Cord of Wood Explains Capitalism
Sun, 07/08/2012 - 9:18am
Vic Berardelli
A friend just loaned me a brilliant book called A Bubble That Broke the World by Garet Garrett (the pen name of Edward Peter Garrett, who between 1922 and 1942 was the chief economics writer for The Saturday Evening Post, and later its chief editorial writer.) The book, long out of print, was published in June 1932 after the Wall Street Crash and at the beginning of the Great Depression.
Garrett, a free market thinker, said the crash could be explained by speculation in unproductive enterprises and bonds (engraved paper which did not represent productivity but merely a means for governments to raise funds for unproductive projects).
He likened the Pharoahs building Pyramids to what we know today as "stimulus" spending. Funds are used to build public works but, he contended, there was no investment to make an economy grow because, once built, the Pyramid sat unproductive as a monument to the government's "public works" and there was no economic growth beyond that. And, once built, the public works provided no continuing employment for the labor unless the Pharoah kept paying them for no work.
Investment in things which increase in value, on the other hand, make an economy grow, he wrote.
He used a cord of wood as an example, although any commodity could be used for the explanation. As we understand a cord of wood here, I thought it worth sharing.
He said one could cut a cord of wood and store it for personal use. One could exchange it with a neighbor for something else one needs, a form of crude barter. Or, one could sell it for money. If one hoarded the money, he had the equivalent of one cord of wood but no increase in value.
But, he wrote, if one took the money to a bank and left it at interest, the value of the cord of wood increased.
Then, he wrote, another industrious man might borrow the money from the bank in order to buy tools to cut more wood. The value of the original cord of wood is thus increased in the form of investment in productivity and economic growth.
With the tools, he wrote, the industrious man might cut three cords of wood, keeping one for his own use and selling the other two. He takes the proceeds and pays off the bank for the money borrowed for the tools and puts the rest of the money in savings at interest which gives the bank more money to invest in loans to other productive enterprises which would grow in value and provide productive jobs.
He wrote:
Now the bank has two cords of wood where there was but one before - not the cordwood itself, not the labor itself, but the money agent of labor; besides which are the tools still in the man's hands. All this from one surplus cord of wood to begin with. Thus we accumulate wealth, and there is no limit to it, provided the labor is not lost.
In making his case, Garrett wrote that money has no value or power in itself, only it what it represents in productivity.
That is an easy-to-understand way to explain the benefits of capitalism to an economically illiterate universe.