In The Gondoliers, or, The King of Barataria, Messrs. Gilbert and Sullivan took on social reformers who thought government so powerful that all you had to do (if you were in power) was to command a thing and it would be done. To very briefly summarize the plot, the Grand Inquisitor of Spain (filling the role of the character who gets ridiculed by the others in every G&S production for making sense) goes to Venice to see if he can locate the long-lost son of the recently deceased King of the Island of Barataria (a made-up land that G&S didn't make up — it's from Don Quixote). He finds two possible kings: young men plying the trade of gondolier. Unable to tell which is which, he appoints them co-kings, with full authority.
To make a long story short, it turns out that both of the gondoliers are republican revolutionaries. When the Grand Inquisitor pays them a visit to see how things are going, he is astonished to find that everyone is of equal rank, and everything is divided equally, and that the two co-kings are well on their way to making their stated goal of abolishing taxes and making everything cheap a reality.
Wisely, the Grand Inquisitor doesn't launch into a long lecture on political economy and why you can't just make everyone equal and keep dividing things up to ensure equality. Instead, he sings a song, concluding with, "When everyone is somebody, then no one's anybody."
Of course, had he been inclined to lecture, the Grand Inquisitor might have called in an American, Henry C. Adams, to explain why it is such a very bad idea to abolish taxes and try to circumvent the laws of supply and demand. We'll hold off on supply and demand (maybe next week), but Adams's reasoning as to why abolishing taxes is a really bad idea should cause a little alarm even today, especially in light of the gigantic deficit:
"As self-government was secured through a struggle for mastery over the public purse, so must it be maintained through the exercise by the people of complete control over public expenditure. Money is the vital principle of the body politic; the public treasury is the heart of the state; control over public supplies means control over public affairs. Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit. Under ordinary circumstances, popular attention can not be drawn to public acts, except they touch the pocket of the voters through an increase in taxes; and it follows that a government whose expenditures are met by resort to loans may, for a time, administer affairs independently of those who must finally settle the account." (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)
#30#
Thursday, March 31, 2011
Wednesday, March 30, 2011
Solidarism and Private Property, Part III: Show Me the Money!
It's always a temptation to take the law, especially God's law, into our own hands when people don't do as we want them to do, or the system isn't operating according to our personal instructions. The problem is that most of us don't have the authority to speak on God's behalf. Even if we do, we usually can't prove it to the satisfaction of others who, after all, have a right to know on what grounds we're pushing them around . . . or they have every right to start pushing back.
So, absent presenting our credentials to others to convince them that we are God's deputies, agents, or merely vested with His power of attorney, what can we do to make things better . . . besides sit around and blame others for everything, that is?
First off, stop expecting somebody else to do something. As Father Ferree explained in Introduction to Social Justice (1948), the common good at our level is in our personal care. It's only when we, individually or in free association with others can't handle it that calling in help is legitimate — and then only as long as we really need the help.
As Father Pesch explained, the State is only to step in to provide our needs when our efforts failed. As Pius XI refined this concept, the State is only to step in to provide the opportunity for us to provide for our own needs when our efforts fail, and (if absolutely necessary — the language states "in extreme cases") provide directly for our personal needs as a last resort when all else fails, that is, we have not yet succeeded, or have failed in our efforts to secure the necessary institutional changes to allow us to meet our own needs through our own efforts.
Nowhere is this more evident than when we consider access to the means of acquiring and possessing capital. As we explained yesterday, trapped by the past savings assumption, there are only two ways for those of us without property to get some: take it from others as an (alleged) punishment, or take it from others as our (alleged) right. Both of these require that we treat those from whom we take things to be treated as criminals, whether or not we can prove it.
Of course, once we're out of the past savings "box," then much more becomes possible. If we don't have to worry about taking what already belongs to somebody else, we can worry about getting something for ourselves without theft or trying to change reality. Strange to say, it's actually very easy . . . once we get out of the past savings box.
The first thing we do is get organized. Then we target the appropriate institutions, in this case commercial and central banking, and the Congress. We then make it possible for every man, woman, and child to create money by entering into contracts to finance capital, paying for the capital out of the future profits generated by the capital itself.
This process has been described in a number of previous postings. We won't go into it any further today, except to say that if you want the "usual" Just Third Way take on how to reform the financial system, read (possibly in this order), Harold G. Moulton's The Formation of Capital, Louis Kelso and Mortimer Adler's The New Capitalists (paying close attention to the subtitle: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings," and Capital Homesteading for Every Citizen.
(BTW, if you can't afford these books, know that the foreword to the Moulton book is available free in .pdf on CESJ's newly reformatted website, as are the complete texts of the other books. If you're not going to be arguing with lawyers or economists, then reading CESJ's foreword to the Moulton book should more than sufficient.)
In this way (more or less) the goal expressed by countless political commentators from the dawn of time can be reached: every person with an adequate capital stake.
If you support this goal, consider showing up at the annual "Fed Rally" sponsored by the Coalition for Capital Homesteading to be held this year outside the main building of the Federal Reserve in Washington, DC on April 15. Stay tuned to this blog for more details.
#30#
So, absent presenting our credentials to others to convince them that we are God's deputies, agents, or merely vested with His power of attorney, what can we do to make things better . . . besides sit around and blame others for everything, that is?
First off, stop expecting somebody else to do something. As Father Ferree explained in Introduction to Social Justice (1948), the common good at our level is in our personal care. It's only when we, individually or in free association with others can't handle it that calling in help is legitimate — and then only as long as we really need the help.
As Father Pesch explained, the State is only to step in to provide our needs when our efforts failed. As Pius XI refined this concept, the State is only to step in to provide the opportunity for us to provide for our own needs when our efforts fail, and (if absolutely necessary — the language states "in extreme cases") provide directly for our personal needs as a last resort when all else fails, that is, we have not yet succeeded, or have failed in our efforts to secure the necessary institutional changes to allow us to meet our own needs through our own efforts.
Nowhere is this more evident than when we consider access to the means of acquiring and possessing capital. As we explained yesterday, trapped by the past savings assumption, there are only two ways for those of us without property to get some: take it from others as an (alleged) punishment, or take it from others as our (alleged) right. Both of these require that we treat those from whom we take things to be treated as criminals, whether or not we can prove it.
Of course, once we're out of the past savings "box," then much more becomes possible. If we don't have to worry about taking what already belongs to somebody else, we can worry about getting something for ourselves without theft or trying to change reality. Strange to say, it's actually very easy . . . once we get out of the past savings box.
The first thing we do is get organized. Then we target the appropriate institutions, in this case commercial and central banking, and the Congress. We then make it possible for every man, woman, and child to create money by entering into contracts to finance capital, paying for the capital out of the future profits generated by the capital itself.
This process has been described in a number of previous postings. We won't go into it any further today, except to say that if you want the "usual" Just Third Way take on how to reform the financial system, read (possibly in this order), Harold G. Moulton's The Formation of Capital, Louis Kelso and Mortimer Adler's The New Capitalists (paying close attention to the subtitle: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings," and Capital Homesteading for Every Citizen.
(BTW, if you can't afford these books, know that the foreword to the Moulton book is available free in .pdf on CESJ's newly reformatted website, as are the complete texts of the other books. If you're not going to be arguing with lawyers or economists, then reading CESJ's foreword to the Moulton book should more than sufficient.)
In this way (more or less) the goal expressed by countless political commentators from the dawn of time can be reached: every person with an adequate capital stake.
If you support this goal, consider showing up at the annual "Fed Rally" sponsored by the Coalition for Capital Homesteading to be held this year outside the main building of the Federal Reserve in Washington, DC on April 15. Stay tuned to this blog for more details.
#30#
Tuesday, March 29, 2011
Solidarism and Private Property, Part II: It's a Nice Idea, But . . .
In yesterday's posting we noted that students of Father Heinrich Pesch, S.J., seem in one accord on the importance of widespread, direct ownership of the means of production and a limited role for the State, that is, private property. The first question to pop into the intelligent reader's mind, however (at least those intelligent readers who have not been reading this blog), is, "It's all very well to say that as many people as possible should directly own the means of production, but how are you going to finance that acquisition without undermining the stability of the currency, giving too much power to the State, or redefining private property to the point at which it ceases to be a natural right?"
These are critical issues, and the question is an important one. Unfortunately, some people who raise them figure they already have the answer, and don't pay too much attention to the legal and financial principles governing the Just Third Way. Under the past savings assumption that underpins all three of the mainstream schools of economics today and virtually all of the minor ones, maintaining universal access to the means of acquiring and possessing capital while, at the same time, preserving private property as a sacred and inviolable natural right, is impossible.
Why? Because if "money" is limited to a general claim on the total wealth of the economy, as some maintain, then the only source of "money" is what already physically exists. Thus, the only way to obtain financing for anything, whether consumption or new capital investment, is either for you to reduce consumption and accumulate claims on the unconsumed wealth in the economy, i.e., "money," or to borrow the "money" accumulated by someone else who cut consumption and "saved."
If we assume as a given that "money" is limited to a general claim on the total existing wealth of the economy, the only ways for people without capital to get capital are 1) exercise heroic "economic virtue" and starve yourself and your dependents until you have accumulated sufficient money savings to purchase capital, 2) persuade someone with savings to lend or give them to you (we include inheritance and gambling gains here, as neither requires the heir or winner to cut consumption), or 3) steal it.
Number 1 is unlikely for anyone with a modicum of common sense. Most people have an innate understanding of Adam Smith's proposition that the purpose of production is not saving, but consumption. Number 2 is unlikely because it's against nature for someone to deprive himself and risk his hard-earned savings for your advantage. Number 3 is unacceptable.
Nevertheless, we see that there are people who have accumulated incredible amounts of money, yet they clearly did not either cut consumption or borrow from others. Within the past savings paradigm, that leaves only one possibility: they stole it.
The solution, then, to the problem of concentrated ownership from a past savings perspective, is either prosecute the criminals and force them to disgorge their obviously ill-gotten gains for distribution back to those from whom they stole the money, or abolish private property altogether by redefining it . . . and prosecute the criminals for the crime of being rich.
There are so many problems with this approach, all dictated by the past savings dogma, that it's hard to know where to start. Let's just take the two major problems, then.
One, rich people must, by definition, be criminals by virtue of the gigantic thefts they carried out.
Sorry. A fundamental principle of law — and thus of society itself — is that you can't find someone guilty of a crime until and unless you have actual evidence 1) that a crime has been committed, and 2) that the individual under suspicion committed the crime. The fact that someone is rich proves only that he or she is rich. It does not prove that he or she is a criminal. The criminality of an individual's accumulation of wealth is a presupposition on your part. The argument usually going along these lines: "No honest person could possibly have accumulated that much money, therefore, anyone with that much money must be a criminal." In other words, rich people are criminals because they are rich, and they are rich because they are criminals.
Two, despite the universal prohibition against theft, private property isn't really a natural right, or the natural law doesn't really mean what it has traditionally been understood to mean. Private property isn't really sacred and inviolable, and can be redefined to obtain a desired end, given that the end is sufficiently important.
Again, sorry. Remember that we're discussing the solidarism of Father Pesch here, a school of thought within the Catholic Church, not moral relativism. Even so, the argument is almost exactly the same in other systems, whether Christian, Jewish, Islamic, or pagan. As such, no interpretation of private property, regardless what we might call it or how we might argue, can change the characterization of private property as pertaining to the natural law.
Neither can we change the basis of the natural law from God's Essence, which is self-realized in His Intellect, to our private interpretation of something that we believe, however fervently, to be God's Will. "The law is found in reason alone," as Aquinas reminded us. Like life and liberty (freedom of association/contract), private property is a "natural right," and that means that every person — and every human being is a "natural person" — has the inalienable right to be an owner. How that right is to be exercised is a matter for prudence and expedience, but no definition of the exercise of property can negate the underlying right to be an owner, or a grave injustice against nature itself has been committed.
That certainly seems to put us in a box, doesn't it? We can't punish the rich for being rich and confiscate their wealth as punishment for their criminal acts. Neither can we redefine private property so that we can simply take what belongs to the wealthy without having to prove their criminality.
There is, however, a way out, one that we will start to look at tomorrow.
#30#
These are critical issues, and the question is an important one. Unfortunately, some people who raise them figure they already have the answer, and don't pay too much attention to the legal and financial principles governing the Just Third Way. Under the past savings assumption that underpins all three of the mainstream schools of economics today and virtually all of the minor ones, maintaining universal access to the means of acquiring and possessing capital while, at the same time, preserving private property as a sacred and inviolable natural right, is impossible.
Why? Because if "money" is limited to a general claim on the total wealth of the economy, as some maintain, then the only source of "money" is what already physically exists. Thus, the only way to obtain financing for anything, whether consumption or new capital investment, is either for you to reduce consumption and accumulate claims on the unconsumed wealth in the economy, i.e., "money," or to borrow the "money" accumulated by someone else who cut consumption and "saved."
If we assume as a given that "money" is limited to a general claim on the total existing wealth of the economy, the only ways for people without capital to get capital are 1) exercise heroic "economic virtue" and starve yourself and your dependents until you have accumulated sufficient money savings to purchase capital, 2) persuade someone with savings to lend or give them to you (we include inheritance and gambling gains here, as neither requires the heir or winner to cut consumption), or 3) steal it.
Number 1 is unlikely for anyone with a modicum of common sense. Most people have an innate understanding of Adam Smith's proposition that the purpose of production is not saving, but consumption. Number 2 is unlikely because it's against nature for someone to deprive himself and risk his hard-earned savings for your advantage. Number 3 is unacceptable.
Nevertheless, we see that there are people who have accumulated incredible amounts of money, yet they clearly did not either cut consumption or borrow from others. Within the past savings paradigm, that leaves only one possibility: they stole it.
The solution, then, to the problem of concentrated ownership from a past savings perspective, is either prosecute the criminals and force them to disgorge their obviously ill-gotten gains for distribution back to those from whom they stole the money, or abolish private property altogether by redefining it . . . and prosecute the criminals for the crime of being rich.
There are so many problems with this approach, all dictated by the past savings dogma, that it's hard to know where to start. Let's just take the two major problems, then.
One, rich people must, by definition, be criminals by virtue of the gigantic thefts they carried out.
Sorry. A fundamental principle of law — and thus of society itself — is that you can't find someone guilty of a crime until and unless you have actual evidence 1) that a crime has been committed, and 2) that the individual under suspicion committed the crime. The fact that someone is rich proves only that he or she is rich. It does not prove that he or she is a criminal. The criminality of an individual's accumulation of wealth is a presupposition on your part. The argument usually going along these lines: "No honest person could possibly have accumulated that much money, therefore, anyone with that much money must be a criminal." In other words, rich people are criminals because they are rich, and they are rich because they are criminals.
Two, despite the universal prohibition against theft, private property isn't really a natural right, or the natural law doesn't really mean what it has traditionally been understood to mean. Private property isn't really sacred and inviolable, and can be redefined to obtain a desired end, given that the end is sufficiently important.
Again, sorry. Remember that we're discussing the solidarism of Father Pesch here, a school of thought within the Catholic Church, not moral relativism. Even so, the argument is almost exactly the same in other systems, whether Christian, Jewish, Islamic, or pagan. As such, no interpretation of private property, regardless what we might call it or how we might argue, can change the characterization of private property as pertaining to the natural law.
