Thursday, December 16, 2010

Games People Play

It's become painfully obvious that the world's most popular sport isn't soccer, baseball, or even texting. It's jumping to conclusions after warming up playing word games. On today's swampy intellectual and moral playing field shadowed over with a heavy positivist cloud cover, even understanding the idea of absolutes of the natural moral law and discerned as far as human capacities permit through the use of reason is virtually unthinkable. People waste their time twisting themselves and their thoughts into moral and intellectual pretzels — and you know what happens if you try to untwist a pretzel.

This makes it all the more difficult to explain the Just Third Way, especially as the principles of the Just Third Way are applied in Binary Economics and compared with today's "mainstream" schools of economics. We've spent the last couple of years on this blog explaining in great detail the philosophical framework of the Just Third Way, its principles (especially as they relate to money and credit, banking, and finance), and how these principles might be applied in Capital Homesteading to bring about a more economically (and politically) just and human(e) future for all.

A major part of the groundwork involved in this effort is surfacing or developing accurate definitions of terms and concepts. One of the more difficult terms to define, for example, is "money." Economists and even banking experts muddy the waters on this one by insisting on defining money by its function, that is, what money does or can be made to do, rather than by its nature, that is, what money is, or the basic principle(s) of money.

Almost as difficult as defining "money" is defining the terms "capitalism" and "socialism." Money has a lot of emotional and historical "baggage" that gets in the way of gaining a true understanding, but capitalism and social certainly give it a run for the, well, money. Call something "socialist," for example, and it seems that nobody actually tries to understand what you mean. Instead, people immediately assume that you're using a pejorative just to score off an opponent, rather than giving an objective and accurate description.

Case in point: a couple of days ago we stated that chartalism, a theory originated by Georg Friedrich Knapp and detailed in his book, The State Theory of Money (1924), is socialist. In its purest form, chartalism puts total control over money and credit in the hands of the State. Today's chartalists modify the form of chartalism by permitting some private control (under State guidance, of course), but this does not change the substantial nature of the theory.

Emphasizing form over substance, a chartalist (or, at least, someone claiming to understand chartalism better than we do) responded by claiming that the modifications and changes introduced by modern chartalists into the application of the pure theory have, in effect, rendered it non-socialist. The debate then continued by claiming that the principles underpinning the Banking School of finance — Say's Law of Markets and the real bills doctrine — are, essentially, hogwash, and the relevant framework is that of the Currency School of finance.

On the contrary! As we have attempted to explain over and over (and are now forced to close the debate with this final posting), you can change the form or application of something, you can even redefine something to suit your personal opinion, but the thing remains what it is. If you change the definition of something, you are either abolishing the thing for what it was and making it something different, or claiming that the thing never was what it was. In either case you are only playing games.

Further, it is a bad argument to try and claim that the financial principles of the Just Third Way, notably Say's Law of Markets and the real bills doctrine, are bad because they are not the principles of the Currency School. Heavy sigh. As G. K. Chesterton explained,

It is no good to tell an atheist that he is an atheist; or to charge a denier of immortality with the infamy of denying it; or to imagine that one can force an opponent to admit he is wrong, by proving that he is wrong on somebody else's principles, but not on his own. After the great example of St. Thomas, the principle stands, or ought always to have stood established; that we must either not argue with a man at all, or we must argue on his grounds and not ours. We may do other things instead of arguing, according to our views of what actions are morally permissible; but if we argue we must argue "on the reasons and statements of the philosophers themselves." (G. K. Chesterton, St. Thomas Aquinas: The "Dumb Ox." New York: Image Books, 1956, 95-96.)
To settle the matter once and for all, then, let's examine what "the authorities" are actually saying. In the Wikipedia, "chartalism" is described as, "a monetary standard in which government-issued tokens are used as the unit of money. In such a system, fiat money is created by government spending. Taxation is employed to reclaim the money and control the total amount of fiat money in existence. Reclaiming most of this issued money via taxation is essential to maintaining its value in exchange." The entry goes on to explain,
Modern Chartalism theory states that under a fiat money system, net currency is created by government through deficit spending. Because the issued currency is not tied to or backed by a commodity, currency can only be created when the government spends. Government may, or may not, ask for that currency back in taxes. The demand to hold and acquire this government issued currency is driven by taxes levied by the state — which typically can only be paid in the state-issued fiat currency.

