Tuesday, December 30, 2008

Open Letter to Tom Friedman of the New York Times

Steve Roy, Guest Blogger

I just sent this in to the New York Times as a letter to Mr. Tom Friedman:

If Mr. Friedman is interested in helping turn this country around, he could devote a column or two to the work of civil rights champion, attorney, and economist Norman Kurland, president of the Center for Economic and Social Justice in Washington, DC. Dr. Kurland has been promoting a true, Just Third Way in economics, based on the work of Louis Kelso, the creator of the ESOP and famed American philosopher Mortimer Adler.

Dr. Kurland is an amazing man who co-founded the Center for Economic and Social Justice — www.cesj.org — specifically to promote a departure from the debilitating legacy of John Maynard Keynes, and offer a logical new alternative that would expand capital ownership to include all Americans, not just a wealthy few.

As even mainstream media pick up stories about the end of Keynes' now-discredited, debt-based economic model, one finds many saying capitalism is dead, and that socialism is all that's left. It is not. For over 50 years there has been a proposed alternate system that almost no one has spoken openly about.

Mr. Friedman, if you are an honest broker of information, as I believe you are, you will pick up this challenge:

Look at the material on cesj.org. Call Norm — he is accessible and ready to respond at almost any time — do your due diligence, and then report what you find to the world. You will be breaking what may be the most important news since the first American Revolution established the concept of political freedom — the announcement of a Second American Revolution that will establish a concept of economic freedom and justice without which the first revolution cannot be sustained.

I pray you move quickly, before it's too late and, in our panic and uncertainty, we contaminate our economy with even more socialism than it already has. How ironic if the United States of America were to be relegated to the dustbin of history as just another failed collectivist State in the end.


Steve Roy

Monday, December 29, 2008

Even Keynesians Agree: Savings Equals Investment

We didn't get a chance to post this letter to the Wall Street Journal on the blog the day we sent it, but the situation hasn't changed any, and the points remain valid. We did cc. members of the Kelso Binary Economics Discussion Group, one of whom forwarded the letter to the President-elect's new Change.gov website with the following note: "This is profoundly important and needs to be heard. It also needs to inform how we address the economic crisis we are confronted by." He then added the comment, "Let's hope someone is paying attention."

Messrs. Damian Paletta and David Enrich's article in today's Wall Street Journal poses a seemingly insoluble conundrum ("Banks Told: Lend More, Save More," WSJ, 12/26/08, C1). The only problem, however, lies in approaching the task from the inherently flawed perspective imposed by reliance on Keynesian economics. According to the world's most noted defunct economist, it is impossible to finance capital formation (investment) without first cutting consumption and saving. That is the only way (so Keynes believed) the "iron law" that savings = investment could be held sacrosanct.

Commercial banking, however, is premised on something called the "Real Bills" doctrine. Rejected by Keynes because it contradicted his most deeply held dogma, the Real Bills doctrine states in essence that if money is created through the extension of capital credit for financially feasible, self-liquidating investments, there will be no inflation or deflation. Further, there will always be exactly enough investment capital as is needed to finance sound capital projects that pay for themselves out of future profits. The savings = investment equation remains valid, for the only change is that, instead of first saving, then investing, the process becomes first investing, then saving, as the equation itself implies.

The Federal Reserve System, in common with virtually every other central bank in the world, was established firmly on the assumption that the Real Bills doctrine remains permanently valid. Creating money through the commercial banking system by discounting eligible commercial, industrial, and agricultural paper at the Federal Reserve and collateralizing the loans with capital credit insurance has the potential to provide as much financial capital as is required to finance sound capital projects. Using the central bank to extend credit for government expenditures, consumer spending, speculation, or vague "economic stimulus," however, is a recipe for the inflation that Keynes relied on to fuel his economic system and creates the illusion that real investment and production are unnecessary, or a distant second to Keynes' program of inflating demand artificially by manipulating monetary and fiscal policy.

Under the Real Bills doctrine, it is possible for the banks to do as a matter of course what in the Keynesian universe is impossible: increase both savings and investment at the same rate by adhering strictly to the law that even Keynes relied on: savings = investment. A means to achieve this end can be found in a proposal called "Capital Homesteading for Every Citizen," from the book with the same title. A study of the proposal by bankers and policymakers confused and bewildered by the economic crisis would be well worth the effort. It's time people stopped being the slaves of "some defunct economist" who got us into the present mess in the first place, and learned to rely on their own common sense.

Friday, December 26, 2008

News from the Network, Vol. 1, No. 18

As this is the last "News from the Network" for 2008, we will use it to list the major accomplishments through the year. Obviously, we've been very busy working on ways to address the current economic crisis. Fortunately, because of our study of the principles of binary economics and economic and social justice, we are to develop specific programs rapidly, while the major media and policymakers have been floundering in bewilderment over what to do. As a case in point, the "Homeowners' Equity Corporation" was substantially worked out early in 2008, before the true magnitude of the problem became apparent. Had it been implemented immediately, the greater meltdown in housing and which hit the financial markets like a tsunami might have been avoided. As it is, implementation of Capital Homesteading or the HEC, even at this late date, could go a long way toward restoring confidence in the economy and provide the basis for sound and rational growth. Here are the year's highlights:
• Beginning with a proposal we worked out some years ago for the Georgetown University Medical Center, CESJ developed a more comprehensive plan to address the crisis in health care. This project was initiated at the request of Dr. Steven White, past president of the Catholic Medical Association. We incorporated elements listed in a paper prepared by the CMA, as well as an article by Michael D. Greaney originally published in Social Justice Review. From this seed we grew a "total plan" that would address not only the ethical crisis in medicine, but, by integrating the proposal with Capital Homesteading, how to finance adequate health care for everybody. The paper, still in progress, can be found on the CESJ web site.

• In concert with the health care reform paper, CESJ proposed the formation of "Doctors for Social Justice" as a means for medical care professionals of all types (not just physicians) to study the concept, then organize in social justice and work toward its implementation. This effort is still looking for a leader around which to gather a core group of concerned and effective individuals.

• Major advances have been made in East St. Louis, Illinois, to implement a major redevelopment project, including a citizens land cooperative to be owned by all citizens, a CESJ chapter, a Fuller-Kelso World Design Science Center, a $65 million prototype renewable energy power plant and manufacturing complex and a "Homeowners' Equity Corporation" (below). Laura Zacher was able to meet and gain support for the CLC from eleven mayors of towns in the area. Plans were made and goals were set, with the result that events have been moving steadily toward beginning the long-planned revitalization project that began decades ago with the vision of design science revolutionary R. Buckminster Fuller.

• Norman Kurland has been interviewed on a number of radio shows, notably Dawud Muhammad's "Talk Black Live Radio" in connection with the East St. Louis project, Williamsburg Revolutionary Radio, and Michigan Catholic Radio (WMCR). Norm has also attended seminars and lectures sponsored by Freedom House, New America Foundation, and other organizations and think tanks in the Washington, DC area.

• Significant outreach efforts were made to potential "prime movers," notably David Walker, former Comptroller General of the United States, who is now with the Peter G. Peterson Foundation working to alert people to the unsustainable debt of the federal government resulting from budget deficits and future entitlements under Social Security, Medicare, and Medicaid, totaling over $55 trillion projected in coming decades. A telephone conference has been scheduled between Mr. Walker and Norman Kurland for January 6, 2009. There was also an e-mail campaign to try and surface potential leaders from within Dáil Éireann and Seanad Éireann, the two houses of the legislature of the Republic of Ireland. In connection with that, CESJ got 14 responses, of which the one from Senator Shane Ross requested further information.