Neither can we change the basis of the natural law from God's Essence, which is self-realized in His Intellect, to our private interpretation of something that we believe, however fervently, to be God's Will. "The law is found in reason alone," as Aquinas reminded us. Like life and liberty (freedom of association/contract), private property is a "natural right," and that means that every person — and every human being is a "natural person" — has the inalienable right to be an owner. How that right is to be exercised is a matter for prudence and expedience, but no definition of the exercise of property can negate the underlying right to be an owner, or a grave injustice against nature itself has been committed.
That certainly seems to put us in a box, doesn't it? We can't punish the rich for being rich and confiscate their wealth as punishment for their criminal acts. Neither can we redefine private property so that we can simply take what belongs to the wealthy without having to prove their criminality.
There is, however, a way out, one that we will start to look at tomorrow.
#30#
Monday, March 28, 2011
Solidarism and Private Property, Part I: What Would Father Pesch Say?
Depending on whom you ask, the social welfare system in the United States is either just peachy and everything is fine (if we could just get the rich to pay their fair share of taxes), or the projected deficits are so gargantuan as to impose a burden on existing and future generations that can never be paid. While it definitely makes us unpopular in certain circles (notably the State-Can-Do-Everything groups equidistant from a center point . . . the point being that the State has effective total power over everything by means of controlling money and credit), we tend to the latter position — with qualifications.
We say "with qualifications" because if you say one discouraging word about the wage and welfare system, not only do the antelope stop playing, the tendency on the part of a growing number of listeners (a term we use advisedly . . . they aren't really listening) is for them to declare that we're obviously against just wages and a helping hand, and that we probably like pinching babies and kicking puppies.
No, we’re all in favor of a just wage and a social welfare system, as long as the former truly is just, and the latter is kept within the bounds of reason. Why? Because you can’t pay people when you don’t produce anything, and you can’t redistribute when others aren’t producing. These are basic facts of life, despite the fact that a great many people seem to be living in — and on — denial.
There are circles, however, where our position has some credibility, such as the Königswinterkreis, literally, "King's Winter Circle," a discussion group formed by students of Father Heinrich Pesch, S.J., renowned as the "Father of Solidarism." Especially through the efforts of Father Oswald von Nel Bruening, S.J., who headed up the Königswinterkreis and drafted Quadragesimo Anno under the direction of Pope Pius XI, certain of Father Pesch's important ideas made their way into Catholic social teaching. The concepts thus made their way into the Aristotelian/Thomist interpretation of the natural law, which the Catholic Church claims is the basis for its social teachings.
One of the most important concepts emphasized by Father Pesch — and thus his students — was the critical nature of widespread direct individual ownership of the means of production, and the necessity of relegating the State to a secondary role as the guarantor of individual and social wellbeing. The State, according to Father Pesch, was only supposed to step in once individual and group efforts had failed to secure the necessary institutional change. Otherwise, it is up to the individual, family, and social group to take care of things.
While we've previously focused on the contributions of Dr. Heinrich Rommen, who ended up teaching at Georgetown University, we've also found a great deal of support for the position of the Just Third Way in the work of another member of the Königswinterkreis, Dr. Goetz Briefs, a labor economist who was Chairman of the Economics Department at Georgetown. In the 1937 English translation of his book, The Proletariat, Dr. Briefs pointed out that the bankruptcy of the State by trying to make up for the deficiencies of capitalism (socialism he had already written off) was inevitable:
"In addition to this insecurity and distress which the nature of the system imposes upon workers in general there are hardships entailed upon some smaller groups, by reason of their particular circumstances — age, for example, or occupation — the members of which find that the demand for their services has been temporarily, perhaps even permanently, reduced. Then too there are great numbers of workers whose earnings are but little above the subsistence level and do not permit the accumulation of savings to meet emergencies. It is the testimony of experience that capitalism offers no guarantee of either steady employment or adequate pay.
"This is no accidental defect. It derives from the vary nature of the system and the principles of its operation. It cannot keep prosperity always at a high level; it cannot by any means at its command stabilize the business cycle; and it cannot indefinitely continue to open up new continents. If there is to be advance along technical lines, if there is to be active competition, if business is to be guided by individual initiative and enterprise, there are bound to be ups and downs in the number of available jobs and in the wage level. And this, of course, rules out the chance that a job can ever be a satisfactory substitute for property as a means of security. A dynamic capitalism and a static job situation simply do not go together. Nor can there be a high wage level for the marginal worker and at the same time sufficient enterprises to absorb the available supply of labor on the market. These things are obviously incompatible." [Goetz Briefs, The Proletariat: A Challenge to Western Civilization
. New York: McGraw-Hill Book Company, Inc., 1937, 250-251.]
This is certainly something to ponder in the days to come, as economies throughout the world (0 too many to list) continue to decay as the financial demands on governments continue to grow, and there are fewer and fewer wage system jobs to generate income in the "jobless recovery."
#30#
We say "with qualifications" because if you say one discouraging word about the wage and welfare system, not only do the antelope stop playing, the tendency on the part of a growing number of listeners (a term we use advisedly . . . they aren't really listening) is for them to declare that we're obviously against just wages and a helping hand, and that we probably like pinching babies and kicking puppies.
No, we’re all in favor of a just wage and a social welfare system, as long as the former truly is just, and the latter is kept within the bounds of reason. Why? Because you can’t pay people when you don’t produce anything, and you can’t redistribute when others aren’t producing. These are basic facts of life, despite the fact that a great many people seem to be living in — and on — denial.
There are circles, however, where our position has some credibility, such as the Königswinterkreis, literally, "King's Winter Circle," a discussion group formed by students of Father Heinrich Pesch, S.J., renowned as the "Father of Solidarism." Especially through the efforts of Father Oswald von Nel Bruening, S.J., who headed up the Königswinterkreis and drafted Quadragesimo Anno under the direction of Pope Pius XI, certain of Father Pesch's important ideas made their way into Catholic social teaching. The concepts thus made their way into the Aristotelian/Thomist interpretation of the natural law, which the Catholic Church claims is the basis for its social teachings.
One of the most important concepts emphasized by Father Pesch — and thus his students — was the critical nature of widespread direct individual ownership of the means of production, and the necessity of relegating the State to a secondary role as the guarantor of individual and social wellbeing. The State, according to Father Pesch, was only supposed to step in once individual and group efforts had failed to secure the necessary institutional change. Otherwise, it is up to the individual, family, and social group to take care of things.
While we've previously focused on the contributions of Dr. Heinrich Rommen, who ended up teaching at Georgetown University, we've also found a great deal of support for the position of the Just Third Way in the work of another member of the Königswinterkreis, Dr. Goetz Briefs, a labor economist who was Chairman of the Economics Department at Georgetown. In the 1937 English translation of his book, The Proletariat, Dr. Briefs pointed out that the bankruptcy of the State by trying to make up for the deficiencies of capitalism (socialism he had already written off) was inevitable:
"In addition to this insecurity and distress which the nature of the system imposes upon workers in general there are hardships entailed upon some smaller groups, by reason of their particular circumstances — age, for example, or occupation — the members of which find that the demand for their services has been temporarily, perhaps even permanently, reduced. Then too there are great numbers of workers whose earnings are but little above the subsistence level and do not permit the accumulation of savings to meet emergencies. It is the testimony of experience that capitalism offers no guarantee of either steady employment or adequate pay.
"This is no accidental defect. It derives from the vary nature of the system and the principles of its operation. It cannot keep prosperity always at a high level; it cannot by any means at its command stabilize the business cycle; and it cannot indefinitely continue to open up new continents. If there is to be advance along technical lines, if there is to be active competition, if business is to be guided by individual initiative and enterprise, there are bound to be ups and downs in the number of available jobs and in the wage level. And this, of course, rules out the chance that a job can ever be a satisfactory substitute for property as a means of security. A dynamic capitalism and a static job situation simply do not go together. Nor can there be a high wage level for the marginal worker and at the same time sufficient enterprises to absorb the available supply of labor on the market. These things are obviously incompatible." [Goetz Briefs, The Proletariat: A Challenge to Western Civilization
. New York: McGraw-Hill Book Company, Inc., 1937, 250-251.]This is certainly something to ponder in the days to come, as economies throughout the world (0 too many to list) continue to decay as the financial demands on governments continue to grow, and there are fewer and fewer wage system jobs to generate income in the "jobless recovery."
#30#
Friday, March 25, 2011
News from the Network, Vol. 4, No. 12
This has been a week of great activity with respect to meetings — at which a lot of work is done, but very little that is reportable as "news." The stock market, of course (duplicating events that led up to the Crash of 1929) continues to fluctuate wildly, even in Japan, where the actual productive businesses are looking at a bleak future . . . unless the Just Third Way can be implemented.
As for the rest of the world,
• A number of important contacts have been made, one with a lawyers association, with which we've scheduled a meeting in early April.
• Work progresses on a major article that shows the connection between the natural moral law, human positive law, and the monetary and fiscal reforms advocated under the Just Third Way. The connection between power and property is being strongly emphasized.
• Outreach continues on the Harris Neck initiative. Much is still in the discussion stage, but even there, progress is being made.
• Guy Stevenson of Iowa has been working on creating animated vignettes of the Just Third Way. This is a difficult task, considering the fact that much of the material is "outside the box" for most people, and is thus considered somewhat esoteric, rendering the feat of animating it all the more impressive.
• As of this morning, we have had visitors from 49 different countries and 46 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Poland. People in Germany, Venezuela, the Philippines, Poland, and Malaysia spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "The New Manifest Destiny," "Attaining Justice in the Arab World," and "The Wrath of Keynes, or, The Fall of the House of Hayek."
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.
#30#
As for the rest of the world,
• A number of important contacts have been made, one with a lawyers association, with which we've scheduled a meeting in early April.
• Work progresses on a major article that shows the connection between the natural moral law, human positive law, and the monetary and fiscal reforms advocated under the Just Third Way. The connection between power and property is being strongly emphasized.
• Outreach continues on the Harris Neck initiative. Much is still in the discussion stage, but even there, progress is being made.
• Guy Stevenson of Iowa has been working on creating animated vignettes of the Just Third Way. This is a difficult task, considering the fact that much of the material is "outside the box" for most people, and is thus considered somewhat esoteric, rendering the feat of animating it all the more impressive.
• As of this morning, we have had visitors from 49 different countries and 46 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Poland. People in Germany, Venezuela, the Philippines, Poland, and Malaysia spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "The New Manifest Destiny," "Attaining Justice in the Arab World," and "The Wrath of Keynes, or, The Fall of the House of Hayek."
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.
#30#
Thursday, March 24, 2011
The Worst Disaster Since World War II, Part IV: Financing the Future
According to an Associated Press, the Japanese government expects that "the cost of the earthquake and tsunami that devastated the northeast could reach $309 billion, making it the world's most expensive natural disaster on record." ("Japan Disaster Likely to be World's Costliest," AP, 03/23/11.) Nor will the effects be confined to Japan. As one Japanese economist stated, "The aftermath of the tragic events in Japan will obviously alter the domestic economy. However, Japan's position in the global economy is such that there must also be some transmission of the shock to other parts of the world."
This suggests a rather grim, if not bleak future. As one Japanese journalist remarked in a personal communication to this writer, "Though Japanese stocks rallied sharply recently, many Japanese economists are pessimistic about the economy. There was a huge loss in productive capacity in many industries, especially automakers like Toyota that is expected to decrease production due to planned power outages as well as the quake. . . . Is there any hope for Japan?"
The answer? Yes — but not if financing the future Japan is carried out in the usual, that is, Keynesian way, and relies on existing accumulations of savings to fund the effort through taxation and inflation. The previous three postings in this series have given a relatively optimistic picture of the capacity of the Japanese people not only to rebuild, but to attain once again their former status as the second largest economy in the world. Implementing a program of "Capital Homesteading" — whatever they might want to call it — and building participatory ownership of the "new" economy into the people of Japan through financing vehicles such as Capital Homestead Accounts, Citizens Land Banks, and Homeowners Equity Corporations offers a great deal of hope to Japan, but only if the money can be found to finance the effort . . . and $309 billion is a lot of money.
Yes, $309 billion is an enormous sum, and, assuming traditional, past savings-based financing, could impoverish or cripple Japan economically for decades. Fortunately, there is a viable alternative to past savings-based financing available. This is an alternative that will not have a negative impact on either the Japanese or global economy, and can make everyone in Japan (at least in relative terms) rich in the process — and without taking anything from anyone else.
As regular readers of this blog are already doubtless aware, we refer to the "pure credit" principles of the "Banking School of finance" under "Say's Law of Markets" and the "real bills doctrine" as analyzed by Dr. Harold G. Moulton in The Formation of Capital (1935). Louis O. Kelso and Mortimer J. Adler refined Moulton's ideas by adding the essential expanded ownership factor in The Capitalist Manifesto (1958) and The New Capitalists (1961). The Center for Economic and Social Justice ("CESJ") applied the integrated package in a comprehensive Just Third Way economic reform proposal called "Capital Homesteading" in Capital Homesteading for Every Citizen (2004).
The significance of the Just Third Way as the optimal framework within which to rebuild Japan is found in the subtitle to The New Capitalists: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings." Without the "pure credit" financing described in The Formation of Capital, funds for rebuilding will be limited to existing accumulations of savings (which are already invested), or future reductions in consumption.
Unfortunately, liquidating existing investment to finance rebuilding would further decrease existing productive capacity. Reducing existing productive capacity would decrease supply and thus profitability, making the whole exercise pointless. Cutting current or future consumption to finance new capital formation — restricting demand — would also seriously compromise the profitability of the new capital, making the new capital less feasible financially and, again, rather pointless.
The answer? Get out of the "past savings box." There is absolutely no reason for economic growth and development to be tied in any way, shape, or form to existing accumulations of savings except, possibly, to serve as collateral for loans extended to finance new capital — and collateral can be replaced by capital credit insurance and reinsurance.
The key to getting us out of the "past savings box" is to realize that there is an invention specifically designed to allow people to finance new capital without the use of existing accumulations of savings or by restricting current or future consumption. This is the "commercial (or mercantile) bank," backed up with a "central bank."
The process sounds complicated, especially when contrasted with the simplistic belief that new capital can only be financed by cutting consumption and accumulating money savings. To try and make it as simple as possible, however, the process of financing new capital without first cutting consumption works something like this:
Someone has a "financially feasible" project in mind. That is, someone has the opportunity to purchase or build capital that will generate a profit by producing marketable goods or services. This opportunity has a "present value." If the cost of purchasing or building the capital is less than or equal to the conservatively estimated present value of the stream of profits to be generated in the future, the capital is a "good buy" and worth financing.
The owner of the present value of the capital (which doesn't yet exist except as a business plan) "draws a bill" on that present value. This is a "bill of exchange," and consists of a contract to redeem the bill at some specified date in the future, or on the occurrence of some specific event. This bill can either itself be used as money and used to purchase or build the capital, or taken to a commercial bank and exchanged for a promissory note issued by the bank, and the bank's promissory notes used as money.