The theory was developed by economist G.F. Knapp into the 1920s, with important contributions by Alfred Mitchell-Innes also. It was influential on the 1930 Treatise on Money by John Maynard Keynes — Knapp and Chartalism are cited approvingly on its opening pages. Chartalism experienced a revival under Abba P. Lerner, and has a number of modern proponents, who largely identify as post-Keynesian economists.
And what did Keynes say in his Treatise on Money?
It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of money has been reached that Knapp's Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized. (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)
If we understand private property (to say nothing of money and credit, banking, and finance), we are forced to the conclusion that, remonstrate as you will, call us whatever names you like, chartalism is, as we stated, a form of socialism. A State that issues money without backing and eliminates the necessary private property stake is socialist — no ifs, ands, or buts.  Thus chartalism — "the doctrine that money is peculiarly a creation of the State" — is, without question, a form of socialism.

#30#

18 comments:

Anonymous said...

Mr Greaney, I really love the work you do on this blog. I am relatively new to the thinking behind the Just Third Way, and trying to get my head around it.

One of the things that made me choke on my coffee was your assumption of a 15% rate of return under the Capital Homesteading proposal. I realize I'm not totally understanding the big picture, and you are not expecting America to become a nation of Warren Buffetts...he would kill to have a consistent rate like this.
Could you briefly address this, or send me to a previous post where this was discussed?

Michael D. Greaney said...

It would be best to go to the material on the CESJ website, but the quick answer is that most investors today calculate ROI based on the rise in the stock price and/or the dividend rate. The problem is that stock prices frequently have little to do with actual corporate earnings, and the dividend rate is determined by the board of directors ... and again may have little to do with actual earnings. Both dividends and stock prices — when there is any relation to reality — are based very loosely on after tax income with no necessary correlation between earnings and what the investor realizes. Thus, the ROI to the outside investor may differ significantly from that calculated on capital investment within the same company. Factoring in the double taxation on corporate profits, the "real" tax rate on corporate earnings is roughly 50%, making a 15% pre-tax ROI to the company the equivalent of around 7-1/2% to the investor. Historically, of course, blue chip investments have yielded on the average between 9-12% per year ... after taxes, so 15% is actually very conservative given the proposed tax deductibility of dividends under Capital Homesteading.

This is made even more evident when we look at the concept of "payback." Most companies will not invest in new capital unless it pays for itself in 3 to 7 years, depending on the type of capital. (Agricultural land, for instance, is expected to have a 5 to 7 year payback, down from 12 to 15 a thousand years ago ... and absent the speculation that manages to gallop in when dealing with land of any type.)

A payback of 5 years (a common figure for rule of thumb decisions) is an ROI of 20% for that capital. The figure usually targeted, however, is 30% (before taxes, of course). This is because you are conservative when financing capital, and then tend to produce far beyond the conservative estimate used to determine the feasibility of the investment.

nail-in-the-wall said...

Dear Anonymous:

That paradigm can best be examined in this video. (7:46 minutes)
Two-Factor Theory : Louis Kelso
As to the 3rd way "Think in the terms of the moral dimension, hence the "Just" third way.

But than I'm just a nail in the wall,..

Guy c. Stevenson
"It's a duct tape world!"
"A duck tape Congress"
"A duct tape economy"
And,.. A duct taped people until we the people,.. Pass Capital Homesteading.

Anonymous said...

David W:

You mention the influence of
Alfred Mitchell Innes, and later you wrote:
"If we understand private property (to say nothing of money and credit, banking, and finance), we are forced to the conclusion that, remonstrate as you will, call us whatever names you like, chartalism is, as we stated, a form of socialism. A State that issues money without backing and eliminates the necessary private property stake is socialist — no ifs, ands, or buts."

Excuse me, but did you ever read a line of Innes' two important essays?

They have absolutely nothing to do with socialism, wide and far. They are describing a theory of what money in history was, and actually is.
He convinced me that a gold standard is absolutely not feasable in the long run nor necessary or even a thing to be wished for.
And: He argues NOT for a gov.monopoly on money; in fact, in his thoughts, 'money' is more of a relationship than a tangible thing, can be and is created
by individuals without a gov wide and far.
His concept of money is very important.
Please read, then state s.th. about that man!

Innes, The Credit Theory of Money:
http://www.ces.org.za/docs/The%20Credit%20Theoriy%20of%20Money.htm
Innes, What is Money?

http://economics.arawakcity.org/node/356

Anonymous said...

