Re: Financial asset accumulation in a zero-returns system?

[Trond Andresen <t.andresen@xxxxxxxxxx>]

At 13:54 28/05/98 PDT, Bill Ryan wrote in reply me:

>(Bill) had said that, "The excessive production of capital is concomitant to
>the increasing concentration of wealth and debt accumulation.  This will
>occur ~even if the rate of interest is somehow reduced to zero~."
>
>I will go further and state that it will occur ~even if there is
>complete profit sharing, where profits in their totality are equitably
>distributed to workers~."
>
>(Trond) asked, "But by what sort of mechanism can this occur?"
>
>To some extent, I have answered your question in previous posts.  But I
>am preparing a more comprehensively coherent reply, which I will try to
>send in a few days.

While waiting for that message, some thoughts on the term "capital":
It is commonly employed to mean two different things:

(A) Financial assets, usually non-liquid return-yielding ones, like stocks,
bonds, loans. They correspond to other agents' debt.

(B) Equipment and buildings for (physical) production, infrastructure.

Of course and very often, the control over items of type B is mirrored in
the form of items of type A. This explains the common muddling of the two
(in reality) distinct categories.

Bill and me do not disagree that if a society generates a
production surplus, then this surplus will be used to modernize and expand
the capacity for production of goods and services, transport system,
communications, other infrastructure  (increase in "capital", type B).

In a system with real positive financial returns "capital" type A will
accumulate in parallell  with the build-up of "capital" type B.

But build-up of type B will *also* happen in a zero-return system (our
thought experiment, abbr. ZRS from now on). In a ZRS we will have an
increase in type B "capital" (and as I said earlier, because of the
non-occurence of financial crises, probably a faster increase, cet. par.),
since also in this system part of the workforce will be employed in
expanding production, financed by not-consumed aggregate income.
But this will take place without type A increase (in real currency terms).

Why? Let us discuss three separate categories:

-loans and bonds,
-stocks,
-retained profits .

Loans and bonds in a ZRS only represent a temporary transfer of
liquidity to other agents, who repay this later without interest. Money is
shifted around in society, enabling "capital" type B growth to occur, without
growth in type A. The sum of all outstanding loans and bonds in real
currency terms will not grow. This sum will be essentially constant,
fluctuating around this constant value, as opposed to type B, which will
grow persistently.

Now to stocks in the ZRS. First, they are not a source of a stream of future
returns, so that that there are no proceeds that can be re-invested to
amass more stocks. In the ZRS a share is only a perpetual claim to part
ownership of a firm. But stocks are a bit more tricky since they are
perpetuities. One could reasonably conjecture that capital type A will grow
persistently in a ZRS as long as people save in stocks instead of
bonds/loans. But as opposed to loans/bonds, the amount of stocks as measured
by the real currency invested in them, are *bounded*, corresponding to the
population of firms in a society. For every expansion of an existing firm or
start-up of a new one, mirrored by new stocks being issued, there are (part
of) firms being terminated, this mirrored by existing stocks being (partly) written
off. In a ZRS, stockholders simply *lose* (most of) their original investment
sooner or later. What they have received for this is a voice in the
management of the firm during its lifetime. (As opposed to when you lend,
and do not have a say on how the borrower uses his borrowed money).
Thus the aggregate financial capital (i.e. type A) in the form of stocks
will also *not* grow persistently in a ZRS. (The reader may now very well
protest that people will not invest in stocks in that sort of society. More
on that below.)

Finally,  to retained profit. Due to the typical relationship of power between employer and employees, one can imagine that the employer (in this case
also the owner) is able to extract a profit from the labour of his workforce,
use this to expand his ownership over firms with accompanying workforce,
in the next round extract more profit based on this, and so on.
But a ZRS scenario must presuppose that profit is shared between all
workers in a firm. Bill says that assets/debt will accumulate _even_ with
profit sharing, so this assumption is already accepted by him.

To sum up, in a ZRS system, persistent financial accumulation will not
happen. The sum of aggregate financial claims at any time may of course be
large - the larger, the rate of growth - since a large sum saved corresponds
to a high investment rate. But the sum will not grow persistently.

(A less unrealistic system is of course not a ZRS, but an LRS - a low return
system. And in the LRS, returns on stocks may be somewhat larger than
returns on bonds and loans, thus making stocks an interesting option. As I
have demonstrated in my previous message in this thread, an LRS system
may avoid exponential asset/debt growth even if there are positive real
return rates as long as they are not to high.)

Anyway, the topic was not whether a ZRS was a realistic system or not, but
whether such a system neccessarily would experience financial accumulation.
It is now up to William (or others) to explain through what sort of mechanism
this can occur.

Trond Andresen