Tuesday, January 15, 2013


Many argue either from stupidity or from deceit that capital gains income somehow is different than labor income. It's not.

Back on January 6, 2013, Reason Magazine published Why Double Taxation Must Cease by Sheldon Richman, senior fellow at the Future of Freedom Foundation.

In his writing, makes these Richman claims:
"Capital gains is ... not ordinary income. It results from ...  a decision to forgo consumption in the present, perhaps for greater consumption in the future." 
"... a rate that does not distinguish among types of income is in fact biased against investment income, and hence investment itself." 
"Time is valuable, and other things equal, people prefer present goods to future goods. That's why the present value of future goods is discounted. This is known in economics as "time preference." 
The person who invests $1,000 in hopes of having 10 percent more in a year demonstrates that he prefers $1,100 a year from now to $1,000 today."
For a theory to be useful and closer to truth, it must apply equally to many things observed. de Fontenay adroitly stated, “The theory of revenue must be the same for all classes of human production.”

Interest is not some magical thing outside of trade, or commerce, or authentic economics. Interest has nothing to do with being compensated for putting off future consumption.

Interest paid is a kind of income, the same as rent for land, wages for labor, annuities or even copyrights. Interest arises from the recurring purchase and sale of capital in exchange for rights of action. 

Interest has nothing to do with time preference as Richman claims and as others, notably von Mises have claimed.  The belief that others must be paid a high rate of interest for use of their funds to induce them to give up present consumption is false.

To help many come to see at long last truth, two kinds of capitalists exist, credit capitalists and material capitalists, although the distinction is for illustrative purposes.

Material capitalists use material capital — products that yield intermediate goods — to produce what are products that either are material capital to another or products of final goods. 

Credit capitalists use cash and credit as capital. Credit lent at interest is done so because that is the product the credit capitalist sells.

Men (and women) seek to earn income with the least necessary effort. This is as natural as it is for water to flow down slope.

If speculation offers a chance for anyone to support oneself with less effort than needed to expend in another activity opened to that one, that one is going to choose speculation. It is as natural for anyone to seek profit through exchange by belief in possessing superior reckoning needed for speculation as it is for the one endowed with superior physical stature to seek riches as a professional athlete.

Those who become credit capitalists do so because it is their preference to not become material capitalists. Time has nothing to do with it.

Credit capital (undifferentiated capital) arises because earning rent on credit capital, that is earning interest, obviates the need for credit capitalists (bankers, lenders, investors) to guess what material capital (differentiated capital) producers need and thus efficiently reduces the need for them to be Nostradamus. 

The credit capitalist concludes that rather than buy material capital and attempt to make something for which demand might be insufficient to yield profit and thus fail to earn so-called (material) capital interest, often said the natural rate of interest on (material) capital; the credit capitalists decides to sell money capital and buy a right of action from another material capitalist.

As long as profits can get earned by all material capitalists in the game and credit capital remains idle, credit capitalists must induce ever less clever persons who lack business acumen to become businessmen. Inducement comes from lowering interest rates so that these less clever persons believe they can gain profit from their jubilant expectation of sales that never materialize precisely because they lack skills needed to make stuff that turn shoppers into customers.

In the end, without profit, no interest can get paid to bankers and other assorted credit capitalists.

For it should be clear to all at once, that if no surplus crop exists from land, no rent can get paid on that land. Even if surplus crop harvest were to exist, if no demand exists to acquire that surplus, no rent can get paid.

It is only when demand exists to take up the surplus of crops that rent can arise. Rent is the share of profits the farmer distributes to the landlord.

As ever greater demand exists for a surplus of crops, the price of such surplus rises. Thus, it pays to enlarge the area of cultivation.

Rent near the demand for the surplus rises as the cost to bring such surplus is lower than cost to bring additional surplus from further out. The further out one goes, the higher the increase in the cost of production and the profit, from which rent gets paid decreases until at last no profit exists from which to pay rent.

And so is it the same with interest. The smartest businessmen with most business acumen are first to enter into production. As demand rises for their products, it pays to enlarge the area of production. The further out one goes by inducing ever dumber persons into trying their hands at business, the profit from which interest can get paid decreases until no profit exists from which to pay any interest.

It’s that simple. No one needs an elaborate theory of time preference like something from Jean-Claude Van Damme in Time Cop. When Sally Secretary does the above by buying shares of APPL for her 401-k rather than rolling up her sleeves and going into the smart phone manufacturing business herself, we think nothing of it. Yet, when foolish neoclassical economists, think on this matter, they devise an elaborate time preference theory.

The credit capitalist buys the right to claim a part of the profits, if any exist, from the material capitalist. The material capitalist engages in production of things in hopes of earning sales that exceed the Cost of Production suitably sufficient to distribute a share of profit to the money capitalist, that is, to to pay rent (interest) on money capital.

Rather than the false belief of the credit foregoing present consumption for future consumption, the credit capitalist buys in the now, a hoped-for income stream rather than blowing what she has, which could become capital, and trying to live either as a beggar or a brute laborer.

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