David W:
additional link:
Innes on Moneyb - no relationship with socialism whatsoever,
(with discussion):
http://moslereconomics.com/mandatory-readings/what-is-money/

Michael D. Greaney said...

Here we go again.

I have Innes's work right here in front of me. The system he describes cuts the essential link between private property and money creation. (vide Irving Fisher, The Purchasing Power of Money, New York, Macmillan, 1931 (reprint of the 1911 edition), pp. 4-5.) By removing the necessary private property link by abrogating an owner's right of control of what he or she owns and freedom to contract at will, State control of money and credit effectively abolishes private property (cf. the description of socialism as "State capitalism," as both undermine the institution of private property as a natural right).

Property being a right and not the thing owned, anything that undermines private property as a right effects the abolition of private property. "The theory of the communists may be summed up in the single sentence: the abolition of private property." Karl Marx, The Communist Manifesto.

Chartalism does this, as does Keynesian economics, social credit, distributism in its modern form, and georgism (Progress and Poverty, 408-410, esp. the passage beginning, "In this way the State can become the universal landlord without calling herself so", etc.).

Anonymous said...

David W
First: Thank you for allowing my voice into your forum; ... didn't take it for granted.
Second: I'm perfectly with you about the importance of property rights. Contrary to an anarcho-libertarian view I deem the state (the better one, that is) as essential for those very property rights and for the contract law/principle (L.v.Mises'„Vertragsprinzip“) though . Otherwise you'd need a gang.
Third: Innes isn't Irving Fisher; Keynes, chartalism and others may refer to Innes, but the question is: To what extend rightfully so? With proper conclusions? Let's stick with Innes, can we?
(end of part one; more to come)

Anonymous said...

Fourth:
Michael: „The system he describes cuts the essential link between private property and money creation.“
David, being me: What do you mean by „The system he describes ...“?
He gives a historical account on how coins were used; central therein: the metallic content varied wildly, basically from coin to coin, and that during antiquity and beyond. He concluded: Decisive was the face value, not the metallic content. Besides, among others, clay and wood (tally sticks) were used as 'money'; the latter in the UK not that long ago.
And yes, here he is describing a system: that of money as a thing of face value. He tells a different story than Menger about the origins of money - whether he's right or not is a historical question.
Question to you, Michael: do you have valid information that suggests otherwise?
Fifth:
(and now we are about to cut the cheese). From his historical observations (as Menger does; Menger seems not so much to observe than to assume though) he asks the question: What actually is money?
According to Innes, money is credit. One gives a good, commodity, service - and accepts a promise.
Always. Otherwise it's barter. This promise can be expressed by several and different means. In some cases, your memory might suffice, or a knot in your blowrag. In essence, money is an intangible thing. Only it's expression is tangible, an aid for your memory, and in a better world with honest people and better memories, the pure remembrence would suffice. We call the expression of that credit 'money'. But in character, it remains a credit.
To understand this, is of utmost importance to the case. With money being a credit, we see the core problem of money: a confidence problem, expressed in your case in your pledge for gold.
And ... that's where economy meets philosophy, or better: theology. I like THAT part.

Innes gives some examples; I'll construct another one:
If you, being a diary farmer, go to an Irish put for a marvelous pint of Guinness, the innkeeper might draw a line on a board - money. You repeat the process, collecting a bunch of lines on 'your' board. You come back next friday with, say four pieces of salty Irish butter: the 'money' disappears, you got even. The innkeeper might hand the board over to his cousin, being in no need for salty butter himself: the cousin approaches you with that board for butter or a chicken: a means of exchange. ... where is the government? Superfluous in this case, and in many others.
But the character of money takes shape.

Anonymous said...

David W
Fifth (...actually out of 7, sorry):
(and now we are about to cut the cheese). From his historical observations (as Menger does; Menger seems not so much to observe than to assume though) he asks the question: What actually is money?
According to Innes, money is credit. One gives a good, commodity, service - and accepts a promise.
Always. Otherwise it's barter. This promise can be expressed by several and different means. In some cases, your memory might suffice, or a knot in your blowrag. In essence, money is an intangible thing. Only it's expression is tangible, an aid for your memory, and in a better world with honest people and better memories, the pure remembrence would suffice. We call the expression of that credit 'money'. But in character, it remains a credit.
To understand this, is of utmost importance to the case. With money being a credit, we see the core problem of money: a confidence problem, expressed in your case in your pledge for gold.
And ... that's where economy meets philosophy, or better: theology. I like THAT part.