In both cases the transaction is called "discounting." If the bill passes to another "holder in due course," it is called "rediscounting." To spread the risk and ensure a uniform currency, the bank can rediscount the bill at a central bank, which issues its own promissory note to the bank. The "borrower," that is, the original drawer of the bill, purchases or builds new capital, makes it profitable, and redeems (buys back) the bill from the bank, and afterwards uses the income from the capital — the profits — for consumption. Both supply (production) and demand (consumption) have been increased without reducing either production or consumption. On the contrary, both production and consumption have been increased.
If everyone in an economy finances new capital in this way, production and consumption will be equal. The economy will be in balance and prosperous. This is why Kelso and Adler insisted that all new capital financed using the real bills doctrine (an application of Say's Law of Markets) must be broadly owned by as many people as possible. This would ensure that people would have to save only for emergencies, not to finance new capital, thus keeping demand high naturally, without the need for artificial stimulus by government.
The hardest part of this program is to realize that the financing of new capital formation need not be tied to the "supply of loanable funds" — the existing accumulations of savings — and that the currently wealthy do not have to give up anything. The non-rich can finance and thus own new capital without cutting consumption, or borrowing or redistributing the savings of the rich.
In this way Japan can "finance the future" without harming their economy further, and — as they did when they adopted "the Demming Way" — show the way to the rest of the world, coming out on top in the process.
#30#
This suggests a rather grim, if not bleak future. As one Japanese journalist remarked in a personal communication to this writer, "Though Japanese stocks rallied sharply recently, many Japanese economists are pessimistic about the economy. There was a huge loss in productive capacity in many industries, especially automakers like Toyota that is expected to decrease production due to planned power outages as well as the quake. . . . Is there any hope for Japan?"
The answer? Yes — but not if financing the future Japan is carried out in the usual, that is, Keynesian way, and relies on existing accumulations of savings to fund the effort through taxation and inflation. The previous three postings in this series have given a relatively optimistic picture of the capacity of the Japanese people not only to rebuild, but to attain once again their former status as the second largest economy in the world. Implementing a program of "Capital Homesteading" — whatever they might want to call it — and building participatory ownership of the "new" economy into the people of Japan through financing vehicles such as Capital Homestead Accounts, Citizens Land Banks, and Homeowners Equity Corporations offers a great deal of hope to Japan, but only if the money can be found to finance the effort . . . and $309 billion is a lot of money.
Yes, $309 billion is an enormous sum, and, assuming traditional, past savings-based financing, could impoverish or cripple Japan economically for decades. Fortunately, there is a viable alternative to past savings-based financing available. This is an alternative that will not have a negative impact on either the Japanese or global economy, and can make everyone in Japan (at least in relative terms) rich in the process — and without taking anything from anyone else.
Pure Credit v. Past Savings
As regular readers of this blog are already doubtless aware, we refer to the "pure credit" principles of the "Banking School of finance" under "Say's Law of Markets" and the "real bills doctrine" as analyzed by Dr. Harold G. Moulton in The Formation of Capital (1935). Louis O. Kelso and Mortimer J. Adler refined Moulton's ideas by adding the essential expanded ownership factor in The Capitalist Manifesto (1958) and The New Capitalists (1961). The Center for Economic and Social Justice ("CESJ") applied the integrated package in a comprehensive Just Third Way economic reform proposal called "Capital Homesteading" in Capital Homesteading for Every Citizen (2004).
The significance of the Just Third Way as the optimal framework within which to rebuild Japan is found in the subtitle to The New Capitalists: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings." Without the "pure credit" financing described in The Formation of Capital, funds for rebuilding will be limited to existing accumulations of savings (which are already invested), or future reductions in consumption.
Unfortunately, liquidating existing investment to finance rebuilding would further decrease existing productive capacity. Reducing existing productive capacity would decrease supply and thus profitability, making the whole exercise pointless. Cutting current or future consumption to finance new capital formation — restricting demand — would also seriously compromise the profitability of the new capital, making the new capital less feasible financially and, again, rather pointless.
The answer? Get out of the "past savings box." There is absolutely no reason for economic growth and development to be tied in any way, shape, or form to existing accumulations of savings except, possibly, to serve as collateral for loans extended to finance new capital — and collateral can be replaced by capital credit insurance and reinsurance.
Financing the Future
The key to getting us out of the "past savings box" is to realize that there is an invention specifically designed to allow people to finance new capital without the use of existing accumulations of savings or by restricting current or future consumption. This is the "commercial (or mercantile) bank," backed up with a "central bank."
The process sounds complicated, especially when contrasted with the simplistic belief that new capital can only be financed by cutting consumption and accumulating money savings. To try and make it as simple as possible, however, the process of financing new capital without first cutting consumption works something like this:
Someone has a "financially feasible" project in mind. That is, someone has the opportunity to purchase or build capital that will generate a profit by producing marketable goods or services. This opportunity has a "present value." If the cost of purchasing or building the capital is less than or equal to the conservatively estimated present value of the stream of profits to be generated in the future, the capital is a "good buy" and worth financing.
The owner of the present value of the capital (which doesn't yet exist except as a business plan) "draws a bill" on that present value. This is a "bill of exchange," and consists of a contract to redeem the bill at some specified date in the future, or on the occurrence of some specific event. This bill can either itself be used as money and used to purchase or build the capital, or taken to a commercial bank and exchanged for a promissory note issued by the bank, and the bank's promissory notes used as money.
In both cases the transaction is called "discounting." If the bill passes to another "holder in due course," it is called "rediscounting." To spread the risk and ensure a uniform currency, the bank can rediscount the bill at a central bank, which issues its own promissory note to the bank. The "borrower," that is, the original drawer of the bill, purchases or builds new capital, makes it profitable, and redeems (buys back) the bill from the bank, and afterwards uses the income from the capital — the profits — for consumption. Both supply (production) and demand (consumption) have been increased without reducing either production or consumption. On the contrary, both production and consumption have been increased.
If everyone in an economy finances new capital in this way, production and consumption will be equal. The economy will be in balance and prosperous. This is why Kelso and Adler insisted that all new capital financed using the real bills doctrine (an application of Say's Law of Markets) must be broadly owned by as many people as possible. This would ensure that people would have to save only for emergencies, not to finance new capital, thus keeping demand high naturally, without the need for artificial stimulus by government.
The hardest part of this program is to realize that the financing of new capital formation need not be tied to the "supply of loanable funds" — the existing accumulations of savings — and that the currently wealthy do not have to give up anything. The non-rich can finance and thus own new capital without cutting consumption, or borrowing or redistributing the savings of the rich.
In this way Japan can "finance the future" without harming their economy further, and — as they did when they adopted "the Demming Way" — show the way to the rest of the world, coming out on top in the process.
#30#
Wednesday, March 23, 2011
The Worst Disaster Since World War II, Part III: Green Recovery and Growth
One of the features of a modern economy that politicians and policymakers work ceaselessly to overcome is the fact that as technology advances, human labor becomes relatively less valuable as an input to the production of marketable goods and services. This puts downward pressure on wages in competition with technology. It becomes increasingly difficult for people to gain an adequate and secure income solely from wages without massive State intervention in the economy.
The solution to the problem of inadequate wage income is not to increase dependence on the State as the source of all economic good — or any, for that matter. The State does not create wealth. People create wealth. Understanding that is the basis of all sound monetary and credit policy.
Instead of looking to the State to solve all of our problems, then, the solution is actually straightforward and simple. As Louis Kelso pointed out when interviewed for an editorial in Life magazine in 1964, "If the machine wants our job, let's buy it [the machine]." In other words, if a machine can do the job we were doing, we should buy the machine and, as owners, receive the income (profits) generated by the machine as a right of private property, rather than ask the State to confiscate profits from other owners to give to us.
To do this, Kelso invented the ESOP, the "Employee Stock Ownership Plan," a method of corporate finance that would allow workers who have no savings and who cannot afford to cut consumption to acquire part ownership of the companies for which they work. Since they have no savings and generally can't afford cuts in pay, the ESOP allows workers to "buy now, pay later" . . . out of the profits generated by the company itself, profits to which they, as owners, would have a natural right. Kelso's idea was that workers-as-owners would first use their portion of profits to pay for their shares in the company, and then use the profits as a "second income" to supplement or (in some cases) replace income from wages.
Powerful as it is in contrast to the standard wage system arrangement, the ESOP is not potentially the most powerful, nor the most effective application of Kelso's ideas. For example, it only applies to people who work in corporations, not sole proprietorships, partnerships, non-profit or government workers, or the military, to name a few other groups.
Consequently, the "ESOP concept" can be adapted to other situations, with the most generally applicable being the "Capital Homestead Account," or "CHA." A CHA would empower ordinary people to borrow money, the amount to be determined by a pro rata share of the total estimated growth of the economy for a period. Using non-recourse credit, collateralized with capital credit insurance and reinsurance (for greater security), ordinary people would be able to participate in the economic growth of the economy both as wage workers (owners of labor) and as shareholders (owners of capital).
Other financing and ownership vehicles also use the same concept. There's the "Citizens Land Bank," or "CLB," which could be used to finance rebuilding infrastructure and vest every citizen in an area with direct ownership of the land and infrastructure — what used to be considered a "natural monopoly" of the State, but by using the corporate structure creatively, could be owned directly by everyone.
The "Homeowners Equity Corporation," or "HEC," would drastically reduce both the cost and the risk of home ownership by making people owners not of their homes directly, but of the corporation that owned their homes. Rental payments would be equal to the original cost of buying or building the home, plus a maintenance fee and a fair profit for the management company. As rental payments were made — much lower than mortgage payments on the same house due to "no interest" money used by the corporation to finance the house — the tenant would earn shares in the corporation up to the cost of the house. When the tenant had earned shares equal to the cost of the house, he or she could continue as a tenant with a favorable long-term lease at a much-reduced rent, or exchange the shares for title.
All of these vehicles and more should be considered when the question comes up as to how Japan is going to finance the rebuilding. Many people have lost everything, some of them after having worked an entire lifetime building lives for themselves and their families. It would be wrong to make them pay once again, and then not receive the full benefit of owning the rebuilding.
Whoever finances the future will own the future. Shouldn't it be the people who will ultimately pay for it? The Japanese people are going to be asked to make great sacrifices in the near future. It is only right that they receive the full stream of benefits from the sacrifices they will make, and in many cases have already made.
#30#
The solution to the problem of inadequate wage income is not to increase dependence on the State as the source of all economic good — or any, for that matter. The State does not create wealth. People create wealth. Understanding that is the basis of all sound monetary and credit policy.
Instead of looking to the State to solve all of our problems, then, the solution is actually straightforward and simple. As Louis Kelso pointed out when interviewed for an editorial in Life magazine in 1964, "If the machine wants our job, let's buy it [the machine]." In other words, if a machine can do the job we were doing, we should buy the machine and, as owners, receive the income (profits) generated by the machine as a right of private property, rather than ask the State to confiscate profits from other owners to give to us.
To do this, Kelso invented the ESOP, the "Employee Stock Ownership Plan," a method of corporate finance that would allow workers who have no savings and who cannot afford to cut consumption to acquire part ownership of the companies for which they work. Since they have no savings and generally can't afford cuts in pay, the ESOP allows workers to "buy now, pay later" . . . out of the profits generated by the company itself, profits to which they, as owners, would have a natural right. Kelso's idea was that workers-as-owners would first use their portion of profits to pay for their shares in the company, and then use the profits as a "second income" to supplement or (in some cases) replace income from wages.
Powerful as it is in contrast to the standard wage system arrangement, the ESOP is not potentially the most powerful, nor the most effective application of Kelso's ideas. For example, it only applies to people who work in corporations, not sole proprietorships, partnerships, non-profit or government workers, or the military, to name a few other groups.
Consequently, the "ESOP concept" can be adapted to other situations, with the most generally applicable being the "Capital Homestead Account," or "CHA." A CHA would empower ordinary people to borrow money, the amount to be determined by a pro rata share of the total estimated growth of the economy for a period. Using non-recourse credit, collateralized with capital credit insurance and reinsurance (for greater security), ordinary people would be able to participate in the economic growth of the economy both as wage workers (owners of labor) and as shareholders (owners of capital).
Other financing and ownership vehicles also use the same concept. There's the "Citizens Land Bank," or "CLB," which could be used to finance rebuilding infrastructure and vest every citizen in an area with direct ownership of the land and infrastructure — what used to be considered a "natural monopoly" of the State, but by using the corporate structure creatively, could be owned directly by everyone.
The "Homeowners Equity Corporation," or "HEC," would drastically reduce both the cost and the risk of home ownership by making people owners not of their homes directly, but of the corporation that owned their homes. Rental payments would be equal to the original cost of buying or building the home, plus a maintenance fee and a fair profit for the management company. As rental payments were made — much lower than mortgage payments on the same house due to "no interest" money used by the corporation to finance the house — the tenant would earn shares in the corporation up to the cost of the house. When the tenant had earned shares equal to the cost of the house, he or she could continue as a tenant with a favorable long-term lease at a much-reduced rent, or exchange the shares for title.
All of these vehicles and more should be considered when the question comes up as to how Japan is going to finance the rebuilding. Many people have lost everything, some of them after having worked an entire lifetime building lives for themselves and their families. It would be wrong to make them pay once again, and then not receive the full benefit of owning the rebuilding.
Whoever finances the future will own the future. Shouldn't it be the people who will ultimately pay for it? The Japanese people are going to be asked to make great sacrifices in the near future. It is only right that they receive the full stream of benefits from the sacrifices they will make, and in many cases have already made.
#30#
Tuesday, March 22, 2011
The Worst Disaster Since World War II, Part II: An Approach to Reconstruction
Yesterday we noted that, in our opinion, the triad of disasters to hit Japan was more destructive than World War II, both in physical terms and psychologically. Without changing that assessment, however, we would like to qualify it.
The recent destruction was worse, but the potential for rebuilding and the available resources are much greater than in the mid-1940s. The industrial base is, despite some very heavy hits, still largely intact. The financial infrastructure, although being used improperly, is also completely intact and functioning. Even the energy system has not been dealt a fatal blow. With these three critical systems for the most part untouched, there is nothing to stop Japan from rebuilding the devastated areas with relative speed, and, at the same time, carrying out some necessary reforms to put the recovery on a "green," that is, a sound and sustainable footing, both economically and financially.
Of the three, energy is the most immediate. It may also, in some ways, be the easiest to solve, at least relative to the other two. The current structuring of industry, commerce, and finance in Japan "ain't broke" (at least, not in any way that is obvious to most people), so there is no real incentive to fix it. The nuclear emergency, however, has brought a number of problems, both actual and potential, to light.
Let's not waste time in recriminations about the "obvious" dangers of nuclear power due to damage suffered as a result of the worst earthquake in the country's history. Nor should we gloss over the problem by pointing out that, all things considered, nuclear energy has taken far fewer lives than coal mining or oil drilling, so everything must be all right. The task right now is to deal with the damaged reactors, and start supplying sufficient energy to the grid to speed recovery and reconstruction. Those reactors that are safe and fully operational should be maintained in use — for now.
Damaged facilities represent a more serious immediate problem. Clearly the country cannot do without power. If a reactor can be repaired quickly and safely, it must be put back into service. Those that are damaged beyond repair, or that cannot be repaired quickly or safely, should be shut down and replaced, but not with another reactor, or with conventional oil or coal fueled facilities, except on an extremely short-term basis.
