The Economics of Mass Destruction - Part I

Econophile's picture

From The Daily Capitalist

The Power of Capital

The most valuable economic substance in the world is capital. It is not “money” if we define money as pieces of green paper. Governments cannot create wealth by printing money. If they could we wouldn’t have to work.

The formation of capital plus a culture of entrepreneurship is the only way to create economic well being. When government policies destroy capital it diminishes everyone’s economic well being.

Capital is saved wealth. If you produce goods and you make a profit and save the profit, then you have created capital. Ditto with your labor. If you spend all of your wages, you’ve saved none of the wealth created from the goods you made and you have no capital.

It takes societies a long time to create and amass capital. In the U.S. we have a dynamic financial infrastructure to generate wealth/capital. It started with the rights guaranteed by the Constitution, but it took about a century to create our wealth-creating financial infrastructure. While you can criticize it all you want, wealth is widely distributed in America when one compares our standard of living to elsewhere.

This financial infrastructure is called capitalism.

Our current economic policies are destroying capital and our well being. These policies are now globalized. They are the Economics of Mass Destruction.

International Coordination of Economic Policy

I have a folder entitled “Supranational” in which I keep research related to international regulation of the world’s economy. As I anticipated, after the Crash nations joined together to coordinate economic policies and  the regulation of financial activities.

The conformance of economic policies was rather automatic. Most of the world’s economic ministers, especially those of the G-20 countries, have adopted familiar Neo-Keynesian/Neoclassical policies of fiscal and monetary stimulus. In most countries the results of these policies have been as disappointing as ours.

Monetary Stimulus

Look at monetary stimulus. It is no coincidence that central bank interest rates of advanced economies are historically low; they all are trying to create massive monetary stimulus to revive their economies. Higher interest rate countries such as the BRICs with less stable economies either have more trouble selling sovereign bonds on the international markets or are attempting to thwart rising prices.

Central Bank Interest Rates

Fiscal Stimulus

Almost all these countries engaged in fiscal stimulus as well. The Bush Administration committed about $700 billion to the various bailout schemes. Then the Obama Administration came up with a massive Keynesian spending program (initially $787 billion). Other countries followed:

Type of Stimulus as a Percentage of GDP

Note this subsidies chart doesn’t reflect the U.S. TARP and related bailouts. Source the OECD

Financial Regulation

The last piece of the globalization of economic policy was to increase regulation over financial activities. The post-Crash drive to coordinate financial regulation was unified by the theory that the cause of the Crash was Wall Street: the investment banks, investment companies, hedge funds, the big “banksters,” and insurance companies. Not to mention greed and overpaid executives. If governments admit any fault it is that they failed to adequately exercise their existing regulatory powers.

Which means that many of the laws passed here are or will be similar to those enacted in other major countries. For example, the Dodd-Frank financial overhaul act contains many rules that had been discussed with G-20 counterparts. “Forum shopping” or the “you can run but you can’t hide” policy, was a major factor. The new bank capitalization rules of Basel III are an outcome of the Crash. No treaties are required to accomplish most of this legal conformation; meetings between economics ministers and their regulatory staffs were all that was needed and individual governments did the rest.

The Failure of Regulation

Unfortunately our new laws (Dodd-Frank) fail to address the primary cause of the Crash: the Federal Reserve itself. Its years of easy money policy kicked off the massive credit boom that landed on the housing market because of U.S. government policies that encouraged capital to flow into residential real estate. The boom ended when the Fed raised rates.

I don’t mean to spare Wall Street in my criticism; they failed in many ways, primarily their faulty risk models. But, while they pushed the scheme forward, they didn’t cause the boom or the bust. History shows us that cheap money from central banks, or from banks or sovereigns pre-existing central banks, always have caused these boom-bust cycles. Just because the Fed took over doesn’t mean that bad banking theories changed.

The Globalization of Failed Economic Policies

The purpose of this article is not meant to be an exposé of an international conspiracy or secret cabal to control the world. These policies are the logical conclusion of theories of economics and political organization that have been taught in our universities before our oldest citizens were college freshmen. Some of these ideas even trace back to Ancient Rome. Sub sole nihil novi est.* These ideas were developed in Europe, but took root and flowered in our best universities. Because of the stature of America’s academic institutions, which stature is founded on capitalism’s prosperity, it is no surprise that these Neo-Keynesian ideas have spread throughout the world.
*There is nothing new under the sun.

You may believe this regulatory coordination and conformation is a good thing because it gives enterprise a more stable regulatory foundation in which to operate. Or that it is necessary to prevent another crash. Or that regulators have superior knowledge and can be trusted to properly guide economies. But that is not the case.

