Chapter 4: A Futile Chore
Footnote: Barriers: Capital Starvation
Banks are only willing to lend you money provided you can prove to them that you don't need it. To most of us, therefore, a bank can never be more than a place to store money and a mechanism for sending and receiving it. But by refusing to lend, banks are in fact withholding what is rightfully ours.
The Need For Capital
The human life-form does not have built into it the means of generating its needs of life. It has the ability to work. It can output both mental and physical labour. But it cannot, without the use of mechanisms external to itself, produce food, clothing and shelter. To survive, therefore, the human being must have access to, and the use of, those external mechanisms necessary for converting its labour into its needs of life. These means and mechanisms are the resources provided by the Earth's mantle and biosphere. What this amounts to, in a word, is land.
In our capitalist economy land is all owned by a small minority of individuals known as capitalists. Thus it is only by their leave that the rest of us may convert our labour into our needs of life. This may be granted in the form of employment. They provide us with our subsistence in return for our labour. They may condescend to grant some of us the use of their resources in return for a part of what those resources yield in response to our labour. The resources they grant us use of are then known as capital. What they demand of us in return for granting us use of their capital is then known as interest.
The industrial revolution brought specialisation. The capitalist who lends capital to an artisan may not want his interest paid in the form of what that artisan's specialist skills create. Conversely, an artisan who borrows capital may not want the kind of resource owned by the capitalist who is willing to lend to him. Consequently a free market was born through which both capital resources, and the interest they generated, could be exchanged in terms of a universal commodity known as money which erroneously is perceived to possess always a fair and common value.
The upshot is that if for any reason the capitalist chooses not to employ the labourer or lend to the artisan then neither can acquire his need of life. To function and survive in a capitalist economy, the artisan therefore must obtain capital.
When we come into this world we bring nothing with us. Our needs are provided by our parents. In an equitable world, we would inherit the means of converting our own labour into those needs of life. Our parents would, when we grew up, also provide us with, or pass on to us, the means they were given. In our capitalist world, however, only capitalists inherit. Most parents do not have such means to give or pass on to their children. Consequently, when most of us reach adulthood we must either live by selling our labour or borrow capital from a capitalist with which to buy or rent the means of converting our labour into our needs of life. We must each and all beat a path, cap in hand, to the capitalist's door.
A capitalist makes his capital available to an artisan either directly person-to-person or through a bank or other corporate instrument which administrates a common fund in which he holds a share. The artisan's quest is to convince the capitalist that his capital will be safe if he lends it to the artisan and that he will receive a good rate of interest or profit by so doing. But how does the capitalist become convinced?
First of all, the borrower needs what the capitalist perceives as the right background. It has always mystified me how capitalists (and those who act on their behalf) make decisions regarding to whom they will and to whom they will not lend money. I am among those to whom they most definitely will not. In the early 1980s, a friend and I used to make competitive predictions on how long each newly-launched whiz-kid computer dealership or software house would survive. A year? Six months? Our guesses were uncannily accurate. But obviously, the banks thought they were a safe investment and that we were not, despite our meticulously formulated business plans.
The ones who always seem to succeed in obtaining finance are either those with rich well-connected parents and those 'Jack-the-lad' con-men who have the gift of the gab and a nose for a deal. A street market trader thus has far more of what is required to gain the confidence of a capitalist than does a hard working highly skilled artisan. Yet it is the artisan who provides his clients with what they actually want, what they actually need and what is ultimately best for them.
Secondly, the borrower needs both existing assets and a steady income. A lender may thus condescend to lend capital to a borrower provided the borrower has:
- assets to offer as security which have a value considerably greater than the value of capital he wishes to borrow, and
- an income sufficient to enable him to pay back the capital, and the interest on the capital, within the period of time determined by the lender.
On this basis, neither my personal assets (my house) nor my income (state welfare) are sufficient to enable me to borrow capital.
