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Business and Credit

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I’ve been amazed at the sheer numbers of otherwise sensible people who seem to be under the impression that paper credit–not savings and capital–is the key to capitalist success. It’s as if the core message of the Austrians has not stuck at all, and many capitalists themselves have bought into the line of the Keynesians and others who believe that productivity itself will dry up in absence of low-price lending for all. If banks “hoard” their resources, we will all be back to the stone age, or so they claim.

There are times to defend credit, as when government is trying to crack down on payday lending or trying to regulate credit instrument exchanges in the securities industry, and times to put matters in perspective and point out that credit must be built on a foundation of deferred consumption and savings.

So I really appreciate this corrective piece on LewRockwell.com by Stephen Fairfax, even if he might have pointed out that the good credit of large business–and their ability to sit on invoices for way too long–is well earned and that they are not “forcing” anyone to do anything. The long invoices schedules of big business are a market convention that can be overthrown in competitive rivalry if they are inefficient.

In any case, he is certainly right about how small business must work.

None of the small business owners I know depend upon easy credit to make their payroll. When things get to the point where you need to borrow to pay your employees, the end is near. Most small businesses fail in the first few years, in large part because business is not easy, it is hard. Not everyone is good at it. But it is an essential part of free trade and the market economy that businesses fail, so that new, better ones can arise in their place.

Few small businesses depend upon easy credit. Banks are generally reluctant to lend to small businesses, with good reason. Most small businesses are funded by owner’s savings. Sometimes start-up money comes from loans by parents or friends. While I can understand that small businesses involved in building houses might profit from easy credit, the market is sending unmistakable signals that there are too many houses that are too expensive. Flooding the system with still more easy credit can’t be the cure, it is the problem.

There’s no denying that life is easier with easy credit, at least until the bill comes due. But there is an alternative: savings. Before my firm hires a new employee, we save enough to buy the equipment they will need, and to pay their salary for the weeks or months it will take to train them. Those savings come from our profits.

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