News from the Network, Vol. 2, No. 29

A few weeks ago we posted comments on this blog to the effect that Keynesian economics labors under the delusion that you can get out of a hole by digging it deeper. Some people expressed doubts that the Great Defunct Economist ever said or implied any such thing. Whether or not TGDE said it or meant it, it's painfully evident that Keynesians believe it as unquestioned dogma. Yesterday (Thursday, July 16, 2009) the CNS news service reported that Mr. Joseph Biden, Vice President of the United States, stated unequivocally, "Now, people when I say that look at me and say, 'What are you talking about, Joe? You're telling me we have to go spend money to keep from going bankrupt?'" Biden said. "The answer is yes, that's what I'm telling you." [Emphasis added.]

Paradoxically, we can agree with Mr. Biden — if by "spend money" he means implementing Capital Homesteading and opening up democratic access to the means of acquiring and possessing private property in the means of production. Proper use of the commercial banking system and the Federal Reserve to create new money for financially feasible productive projects in ways that create new owners would, in and of itself, go a long way toward restoring not only faith in the government, but lay the foundation of a financially and politically sound economy.

If you know how to get information about Capital Homesteading to Mr. Biden, or if you know somebody who knows how (or know somebody who knows somebody who knows how . . . ad infinitum, or at least to Kevin Bacon's six degrees of separation), give it a shot. Clearly at this point we have nothing to lose and everything to gain, as can be seen from this week's News from the Network:

• The letter on the pope's new encyclical, Caritas in Veritate, we sent to the Wall Street Journal on Wednesday and posted as an entry on this blog yesterday has received some very favorable comment. Guy Stevenson posted the letter and a link to this blog on the website of "America's Independent Party," in which Alan Keyes is involved. Antonio Betancourt, of the Summit Council for World Peace commented, "The content of this letter as a response to the Wall Street Journal's article on the Pope's latest encyclical on the global economy is what makes me so proud to be a member of and be part of the Center for Economic and Social Justice ("CESJ"). What a clarity and depth in just a few paragraphs."

• Dawn K. Brohawn has been developing and refining an overall plan to restructure the CESJ website. While the task can seem monumental, the end result should be a website that is both more "user friendly" and conveys the message of the Just Third Way more effectively and efficiently.

• The CESJ Quarterly Board Meeting will take place tomorrow, Saturday, July 18, 2009 at 10:00 am. Please advise CESJ via the contact information on the website if you want to be notified of future Board Meetings.

• One of the topics discussed at the Board Meeting will be the possibility of turning the current blog series on usury into a book. If the project proves to be feasible, the emphasis will be shifted to the Just Third Way as a whole from the relatively narrow subject of usury and its effect on concentrating ownership of the means of production.

• The June-July issue of The Catholic Worker contains an interesting article, "False Gods, Real Dilemma," by Ted Walker, on the problem of advancing technology and human alienation. One possibility not explored in the article is restructuring the social order along the lines suggested by the Just Third Way to ensure that humanity controls technology through private property, rather than allowing technology to be used to control humanity by continuing the present concentrated distribution of ownership. Technology can play an important role in securing freedom and respect for personal sovereignty and human dignity — but only if actual, flesh-and-blood human beings own (and thus control) the technology, instead of the other way around, as is effectively the case when ownership of the means of production is concentrated. As Dorothy Day liked to quote, "Proper-ty is proper to man." We would only insert the word "every" between "to" and "man," and make certain that "man" is understood in its generic sense.

• As of this morning, we have had visitors from 28 different countries and 42 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, Brazil, the UK, and the Philippines. People in Chile, the United States, Brazil, the United Kingdom, and Canada spent the most average time on the blog. The most popular postings continue to be those in the series on usury, or which only a few remain to go up, and the news reports.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up. Read more Entry>>

Wall Street Journal on Caritas in Veritate

In order not to lose the timeliness of this posting, we're once again delaying the completion of the series, "On Usury and Other Dishonest Profit" in order to post a letter we wrote yesterday to the Wall Street Journal. While one individual who reviewed the letter stated that the Wall Street Journal probably would have to put too much thought into understanding it, and thus would not publish it, you never know. Besides, publishing it on this blog gets it out to a somewhat more insightful, if somewhat smaller public.

July 15, 2009

Dear Sir(s):

Pope Benedict XVI's new encyclical, Caritas in Veritate makes a good start on giving principles for straightening out the economy — but only a start. Its effectiveness depends on what "just and moral people" do with it. As both Father Robert Sirico ("The Pope on 'Love in Truth'," WSJ, 07/10/09, A17) and Ms. Julie Davis ("Economics Isn't Jesus's Main Focus," WSJ, 07/15/09, A14) understand, "there is no just or moral system without just and moral people."

Unfortunately, many people will be tempted to take this to mean that the system itself cannot be corrected, or will not function properly until and unless a determinate number of people in the system are just and moral. If we wait to act until most people are perfect, however, we are going to be waiting a very long time, as well as obviating the very reason we have a system in the first place: to assist individuals in the task of developing more fully as human beings through recognition of and respect for personal sovereignty and human dignity.

As even Adam Smith understood, as long as our economic institutions are properly designed and maintained in a manner consistent with essential principles of justice, it is not necessary for everyone to be just and moral before they work to become just and moral. Initially, a small cadre in positions of power can organize and act justly and morally to correct the system, thereby opening up equal opportunity for everyone else. After that, as Smith pointed out in The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776), even a "selfish and rapacious" individual can develop habits of doing good.

Applied consistently, as in the design of the United States by the Founding Fathers, principles of justice would result in a system in which 1) the role of the State is limited to what is necessary to protect life, liberty, and property, and provide a "level playing field," 2) the market is free and open and recognized as the best means for determining just wages, just prices, and just profits, 3) the rights of private property are restored, especially in corporate equity, and 4) all artificial barriers are lifted that inhibit or prevent universal or equal access to the means of acquiring direct ownership of the means of production, whether by individuals alone or in free association with others.

Although this last was a central point in the teachings by Pope Leo XIII in Rerum Novarum (1891) and Pope Pius XI in Quadragesimo Anno (1931), the necessity of widespread ownership of the means of production was not mentioned in Caritas in Veritate. This suggests to many people, unfamiliar with previous encyclicals and the Catholic belief in their permanent validity, that private property is no longer important, and the State must now assume responsibility for and control over everyone's life.

That is why in the near future we should probably expect to see a clarification of the principles of justice as they apply to economics, at least as soon as the Vatican sees the variety of contradictory interpretations people will force on Caritas in Veritate in spite of explicit warnings in the encyclical itself. The alternative is to leave unchallenged the wrong idea of the proper role of the State, and neglect the importance of private property. Read more Entry>>

On Usury and Other Dishonest Profit, Part XXXII

Louis Kelso and Mortimer Adler called it "the universal collateralization requirement." It is the single largest barrier that prevents or inhibits the acquisition of a significant capital stake by the great mass of people who lack existing accumulations of savings, and thus interferes with the realization of personal sovereignty and respect for human dignity. Nowhere is this more evident than in the current economic crisis.

The powers-that-be keep complaining that "the banks" aren't lending. Usually they mean that banks aren't allowing consumers to spend increasing amounts of money that consumers don't have, putting them deeper and deeper into debt in order to stimulate the economy by "creating" effective demand. Being oriented toward Keynesian solutions, the powers-that-be don't realize that, in accordance with Say's Law of Markets (which Keynes rejected), the only real way to create effective demand is to produce something, either by means of your labor or your capital, that you can exchange for the productions of others. Anything else is a way of hiding the fact that you are redistributing what belongs to someone else.

That being the case, the only lending that banks should carry out is for investment in new or replacement capital. Replacement capital can come out of existing accumulations of wealth. This is simple justice, for an owner should be permitted free access to the means to maintain and protect his or her current accumulation. Having existing wealth, there is no problem with collateral.

All new capital, however, should be financed out of "pure credit," and in ways that open up access to ownership for those who currently have no capital ownership, or whose ownership is insufficient to generate an adequate and secure income. This does not mean preventing those who are currently wealthy from obtaining more wealth. It does mean putting them on the same basis as everyone else, as Hilaire Belloc recommended in his 1936 essay, The Restoration of Property. This kind of financing is embodied in CESJ's Capital Homesteading proposal.

Unlike Belloc, however, the principles of the Just Third Way as applied in a Capital Homesteading program do not lay heavy burdens on the rich with the intent of bringing them down to the level of everyone else. Capital Homesteading concentrates instead on lifting barriers to full participation in the common good that prevent or inhibit those who currently lack a sufficient accumulation of wealth from using the same mechanisms and receiving the same treatment as the currently wealthy. Instead of bringing down the rich, Capital Homesteading would lift up the poor.