Bridging The Credit Gap
But one cannot run a business in an unregulated free market economy without an initial large injection of capital. It is not possible in the normal run of things to start small and build up gradually. This is illustrated by my own business during the mid 1980s when I had contract programmers and technical writers who worked on a client's projects.
My house then had a market value of about £60,000. I still had a mortgage on it. The bank was prepared to lend me a quarter of its value for business purposes provided I gave them what is called a 'second charge' on the property. This meant that if ever I were unable to pay them back what I borrowed from them, they would have the right to sell my house and take the money thus received to pay off my debt to them. The building society who provided my mortgage naturally had the 'first charge'.
The bank thus allowed me an overdraft of up to £15,000 for my business. From work I had done previously I had accumulated savings of another £15,000. I therefore had up to £30,000 of available capital.
The norm and tradition of the industry was that contractors were paid at the end of each week. There was no norm or tradition regarding when my client would pay me. Of course there was as always a clause in our contract which said that they would pay within 30 days of invoice. But anybody who has ever traded in this lawless economy knows about the proverbial cheque in the proverbial post in the proverbial '30' days! In reality, I received payment from 100 to 120 days after invoice, which in this country is the best one can ever expect. Let us be optimistic and say the delay to my receiving payment was 100 days.
Because I paid my contractors at the end of each week, the length of time I had to wait for my money after having paid a contractor was on average 93 days. With £30,000 of capital, and an average rate per contractor of £80 a day, I could never support more than 4 contractors at any given time. Before I could take on a 5th contractor I would have to accumulate another £7,500 of capital out of the profit I was making on the first four.
I had set the average mark-up per contractor to 12½%. This was a mid-range profit margin in the industry at the time. It worked out at £10 per day per contractor. Thus I made £40 per day on my four contractors. This was my income. It was half what my average contractor was receiving. I had to pay my tax and run my business out of this as well as live on it. Were it not for other work which I was doing myself I could not have survived. It was payment for this other work, not the profit from the contractors, which eventually allowed me to save enough to take on another contractor.
Despite this obvious and simple arithmetic, many of the contractors were convinced that all I did was sit back and count the money coming in while they worked. This made me feel awkward because by nature I am an artisan: not a businessman. But sadly, the industry does not allow one whom circumstances force to be home-based to work as a contract programmer. My only happy option was therefore to act as a kind of subcontracting agency for other contractors at the time - an opportunity for which I will nonetheless always remain very grateful to those who made it possible.
In this unregulated and immoral free market, the large and powerful invariably delay paying for what they have received from their small suppliers. This imposes a very low insurmountable limit upon the income of the uncapitalised business. It makes the small business very vulnerable. It places upon its proprietor an unbearable level of stress. It renders too much of his time unproductive. It thus inevitably detracts from the effort he is able to put into the primary service he provides. Both the artisan and his oppressive customer thus become losers as a result of this reprehensible practice.
My contracting business could not expand to a self-sustaining size because my bank would not lend me sufficient capital to finance the credit gap caused by the propensity for large corporations to renege (as they do universally) on pre-agreed payment terms. I therefore discontinued this aspect of my business.
Capitalising a Product
I could not adequately capitalise a proper business for finding and supplying contract programmers and technical writers. The industry would not in general allow me be to be a programmer or technical writer working at home. So, since I could not write and document software products for others, I decided to produce my own with a view to selling them directly to end-users.
I designed and produced my first software product with little trouble. I did not need capital for this. I managed to find several businesses to try it and buy it. I did not need capital to do this either. Many of these initial customers went on to use it to great effect and benefit. However, if I were ever going to sell enough of my software to make my living, I would have to market it. For this I definitely needed capital.
I wrote a business plan for marketing my first software product. I took it to my bank manager. He would not lend me the capital, but referred me to several other sources of venture capital. After about 18 months of effort none of these would capitalise me either. They gave several reasons for this. My product was new. It had no precedent in the marketplace. Banks and investors don't take risks on endeavours for which there is no established precedent. It was at that time my only product. It used new technology: it ran on an Apple II microcomputer, and, when it arrived, the PC. I was perceived to have no 'track record' in computer software. The fact that I had at the time been a programmer and technical writer for 15 years did not seem to count.