The serious economic problems we have are the direct outcome of mainstream economic thought and these ideas now operate worldwide. If one studies economics in London, or Paris, or Rome, or Beijing, the lessons are very much the same. If one examines the policies of the EU and its member states or China or Japan, they are remarkably similar.

Perhaps the term the “Economics of Mass Destruction” is a bit of hyperbole, but I am giving fair warning that we Americans, the most dynamic capitalists and the primary drivers of the world economy, are heading for long-term economic decline if we continue with the same Keynesian doctrine that got us into the current historically big mess.

While it is nice to believe that emerging economies such as Brazil, Russia, India, and China will take up the slack, I am not convinced they yet have in place the cultural and financial resources that have made America the world’s leader.

Because of the globalization of these ideas, it now appears that the whole world will rise or fall on these policies.

Tomorrow, Part II of II: The fallout of the globalization of failed economic policies.

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ddtuttle's picture

This stuff is so ripe for conspiracy theories. In fact, you can't anything about global economic coordination without sounding like a nut. I have many thoughts about this post and the comments, but one comes to mind.

First, Matt Tiabbi got it wrong: the vampire squid is NOT Goldman, it's the Fed. The Fed was CREATED to suck money out of the government to save the banking system when it inevitably gets in trouble. The Fed is a private corporation OWNED by the banks. The propaganda says that this is just a formality, and the government really controls the Fed. Nonsense! The Fed is utterly controlled by the banks, many of them international in scope. The Fed has never and never will operate for the benefit of the American people.

Over the last 100 years the Fed has expanded it reach, controlling the very language we use to describe economics. What passes for Economic 101 at our Universities is actually propaganda designed to maintain the illusion that banks are good servants of society. If you are a professor or bank economist and you try to expose the banks and FRB for what it really is, you will be black listed by the Fed. It is not a coincidence that the only economist making progress on a real theory of economics is Australian Steve Keen, who is well outside the Fed's direct control.

Ancient Rome had Julius Caesar, the Barbarians had Genghis Khan, then there was Napoleon and more recently Hitler. These famous power grabbers were the focal points of empire building. Each saw an opportunity for massive social arbitrage, and took it. Julius Ceasar conquered Gaul on his own initiative, it wasn't the city of Rome doing it. LIkewise, for the others: empires are built by exploiting concentrations of power independent of governments.

Today, the USA is engaged in the same thing. After WW II, we chose not to conquer the world militarily, even though we probably could have. Instead we took a page from the British Empire, and added our own chapter. We use our financial system to dominate the international scene. The apparent reduction in US power is an illusion covering the fact that our banking system grows ever stronger, even during this crisis.

The central component of control is the dollar reserve currency. Over the past 30 years the number of dollars and dollar based credit and derivatives has grown to enormous proportions: some putting it at $1 quadrillion. This stupefying amount of money prevents governments from shutting the banks down, even though they have ignored all laws governing solvency and levered themselves to absurd ratios of 100:1 in some cases. At any point a government tries to do fiduciary duty and close these banks down, they simply say "if you shut us down, the whole system will collapse!".

The Fed has been assisting this power grab for decades. So because the Fed is owned by the banks, it is those people who own the banks that really call the shots. Now, this is fertile ground for all kinds of conspiracy theories, which are almost certain to be wrong. But clearly many ultra-wealthy families and individuals are in a position to acquire ever greater control over international banks probably over many generations. The identity of these people is the subject of much speculation: Rothschilds, Saudi Royal Family, etc. but that is probably a smoke screen hiding the true owners.

Finally, there is the BIS. The BIS is owned by the world's central banks, and really beholden to them, rather than controlling them. And since all the world's central banks are, like the Fed, owned by their member banks, the real power over all central banks and the BIS resides with the true owners of the banks. This ownership is hidden behind many layers of shell corporations, but is likely not set up for 'your' benefit. I would only point out that, the while we don't yet have world government, that non-existent world government already has a central bank: the BIS.

So Fascist or Socialist, it REALLY doesn't matter. As always to understand the power structure of the world just follow the money.

Kalki's picture

This is not a fault of the Government or Society or the fed. It's the fault/failure of the philosophers and thinkers who should be the guiding force to the population with NO WORLDLY DESIRES for themselves.

The message from the person regarding capital as just a form of energy was 100% accurate.


RockyRacoon's picture

Thanks... again!  Great information.  Looking forward to the follow-up.

sbenard's picture

"Capital is saved wealth."