As Kelso and Adler point out in their second book, The New Capitalists (1961), the chief problem in opening up democratic access to the means of acquiring and possessing private property in the means of production is the "universal collateralization requirement." This highlights the significance of the book's subtitle: "A Proposal to Free Economic Growth from the Slavery of Savings." By "savings," Kelso and Adler mean existing accumulations of wealth, not the "future" or "forced" savings that are used to repay a "pure credit" loan. "Pure credit" refers to the process of creating money through the banking system for investment in productive capital without first requiring that savings be accumulated.

Instead (as we've described previously in this series), in the "pure credit" process, 1) a capital project is identified or developed, 2) the prospective investor/entrepreneur presents a proposal to the loan officer(s) of a financial institution that has the power to create money, 3) the proposal is carefully examined ("vetted"), and — assuming that the proposal appears to be sound — money is created by extending credit and printing currency or balancing the loan with a demand deposit on the books of the financial institution. When the capital project begins to generate revenue, the borrower repays the loan, plus remits to the financial institution whatever service charges, risk premium, and interest rate has been added.

The financial institution cancels the amount of the principal (it can't, after all, logically cancel more than that, for that was all the institution created), and books the service charges, risk premium, and interest rate as revenue. When the financial institution's expenses are greater than the amount of revenue generated by operations, the financial institution has a loss or negative net income for the period. When the financial institution's expenses are less than the amount of revenue generated by operations, the financial institution has a profit or positive net income for the period. Unlike a government that has hijacked a central bank, a private financial institution, even though it has the power to create money, cannot create money to cover its own deficits or in response to anything other than a financially sound loan.

In this system, the use of existing accumulations of savings is for collateral. "Collateral" is simply an accumulation of wealth that a borrower pledges to turn over to a lender in the event the borrower fails to repay a loan. Collateral is thus a form of insurance, and almost always consists of accumulated savings of the borrower, or a guarantee by someone with accumulated savings or secure earning power (a presumed ability to save).

The key, then, to obtaining capital credit (or any credit) within the current system is ownership of or access to existing accumulations of savings or the ability to save. That being the case, any mechanism that would eliminate the need to use accumulated savings would open up access to the means of acquiring and possessing the means of production to everyone who currently lacks savings. This, as anyone who reads the daily paper or watches television knows, is virtually the whole of the human race, struggling under a colossal burden of debt incurred for consumption, the interest on which is pure usury.

Essentially, the "proposal" is to replace the "universal collateralization requirement," a form of insurance, with an actual capital credit insurance policy issued by a commercial insurer. In order to spread the risk even further, one or more commercial capital credit reinsurance companies would be established. The premiums for the policies would come out of the usual "risk premium" now included as part of the interest rate charged on all commercial loans.

Initially, all capital credit insurers would, out of common prudence, reinsure all policies until they had built up a sufficient liquidity pool to pay out in the event of loan default. There would be at least two sources of liquidity for the insurance pools of the reinsurance companies. One would be private investors, who, unable to use their accumulations for anything other than speculative investments, gambling, or consumption, would (assuming they are rational) invest whatever they don't use in speculation or consumption either in government securities, or in capital credit reinsurance.

The reinsurance companies would invest their liquidity pools in government securities, treating the insurance pool the same as bank reserves (i.e., either in cash or government securities). Capital credit insurance companies would also be prohibited from investing their insurance pools in anything other than cash or government securities. This is necessary, for the insurance companies would otherwise, like an athlete who bets on him- or herself, be investing in the same thing that they were insuring. This is a type of financial irresponsibility that led to the bankruptcy of AIG and other insurance companies.

We now appear to have all the pieces in place to establish and maintain an economy that does not rely on usury and other dishonest profit to function. What we need now is a feasible program to implement these ideas. We will begin to look at one possible program in the next posting in this series: Capital Homesteading for Every Citizen. Read more Entry>>

On Usury and Other Dishonest Profit, Part XXXI

One of the basic problems with Keynesian economics is that it takes concentrated ownership not only as a given, but as a necessity if society is to grow and advance economically: "The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (The Economic Consequences of the Peace, 1919, 2.III)

What does this mean, given Keynes' distorted and insufficient understanding of employment, interest, and money? Keynes assumed that most people could only gain income from wages, thus demonstrating that he did not understand that, in a well-structured economy based on basic natural law, wages are an anomaly. Keynes' reliance on wages as the primary, if not sole source of income for most people was in turn based on his belief that financing for capital formation could only come out of existing accumulations of savings. That meant that, because savings equals investment, income from capital must be used to finance more capital, and not used for consumption. Finally, Keynes believed that money was only a means of transferring effective demand, and had no necessary connection with production.

Unfortunately, Keynes' paradigm meant that marketable goods and services would pile up unsold. This is because income from capital was not used to clear inventories of marketable goods and services that were produced by capital, but diverted to invest in yet more capital. This in turn meant that, because production equals income, the production representing the income diverted to reinvestment remained unsold. In a vicious circle, increasing amounts of goods would pile up unsold, and ownership would become more and more concentrated. This would mean that capital would become increasingly financially unfeasible at the same time that more and more capital was required in order to provide jobs and effective demand so that people who lived by wages alone could afford to purchase the increasing mountain of unsold goods and services.

Keynes' solution to market gluts (which is what he termed the piles of unsold marketable goods and services) was threefold. First, if projects could be found that produced unmarketable or useless goods and services, or goods and services marked for destruction (as in a war), jobs would be created and effective demand generated that could be diverted away from the useless or unmarketable goods and services that would not be purchased, and used to clear the unsold accumulations of marketable goods and services.

Second, the government would tax the rich to redistribute some of their purchasing power, being careful not to tax too much so as not to discourage the rich from investing in yet more capital and concentrating ownership of the means of production even further.

Third, the government could print money and, through the magic of inflation, transfer wealth from the holders of wealth to the recipients of State largesse via the hidden tax that inflation necessarily embodies.

Thus, the Keynesian paradigm is necessarily based on theft and waste, fostering greed and envy, and catering to the worst in human nature. Keynes managed to combine the worst in both capitalism and socialism, instead of taking whatever good there is in either system, and using it within an ethical framework — a stopgap, but at least an acceptable one that can operate in the short term.

In contrast, binary economics relies on using our institutions, especially private property, money and credit, in a manner consistent both with the wants and needs of individual people and society, and with reality. Binary economics thus respects human dignity instead of setting itself in opposition to it.

Binary economics regards private property as important for several reasons, but for the purposes of this discussion, its importance relates to the fact that it gives the owner the right to receive the income generated from capital, and to spend it in any way he or she wishes, taking into consideration his or her wants and needs and the demands of the common good. "Spending" does not include reinvestment, because using capital income for reinvestment instead of consumption distorts the economic equation expressed in Say's Law of Markets, the observation that production equals income, and therefore supply generates its own demand, and demand its own supply.

If income generated by capital is spent on consumption instead of reinvested to form more capital, however, where does the money come from to finance capital formation? From the commercial banking system in accordance with the "Real Bills" doctrine. By creating money out of the inherent financial feasibility of the economy, that is, out of specific projects that have a reasonable expectation of paying for themselves out of future earnings of the capital formed, as much money as is needed for financing is created at will, without decreasing effective demand, or requiring that the wealthy sacrifice their own wants and needs or have their wealth taxed or inflated away in order to finance capital formation so that others can have jobs.

The only remaining question is how are people who currently own little or nothing in the way of capital supposed to come up with collateral in order to reassure the commercial banks that the proposed investments are as sound as possible? That is the question we will examine in the next posting in this series. Read more Entry>>

On Usury and Other Dishonest Profit, Part XXX

Especially in light of the economic upheavals over the past year and a half as of this writing, no one can deny that there are serious problems with our financial and economic institutions. It is clear that we live in an out-of-control global marketplace. Mainstream economists cannot agree on how to address such problems as the increasing income insecurity of most workers in globalized markets due to "wage arbitrage" (i.e., outsourcing and shifting of jobs to cheaper labor markets) and how to overcome the widening gap in capital ownership and economic power between a small elite of capital owners and financiers and virtually 99% of the rest of humanity.

Binary economists contend that the real problem is not, as cynics suggest, an evil conspiracy of a governing elite or those who work on their behalf. Rather, the real problem is the system controlling access to money, credit, and capital ownership. Once the flaws in any system created by humans are discovered, binary economists argue, that system can be corrected as citizens become more enlightened and demand new solutions.

Kelso's binary economic system combines the elegance of classical market theory with classical moral philosophy and the highest spiritual values. He points out precisely where Adam Smith, Karl Marx, and John Maynard Keynes fell short theoretically by not recognizing the increasing productiveness of capital as the main source of economic growth and the most logical source of widespread income distribution. This conceptual omission by Smith, Marx, and Keynes is embedded in all conventional schools of economic thought, from left to right. Consequently, economic theorists have been led down the path where few of them can ever make accurate predictions about the future or offer sound, long-range solutions to meet the dangers of economic globalization.