The fact is, a tenth, a hundredth or maybe even a thousandth of the funds the Bank of Japan recently poured into the stock market to keep up the price level for speculators would, if used to develop a viable hydrogen-based power generation system, potentially have an e-macrosystem up and running in eighteen to twenty-four months, based on projections with which CESJ was supplied years ago.
We're not experts in energy generation (obviously), but we were told a few years back that "proof of concept" and ironing the bugs out of existing technology to fit the parts into an integrated system would cost between $5 and $10 million. This would be a drop in the bucket for a country like Japan. The system is based on "waste-to-energy" conversion, using toxic and otherwise non-recyclable "garbage" as fuel to convert hydrogen to produce electrical power plus pure water and other useful byproducts.
Coincidentally, we understand that one of the byproducts resulting from reducing toxic waste to non-toxicity by using it as fuel would be inert building blocks of great strength, surely a useful product when rebuilding a country. We don't know enough about the process, but it might even be possible to recover rare earths in usable form from discarded electronic equipment, thereby reducing dependency on foreign sources of supply.
Once the hydrogen-based energy system was proved, perfected and on-line, Japan could immediately begin phasing out existing nuclear plants, replacing them with the safer and much more profitable hydrogen system. One fact of which Japanese policymakers should be aware: switching back to traditional fossil fuels, even for the 10% or so of Japan's energy needs currently supplied by nuclear power, would only be achieved at tremendous cost. Hydrogen, however, is the most common element in the universe — it's what the sun runs on, and has for billions of years. Hydrogen is, to all intents and purposes, free. Japan can obtain all it wants from even the most polluted water, and clean up the environment in the process.
One more thing. A switch to "green" energy should be financed in way that is also "green," that is, sound, stable, sustainable and in which everyone can participate and enjoy the benefits not just of cheap and safe power generation through purchase, but the profits of the system through ownership. How to finance the future in a sound, sustainable and participatory way will be a significant issue in the weeks and months to come.
Recent events have shown how well the Japanese pull together and work toward a common goal and for the common good. It's time they start receiving benefits from their hard work and sacrifice, and be given the opportunity to own the future of their own country.
#30#
The recent destruction was worse, but the potential for rebuilding and the available resources are much greater than in the mid-1940s. The industrial base is, despite some very heavy hits, still largely intact. The financial infrastructure, although being used improperly, is also completely intact and functioning. Even the energy system has not been dealt a fatal blow. With these three critical systems for the most part untouched, there is nothing to stop Japan from rebuilding the devastated areas with relative speed, and, at the same time, carrying out some necessary reforms to put the recovery on a "green," that is, a sound and sustainable footing, both economically and financially.
Of the three, energy is the most immediate. It may also, in some ways, be the easiest to solve, at least relative to the other two. The current structuring of industry, commerce, and finance in Japan "ain't broke" (at least, not in any way that is obvious to most people), so there is no real incentive to fix it. The nuclear emergency, however, has brought a number of problems, both actual and potential, to light.
Let's not waste time in recriminations about the "obvious" dangers of nuclear power due to damage suffered as a result of the worst earthquake in the country's history. Nor should we gloss over the problem by pointing out that, all things considered, nuclear energy has taken far fewer lives than coal mining or oil drilling, so everything must be all right. The task right now is to deal with the damaged reactors, and start supplying sufficient energy to the grid to speed recovery and reconstruction. Those reactors that are safe and fully operational should be maintained in use — for now.
Damaged facilities represent a more serious immediate problem. Clearly the country cannot do without power. If a reactor can be repaired quickly and safely, it must be put back into service. Those that are damaged beyond repair, or that cannot be repaired quickly or safely, should be shut down and replaced, but not with another reactor, or with conventional oil or coal fueled facilities, except on an extremely short-term basis.
The fact is, a tenth, a hundredth or maybe even a thousandth of the funds the Bank of Japan recently poured into the stock market to keep up the price level for speculators would, if used to develop a viable hydrogen-based power generation system, potentially have an e-macrosystem up and running in eighteen to twenty-four months, based on projections with which CESJ was supplied years ago.
We're not experts in energy generation (obviously), but we were told a few years back that "proof of concept" and ironing the bugs out of existing technology to fit the parts into an integrated system would cost between $5 and $10 million. This would be a drop in the bucket for a country like Japan. The system is based on "waste-to-energy" conversion, using toxic and otherwise non-recyclable "garbage" as fuel to convert hydrogen to produce electrical power plus pure water and other useful byproducts.
Coincidentally, we understand that one of the byproducts resulting from reducing toxic waste to non-toxicity by using it as fuel would be inert building blocks of great strength, surely a useful product when rebuilding a country. We don't know enough about the process, but it might even be possible to recover rare earths in usable form from discarded electronic equipment, thereby reducing dependency on foreign sources of supply.
Once the hydrogen-based energy system was proved, perfected and on-line, Japan could immediately begin phasing out existing nuclear plants, replacing them with the safer and much more profitable hydrogen system. One fact of which Japanese policymakers should be aware: switching back to traditional fossil fuels, even for the 10% or so of Japan's energy needs currently supplied by nuclear power, would only be achieved at tremendous cost. Hydrogen, however, is the most common element in the universe — it's what the sun runs on, and has for billions of years. Hydrogen is, to all intents and purposes, free. Japan can obtain all it wants from even the most polluted water, and clean up the environment in the process.
One more thing. A switch to "green" energy should be financed in way that is also "green," that is, sound, stable, sustainable and in which everyone can participate and enjoy the benefits not just of cheap and safe power generation through purchase, but the profits of the system through ownership. How to finance the future in a sound, sustainable and participatory way will be a significant issue in the weeks and months to come.
Recent events have shown how well the Japanese pull together and work toward a common goal and for the common good. It's time they start receiving benefits from their hard work and sacrifice, and be given the opportunity to own the future of their own country.
#30#
Monday, March 21, 2011
The Worst Disaster Since World War II, Part I: The Situation
The Japanese media have described the magnitude of the disaster as the worst since World War II and the destruction of Hiroshima and Nagasaki. With all due respect to commentators who are doing their jobs while clearly in a state of shock, it is worse than that. The war was not completely unexpected nor were people unprepared. The destruction, convulsive and widespread as it was, was spread out over time, giving people a chance to become accustomed to it — up to a point. Further, while there was a great deal (far too much, as in any war) of "collateral damage," primary targets were generally intended to be either military in character, or to destroy the ability to wage war. However bad things got, the situation could be grasped, if not accepted, as "fortunes of war."
The earthquake, tsunami, and nuclear emergency were a different thing altogether. Yes, all three were potential disasters for which the Japanese were prepared . . . up to a point. The early warning systems of Japan for earthquakes and tsunami are unequaled in the world. The nuclear power plants had ordinary, even extraordinary safety features. The problem was that the combination of disasters, each alone sufficient to wreak unprecedented destruction, were, taken individually, of a magnitude that could not have been imagined, nor adequate preparation made. Being unimagined singly, the combination . . . words fail. The more or less selective destruction of war, however widespread, cannot be compared to the totality of devastation combined with the cosmic indifference of the forces of nature. In war, you can always blame the enemy. Who do you blame when nature itself seems to have turned against you?
All of this serves to highlight how well the people of Japan are bearing up under the unimaginable, a reaction that could reasonably be described as exemplary. Other places suffering lesser catastrophes might have expected riots, civil unrest, even the fall of the government. The worst disaster-related event in Japan seems to have been a spate of panic-buying by the Japanese public, something not unfamiliar in American cities along the Mason-Dixon line when blizzards are predicted. There have also been some complaints about the slowness of the government to supply accurate information, and a relatively minor incident in which someone stole gasoline from stations near the stricken areas, hampering relief efforts to a degree.
The task now is to develop a viable plan for reconstruction, a subject we will address in later postings in this series. Obviously, any plan must not only address the immediate problems, but finance the future in a ways that lays the foundation for a more just future not just in Japan, but throughout the world. Nothing can prepare us for the unimaginable, any more than anything can make up for what has happened. We can, however, do the best with what we have — and help us all bear up against the worst that life — and nature — can throw against us in the future.
#30#
The earthquake, tsunami, and nuclear emergency were a different thing altogether. Yes, all three were potential disasters for which the Japanese were prepared . . . up to a point. The early warning systems of Japan for earthquakes and tsunami are unequaled in the world. The nuclear power plants had ordinary, even extraordinary safety features. The problem was that the combination of disasters, each alone sufficient to wreak unprecedented destruction, were, taken individually, of a magnitude that could not have been imagined, nor adequate preparation made. Being unimagined singly, the combination . . . words fail. The more or less selective destruction of war, however widespread, cannot be compared to the totality of devastation combined with the cosmic indifference of the forces of nature. In war, you can always blame the enemy. Who do you blame when nature itself seems to have turned against you?
All of this serves to highlight how well the people of Japan are bearing up under the unimaginable, a reaction that could reasonably be described as exemplary. Other places suffering lesser catastrophes might have expected riots, civil unrest, even the fall of the government. The worst disaster-related event in Japan seems to have been a spate of panic-buying by the Japanese public, something not unfamiliar in American cities along the Mason-Dixon line when blizzards are predicted. There have also been some complaints about the slowness of the government to supply accurate information, and a relatively minor incident in which someone stole gasoline from stations near the stricken areas, hampering relief efforts to a degree.
The task now is to develop a viable plan for reconstruction, a subject we will address in later postings in this series. Obviously, any plan must not only address the immediate problems, but finance the future in a ways that lays the foundation for a more just future not just in Japan, but throughout the world. Nothing can prepare us for the unimaginable, any more than anything can make up for what has happened. We can, however, do the best with what we have — and help us all bear up against the worst that life — and nature — can throw against us in the future.
#30#
Friday, March 18, 2011
News from the Network, Vol. 4, No. 11
The response of the people of Japan and the rest of the world to the disaster has been inspiring. It reinforces our conclusion from last week that, however horrifying the situation, there is something inherent in humanity itself that has the capacity to keep us coming back. As the ancient Romans said, Dum spiro, spero — while I breathe, I hope. All that is necessary is for human ingenuity to step in and develop new and creative solutions that seem insoluble under existing assumptions.
We are therefore doing our best to keep refining the concepts of the Just Third Way and continue our efforts to present the ideas to key figures and prime movers. Nothing can undo what has happened, but it might be possible to make the future better than the present grim outlook would suggest could be the case.
We are, of course, doing our best to present some intelligent commentary on the situation (which we hope to have ready next week), having spent a full week trying to grapple with the enormity of it all — thereby explaining, at least in part, the seeming triviality of the postings for the past week. In the meantime, we have the routine tasks involved in presenting the revolutionary ideas of the Just Third Way to the world:
• Dave Kelly will be the featured guest tomorrow on Russell Williams's The Challenge on WKND Gospel Radio, Hartford, Connecticut. To repeat the contact information from the station's press release, "Tune in every Saturday morning at 9 AM Eastern on WKND 1480 AM Windsor-Hartford, CT and online at www.goisradio.com/wknd. Call in and let your voice be heard at 860-218-2173 or 860-218-2174."
• CESJ had its monthly Executive Committee meeting on Wednesday. Most of the meeting was concerned with routine business and discussion and updates of projects in progress.
• Norman Kurland had a number of meetings this week revolving around the Harris Neck initiative. It appears that the prime movers are getting a better grasp of the scope of the Just Third Way, and its potential for overcoming what can seem otherwise like insurmountable problems.
• We received a copy of The Weekly Economist from Tokyo this morning containing an article by Misako Hida (written and submitted before the earthquake and tsunami) referencing CESJ on the need for both Japan and the U.S. to investigate new approaches to financing economic growth. Our resident Japanese experts have not yet had time to translate the article for us, but it may be that the article contains the seeds of a potential new approach to rebuilding after the disaster in a way that fosters direct ownership participation by all Japanese in the rebuilding and subsequent economic growth.
• Work proceeds on the rewriting of Capital Homesteading for Every Citizen. As regular readers of this blog are aware, we have made a number of breakthroughs in our understanding of money, credit, banking, and finance theory over the past two years. Combined with the rapidly changing world situation since 2004, a revision of CESJ's "blueprint for change" had become a virtual necessity. We hope to have the revision ready for 2012.
• As of this morning, we have had visitors from 50 different countries and 48 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and the Philippines. People in Germany, Venezuela, Poland, Malaysia, and Hong Kong spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "The New Manifest Destiny," "Attaining Justice in the Arab World," and "Own or Be Owned."
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.
#30#
We are therefore doing our best to keep refining the concepts of the Just Third Way and continue our efforts to present the ideas to key figures and prime movers. Nothing can undo what has happened, but it might be possible to make the future better than the present grim outlook would suggest could be the case.
We are, of course, doing our best to present some intelligent commentary on the situation (which we hope to have ready next week), having spent a full week trying to grapple with the enormity of it all — thereby explaining, at least in part, the seeming triviality of the postings for the past week. In the meantime, we have the routine tasks involved in presenting the revolutionary ideas of the Just Third Way to the world:
• Dave Kelly will be the featured guest tomorrow on Russell Williams's The Challenge on WKND Gospel Radio, Hartford, Connecticut. To repeat the contact information from the station's press release, "Tune in every Saturday morning at 9 AM Eastern on WKND 1480 AM Windsor-Hartford, CT and online at www.goisradio.com/wknd. Call in and let your voice be heard at 860-218-2173 or 860-218-2174."
• CESJ had its monthly Executive Committee meeting on Wednesday. Most of the meeting was concerned with routine business and discussion and updates of projects in progress.
• Norman Kurland had a number of meetings this week revolving around the Harris Neck initiative. It appears that the prime movers are getting a better grasp of the scope of the Just Third Way, and its potential for overcoming what can seem otherwise like insurmountable problems.
• We received a copy of The Weekly Economist from Tokyo this morning containing an article by Misako Hida (written and submitted before the earthquake and tsunami) referencing CESJ on the need for both Japan and the U.S. to investigate new approaches to financing economic growth. Our resident Japanese experts have not yet had time to translate the article for us, but it may be that the article contains the seeds of a potential new approach to rebuilding after the disaster in a way that fosters direct ownership participation by all Japanese in the rebuilding and subsequent economic growth.
• Work proceeds on the rewriting of Capital Homesteading for Every Citizen. As regular readers of this blog are aware, we have made a number of breakthroughs in our understanding of money, credit, banking, and finance theory over the past two years. Combined with the rapidly changing world situation since 2004, a revision of CESJ's "blueprint for change" had become a virtual necessity. We hope to have the revision ready for 2012.
• As of this morning, we have had visitors from 50 different countries and 48 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and the Philippines. People in Germany, Venezuela, Poland, Malaysia, and Hong Kong spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "The New Manifest Destiny," "Attaining Justice in the Arab World," and "Own or Be Owned."
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.
#30#
Thursday, March 17, 2011
The Wrath of Keynes, or, The Fall of the House of Hayek, Part X
There are more than a few parallels between the current world situation and that which prevailed in the 1890s. The world was in the grip of the first "Great Depression." The financial services industry, especially in the United States and Great Britain, both saddled with inelastic, debt-backed currencies based on existing accumulations of savings, was completely inadequate to respond to the crisis. Jobs disappeared at an alarming rate.
As the decade wore on, crop failures spread rapidly throughout the world, driving food prices up and causing widespread unrest. Popular fiction presented one scenario after another of a cataclysmic war to end all wars, with many of the novels ironically putting the start of "the final war" in 1914.