• In response to a question by Reverend Robert Brantley, "How would Capital Homesteading address the home mortgage crisis?", CESJ developed the "Homeowners' Equity Corporation," or "HEC." The HEC would be a means whereby people in danger of losing their houses to foreclosure in the backwash of the subprime mortgage fiasco could join with others in the same situation and organize to implement a "rent to own" plan that would use "interest free" money from the Federal Reserve channeled through the commercial banking system for financing. CESJ prepared a draft proposal, that former Congressman Walter Fauntroy has been working to bring to the attention of potential prime movers in the Obama transition team.

• Members of CESJ as private individuals attended the Virginia Republican Convention in support of Robert Marshall's primary bid for U.S. Senator. Bob Marshall has been a supporter of the Community Investment Corporation and the Just Third Way for many years, and introduced a CIC bill in the Virginia House of Delegates. Thomas Pekarek in Ohio's 11th District also used Capital Homesteading themes in his campaign.

• CESJ's annual celebration in April was well attended, and preceded by a demonstration outside the Federal Reserve in Washington, DC, sponsored by the American Revolutionary Party, which many CESJ members attended. The point of the annual demonstration that started in April 2005 is to convince the Federal Reserve to adopt Capital Homesteading monetary and credit reforms as a way of financing acquisition of productive assets by ordinary people who currently lack access to the means of acquiring and possessing private property.

• Great efforts have been made by Ulysses James Montgomery, and Norman and Marie Kurland to save Nihonmachi Terrace in San Francisco's "Japan Town" for the elderly residents, who are baffled by proposals to renovate the building at great cost in a way that residents fear could result in their losing their homes.

• On August 7-9, 2008, in cooperation with the Catholic Central Union of America (which was hosting its annual convention of the Scholars for Social Justice), CESJ participated in the first Social Justice Collaborative to seek areas of commonality and cooperative action on capital ownership as a fundamental human right. This initiative sprung from challenges to CESJ's Just Third Way coming from scholars from the Distributist school of thought. The Social Justice Collaborative brought together a number of scholars, including Dale Ahlquist (president of the American Chesterton Society), Don Killoren (representing the Georgists), and various university professors from the U.S. and Canada. CESJ's network was represented by Father Edward Krause (director of the Central Bureau), Fr. Matthews Habiger, Geoff Gneuhs, Dr. Sam Nigro, Rudy Wrobel, Laura Zacher (Senior Project Manager for the East St. Louis MECLC project), The Hon. Alvin Parks, Jr. (mayor of East St. Louis), and Dawud Muhammad of Talk Black Live Radio, among others. Prior to the discussions between CESJ, the Distributists and the Georgists, the Collaborative sponsored panels on universal health care reform. Specific proposals were presented by Michael O'Dea (Christus Medicus), Dr. Sam Nigro, and CESJ's Norman Kurland. Perhaps the most important outcome of the Collaborative was the development of a joint statement to launch the Abraham Federation, reflecting support from the Muslim, Christian and Jewish communities: "The Abraham Federation is a coalition of organizations that hold in common the idea that access to property ownership is the key to justice, and justice is the key to peace. We are a think tank and catalyst for social change comprised of Muslims, Christians, Jews and all who uphold the principles of natural law. We advocate limited economic power of the State, free and open markets, and the full rights of private property."

• Michael D. Greaney delivered the Keynote Address at the centenary of the Central Bureau, Catholic Central Union of America. The address, "Good is to be Done," correlated the Just Third Way based on natural law with Catholic social teaching, promotion of which is the special mission of the CCVA.

• In response to a request to contribute a chapter to a book on "social capitalism" that was to be published in the United Kingdom, CESJ made extensive revisions in its Just Third Way paper. While the book project appears to have been abandoned, the new version of the Just Third Way paper represents a major advance in communicating the vision.

• Economic Justice Media, CESJ's imprint for its publishing effort, released two major works in 2008. The first is In Defense of Human Dignity, a collection of articles by Michael D. Greaney previously published in Social Justice Review, the official journal of the Central Bureau, Catholic Central Union of America in St. Louis. The book has received some extremely positive feedback, and is being considered as a text or supplemental reading for a number of education programs focused on social justice and economics. The second is an annotated edition of The Emigrant's Guide, a "long lost" book by William Cobbett, revered by distributists as "the apostle of distributism" for his strong advocacy of widespread ownership of the means of production. CESJ's edition features an in-depth foreword as well as extensive notes and an index, which create significant "value added" for the reader interested in "minute particulars" of a system described in broader strokes by Alexis de Tocqueville in Democracy in America. Both volumes are available from Amazon. In Defense of Human Dignity is also available from Barnes and Noble, while our edition of The Emigrant's Guide may soon be available there as well.

• A well-known press in the Netherlands (Elsevier) is republishing the Iraq oil proposal on their on-line journal Futures. The journal goes to scholars all over the world.

• Norman G. Kurland was invited by Prof. A. Y. Zohny, the Academic Director for the International Business and Trade Washington Seminar Program at American University in Washington, DC, who heard Norman G. Kurland speak at the New America Foundation, and arranged for Norman G. Kurland to speak before a class of around 35 students at American U. It turned into a two-hour meeting, moving from one classroom to another, and responses were very favorable.

• After mistakenly publishing negative remarks about CESJ and the CCVA, The Wanderer, a national Catholic weekly newspaper, corrected its comments and published a positive overview of CESJ, the CCVA, and the social thought of Reverend William J. Ferree, S.M., Ph.D., in its "From the Mail" column in the December 12, 2008 issue. The column led to requests for copies of books by Father Ferree. Two works by Father Ferree are available as free downloads in .pdf from the CESJ web site, www.cesj.org: Introduction to Social Justice, and the annotated transcript of a series of talks on social charity.

• Members of CESJ attended the "End the Fed" rally on November 22, 2008 in Washington DC, and heard Norman Kurland's 14-minute talk on ending the Federal Reserve's current method of operation by reorienting it back to its original mission of providing liquidity for private sector growth and cutting the federal government off from its ability to circumvent the controls in place to prevent it from monetizing government deficits. By adding Kelsonian features to a reform of the central bank, the Federal Reserve could serve to finance the acquisition of capital by people who currently lack access to the means of acquiring and possessing private productive property.

• CESJ met with Mr. Chris O'Connor, Financial Secretary of the Arlington, Virginia, Colonel John Fitzgerald Division of the Ancient Order of Hibernians in America, to discuss possible collaboration on projects to teach people about social justice and effective social action. The Ancient Order of Hibernians, or "AOH," has the potential to become a leader in the effort to restore a proper understanding of social justice to America's educational institutions.

• Finally, we started this blog — and managed to keep up with it. As of this morning, we have had visitors from 21 different countries and 32 states and provinces in the United States and Canada to this blog over the past two months.
That's the year in review, at least briefly. 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."

Tuesday, December 23, 2008

Happy Holidays, Etc.

