Thursday, October 23, 2008

The Economics That Dare Not Speak Its Name

The Associated Press reports that there will be a November 15 summit of world leaders in Washington, DC to deal with the worldwide financial crisis ("World leaders to meet on economy in Washington," Deb Riechmann, Associated Press, 10/22/08). A White House spokesman said that, "the first meeting will focus on the underlying causes of the financial crisis, the global response and the principles that should guide any reforms."

Despite the evident goodwill that will bring together leaders from "Japan, the United Kingdom, France, Germany, Italy, Canada and the United States, the European Union China, Brazil, India, Russia, South Korea and other major economies," as well as whoever "wins" (a term we use advisedly) the U.S. presidential election, it is clear that none of them has either the framework or principles with which to address the situation. We therefore feel it is reasonably safe to predict that a number of critical issues — and solutions — will not be raised or discussed. Although there are many, here are seven:
1. Growing gap between rich and poor. Keynesian economics depends on a small class of extremely wealthy people who cannot consume all of their income and thus (in Keynes' view) are absolutely necessary to provide investment capital. When push comes to shove (as in the current financial crisis) the poor are going to have to fend for themselves in the interests of preserving the overall economy, the rationale being that without a sound economy, the poor won't have anything, anyway. The Just Third Way, with its reliance on creating new money for investment instead of relying on existing accumulations of wealth to finance new capital formation, makes reducing the gap between rich and poor a primary consideration instead of a throwaway for the sake of expedience.

2. Instituting proper internal controls. The powers-that-be are frantically trying to come up with some quick fix that will restore the status quo. This necessarily orients them toward trying to impose the desired result by controlling people and institutions with either the carrot or the stick, both wielded by the State. Socialism (whether or not you call it that) consists of State ownership or control of the means of production. "Control" is "property" in all codes of law, so that State control abolishes private property. On a more "practical" note, the imposition of desired results has never worked, as it is directly contrary to human nature. The Just Third Way, on the other hand, advocates restructuring our institutions (including our financial institutions) so that they operate as intended with self-regulation and self-control; the structure of the institutions themselves making the desired acts or ends optimal, not coerced. The role of the State is limited to policing abuses when individuals or institutions violate their own rules.

3. Restoration of private property. Private property and ownership, especially for people who own a small or moderate amount of income-generating assets, is generally irrelevant in Keynesian economics. When considered at all, it seems to be viewed as an impediment to the efficient functioning of the capital markets. Keynes believed that most people could only gain income from wages, not ownership. Thus "full employment," not "full production" becomes the focus of Keynesian economic policy. In contrast, the Just Third Way (consistent with the natural law) advocates that owners actually own what they own. That is, people have a natural right to the full stream of income from what they own. Again, in "practical" terms, income from capital can supplement, even in cases replace what people earn from selling their labor, especially when the value of labor as an input to production is falling in the market in competition with capital (technology).

4. Reform of the currency. At present, virtually the entire money supply of the United States is backed by government debt. The Federal Reserve was established in concert with the Internal Revenue Service to prevent the government from being able to do this. That is, the Federal Reserve would create money as needed to finance private sector investment, and the IRS would raise the money necessary to keep the government running without borrowing. The Just Third Way proposes that the original purposes of both institutions be restored.

5. Reform of the banking system. This is a subset of no. 2 above. Issue banking (banking that creates money) needs to be separate from deposit banking (banking that lends money deposited by savers), and financial institutions need to be restricted to the function for which they were designed. The most common form of "issue bank" is the commercial bank, which creates money for private sector investment, taking a fee for the service. The most common form of "deposit bank" is the investment bank, which "intermediates" between people with money ("savers") and investors, putting the two together and taking a fee for the service. Combining commercial banking with investment banking, and either one with brokerage services, is a certain recipe for disaster. The Just Third Way advocates that strict controls be instituted preventing one type of financial institution from filling a function for which it was not designed.

6. Limiting the economic power of the State. This has already been hinted at in the above points, but it is useful to reiterate the fact that the State is a very specialized tool designed to maintain the common good . . . not everyone's individual good. This means the State ensures equal opportunity and polices abuses, making it possible for people to solve their own problems. The State should be extremely careful at all times about going beyond this narrowly-circumscribed role, especially the temptation to interfere with the natural right of free association that underpins the free market in an effort to ensure equality of results — thereby bringing private sector growth and entrepreneurship to a grinding halt.

7. Free and open markets. Again, this is implied above, but it bears repeating. By "free and open market," of course, the Just Third Way does not mean a market in which "anything goes," but a market within a strict juridical order to which all have free and equal access. The competition within a justly regulated free market is one of the strongest checks and balances we mentioned in point no. 2.
Obviously, this only scratches the surface of what needs to be done. Without these and other structural reforms, however, the only thing that will result from yet another "Financial Panic Summit" will (not surprisingly) be more panic, more financial chaos, and less hope that anything substantive will ever be accomplished.

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