From: Lee Corbin (lcorbin@tsoft.com)
Date: Mon Feb 03 2003 - 03:04:23 MST
I was reading Paul Johnson's "A History of the American People"
and he says on p. 236:
"The 'physical fallacy' is a belief that only those who worked with
their hands and brains to raise food or make goods were creating
'real' wealth and that all other forms of economic activity were
essentially parasitical. It was commonly held in the early 19th
century, and Marx and all his followers fell victim to it. Indeed
plenty of people hold it in one form or another today, and whenever
its adherents acquire power, or seize it, and put their beliefs into
practice, by oppressing the 'parasitical middleman', poverty invariably
follows. The theory fell on a particularly rich soil because American
farmers in general, and Southerners in particular, already had a
paranoid suspicion of the 'money power' dating from colonial times."
Other books I've been reading, such as DeSoto "The Mystery of
Capital", Mancur Olsen's "Power and Prosperity", and Easterly's
"The Elusive Quest for Growth", all priase the very sophisticated,
intricate, and indirect kinds of markets, and blame a lot of
third world poverty on their absence there.
So I did a Google search on "physical fallacy", and came across
Peter Jaworsky's blog:
12.10.02
A NOTE ON PROCESS part 2
"the physical fallacy"
According to Sowell, "in medieval times, the physical fallacy led to the doctrine that an object had a "just price" based upon
objective costs incurred by the producer and not upon the subjective valuation of the consumer." (Sowell, p. 67)
The 'physical fallacy' is, roughly, the idea that only those who deal with things 'physically' or tangibly with their tactile senses
'actually' do something with whatever it is they're handling. It is an emphasis on less abstract activities--the placing of
ingredients into a pot, rather than the recipe itself. It emphasizes the role of physical composition, over abstract invention. The
physical fallacy is the idea, at core, that only those who deal physically with physical things are 'actually' doing anything.
Take interest and the role of banks and lending institutions. For a lot of people, they do 'nothing' and, thereby, are making money
on our backs. The function of interest, the making of additional capital out of a set amount of capital (or money on money), is seen
as dishonest or, worse, downright immoral (not that dishonesty is moral...)
Lending money, however, is a valuable function necessitated by a number of considerations. Not the least of which is the fact that
some of us 'know' what to do with a certain sum of money right now. Others amongst us sort of want money, but how much we want it is
dependant upon how much we are willing to give up in the future. That is, after all, the trade-off that we make--more money now, for
less money later (assuming borrowing, not earnings. What you earn today is typically less than what you will earn tomorrow).
The function the lender serves is to bid up the price of current dollars (measured in future payments) until it more closely
approximates the value of that money amongst a various sum of individuals. The interest rate will change as people either want more
money now, or more of it later. Lenders are people willing to give up immediate satisfaction, for a greater satisfaction later on.
It is what we do when we invest either in financial things (stocks, bonds, whatever) or in personal capital (an education, piano
mastery and so on). We give up immediate pleasure for a greater gain in the future.
So too with the lenders. No pleasure now, more pleasure later.
We seem to hate the lenders, however, in accord with the physical fallacy. They do nothing, really, except change the time structure
of money. They allow others to bring capital to bear in the present, and await their enrichment later. Intertemporal employment, if
you will.
Nevertheless, the process is necessary and valuable. It allows those who value current money more than others to get at that
money--a valuable service. Those who value present money a little less can make exchanges. In this way, we approximate actual
time-preferences of various actors on the market, and manage to satisfy more values, wants, needs and desires.
http://www.peterjaworski.com/thought
Lee
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