Thursday, September 8, 2011

Capital Day, Part III: Production and Employment, the Key to Economic Recovery

Yesterday we saw that the Keynesian assumptions that got us into the current mess are no longer susceptible to Keynesian solutions — if they ever were. Take, for instance, the primary Keynesian assumption that "money" consists exclusively of State-emitted bills of credit, i.e., coin, currency, and demand deposits ultimately backed by government debt. ("Money is peculiarly a creation of the State." John Maynard Keynes, A Treatise on Money, Volume I, The Pure Theory of Money. New York: Harcourt Brace and Company, 1930, 4.) From this seemingly trivial error, all the problems we see today necessarily follow. Some of the major problems are:

• The fixed belief that it is impossible to finance new capital formation without first cutting consumption and accumulating money savings. ("So far as I know, everyone is agreed that saving means the excess of income over expenditure on consumption." John Maynard Keynes, The General Theory of Employment, Interest, and Money, 1936, II.6.ii),

• The fixed belief that the cost of advancing technology can only be borne by the State, or by a wealthy elite who are either controlled by the State or have managed to control the State in self-defense. ("The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." John Maynard Keynes, The Economic Consequences of the Peace, 1919 2.III.)

• The fixed belief that most people (ideally all) are constrained to receive income solely from State-subsidized wages or direct State welfare payments — Hilaire Belloc's "Servile State." ("I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation of full employment." Keynes, General Theory, op. cit., V.24.iii.)

• The fixed belief that private property in capital must be abolished. ("It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary." Ibid.)

• The fixed belief that liberty, i.e., freedom of association/contract, has already been abolished. ("It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account." Keynes, Treatise on Money, loc. cit.)

• The fixed belief that the State has the power to alter reality by re-defining essential precepts of the natural law. ("[The State] claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least." Ibid.)

When we say "fixed belief," of course, we do not mean a sound belief in good repair. We mean a dogmatic, unquestioning assumption of something that has not been subjected to proof. The prevalence of fixed beliefs may itself be the most serious problem of all, for every single one of the above problems can be refuted with ease by anyone who will bother to take a look at reality.

Knowing what we know, however, what is the best way to get out of the current situation — and keep it from happening again? . . . at least, for the same reasons.

Back in 1936, Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, accurately predicted the "Depression within the Depression" of 1937-1938. Usually blamed on a tightening of monetary policy by the Federal Reserve, the downturn was, in fact, caused by the failure of the Keynesian New Deal to rebuild a solid foundation for economic recovery.

The emphasis of the New Deal was on job creation financed by increased government debt. Moulton explained that subsidized "job creation" for make-work didn't really constitute "employment," and would disappear the moment the government money ran out — which it did. No, the real keys to sustainable economic recovery are, one, real employment involving, two, the production of marketable goods and services. (Harold G. Moulton, The Recovery Problem in the United States. Washington, DC: The Brookings Institution, 1936, 114.) By focusing on artificially stimulating demand through creation of ephemeral employment and ignoring production, Keynesian monetary policy actually made the second Great Depression, 1930-1940, twice as long and much worse than the first. The New Deal gave only the illusion of recovery.

Recovery from the economic downturn of the 1890s was not the result of increased government spending or expansion of the role of the State. What brought the United States out of the first Great Depression of 1893-1898 was the combination of a bumper crop of wheat in the U.S. at the same time there were widespread crop failures in Europe. This spurred production and employment in the U.S., the same way that World War II brought the country out of the second Great Depression of the 1930s, and, previously, that World War I brought the country out of the recession of 1915.

Still, as accurate as Moulton's analysis and prediction turned out to be, he left out one important fact. This is a fact that also explains why the Keynesian New Deal was virtually guaranteed to fail. And what is that? Only that the wheat that brought the United States out of the first Great Depression was produced on farms, the ownership of which was relatively broadly distributed throughout the economy. As a macroeconomist, Moulton didn't get into anything other than the importance of private ownership of capital. He did not consider the distribution of private ownership of capital relevant to his analysis — that's a "micro" issue.

The fact that ownership of the land used to produce the bumper crop of wheat was widely distributed is significant. It meant that the "windfall profits" went directly to people who used it for consumption, or as the realization of the "future savings" against which they had borrowed to finance improvements and operating costs. Little, if any, of the profit was reinvested. All of it went to current or past consumption, that is, paying off loans for capital improvements or expenses. (Yes, it's true. As far as the producer of capital goods is concerned, new capital formation is not investment or reinvestment, but consumption, as Moulton accurately observed in The Formation of Capital.)

The importance of widespread direct ownership of capital was the refinement that Louis Kelso and Mortimer Adler added to Moulton's work. While the principles are detailed in Kelso and Adler's The Capitalist Manifesto (1958), the "mechanical details" are described in their later collaboration, The New Capitalists (1961), as is demonstrated by the provocative subtitle of the book: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

(When we say that expanded capital ownership was the refinement that Kelso and Adler added to Moulton, we do not mean that the importance of Kelso and Adler is limited to what could be handled with a footnote in some of Moulton's books. Very much the contrary! It's just that the issue we're looking at in these postings is the problem of "Money Manipulation and Social Order," and how the combination of Moulton and Kelso and Adler addresses this specific issue.)