Binary economics states that in a genuinely free market economy, people should be able to contribute to and gain their incomes from the economic process, based on both their labor and their capital inputs. Most neo-classical and Keynesian economists would dismiss this postulate as absurd, asserting that this condition exists already under capitalism.

Because of artificial institutional barriers to broad-based ownership under current economic policies, however, most people can only expect to legitimate their incomes through their labor alone. Consequently the market system breaks down, as government is forced to interfere with the market mechanism and redistribute incomes to non-owning working people and the unemployed.

As pointed out by Robert Ashford and Rodney Shakespeare in their book Binary Economics: The New Paradigm, Kelso's theory offers,

• A new understanding of the relationship between humans and things as they work together to produce goods and services;

• A new explanation for industrial growth, poverty and affluence; and

• A new strategy for achieving general affluence for all people on free market principles.

Ashford and Shakespeare offer clear definitions and examples of the Kelsonian concepts of "productiveness," "binary growth," and "binary property rights." They also address the fundamental flaw in today's dominant economic paradigms: an unrealistic, inefficient and blind reliance on "labor productivity" to justify mass redistributions of purchasing power.

Because of these blind spots in traditional economic theories, all existing systems are structured to concentrate economic power, spawning corruption, crime, exploitation and dehumanization of workers, and endemic poverty and powerlessness in our "global village." If we believe in democracy and empowering every person with rights and responsibilities to contribute to peace through justice in the world, then clearly something new is needed.

In its practical applications, the operation of binary economics can possibly best be illustrated by how the ESOP, the "Employee Stock Ownership Plan" — definitely not to be confused with stock option plans which require participants to put up their own money — works. The ESOP is not perfect by any means (no human creation can claim that), but it is at present the only means available that transcends the problem of how workers without savings and who are unable to cut consumption in order to save can acquire ownership of a significant stake of capital. Thus, we should look at the ESOP in this discussion not as an ideal solution, but as a way of understanding how the principles of binary economics can be applied in the "real world" of what Reverend Heinrich Pesch, S.J., Ph.D., called Volkswirtschaft, that is, how ordinary people carry out the business of daily life (not, as one translator mistakenly put it, the national economy, tacitly rejecting the whole idea of free will and personal sovereignty).

Unfortunately, Father Pesch's work has been obscured by those whom Joseph Schumpeter described in his History of Economic Analysis (1954) as Marxists and liberals. Schumpeter then made his own mistake by claiming that Father Pesch's "solidarism" is consistent with the fascist "corporate state" model presumably outlined in Pope Pius XI's encyclical, Quadragesimo Anno (1931). (On the contrary — Pius XI used "corporation" in the sense used by Thomas Hobbes in Leviathan, 1651, not in fascist Italy in the 1920s and 1930s.)

In current law, an ESOP is a qualified "defined contribution plan." This means that, whatever a participant's "vested balance" (percentage of ownership) happens to be when he or she qualifies for a distribution, that amount is paid out to him or her. This is in contrast to a "defined benefit plan," by means of which a company can make promises that it might not be able to make good on. A defined contribution plan can only pay out what is actually in the plan, and thus is inherently much less risky than a defined benefit plan that may or may not be fully funded.

As the ESOP was designed to operate, workers purchase shares in the company that employs them by borrowing money through the ESOP trust. Typically, the company itself guarantees the loan, for it is ultimately responsible for making the debt service payments. The ESOP purchases company shares with the proceeds of the loan, and places the shares in a suspense account. Each year the company makes a tax deductible "contribution" (actually a share of profits) in cash to the ESOP. This cash is used to make payments of principal and interest on the loan.

As the loan payments are made each year, a pro rata number of shares are released from suspense and allocated to the accounts of active participants. When the acquisition loan has been paid in full, the company continues to make cash contributions to the ESOP. This cash is invested in a diversified portfolio of assets and allows the ESOP to build up a liquidity pool to repurchase shares from participants who terminate employment with the company and incur any required break in service, that is, a period of time that must elapse between when a participant terminates employment and when he or she can receive a distribution of the value of the cash and company shares in his or her account.

ESOPs can also repay the acquisition loan or pass through profits to participants by means of dividends that are tax deductible at the corporate level. This is, at present, the only way within a C-corporation to eliminate the "double taxation" on corporate dividends. Note, however, that (as with an S-Corp), dividends are fully taxable at the individual level, that is, to the recipient.

Mentioning the S-Corp brings in another possible way of benefiting workers. An S-Corp, if it is 100% owned by the workers through an ESOP, pays no corporate taxes at the federal level, as well as in most states. This is because an S-Corp is, essentially, a partnership with limited liability, and is taxed once, as if it were an extension of its owner(s). An ESOP, because it is a "qualified retirement trust," does not pay taxes. Corporate income from an S-Corp ESOP is only taxable as income to the recipients when those recipients receive dividends or a distribution of benefits from the ESOP. This makes a company with a 100% S-Corp ESOP much more profitable, and thus more financially viable — which directly benefits the workers.

These principles and the way an ESOP operates can be applied to other vehicles as well, such as a number of pioneering strategies that the Center for Economic and Social Justice has worked out, beginning with Capital Homesteading, but including such innovative proposals as the "Doctors' Plan for Universal Health Care," The "Homeowners' Equity Corporation," the Community Investment Corporation, the Abraham Federation, and so on.

We will start to examine the financing aspect of expanded ownership in a well-structured economy in the next posting in this series — that is, where the money comes from to finance capital formation. Read more Entry>>

News from the Network, Vol. 2, No. 28

One of the more difficult things about the current administration is trying to figure out the rationale of their monetary and fiscal policy, to say nothing of how they think what they're doing is going to affect the economy. It's very difficult to get anything other than vague promises that never seem to come to fruition, or contradictory demands. Within the last few days, for example, following months of demands that financial institutions make more consumer credit available to "stimulate" the economy, Mr. Obama declared that he was in favor of forcing people to save more. Thus, at one and the same time, people are supposed to save and dis-save, or consume and cut consumption.

Of course, this conundrum could easily be solved by the adoption of a Capital Homestead Act, but the administration and its advisors are firmly committed to the disproved Keynesian dogma that only existing accumulations of savings can be used to finance capital formation; new money creation is restricted to monetizing government debt and bailing out failed companies. This used to be called, "throwing good money after bad." (Now, of course, it's throwing bad money after worse, but that's a different issue.) By adopting a Capital Homestead Act along the lines recommended by the Center for Economic and Social Justice, people would be empowered to both spend and save — spend out of existing accumulations, and save (invest) out of real "forced" or "future" savings instead of coerced savings mandated by a desperate government seemingly intent upon undermining what little effectiveness it has left.

That being the case, what has the Global Justice Movement been doing to reconcile all the contradictory demands being forced on the State and the economy?

• On Monday, Norman Kurland had a good meeting via telephone with Mayor Alvin Parks of East St. Louis. The East St. Louis project, the "Metro East Citizens' Land Cooperative," or MECLC, will be a Community Investment Corporation, "CIC," as outlined in Illinois House Bill 4922. It will be dedicated to operating a professional land leasing and development company to serve its shareholders, the resident owners, and to link them to land and technology through ownership.

• On Tuesday, the CESJ team downloaded the new encyclical, Caritas in Veritate, and began work on an analysis. A preliminary reading reveals that the main emphasis of the encyclical appears to be on emergency measures intended to ameliorate the worst effects of the current global financial crisis in the short term, what Pope Leo XIII referred to in the first social encyclical as, "a duty, not of justice (save in extreme cases), but of Christian charity — a duty not enforced by human law," (Rerum Novarum, § 22), a judgment in which Pope Benedict XVI clearly concurs. While the encyclical recommends that business leaders and politicians begin looking to the long term instead of focusing always on the short term, essential principles of economic justice based on the natural law that can be used to develop long term solutions are not explicitly evident. This suggests that Caritas in Veritate may be the "first part" of a holistic program to address both the short and the long term issues in the economic crisis. In particular (since Catholics believe that all infallible teachings of their Church remain permanently valid and cannot be changed), we would look to a second encyclical especially on the subject of economic justice to address the critical importance of private property, for (as Leo XIII reminded us over a century ago) "That right to property, therefore, which has been proved to belong naturally to individual persons, must in like wise belong to a man in his capacity of head of a family; nay, that right is all the stronger in proportion as the human person receives a wider extension in the family group. It is a most sacred law of nature that a father should provide food and all necessaries for those whom he has begotten; and, similarly, it is natural that he should wish that his children, who carry on, so to speak, and continue his personality, should be by him provided with all that is needful to enable them to keep themselves decently from want and misery amid the uncertainties of this mortal life. Now, in no other way can a father effect this except by the ownership of productive property, which he can transmit to his children by inheritance." (Rerum Novarum, § 13)

• On Tuesday evening, David Jon Sponheim of America's Third Party interviewed Norman Kurland for the party's "Blog TV Channel." Mr. Sponheim seemed to very interested in the possibilities offered by the Just Third Way.