Nevertheless, three organisations did consider it further. One of them was a globally known household name. They liked the product and were willing to capitalise the marketing of it. But only under terms and conditions which to me not only seemed unfair, but also totally incongruous. The proposition put by each followed pretty well the same scenario as follows.
There would be a business venture. Its objective would be to market the software product I had developed and field-tested. The venture needed to be capitalised. Each party to the venture would contribute to the venture. Each party would receive a share of the profits it produced. All perfectly reasonable. Incongruity came in the balance between what each party should contribute.
My proposal was that I would contribute the product: they would contribute the capital for marketing it. We would split the profits it generated according to a proportion to be decided. My business plan specified an amount of capital which would be needed to capitalise the marketing process. They said they would contribute half this amount and that I should contribute the other half. For this they wanted half the profits. I reiterated that the whole idea was for them to contribute all the marketing capital. To this they asked me with surprise what I would then be contributing to the venture that I should receive half the profits. I said that I was contributing the product into which I had put over 15,000 hours of my time over several years at my own expense. To this they replied, "but what capital are you contributing?". It appeared that the product did not count as a contribution to the venture. I explained my notion of the proposition through the following table.
||In Return For
|All instances of the|
product to be sold
|Capital required to|
market the product
|A share of the profit
||Financial, marketing and|
They still could not see that I would be contributing anything to the venture for which I should receive a share of the profit it generated. I began to despair. As a last attempt to communicate I devised a different proposition. I put it to them as real. To me though it was hypothetical. I said that I had changed my mind and I would contribute half the capital. My new proposition altered my original table to the following one.
||In Return For
|Half the capital required|
to market the product
|Half the capital required|
to market the product
|A half share of the profit
||Financial, marketing and|
I then announced to them that the venture would now need considerably more capital. "What for?" they said. "To buy a product to sell." I said, "The venture now owns no product. It cannot sell what it does not own. It must now buy the product from its owner, namely me. I will use the half of the capital I am to contribute in order to buy the exclusive rights to the product for the venture. The venture will from then on be free to sell as many instances of the product as it likes."
They replied that the years of work I had put into the product at my own cost was "water under the bridge" and that I could not expect to get anything back for that. As far as the product was concerned it was part of my 'technical expertise' for which I would be remunerated for the time I spent installing, supporting and maintaining the product on behalf of the venture. I would still have acquired the same expertise even if I had developed the product for an employer. Its existence is therefore independent of, and in addition to, the software I produced while acquiring it. I gave up trying to reason or communicate with capitalists.
By this time those original first users of my product had produced lots of feed-back in response to which I gradually implemented improvements. Eventually I got to the point of specifying a complete rewrite of the product to run on the latest operating systems and graphical user interfaces. However, since I knew I would be unable to market it, I decided against developing the new re-designed version of the product.
It seems that those who decide who shall and who shall not be capitalised are people who are completely unequipped in both technical knowledge and the ability to assess market acceptability. How this is so often and frustratingly proven each time a demised British invention reappears as the munitions of a devastating commercial salvo from the other side of the Atlantic. The majority of small businesses are doomed to failure not because there is no market for their products, or because their products are no good, but purely through lack of capital.
Running on Batteries
The recession started to bite around March 1990. Demand for my first product rapidly wound down and then disappeared. This was expected. The odd items of support and upgrade work could not even begin to provide a living. I was running on batteries. My income ceased. My savings fell below £3,000. So reluctantly in April 1991 I signed on as unemployed. From then on the only way was down. Economically I was like a fire which was too small to remain self-sustaining. Money got tighter and tighter.
A couple of years later the recession eased. I always have a vast reserve of workable ideas. Quality opportunities began to present themselves again. But locked into the poverty of state welfare I had absolutely no means of realising them.
