Industrial capital, finance capital, and supply and demand.

The phrase "Economics 101: Supply and Demand" purports to reduce how prices are established to one irrefutable law: price increases with increasing demand and decreases with increasing supply.

But this purported law ignores a more fundamental relationship than that of supply and demand, namely the relationship between industrial and finance capital.

Industrial capital invests in plant and equipment, R&D, and employing labour to develop new technologies and manufacture and distribute goods.

Finance capital buys assets either to hold and sell later or to use to extract economic rent from the productive economy in the present. Economic rent is unearned income that is not limited in any way by what it cost to produce a rent-extracting asset.

Three key principles distinguish the goals and purposes of industrial capital from those of finance capital:

1. Human activity – labour – adds value to the inputs to any industrial process. This allows a manufactured product to be sold at a higher price than the total cost of its inputs. The price of a financial asset depends only on what the highest bidder is willing to pay to own it (or in the case of a rental property, to use it).

2. For industrial capital, profit is directly tied to and limited by the cost of production. This is because in order to sell the maximum number of units manufactured, and thus maximize profit, the price a consumer must pay per unit must be as low as possible to lure that consumer's money away from competing products. For finance capital, the objective is to maximize price, one corollary being that the maximum, not minimum, price one holder has successfully demanded determines the "market" rate.

3. When demand for a manufactured product increases, industrial capital increases production to satisfy it. This lowers unit cost in a number of ways, which enables the manufacturer to reduce a product's price, sell more units, and thus increase profit. Increasing production reduces unit cost by spreading administrative, R&D, machinery, and floor space costs, among many other costs, across more units. Adding a second or third shift dilutes these costs even further, as does buying components and supplies in larger lots. When demand for a financial asset increases, finance capital sells or rents to the highest bidder, thus maximizing, not minimizing, its price and the economic rent extracted.

Finance capital justifies concentrating wealth in the hands of asset holders on the basis of subjective arguments that elevate economic rent extraction to a higher moral plane than social responsibility. Limiting an asset holder's "freedom" to charge as much as the traffic will bear is angrily attacked as "antidemocratic," despite the fact that the vast majority of the demos shovel ridiculously inflated rents into the hands holding those assets.

One out of every five dollars that were spent in BC in 2021 passed into the hands of the RERL (Real Estate and Rental and Leasing) sector.

In August, 2022, mortgage debt in Canada reached $2.06 trillion. (Mortgage debt in October, 2000 was $418 billion.) Non-mortgage household debt in August, 2022 was $724.2 billion. Canada's nominal GDP in 2022 was $2.14 trillion. Canadians' total household debt in 2022 was thus almost 110% of Canada's GDP.

According to the Toronto Star on July 6, 2023, "The wealthiest 20% of households controlled nearly 68% of the total net worth in Canada in the first quarter of 2023, while the least wealthy 40% accounted for 2.7%."

Finance capital, in contrast to industrial capital, does not conceptualize an economy as a system.

This is reflected in the fact that, according to the Conference Board of Canada, "Canadian financial institutions and pension funds held $7.8 trillion in assets at the end of 2018." These dollars do not circulate throughout the economy but are sequestered in financial instruments whose function is to extract rents in the form of interest or other payments from businesses and wage earners who perform useful work.

"Deindustrialization" – the word – projects a glorious future in which everybody enjoys wonderfully manufactured things and nothing is manufactured. No money is invested in plant, equipment, or educating tomorrow's workforce. You just bet trillions of dollars in the derivatives casino, and by magic, "wealth" is created.

But an economy is a system, and its viability rests ultimately on productive work performed by human beings. This means there are certain functions an economy must perform to support the physical, emotional, and intellectual health of the workforce in order for it and the economy to thrive.

Finance capital understands government's responsibility to be to backstop economic rent extraction by eliminating taxes and social spending, privatizing public services, and enforcing the claims of creditors.

Industrial capital understands government's responsibility to be to minimize the cost of labour by keeping the cost of living low. These goals are accomplished by providing universal healthcare, public education, and housing managed as a public utility.

Preventing privatizers from forcing workers to pay inflated prices for essential services, including housing, shields businesses from having to pay inflated wages. This in turn minimizes the prices manufacturers charge for their products, helping them be competitive in global markets.

Housing in Canada has been thoroughly financialized. Its purpose should be, and was for many decades, to house people, but a long list of financial predators, including developers, pension funds, municipalities, REITs, banks, and many other finance sector actors, use housing to extract economic rent from the Canadian economy. Meanwhile, supports for the welfare of the Canadian workforce, most notably healthcare and education, in addition to housing, have been degraded catastrophically.

Suggesting that housing in Canada be managed as public infrastructure raises howls of protest from the legions of financial predators who use housing to extract economic rent, but the fact is that if housing construction were publicly financed with no- or low-interest loans and housing rented for what it costs to build and maintain it, hundreds of billions of dollars disappearing into the derivatives casino today would be available to train medical professionals and other skilled workers for tomorrow, staff hospitals and other medical and social services properly, and above all invest in industry, not economic rent extraction.

There are needs worldwide for innovative materials, technologies, products, and methodologies. Canadians holding a bit of capital should not be using it to prey on their fellow citizens by grossly overpricing housing but should be working together as a nation to prosper in the world economy so that Canada as a country and every Canadian benefits.

Jan. 19, 2024 Bill Appledorf