Consumer debt mounted to previously unheard-of levels. The home mortgage crisis caused many people to walk away from the new homes they had purchased during the economic boom of the 1880s that followed the currency reform in response to the Panic of 1873. Many homeowners stole away in the middle of the night to avoid the sheriff. This gave rise to local haunted house legends as neighborhood children made up stories to account for the mysterious disappearances and to put a scare into their friends.
Socialism in various forms was touted as the panacea as the gilt wore off the Gilded Age. Frederick Jackson Turner's paper on the importance of the frontier in forming American civilization and character presented at the Columbian Exhibition announced that the end of free land meant the end of democracy. William Jennings Bryan, the "Boy Orator of the Platte," was very nearly elected president on a platform of "free silver," i.e., inflationary redistribution of purchasing power to relieve debtors, especially farmers saddled with mortgages and other debt dating from the Civil War, the loans being obtained when prices were high and money was inflated and cheap, but now coming due when prices were falling and money was deflated and expensive.
What saved the American economy in the late 1890s were bumper crops at a time when European and Asian crop failures ensured high prices. This allowed farmers in many cases to pay off their debts, and virtually ensured the election of William McKinley, who ran against Jennings on a platform of a stable currency backed by (or at least valued in terms of) gold, and promotion of trade through a protective tariff that benefited both industry and agriculture.
According to Dr. Harold G. Moulton, however, the economic recovery and the diversion of the 1896 election into "the silver question" left the main problems unsolved. The country was still saddled with an inelastic currency, courtesy of the National Bank System that backed its notes with government debt. Industry, commerce, and agriculture were thus still at the mercy of existing accumulations of savings to finance new capital formation.
Further, while the majority of people in the 1890s were still engaged in agriculture, the number was shrinking rapidly, and the wage system job was becoming the norm. As Judge Peter S. Grosscup noted in a series of articles in the early 20th century, small ownership was disappearing as people left the farm for high paying factory jobs, and small businesses were bought out by the trusts and conglomerates, or forced out of business.
#30#
As the decade wore on, crop failures spread rapidly throughout the world, driving food prices up and causing widespread unrest. Popular fiction presented one scenario after another of a cataclysmic war to end all wars, with many of the novels ironically putting the start of "the final war" in 1914.
Consumer debt mounted to previously unheard-of levels. The home mortgage crisis caused many people to walk away from the new homes they had purchased during the economic boom of the 1880s that followed the currency reform in response to the Panic of 1873. Many homeowners stole away in the middle of the night to avoid the sheriff. This gave rise to local haunted house legends as neighborhood children made up stories to account for the mysterious disappearances and to put a scare into their friends.
Socialism in various forms was touted as the panacea as the gilt wore off the Gilded Age. Frederick Jackson Turner's paper on the importance of the frontier in forming American civilization and character presented at the Columbian Exhibition announced that the end of free land meant the end of democracy. William Jennings Bryan, the "Boy Orator of the Platte," was very nearly elected president on a platform of "free silver," i.e., inflationary redistribution of purchasing power to relieve debtors, especially farmers saddled with mortgages and other debt dating from the Civil War, the loans being obtained when prices were high and money was inflated and cheap, but now coming due when prices were falling and money was deflated and expensive.
What saved the American economy in the late 1890s were bumper crops at a time when European and Asian crop failures ensured high prices. This allowed farmers in many cases to pay off their debts, and virtually ensured the election of William McKinley, who ran against Jennings on a platform of a stable currency backed by (or at least valued in terms of) gold, and promotion of trade through a protective tariff that benefited both industry and agriculture.
According to Dr. Harold G. Moulton, however, the economic recovery and the diversion of the 1896 election into "the silver question" left the main problems unsolved. The country was still saddled with an inelastic currency, courtesy of the National Bank System that backed its notes with government debt. Industry, commerce, and agriculture were thus still at the mercy of existing accumulations of savings to finance new capital formation.
Further, while the majority of people in the 1890s were still engaged in agriculture, the number was shrinking rapidly, and the wage system job was becoming the norm. As Judge Peter S. Grosscup noted in a series of articles in the early 20th century, small ownership was disappearing as people left the farm for high paying factory jobs, and small businesses were bought out by the trusts and conglomerates, or forced out of business.
#30#
Wednesday, March 16, 2011
The Wrath of Keynes, or, The Fall of the House of Hayek, Part IX
It's fine to say that all new money should be restricted to financing new capital formation — but what about people who need money now for non-capital expenditures? Even non-owners have to eat, have a place to live, clothe themselves, get educated, and obtain health care. Are people who need financing for things that do not generate their own repayment to be left out in the cold?
No. In the opening passages of Adam Smith's The Wealth of Nations, it is obvious that the purpose of production is consumption. That being the case, we cut consumption now and save only to consume in the future, not to reinvest the savings. The financing for investment should, as Dr. Moulton explained in The Formation of Capital, come only from discounting and rediscounting bills of exchange ("discounting" and "rediscounting" being the special terms for drawing bills of exchange and using them as money).
A student or prospective homeowner who has not accumulated sufficient savings to "consume" by going to school or purchasing a home has to find the money somewhere. If not given as a gift or charity, the only recourse is to borrow somebody else's accumulated savings — the special purpose for which banks of deposit were invented: they aggregate savings from savers, and lend them to borrowers, charging a fee for the service.
Since the purpose of such loans is to consume unconsumed production (expend savings), this can be considered good credit or debt to the extent that it is socially or politically expedient and serves a useful purpose. Economically and financially, however, it must be classified as bad credit because what the money is spent on does not directly generate its own repayment.
#30#
No. In the opening passages of Adam Smith's The Wealth of Nations, it is obvious that the purpose of production is consumption. That being the case, we cut consumption now and save only to consume in the future, not to reinvest the savings. The financing for investment should, as Dr. Moulton explained in The Formation of Capital, come only from discounting and rediscounting bills of exchange ("discounting" and "rediscounting" being the special terms for drawing bills of exchange and using them as money).
A student or prospective homeowner who has not accumulated sufficient savings to "consume" by going to school or purchasing a home has to find the money somewhere. If not given as a gift or charity, the only recourse is to borrow somebody else's accumulated savings — the special purpose for which banks of deposit were invented: they aggregate savings from savers, and lend them to borrowers, charging a fee for the service.
Since the purpose of such loans is to consume unconsumed production (expend savings), this can be considered good credit or debt to the extent that it is socially or politically expedient and serves a useful purpose. Economically and financially, however, it must be classified as bad credit because what the money is spent on does not directly generate its own repayment.
#30#
Tuesday, March 15, 2011
The Wrath of Keynes, or, The Fall of the House of Hayek, Part VIII
Today's Wall Street Journal reported that, in defense of consumers, Elizabeth Warren is taking on the financial services industry — "the banks." ("Banking's Scourge On Charm Offensive," WSJ, 03/15/11, A1, A14.) Naturally, the Journal has flown to the defense of the financial services industry, suggesting that the concern for consumers is little more than a way of buying votes at the expense of Wall Street. ("Review and Outlook: More Mortgage Mischief," WSJ, 03/15/11, A16.)
Unfortunately, the Journal is probably right on the mark. The effort seems geared toward protecting consumers from the consequences of their own folly, purchasing things on credit that they couldn't pay for out of existing accumulations of savings or current income, and that didn't generate their own repayment out of future profits. Something that struggling debtors see as a solid gain can't help but benefit the current administration, which increasingly is perceived as lacking a coherent vision to address growing problems throughout the world.
Of course, the Journal is as guilty of Ms. Warren of only looking at half the story — and of making the same basic assumptions. The financial services industry recklessly extended credit, creating massive amounts of money for non-productive uses. This made it even more difficult for people who desperately need to become owners of capital to borrow money for productive purposes. Instead, Wall Street focused all its efforts — then as now — on speculation and gambling at the expense of production.
Consistent with the presumably iron dictates of both Keynesian and Austrian economics, both Ms. Warren and the financial mavens of Wall Street are looking only at existing accumulations of savings, and trying to figure out how to divide up a rapidly shrinking pie. Do we follow Keynes and redistribute through inflation via a debt-backed elastic currency and confiscatory taxation to stimulate demand? Or do we maintain an inelastic, asset-backed currency to stabilize the dollar, prevent inflation, and stimulate supply?
Why does the line from Mark Twain's Huckleberry Finn pop into my head as I examine the alleged differences between Keynesian and Austrian economics? You know — after Jim is captured, and the people insane enough to think slavery is normal looking at all the bizarre, even surreal things that Tom Sawyer, fed on a steady diet of novels by Sir Walter Scott and other romances, talked poor Jim into doing as the "proper" behavior for "a captive heart," busted or not, and exclaiming, "That [bleep] must be crazy!"
We could, of course, get wild and crazy ourselves and go with an elastic, asset-backed currency as the Federal Reserve was originally established to provide by rediscounting qualified paper and engaging in limited open market operations in private sector commercial paper. That, however, 1) restricts the role of the State to regulating the currency and setting its value, forcing the government to live within its means, and 2) breaks the monopoly of the rich over the means of acquiring and possessing private property.
If we did something as nutty as use the financial system the way it was designed to operate, all new money created would be to finance new capital formation, not redistribution through inflation. Adding a requirement that all new capital financed in this way must be broadly owned in order to stimulate consumer demand ensures that both sides of Say's Law — supply and demand — are satisfied at the same time.
On the other hand, maybe we should just wait around for a deus ex machina to solve everything for us by freeing the wage and welfare slaves with a wave of a magic wand, just as Miss Watson freed Jim in her will . . . as Tom Sawyer finally informed everybody once he'd had his fun forcing people, especially Jim, to jump through all his hoops and play his weird games.
Or not. We could end up waiting a very long time.
#30#
Unfortunately, the Journal is probably right on the mark. The effort seems geared toward protecting consumers from the consequences of their own folly, purchasing things on credit that they couldn't pay for out of existing accumulations of savings or current income, and that didn't generate their own repayment out of future profits. Something that struggling debtors see as a solid gain can't help but benefit the current administration, which increasingly is perceived as lacking a coherent vision to address growing problems throughout the world.
Of course, the Journal is as guilty of Ms. Warren of only looking at half the story — and of making the same basic assumptions. The financial services industry recklessly extended credit, creating massive amounts of money for non-productive uses. This made it even more difficult for people who desperately need to become owners of capital to borrow money for productive purposes. Instead, Wall Street focused all its efforts — then as now — on speculation and gambling at the expense of production.
Consistent with the presumably iron dictates of both Keynesian and Austrian economics, both Ms. Warren and the financial mavens of Wall Street are looking only at existing accumulations of savings, and trying to figure out how to divide up a rapidly shrinking pie. Do we follow Keynes and redistribute through inflation via a debt-backed elastic currency and confiscatory taxation to stimulate demand? Or do we maintain an inelastic, asset-backed currency to stabilize the dollar, prevent inflation, and stimulate supply?
Why does the line from Mark Twain's Huckleberry Finn pop into my head as I examine the alleged differences between Keynesian and Austrian economics? You know — after Jim is captured, and the people insane enough to think slavery is normal looking at all the bizarre, even surreal things that Tom Sawyer, fed on a steady diet of novels by Sir Walter Scott and other romances, talked poor Jim into doing as the "proper" behavior for "a captive heart," busted or not, and exclaiming, "That [bleep] must be crazy!"
We could, of course, get wild and crazy ourselves and go with an elastic, asset-backed currency as the Federal Reserve was originally established to provide by rediscounting qualified paper and engaging in limited open market operations in private sector commercial paper. That, however, 1) restricts the role of the State to regulating the currency and setting its value, forcing the government to live within its means, and 2) breaks the monopoly of the rich over the means of acquiring and possessing private property.
If we did something as nutty as use the financial system the way it was designed to operate, all new money created would be to finance new capital formation, not redistribution through inflation. Adding a requirement that all new capital financed in this way must be broadly owned in order to stimulate consumer demand ensures that both sides of Say's Law — supply and demand — are satisfied at the same time.
On the other hand, maybe we should just wait around for a deus ex machina to solve everything for us by freeing the wage and welfare slaves with a wave of a magic wand, just as Miss Watson freed Jim in her will . . . as Tom Sawyer finally informed everybody once he'd had his fun forcing people, especially Jim, to jump through all his hoops and play his weird games.
Or not. We could end up waiting a very long time.
#30#
Monday, March 14, 2011
The Wrath of Keynes, or, The Fall of the House of Hayek, Part VII
One of the most remarkable statements made by John Maynard Keynes in his Treatise on Money — trashed for its inherent collectivism by Friedrich von Hayek — was Keynes's declaration that the State, consistent with the growth of its absolutism, has the right and the power to "re-edit the dictionary." (It's on pages 4 and 5 of Volume I, if you care to look it up.)
Perhaps even more remarkable than Keynes's blatant declaration of such absolute State power was that von Hayek seems to have missed it in his famous and justified critique of the Treatise. This is only comprehensible when we consider that both Keynes and von Hayek were firmly ensconced in the Currency School of finance, and the Currency School is just as solidly established on the shifting sand of relativism, of which the single most important — and obvious — symptom is the redefinition of money.
The legal and accounting definition of money — and the definition used by those schools of economics based on the British Banking School of finance — is "anything that can be used to settle a debt." This is the "substantial" definition of money. For its part, however, the Currency School and those schools of economics based on Currency School principles (rejection or redefinition of Say's Law, exclusive reliance on existing accumulations of savings to finance new capital formation, and rejection of the real bills doctrine) restrict their understanding of money to the functional definition, and then restrict the term money itself to currency and "currency substitutes."
This highlights the necessity of being very careful with the terms we use, especially in how we define them. In Banking School terms, for example, the phrase "moneyless economy" is meaningless. In Currency School terms, it makes perfect sense.
As another example, take the recent discussions within the Global Justice Movement over whether it is an application of basic principles of binary economics for the State to create money to finance education or home ownership, an allowable expedient, or directly opposed to essential principles of binary economics. Is this "good credit" or "bad credit"?
This is a extremely complex question. Even to discuss the matter, we have to set aside for the sake of the argument the principle that neither the State nor banks actually "create" money. (The State effectively mortgages future tax collections, while banks exchange one form of money — bills of exchange — for another, the bank's own promissory notes. In neither case is there a question of "money creation.")
Distinguishing between bad credit and good credit is not the same as saying it's a bad idea to borrow to buy a house or to finance an education. Not to try and get too confusing, but we can classify both as good uses of bad credit — depending on the source of the money.
The key to understanding this is that there are two sources of this thing we call "money," in legal and accounting terms defined as "anything that can be used to settle a debt." Unfortunately, most of modern economics (notably the three mainstream schools of economics, the Keynesian, Monetarist/Chicago, and Austrian) recognize only one source of money: unconsumed production.
That is, according to most current thinking, the only way to save is to reduce consumption, accumulate the savings in the form of cash or cash substitutes (e.g., time deposits), then invest. This provides the economy with the "supply of loanable funds," and determines the "production possibilities curve."
The supply of loanable funds may be used for consumption (including housing and education) or investment. If there is not enough investment, Keynesian theory says that you increase the amount of the currency, shifting purchasing power away from consumers and to producers for reinvestment via inflation. Austrian theory says you leave the amount of the currency alone and let the interest rate rise to lure more money away from consumption and into reinvestment.
