Wednesday, September 07, 2011

Limits to total capital in the system

One of the implication of the crisis is that there is a limit to total capital in the system. While the statement is simplistic, it has more sophisticated underpinnings. In a sense, we collectively found that there is too much capital in the system and too little stock of assets, goods, services etc (hereafter simply referred as assets and goods) to show for it.

Clearly at some point we realized that our stock of assets and goods contains too many derivatives  and too few real assets and goods. At such point the capital locked in or residing in some of these derivatives (the bad ones specifically) was under risk. Economists would call this misallocated capital. This capital should have evaporated in a true capitalist system so as to keep the Darwinian selection mechanism healthy.

Yet, what happened was transfer of this mal-investment to government and hence to public shoulders. By virtue of the fact that governments cannot be obliterated, the capital must also continue to burden us till the government sees light of the day.

Whatever the reality, the crisis does indicate a threshold for level of capital in the global economy where things are at equilibrium. The questions are many. 

How can decipher the exact amount of capital stock existing in some secular value terms? How can the world estimate the collective stock of assets and goods to correspond to this stock of capital?

My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.