Innes gives some examples; I'll construct another one:
If you, being a diary farmer, go to an Irish put for a marvelous pint of Guinness, the innkeeper might draw a line on a board - money. You repeat the process, collecting a bunch of lines on 'your' board. You come back next friday with, say four pieces of salty Irish butter: the 'money' disappears, you got even. The innkeeper might hand the board over to his cousin, being in no need for salty butter himself: the cousin approaches you with that board for butter or a chicken: a means of exchange. ... where is the government? Superfluous in this case, and in many others.
But the character of money takes shape.

Anonymous said...

Sixth (out of 7 - almost done!):
What about gold? A better system? One without Government?
You need a proper means of exchange.
Unless you use gold directly, making every deal a barter, you've got the very same problem:

Paper-money, redeemable for gold: still money as credit. All you got is a credit-certificate, this time on (because of the high demand, highly priced ... highly price-inflated!) gold; still a credit. If you use 'gold-backed' digitals, via credit-/debitcard, PC, etc: still credit.
You are forced to 'trust'; and by accepting 'gold- backed' paper or digitals, you're acting as if you do, at least. The confidence problem is just shifted, if at all, depending who will issue that gold money - but it's still there.

Additionally:
But the price of gold isn't 'just' fixed (no pun intended even though it comes in handy)
You will get at least two prices for you gold coins: one, what the issuer thinks it's worth and imprints on it . And, there is an international market for gold out there, commanded by demand and supply. This market might have a differing view from your issuer (a seignorage gap evolves).
The smarter creatures will observe this market and pass the coin along, as long the face value is equal or above market. If not, they will hold it back - with implications!
If you really want to use gold, the 'just' thing to do would be, listen to Abraham, son of Terah: abandon the face value, and use it by weight.
Gold won't redeem you - it will only add a detour to the problem - with implications. Gold isn't neutral or fixed in value; it has it's own market dynamics - if you want to implement it as load-bearing column of your monetary system, this is worth some meditation.
Again and in summa: At the core, you've got the confidence problem.
Always when you do business: either it's barter, or money is a credit. That's inescapable.

So, stating the bare facts, what has that to do with: „The system he describes cuts the essential link between private property and money creation.“ ?

Anonymous said...

David W

Seventh:
Property rights secured by gold - against the Gov? - please explain that miracle to me.
The government can „divorce“ you from your property with or without a gold standard: taxes,
redeemable in gold are still taxes; an indebtedness of a Gov. for several generations of your children ahead is still indebtedness, and bad (old...-est) news, propertywise. (... and, better without Gov?- there is always someone in demand for (your) property, who outguns you).

Greetings from Germany, David

Anonymous said...

David W
sorry to bother you: if you allow my comment to get published:
it's: "Irish pub" not "Irish put"
any chance to being corrected? (and this post deleted?).
My German-English is funny enough without that kind of mistakes, I think.

Michael D. Greaney said...

Okay — first, an administrative detail. We had a problem at one time with trolls, so all comments to the blog are moderated. That's why they don't appear immediately.

To answer the question re. the system Innes described, he took the definition of money used by almost all modern economists and such authorities as Knapp and Helferrich for granted: that "money" is a creature of law, and thus is under the control of the State. This is an inevitable conclusion when operating from within what in Binary Economics is called "the past savings paradigm," or the principles of the British Currency School of finance. This was the orientation of, e.g., Hobbes, Bagehot, and Keynes. It assumes that taxation is not a grant from the people to the State, but an exercise of property by the State in the wealth of the nation.

Under Currency School assumptions, the money (limited to currency) is backed not by private property that the drawer of a bill of exchange has in the present value of existing and future marketable goods and services, but by the State's ability to make good on the promise it has issued by virtue of its claim on wealth nominally owned by the citizens. Hence, under the Currency School we have the definition of money as a "general claim on the wealth of the economy," which presumes as a given that the State is the ultimate owner of that wealth.

This presumably gives the State the "right" to change the amount of metal in the coins, or to redefine the value of the currency at will — thereby making inroads on the private property of its own citizens by manipulating the means of conveying property rights: money.

Michael D. Greaney said...

In contrast, Binary Economics uses the principles of the "British Banking School" of finance. That is, "money" represents a private property claim to the present value of existing and future marketable goods and services. Money, which can take any form acceptable to the parties engaged in a transaction ("anything that can be used in settlement of a debt") is thus a symbol of that private property stake, and a means of conveying the property right within an economy. Money is thus not a GENERAL claim, but a FUNGIBLE claim on the wealth of the economy — an important distinction.