There will be no posting tomorrow, Christmas Eve, or on Christmas Day. (This will probably also hold true for New Year's Eve and New Year's Day, but let's see how things develop.) If we manage to finish our year end summation of events, we will post that on Friday, December 26, but that depends on other factors as well. Some of us have religious duties and obligations, others have traditional family activities to consider, and others might have automobile doors that need fixing (as if you needed to hear that).

In short, while in light of the continuing economic situation there is no lack of material on which to comment on this blog, we have temporarily run short of that most precious commodity, time. We will resume normal blogging at the earliest possible date, but until then, we'll do what we can.

How's that for getting in your excuses ahead of time?

William Cobbett's "The Emigrant's Guide"

No, we're not suggesting that anyone leave the United States to get ahead in these difficult times. We'd just like to announce that our latest publication, a new, annotated edition of The Emigrant's Guide by William Cobbett, is available for sale on Amazon, and will probably be up on Barnes and Noble within a short time. The book features an in-depth foreword by CESJ's Director of Research, which explains the context of the book and shows how Cobbett's thought fits in with the principles of the Just Third Way.

We'll be sending out some press releases in the near future, but loyal blog readers and participants in the Kelso Binary Economics Discussion Group have the opportunity to get in ahead of the crowd and get their copy before the rush starts. To purchase a copy retail, go to the link above for Amazon (or Barnes and Noble, when we get it), or put in a special order at your local bookstore. The ISBN for our edition is 0-944997-01-5 (10-digit) or 978-0944997017 (13-digit), and the cover price is $20.00. If you want to purchase quantities in bulk (e.g., ten or more copies), you can order direct from CESJ for $16.00 per copy plus shipping of $1.50 per copy within the continental United States. As the back cover of The Emigrant's Guide will inform you,
William Cobbett (1763-1835) was a British journalist, reformer, and politician. Greatly admired by Gilbert Keith Chesterton (With Hilaire Belloc the found of "distributism") and Dorothy Day of the "Catholic Worker Movement," Cobbett's continuing theme was the economic disenfranchisement of the average person. To Cobbett economic power was rooted in one thing: access to the means of acquiring and possessing private productive property, which more and more modern commentators are beginning to realize is the basis of a sound political as well as economic order. As Chesterton said of Cobbett, "The chief mark of the modern man has been that he has gone through a landscape with his eyes glued to a guidebook, and could actually deny in the one, anything that he could not find in the other. One man, however, happened to look up from the book and see things for himself; he was a man of too impatient a temper, and later he showed too hasty a disposition to tear the book up or toss the book away. But there had been granted to him a strange and high and heroic sort of faith. He could believe his eyes."
To get the most out of the book, you might want to be familiar with the work of Alexis de Tocqueville, whose Democracy in America (the first volume of which was published the year Cobbett died) gives a much broader and institutional view of the United States that fits very well with Cobbett's extremely personal approach. Although certainly not in the same class as de Tocqueville's masterpiece (considered the first great work of sociology), Cobbett's Emigrant's Guide gives a unique, personal perspective on Jacksonian America that cannot be obtained from textbooks or formal histories, that fleshes out Democracy in America better than all the learned lectures or heavy treatises on what America was "really like" in the early 19th century.

You don't need to read de Tocqueville to appreciate Cobbett, however, be a diehard Chestertonian, or even think of Cobbett as the "Apostle of Distributism," as Chesterton put it. From the first sentence you'll realize you've got hold of an extremely opinionated, often irascible, yet (in a paradox that probably delighted Chesterton) kindly man who kept the individual as well as social good of himself and others always in the forefront. He's also extremely entertaining, as a reader of any of Cobbett's other books can tell you.

Although weighing in at 200 pages or so (not counting the extended foreword of more than 40 pages), the book is a quick and enjoyable read. It is head and shoulders above other "how to" manuals and guides due to Cobbett's obvious interest in actual people, rather than in demographic classes, movements, or anything other than the essential dignity of the human person. Nor do you have to agree with Cobbett in every particular, or even most particulars to gain "instruction and amusement" from the book, any more than you have to be an English pauper in the early 19th century to derive pleasure and a little bit of learning.

Try it. I think you'll like it.

Monday, December 22, 2008

Cracks Appearing in Keynesian Economics

Definite cracks are beginning to appear in the hitherto seemingly unshakable Keynesian foundation of modern monetary and fiscal policy. In the "Weekend Journal" section of the Wall Street Journal of December 20-21, 2008 (W1), James Grant's essay on "Is the Medicine Worse Than the Illness?" suggested that the traditional Keynesian "print and spend" solution might not be what the situation calls for. This was followed on Monday in the Washington Post with Robert Samuelson's column, "Bankers in the Crucible" (12/22/08, A21), which at first seemed to speak glowingly of the "aggressive" response of the world's central banks to the current crisis, but then closed with the daunting comment, "These responses seem plausible but prompt [the] troubling question: What if this downturn is following a different script and defeats central banks' aggressiveness?"

Unfortunately, while these signs of discomfort are "comforting" in that they suggest that thoughtful people might be open to new ideas, Grant does little more than claim that interest rates should be kept high to prevent unwise investment. Samuelson for his part doesn't really do anything more than hint that he is a little uneasy about applying remedies that, while they may have worked in the past (we disagree on that), may not be quite right for the present crisis.

Proponents of binary economics and the Just Third Way have been saying the same thing for decades. You can't pretend to have a free market when the cost of financial capital is centrally controlled, nor can you continue to mortgage the future to pay for the present — or (ultimately) at all, for that matter. Parallels between Madoff's Ponzi scheme and Keynesian economics occurred to us last week, but it is an apt comparison, and bears repeating.

Instead of trying to fix Keynesian economics, policymakers and politicians should be taking a look at truly innovative and revolutionary approaches to restructuring an economy along more just and common sense lines. Programs such as Capital Homesteading should be receiving far more attention than they are at present.

Friday, December 19, 2008

News from the Network, Vol. 1, No. 17

With the end of the year coming fast on us, things are slowing down both politically and economically. Many people believe that the current situation in both areas is due to inherent flaws in the Bush administration (if not Mr. Bush himself), but we tend to think that virtually the whole of the mess can be traced directly to reliance on an outdated and inadequate paradigm of political economy. Thus, even as there is frantic activity directed toward fixing the system and repairing specific failures of institutions, little or nothing is done to correct the underlying flaws; the system itself is badly in need of a drastic overhaul and restructuring. In light of this overwhelming need to address a desperate situation, we have been making various efforts to wake people up to the need for reform.
• To correct the item from last week's News from the Network, the start of project "Celtic Cornucopia" was delayed until this week. On Tuesday, December 16, 2008 we sent 226 e-mails, one to each member of Dáil Éireann and Seanad Éireann (the Irish House of Representatives and Senate, respectively). On Thursday, December 18, 2008, we sent out a press release to 81 Irish and Irish American newspapers and other media (such as RTE). As of this morning, we have received 10 acknowledgments from various Deputies in the Dáil (including Mr. Brian Cowen, the Taoiseach, or Prime Minister), and only 9 of the press releases were returned as "undeliverable," which is a very good rate, considering that we located the media e-mails more by guess and hit-and-miss than anything else. The 10 responses from the Deputies indicated that they (or their staffs) had read the e-mails, at least in part, and were simply acknowledging receipt. This was much more than we expected, for none of them have any idea what this "Center for Economic and Social Justice" might be, or what business Americans might have in offering unsolicited advice on the Just Third Way to the Irish government. In the future, however, there are at least ten people connected with the government of Ireland who might recognize the term "Capital Homesteading" (especially if it appears in a newspaper), and may remember it as a possible solution to the current crisis as the economic situation continues to deteriorate. We hope to get out bound copies of Capital Homesteading for Every Citizen to the Taoiseach and various party leaders either today or in the coming week, with the hope that such seed-dropping will bear fruit when the legislature reconvenes after Christmas.

