Capital versus Cash

Traditional definitions of capital include cash, raw materials, land, machines, etc. Only the "cash" part I submit isn't real wealth. By "cash" - I mean dollars, gold, currency, any medium of exchange.

Cash only has value as long as other people are willing to trade stuff for it. You don't use the cash itself for anything - you only use it as a substitute for other things. For example, you don't build a house out of cash - you have to first trade the cash for building materials. You don't eat cash, you have to first trade the cash for food. Thus the value of the cash isn't intrinsic - rather, it's social. It is only good if other people are willing to trade stuff for it. If everybody in the world disappeared and all you had was a lot of cash, it would be useless. If everybody in the world disappeared and instead of cash, you had food, equipment, a home, raw materials, etc, none of that is useless. If everybody disappeared and you had cash, food, equipment, etc - everything but the cash would be useful to you. Thus the value of cash is only social value.

So let's say all the capitalists (ie. "entrepreneurs"* as some call them) fled the country with their cash. What has your country really lost? All your country's real productive ability remains (which Adam Smith refers to as the Wealth of Nations). Your country can continue to produce stuff and trade the output of their production with other nations, if they want to. What else can they do? If each country simply decides to stop accepting the cash they used to use, and issue new cash for their trade**, then it basically renders those who hold a lot of the old cash completely broke.

Thus there really isn't much to fear about capital flight.

 

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*creases says: A lot of entrepreneurs don't own the capital that funds their enterprise; they have to go to venture capitalists, investors, creditors, etc.

Indeed I agree. The word "entrepreneur" is sometimes used to refer to the person with the idea and sometimes used to refer to the person who provides the funding. Sometimes this obfuscation is the result of confusion, and perhaps sometimes the obfuscation is deliberate in order to make exploiters sound more valuable to society. Often the person with the idea ends up selling his company to venture capitalists, becoming their wage slave in the process, just so he can give his idea a chance to grow.

**In terms of psychology, yes, people don't like to feel like their efforts were in vain, however this writeup is about how to deal with capital flight (or threats of capital flight) made by capitalists, in an attempt to get various regions to race to the bottom.

Money was simply invented to make it easier to trade stuff and because it was a convenient way of measuring the relative value of different things. Its utility lies in the fact that it facilitates saving, or delaying the consumption of resources from one period to the next, and because it makes it easier for those saved resources to be recycled.

Now there are two great mistakes people make when they're discussing money. The first mistake is to think that it is real and nothing else matters. The second mistake is to think that it isn't real and doesn't matter at all. The trick is to appreciate that whilst money is an abstract concept, behind that abstraction lies something very real.

For example; when, at the end of every month, your employer hands you a cheque (or check), the money value of that cheque might not be 'real', but it represents the very real fact that you have got out of bed most days and dragged your sorry arse (or ass) across town and sat down at a desk, or stood in front of a production line, and actually done something which might possibly have been deemed useful and of value by said employer. Thus when you decide not to spend some of the money value of that cheque and to put it aside for some future eventuality, the accumulated value of those savings might on the face of it appear to be nothing more than a number on a computerised ledger, but in reality it will represent weeks, months, or even years of physical effort on your part.

Should some individual then come along and announce that they have all of a sudden decided to abolish this 'old money' (thus rendering your savings valueless) and replace it with some 'new money', you are unlikely to be satisfied with their explanation that none of it was 'real' in the first place, and that the nation's productive capacity remains intact. You are far more likely to go down to Texas, get yourself an AK47, and then return to shoot the little bastard's head off.

This polemic was brought to you by the Department of Financial Sanity and will probably self-destruct sometime very soon.