Under the principles of the Banking School, the State has the responsibility of setting and regulating the value of the currency, but it cannot change that at its will without harming the private property interest of every holder of the currency (thereby violating private property), nor can the State do more than certify the value of whatever is used for currency and enforce contracts — the State cannot, in the Banking School sense, "create money," for that would be to obviate private property completely.

There are a number of postings on this blog that relate to this and go into much more detail, but the crux of the issue is whether we are to be bound by the assumption that only existing accumulations of savings can be used to finance new capital formation (Currency School) or whether we realize that "future savings" based on the present value of marketable goods and services to be produced in the future also have value and can be conveyed via contract in transactions, i.e., used as money by drawing bills of exchange.

Anonymous said...

David W.
Thank you for your real quick response.
But I'm afraid, there is some hard digestible complexity in your response.
So, two questions:
1.: Innes stated, and there I see the core of his essays: Money is credit.
I add (or repeat). Always. Whether on a gold standard or not. This is inescapable. Question: Do you agree or not. If not, what's wrong with it?

2.: You wrote: "but the crux of the issue is whether we are to be bound by the assumption that only existing accumulations of savings can be used to finance new capital formation (Currency School) or whether we realize that "future savings" based on the present value of marketable goods and services to be produced in the future also have value and can be conveyed via contract in transactions, i.e., used as money by drawing bills of exchange."
If this is a core issue for you:
Could you point out, what that could possibly mean?

Michael D. Greaney said...

We agree — as we've pointed out a number of times on this blog, we take the position of Henry Dunning Macleod that money and credit are simply two different forms of the same thing.

The issue of past v. future savings is where the real problem lies, as your question reveals. A number of the postings on the blog go into this, but perhaps the most useful thing would be to download the free copy of Kelso and Adler's "The New Capitalists," which you can get in .pdf by clicking on the "Just Third Way Bookstore" and scrolling down until you get to the free books from the Kelso Institute section.

The Formation of Capital by Harold G. Moulton is also useful, and was a primary source for Kelso and Adler. I believe it should be available on Amazon Deutschland by now, or there are a number of used copies available on abebooks.com — but they won't have our foreword that ties Kelso and Adler into Moulton's work in pure credit.

Anonymous said...

David W
Thank you for the links you provided.
The Capitalist Manifesto seems to contain some great lines and observations.

Again, to your sentence ...
"...but the crux of the issue is whether [...] we realize that "future savings" based on the present value of marketable goods and services to be produced in the future also have value and can be conveyed via contract in transactions, i.e., used as money by drawing bills of exchange."
Well, it's done already, big time: the thing is called 'loan', and every entrepreneur is provided with it as soon as he can plausibly explain, how the „future savings“ will come about based on his presented business plan.

But save for the way you put it, this seems pretty trivial to me. Where is the genius hidden in this?

Michael D. Greaney said...

Well, actually, the money created by discounting and rediscounting bills of exchange is far from trivial or negligible. In 1839, for example, Congressman George Tucker estimated that more than 95% of the total U.S. money supply was in the form of bills of exchange, whether "merchants' acceptances" that passed between private individuals and businesses without the intermediation of a financial institution, or "bankers' acceptances" that were discounted or rediscounted at banks of issue ("commercial" or "mercantile" banks).

As late as 2008, a rough calculation based on U.S. GDP plus non-domestic transactions (exports and imports), the velocity of money, and the definition of "money" used by the Federal Reserve (M1 Plus M2 — "M3" and above have been discontinued) plugged into Irving Fisher's Quantity Theory of Money Equation (M x V = P x Q) reveals that including only coin, banknotes, demand deposits and selected time deposits in the definition of money (i.e., M1 and M2) leaves approximately 60% of transactions in the U.S. unaccounted for, or cir. $10 trillion.

This $10 trillion or so was thus in a form of money other than coin, banknotes, demand deposits, and selected time deposits — that is, the transactions were carried out by means of various types of bills of exchange that were never discounted or rediscounted at a commercial bank (bank of issue), but circulated among private individuals and companies.

Clearly the role of the private sector with respect to money creation has decreased over time as the State has taken over more and more economic control, but the private sector still drives the U.S. economy, as reflected in the predominance of such "private sector money" that the State may regulate, but does not issue or create.