• We received the "proof" copy of our edition of The Emigrant's Guide by William Cobbett, the early 19th century journalist and political commentator whom G. K. Chesterton considered the "apostle of distributism." Cobbett, however, is much more than an obscure precursor of a "romantic" economic theory (as some rather dyspeptic critics have termed Chesterton and Belloc's brainchild). The Emigrant's Guide, almost unknown since its original publication in 1829, contains a wealth of information about early 19th century America that not only distributists, but followers of Henry George and, especially, admirers of Alexis de Tocqueville's monumental Democracy in America and libertarians will find extremely fascinating. Although we've added a lengthy foreword and have heavily annotated the text, in addition to compiling a bibliography and index, the book makes for a relatively quick "read," and at a little over 200 pages, is much easier to digest in a single sitting than de Tocqueville's masterpiece. The foreword in particular provides the reader with a necessary orientation to a world that now seems almost alien to the average American, while the book itself serves as an invaluable guide not only for people emigrating from England to America in the 1830s, but for serious de Tocqueville scholars today. Like all of Cobbett's writings, however, the book was written for ordinary people, and is extremely entertaining, as well as a source of first-hand early American history. High school students in particular should find the book interesting, as Cobbett habitually questions unthinking authority and urges people to make their own decisions, albeit with proper respect and deference to thinking authority. The book should be available for sale on Amazon and Barnes and Noble by the first week of January 2009. Be sure, however, that you obtain our annotated edition, ISBN 0-944997-01-5, although the other editions out will, of course, have the full text of Cobbett's original.

• We haven't obtained a copy yet, but we received an e-mail that mentioned the December 12, 2008 issue of The Wanderer, a national Catholic newspaper, made some very favorable comments about the Just Third Way (the movement, not the blog) in its "From the Mail" column, along with information about the social thought of Reverend William J. Ferree, S.M., Ph.D., one of the co-founders of the Center for Economic and Social Justice. When Father Ferree died in 1985 he was termed "America's greatest social philosopher" by Reverend Andrew F. Morlion, O.P., Ph.D., founder of the International University of Social Studies in Rome. If you have a copy of the "From the Mail" column from the 12/12/08 Wanderer, we'd be grateful if you'd send a photocopy to CESJ at P. O. Box 40711, Washington, DC 20016.

• In light of the above news item, we are pleased to report that we are making progress in our ongoing effort to republish the works of Father Ferree. Of course, both Introduction to Social Justice (1948) and the transcript of his series of talks on social charity are available as free downloads on the CESJ web site, www.cesj.org, but we expect within the next couple of months to publish both in a combined volume, with a foreword and annotations to explain the large number of topical references Father Ferree made in the course of the seminar on social charity he presented in 1966 after he returned from Rome. We also hope to republish Father Ferree's doctoral thesis, his revolutionary analysis of the social doctrine of Pope Pius XI, The Act of Social Justice, from 1942. If we get the time, we also hope to begin editing two manuscripts Father Ferree left incomplete at the time of his death, Forty Years After . . . A Second Call to Battle, and Administration and Social Ethics, as well as revise Introduction to Economic and Social Development (1966) in light of the development of Louis Kelso's binary economics, of which Father Ferree was unaware when he wrote the book.

• As of this morning, we have had visitors from 24 different countries and 35 states and provinces in the United States and Canada to this blog over the past two months.
As usual, there are a great many other news items that we haven't heard about because you haven't submitted them. If you're tired of reading about what we're doing, let's hear from you. If you have a SHORT item about how you are advancing the Just Third Way, send us a note about it at mgreaney [at] cesj [dot] org.

Thursday, December 18, 2008

Lord Keynes, Reverend Malthus, Dr. Moulton, and Monsieur Say

A pillar of Keynesian economics is the rejection of "Say's Law of Markets." Say's Law (named for the French political economist Jean-Baptiste Say, who seems to have expressed it most clearly) is a principle of classical economics that supply generates its own demand, and demand, its own supply. According to Keynes (Marx rejected Say's Law for different reasons), the existence of market gluts — goods that cannot be cleared at market prices — disproves Say's Law. According to Keynes, the only way to clear "excess production" is for the State to print money, inflate the currency, and thereby redistribute purchasing power.

Evidently the Reverend Thomas Malthus, author of the noted Essay on Population (1797), agreed with Keynes, at least in rejecting Say's Law. In 1821, then, a series of letters Say wrote to Malthus were translated into English and published. In the very first chapter we find the following response to Malthus' rejection of Say's Law. Read the following extract carefully, for not only does the slightly archaic language confuse the meaning somewhat to our modern understanding, but the concepts appear radically different to minds conditioned by nearly two centuries of Malthusian doctrine, and almost a hundred years of Keynesian dogma. Critical passages are highlighted.

All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce.

To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.

From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce.

I know that this proposition has a paradoxical complexion, which creates a prejudice against it. I know that one has much greater reason to expect to be supported by vulgar prejudices, when one asserts that the cause of too much produce is because all the world is employed in raising it. — That instead of continually producing, one ought to multiply barren consumptions, and expend the old capital instead of accumulating new.
Keynes' solution to a declining or stagnant economy is found in the highlighted passage in the final paragraph: "That instead of continually producing, one ought to multiply barren consumptions, and expend the old capital instead of accumulating new." That is, people should first purchase existing inventories before producing anything more. Say's analysis, however, was that if goods remain unsold by some people, it is because other people aren't producing.

Keynesian remedies, therefore, concentrate on redistributing existing purchasing power. This is done either through the tax system, or by inflating the currency and increasing government expenditures and welfare payments. Remedies based on Say's Law, however, concentrate on creating new purchasing power without redistributing existing wealth.

The only problem is that Say did not take potential or actual barriers to engage in production into account. He assumed as a matter of course that anyone who wanted to could produce, whether by means of labor, land, or capital, "capital" meaning productive assets other than natural resources; all natural resources were grouped as "land." (Kelso and Adler — below — group all non-human productive assets into the category of "capital.") Say did not acknowledge, or (possibly) realize that there could be barriers to becoming an owner of capital, any more than he could imagine barriers to employing one's labor.

Clearly, however, there are barriers to becoming an owner of productive assets if you do not already own something that you can pledge as collateral or use to purchase capital outright. Worse, as technology advances and human labor becomes relatively less valuable as a factor of production, a significant barrier appears limiting the ability to employ one's labor as a means of engaging in the production of goods and services. Given a free choice between a relatively less expensive machine or expensive human labor, an employer will choose the machine.

Nevertheless, Say's Law remains valid. The problem is that factors that are not inherent in the economic process interfere with its ability to function. The fact that capital is becoming increasingly productive over time and human labor less productive in comparison is irrelevant to Say's Law, for people do not produce only by their labor, but also "through the means of their capital or their land."