Thus, the "recipe" for sustainable economic recovery and growth is (just as Moulton pointed out) production and employment. It can't be just any employment so long as people get paid for it, however, as Keynes asserted. (Keynes, General Theory, op. cit., III.10.vi.) It has to be employment of the factors of production engaged in producing marketable goods and services. In this way Say's Law will function properly, but only if, one, financing of new capital is not out of existing accumulations of savings, accessed by borrowing from or redistributing the holdings of the wealthy, but "future savings" accessed by discounting and rediscounting bills of exchange drawn on the present value of the expected future stream of income realized by producing and marketing goods and services.

Two, the ownership of the new capital financed using such "pure credit" (i.e., not dependent on existing accumulations of savings) techniques is broadly distributed. In this way, there would be a systemic encouragement for new capital owners to use the profits first to pay for the capital, and then later for consumption needs — not reinvestment in additional new capital.

A further refinement implicit in Kelso and Adler (and explicit in Rev. William J. Ferree, S.M., Ph.D., Introduction to Social Justice, 1948) is that the new arrangement of the economic and financial order cannot be achieved by State fiat. Rather, people must organize, develop necessary institutional reforms, get them accepted and only then (and only if necessary — not everything can or should be embodied in positive law) should the State act through the government by passing any necessary laws to embody changes in our institutions.

To explain the difference in the two approaches, let's take the efforts of the distributist movement to achieve a society characterized by widespread ownership of capital. As we previously alluded, in 1912 with the publication of The Servile State, Hilaire Belloc warned against certain trends he saw developing in the world. In 1936 he proposed a solution for the growth of the "Servile State" in An Essay on the Restoration of Property.

Unfortunately, what Belloc proposed would have been unworkable — and not just because he didn't understand money, credit and banking. Belloc's proposal relied on external controls — coercion — imposed by the State to make the "large man" equal to the "small man" when it came to access to capital credit. Consistent with "the act of social justice," what is needed is not desired results imposed by force, but systemic changes — "internal controls" — in the institutions themselves, so that doing the right thing is optimal, both out of self-interest and out of respect for other individuals and the system as a whole.

To illustrate, recall that under Glass-Steagall commercial banks and investment banks had to be completely separate institutions. It was not a question whether an internal transaction by means of which a commercial bank used its discounting and rediscounting ("money creation") power to finance a questionable transaction that was improperly scrutinized or violated ethics. Such transactions were impossible to begin with, because commercial banks could not engage in investment banking, and vice versa. An improper transaction violated the law simply because the transaction had taken place.

With the full repeal of Glass-Steagall, however, banks could combine the commercial and investment banking functions, and such transactions could legally take place. When something went wrong (as was inevitable), guilty parties could escape blame by forcing the investigation away from the fact of the transaction (objective reality), and on to questions about the quality of the transaction (subjective opinion). Consequently, what should have been small, localized problems, easily fixed, became systemic, and now threaten to bring down the global financial system.

Surprisingly, however, the problem is still relatively easy to fix. The hard part is getting through to the people who have the power to make the changes in the law necessary to make it possible to replace that portion of the money supply backed with government debt, with money backed by private sector hard assets, and to make it possible for people who currently own no capital to have democratic access to capital credit.

We have the principles: the Just Third Way. We have the program: Capital Homesteading. There is even an organization started specifically to push for the passage of a Capital Homestead Act by 2012: The Coalition for Capital Homesteading.

What we need is official recognition that the effort is important, even essential if civilization is to survive: "Capital Day," a day promoting widespread direct ownership of capital. We suggest March 1 of every year, regardless what day of the week on which it falls. This would emphasize the fact that capital works for you day and night, 24/7, and doesn't take it out of you the way labor does.

Further, Capital Day should not be a "holiday." Why? Well, for one thing, "holiday" derives from "holy day," and let's not glorify things. Capital is a thing, not a sacred object. Property, that is, ownership of things, should be regarded as a sacred and inviolable right (Rerum Novarum, § 46), and thus "holy," but the thing owned? Not likely.

For another, we've got to overcome this idea that "labor" and "capital" are somehow mutually exclusive factors of production, and that if you're an owner, you can't use your labor, and that if you use your labor, you can't own capital. This is obviously nonsense, as the popes have pointed out. As Pope Pius XI explained in a widely ignored or misunderstood passage in Quadragesimo Anno,

"In the application of natural resources to human use the law of nature, or rather God's will promulgated by it, demands that right order be observed. This order consists in this: that each thing have its proper owner. Hence it follows that unless a man is expending labor on his own property, the labor of one person and the property of another must be associated, for neither can produce anything without the other. Leo XIII certainly had this in mind when he wrote: 'Neither capital can do without labor, nor labor without capital.' [Rerum Novarum, § 28] Wherefore it is wholly false to ascribe to property alone or to labor alone whatever has been obtained through the combined effort of both, and it is wholly unjust for either, denying the efficacy of the other, to arrogate to itself whatever has been produced." (§ 53.)

Since we aren't asking for a holiday, per se, it should be relatively easy to get Congress to pass a resolution adopting March 1 as "Capital Day." We realize that March 1 is already "National Nathan's Birthday" (no idea, but it's in the Wikipedia), but we can double up. After all, March 22, for instance, is both "National Broccoli Day" and "World Water Day" (to cook the broccoli in?), so Nathan, whoever he is, should be okay with that.

The implication to passing such a resolution, of course, is that the Congress would be giving tacit support to the adoption of a Capital Homestead Act. Given a choice, however, open doors for the passage of a Capital Homestead Act. Get that, and every day will be Capital Day.

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