• On Wednesday, thanks to the efforts of Daniel Moore (who has been making great efforts to present the Just Third Way to unions as an alternative to the conflict-ridden model of industrial relations), Charles Showalter interviewed Norman Kurland for an hour on Mr. Showalter's radio talk show, "The Union Edge." While touching briefly on such topics as universal health care and how capital is financed, Norm focused on the benefits of worker ownership, but most of all changing the role of the unions from the conflict-ridden model of industrial relations, to solidaristic, justice-based "ownership unions" that secure and protect the ownership as well as labor rights of their members.

• On Wednesday evening, Norman Kurland had extended telephone conversations with Oklahoma State Representative Anastasia Pittman, and George State Representative Calvin Smyre. Representative Smyre is president of the National Black Caucus of State Legislators. As a result of the conversation, Norman Kurland is sending a package of materials to Ms. Pittman and Mr. Smyre. The idea is that this will help kick start the development of an agenda to get started on raising the funding for the Metro East Citizens' Land Cooperative in East St. Louis (see above) out of the economic stimulus money. The project will provide an exemplar to demonstrate the financial feasibility of green, renewable and sustainable energy, as well as the benefits of widespread, direct citizen ownership of community infrastructure and other resources ordinarily owned by government. This will build an example of how private sector initiatives can achieve sustainable development in which everyone shares equitably. Once developed, the model can be replicated throughout all fifty states, then the world.

• As of this morning, we have had visitors from 26 different countries and 39 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Brazil, Canada, the UK, and the Philippines. People in Venezuela, Chile, the United States, Canada and the United Kingdom spent the most average time on the blog. Not surprisingly, the most popular postings are the series on usury (which may actually finish soon), and the news reports.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up. Read more Entry>>

On Usury and Other Dishonest Profit, Part XXIX

Despite the obvious benefits that accrue to the whole of society from widespread direct ownership of the means of production with the full rights of private property, the question remains, 1) how can a state of society characterized by widespread direct ownership of the means of production be instituted and maintained? Even more crucial in our day and age, how can the economic, financial, and political establishments be convinced 2) of the desirability of widespread ownership, and 3) of its feasibility? This issue has confronted and, to some extent, baffled people such as Henry George, G. K. Chesterton and Hilaire Belloc, and Major C. H. Douglas for the better part of the twentieth century. While each of these developed specific proposals, there are weaknesses in them that affect their political feasibility and, sometimes, financial viability.

Addressing these three questions, Louis O. Kelso and Mortimer J. Adler developed and systematized what became known as "binary economics." The following explanation of binary economics is taken largely from Dr. Norman G. Kurland's short paper, "Binary Economics in a Nutshell."

A careful examination of the principles of binary economics reveals a system of interconnected principles that bridge classical, Keynesian and other schools of economics. Further, Kelso and Adler offer a new "post-scarcity" paradigm for analyzing and correcting structural economic defects that foster such seemingly intractable problems as global poverty, environmental destruction and the widening gap between the haves and have-nots.

In Kelso's system "binary" means "consisting of two parts." Kelso divides the factors of production into two all-inclusive, physically interdependent and market-quantifiable categories — the human ("labor") and the non-human ("capital"). The central tenet of binary economics is that, through the property (or ownership) principle, these two "independent variables" can link marketable outputs from the labor-capital mix directly to incomes distributed according to market-quantified values of all "labor" and all "capital" inputs. There are thus only two modes by which a person can legitimately contribute to production and thereby be entitled to a commensurate distribution: 1) through his own human inputs ("labor" of whatever form), or 2) through his own non-human inputs ("capital" of whatever form).

Binary economics attributes most of the increases in the labor-capital mix of the modern world to capital assets in the form of ever-improving technologies, structures and system designs, and far less to any increased productiveness of human labor. Classical economic theory, on the other hand, regards all output and earnings derived from capital enhancements as if they were produced by "increased labor productivity," thus rationalizing higher and higher pay for less and less human effort.

Binary economics holds that broad-based affluence and economic freedom, as opposed to financial insecurity and economic dependency for the many, would be made possible through the widespread ownership of constantly improved capital assets, including system changes, that are added to produce more and more consumable goods with less and less human input and resources.

In contrast to traditional schools of economics which assume that scarcity — almost always understood as insufficiency (economic scarcity is something else) — is inevitable, binary economics views shared abundance — sustainable economic growth and the equitable distribution of future wealth and income throughout society — as achievable by connecting every person through private ownership of property in ever-advancing technologies, institutional systems and structures.

Professor Robert Ashford was the first to identify three concepts within binary economics that set it apart fundamentally from all preceding economic approaches: "binary productiveness," "the binary property right," and "binary growth." In their book Binary Economics: The New Paradigm, Robert Ashford and Rodney Shakespeare describe these three distinguishing concepts as follows:

1. Binary productiveness. While human beings contribute to economic growth through all forms of labor, capital assets such as machines and technological processes are making an even bigger, ever-increasing contribution to overall output, in relation to that contributed by human labor.

2. Binary property right. The natural right of every person to acquire, on market principles, private (individual and joint) ownership of wealth-creating capital assets.

3. Binary growth. Economies grow steadily larger as private capital acquisition is distributed more broadly among the population on market principles. This highlights the importance of unleashing the unutilized or underutilized capacity of all economic systems to produce in greater abundance.

These components interact and reinforce one another, allowing for maximum rates of sustainable growth within a modern, globalized economy.

Binary economics recognizes a natural synergy, as opposed to an unavoidable trade-off, between economic justice and efficiency within a global free marketplace. Rejecting pure laissez-faire assumptions, binary economics is (as we have been examining in these postings) based on four pillars of a truly free and just global marketplace. To restate them in slightly different ways than we have previously listed them, these four pillars are,

1) limited economic power of the State (whose main role should be to promote justice by eliminating special privileges, monopolies and other barriers to equal participation),

2) free and open markets for determining just wages, just prices, and just profits.

3) the restoration of and universalized access to the full rights of private property, and

4) effective means for democratizing ownership of capital, including universal access to money and capital credit for financing growth and transfers of productive assets.

The theory of binary economics is underpinned by three interrelated principles of economic justice:

1. Participative justice, the input principle which demands as a fundamental human right, equal opportunity for every person to contribute to the production of society's marketable wealth both as a worker and as a fully empowered owner of productive assets.

2. Distributive justice, the outtake principle which holds that the contribution of labor to the economic process should be compensated at the market-determined rate (or "just wage") for each particular type of human contribution to the production of marketable wealth, with capital contributions compensated by the residuals (in the form of "profits" and "rentals") from the sales of marketable goods and services.

3. Harmony, the feedback principle that balances and restores participation and distribution within a market-based economic system to counter monopoly tendencies. This principle was referred to by Louis Kelso and Mortimer Adler as the "principle of limitation" and by others as "social justice" or "restorative justice."

In the next posting in this series we will look at some of the problems that binary economics addresses. Read more Entry>>

The Mortgage Crisis in Ireland

It appears that the crisis in property values might have the potential to bring Northern Ireland and Éire together, if yesterday's report published in the Belfast Telegraph is any indication ("Republic's toxic assets 'could cause Northern Ireland property prices to nosedive'," Belfast Telegraph, 07/07/09). Officials at the highest levels on both sides of the border are holding emergency talks on what to do about the situation, reported in language with no small hint of hysteria and panic.

Ironically, a solution — Capital Homesteading for Every Citizen — has been suggested not once, but several times. As reported on this blog, we have managed to get word to a couple of Ministers and members of Dail Eireann, as well as to members of the Economic Social and Research Institute (Ireland's premier think tank), but there has been no real interest expressed, for whatever reason. This is more than a little perplexing, for included in the overall Just Third Way Capital Homesteading proposal is the "Homeowners' Equity Corporation" program, or "HEC." The HEC has the potential not only to solve the current "toxic asset" crisis, but also point the way to a permanent solution to many of the other economic and political ills afflicting not only Éire and Northern Ireland, but the United Kingdom, the United States, and the rest of the world.

Coincidentally, this writer contributed an article yesterday to the Helium Writers' Cooperative on the subject, which has (at least as of this morning) achieved the top rating. Clearly people are seeking a new solution, and, just as clearly, those who have come across the HEC believe that there may be something in the proposal (to say nothing of Capital Homesteading itself) that has the potential to achieve something positive.

The HEC has the potential to answer every concern expressed in the article in the Belfast Telegraph. The problem is that the leaders in Éire and Northern Ireland either don't know anything about it, or, if they know about it, haven't taken it seriously.