To Say, then, the solution to "overproduction" was obvious: produce more. Those who are not producing must produce, and thereby create the purchasing power to clear inventories of existing goods at market prices.

The problem, then, is that the malfunctioning of Say's Law is not a problem of economics. On the contrary, it is a problem of how capital formation is financed. Keynes assumed that capital could only be financed by cutting consumption, saving, then investing. Keynes' assumption requires that ownership of the means of production be as concentrated as possible. Owners receive far more income than they can possibly spend on consumption. The excess is necessarily reinvested to create jobs for people who own nothing.

If people earn too little money from their labor, unsold production can be cleared by having the State print money, thereby redistributing purchasing power through the "hidden tax" of inflation. If people earn too much money from their labor, the State will tax the excess away. The former technique is Keynesian "monetary policy," while the latter is Keynesian "fiscal policy." Both techniques require a large outstanding and permanent national debt and a currency backed exclusively by that debt in order to facilitate State manipulation and control of the currency and the price level.

Unfortunately, both techniques lead ultimately to national bankruptcy. The national productive capacity becomes concentrated in fewer and fewer hands. Because the need to form new capital is not determined by economic consumer demand (necessarily decreasing as increasing amounts of consumption income are diverted to reinvestment), but by the political need to "create jobs," national productive capacity eventually becomes alienated from what the consumer wants, needs, and can afford. Planned obsolescence, massive advertising, colossal increases in the need and demand for consumer credit, tax cuts, stimulus packages, bailouts, and stock speculation on an immense scale replace the genuinely productive activity on which Say relied to make his "Law" function.

This is why the problem of Say's Law not working is financial not economic. Keynes' incredibly convoluted solutions to economic problems were and remain necessarily wrong because he was trying to fix a problem of corporate finance (a microeconomic job) with macroeconomic tools. It's like trying to drive in a screw with a sledgehammer. The screw will go in, certainly, but the damage will be heavy, and may destroy whatever is being constructed or repaired.

If we assume, however, that capital can be financed without first having to cut consumption, save, and then invest, the functioning of Say's Law can be restored. In 1935, Dr. Harold Moulton, then president of the Brookings Institution, demonstrated that Keynes' most basic assumption — cut consumption, save, invest — is wrong. Dr. Moulton's short monograph, The Formation of Capital, proved that in the United States from 1830 to 1930 by far the bulk of new capital formation was financed not by cutting consumption, saving, and then investing, but by commercial banks creating money out of the inherent productive capacity of future capital. That is, capital formation was not financed by existing savings, but by the creation of new money by the banks through the extension of credit for capital projects that would pay for themselves out of future income — the projects were "self-liquidating."

The only thing Dr. Moulton left out of his analysis was the key factor that Say took for granted: that people who did not produce because they were unable to employ (or simply didn't have) labor, capital, or land, would, in fact, somehow produce. This remained a conundrum for the next 20 years, until Louis Kelso and Mortimer Adler published The Capitalist Manifesto in 1958, and followed it up with The New Capitalists in 1961. The subtitle of the latter book is perhaps the most significant issue when asking the question how people who currently lack access to the means of acquiring and possessing capital are to be empowered to do so: "How to Free Economic Growth from the Slavery of Savings."

Kelso and Adler's position was that Say's Law could be restored 1) by financing all new capital formation through the extension of bank credit and collateralizing the loans by using capital credit insurance (paid for by using the usual "risk premium" charged on all loans as an actual insurance premium), 2) making certain that people who currently own little or nothing in the way of capital are able to purchase self-liquidating investments in new capital financed through such extension of bank credit, and 3) use all income from new capital first to retire the loan by means of which the capital was acquired in the first place, then afterwards for consumption.

Thus, it is possible to solve the seemingly impossible economic problems of today if we free ourselves from the "slavery of savings" (or, more accurately, the slavery of Keynesian economics), and restore the functioning of Say's Law of Markets in a way that enables everyone to participate in the economic process, both as owners of labor, and as owners of capital.

Wednesday, December 17, 2008

Addressing the Financial Crisis in Ireland

Yesterday, at the suggestion of Mr. Chris O'Connor, Financial Secretary of the local division of the Ancient Order of Hibernians, we sent out a letter via e-mail to each member of Dáil Éireann and Seanad Éireann (the House of Deputies and the Senate of Ireland, respectively). As of this posting, we've gotten 9 responses, one even being from the Taoiseach, or Prime Minister, Mr. Brian Cowen. We don't know if it will lead to anything, but at least the effort has the potential to inform the leadership of a country that an alternative exists to the traditional reliance on bankrupt and bankrupting Keynesian solutions. Today we followed up with a press release to a number of newspapers in Ireland, as well as some Irish American publications. If you are in Éire, you might want to send your own note to your Deputy and Senator asking him or her to look into Capital Homesteading as a serious alternative to current attempts to address the situation. If you're in the United States or another country, please feel free to adapt the text to your particular situation, and send something to your own representative.

Dear Sir/Madam (we inserted the actual names):

The world financial disaster has thrown into chaos every economy across the face of the globe. As serious as the situation is, however, this crisis presents a unique opportunity to explore new economic ideas, sound policies and practical applications that will allow the people of Ireland to grow their economy and attain a more just, prosperous and sustainable future for themselves and their families.

I am writing you as a concerned citizen of the United States of America and President of the Center for Economic and Social Justice (CESJ), based outside of Washington, D.C. Founded in 1984, CESJ is a non-partisan, non-profit think tank that disseminates concepts and applications for universalizing citizen and worker access to ownership of productive assets. Information on CESJ's concepts, achievements and global network is provided on our web site at www.cesj.org.

Our scholars have been following the housing, pension and credit crises in Ireland, which share the same institutional roots as the economic crises in the U.S. As you know, today's economic collapse cannot be fixed by employing the same tired tools and methods that brought about the crisis in the first place. Only an economic program based firmly on common sense, with principles that respect the dignity and promote the empowerment of each and every human person, can succeed in turning this situation around.

Because of your responsibilities as a policymaker and decision-maker, we wish to bring to your attention an innovative approach called "Capital Homesteading." What is Capital Homesteading?

- A system that allows low-income citizens to attain ownership of their homes.

- A system that allows citizens to become shareholders in corporations and owners of other businesses and enterprises with real assets and income.

- A system that delivers justice and hope to those most affected by the financial crisis.

- A system that grows the economy over the long-term, but offers some immediate solutions to the current crisis.

Capital Homesteading is based on the principle that every human being has a natural and equal right to the legal and institutional means to acquire and possess capital assets sufficient to provide an adequate and secure income. A policy summary of Capital Homesteading is available at: http://www.cesj.org/homestead/summary-cha.htm. A more complete proposed blueprint for turning an economy around can be accessed at: http://www.cesj.org/homestead/capitalhomesteading.pdf

One practical application that may be of immediate interest to you addresses the housing and credit crisis. You can access this proposal at: http://www.cesj.org/homestead/strategies/national/homeequitycorp.htm. We hope that every member of Dáil Éireann and Seanad Éireann, as well as all members of the government and everyone interested in the welfare of the citizens of Ireland will consider Capital Homesteading and its related proposals.

If you have any questions or if CESJ can assist you in these matters, please feel free to contact me directly at thirdway@cesj.org or by telephone at 703-243-5155.