Both theories (the Monetarist/Chicago theory is a combination of Keynesian and Austrian, and is too complicated to go into for this discussion) fail to take two important factors into consideration. As explained by Dr. Harold Moulton, president of the Brookings Institution from 1916 to 1952, in his book, The Formation of Capital (1935),
1. Cutting consumption to accumulate financing for new capital formation means that the new capital is more likely to fail due to insufficient consumer demand, and
2. The actual financing for new capital formation has almost always come not from restricting consumption and accumulating unconsumed production ("saving"), but from the expansion of commercial bank credit by exchanging "private money" issued by individuals and businesses in the form of "bills of exchange" drawn on the present value of existing or future marketable goods and services, for the bank's promissory notes (banknotes/currency) or demand deposits (checking accounts). Commercial banks ("banks of issue") — including the Federal Reserve and other central banks — do not create money. All they do is exchange "private money" for a more useful and convenient form. (This is called the "real bills doctrine," and is rejected by all three mainstream schools of economics.)
There are thus two types of banks, the "bank of deposit," and the "bank of issue." A bank of deposit is defined as a financial institution that takes deposits and makes loans. That is, it can only lend out accumulated savings. A bank of deposit is the proper place for a student or prospective homeowner to go to borrow money. The most common forms of deposit bank are savings and loans and credit unions, although investment banks are, properly speaking, also deposit banks.
The bank of issue is defined as a financial institution that takes deposits, makes loans, and issues promissory notes. The most common type of issue bank is the commercial or mercantile bank, which is (or is supposed to be) in the business of exchanging "private money" created by individuals and businesses by drawing bills of exchange, for the more generally acceptable promissory notes and demand deposits issued or held by the bank. A central bank is essentially a bank of issue for banks of issue to ensure adequate liquidity and a uniform currency that passes at par among all the member banks.
The idea of the real bills doctrine as implemented by commercial banks and backed up by a central bank is that there should always be enough "money" to fund all financially feasible projects that have a present value, even if the marketable goods and services expected to result from the project do not yet exist, and the factory hasn't even been built. Creating money in this fashion and using it for productive purposes is "good" debt or credit.
#30#
Perhaps even more remarkable than Keynes's blatant declaration of such absolute State power was that von Hayek seems to have missed it in his famous and justified critique of the Treatise. This is only comprehensible when we consider that both Keynes and von Hayek were firmly ensconced in the Currency School of finance, and the Currency School is just as solidly established on the shifting sand of relativism, of which the single most important — and obvious — symptom is the redefinition of money.
The legal and accounting definition of money — and the definition used by those schools of economics based on the British Banking School of finance — is "anything that can be used to settle a debt." This is the "substantial" definition of money. For its part, however, the Currency School and those schools of economics based on Currency School principles (rejection or redefinition of Say's Law, exclusive reliance on existing accumulations of savings to finance new capital formation, and rejection of the real bills doctrine) restrict their understanding of money to the functional definition, and then restrict the term money itself to currency and "currency substitutes."
This highlights the necessity of being very careful with the terms we use, especially in how we define them. In Banking School terms, for example, the phrase "moneyless economy" is meaningless. In Currency School terms, it makes perfect sense.
As another example, take the recent discussions within the Global Justice Movement over whether it is an application of basic principles of binary economics for the State to create money to finance education or home ownership, an allowable expedient, or directly opposed to essential principles of binary economics. Is this "good credit" or "bad credit"?
This is a extremely complex question. Even to discuss the matter, we have to set aside for the sake of the argument the principle that neither the State nor banks actually "create" money. (The State effectively mortgages future tax collections, while banks exchange one form of money — bills of exchange — for another, the bank's own promissory notes. In neither case is there a question of "money creation.")
Distinguishing between bad credit and good credit is not the same as saying it's a bad idea to borrow to buy a house or to finance an education. Not to try and get too confusing, but we can classify both as good uses of bad credit — depending on the source of the money.
The key to understanding this is that there are two sources of this thing we call "money," in legal and accounting terms defined as "anything that can be used to settle a debt." Unfortunately, most of modern economics (notably the three mainstream schools of economics, the Keynesian, Monetarist/Chicago, and Austrian) recognize only one source of money: unconsumed production.
That is, according to most current thinking, the only way to save is to reduce consumption, accumulate the savings in the form of cash or cash substitutes (e.g., time deposits), then invest. This provides the economy with the "supply of loanable funds," and determines the "production possibilities curve."
The supply of loanable funds may be used for consumption (including housing and education) or investment. If there is not enough investment, Keynesian theory says that you increase the amount of the currency, shifting purchasing power away from consumers and to producers for reinvestment via inflation. Austrian theory says you leave the amount of the currency alone and let the interest rate rise to lure more money away from consumption and into reinvestment.
Both theories (the Monetarist/Chicago theory is a combination of Keynesian and Austrian, and is too complicated to go into for this discussion) fail to take two important factors into consideration. As explained by Dr. Harold Moulton, president of the Brookings Institution from 1916 to 1952, in his book, The Formation of Capital (1935),
1. Cutting consumption to accumulate financing for new capital formation means that the new capital is more likely to fail due to insufficient consumer demand, and
2. The actual financing for new capital formation has almost always come not from restricting consumption and accumulating unconsumed production ("saving"), but from the expansion of commercial bank credit by exchanging "private money" issued by individuals and businesses in the form of "bills of exchange" drawn on the present value of existing or future marketable goods and services, for the bank's promissory notes (banknotes/currency) or demand deposits (checking accounts). Commercial banks ("banks of issue") — including the Federal Reserve and other central banks — do not create money. All they do is exchange "private money" for a more useful and convenient form. (This is called the "real bills doctrine," and is rejected by all three mainstream schools of economics.)
There are thus two types of banks, the "bank of deposit," and the "bank of issue." A bank of deposit is defined as a financial institution that takes deposits and makes loans. That is, it can only lend out accumulated savings. A bank of deposit is the proper place for a student or prospective homeowner to go to borrow money. The most common forms of deposit bank are savings and loans and credit unions, although investment banks are, properly speaking, also deposit banks.
The bank of issue is defined as a financial institution that takes deposits, makes loans, and issues promissory notes. The most common type of issue bank is the commercial or mercantile bank, which is (or is supposed to be) in the business of exchanging "private money" created by individuals and businesses by drawing bills of exchange, for the more generally acceptable promissory notes and demand deposits issued or held by the bank. A central bank is essentially a bank of issue for banks of issue to ensure adequate liquidity and a uniform currency that passes at par among all the member banks.
The idea of the real bills doctrine as implemented by commercial banks and backed up by a central bank is that there should always be enough "money" to fund all financially feasible projects that have a present value, even if the marketable goods and services expected to result from the project do not yet exist, and the factory hasn't even been built. Creating money in this fashion and using it for productive purposes is "good" debt or credit.
#30#
Friday, March 11, 2011
News from the Network, Vol. 4, No. 10
The most important news item is one we'd rather not have occurred, the earthquake that hit Japan. "Fortunately" — if that is even a word you want to use in this context — the epicenter was hundreds of miles north of Tokyo, and the region hardest hit is not as heavily populated as the southern islands. Coming on top of the economic downturn and increasing pressure from other countries making claims on Japanese territory, however, the country is in a very bad position.
It has, however, been in much worse shape. Japan is the only country in the world to be the target of nuclear weapons, to say nothing of the devastation wrought by conventional weapons after a decade of war that spanned the world. Japan's industrial base and, more important, the financial system is still largely intact.
Why is the state of the financial system so important? To be blunt, you can very quickly rebuild an industrial base if you have financing, but you can do nothing, even with a fully intact and operational industrial capacity, if you can't finance it. Without financing, labor and capital remain idle and useless, just as Charles Morrison explained:
"Confidence and credit are only moral elements in society; they may be said to be, to a great extent, mere matters of opinion; yet their importance in the production and distribution of wealth is so great, that the whole machinery of material production is kept at work, disordered, or paralysed, according as these principles act in a healthy manner, irregularly, or not at all. They are to our industrial community what the nervous system is to the body, a slight and sensitive substance in itself, but the indispensable cause of all the life and motion of the system. A great nation may possess in abundance all the means of producing wealth, — population, intelligence, capital, natural and artificial instruments of production; and yet, if credit and confidence should be from any cause destroyed, all these resources seem to have lost their virtue, and general distress prevails. Let confidence and credit be restored, and the whole system is immediately set in motion again, and in a very short time general prosperity returns." (Charles Morrison, An Essay on the Relations Between Labour and Capital
. London: Longman, Brown, Green, and Longmans, 1854, 200.)
The reason for bringing this up is that if Japan attempts to finance the reconstruction effort in the conventional Keynesian manner and relies on existing accumulations of savings at home and abroad, the country will soon find itself in a very, very bad position economically. First, of course, the vast amount of savings already accumulated in Japan are not truly available to finance a rebuilding effort. "Savings," as even Keynes admitted, "equals investment." The savings are already invested in Japan's industry, agriculture, and commerce. Using domestic savings to finance investment or reinvestment in one area means liquidating other investments.
That leaves infusions of foreign financial capital. That, in turn, means making Japan dependent on other countries . . . countries that, in some cases, are already trying to make inroads on Japan's territorial integrity. This would only increase if Japan's economy weakens further. As Henry C. Adams explained more than a century ago,
"The facts disclosed permit one to understand how deficit financiering, carried so far as to result in an interchange of capital and credit between peoples of varying grades of political advancement, must endanger the autonomy of weaker states unable to meet their debt-payments. Provided only that the interests involved are of sufficient importance to make diplomatic interference worth the while, the claims allowed by international law will certainly be urged against the delinquent states, and the citizens of such states may regard themselves fortunate if they succeed in maintaining their political integrity." (Henry C. Adams, Public Debts, An Essay in the Science of Finance
. New York: D. Appleton and Company, 1898, 28-29.)
It is not improbable to speculate that any country lending financial capital to Japan will face the tremendous temptation to sell that debt to countries seeking financial leverage to use against Japan. Countries purchasing the debt might have no hesitation in using that leverage to gain political advantage to press their territorial claims.
This sounds hopeless — and, given the standard Keynesian approach to financing economic growth, it is exactly that. In The Formation of Capital, however, Dr. Harold G. Moulton explained how reliance on existing accumulations of savings to finance new capital formation (and thus economic growth) is not only unnecessary, it actually works to the detriment of the economy.
Especially as refined by Louis Kelso and Mortimer Adler in their second collaboration, The New Capitalists (1961), the "pure credit" financing method described by Dr. Moulton shows how, by discounting and rediscounting bills of exchange, the present value of all un- or under-utilized productive capacity in a country can be used, in a very real sense, to finance itself, without relying on domestic existing accumulations of savings or infusions of foreign financial capital. Japan's existing pool of savings that is in the form of corporate retained earnings can be put to its proper use of financing consumption and sustaining demand by paying the earnings out as dividends that are tax deductible at the corporate level. Consumer demand is going to take a tremendous hit in the weeks and months to come, and is going to need a lot of non-government stimulus. Financing for economic growth can come not from retained earnings, but from the country's commercial banks, which can rediscount no-interest development loans at the Bank of Japan. Capital credit insurance and reinsurance can satisfy the demand for collateral.
Most important, the ordinary people of Japan can participate in the recovery and growth through the implementation of a Capital Homesteading program — which will not only improve the lot of ordinary citizens, but strengthen the economic wellbeing of the entire country immensely, and put a few strong cards in its hand for dealing with foreign economic and political intrusion.
As for the rest of the world:
• Michiel Bijkerk reports from the Netherlands Antilles that, "There is a Just Third Way voice in Bonairean politics now." As he continues, "The elections have in the meantime passed. With an extremely limited budget and without buying any votes, we managed to pass the threshold. Only just, but we passed it. We have one seat in the Island Council of 9. Depending on coalition agreements we can do two things: 1) Voice the Just Third Way (which we call 'Solidarismo'); 2) Set up a Pilot project along 'CIC-lines'. Hopefully more opportunities will arise."
• Norman Kurland will be the featured guest tomorrow on Russell Williams's The Challenge on WKND Gospel Radio, Hartford, Connecticut. To repeat the contact information from the station's press release, "Tune in every Saturday morning at 9 AM Eastern on WKND 1480 AM Windsor-Hartford, CT and online at www.goisradio.com/wknd. Call in and let your voice be heard at 860-218-2173 or 860-218-2174." By the way, Norm is scheduled for 9:30, so if you call in before then, remember two things: 1) make your comments brief to give others a chance to call in, and 2) don't use up more than a minute (or less) — Russell's show is proving to be popular, and the guest slot is 9:30, not 9:31 or 10:48, and people are tuning in to hear the conversation between Russell and his scheduled guest at that time.
• Thanks to Pollant Mpofu, Norman Kurland had a very interesting telephone conversation with an official in the British government early this week (and we mean early — due to the time difference, Norm was up at 4 am). The meeting was quite productive in gauging interest in the Just Third Way in some quarters. In the meantime, Pollant continues his efforts to arrange meetings with high government officials, religious authorities, and labor leaders.
• We have responded to a number of enquiries this week concerning the monetary and fiscal reforms embodied in Capital Homesteading, especially the basic theory. Whatever the starting point, the discussion always seems to revolve around the question of the necessity of existing accumulations of savings in the financing of new capital formation. According to the thinking embodied in the three mainstream schools of economics as well as virtually all monetary and fiscal policy in place throughout the world, existing accumulations of savings are essential. Say's Law of Markets is either rejected or redefined, and the real bills doctrine is dismissed. As is clear in The Formation of Capital, this is the wrong approach, and so we try to make clear that the past savings dogma is tantamount to economic and financial slavery.
• CESJ has made contact with a lawyers association that has a commitment to the restoration of the natural law as the basis of a just social order. Currently we are investigating possible areas in which collaboration might be mutually beneficial.
• Work is progressing on the planned revision of Capital Homesteading for Every Citizen. While the principles presented in the current edition remain permanently valid, we have refined their application. Also, due to the current economic downturn, many of the benefits of Capital Homesteading have become increasingly obvious, and would benefit from a slightly different presentation.
• As of this morning, we have had visitors from 48 different countries and 47 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the Philippines, the UK, Canada, and India. People in Venezuela, Germany, Hong Kong, Australia, and the Philippines spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "Seeing the Nose on Your Face," "The New Manifest Destiny," and "The Right to Choose."
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.
#30#
It has, however, been in much worse shape. Japan is the only country in the world to be the target of nuclear weapons, to say nothing of the devastation wrought by conventional weapons after a decade of war that spanned the world. Japan's industrial base and, more important, the financial system is still largely intact.