What we need, obviously, is for people with contacts — or people with contacts who have contacts — at the appropriate levels of government (at this point that is probably the ministerial level) to open the door to these ideas and get them to the people who can take the ball and run with it. This, of course, means you — whoever you are. If you have read this far, you evidently think there's something in the Just Third Way that has the potential to bring about lasting reform in our economic and political institutions. The question then becomes what you are going to do about it.

Here's what you can do:

1. Get to your contact(s) (or your contacts with contacts) and mention that there is a program that has the potential to solve what many people are starting to regard as one of the worst financial disasters in history.

2. Send your contact(s) to the CESJ website, pointing out that most of the literature on the subject is free and available for download.

3. Suggest to them that if they find the material has possibilities (and, at this point, anything has to be better than what is in place), they open the door for a meeting between a minister (or, better, the Taoiseach, Mr. Brian Cowen) and Norman Kurland to discuss the best way to implement Capital Homesteading.

In light of the increasingly horrifying economic news coming out of Ireland (or anywhere else, for that matter), nobody has anything to lose by giving serious consideration to Capital Homesteading. It might even do some good — and, in social justice, it is your personal responsibility to see that contacts are established and doors opened so that something effective can be done. Read more Entry>>

On Usury and Other Dishonest Profit, Part XXVIII

Before the advent of the Great Defunct Economist (Lord Keynes), the necessity for widespread ownership of the means of production was an idea almost universally accepted. The problem was how to bring it about. To take only one example, the 19th century political economist Charles Morrison explained the situation this way.

Referring to worker ownership as an application of the "principle of cooperation," he stated, "There is nothing in the principle inconsistent with the fundamental laws of industry. The expediency of applying it more extensively than is at present done, must be judged of by striking a balance between the advantages and the disadvantages which are likely to result from it in practice, as compared with the plan of remuneration rating the laborer by fixed wages." ("On Cooperation," An Essay on the Relations Between Labour and Capital, 1854) Morrison goes on to say,

The co-operative principle presents this advantage, that the participation of the workmen in profits tends to give them a motive for working with industry, and using their intelligence as well as their manual labor in promoting the improvement of the business. Each working man will have an interest in doing his own duty, and in seeing that every other workman does the same. In this way the men will have a motive for exercising a superintendence over one another; and a public opinion is likely to be created among the whole body in favour of diligence and good conduct. Another advantage which may be expected, is, that the community of interest which will exist to a certain degree in a co-operative association between capitalists and men, and in a more complete manner in an association of workmen alone, will tend to prevent or soften collisions and obstructions to the progress of the business, arising from the pretensions or passions of any of the parties concerned. (Ibid.)

There are, however, two problems associated with Morrison's analysis. One, he accepted the assertions in Thomas Malthus' 1797 Essay on Population as a given, even unquestioned dogma, although by 1854 they had been disproved not once, but many times over. As one economic historian described the situation, in words that apply equally well to the Keynesian paradigm and its insistence on the necessity of existing accumulations to finance capital formation,

The teaching of Malthus' Essay became firmly entrenched in the system of the economic orthodoxy of the time in spite of the fact that it should have been, and in a sense was, recognized as fundamentally untenable or worthless by 1803 and that further reasons for so considering it were speedily forthcoming. It became the "right" view on population, just as free trade had become the "right" policy, which only ignorance or obliquity could possibly fail to accept — part and parcel of the set of eternal truth that had been observed once for all. Objectors might be lectured, if they were worthy of the effort, but they could not be taken seriously. No wonder that some people, utterly disgusted at this intolerable presumption which had so little to back it began to loathe this "science of economics" quite independently of class or party considerations — a feeling that has been an important factor in that science's fate ever after. (Joseph Schumpeter, History of Economic Analysis, 1954, 581-582)

Two, Morrison accepted without question the necessity of existing accumulations of savings in financing capital formation. This is ironic, for it was Keynes' acceptance of the same disproved premise that led the Great Defunct Economist to exactly the opposite conclusion, that small ownership must be eliminated from the economy in the interests of greater efficiency and a more equitable distribution of effective demand. Note that Keynes defined "functionless investor" as someone who spends the income from capital on consumption rather than reinvestment. A "rentier" is a small investor who gains the bulk or entirety of his or her consumption income from capital. To do him justice, Keynes did not really advocate actual "mercy killing" of small investors. He was trying to be clever.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution. (General Theory, 1936, VI.24.ii)

Further, several refutations of the need for existing accumulations of savings to finance capital formation were widely available by 1854. The debates over Sir Robert Peel's Bank Charter Act of 1844 and especially the "Battle of the Bank" that resulted from Andrew Jackson's quarrel with Nathaniel Biddle and the Second Bank of the United States and the Specie Circular of 1836 had generated a vast body of literature on the subject. This was particularly so in that some economic historians credit the Specie Circular with causing "Hard Times," the depression of the late 1830s. Notable in this respect was the treatise by George Tucker, an American Congressman and political economist (who is also credited with being America's first science fiction writer under the pseudonym "Joseph Atterly), The Theory of Money and Banks Investigated (1839), a careful analysis of the validity of the "Real Bills" doctrine and a refutation of Andrew Jackson's theories on money and credit.

Morrison therefore saw only four ways in which ordinary workers could become owners of even a sub-economic ownership stake of capital:

One plan is, that the employer should find all the capital, paying to every workman a fixed rate of wages, as at present, and that any surplus which may remain after paying wages and expenses, and a certain rate of interest on capital, should be divided between the workmen and the employer.

Another course, which might be adopted where the workmen had some funds of their own, would be, that they should put these funds into the business, and thus become partners in respect of these funds, while they would receive wages for their labor as at present.

A third plan is, that the working men should associate themselves with a capitalist, who might be willing to become a sleeping partner in the business, leaving to them both the labor and the management, and dividing the proceeds with them.

A fourth is, that the working men should keep the entire business in their own hands, supplying the requisite capital either from their own funds, or by borrowing, or by a combination of both means. (Morrison, op. cit.)

Morrison's reliance on existing accumulations of savings as the only source of financing for capital formation, however, led him to the gloomy conclusion that, as a widespread thing (regardless of the great benefits that would accrue to capitalists, workers, and society as a whole), worker ownership would be very slow to implement, and would apply only to certain favored classes of workers:

The principle of part payment for labor by a share in profits is impracticable, when the average remuneration of labor is so low that it will only furnish necessaries, and therefore cannot admit of reduction; and it is only consistent with the welfare of the working man, when his average remuneration is so high that he can in a bad year bear some considerable reduction below that average without much privation. It is more applicable where the number of workmen in a business is small, and the share of each in the result considerable. It is most applicable where the profitableness of the result depends chiefly on the skill and zeal of the workmen; and it is least so where the results are mainly determined by mechanical arrangement, magnitude of capital, or the business talents of the heads of the establishment. It can hardly be adopted excepting in cases where the workmen are select in character, and are usually employed for a long time in the same establishment. It cannot work well in any case, unless much mutual confidence and good feeling prevails between the employers and the employed These considerations show the great difficulties which stand in the way of any extensive application of this principle to the productive industry of this country. To give it a fair chance of success it should be tried in the first instance in particular cases, which present the conditions most favorable to success, and with workmen select in character and intelligence. If in these cases its results should be satisfactory both to the employers and employed, its application will be gradually extended. (Ibid.)

Is there, however, another way to achieve the desired result of widespread ownership of the means of production? We will examine that question in the next posting in this series. Read more Entry>>

On Usury and Other Dishonest Profit, Part XXVII

In the previous posting in this series we examined why the restoration of the rights of private property, particularly in corporate equity, is such a critical aspect of a just economic order. We discovered that, contrary to the traditional understanding of property rights, as well as the claims of supporters of capitalism, capitalism undermines private property in three important ways:

Denial of the "fruits of ownership." The only reason someone engages in productive activity is to produce something of utility, that is, to make a profit, whether tangible or intangible. As Pope Leo XIII pointed out, "It is surely undeniable that, when a man engages in remunerative labor, the impelling reason and motive of his work is to obtain property, and thereafter to hold it as his very own. If one man hires out to another his strength or skill, he does so for the purpose of receiving in return what is necessary for the satisfaction of his needs; he therefore expressly intends to acquire a right full and real, not only to the remuneration, but also to the disposal of such remuneration, just as he pleases. Thus, if he lives sparingly, saves money, and, for greater security, invests his savings in land, the land, in such case, is only his wages under another form; and, consequently, a working man's little estate thus purchased should be as completely at his full disposal as are the wages he receives for his labor. But it is precisely in such power of disposal that ownership obtains, whether the property consist of land or chattels." (Rerum Novarum, § 5) An owner has the right to the profits generated by what he or she owns. Denying this right, as Henry Ford did to the Dodge brothers, abolishes private property to that degree.