Norman G. Kurland, President
Center for Economic and Social Justice

Tuesday, December 16, 2008

The Unions Forever?

Dinosaurs ruled the Earth until (as some paleontologists believe) a large comet or meteor hit the planet, causing massive climatic change that destroyed the great lizards' food supply, allowing mammals to gain a foothold and eventually dominate the world. Similarly, labor unions ruled the economic world until accelerating technology and cheaper foreign labor caused unions to seek State support to maintain their position. As State-imposed solutions rarely if ever work, union membership has declined to the point where only 7.9% of the private sector workforce was unionized in 2004, down from a high of 34.9% in 1949, according to statistics published by the Labor Research Association. That means that for the past half century, private sector union membership has declined by an average of 0.48% per year. Assuming the decline continues at a steady rate, there will be no private sector union membership by 2021.

That, of course, is unrealistic. One of two things will happen before private sector unions fade away like old soldiers. One, the government will step in and offer its protection. Backed up by the coercive power of the State, union membership will become a virtual mandate if anyone wants to secure a job in America's disappearing industrial base. Effectively socialism, this will allow the State to control both employers and employed in a self-defeating and panic-stricken effort to "save American jobs" and the remnants of the once-great industrial powerhouse.

By redistributing an increasing share of a shrinking pie to unions and their members, today's union leadership and the country's policymakers believe that they will somehow achieve progress and economic growth by undermining an essential aspect of human nature. That is, the only reason people invest and form capital is to derive the "fruits of ownership" from their productive assets. In a rational universe, people do not invest their time, effort, and ownership in something to secure an adequate income for others, especially when they and their dependents have not secured an adequate income.

This brings us to the other thing that could happen. Union leadership and the country's policymakers could wake up to the fact that human labor since the Industrial Revolution has been responsible for less and less of the total production of goods and services that takes place. "Capital" and "labor" are two independent variables in the production equation. Neither one can do without the other, but the coefficients of capital and labor have been changing as technology advances.

A "coefficient" is the number by which a variable is multiplied that expresses how the variables relate to one another. For example, in the equation 2x + y = z, there has to be twice as many "x"es as there are "y"s — regardless how big y or small x is — or the equation will no longer equal z. Over time, capital's coefficient has been getting rapidly larger, while labor's has been just as rapidly decreasing to keep the equation equal. (Of course, under the illogic of Keynesian economics, the equation has been distorted to such an extent by artificial manipulation of the system by the State that it is not equal, but that is a different issue, and is causing its own problems.)

Faced with the mathematical certainty that as the coefficient of capital increases, that of labor must decrease, the obvious solution is to cut labor in on some of the returns to capital. Keynesian economic policy does this by redistribution, inflation, job creation, and various other expedients that do nothing to increase the coefficient of labor, and, in fact, probably operate to increase the coefficient of capital at a faster rate, as owners of capital seek to replace increasingly expensive labor with more cost efficient capital.

A more direct means of getting some of the returns to capital legitimately to labor is to ensure that sellers of labor are also owners of capital. Workers would then derive the fruits of ownership (income and control) by right, rather than by expropriation or other coercive and illegitimate means.

If America's labor unions would grasp the reality of the situation, they would leap at the chance to expand their sphere of influence from mere labor, to ownership. Within an economy in which the rights of labor are becoming negligible due to the diminished importance of labor in the production equation, the rights of ownership are left without any organized movement to make certain that the ownership rights of ordinary workers are recognized, secured, and protected.

By concentrating exclusively on the rights of labor, unions are letting a much broader field of activity lie fallow. As the role of human labor decreases, there are fewer and fewer workers to protect, and thus less perceived need for unions. Potentially, however, as the role of capital increases, the number of owners whose rights need to be protected is limited only by the number of people. There can, after all, be only one person per job, but a single asset can be owned by an effectively infinite number of people.

There is only one obvious course of action for America's unions, and after them the unions of the world. They must transform themselves from organizations protecting the extremely limited and decreasing number of people who sell their toil, to the potentially infinite number of people who can own the means of production.

Monday, December 15, 2008

Keynes' Ponzi Scheme

Everyone (or almost everyone) on Wall Street is running around trying to save capitalism from the Madoff scandal, without first asking the question as to whether capitalism is worth saving. (They also fail to ask whether what we've got in place under the iron rule of Lord Keynes is "capitalism," or something that looks, walks, and quacks like a socialist duck.) Consequently, we sent the following blast to the Wall Street Journal today. Lest anyone should think we're ignoring the problems that the UAW is presenting, effectively betraying the legacy of the late Walter Reuther — we're working on our response to their self-defeating "victory" in trying to force the country into a socialist wage-slave system. It's just that the Madoff situation is so obviously the fruit of the Keynesian model that it was difficult to pass up. You always pick off the easy targets first.

The only real mystery surrounding Bernard L. Madoff's Investment Securities scandal is why people are so mystified at how he was able to pull it off. A flurry of articles in today's Wall Street Journal ("Losses in Madoff Case Spread," A1; "In Palm Beach, Investors Assume Worst," A16; "Investors May Have to surrender Gains," A16; "SEC Had Chances for Years to Expose Madoff's Alleged Ponzi Scheme," A16; "Review & Outlook: Madoff and Markets," A18) all reveal a basic lack of understanding of what is really going on.

Madoff's success is easily explained. A Ponzi scheme is, after all, only Keynesian economics in microcosm — if a $50 billion graft can be referred to as "micro" in scale. People have been conditioned since the New Deal to believe unquestioningly in the Keynesian dogma that we can have what we want today, and let future generations pay for it. They, in turn, pass the debt on to their children, and so on. As long as nobody questions the basic assumption — that people, institutions, and governments can continue making promises they can't possibly keep — everything is fine. We only need to keep bringing in new investors/taxpayers to pay out old investors/taxpayers.

The projected deficit in Social Security and Medicare, the national debt, the growing burden of consumer debt (ironically highlighted in "This Year, More Than Ever, It's Tough to Be a Compulsive Shopper," A1), the subprime mortgage crisis (the list is becoming endless) all rely on finding more and more people in the future to bring in to foot the bill for today's expenditures. When fewer people come in than expected, credit dries up, or the social surplus proves insufficient to fund the scheme, the system collapses under the weight of its own illogic.

The alternative is to implement an economic system based on common sense instead of the desire to get something for nothing that underlies Keynes' system. Such a program is called "Capital Homesteading for Every Citizen," from the book with the same title. Increasing regulation and forcing government to do jobs it was not designed or intended to do is not the answer. It didn't work to stave off Madoff’s stunt, and it won't save a Keynesian economy from itself. The only solution is to try something based on the belief that true justice consists only in receiving what you are due, not in sticking it to generations unborn.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).

