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.

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