Why is the state of the financial system so important? To be blunt, you can very quickly rebuild an industrial base if you have financing, but you can do nothing, even with a fully intact and operational industrial capacity, if you can't finance it. Without financing, labor and capital remain idle and useless, just as Charles Morrison explained:
"Confidence and credit are only moral elements in society; they may be said to be, to a great extent, mere matters of opinion; yet their importance in the production and distribution of wealth is so great, that the whole machinery of material production is kept at work, disordered, or paralysed, according as these principles act in a healthy manner, irregularly, or not at all. They are to our industrial community what the nervous system is to the body, a slight and sensitive substance in itself, but the indispensable cause of all the life and motion of the system. A great nation may possess in abundance all the means of producing wealth, — population, intelligence, capital, natural and artificial instruments of production; and yet, if credit and confidence should be from any cause destroyed, all these resources seem to have lost their virtue, and general distress prevails. Let confidence and credit be restored, and the whole system is immediately set in motion again, and in a very short time general prosperity returns." (Charles Morrison, An Essay on the Relations Between Labour and Capital
. London: Longman, Brown, Green, and Longmans, 1854, 200.)The reason for bringing this up is that if Japan attempts to finance the reconstruction effort in the conventional Keynesian manner and relies on existing accumulations of savings at home and abroad, the country will soon find itself in a very, very bad position economically. First, of course, the vast amount of savings already accumulated in Japan are not truly available to finance a rebuilding effort. "Savings," as even Keynes admitted, "equals investment." The savings are already invested in Japan's industry, agriculture, and commerce. Using domestic savings to finance investment or reinvestment in one area means liquidating other investments.
That leaves infusions of foreign financial capital. That, in turn, means making Japan dependent on other countries . . . countries that, in some cases, are already trying to make inroads on Japan's territorial integrity. This would only increase if Japan's economy weakens further. As Henry C. Adams explained more than a century ago,
"The facts disclosed permit one to understand how deficit financiering, carried so far as to result in an interchange of capital and credit between peoples of varying grades of political advancement, must endanger the autonomy of weaker states unable to meet their debt-payments. Provided only that the interests involved are of sufficient importance to make diplomatic interference worth the while, the claims allowed by international law will certainly be urged against the delinquent states, and the citizens of such states may regard themselves fortunate if they succeed in maintaining their political integrity." (Henry C. Adams, Public Debts, An Essay in the Science of Finance
. New York: D. Appleton and Company, 1898, 28-29.)It is not improbable to speculate that any country lending financial capital to Japan will face the tremendous temptation to sell that debt to countries seeking financial leverage to use against Japan. Countries purchasing the debt might have no hesitation in using that leverage to gain political advantage to press their territorial claims.
This sounds hopeless — and, given the standard Keynesian approach to financing economic growth, it is exactly that. In The Formation of Capital, however, Dr. Harold G. Moulton explained how reliance on existing accumulations of savings to finance new capital formation (and thus economic growth) is not only unnecessary, it actually works to the detriment of the economy.
Especially as refined by Louis Kelso and Mortimer Adler in their second collaboration, The New Capitalists (1961), the "pure credit" financing method described by Dr. Moulton shows how, by discounting and rediscounting bills of exchange, the present value of all un- or under-utilized productive capacity in a country can be used, in a very real sense, to finance itself, without relying on domestic existing accumulations of savings or infusions of foreign financial capital. Japan's existing pool of savings that is in the form of corporate retained earnings can be put to its proper use of financing consumption and sustaining demand by paying the earnings out as dividends that are tax deductible at the corporate level. Consumer demand is going to take a tremendous hit in the weeks and months to come, and is going to need a lot of non-government stimulus. Financing for economic growth can come not from retained earnings, but from the country's commercial banks, which can rediscount no-interest development loans at the Bank of Japan. Capital credit insurance and reinsurance can satisfy the demand for collateral.
Most important, the ordinary people of Japan can participate in the recovery and growth through the implementation of a Capital Homesteading program — which will not only improve the lot of ordinary citizens, but strengthen the economic wellbeing of the entire country immensely, and put a few strong cards in its hand for dealing with foreign economic and political intrusion.
As for the rest of the world:
• Michiel Bijkerk reports from the Netherlands Antilles that, "There is a Just Third Way voice in Bonairean politics now." As he continues, "The elections have in the meantime passed. With an extremely limited budget and without buying any votes, we managed to pass the threshold. Only just, but we passed it. We have one seat in the Island Council of 9. Depending on coalition agreements we can do two things: 1) Voice the Just Third Way (which we call 'Solidarismo'); 2) Set up a Pilot project along 'CIC-lines'. Hopefully more opportunities will arise."
• Norman Kurland will be the featured guest tomorrow on Russell Williams's The Challenge on WKND Gospel Radio, Hartford, Connecticut. To repeat the contact information from the station's press release, "Tune in every Saturday morning at 9 AM Eastern on WKND 1480 AM Windsor-Hartford, CT and online at www.goisradio.com/wknd. Call in and let your voice be heard at 860-218-2173 or 860-218-2174." By the way, Norm is scheduled for 9:30, so if you call in before then, remember two things: 1) make your comments brief to give others a chance to call in, and 2) don't use up more than a minute (or less) — Russell's show is proving to be popular, and the guest slot is 9:30, not 9:31 or 10:48, and people are tuning in to hear the conversation between Russell and his scheduled guest at that time.
• Thanks to Pollant Mpofu, Norman Kurland had a very interesting telephone conversation with an official in the British government early this week (and we mean early — due to the time difference, Norm was up at 4 am). The meeting was quite productive in gauging interest in the Just Third Way in some quarters. In the meantime, Pollant continues his efforts to arrange meetings with high government officials, religious authorities, and labor leaders.
• We have responded to a number of enquiries this week concerning the monetary and fiscal reforms embodied in Capital Homesteading, especially the basic theory. Whatever the starting point, the discussion always seems to revolve around the question of the necessity of existing accumulations of savings in the financing of new capital formation. According to the thinking embodied in the three mainstream schools of economics as well as virtually all monetary and fiscal policy in place throughout the world, existing accumulations of savings are essential. Say's Law of Markets is either rejected or redefined, and the real bills doctrine is dismissed. As is clear in The Formation of Capital, this is the wrong approach, and so we try to make clear that the past savings dogma is tantamount to economic and financial slavery.
• CESJ has made contact with a lawyers association that has a commitment to the restoration of the natural law as the basis of a just social order. Currently we are investigating possible areas in which collaboration might be mutually beneficial.
• Work is progressing on the planned revision of Capital Homesteading for Every Citizen. While the principles presented in the current edition remain permanently valid, we have refined their application. Also, due to the current economic downturn, many of the benefits of Capital Homesteading have become increasingly obvious, and would benefit from a slightly different presentation.
• As of this morning, we have had visitors from 48 different countries and 47 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the Philippines, the UK, Canada, and India. People in Venezuela, Germany, Hong Kong, Australia, and the Philippines spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "Seeing the Nose on Your Face," "The New Manifest Destiny," and "The Right to Choose."
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.
#30#
Thursday, March 10, 2011
The Wrath of Keynes, or, The Fall of the House of Hayek, Part VI
Now we come to the "heartless fiend" portion of our discussion of the weaknesses inherent in both Keynesian and Austrian economics as a result of both systems' reliance on existing accumulations of savings to finance new capital formation. At the risk of once again opening up a can of worms, what's the story on creating money for such things as student loans and home mortgages? Are loans for such purposes good debt or credit, or bad debt or credit? Does such a thing as "good debt" even exist?
"Good" debt does exist, but we must be careful of the words we use. "Good" debt is any credit extended to finance something that, directly and in and of itself, generates its own repayment by making a stream of profit on the production of marketable goods and services. Thus, credit extended to purchase a shoe factory would be "good debt" if the assumptions used in determining whether or not to make the investment were good.
"Bad" debt is any credit extended to finance something, directly and in and of itself, does not generate its own repayment. The purchase may be essential, such as for food, clothing, or shelter, or it may be for something that increases or maintains future earning power, such as education or health care, but if the item(s) or activity does not, in and of itself, and as a direct result of the use of the item or participation in the activity, generate profits, the debt cannot be considered "good."
Credit extended for speculation, that is, not in anticipation of the stream of profits to be generated by the marketable goods and services to be produced, but in anticipation of changes in the value of the asset itself, is "bad" credit. Purchasing a home for more than you can currently afford in anticipation of a rise in the value of the home is speculation. Securitizing the mortgages made for speculative purchases constitutes drawing "fictitious bills," and is fraud — the present value of any asset is either its current market value, or the discounted cash flow of the stream of profits realized from the reasonably anticipated future production of marketable goods and services. Valuing any asset in excess of either of these two estimates is "overtrading," i.e., issuing securities or promissory notes against something that does not exist.
Credit extended for the purchase of a home or to finance education is "bad" credit in that neither home ownership nor education ordinarily produce directly marketable goods and services. It may be expedient, even socially essential that credit be extended for such things, but the funds should always come out of existing accumulations of savings, even if it requires a special tax levy. Money should never be created to finance anything that is not directly productive.
#30#
"Good" debt does exist, but we must be careful of the words we use. "Good" debt is any credit extended to finance something that, directly and in and of itself, generates its own repayment by making a stream of profit on the production of marketable goods and services. Thus, credit extended to purchase a shoe factory would be "good debt" if the assumptions used in determining whether or not to make the investment were good.
"Bad" debt is any credit extended to finance something, directly and in and of itself, does not generate its own repayment. The purchase may be essential, such as for food, clothing, or shelter, or it may be for something that increases or maintains future earning power, such as education or health care, but if the item(s) or activity does not, in and of itself, and as a direct result of the use of the item or participation in the activity, generate profits, the debt cannot be considered "good."
Credit extended for speculation, that is, not in anticipation of the stream of profits to be generated by the marketable goods and services to be produced, but in anticipation of changes in the value of the asset itself, is "bad" credit. Purchasing a home for more than you can currently afford in anticipation of a rise in the value of the home is speculation. Securitizing the mortgages made for speculative purchases constitutes drawing "fictitious bills," and is fraud — the present value of any asset is either its current market value, or the discounted cash flow of the stream of profits realized from the reasonably anticipated future production of marketable goods and services. Valuing any asset in excess of either of these two estimates is "overtrading," i.e., issuing securities or promissory notes against something that does not exist.
Credit extended for the purchase of a home or to finance education is "bad" credit in that neither home ownership nor education ordinarily produce directly marketable goods and services. It may be expedient, even socially essential that credit be extended for such things, but the funds should always come out of existing accumulations of savings, even if it requires a special tax levy. Money should never be created to finance anything that is not directly productive.
#30#
Wednesday, March 9, 2011
The Wrath of Keynes, or, The Fall of the House of Hayek, Part V
One of the many problems with relying on existing accumulations of savings to finance new capital formation is that it virtually mandates the wage and welfare system for the vast majority of people. Locked into the wage system, the issue becomes not whether there is a way to finance capital formation that will allow people to own the means of production and get them out of the wage system entirely, but how to manipulate the money supply to get what you want.
With the Austrians, the goal is manipulating the money supply by refusing to let it expand and contract with the present value of existing and future marketable goods and services in the economy. With the Keynesians, it’s how to break the essential link between private property and money, inflating the currency to achieve adequate redistribution of purchasing power through job creation.
Unfortunately, putting jobs first and relying on them to sustain the economy puts the cart before the horse. If we have any respect for human dignity, labor is an input to production, i.e., no job exists unless there is a demand for marketable goods and services. As Dr. Harold Moulton pointed out in his monograph, The Formation of Capital (1935), consumer demand drives the demand for new capital formation, and the demand for capital drives the demand for labor. To create jobs simply to generate effective demand, as Keynesian monetary and fiscal policy attempt to do, is to degrade work from something that ennobles man, to a hoop to jump through to receive a handout.
Further, contrary to Keynes's assumption, human labor is not the only input to production. Labor is rapidly being replaced by technology. Dr. Moulton noted, for example, that the number of people involved directly in manufacturing decreased from 1920 to 1929, at a time when production was soaring. The tremendous number of new jobs came in support and administration, not direct production. Now, with advances in computer technology, even these jobs are disappearing.
Keynes thought to solve this problem by producing goods that were not made to sell, or were manufactured only to be destroyed, as with war material. Leo XIII had a better idea, that people should own the technology that is displacing them from their jobs. (It's significant that the Luddites did not reject technology, only technology that they did not own.)
The problem is that under current ideas of how new capital is financed, only the wealthy can own the new capital, or the State must take it over, i.e., either capitalism or socialism, albeit under many names. The fixed, almost dogmatic belief is that the only way to finance new capital is to cut consumption (which takes away the incentive to finance new capital!), accumulate money savings, then invest. People who cannot afford to save and must spend their income on consumption, cannot afford the new capital as it becomes increasingly expensive, and thus remain wage workers or welfare recipients . . . when there is the money to give them.
Using a different method of finance, however (not new — it antedates the current system by at least 7000 years), new capital can be financed by promising to pay for the new capital out of future profits, rather than past savings, a process that Louis Kelso and Mortimer Adler called "future savings" in their second collaboration, The New Capitalists, which, coincidentally, was published exactly fifty years ago. The subtitle is significant: "A Proposal to Free Economic Growth from the Slavery of Savings."
These promises are "money," understanding money in the legal and accounting sense as "anything that can be used to settle a debt." In that sense, all money is a contract, and all contracts are money, thus any competent person can, assuming the financial system is properly reformed to permit it, enter into a contract, become an owner of capital, and pay for the capital out of future profits without cutting current consumption or using existing accumulations of savings for anything other than collateral — which itself can be replaced with capital credit insurance.
These principles briefly stated here are applied in a proposal called "Capital Homesteading," described on the website of the Center for Economic and Social Justice, www.cesj.org.
#30#
With the Austrians, the goal is manipulating the money supply by refusing to let it expand and contract with the present value of existing and future marketable goods and services in the economy. With the Keynesians, it’s how to break the essential link between private property and money, inflating the currency to achieve adequate redistribution of purchasing power through job creation.
Unfortunately, putting jobs first and relying on them to sustain the economy puts the cart before the horse. If we have any respect for human dignity, labor is an input to production, i.e., no job exists unless there is a demand for marketable goods and services. As Dr. Harold Moulton pointed out in his monograph, The Formation of Capital (1935), consumer demand drives the demand for new capital formation, and the demand for capital drives the demand for labor. To create jobs simply to generate effective demand, as Keynesian monetary and fiscal policy attempt to do, is to degrade work from something that ennobles man, to a hoop to jump through to receive a handout.
Further, contrary to Keynes's assumption, human labor is not the only input to production. Labor is rapidly being replaced by technology. Dr. Moulton noted, for example, that the number of people involved directly in manufacturing decreased from 1920 to 1929, at a time when production was soaring. The tremendous number of new jobs came in support and administration, not direct production. Now, with advances in computer technology, even these jobs are disappearing.
Keynes thought to solve this problem by producing goods that were not made to sell, or were manufactured only to be destroyed, as with war material. Leo XIII had a better idea, that people should own the technology that is displacing them from their jobs. (It's significant that the Luddites did not reject technology, only technology that they did not own.)
The problem is that under current ideas of how new capital is financed, only the wealthy can own the new capital, or the State must take it over, i.e., either capitalism or socialism, albeit under many names. The fixed, almost dogmatic belief is that the only way to finance new capital is to cut consumption (which takes away the incentive to finance new capital!), accumulate money savings, then invest. People who cannot afford to save and must spend their income on consumption, cannot afford the new capital as it becomes increasingly expensive, and thus remain wage workers or welfare recipients . . . when there is the money to give them.