Friday, December 12, 2008

News from the Network, Vol. 1, No. 16

As the holidays approach, we spend more time setting up opportunities for the New Year and completing routine annual tasks than we do "accomplishing" definable tasks. In light of deteriorating economic conditions, this could be considered an accomplishment in itself — but it is clearly not enough if we are to succeed in bringing the Just Third Way to the attention of political leaders and policymakers. For that reason, each of you might want to consider how, in the New Year, you can make the effort to open at least three doors, create three opportunities, or carry out three discrete tasks directed toward advancing understanding, acceptance, and implementation of Capital Homesteading and other Just Third Way programs.
• Early this week we reconnected with Dr. Damian P. Fedoryka, a past president of Christendom College in Front Royal, Virginia. Dr. Fedoryka wrote an in-depth review of CESJ's 1994 compendium Curing World Poverty: The New Role of Property, that was published in the July-August 1994 issue of Homiletic and Pastoral Review. We are meeting with Dr. Fedoryka later in December to discuss ways in which he might be able to use his contacts to help advance the Just Third Way — and perhaps do another review, this time of Michael D. Greaney's book, In Defense of Human Dignity. If you have entry into any newspaper or other periodical, you might want to consider writing a review. You can obtain a .pdf review copy by sending an e-mail to CESJ at thirdway [at] cesj [dot] org. If you are a blogger, you are especially encouraged to take advantage of this, particularly if you have as much trouble as I do in coming up with interesting postings on some slow news days.

• Project "Celtic Cornucopia" begins its first outreach effort today with e-mails sent to each member of Dáil Éireann and Seanad Éireann (the Irish House of Representatives and Senate, respectively). The e-mails will contain links to the .pdf version of Capital Homesteading for Every Citizen and other descriptive material. Regular bound copies along with some other Just Third Way enclosures will be sent to the Taoiseach (Prime Minister) and some of the major party leaders, as well as Gerry Adams of Sinn Fein to show that there is an economic program available that will solve the current financial crisis as well as provide a sound foundation for building a lasting peace and eventual unification through common interests.

• Eventually the Irish — north and south — might want to look into our latest book, In Defense of Human Dignity. Sales remain steady, although not spectacular. While the book is written from a Catholic perspective, it seems to be resonating with people from other faith traditions, reinforcing the fact that the natural law is the common denominator and provides the universal principles on which society must be restructured. The book can be ordered from Amazon and Barnes and Noble.

• CESJ friend and supporter Walter Fauntroy is still working at introducing the Just Third Way to the future movers and shakers in the new administration. Walter thereby demonstrates Number 17 in the Code of Ethics in an exemplary manner.

• Speaking of persistence, persistence, and persistence, the Washington Post's otherwise excellent writer and analyst Steven Pearlstein is continuing to chastise the powers-that-be (good), but without offering anything substantive to correct the situation (bad) ("Just One Real Leader, and We Could Have Avoided This Mess," Washington Post, 12/12/08, D1). Assuming we get the time today, we'll send off (another) letter to the Post and Pearlstein reminding both of them that neither of them has given serious consideration (or any consideration at all, for that matter) to our Just Third Way solution.

• As of this morning, we have had visitors from 27 different countries and 37 states and provinces in the United States and Canada to this blog over the past two months.
As usual, there are a great many other news items that we haven't heard about because you haven't submitted them. If you're tired of reading about what we're doing, let's hear from you. If you have a SHORT item about how you are advancing the Just Third Way, send us a note about it at mgreaney [at] cesj [dot] org.

Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).

Thursday, December 11, 2008

Is the United States Now a "Command Economy"?

The political pundits all seem to be in agreement this morning that the automakers' bailout is in trouble. It has passed the House, but now seems stalled in the Senate. Wall Street and the financial markets are unsure which way to jump, or even whether to buy long or sell short to make as much money as possible on other people's uncertainty. ("Wall Street lower amid auto bailout worries," AP, 12/11/08)

Once again the political and the financial powers-that-be are missing the point — just as they've missed the point for over a century on the difference between credit extended for consumption, speculation, and government expenditures ("bad credit"), and credit extended for self-liquidating capital investment ("good credit"). There is a very deeply superficial understanding about ends and means in this country, possibly the result of the riptide of moral relativism that has inundated human thought and behavior for more than a hundred years. If the end appears good, e.g., greater consumer buying power, meeting government deficits without recourse to taxation, saving the automobile industry — whatever — how it is done matters very little, if at all.

The problem is that choosing the wrong means to achieve even a greatly desired, even necessary end can result in the opposite of what was intended. The restrictions proposed for the auto industry make sense in light of the method chosen to bail them out — but is a bailout the best or only way to accomplish the desired end? With the State dictating what products shall be developed, how much can be produced, setting compensation, and so on, what results is a "command economy," more popularly known as socialism or communism. We are faced with the supreme irony that, given the Keynesian economic framework, the only way to save the free market is to destroy it, that is, change it from a free market into a centrally-planned "command economy."

Instead of Keynes, then, the economic and political powers-that-be should be looking at Kelso and Adler, and studying the possibility of saving the automakers — and the rest of the economy — by means of applications based on the principles of Kelsonian Capital Homesteading and ownership, not Keynesian full employment and inflation.

Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).

Wednesday, December 10, 2008

Increase Consumer Income and Stimulate Economic Growth

Here is today's blast to the Wall Street Journal. It is becoming more evident every day that few people realize the difference between good credit (credit used to finance self-liquidating capital projects) and bad credit (credit used for consumption, speculation, and government spending). Even worse, the predominant economic theory holding the world in thrall today is that of Lord Keynes ... who appears to have had a very tenuous grasp (if any) on money, credit, and banking, despite the involved and confusing explanations in his General Theory.

Mr. Harvey Golub's op-ed piece in yesterday's Wall Street Journal ("Getting Out of the Credit Mess," WSJ, 12/09/08, A17) provides a necessary wakeup call to those who still mistakenly believe in the Keynesian dogma that the State can spend the country out of recession and depression. He is absolutely correct that credit — when it is used at all — must be used for sound, financially feasible loans that carry a reasonable expectation of repayment. Mr. Golub is also correct that only increasing consumer earning power through economic growth and decreasing (ideally eliminating) loans made for projects that do not generate their own repayment or are insufficiently collateralized with existing hard assets will bring us out of the current crisis.

We would add that, consistent with the findings of Dr. Harold Moulton in his iconoclastic monograph The Formation of Capital (1935) and the work of Dr. Louis O. Kelso and Dr. Mortimer J. Adler in The Capitalist Manifesto (1958) and The New Capitalists (1961), we cannot limit our understanding of "consumer earning power" solely to the ability to sell labor for wages. We must add in the natural right that each human person has to own productive assets — capital — and derive an income therefrom. If, in accordance with sound central banking theory we use the commercial banking system and the central bank to create money exclusively to finance capital formation, and stop money creation for consumer purchases, speculation, and government spending, there is no need to divert capital incomes (dividends and capital gains) from consumption to reinvestment. If all newly-formed capital is owned by people who finance its acquisition with such "new money," and who use both their labor incomes and capital incomes for consumption, dramatically increasing consumption, the economic growth that we need to get out of debt will occur.

The only issue that remains is how to initiate the process of capital formation so that people who currently own little or nothing in the way of income-generating assets will have something to purchase with the credit extended for such purposes. As Dr. Moulton demonstrated in 1935, the demand for capital is derived from consumer demand; typically before periods of intense capital formation, there is an upswing in consumer demand. This increase in consumer demand depletes savings, leaving little or nothing left to finance the formation of capital, hence the need to use the banking system to create money for that purpose.

The problem today is that savings have already been depleted and enormous debt incurred, not for the legitimate purpose of capital formation, but for consumption, speculation, and government spending. This has severely curtailed the lending capacity of financial institutions, while the central bank is busily following standard Keynesian dogma by creating ever-increasing amounts of money for consumption, speculation, and government spending — a classic case of trying to get out of a hole by digging it deeper.