Among the rules for receiving state welfare is one that
limits how much liquid capital you are allowed to possess without having to use it to live on. At the time it was £3,000. Even if I had been given capital by a benefactor which was in excess of this I would still have had to use it to live on. With capital above £3,000 I would have had my state welfare reduced by an amount which increased with the capital. With more than £8,000 of capital I would have received no state welfare and would have had to live entirely on my capital.
A Fresh Start
There can be nothing to spare out of the £3,000 I managed to hold onto to capitalise a re-start of my former business as a self-employed artisan. The entire amount would not be enough. Ten times that amount would not be enough. Even if somebody gave me a further £5,000 it would be sitting in a very leaky bucket. It would merely provide my minimal domestic needs until it ran out. The rules do not allow me to spend it at a rate any greater than state welfare. If I were to spend it any faster, I would be seen as disposing of my capital extravagantly, safe in the knowledge that I could go back onto state welfare sooner just as easily as later. Being thereby forced to live within the financial constraints of state welfare, I am rendered unable to travel the length and breadth of the country and make heavy use of the telephone in order to find business.
Without fuel, my car will not move. It is therefore pointless my saying to my car, "If you take me to Birmingham I promise to reimburse your tank with the necessary fuel within 30 days." There is no such thing as payment in arrears in physics or engineering. Cause must precede effect. The means must be there before the job can be done.
Capital is the fuel of business. Enough must be available to sustain the business until it can sustain itself with revenue. It must then remain available to smooth out inevitable ups and downs in revenue and outgoings. Furthermore, unlike a physical mechanism, a business needs additional capital to survive the reprehensible man-made practice of payment in arrears. In a capitalist free-market, might always has its way. By delaying payment for 3 months ... 6 months ... 12 months ... 18 months ... forever, I am forced by my customers to contribute without reward to the capitalisation of their much larger and hence less needy businesses. The better survivability of big businesses is probably less to do with economy of scale and much more to do with their ability to free-load on the backs of the individuals and smaller businesses who have to trade with them.
A Basic Human Right
We were all born on this planet as nothing but helpless babies. All 6,000 million of us. None of us brought anything with us. None of us helped 'capitalise' the planet. It was all there when we arrived. Why then is this planet's immense inventory of productive resources deemed to be owned by a privileged few? By rights, since we all brought nothing, what is there should be divided out equally among us so that we each may apply our share to transforming our labour into our needs of life. In the context of our modern capitalist economy we should each be given by right one 6-billionth of the global capital with which to finance our individual economic endeavours.
Why then are we required to rent our capital from capitalists? What is special about these people that we should have to pay them usury for what the planet itself provides for turning human labour into human needs? By any unfettered system of morality, it is ours anyway. They are working a con. They are defrauding us of what we rightfully own by virtue of having been born as human beings on this planet. Nevertheless, the system of law which prevails at this time gives them the power of possession, however wrongly. For the present, we must therefore endeavour to live with it as best we can.
Being long-term unemployed, neither banks nor others will consider lending me capital to restart my business. Before I became unemployed I was self-employed. This makes me ineligible for all government start-up schemes for helping the unemployed to set up in business. Besides, such schemes assume that the applicant has received a substantial redundancy payment from his former employer which the scheme then matches to form the starting capital for the applicant's new business.
My savings have now fallen below £2,000. What little remains is vital for buffering my domestic outgoings and for family emergencies. I have no capital available for restarting my business. Coming off state welfare back into self-employment is therefore not an option. In any case, even if I had the capital, I simply could not survive the long and uncertain period of attrition between starting work and receiving my first payment with which to replenish my needs of life. This is not the 4 weeks which state welfare now allows for: it is month after month after month after month. And it will take phone call after phone call after phone call after phone call; letter after letter after letter after letter, most probably culminating at least in the taking out a county court summons.
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©May 1998 Robert John Morton