Showing posts with label theory of capital. Show all posts
Showing posts with label theory of capital. Show all posts

Thursday, November 27, 2008

How Zimbabwe’s Experience May Apply To The US

The basic difference between the US and Zimbabwe is one of capital structure or its stages of production. Zimbabwe has a primitive capital structure while the US has a more complex capital structure.

To understand the concept of capital structure, we excerpt Ludwig M. Lachmann in his book Capital And Its Structure

``All capital goods derive their economic significance from their mode of use, or rather, from their actual and potential modes of use…We realize that a heterogeneous capital concept compels us to seek the 'common denominator' of these heterogeneous resources, the common criterion of their capital quality, in their 'designed complementarity', their mode of use within the framework of a plan. Each plan is a logical structure in which means and ends are coordinated by a directing and controlling mind. In the functional variety which is of the very essence of capital utilization plans capital resources exhibit those structural relationships we shall have to study.

``All capital goods are, directly or indirectly, instruments of production. Not all of them are man-made (e.g. mineral resources are not) but all of them are man-used. It is indeed characteristic of such 'natural' capital resources that but for the existence of man-made capital designed to be employed in conjunction with them, they would not even be economic goods. The theory of capital is thus primarily a theory of the material instruments of production. It must have something to say about the role of capital goods in production plans, about the mode of their combined use. In other words, production plans are the primary object of the theory of capital.” (highlight mine)

Roger Garrison: Capital or Structure of Production

For a good account of the production process of a pencil see this article, "I, Pencil: My Family Tree as told to Leonard E. Read" (hat tip: Robert Murphy)

But failed policies can undermine a country's capital structure such as in Zimbabwe’s case -Mugabe's confiscation of farms as part of the controversial land reform, Zimbabwe’s intervention in the Democratic Republic of Congo (DRC)’s war in 1998; the parliamentary (2000/2005) and presidential (2002) elections and the introduction of senators in 2005 (at least 66 posts) as part of ‘widening the think tank base’ and the international payments obligations as discussed in Will Debt Deflation Lead To A Deflationary Environment?

Courtesy of Indexmundi.com

The detrimental impact of policy failures has resulted to the economic deterioration (see above) and the shortening or reduction of its economy's capital structure, which has prompted the Mugabe government to become exceedingly dependent on its printing press than from its taxpayer’s capacity to finance or from its impaired ability to borrow from funding abroad. With 85% unemployment government has virtually dominated the economy.

And so, the hyperinflation depression.

Nonetheless, while the US may have a complex capital structure today, a major string of policy failures which may result to the deepening of economic losses and increasing size and influence of its government can increase the risks of reducing its capital structure, thereby giving the same conditions with that of Zimbabwe of having limited ability to tap its taxpayer for funding and the diminishing prospects of accessing foreign taxpayer funds to support the role of its rapidly expanding leviathan.

This also translates to greater reliance on the printing press to sustain the government’s political objectives.

Hence, the risk of a Mises Moment endgame.