Tuesday, April 19, 2011

The Slavery of Past Savings, Part II: Bad Assumptions Make Bad Problems Worse

Yesterday we posted a few thoughts on how the slavery of past savings keeps many people locked into a "condition of dependency," as one of the euphemisms for slavery in the Antebellum South had it. The trouble is that just putting down thoughts seldom makes things "real" to people. It's too easy to say that the writer means somebody else, or doesn't really understand your specific situation, and reject it out of hand.

Case in point: the condemnation of slavery issued by Pope Gregory XVI in the Bull In Supremo Apostolatus (1839) was almost immediately stripped of all meaning by some southern Catholic bishops anxious to keep Catholic slave owners in the Church — and contributing. The centuries of prior condemnations of slavery were simply ignored, and the faithful assured that the Bull didn't apply to chattel slavery as practiced in the American south.

We see something similar today in the way that academic economists hasten to assure their own faithful followers that papal condemnations of unjust social, economic, and financial institutions don't apply to them — usually due to the alleged absolute necessity of past savings to finance capital formation. The rather flabby rationalizations usually go something like this:

Worker ownership? Must be prudential. Why? Because if ownership is widespread, then nobody can save enough to finance new capital, and the economy will disintegrate.

Private property? Must be prudential. Why? Because if the State can't redefine private property, then it can't justify confiscation and redistribution to keep the economy running by increasing effective demand, instead of only on an emergency and temporary basis in cases of extreme need.

Liberty? Must be prudential. Why? Because if the State cannot direct every individual action, people just won't do what the State wants them to do, especially if a determinant number of people have direct, personal, and effective ownership of the means of production.

And so on. Ultimately, the past savings dogma means that all rights come from the State, and that humanity was created for the State, not the State for humanity.

The tragedy is that the slavery of past savings is no longer a mere catch phrase to inspire people to organize to change the system. In a graphic example of the utter dependency that the past savings dogma forces on people, we need look no further than the floundering that characterizes the effort to start rebuilding Japan after the triple horror of an earthquake, tsunami, and nuclear emergency. The people of Japan are now threatened with a fourth disaster: mishandling of the financing of the rebuilding effort.

Are either the people of Japan or their officials incompetent or motivated by anything other than good will? No sane person could make that argument and be able to support it with any credible evidence. Are they, however, effective?

That's a different issue. Evidence strongly supports the contention that the Japanese, like the rest of the world, are trapped in a flawed system dictated by the disproved past savings dogma.

Consequently, the same officials who reacted to the immediate aftermath of the disasters with competence and efficiency, even heroism, are now facing serious consequences for their "failure" to take effective subsequent action. As today's Wall Street Journal reported, "Government officials who drew praise for early disaster-relief efforts . . . could face growing criticism from disaster survivors if more progress isn't seen soon." ("Hard Choices Slow Rebuilding in Japan," Wall Street Journal, 04/19/11, A12.)

Japanese officials cannot be blamed for the lack of progress. It's "the system" within which they are forced to operate. The slavery of past savings dictates that rebuilding cannot take place until and unless consumption is cut and sufficient money savings accumulated. That means 1) using whatever savings have been accumulated in the country by cutting consumption in the past (mostly invested in government debt), 2) inflating the currency to shift "forced savings" from consumers to producers through involuntary reductions in current consumption, 3) borrowing from other countries, or 4) some combination thereof — none of which is politically feasible or financially sound, and in combination are a recipe for economic suicide.

Consequently, you have many cases similar to that reported for Mr. Jun Koisumi and his family, proprietors of an eyeglass shop in Kesennuma for more than eighty years, and which was completely destroyed in the earthquake and tsunami. Mr. Koisumi has stated he wants to start all over again, but "he doesn't really know how because he doesn't have the money." (Ibid.) While there are major concerns expressed about clearing away rubble and locating the bodies of those still missing, the real issue is always finding the financing. As the article related, "many are hitting a wall as they wait for more guidance from government officials about how and where to rebuild, and how to pay for it." (Ibid.)

This is how a single bad assumption (and the subsequent bad assumptions built on it) makes bad problems even worse. With sufficient financing, the cleanup and recovery of the bodies of the missing could be factored into the cost of rebuilding specific enterprises, such as that belonging to the Kesennuma family. Bringing a site into condition to be used in a productive enterprise is always capitalized, at least in theory. With financing extended as described in Harold Moulton's The Formation of Capital, and incorporating the refinements added by Louis Kelso and Mortimer Adler in The Capitalist Manifesto and The New Capitalists, the only question should be whether the present value of the projected future stream of income to be generated by the capital (the new or rebuilt business) exceeds the cost of cleanup plus whatever it takes to make the enterprise profitable.

Financing is thus not the problem that virtually all the "experts" presume it to be. It is only a question of marshalling non-financial resources, such as labor, equipment, and raw materials, sufficient to clean up the sites and get the enterprises into production as fast as possible. As happened in the United States at the outbreak of World War II, Japan would immediately reach full employment.

Nor would the benefits be limited to Japan. In wartime, a country is limited to what it has inside the country, or can obtain from its allies. That need not be a concern in Japan, which — potentially — has the resources of the entire world on which to draw . . . if the financing can be found (and re-read the above paragraph). If there are not enough workers, equipment, or raw materials in Japan, they can be imported.

With the high levels of unemployment in the U.S., for example, it would be very easy to find temporary workers for, say, a six- to eighteen-month assignment in Japan, along with construction companies ready, willing and able to supply all the necessary equipment, even if only on a rental basis. By the time the workers returned to the U.S., this country would have learned a lesson from the Japanese recovery, and implemented its own rebuilding program (have you seen some of our cities, to say nothing of our heavy industry?), with a vastly increased demand for labor. (There would also be the added benefit of greater understanding and cooperation between two of the major Pacific Rim countries, to the benefit of all.)

Centuries of enslavement to bad ideas is long enough. It's time to start taking some effective action.

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