Varying the Cost of Capital

I used to have somewhat libertarianish views on economics. I never believed in “abolishing public schools” or any of that type of nonsense, but I accepted the libertarian/conservative claim that the “free market” was the most efficient economic system and that state meddling in it would only lead to inefficiency. Along with Lion of the Blogosphere and Steve Sailer one of the ways I “saw the light” on this matter was through reading an article by Robert Locke titled “Japan, Refutation of Neoliberalism.”

A major reason why Marxist economies are so inefficient is malinvestment of capital. It is argued a government run financial system in a capitalist country like America would malinvest capital as well. Locke showed that the example of Japan proves that a “centrally planned” financial system can run an economy effectively.

In a laissez faire system of capital allocation investment decisions are theoretically made with only one consideration, that of the risk adjusted return on capital to the investors. But this system does not consider which businesses or industries deliver the greatest financial benefit to people who are not the investors, nor does it consider the social, economic, or political benefit to the nation of the given businesses or industries.

Locke explains that in Japan’s system banks, though privately owned, are heavily regulated by the government. This allows Japan’s Ministry of Finance(MOF) to crack down on any bank that isn’t doing what it wants it to do. Locke explains that:

As noted above, the MOF’s key role is to audit the performance of the banks in allocating capital. But what counts as performance? In a conventional capitalist system, that’s an easy question: maximizing return on capital. But in the Japanese system, this is not so.

For a start, the capital in question, although nominally privately owned, is “captive” capital in that it has nowhere else to go if it is unhappy with its return. This seemingly minor fact changes the whole dynamic of the entire economic system, because it means that capital, rather than chasing the highest return, can be made to obey political directives. Obviously, from the point of view of enriching individual investors this makes no sense, but this is not the MOF’s objective. The investors don’t have their money stolen from them – Japan is not a Marxist society – and they certainly get some return, but they do not get the maximum possible return.

What the MOF does want is to supply huge quantities of cheap capital to Japanese industry to build up its long-term productive capacity. The MOF wants capital to be paid a low return so that Japanese companies will enjoy the competitive advantage of access of cheaper capital than their European, Asian, and American competitors. In capital-intensive industries like the advanced manufacturing in which Japan specializes, this is a huge advantage.

Why would Japan want to direct capital into advanced manufacturing?

  1. Advanced manufacturing pays high wages to it’s workers. When workers are paid low wages the government steps in and pays for things like food stamps, housing subsidies and free healthcare.
  2. Advanced manufacturing leads to technological innovation that doesn’t factor into the rate of return to the investors. Individuals who make technological advances have often received training and work experience by working for other businesses. The businesses they used to work for get no benefit from their innovation. They are much more likely to receive the relevant training in advanced manufacturing than in cotton farming.

Other industries, like computer programming and medicine, have similar advantages.

In addition to the economic benefit of some industries rather than others there is also a question of the social benefit. Individuals will disagree on what they consider socially beneficial, but one thing I think people of all political persuasions could agree is not socially beneficial is gambling. If gambling cannot be made illegal due to ideological or practical reasons,(such as the inevitable black market) it could constrained by being made to pay high costs for investment capital.

Varying the cost of capital would require Japan-style regulation of the banks and of the stock market(which is not nearly as important in Japan as it is in America), and it would require bureaucrats who were not stupid, lazy, greedy, or unfairly biased in favor of one industry, region or race within the nation. For this reason it is advisable only if you can have a situation like Japan’s where you have bureaucrats who are smart and patriotic(or, in a universalistic context, humanitarian). Locke compares the motivation behind Japan’s MOF bureaucrats to that of military commanders in the United States.

A good system of varying the cost of capital should have the following characteristics:

  1. The cost of capital should be lowest for those industries which are socially beneficial, pay their workers high wages, and/or lead to technological innovation.
  2. The cost of capital should be intermediate for other industries.
  3. The cost of capital should be highest for industries which are judged to be socially detrimental, which produce great inequalities that require the government to fix or which harm the environment.

America’s Economy and the Cost of Capital

In America’s economy today agriculture and higher education are two industries where subsidization through artificially low cost capital plays a major role.

In America farmers enjoy cheap, government provided loans. Japan also subsidizes agriculture, though with it the practice seems much more defensible. Japan is a very crowded country and must import much of it’s food, thus there is a national-security reason for subsidizing Japanese agriculture. In addition Japanese farming is argued to be a part of Japanese culture. America cannot justify subsidies to agriculture on the first point and can only partially justify it on the second point. In much of the country the agricultural sector serves to replace Americans and their culture with Hispanics and their culture, though I’m sure many in our government see that as a good thing.

