Is a flat screen HDTV a small or large improvement over those TVs of old? Is Netflix's mailing out DVDs a major or minor advance over Blockbuster's retail stores? In every case like this (and you can spend hours thinking of new examples) at the time when the innovation happened, there was no way to tell whether the new product would win out. Somebody had to gamble and move capital into the new production lines. Somebody else could have easily argued that the new product is not enough of an improvement to make it worth laying off so many workers.

The alternative is to recognize that de Soto is right. Factories, like houses, have two aspects. There is the actual, visible building to be sure. But the real magic of generating wealth comes from the invisible potential of the capital inherent in that physical building. Allowing capital to move is exactly what generates the wealth in the first place. 

...the Right/Left never even asks the threshold question: what is the point of an economy?  It is to create wealth, not jobs.  Rather than fighting to make the economy less productive, as they are, they ought to seek to make capital universal.

Posted by at August 29, 2020 9:52 AM