Consumption vs Capital Investment

Several terms are bandied about loosely without most people really knowing what they mean.  Examples are democracy, capitalism and free markets.  Let's look at capitalism.

A couple we know recently took a trip to northern Europe. In the videos that he took were many of the opulent castles and palaces that the kings, barons and czars - i.e., the 'wealthy' of yesteryear -built with the resources taxed or stolen from the peasants. What occured to me was that these wealthy only spent for their own aggrandizement. In other words, they only consumed. Their expenditures did not result in productive investment, and thus the only benefit (if you can call it that) to the peasantry was to be allowed to live for the benefit of the aristocrats.

As the mercantile class grew, more and more wealth gained from trade was reinvested in capital goods - ships, factories and the like. The wealthy became wealthier, but in addition the standard of living of the entire populace rose. With the Industrial Revolution, capital investment yielded ever greater returns in productivity. By the twentieth century the 'poor' were enjoying consumer goods and a standard of living that were undreamed of by the palace building kings and czars.

 The moral of all this is that what counts is not how wealthy some people are, but what they do with the money. If they spend it on lavish living or even give it to the poor for consumption, no standard of living increases in productivity occur. Only if their wealth is invested in capital goods - i.e. productive enterprises - is the overall standard of living of a society improved.

 A corollary to this fact is that when the government confiscates wealth from the members of a society and uses the funds for anything other than supporting the rule of law, property rights and enforcement of contracts that are necessary for a capitalist system to exist, the improvement in the standard of living will slow, stagnate or even deteriorate. Wealth transfer programs result in resources being diverted from capital investment to consumption, with the attendant loss in productivity.

 Since the majority of the people in a society put little to nothing into capital investment, their labors are no different than that of the serfs that built the palaces unless their efforts are directed toward building productive resources. As the Russians and Chinese found out, if capital investment is not allowed to flourish, the society soon is standing in lines for bread.

One principle obviously follows from the above observations. Taxing income, especially of the 'wealthy', puts the emphasis totally in the wrong direction. The taxation should be on building palaces, not on building factories. The proper form of taxation is thus on consumption by the individual, not on investment.

I also note that those who become wealthy manipulating or even destroying financial markets are NOT capitalists.  They are in many ways like the kings and barons of old - parasites that garner much of the wealth of a society for their own pleasures, but invest little to none of their wealth in capital goods for productive purposes.