The interest rates on government provided student loans are significantly lower than the “market rate.” The government makes some profit, but not the maximum possible profit. Hillary Clinton, who I predict will be the next president, proposes to reduce interest rates so low that the government will make no profit. This is in effect a subsidization for individuals to “invest” in education. Clinton’s campaign website states:

Lifting incomes for everyday Americans is the defining economic challenge of our time. And to raise wages, there is no better investment we can make than in education. College graduates earn $570,000 more on average in their careers than high school graduates.

This reflects what liberals think about education. When reciting statistics like this it does not occur to them that the 570,000$ more might be due to the people who go to college being inherently smarter and less likely to commit crime or have an unplanned pregnancy, or with the fact that college is used to signal intelligence or other valuable traits. Nope, they assume those 4 years in college give the individual greater value creating power, 570,000$ worth of it.

Higher education leads to technological advancement, but it depends on what the individual is being taught. Nuclear physics should not be judged equally to political philosophy. What about being socially beneficial? Education is socially beneficial in general, but everyone knows education in the “liberal arts” is highly politicized. Liberal professors admit to discriminating against conservatives. You might view feminism, antiracism, and secularism as being socially beneficial things to promote, I don’t.

Socially Detrimental Industries to Constrain

In my post on Value Transference in the Private Sector I gave numerous examples of industries which rely on value transference, such as gambling, bottled water, payday loans, and expensive Veblen goods.(like Rolex watches or designer handbags) If these industries cannot be banned outright they could be constrained by a high cost of capital. Other things to constrain in the way(if they can’t be banned) include prostitution, pornography, unhealthy food, degenerate “culture,” and tanning beds.

America’s government has used various sticks and carrots to get banks to give mortgage loans to middle and lower class Americans at artificially low rates. This might seem like a socially beneficial idea, though it lead to disaster with the housing bubble.

In the years after World War Two the government’s cheap loans to housing were dependent on what neighborhood the housing was in, this was “redlining” and had the practical effect of discriminating against Black neighborhoods.(Some White neighborhoods were “redlined” as well.)

Varying the costs of capital can be used to achieve social objectives in terms of housing. It might be judged socially beneficial to give artificially cheap loans to build “low income housing” in middle class neighborhoods to combat “segregation,” while luxury housing would be given a higher cost of capital.(Or maybe you think it would be socially beneficial to preserve segregation.)

The Commanding Heights of the Economy

Locke describes Japan’s economy as a “a capitalist economy with socialized capital markets”:

In order to grasp what the Japanese have done, it is worth comparing it to Western attempts to achieve the same thing. For example, the Japanese have understood that the ambition of the advocates of the “mixed economy,” like Hugh Gaitskell in the UK, to socialize the “commanding heights” of the economy, has some rational basis, in that it embodies the desirability for some government direction of the economy without a total Gosplan-style takeover.

But this aspiration was misinterpreted in classic socialism, which understood the commanding heights to be basic industries like coal, steel, and railways. The problem with this, however, is that these industries do not command anything. Important though they are, they do not constitute a lever by which the economy as a whole can be controlled; they do not issue orders to the rest of the economy which determine how it behaves. The supply of capital to business, however, does, and this is under state control in Japan. One way to think of the Japanese system is as a capitalist economy with socialized capital markets. 

Heavy handed regulation, taxation or outright prohibition of industries is likely to lead to accusations of “socialism” or “un-Americanism.” The advantage of controlling, and varying, the price of capital is that it is so indirect. I would think that most people who take out federal government student loans are not even consciously aware that they are being “subsidized.” Nor would the average person realize that the higher price for, and reduced consumption of, tanning beads or the luxury condos would be a result of those industries being made to pay a high cost of capital. Las Vegas’s casinos would still be there, they’d just be a lot less glamorous looking. Locke explains about Japan’s economy:

Much of the Japanese system operates similarly to similar corporate structures in the West, though it faces a deliberately altered set of incentives. Because these incentives are just a fact of life to most of the corporate managers facing them, they don’t even have to know where they came from or why. Most of the system doesn’t even know that it’s centrally-planned, and doesn’t need to.

Controlling the allocation of capital functions as a lever through which the entire economy can be “distorted.” You might even call it an “invisible hand.”


Robert Locke(2004) Japan, Refutation of Neoliberalism, post-autistic economics review, Issue no. 30, March 21, 2005,%20Refutation%20of%20Neoliberalism.pdf

College Compact: Costs Won’t Be a Barrier,, August 10, 2015

Christine Rousselle(2012) OP-ED: Professors Openly Admit They Discriminate Against Conservatives, Campus Reform, August 08, 2012

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