Saturday, November 11, 2006

Capital

How much are you worth? How wealthy are you?
I've decided upon a new measure of wealth. Wealth is how far you can see into the future, your "time horizon".
If you are working at a dead end job and barely making ends meet, if you have no plan for the future other than to do more of the same, you are poor. No matter how much you earn at your job, you are poor.
If you apply yourself every day, even if you earn little, but you aquire skills and develop talents. If you are collecting tools. If you have a vision for the future and are building towards it, though you may be in debt, you are working toward wealth.

Murray Rothbard tells a story about a man stranded on an island where the only food for him to eat is berries. He must eat 200 berries a day to keep from being hungry, and it takes him 10 hours a day to collect this many berries.
He then imagines a tool, a sort of stick, that would help him to collect berries by shaking the bushes in such a way that in 10 hours he might collect 500 berries.
Unfortunately it will take him 10 hours to put this stick together. When is he to do this? He may give up some of his leisure time, but if he gives up some of his labor time he will have fewer berries to eat and he will go hungry.

Rothbard doesn't consider the following scenario, but it best parallels my current situation:
What if this man could somehow "borrow" the resources to develop his stick. Let's say he borrows the equivalent of 10 hours (the time required to make the stick) production at the stick-producing rate: 500 berries, plus 10% simple interest.

Without the loan, he would spent 1 hour every day for ten days building a stick, and only eat 180 berries each of these 10 days, followed by 500 on the 11th day and every day after.

If he takes the loan, however, he will produce 500 berries on the first day, and will give 60 of them in payment on the loan. He will do this for 10 days until 600 berries are repayed.

In the first scenario he must forego 20 * 10 = 200 berries.
In the second he must repay 600 berries. Which is better? If we focus on the losses, one might say forgoing 200 berries is better than having to repay 600. But that way of thinking fails to recognize that the gains outweigh the losses. You see without the stick the man produces only 180berries a day * 10 days = 1800 berries. But with the stick he produces 500 berries a day *10 days= 5000 berries, of which he must repay 600, with a net of 4600 berries. That's 3800 berries more than if he had not borrowed to get the stick.

The use of capital, saved-up resources, creates new wealth rather than redistributing it.

Right now I have very little money, and a good deal of debt. But I have been buying capital with that debt. I have expanded my time horizon farther into the future. I have taken a risk, for there are many uncertainties. But I am enabled to step out and take that risk by the vision which God gave me. He showed me what He wants to do with me, and I have believed Him. For God can see all the way into the future and beyond it. As I grow in imitation of Him by having faith in Him and believing what He says to me I too can see farther into the future with Him. By conforming into His image I am learning to create wealth from the creator. I am not afraid of the debt I am in, because the capital I have invested in will appreciate at a rate greater than the interest I must repay.

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