Excellent article. Anti-capital is anti-savings! It says something fundamental about those who hate capitalism. Not surprising, since savings gives us independence from government, and statists, who are anti-capital, want us all to be relentlessly dependent on the government.

chrisina's picture

Yet the countries who have the highest savings rate are those which were the least capitalist and with the most dirigist government (eg china, India, Germany, France).

Funny this "savings gives us independence from Government" when it's in the country where people distrust the most government, the USA, that one finds the lowest savings rate. Go figure.

Econophile's picture

Savings are higher in BRICs because they don't trust the government. Savings are lower in Japan than here. Savings here are on the rise.(PSAVE)

chrisina's picture

Savings in the East are actually government savings

Savings in Japan were actually always much higher than in the US during the last 30 years. They only started going down in Japan after the explosion of the real estate/Nikkei bubble and the disastrous Japanese Govt policies that resulted. One would think that if savings went up with bad Govt policies and distrust thereof one would have seen the opposite result.


In the West, the only countries which maintained a high savings rate during the last 30 years, were Germany and France, where Govt involvement in the economy and trust thereof is high.

Econophile's picture

Chrisina, you've got so many things wrong, you're wearing me out.

Battleaxe's picture

Capital is saved wealth. If you produce goods and you make a profit and save the profit, then you have created capital. Ditto with your labor.

This is true for everyone, including the Treasury, EXCEPT the FED. The Fed is allowed to create capital with a few mouse clicks and buy Treasury debt with it. When treasuries blow up will the Fed be out ANYTHING? No.

chrisina's picture

 we Americans, the most dynamic capitalists and the primary drivers of the world economy, are heading for long-term economic decline if we continue with the same Keynesian doctrine that got us into the current historically big mess.

Wrong, in a globalized capitalist world governed by the mantra of free trade and free markets the economic decline of the USA and the rest of so called developped economies will happen even faster simply because capital will move wherever it can find the cheapest labour.

I'm afraid this pro capitalist mantra won't be abandonned and that capital which has already moved to cheap labour in great part will continue to flow there. So this decline, planned long ago, is unfortunately for us in the west unavoidable.

Econophile's picture

Hmmm. Didn't realize that. I thought that GDP has expanded since the rise of global trade in the 1980s. So, unless we manufacture plastic gizmos for sale at Walmart, we're screwed?

chrisina's picture

I'm afraid it's not just plastic gizmos, but also garments, electronics, tools, light bulbs, etc...

Yes GDP has expanded in the west since the 1980s, but most of that fake prosperity was obtained from CREDIT (which rose in the west from 150% of GDP to 350%), ie borrowed wealth.

Now that CREDIT is going to deflate back to the level where it is collaterized acceptably to the surviving creditors, either from pay back or liquidation (about $60 trillion), you will see that most of that fake prosperity will actually dissapear... and all the real productive jobs that moved to the east and were temporarily replaced my money pushers insurance sales men and real estate agents will suddenly go poooof.

Econophile, wake up!


Fast Twitch's picture

On the onehand modern universities universally teach Darwin: "Survival of the fittest". The Austrian School of Economics way. Yet on the other hand universally teach Keynes: Print your way to prosperity "Creation". Scientists should teach economics and Economists should teach science. Just saying.

ZeroPoint's picture

You only have part of the story here. The reason those bubbles were created in the first place is because the economy was already flagging.

Why is that? Trade policy. Very bad trade policy. The US didn't protect it's manufacturing base, and the consequence is the lack of jobs that provide adequate wages to the populace.

Let's talk about that before we talk about the Fed putting gasoline on the fire that was already burning.

StychoKiller's picture

Off-Topic:  Looks like Gold and Silver are gonna go where no PTB wants them to go today...

Mercury's picture

Another good Econophile primer!

Some readers may also want to check out the new WGBH doc. I 've recommended before The Ascent of Money:

Very straightforward historical overview that's actually positive on things like Milton Friedman in Chili and the Austrian School (no, really).

- - - - - -

I've always liked The Economist's definitions of capital and capital flows:

-Capital: Stuff that begets other stuff.

-Capital goes where it's welcome and stays where it's well treated.

Good things to keep in mind (especially) these days.

MisterMousePotato's picture

There is a fundamental flaw in this article; to wit: The assumption that policy is actually set according to some underlying lofty economic philosophy, whether Keynesian, Austrian, Republican, Democratan, Stimulan, whatever. This is naive and misleading and wrong.

In fact, every policy and every policy maker is guided by only one principle: What's in it for me and how do I (and my homies) profit from this?

Everything is gamed. Nothing is done for the general welfare. All those words and academic theories are nothing but a beard. Debating policy is a sophomoric exercise. In the real world, nothing matters other than how can this benefit me and mine, and if it hurts everyone else, so much the better.

rwe2late's picture

 exactly correct, MisterMousePotato

Econophile continually adheres to a false dichotomy between government and "private" enterprise.