Financing Growth out of Existing Savings. First, of course, capital isn't usually financed out of existing accumulations of savings — directly. The chief use of savings (which necessarily equal investment, as Keynes agreed, indeed, insisted on) is as collateral for debt financing. Henry Ford undermined the natural right to private property in two ways by accumulating cash to finance plant expansion: 1) he denied the Dodge brothers their fruits of ownership by withholding dividends, and 2) he violated principles of sound finance embodied in the "Real Bills" doctrine and Say's Law of Markets, thereby monopolizing access to the means of acquiring and possessing private property.

Power without Accountability. Henry Ford's chosen method of concentrating ownership — and thus power — in his own hands guaranteed that he would be accountable to no one for any of his actions. By concentrating ownership, Ford effectively negated others' right to be an owner, and actually went so far as to work to strip others not only of the rights of ownership, but of ownership itself.

This brings us to the fourth pillar of an economically just society: widespread direct ownership of the means of production, individually or in association with others. We need to examine why, in concert with the rights of private property, the universal and natural right to property must be restored as well, particularly as it applies to direct ownership of the means of production, individually or in association with others.

Widespread Direct Ownership of Capital

As many people as possible owning a significant amount of capital has both a moral and (not to imply that morality isn't the most practicable thing there is) a "practical" aspect, that is, a utilitarian side.

On the moral side, every human being has a natural right to own enough capital to generate an adequate and secure income. Most political scientists as well as moral philosophers have recognized this from the earliest times:

Aristotle: "Property is part of a household and the acquisition of property part of household management; for neither life itself nor the good life is possible without a certain minimum supply of the necessities (The Politics, 1253b23). . . . There is an immense amount of pleasure to be derived from the sense of private ownership. It is surely no accident that every man has affection for himself: nature meant this to be so. . . . The abolition of private property will mean that no man will be seen to be liberal and no man will ever do any act of liberality; for it is in the use of articles of property that liberality is practiced." (Ibid., 1263a40)

St. Thomas Aquinas: "Two things are competent to man in respect of exterior things. One is the power to procure and dispense them, and in this regard it is lawful for man to possess property. Moreover this is necessary to human life for three reasons. First because every man is more careful to procure what is for himself alone than that which is common to many or to all; since each one would shirt the labor and leave to another that which concerns the community, as happens where there is a great number of servants. Secondly, because human affairs are conducted in more orderly fashion if each man is charged with taking care of some particular thing himself, whereas there would be confusion if everyone had to look after any one thing indeterminately. Thirdly, because a more peaceful state is ensured to man if each one is contented with his own. Hence it is to be observed that quarrels arise more frequently where there is no division of the things possessed." (Summa, IIa IIae, 66, a 2.)

John Locke: "God gave the world to men in common; but since He gave it them for their benefit, and the greatest convenience of life they were capable to draw from it, it cannot be supposed He meant it should always remain common and uncultivated." (Second Treatise on Government, 34)

Religious authorities agree. The universal prohibition against theft embodied in all religions is a clear indication that private property is inherent in human nature as an inalienable right. As Dr. Heinrich Rommen explains,

"Thou shalt not steal" presupposes the institution of private property as pertaining to the natural law; but not, for example, the feudal property arrangements of the Middle Ages or the modern capitalist system. Since the natural law lays down general norms only, it is the function of the positive law to undertake the concrete, detailed regulation of real and personal property and to prescribe the formalities for conveyance of ownership." (The Natural Law, 59)

While this constitutes only a small sample of the support for the idea of private property as a natural right, that is, a right inherent in every human being (and some of the authorities differ in particulars as to what they think constitutes a natural right as well as where and how they believe private property originated), the basic fact remains: private property is a natural right, and thus is a right belonging by nature itself to every single human being. To put it more simply, every single human being on the face of the earth has the right, by the mere fact that he or she is a human being, to acquire and possess private property.

Logically, this also means that every human being has, as a natural right, full and complete access to the means of acquiring and possessing private property. Otherwise the right to be an owner would be meaningless, and that would be a ludicrous contradiction. Thus, as Pope Pius XII noted,

When God blessed our first parents He said to them: "Increase and multiply and fill the earth and subdue it." And to the first father of a human family He said later: "In the sweat of thy brow thou shalt eat bread." Therefore the dignity of the human person normally demands the right to the use of earthly goods as the natural foundation for a livelihood; and to that right corresponds the fundamental obligation to grant private property, as far as possible, to all. The positive laws regulating private property may change and may grant a more or less restricted use of it; but if such legal provisions are to contribute to the peaceful state of the community, they must save the worker, who is or will be the father of a family, from being condemned to an economic dependence or slavery irreconcilable with his rights as a person. (The Rights of Man, 1942, § II)

Obviously, then, the right to be an owner naturally includes the right of access to the means to become an owner. The right to be an owner would otherwise be completely meaningless, much like the right to life is meaningless to anyone who is prevented from living, or the right to liberty is a non-issue for someone who is a slave.

Thus, no rational person could argue against the fact that private property is a natural right, and that no barriers should be put in the way of anyone acquiring and possessing private property. What this means from a utilitarian perspective we will examine in the next posting in this series. Read more Entry>>

News from the Network, Vol. 2, No. 27

While the news items this week are few, they are significant. We would like to see more happening in the network, but it seems that people are too busy doing to be reporting. We urge everyone to send in their brief news notes.

• Speculation is rife on the internet over the content of Pope Benedict's new encyclical, expected now to be released Monday or Tuesday of next week. Naturally we won't know what the encyclical says until we see it, but most of the self-appointed analysts (none of which can have seen an official copy — the official text doesn't exist until it is released) seem to focus on two things: 1) an expected endorsement of socialism or capitalism (as if there is any substantial difference between the two as far as non-owners are concerned), and 2) a call for "renewal" as the start of a solution to the vast economic problems of the world, inevitably to be interpreted by most people as a call to conversion and personal sanctification. If that is indeed the case, we would respond that, 1) socialism can't be endorsed because it has already been condemned on the basis of its substantial nature and cannot be reversed or reconsidered; capitalism can't be endorsed because the Catholic Church, by its own admission, doesn't have the power to endorse specific systems. What the Catholic Church has the power to do is teach the principles that must be embodied in every system for it to be just, that is, the essential principles of the natural law. This leads into the second expectation about a call for "renewal." 2) How should we understand a call for renewal, however it is phrased? This is even easier to answer than the expectation that the pope will somehow endorse capitalism or socialism. As pope, and before that as cardinal, Benedict XVI has made it clear that society must return to the basic principles of the natural law as its guiding moral light. This is, in point of fact, the only thing that a call for renewal could possibly mean in the context of any encyclical. How this renewal, this getting back to basics, is to be achieved is a matter of prudential judgment. The important thing is that people learn the principles of natural law, and then apply them in the restructuring of the social order through acts of social justice. Since encyclicals are documents issued by the Catholic Church primarily for Catholics, it is inevitable that the recommended means by which Catholics are to learn and internalize the principles of the natural law would be greater participation in sacramental life, prayer and meditation. This is because understanding and adhering to the natural law means acquiring and developing virtue, which we must be careful to realize includes both individual and social virtue, in this context especially, social charity and social justice. Participation in the sacramental life of the Church is the chief (but not sole) means by which Catholics are expected to gain an understanding of the precepts of the natural law — although that is, paradoxically, not the chief reason for participating in the sacramental life of the Church. Does this mean, however, that only Catholics can participate in acts of social justice, or that people must be individually perfected in virtue before participating in acts of social justice? Such a demand would be self-contradictory. Our institutions exist to assist us in the acquisition and development of virtue. If they inhibit or prevent that task, they must be restructured through acts of social justice. To demand that people who have been prevented or inhibited from gaining virtue due to flaws in our institutions first gain virtue in order to fix the institutions so that they can gain virtue is, obviously, ridiculous. No, a call to participate in the sacramental life of the Church (or whatever act or acts are best suited to individuals of other faiths and philosophies) as the first step in restructuring the social order can only be understood in a social context as a call to learn and internalize essential principles of the natural moral law as a necessary prologue to engaging in acts of social justice. This is the only thing that makes sense, for we must know that to which we need to conform our institutions before we can conform the institutions. Does anybody need to be spiritually perfect before beginning the task of social restructuring? Such a demand would be both nonsensical and contradictory, as we already noted above. Can only Catholics participate in such a task? Again, no, for the natural law is "written in the hearts of all men," without any such qualification, as the Catholic Church admits, and, in fact, teaches as an essential doctrine. Thus, in a social context it is learning the essential precepts of the natural law, not specific religious practices, to which any call for renewal must necessarily apply.