Using a different method of finance, however (not new — it antedates the current system by at least 7000 years), new capital can be financed by promising to pay for the new capital out of future profits, rather than past savings, a process that Louis Kelso and Mortimer Adler called "future savings" in their second collaboration, The New Capitalists, which, coincidentally, was published exactly fifty years ago. The subtitle is significant: "A Proposal to Free Economic Growth from the Slavery of Savings."
These promises are "money," understanding money in the legal and accounting sense as "anything that can be used to settle a debt." In that sense, all money is a contract, and all contracts are money, thus any competent person can, assuming the financial system is properly reformed to permit it, enter into a contract, become an owner of capital, and pay for the capital out of future profits without cutting current consumption or using existing accumulations of savings for anything other than collateral — which itself can be replaced with capital credit insurance.
These principles briefly stated here are applied in a proposal called "Capital Homesteading," described on the website of the Center for Economic and Social Justice, www.cesj.org.
#30#
Tuesday, March 8, 2011
The Wrath of Keynes, or, The Fall of the House of Hayek, Part IV
Returning to our dual critique of Keynesian and Austrian economics, and the absolute reliance of both systems on an erroneous understanding of money and credit, we want to look today at the critique of the past savings "dogma" by Dr. Harold Moulton in his book, The Formation of Capital (1935).
Primarily a critique of the financial assumptions underpinning Keynesian economics, The Formation of Capital presents the case for "pure credit" as the source of financing for new capital formation and the soundest approach for the source of funding for a sustainable economic recovery.
Pure credit refers to the fact that it is possible to enter into a contract — create money — without first having had to cut consumption and accumulate money savings. Again, the assumption that the only way to finance new capital formation is to cut consumption and accumulate money savings is the fundamental principle and common ground on which the three mainstream schools of economics agree, whether they are Keynesian of any stripe, Monetarist/Chicago, or Austrian.
The past savings doctrine, a basic tenet of the British Currency School of finance, may be why Louis Kelso believed binary economics and mainstream economics were permanently irreconcilable. Kelso may not have given sufficient consideration to the fact that classical economics, from which the three mainstream schools of economics claim descent, was divided into Currency School (which mandated past savings) and Banking School (which accepted Say's Law and the real bills doctrine), and was thus divided on the definition of "money."
The presumed primacy of past savings as the sole source of financing for new capital formation is basic to both the Keynesian and Austrian schools. The Formation of Capital is directed at presenting an alternative to the Keynesian New Deal, but in an appendix takes a look at the analysis of the Austrian school, especially as presented by Friedrich von Hayek. As Moulton explained,
"We may first consider the analysis of the Austrian economist, Dr. F. A. von Hayek, now at the London School of Economics. The following statement is based upon his little volume entitled Prices and Production and upon subsequent articles elaborating his point of view. The basic assumptions which underlie Mr. Hayek's analysis are indicated in the following summary statement:
"It will be observed from these quotations that Hayek assumes that the formation of capital involves a transfer of labor and materials from the creation of consumers goods to the creation of capital goods — this being accomplished by the price mechanism. It is implied, it will be seen, that our productive forces are normally fully employed and that it is impossible in consequence to increase the production of capital goods and consumption goods simultaneously. Hayek submits no evidence to show (a) that the expansion of capital occurs when consumption is declining, or (b) that the prices of capital goods rise while the prices of consumers' goods fall. These are mere assumptions, and they find no support in the data which we have assembled in the course of our investigation.
"Hayek notes that in periods of depression there is some slack in the industrial system, but he bases his primary argument on the assumption that we have full productive capacity. He states that "the assumption of an 'industrial reserve army' is incompatible with the known facts and theoretically inadmissible as a starting point for a theory which attempts to show the causes of crises on the basis of the modern 'equilibrium theory' of price determination." (Economica, May 1931, p. 140.) As our studies conclusively show, there remains a large amount of slack in the industrial system even at the peak of boom periods.
"Hayek next considers the effects of expanding bank credit upon the formation of capital. When bank money is loaned to business men with which to employ labor and materials for the construction of capital, he argues, "entrepreneurs are in this case enabled to attract factors of production . . ., not by a corresponding transfer of funds from consumers' to producers' goods but by additional money handed to them. This means that they will bid up the prices of these factors without there being a corresponding fall in the prices of other factors. Total money income will, therefore, increase, and this increase will in turn lead to an increase in the amount of money expended on consumers' goods." (Econometrica, April 1934, p. 158.) While the prices of consumers' goods will thus rise, they will lag behind the rise in the prices of capital goods. Eventually, after the issue of new bank credit ceases, the prices of consumption goods will rise in relation to the prices of capital goods and depression will ensue. Hayek finds the basic source of maladjustment to be the extension of credit; and he believes a "neutral money" policy would give us permanent stability.
"Again it will be observed that Hayek assumes that the creation of new capital necessarily involves a diversion of labor and capital from the production of consumption goods to the creation of capital goods. Again he cites no evidence either in support of the diversion theory or to show that the prices of capital goods and consumers' goods move in the ways indicated.
"Hayek's analysis breaks down at its very beginning. The assumptions on which he predicates his whole argument are not in accordance with the facts of the business world. Moreover, the central issue in the problem of capital formation, namely, the relationship between consumptive demand and the demand for capital goods, has not been analyzed."
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Primarily a critique of the financial assumptions underpinning Keynesian economics, The Formation of Capital presents the case for "pure credit" as the source of financing for new capital formation and the soundest approach for the source of funding for a sustainable economic recovery.
Pure credit refers to the fact that it is possible to enter into a contract — create money — without first having had to cut consumption and accumulate money savings. Again, the assumption that the only way to finance new capital formation is to cut consumption and accumulate money savings is the fundamental principle and common ground on which the three mainstream schools of economics agree, whether they are Keynesian of any stripe, Monetarist/Chicago, or Austrian.
The past savings doctrine, a basic tenet of the British Currency School of finance, may be why Louis Kelso believed binary economics and mainstream economics were permanently irreconcilable. Kelso may not have given sufficient consideration to the fact that classical economics, from which the three mainstream schools of economics claim descent, was divided into Currency School (which mandated past savings) and Banking School (which accepted Say's Law and the real bills doctrine), and was thus divided on the definition of "money."
The presumed primacy of past savings as the sole source of financing for new capital formation is basic to both the Keynesian and Austrian schools. The Formation of Capital is directed at presenting an alternative to the Keynesian New Deal, but in an appendix takes a look at the analysis of the Austrian school, especially as presented by Friedrich von Hayek. As Moulton explained,
"We may first consider the analysis of the Austrian economist, Dr. F. A. von Hayek, now at the London School of Economics. The following statement is based upon his little volume entitled Prices and Production and upon subsequent articles elaborating his point of view. The basic assumptions which underlie Mr. Hayek's analysis are indicated in the following summary statement:
What happens . . . when somebody saves a part of his income hitherto devoted to consumption . . .? Clearly the demand which is directed to means of production [capital goods] increases, and that directed to consumption goods correspondingly decreases." (Economica, May 1931, p. 142.) "At first the new savings will serve the purpose of transferring a portion of the original means of production previously employed in producing consumers' goods to the production of new producers' goods." [Italics Hayek's. This transfer is induced by changes in the relative prices of capital goods and consumers' goods.] (The same, p. 140.) "The immediate effect of the increase in the demand for producers' goods and the decrease in the demand for consumers' goods will be that there will be a relative rise in the prices of the former and a relative fall in the prices of the latter. (Prices and Production, p. 70.)
"It will be observed from these quotations that Hayek assumes that the formation of capital involves a transfer of labor and materials from the creation of consumers goods to the creation of capital goods — this being accomplished by the price mechanism. It is implied, it will be seen, that our productive forces are normally fully employed and that it is impossible in consequence to increase the production of capital goods and consumption goods simultaneously. Hayek submits no evidence to show (a) that the expansion of capital occurs when consumption is declining, or (b) that the prices of capital goods rise while the prices of consumers' goods fall. These are mere assumptions, and they find no support in the data which we have assembled in the course of our investigation.
"Hayek notes that in periods of depression there is some slack in the industrial system, but he bases his primary argument on the assumption that we have full productive capacity. He states that "the assumption of an 'industrial reserve army' is incompatible with the known facts and theoretically inadmissible as a starting point for a theory which attempts to show the causes of crises on the basis of the modern 'equilibrium theory' of price determination." (Economica, May 1931, p. 140.) As our studies conclusively show, there remains a large amount of slack in the industrial system even at the peak of boom periods.
"Hayek next considers the effects of expanding bank credit upon the formation of capital. When bank money is loaned to business men with which to employ labor and materials for the construction of capital, he argues, "entrepreneurs are in this case enabled to attract factors of production . . ., not by a corresponding transfer of funds from consumers' to producers' goods but by additional money handed to them. This means that they will bid up the prices of these factors without there being a corresponding fall in the prices of other factors. Total money income will, therefore, increase, and this increase will in turn lead to an increase in the amount of money expended on consumers' goods." (Econometrica, April 1934, p. 158.) While the prices of consumers' goods will thus rise, they will lag behind the rise in the prices of capital goods. Eventually, after the issue of new bank credit ceases, the prices of consumption goods will rise in relation to the prices of capital goods and depression will ensue. Hayek finds the basic source of maladjustment to be the extension of credit; and he believes a "neutral money" policy would give us permanent stability.
"Again it will be observed that Hayek assumes that the creation of new capital necessarily involves a diversion of labor and capital from the production of consumption goods to the creation of capital goods. Again he cites no evidence either in support of the diversion theory or to show that the prices of capital goods and consumers' goods move in the ways indicated.
"Hayek's analysis breaks down at its very beginning. The assumptions on which he predicates his whole argument are not in accordance with the facts of the business world. Moreover, the central issue in the problem of capital formation, namely, the relationship between consumptive demand and the demand for capital goods, has not been analyzed."
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Monday, March 7, 2011
The Wrath of Keynes, or, The Fall of the House of Hayek, Part III
We’ve received a few comments on this series, the point of which is that, while presented as completely different from one another, Keynesian and Austrian economics share a common principle. This is that the supply of loanable funds is a commodity, and that it is therefore impossible to finance new capital formation without cutting consumption and accumulating money savings. Further, the supply of loanable funds determines the "production possibilities curve," beyond which it is impossible to finance new capital except to a limited extent in the short run by eliminating waste and increasing efficiency, i.e., by measures that do not require the reinvestment of accumulated savings.
Unfortunately, the commentators seemed to believe that we are trying to reconcile Keynesian and Austrian economics, and thereby achieve a synthesis that will provide a solid foundation on which to implement a sustainable economic recovery. On the contrary, we’re trying to show that, despite the apparent differences between the two systems, they agree just where it does the most harm.
That is, Keynesian economics focuses on demand, evidently assuming that supply will take care of itself, while the Austrian school focuses on supply, taking the opposite position that demand is not something to worry about. Both assume as a given that the only way to have the wherewithal to finance new capital formation is to cut consumption and accumulate money savings.
Consequently our commentator was incorrect in trying to characterize binary economics as “supply side” (or demand side, for that matter), and somehow “post-Keynesian.” On the contrary, by working to restore the functionality of Say’s Law of Markets — which Keynesians reject and the Austrians redefine — binary economics focuses on both supply and demand.
This is consistent with the observation by Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, in The Recovery Problem in the United States (1936), that the two most important factors in an economic recovery are employment (demand) and production (supply). Everything else is secondary.
As Dr. Moulton explained in The Formation of Capital (1935), consumer demand is critical because it provides the justification for new capital investment, that is, production. Financing new capital through the application of pure credit principles is equally critical, because if we cut consumption in order to finance the new capital, we take away the incentive to finance new capital in the first place by lowering demand.
In The New Capitalists (1961), Kelso and Adler refined Dr. Moulton’s thought by pointing out that we cannot rely on a system in which ownership of the means of production in concentrated in few hands, whether those hands are those of the State, as in socialism, or private investors, as in capitalism to ensure the restoration of Say’s Law of Markets and an economy in equilibrium. Neither is the wage system adequate to ensure that there is sufficient demand in the system to clear production at market prices.
Rather, to ensure that the income generated by capital is spent on consumption rather than diverted to reinvestment and where production equals income, ownership of the means of production must be widespread. This emphasizes the importance of the subtitle of The New Capitalists: “A Proposal to Free Economic Growth from the Slavery of [Past] Savings.”
Applied consistently and in conformity with the four pillars of an economically just society, as in the proposed “Capital Homestead Act,” widespread capital ownership will 1) provide adequate funding for all financially feasible capital projects without requiring reductions in consumption, 2) supplement and, in some cases, replace wage income as the source of effective demand (consumption income) for most people, 3) rebuild the tax base and reduce the demands on government so that government can live within its means, and 4) restore political democracy by reestablishing it on a foundation of economic democracy.
None of this is probable, or even possible until and unless we can get away from the slavery of past savings, and restructure the financial system to serve humanity, rather than the other way around.
#30#
Unfortunately, the commentators seemed to believe that we are trying to reconcile Keynesian and Austrian economics, and thereby achieve a synthesis that will provide a solid foundation on which to implement a sustainable economic recovery. On the contrary, we’re trying to show that, despite the apparent differences between the two systems, they agree just where it does the most harm.
That is, Keynesian economics focuses on demand, evidently assuming that supply will take care of itself, while the Austrian school focuses on supply, taking the opposite position that demand is not something to worry about. Both assume as a given that the only way to have the wherewithal to finance new capital formation is to cut consumption and accumulate money savings.
Consequently our commentator was incorrect in trying to characterize binary economics as “supply side” (or demand side, for that matter), and somehow “post-Keynesian.” On the contrary, by working to restore the functionality of Say’s Law of Markets — which Keynesians reject and the Austrians redefine — binary economics focuses on both supply and demand.
This is consistent with the observation by Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, in The Recovery Problem in the United States (1936), that the two most important factors in an economic recovery are employment (demand) and production (supply). Everything else is secondary.
As Dr. Moulton explained in The Formation of Capital (1935), consumer demand is critical because it provides the justification for new capital investment, that is, production. Financing new capital through the application of pure credit principles is equally critical, because if we cut consumption in order to finance the new capital, we take away the incentive to finance new capital in the first place by lowering demand.
In The New Capitalists (1961), Kelso and Adler refined Dr. Moulton’s thought by pointing out that we cannot rely on a system in which ownership of the means of production in concentrated in few hands, whether those hands are those of the State, as in socialism, or private investors, as in capitalism to ensure the restoration of Say’s Law of Markets and an economy in equilibrium. Neither is the wage system adequate to ensure that there is sufficient demand in the system to clear production at market prices.
Rather, to ensure that the income generated by capital is spent on consumption rather than diverted to reinvestment and where production equals income, ownership of the means of production must be widespread. This emphasizes the importance of the subtitle of The New Capitalists: “A Proposal to Free Economic Growth from the Slavery of [Past] Savings.”
Applied consistently and in conformity with the four pillars of an economically just society, as in the proposed “Capital Homestead Act,” widespread capital ownership will 1) provide adequate funding for all financially feasible capital projects without requiring reductions in consumption, 2) supplement and, in some cases, replace wage income as the source of effective demand (consumption income) for most people, 3) rebuild the tax base and reduce the demands on government so that government can live within its means, and 4) restore political democracy by reestablishing it on a foundation of economic democracy.
None of this is probable, or even possible until and unless we can get away from the slavery of past savings, and restructure the financial system to serve humanity, rather than the other way around.
#30#