Government policies are falsely portrayed as arising independent of powerful institutions headed by an elite few. From that mistaken presumption comes the near anarchist conclusion that government alone is the cause of bad policies. And next, that the solution would be to have a "free market" (free of government).

In actuality, one can escape government no more than one can escape society. The marketplace is man-made, not god-given. Government establishes the framework and rules from the get-go. It controls property, fraud, liability, patents, incorporation, taxation, and labor conditions (children, safety, slavery, etc.). Only in that most elemental sense is society itself or government the source of all evil.

The monomaniacal condemnation of government is incorrect. Wealth and power typically go hand in hand. Elites who head large corporations will use that power to self-servingly bend government policies to increasingly reward the institutions they head and themselves. To ignore that is ridiculous. To insist that government has on its own volition empowered those elites is beyond absurd.

Yes, there are other institutions that also self-servingly wield power, from the Pentagon to the Catholic Church. And yes, those who head them may abuse their power, inasmuch as "power corrupts, and absolute power corrupts absolutely".

Sadly, the plight of humanity seems to be, like Sisyphus, to be continually undoing the abuses of those who head ever-changing organizations. Currently, curtailing the abuses of government institutions cannot be done without curtailing the power of private corporate enterprise.

Yes, the Pentagon bureaucracy supports empire-building. But the military-industrial complex is also empowered and driven by arms merchants and global corporations seeking resources and markets.

Yes, the Federal Reserve supports global ponzi finance, but so do global banks and investment houses.



Maos Dog's picture

I don't agree with this. I do believe that the primary problem is government. 

We have a "Which came first, the chicken or the egg" problem here.

A time not so long ago, there were regional and local brands of products, regional and local farms, regional and local stores, for example.  Every time the government  passes some kind of bullshit regulation, the low man on the totem pole, "the smallest business in the chain" gets screwed.

After the regulations start to pile up, the smaller players can't make a profit and close, or, they lose a lot of business to the bigger players that can keep up with the regulations and still provide the product at a competitive price.

Local gives way to regional which gives way to national. National gets into bed with government because it has to in order to survive.

Rinse, wash, and repeat for 40 years and you have the current fascist system we have now, with government completely in bed with business.

Yes, this is oversimplified, but I hope I have made my point.

rwe2late's picture

 yes, your alleged historical narrative is oversimplified to the point of being a fantasy.

"Every" government regulation did not benefit large business at the expense of small business.

But more pointedly, all society is not divided between just small and large business owners. There are also workers and those not in the labor market. The assumption that what benefits either large or small business never conflicts with the best interests of any others is false. Small business, as well as large, may pollute, abuse employees, commit fraud, and self-servingly manipulate government institutions.


Econophile's picture


If there is a cabal of the rich and powerful I would say they have been damned incompetent in protecting their interests.

rwe2late's picture

 Are you unaware of the recent upward transfer of wealth which has resulted in a most inequitable distribution of wealth and power? Perhaps you think all the brouhaha regarding corporate control of the US government is just so much misguided hot air?

 Excessive greed means nothing to organizations whose overriding goal is to maximize profits. Nor does it mean anything to those who head such institutions. Such organizations promote and reward those who endorse their one-dimensional goal, and punish and exclude those who obstruct. It may not be so much a conspiracy as a confluence of interests, though the effect is the same.

 Using government to advance the aims of multinationals, to control resources and markets, to establish monopolies, to escape liability for damages, to denigrate worker health and safety, to pass off costs to the public, all is done to maximize the profit goal.

 The global Pentagon does not serve the citizens of the US, or of any nation. Instead, by pursuing "full-spectrum" global dominance, it has subordinated itself to be the enforcer for the global petrodollar ponzi racket.

 Given their goal, it is hard to see how they could be doing much better than they are. Incompetent? Not so much as you suggest.

calltoaccount's picture

Blame it on the gubment-- is exactly what TPTB want you to do.  But the truth is:


We're Living in a Kleptocracy: Fears of Socialism and Fascism Are a Distraction from the Naked Theft of Trillions
By William Astore Kleptocracy -- now, there’s a word I was taught to associate with corrupt and exploitative governments that steal ruthlessly and relentlessly from the people.  It’s a word, in fact, that’s usually applied to flawed or failed governments in Africa, Latin America, or the nether regions of Asia.  Such governments are typically led by autocratic strong men who shower themselves and their cronies with all the fruits of extracted wealth, whether stolen from the people or squeezed from their country’s natural resources.  It’s not a word you’re likely to see associated with a mature republic like the United States led by disinterested public servants and regulated by more-or-less transparent principles and processes. In fact, when Americans today wish to critique or condemn their government, the typical epithets used are “socialism” or “fascism.”  When my conservative friends are upset, they send me emails with links to material about “ObamaCare” and the like.  These generally warn of a future socialist takeover of the private realm by an intrusive, power-hungry government.  When my progressive friends are upset, they send me emails with links pointing to an incipient fascist takeover of our public and private realms, led by that same intrusive, power-hungry government (and, I admit it, I’m hardly innocent when it comes to such “what if” scenarios). What if, however, instead of looking at where our government might be headed, we took a closer look at where we are -- at the power-brokers who run or influence our government, at those who are profiting and prospering from it?  These are, after all, the “winners” in our American world in terms of the power they wield and the wealth they acquire.  And shouldn’t we be looking as well at those Americans who are losing -- their jobs, their money, their homes, their healthcare, their access to a better way of life -- and asking why? If we were to take an honest look at America’s blasted landscape of “losers” and the far shinier, spiffier world of “winners,” we’d have to admit that it wasn’t signs of onrushing socialism or fascism that stood out, but of staggeringly self-aggrandizing greed and theft right in the here and now.  We’d notice our public coffers being emptied to benefit major corporations and financial institutions working in close alliance with, and passing on remarkable sums of money to, the representatives of “the people.”  We’d see, in a word, kleptocracy on a scale to dazzle.  We would suddenly see an almost magical disappearing act being performed, largely without comment, right before our eyes. Of Red Herrings and Missing Pallets of Money Think of socialism and fascism as the red herrings of this moment or, if you’re an old time movie fan, as Hitchcockian MacGuffins  -- in other words, riveting distractions.  Conservatives and tea partiers fear invasive government regulation and excessive taxation, while railing against government takeovers -- even as corporate lobbyists write our public healthcare bills to favor private interests.  Similarly, progressives rail against an emergent proto-fascist corps of private guns-for-hire, warrantless wiretapping, and the potential government-approved assassination of U.S. citizens, all sanctioned by a perpetual, and apparently open-ended, state of war. Yet, if this is socialism, why are private health insurers the government’s go-to guys for healthcare coverage?  If this is fascism, why haven’t the secret police rounded up tea partiers and progressive critics as well and sent them to the lager or the gulag? Consider this: America is not now, nor has it often been, a hotbed of political radicalism.  We have no substantial socialist or workers’ party.  (Unless you’re deluded, please don’t count the corporate-friendly “Democrat” party here.)  We have no substantial fascist party.  (Unless you’re deluded, please don’t count the cartoonish “tea partiers” here; thesepredominantly white, graying, and fairly affluent Americans seem most worried that the jackbooted thugs will be coming for them.) What drives America today is, in fact, business -- just as was true in the days of Calvin Coolidge.  But it’s not the fair-minded “free enterprise” system touted in those freshly revised Texas guidelines for American history textbooks; rather, it’s a rigged system of crony capitalism that increasingly ends in what, if we were looking at some other country, we would recognize as an unabashed kleptocracy. Recall, if you care to, those pallets stacked with hundreds of millions of dollars that the Bush administration sent to Iraq and which, Houdini-like, simply disappeared.  Think of the ever-rising cost of our wars in Iraq and Afghanistan, now in excess of a trillion dollars, and just whose pockets are full, thanks to them. If you want to know the true state of our government and where it’s heading, follow the money (if you can) and remain vigilant: our kleptocratic Houdinis are hard at work, seeking to make yet more money vanish from your pockets -- and reappear in theirs. From Each According to His Gullibility -- To Each According to His Greed Never has the old adage my father used to repeat to me -- “the rich get richer and the poor poorer” -- seemed fresher or truer.  If you want confirmation of just where we are today, for instance, consider this passage from a recent piece by Tony Judt: In 2005, 21.2 percent of U.S. national income accrued to just 1 percent of earners.  Contrast 1968, when the CEO of General Motors took home, in pay and benefits, about sixty-six times the amount paid to a typical GM worker.  Today the CEO of Wal-Mart earns nine hundred times the wages of his average employee.  Indeed, the wealth of the Wal-Mart founder’s family in 2005 was estimated at about the same ($90 billion) as that of the bottom 40 percent of the U.S. population: 120 million people. Wealth concentration is only one aspect of our increasingly kleptocratic system.  War profiteering by corporations (however well disguised as heartfelt support for our heroic warfighters) is another.  Meanwhile, retired senior military officers typically line up to cash in on the kleptocratic equivalent of welfare, peddling their “expertise” in return for impressive corporate and Pentagon payouts that supplement their six-figure pensions.  Even that putative champion of the Carhartt-wearing common folk, Sarah Palin, pocketed a cool$12 million last year without putting the slightest dent in her populist bona fides. Based on such stories, now legion, perhaps we should rewrite George Orwell’s famous tagline from Animal Farm as: All animals are equal, but a few are so much more equal than others. And who are those “more equal” citizens?  Certainly, major corporations, which now enjoy a kind of political citizenship and the largesse of a federal government eager to rescue them from their financial mistakes, especially when they’re judged “too big to fail.”  In raiding the U.S. Treasury, big banks and investment firms, shamelessly ready to jack up executive pay and bonuses even after accepting billions in taxpayer-funded bailouts, arguably outgun militarized multinationals in the conquest of the public realm and the extraction of our wealth for their benefit. Such kleptocratic outfits are, of course, abetted by thousands of lobbyists and by politicians who thrive off corporate campaign contributions.  Indeed, many of our more prominent public servants have proved expert at spinning through the revolving door into the private sector.  Even ex-politicians who prefer to be seen as sympathetic to the little guy like former House Majority Leader Dick Gephardt eagerly cash in. I’m Shocked, Shocked, to Find Profiteering Going on Here An old Roman maxim enjoins us to “let justice be done, though the heavens fall.”  Within our kleptocracy, the prevailing attitude is an insouciant “We’ll get ours, though the heavens fall.”  This mindset marks the decline of our polity.  A spirit of shared sacrifice, dismissed as hopelessly naïve, has been replaced by a form of tribalized privatization in which insiders find ways to profit no matter what. Is it any surprise then that, in seeking to export our form of government to Iraq and Afghanistan, we’ve produced not two model democracies, but two emerging kleptocracies, fueled respectively by oil and opium? When we confront corruption in Iraq or Afghanistan, are we not like the police chief in the classic movie Casablanca who is shocked, shocked to find gambling going on at Rick’s Café, even as he accepts his winnings? Why then do we bother to feign shock when Iraqi and Afghan elites, a tiny minority, seek to enrich themselves at the expense of the majority? Shouldn’t we be flattered?  Imitation, after all, is the sincerest form of flattery.  Isn’t it?