The solution to this conundrum is the concept of financial feasibility. Typically a business will only invest in new capital formation if there is a perceived consumer demand for the product or service. Thus, consumer demand serves as a type of collateral or insurance for a business loan, backed up with sound market projections and a good business plan. As Kelso and Adler point out, however, it is possible to replace the "universal collateralization requirement" with capital credit insurance, using the risk premium assigned to all loans as an insurance premium.

To provide the initial insurance pool and a "failsafe" reinsurance pool, wealthy investors can provide the liquidity, using the funds that can no longer be used for new capital formation, having been replaced with new money created by the banking system. This pool can be treated the same as bank reserves and invested in government bonds, on which (as the government will no longer have access to the discount window for either primary or secondary issues) the rate will necessarily be close to the fair market cost of financial capital.

Given a reasonable reassurance that the loans will be repaid, either out of future income generated by the newly-formed capital or out of the insurance proceeds in the event of default by the borrower, lenders will make loans for capital projects. This will create jobs and increase consumer demand as well as expand the tax base. By putting more people to work, demand for social welfare payments will decrease, lessening the amount the government requires at the same time tax revenues increase. The surplus can be directly applied to debt reduction.

Such a program will require a reorientation in both citizen and government thinking. The State is not there to provide for all our needs, even when we cannot take care of ourselves. Perceived in that way, the State inevitably starts to arrange things so that it must take care of everyone, thereby extending its power and assuming incompatible functions. No, the role of the State is to make it possible for us to take care of ourselves.

A proposal called Capital Homesteading for Every Citizen, from the book with the same title, details a solution to our current situation. It should be taken seriously at all levels of government, but most especially by the new administration, seemingly locked into the self-defeating Keynesian paradigm.

Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).

Tuesday, December 9, 2008

Keynesian Economics: Socialism Lite

According to an article in the December 8, 2008 issue of the New York Times — itself facing some serious financial problems — Russia's leaders are seizing the opportunity offered by the current economic crisis to re-impose socialist central planning and control on the economy. ("Kremlin Rules: In Hard Times, Russia Tries to Reclaim Industries") Meanwhile, back in the United States, presumed capitalist capital of the world, Congress and the White House are debating not whether to impose central planning, but how far to extend increasingly levels of State interference in the economy (e.g., "Congress, White House nears deal on auto bailout").

The move toward socialism in the United States may surprise many people unaware of the similarities between the two presumably opposed systems of capitalism and socialism, but centralized control over the U.S. economy by the State has been a fact of life since the New Deal, just as centralized control over the U.S. economy by private interests was a fact of life for two generations before that. Prior to that, widespread ownership of the means of production (usually in the form of agricultural land) was the rule, with the rapid takeover of the private sector by concentrated economic power forestalled for a time by Abraham Lincoln's 1862 Homestead Act.

Had it not been for the Homestead Act, the rapid industrialization of the North during the Civil War would have completed its hegemony over the economy in a very short time. Had it not been for the opening of the West, the vast federal lands would have remained under the control of wealthy ranchers, and Reconstruction would have maintained iron control over the South permanently. With the vast western lands broken up into small holdings, however, the power of the ranchers was broken at a time when the rising demand for western beef would have given them (as it nearly did) total control over more than half the land in the U.S., while the escape valve of the movement west kept the federal government from imposing absolute control over the South during Reconstruction.

Today, consistent with the dictates of Keynesian economics (General Theory, V.24.ii), there is virtually no small ownership left to compete with the large corporations, the ownership of which is concentrated in less than 1% of the population. Then, with the current financial meltdown (instead of taking the opportunity offered by the crisis to reform the system and open up capital ownership to ordinary people the way Lincoln opened up the opportunity to own land) the federal government is, instead, working feverishly to install and maintain central planning and control over the economy. This is predominantly by means of absolute control over money and credit, but now is moving to imposing direct State control of industry, beginning with the "Big Three" automakers.

Again, this is perfectly consistent with Keynesian economics. Keynes declared in The General Theory of Employment, Interest, and Money (1935) his rather turgid economic tome (composed, in the opinion of this writer, in a panic to undermine the findings of Dr. Harold Moulton in his brilliant, if iconoclastic monograph, The Formation of Capital, 1935), the State should control the "rate of interest" (i.e., return to capital), the rate of investment, and State "cooperation" with industry — to say nothing of working to eliminate small ownership gradually from the economy. To disabuse people of the idea that the level of State control he advocated was socialist, Keynes calmed people's fears first by writing in an obscure a manner as possible, then stating,
In some other respects the foregoing theory is moderately conservative in its implications. For whilst it indicates the vital importance of establishing certain central controls in matters which are now left in the main to individual initiative, there are wide fields of activity which are unaffected. [Keynes doesn't list the "wide fields of activity" left to individual initiative.] The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation [i.e., manipulating the tax rate to increase or decrease disposable income], partly by fixing the rate of interest [i.e., by fixing the rate of return to capital], and partly, perhaps [!] in other ways [carefully not specified]. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. [i.e., control of the banks will probably not exercise adequate control over new capital formation] I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. [In other words, State control over who can invest and how much — which the communists called "central planning" — will not preclude the imposition of other controls by the State, as seems expedient.] But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. [Of course not — controlling who may own and how they may enjoy how much of the fruits of ownership is to exercise absolute control over the economy and the lives of individual citizens!] It is not the ownership of the instruments of production which it is important for the State to assume. [Ownership is control in all codes of law; Keynes is saying that it isn't necessary to take actual title for the State to own everything.] If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. [i.e., if the State is able to exercise absolute control over everything, it will have achieved its goal.] Moreover, the necessary measures of socialization can be introduced gradually and without a break in the general traditions of society. [Excepting only the "traditions" involving the natural law rights to life, liberty, property, and capacity to acquire and develop virtue.] (General Theory, V.24.iii)
By actually reading what Keynes wrote and understanding its import, we realize that the end result of the Keynesian economic program is effective State ownership and control of virtually every aspect of human life. This is achieved by first controlling money and credit, and then by extending this control directly to industry and commerce. This is consistent with Lenin's approach to undermining the capitalist system: first debauch the currency, then seize direct control once private interests are too weak to resist. If the rot has spread far enough, the capitalists will even beg for State control — fulfilling Lenin's prediction that the capitalists will be so eager to save themselves from their own folly and still make a profit that they will sell the very rope that will be used to hang them.

There is, nevertheless, time to reverse this trend, or even salvage some semblance of a human system in the event the current movement toward State control succeeds — which it appears very likely to do, as bankers and automakers rush to save themselves at taxpayer expense. A Capital Homestead Act can do for America and the world what Abraham Lincoln did with the Homestead Act of 1862.

More — a Capital Homestead Act would be of permanent benefit and effect a lasting restructuring of the social order. Land is by nature limited, while the amount of new capital investment is, for all intents and purposes, limited only by humanity's need for goods and services. Industrial and commercial hegemony over the economy was only made possible with the closing of the land frontier and the effective end of competition to concentrated economic (and thus political) power. It is time to restore the balance, and that balance can only be restored by opening up democratic access to the means of acquiring and possessing private productive property.

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