• On Thursday of this week we had a long and very interesting discussion with Dr. L. Michael Farrell, a professor from Montreal on Sabbatical. A participant in last year's Social Justice Collaborative, Dr. Farrell is studying how to integrate the principles of the Just Third Way into college and university curricula in order to help restore a sound moral orientation to all disciplines in academia.

• As of this morning, we have had visitors from 26 different countries and 41 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, Brazil, Venezuela, and the UK. People in Egypt, Venezuela, Chile, the United States and Brazil spent the most average time on the blog. Not surprisingly, the most popular postings are the series on usury (which may actually finish soon), and the news reports.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up. Read more Entry>>

On Usury and Other Dishonest Profit, Part XXVI

In 1919 automotive pioneer Henry Ford, considered one of the "high priests" of American-style capitalism, did something that, paradoxically, undermined the institution that many people consider fundamental to the capitalist system: private property. In that year, the Dodge brothers sued Henry Ford because he changed the dividend policy of the Ford Motor Company, retaining earnings to finance corporate expansion instead of paying income out in the form of dividends. (Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. (Mich. 1919))

The court ruled, in effect, that minority shareholders are able to enjoy their full "fruits of ownership," including the right to receive any and all income generated by what is owned, only if the majority owner so agrees. That is, the majority owner(s) in the person of the Chairman of the corporate Board of Directors alone has the right to set dividend policy for a company, and does not need the consent of a minority owner or owner(s) to withhold that which belongs to the minority owner(s) by natural right.

In English, that means (according to the Michigan Supreme Court) someone who owns less than 50% of an asset doesn't really own it in the full sense of the term. Anyone who owns more than 50% of that same asset can withhold some of the rights of ownership from the minority owner or owners, consisting of the right to enjoy the income generated by the asset, at his or her discretion.

The decision by the Michigan Supreme Court thereby undermined what it means to be an owner. This struck directly at what has long been considered an inalienable right and the foundation of civil society itself. Unfortunately, many commentators have obscured the true import of the ruling by focusing on a relatively minor issue that was raised as part of the plaintiffs' case. This was whether Henry Ford had the right to lower the price of Ford automobiles in order to increase sales, retain earnings, and keep as many people as possible employed — and lower corporate earnings. As Ford declared, "My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business."

The court agreed that a corporation was not to be run as a charitable enterprise, but for the benefit of the shareholders. Most conventional analyses of the case stop at this point, without realizing the import of the fact that Henry Ford did not, in fact, base his defense on his stated ambition, but on the "business judgment rule." Thus, if the individual elected by the shareholders (who happened to be Henry Ford, as he retained the majority block of shares) decided it was in the best interests of the company — and thus the shareholders — to stop payment of dividends, the minority shareholders had no recourse other than to retain their shares and take whatever the majority owner(s) chose to dish out, or exercise their "take-it-or-leave-it" right to sell their shares and wash their hands of the whole business.

What is also frequently ignored in analyses of the case is the fact that Henry Ford had previously blocked every effort of the minority shareholders to have input into decisions and exercise some degree of control over the business, such as design improvements and marketing strategy. This was particularly egregious with respect to the Dodge brothers, who owned the next largest block of shares (10%) after Henry Ford, and who were increasingly unhappy with the degree of control exercised by Henry Ford.

Consequently, prior to their lawsuit over Ford's restriction of dividend payments, the Dodge brothers began setting up their own automobile manufacturing company in secret, using their Ford dividends to finance the effort. Ford got wind of this and began withholding dividends. Ford was also suspected of wanting to reduce the price of Ford automobiles as a way of justifying the proposed reduction in dividend payouts and reducing the company value per share.

After the Michigan Supreme Court ruled in his favor, Ford threatened to set up another rival automobile manufacturing company, probably to be wholly-owned by Ford personally, apparently as a way to compel the Dodge brothers to sell their shares back to the Ford Motor Company at the reduced value per share that Ford had manipulated. In this he was successful — and thereby undermined another right of private property, that of disposal, by taking away the Dodge brothers' free choice in the matter of whether or not to sell their shares.

It was, however, a Pyrrhic victory. The Dodge brothers used the proceeds of the forced sale to complete setting up their own automobile manufacturing company. They soon designed and marketed an automobile that many car enthusiasts still consider one of the best popular vehicles ever made, the 1926 Dodge. This made the venerable Model T Ford, the basic design of which Henry Ford had resisted changing for almost twenty years (1908-1927), obsolete. Henry Ford was forced to invest vast sums in developing a competitor to the Dodge product, and spent millions more retooling his factories to produce the Model A in 1928. His refusal to share power and pay dividends to minority shareholders cost Henry Ford a huge fortune, and ensured that his company lost its throne as the world's leading automobile manufacturer.

Restoration of Private Property

Aside from the personal cost to Henry Ford, the social cost of Dodge v. Ford Motor Company was enormous. It embodied the attenuation of the property rights of minority shareholders into law, economic theory, and fiscal and monetary policy — and thus into the United States Internal Revenue Code. In consequence, restoring the rights of private property as a feature of economic life will require a vast educational effort to overcome generations-old prejudices and attitudes, as well as to instruct people on what private property is and how it is to be exercised within a just social order.

First, we need to know of what private property consists. Many people believe that "property" is the thing owned. On the contrary, property is two things. One, property is the natural (inalienable) right that every single human being has to become an owner. This is the right to property. Two, property is the bundle of socially-determined rights (the rights of property) that define what an owner may own and how he or she may exercise his or her ownership. The caveat that must be kept in mind when defining how property is to be exercised is that the exercise must never be defined in such a way as to negate the underlying natural right to be an owner.

Second, we need to know why private property is so important. Pope Leo XIII may have said it best in his landmark encyclical, Rerum Novarum (1891): "Every man has by nature the right to possess property as his own. This is one of the chief points of distinction between man and the animal creation." (§ 6) In other words, it is through the acquisition and possession of material goods, especially the means of production, that the human person chiefly distinguishes his or her humanity. To deny anyone the right to be an owner, or attenuate or negate what an owner may do with what he or she owns beyond what is required by the needs and wants of the individual, other groups, and the demands of the common good is to undermine or deny the humanity of the individuals or groups so affected.

Third, as human labor is replaced by capital as the predominant factor of production, it becomes critical that workers who previously relied on the sale of their labor to generate an adequate and secure income become empowered with ownership of the means of production. Only by this means do they acquire as owners of capital the same right to the income generated by capital that they presumably enjoy as owners of labor to the income generated by labor.

Finally, we need to know what to do about this situation. This is embodied in the third pillar of an economically just society: restoration of the rights of private property, particularly in corporate equity. This leads into the fourth pillar of an economically just society, widespread direct ownership of the means of production, which we will look at in the next posting in this series. Read more Entry>>

On Usury and Other Dishonest Profit, Part XXV

People with a moral orientation seem to have a tendency to excoriate the free market as the source of many of the evils that afflict the modern economic common good. The fact remains, however, that, as an application of the human person's natural right of free association ("liberty") and a manifestation of free will, a truly free market that has no barriers to full participation by any individual or group and protects individual and social rights by maintaining a strict juridical order is most consistent with the demands of individual human dignity and the common good as a whole. For this reason, the Just Third Way incorporates free and open markets as a necessary pillar of an economically just society.

Free and Open Markets

"Free and open markets" does not mean the socialist bogeyman of a capitalist laissez-faire Donnybrook. On the contrary, a free and open market is one to which everyone has free access, whether as a producer or a consumer, and as a worker or an owner. Common sense implicit in Say's Law of Markets tells us that, just as every consumer should also be a producer, every worker should also be an owner of the means of production. This enables anyone to produce either by means of his or her labor, or by his or her ownership of capital. Ideally, all these roles — producer, consumer, worker, and owner — should be combined in every individual. The alternative is a society in which a few produce so that many might consume, and a few own so that many might labor.

When the four roles of the market are filled by free choice by every member of society (or at least a determinate number), the action of the market is circumscribed by a strict and just juridical order, and there is an adequate flow of accurate information, the free market is the best means that can be constructed by humanity for determining just prices, just wages, and just profits.

In its function in determining just wages, just prices, and just profits, the free market is an application of Aristotle's "theory of universals." Without perfect knowledge (something normally beyond human realization in any event), however, we can never know a universal exactly or in its entirety. We can, however, approach a reasonable and workable facsimile of a universal by aggregating the "particulars" or specifics that we observe. This is because one and the same universal (the substantial nature of a thing) appears in its entirety and in the same way in every member of a class, although obscured by the particular form ("accidentals") of each thing observed, and inadequacies and errors in human understanding.

As the theory of universals applies to determining the just price for a particular good or service in a free and open market, then, we have to realize that the universal we are working to discern is the price itself — and the price of a thing must be clearly differentiated from the cost of the thing, as well as from the thing itself. We have to realize that an "accidental," that is, something that is related to a thing but not part of that thing's substantial nature, itself has a substantial nature.