RockyRacoon's picture

You are right to a certain extent.  The basic motive is greed and the vehicle for executing the greed is Keynesianism.  There must be an acceptable cover to nefarious action.  I think the article takes your greed meme into consideration without specifically mentioning it.  Staying on point with an economic base was the best way to present the information without getting into the moral weeds. 

StychoKiller's picture

But, Gecko said "Greed for want of a better word, is good."

Widowmaker's picture

Did Gecko also say laws are fallible as long as you're too big?

How about incorporation as a means to lawlessness?

I forget in today's reality...

wake the roach's picture

Capital is saved wealth. If you produce goods and you make a profit and save the profit, then you have created capital.


I don't want to be to picky here but saved profit is not capital, it is potential capital (like a cart of apples sitting on top of a hill that has not been pushed). Capital is technology, infrastucture or even information/knowledge that produces energy efficiency (an energy saving/net surplus and thus a monetary profit). Money itself being nothing but a physical represetation (store, unit of account) of energy which cannot be identified or quantified with our physical sense's without a physical medium to represent it. Each monetary unit being an equal claim on a fraction of the surplus net energy available within an economy. When we invest our share of energy into the production of technology/infrastructure that produces greater energy efficiency (a net energy profit) or allows us to extract and consume greater quantities of finite energy from our environment (also a net energy profit) our money becomes capital. In other words growth (in anything) and thus profit is only possible by consuming more energy from available resources, or by being more efficient in its use. And this is the source of the crisis capitalism faces today. For thousands of years we have been able to simply substitute greater consumption of finite energy resources instead of efficiency to produce growth and thus profit. Think of todays mass consumerism of products that produce no energy efficiency yet can still produce monetary profit. That is capitalism and the physical laws of our universe that it cannot trump. If we want growth/profit we must either consume more energy or invest what we have into producing capital that produces greater efficiency per energy unit. Anyhoo, thanks for the read ;-)

Econophile's picture


I think you are just trying to fit your "small planet" theory into economic thought, which ignores the laws of economics. You miss the point of capitalism I believe. Are you suggesting we are running out of energy? Is this some Malthusian concept? Capitalism isn't physics. See Voluntary Exchange, below. He has a petty good handle on the subject. Thanks for the comment.

wake the roach's picture

You miss the point of capitalism I believe.


