Tuesday, February 8, 2011

The Problem with Money, Part VI: Say's Law and Binary Economics

Yesterday we discovered we're in a serious dilemma if we accept both Say's Law of Markets and its application in the real bills doctrine, and the natural moral law based on God's Essence that is self-realized in His Intellect. (Translation: we base our understanding of what's right on what God is that we see reflected in humanity and discerned by reason — lex ratio — instead of simply accepting on faith what somebody tells us God saidlex voluntas.)

To try and state the dilemma as simply as possible, Say's Law is that we cannot receive what another has produced in an economic transaction unless we offer something we have produced by means of our labor, capital, or land that the other perceives as being of equal or greater value. We cannot receive something simply because we need it, except in extreme cases (Rerum Novarum, § 22). We must have something of at least equivalent value to offer in exchange. The problem is that most of us have nothing of equivalent value to offer in exchange.

This is consistent with the traditional understanding of the natural rights of private property and free association. To be able to offer something in exchange, we have to own it, and we have to be free to dispose of it to whomever we will, and make a contract (create money) to carry out the transaction. We own something either because it has been freely given to us (e.g., our labor because it is inseparable from our bodies, which we own, a gift, inheritance, and so on), or because we have produced something by means of what we own (labor, land, capital) and either consumed it ourselves, or traded what we have produced for the productions of others, to mutual benefit.

In the late 18th and early 19th centuries when Adam Smith and Jean-Baptiste Say wrote, it seemed obvious that human labor was the primary factor of production. Smith, in fact, based his "invisible hand" argument on the assumption that human labor would always be the primary factor of production, and thus the primary mode of distribution. All that labor produces goes by natural right to the owner of labor. All that capital produces goes by natural right to the owner of capital. Because Smith considered human labor "permanently predominant" (our term, not Smith's), no rich man, however "greedy and rapacious" (Smith's terms, not ours — The Theory of Moral Sentiments, 1759), could satisfy his greed without employing the poor. As Smith reasoned, wealth would be distributed as equitably as if "ownership of the earth" was as broadly and evenly distributed as ownership of human labor. Hence, we have the weird distortion of Smith's thought that has cropped up in recent decades that "greed is a virtue," or "greed is good."

The problem is that labor does not have a secure primacy of place in the economic process. The effect of technology is not to enhance human labor, but to replace it. As technology advances, the value of human labor in the productive process decreases relative to that of capital. As capital becomes increasingly productive relative to labor, the market value of labor falls below what the human worker needs to support himself and his dependents in a manner consistent with the demands of human dignity.

Consequently, political demands increase for distribution and redistribution of production based not on equivalence of inputs in a transaction, but on need. To allow this, basic definitions of natural rights, especially private property and freedom of association, have to be changed to accommodate the new situation. This requires a system that employs, as one commentator put it, "a theory of human society peculiar to itself" (Quadragesimo Anno, § 120) in order to shift the understanding of justice from "to each what each is due as an independent other" (contract), to, "to each what each needs as a dependent" (status). This shift is usually called "socialism," but has many other labels, term succeeding term whenever it becomes obvious that what Kelso and Adler called "needism" is contrary to the natural law principles that govern civil society, and thus to essential human nature.

Thus the dilemma: Say's Law claims that if some goods remain unsold, it is because other goods are not produced. If we wish to stimulate effective demand, we must produce something by means of our labor, land, and capital. Most people, however, own nothing other than their labor with which to produce marketable goods and services — and the value of labor is declining relative to capital as an input to production as technology advances. It is therefore critical that "the great mass of people" become owners of capital (Rerum Novarum, § 46), but "But except from pay for work, from what source can a man who has nothing else but work from which to obtain food and the necessaries of life set anything aside for himself through practicing frugality?" (Quadragesimo Anno, § 63)

That is, unless people cut consumption and save, how are they to accumulate money savings in order to purchase the capital that is replacing their labor in the production process and driving down the relative value of their labor to the point where they can no longer survive, much less save?

Keynes thought he had the answer: redefine basic natural rights such as private property and free association, put the State in charge of the economy, and redistribute purchasing power and force savings through inflation. This prescription has driven the world to the brink of bankruptcy, and made the very people it was intended to help worse off than before.

Kelso and Adler had a better answer — and one consistent with essential human nature, that is, the natural moral law: allow ordinary people who currently have only their labor to sell to exercise their natural rights of private property and freedom of association by entering into contracts (create money) to purchase capital, pay for the capital with the future earnings of the capital, and thereafter enjoy capital income to supplement or replace what can be earned by labor. That is, replace the presumed necessity of cutting consumption and accumulating money savings to finance new capital formation, with increasing consumption and using future savings to repay investments already made.

The basic "paradigm" for this type of financing that would restore the functioning of Say's Law of Markets was detailed by Harold Moulton in his contra-New Deal treatise, The Formation of Capital (1935). Kelso and Adler expanded and refined Moulton's analysis in The Capitalist Manifesto (1958) and The New Capitalists (1961). The Center for Economic and Social Justice ("CESJ"), applied the work of Kelso and Adler in Capital Homesteading for Every Citizen (2004), a specific proposal designed to turn the economy around in the shortest possible time to the benefit of all, and with harm to none. (All of these books, by the way, are available in the "Just Third Way 'Bookstore'" over there to your right.)

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