This is because everything that exists, exists as fully as everything else that exists, and exists in the same way. Thus, a loaf of bread possesses the substantial nature of "breadness," or the capacity to acquire and develop "bread virtue." Similarly, a human being possesses the substantial nature of "humanness," or the capacity to acquire and develop human virtue. The aroma, freshness, ingredients, price, cost, and many other things, while characteristics of a loaf of bread, are not themselves bread. A loaf of bread would remain a loaf of bread even if it lacked one or more of these characteristics, as long as the capacity to acquire and develop the missing, un- or underdeveloped characteristics remained intact.

With this understanding, it becomes clear why, in a free market, David Ricardo's labor theory of value, congealed by Karl Marx into an absolute dogma, simply does not make sense. According to Ricardo, "correcting" what he perceived as the mistake of Adam Smith and Jean-Baptiste Say, the value of a thing, and thus its true or universal price, is the cost of the labor that went into it. Unfortunately, cost and price, while accidentals of the good or service produced, each have a substantial nature of their own, as shown by the fact that they have different definitions.

We can therefore discern that cost and price are different from the simple fact that two words exist. Unfortunately, many people use the terms cost and price interchangeably when employing them in ordinary speech, as demonstrated by the definitions in the American Heritage Dictionary: A "cost" is, "An amount paid or required in payment for a purchase; a price. To have as a price." (American Heritage Dictionary.) A "price" is, "The amount as of money or goods, asked for or given in exchange for something else. The cost at which something is obtained." (Ibid.) These definitions make it sound very much as if "price" and "cost" are simply different words for the same thing. That is, in fact, how many otherwise intelligent people understand them.

We, however, are concerned with the technical meanings of cost and price, not the popular meanings. Technically, then, price refers to the amount of money you give up to acquire a good or service. Cost, on the other hand, refers to the amount paid to produce a good or service. Cost represents the sum of the value of the inputs to production — capital and labor — and can be objectively determined on a case-by-case basis. Price, however, is subjectively determined on a case-by-case basis, depending on the perception of the value of the good or service to the buyer.

This is because while price is a function of many things, such as quantity, quality, utility, and so on, the primary determination of price is what a knowledgeable consumer is willing to pay for the thing. This can be, and often is unrelated to what it cost the seller to acquire or produce the good or service. It is an economic and financial decision whether to provide a good or service based on a comparison of the cost to acquire or produce it with the anticipated price at which the good or service can be sold. Pricing being more of an art than a science, there is no necessary correlation between what it costs the provider to produce or acquire something, and the price that can be realized from the consumer.

Individual consumer's subjective decisions on whether or not to buy at a particular price can, however, be objectified after a fashion. By aggregating the prices that individual consumers are willing to pay for a thing in a free market, we approach an approximation of the true, "universal" price of that thing. Paradoxically, we can never know the actual, precise universal price of a particular thing because such factors as quantity, quality, utility and, above all, the price a consumer is willing to pay for a thing are (like society itself) all in a constant state of flux. Within a free and open market maintained within a just and stable social order, however, we can get a good approximation of the objective price of things, and thereby determine just prices, just wages, and just profits in as objective a manner as possible.

Wide fluctuations in prices, wages, and profits, inflation or deflation of the currency, and so on, are all therefore good indications that the institutions of the social order (particularly money and credit) are seriously flawed and that the free market is not operating in a manner consistent with the demands of human dignity.

In the next posting in this series we will examine the third pillar of an economically just society, the restoration of private property, especially in corporate equity. Read more Entry>>

On Usury and Other Dishonest Profit, Part XXIV

From a more realistic understanding of the demands of human dignity, of money and credit, and the three principles of economic justice, we can derive the necessary characteristics of a sound — and, above all, human — financial and economic system. We have distilled these necessary characteristics into four basic "pillars" of an economically and politically just society. These are:

1. A limited economic role for the State,

2. Free and open markets as the best means for determining just prices, just wages, and just profits,

3. Restoration of the rights of private property, particularly in corporate equity, and (the "fatal omission" in virtually all economic systems today),

4. Widespread direct ownership of the means of production, individually or in free association with others.

In understanding these four pillars, we must always keep in mind the principles from which they are derived: 1) respect for human dignity, 2) a more realistic understanding of money and credit, and 3) the principles of economic justice. In this context, the principles of economic justice in particular must be kept explicitly before us at all times: a) Participation (or Participative Justice), b) Distribution (or Distributive Justice), and c) Harmony (Social Justice).

A Limited Economic Role for the State

The State is a necessary institution, the need for which is embedded in human nature by our Creator. Any particular State, however, is a human creation, whether spontaneous by chance human interaction and the accidents of history, or by conscious design. That being the case, the State is subordinate to the human person; the State was made for man, not man for the State. Citizens are bound to the State by a natural law "social contract," consisting of the State's implicit agreement to abide by those rights that are inherent in the human person by virtue of humanity itself, among which are life, liberty, property, and the pursuit of happiness, and the citizens' duty to obey the State in all things that do not violate the natural law.

The primary responsibility of the State is care of the common good. The common good is that complex network of institutions within which the human person normally acquires and develops virtue, that is, becomes more fully human and fits him- or herself for his or her final end. Thus, in what at first glance may seem like a paradox, each human person realizes his or her individuality best within a social context.

The State therefore has the task of maintaining a stable and orderly society that respects individual rights as well as the demands of the common good. This requires maintaining and protecting those rights and other institutions of the common good. This extends to demanding, in extreme cases, the sacrifice of individual members of society (as in a just war) in order to maintain the integrity of the common good. Otherwise the whole of society would be flawed to such an extent that the acquisition and development of virtue by each member of society would be rendered unnecessarily difficult or impossible.

A stable and orderly society is so great a good that we must, on occasion, tolerate even unjust laws and situations if correcting the flawed institution would result in the serious disruption or destruction of the social order. As long as a law, however unjust, does not force any individual to commit an act that violates his or her individual conscience, it can and must be tolerated until such time as individuals organize and carry out acts of social justice to restructure and reform the affected institution(s), putting an end to the injustice.

The State's proper role is thus not to ensure equality or even equitability of results. That is, the State is not supposed to care for individual goods, singly or in aggregate, except in a dire emergency as an expedient, but to ensure equality or equitability of opportunity. The State carries out this function by passing and enforcing just laws in conformity with the natural moral law. The State thereby provides a "level playing field," and protects our natural rights to life, liberty (free association), access to the means of acquiring and possessing private property in the means of production, and acquiring and developing virtue ("pursuit of happiness").

As a human creation, the State only gets its authority from those who come together to form the State. As explained by Aquinas, clarified by Bellarmine, and corrected by Pope Pius XI, consistent with the demands of human dignity, God grants sovereignty to each individual human being. When human persons organize in a group, a portion of this sovereignty is delegated by revocable grant to the group, which becomes a "person" itself by means of that grant.

Depending on the role that the group is intended and designed to play in the common good, this revocable grant of sovereignty may be extremely limited and temporary, or very great in scope and of long duration. Because the State's role is care of the common good itself, the grant typically constitutes the full amount of all that can legitimately be granted, subject in all cases, of course, to the demands of individual human dignity within the common good.

The State may consist of a number of different levels of sovereignty, and even divide different aspects of sovereignty internally, but all, ultimately, derive from the human persons who make up the State. Individuals, as an organized expression of their values and goals, form such institutions as means of assisting each individual's acquisition and development of virtue, and thus enhance the quality of each person's individual and social life.

When the State abuses its authority, and the abuse has a material effect on the common good, the citizens have the duty to change rulers, even the form of government in order to correct the problem. Similarly, when citizens, individually or in free association with others, become able to carry out a task that is traditionally carried out by the State, the State is obligated to devolve its authority and responsibility for that task back to the citizens, or it is guilty of abusing its authority.

Thus, when the citizens are able to take care of their material needs without undue interference by the State, the State is obliged by the terms of the natural law "social contract" that binds citizens to the State to permit the citizens to meet their own needs through their own efforts. Further, when the citizens organize and come together in solidarity with the goal of meeting their material needs, the State is obliged to pass and enforce any laws necessary to make it possible for the organized groups of citizens to meet their material needs in the most efficient and cost effective manner possible.

Finally, the State is obliged to assist all citizens to the fullest extent possible in gaining power over their own lives so as to meet their material needs adequately through their own efforts. Except as an expedient to address an emergency situation, the State may never maintain citizens in a dependent condition (effective infants) on itself or others through failure to assist the citizens in becoming independent adults, or by failing or refusing to pass any necessary enabling legislation that would allow all citizens equal access to the economic and political institutions of the common good.

Thus, the first pillar of an economically just society, a limited economic role for the State, is a necessary foundation for the other three pillars, the second of which — free and open markets — we will examine in the next posting in this series. Read more Entry>>