Capitalism is the conversion of food energy into labor work. The ability to perform labor work dependant upon a food energy surplus. This energy surplus is what we sell in exchange for a medium of energy exchange (money) for which we can use to purchase goods and services that themselves require energy to produce. When labor sells its surplus energy it never receives equal energy compensation. The net remainder is energy profit (money) to the employer. And/or products are marked up and then purchased by labor. Both means to profit have the same result, as labor never receives an equal energy exchange when they sell their energy surplus in return for money, labor can NEVER afford to purchase the goods and services they produce. But due to the need to be price competitive in the free market, the employer must reinvest an ever increasing (diminishing returns) portion of the energy surplus into capital that increases energy efficiency per unit of energy in excess of that which labor can produce through muscle power alone. This dislocates the labor commodity from access to an energy income that would allow them to purchase goods and services. This energy efficiency produced by capital but which displaces labor allows increased production and thus the products can be sold into the market at ever competitive rates. Over time, this leeds to ever increasing unemployment and thus new markets must be found to exchange the products. Also, goods are manufactured with planned obsolescence to increase production. Eventually, as returns on capital investment fall, even the labor that remains must be outsourced to workers that receive even less energy income. As the system continues to require growth in order to produce profit, eventually it taps out all global consumer and labor markets. Labor is offered credit in order to purchase the goods but due to interest cannot be maintained. Central banks lower interest rates further producing price distortions and resulting economic downturns. Nations intervene in currency markets in order to devalue and make there products competitive because every nation needs to produce goods for export... The world becomes labor commodity and capital saturated but with no means for the two to ever reconnect due to the need for profit. Labor having no monetary means to purchase all the goods manufactured by capital, and capital investment offering no return as even the cheap goods it produces cannot be purchased by labor/consumers. Still energy seeks net return but there is little to be found. What money remains eventually finds its way into hard assets/commodities as a perceived safe store of value. This drives up commodity prices and thus drives the price of goods and services even higher... The system collapses... Or something like that, yada yad yada...

Capitalism isn't physics.

Yes it is... From the day man first picked started using basic torque/velocity/ multiplying tools to increase hunting efficiency and thus, net energy gains... Or if you want to get really specific, man has been a capitalist since the time our first single celled ancestor had the spark of life...  Anything thats grows, living or not, is a capitalist... Ultimately, capitalism is seeking growth (which we do for profit), and there is only two ways to achieve it. Either consume more energy, or use energy more efficiently... Go for a hike in the wilderness if you want to experience capitalism par excellence, if its not too hippy for you ;-)...

Are you suggesting we are running out of energy?

No, energy is unlimited, for all intents and purposes... But the energy resources we can and do utilize to perform work are experiencing diminishing returns and have been for quite some time. And then we must take into account increasing global demand for this increasingly scarce energy... Just like with producing monetary profit, to increase the supply and thus reduce the price of energy we must increase the net energy gains (EROEI) at the point of resource extraction which is not possible... And even if it was, the paradox of energy efficiency is that the more efficient we become, the more energy we consume, Jevons paradox...

This ship is going down and would have done so decades ago if not for debt bubbles, I bet we can both agree on where we can find the bubbles of last resort... Checkmate... Only question is, will we hit the reset button or progress to an improved system...




Windemup's picture

Hate to be picky but Capital is Wealth reallocated back into the equation Land + Labor = Wealth. 

Where you get Land + Labor + Capital = More Wealth.

Henry George, The Science of Political Economy.

Voluntary Exchange's picture
@wake: .................................................................................................... Saved profit is capital/wealth because the concept of wealth/capital is a potential.  In must be applied using the appropriate technology (intellectual capital if you will) and combined with time and a process (usually including purchased labor as well) to in turn create other goods that other people value and are willing to exchange their things of value for. Infrastructure is capital that has been transformed into capital for new production purposes from the original factors of production and has become property that is used over a useful life (durable good) to create more wealth/capital. It is best managed by private property ownership. Genuine money is both a unit of account and a store of value with intrinsic value in itself, which it why it is wealth. Fiat money is not genuine money as it fails the intrinsic value test. It is at the mercy of the counterfeiters and monopoly "governments" to retain its value. It is a counterfeit  and a tool to control and steal. It also looses out in competition with genuine money in a free market where no state interferes in voluntary exchanges; legal tender laws and fiat currency being a huge interference with the free market. .......................................................................................................................................... Energy that is available for useful work is a good that can be used as capital or as consumer good. It is, like other goods, quantifiable and exchangeable with other goods including genuine money and thus a quantity of money can purchase a quantity of energy. Do not attempt to equate a quantity of energy with a basic concept of actual value (as opposed to unit of "value"/"account"). Value is subjective and exits exclusively in the the mind of an individual and thus varies from person to person. It might be practically used as money if it was readily exchangeable, easily transportable and durable in the exchangeable form.  Any commodity can be used as a unit of account and store of "value".  ........................................................................................................................................ Practically speaking I could agree with a statement that there is finite energy at any particular time in the market place.  But it is a commodity good who's supply in also a function of technology and productive capital/wealth/labor. If you mean to argue that we are running out of fixed supplies of only so much fixed energy this can ultimately be true if we live in a static, closed universe.  There are other technologies that can come into play here so I am not sure what you are getting at. Are you sounding some kind of alarm and advocating some kind of conservation?  The best way to do that is by letting free market forces work. Do you wish to argue otherwise?
wake the roach's picture

Do not attempt to equate a quantity of energy with a basic concept of actual value (as opposed to unit of "value"/"account"). Value is subjective and exits exclusively in the the mind of an individual and thus varies from person to person.


I have no intent to cause you offense, but it is not the economic ignorance of the worlds majority that keeps me awake at night, it is the intelligent and generally well informed thinkers such as yourself... I have no will left in me for any relevant rebuttal... I'm done with ZH, good luck...

Oh, but i will leave you with a final thought exercise...

Locate all the terms we use to explain economic theory that correspond to terms we use to describe energy in physics then ask yourself, "is it merely a coincidence?

Darwin described the struggle for greater net energy consumption or efficiency in his work on biophysical evolution. Marx described net energy value and as the driving force in his social and economic evolution theories... And Einstein explained in physics... Our universe is nothing but potential energy collapsed into the wave function that some mystery information component (for now anyway) forms into the elements of mass we know, and feel as reality whose mass gives us energy we can utilize to perform work here in reality. It is everything and your subjective view of value will never change that (no matter how long you probably spend staring at a pen attempting to move it with your mind)... If you feel that you can then maybe you would be kind enough to solve a problem for me... I want to purchase a 57 olds coupe for restoration but I don't know how much I should pay for it... I do know that in reality, as it has been made obsolete by the energy efficiency of modern vehicles, it is worth only as much as the scrap iron that can be recycled from it relative to the energy cost of extracting and processing iron ore? But you cannot, because placing the word value behind subjective is an absolute paradox. An idea best left to the philosophers and artists (l'art pour l'art?) of our world to explore as it is completely irrelevant, not to mention dangerous to continue to explore in economics/physics...  

“Do you want a name for this world? A solution for all its riddles? A light for you, too, you best-concealed, strongest, most intrepid, most midnightly men? This world is the will to power-and nothing besides! And you yourselves are also this will to power-and nothing besides!” Friedrich Nietzche.

duo's picture

Therefore, housing, which is an energy sink (as more homes are built and connected to ghe grid) is a destroyer of capital.  Try to explain that to a real estate agent.

wake the roach's picture

Yep, we all need a roof over our heads but a house is not capital, neither is the new flatscreen TV, the BMW, or the savigs you have in the bank that created the reserve for another suckers BMW loan... And as housing is generally the most energy intensive investment most people will ever make, it is also the most destructive... The production of materials we use to build homes and the labor required to produce them generally feeds back with little energy loss into the real economy (discounting the destructiveness of credit)... But it is the energy investment into land (natural capital) that is so destructive and it is credit alone that makes it so... Natural capital is formed by energy we cannot utilize (ie we do not/ can not produce land) and thus requires very little capital input to make ready for the building of infrastructure... It is an energy black hole leading directly into the banks who then use it to create another false claim on real energy... Credit is a fraudulent claim on an economys real energy surplus... Without credit, the value of pure money would always be at an energy value equilibrium dependent only upon the increase or decline in supply of energy to an economy... The time will come when we will wake up to the fact that macroeconomics is the study of net energy surplus and how it is allocated and invested into capital or consumption... Unfortunately, by the time we accept this fact it will probably be too late... Without wanting to sound alarmist, I honestly fear for the future of mankind... The outcome of the next decades economic restructuring will determine the fate of our young global civilization, I truly believe that... We need to drop the ideology and irrational fears and face the mathematical and physical reality of the profit system of energy exchange before natures laws of thermodynamics does it for us... This is a zero sum game, once we burn through our precious gift of fossil fuels, man will never again have the net energy gains required to produce sustainable energy technology that will open the doors to a future of unlimited human potential... Yeesh, Sorry to about the rant haha ;-)

eigenvalue's picture

Emerging economies such as Brazil, Russia, India, and China can't take up the slack.

The so-called BRICs are on their way to ruins. Just read Chanos' analysis of China.

BobWatNorCal's picture

No place to run. No place to hide.