A Blog of the Global Justice Movement

Thursday, February 16, 2012

Raw Judicial Power XXIII: Solution

A search for a viable solution for the current political and economic situation is, as we have seen, handicapped by an unspoken, possibly unconscious assumption at work. We have gone into this in some depth in this blog series, explaining how, in a country presumably based on the natural law, natural rights are often ignored or redefined in order to achieve political or economic goals. What we have to do now is come up with a solution.

Fortunately, coming from the perspective of the Just Third Way, that is a relatively straightforward process. First, however, we have to "re-educate" ourselves about that critical assumption. The best way to do this is to take a look at how the presumably mutually exclusive systems of capitalism and socialism operate within the "past savings paradigm."

Both capitalists and socialists assume as a given that the only way to finance new capital formation is to reduce consumption, accumulate money savings, then invest. (If you just said, "Of course" to yourself, that does not mean you are necessarily a capitalist or socialist, but that you have made the same assumption that leads inevitably to one or the other.)

That being the case, it follows that as capital instruments become increasingly expensive as technology advances (and replaces labor in the production process), there must be a class of persons, necessarily small, who cannot consume all the income their capital generates. Assuming they act rationally, such people reinvest their excess consumption income in additional capital. This presumably creates jobs for everyone else. In capitalism the class of owners is a small private elite, the smaller, the better in order to finance increasingly expensive capital instruments. In socialism, it is the State.

We are, obviously, defining capitalism as concentrated private ownership of capital, and socialism as concentrated public ownership of capital.

As technology replaces labor as the predominant input to production, the market value of labor declines relative to capital. This creates problems, for when ordinary people lack sufficient income, there is insufficient demand to clear production at market prices.

Capitalists claim that new jobs will be created by investment in new capital. This is true up to a point, but eventually the productive capacity of the new capital itself outstrips the need for additional labor input. When that happens, the number of new jobs, and then existing jobs, starts to decline.

For example, from 1919 to 1929 when the U.S. economy was rapidly expanding and creating millions of new jobs, the number of people engaged in direct manufacturing declined dramatically. The new jobs came in administration, sales, and logistical support — jobs that are now disappearing in response to advances in computer technology.

The socialist solution to the inequities of concentrated ownership of capital is for the State to take over either ownership directly, or exercise a degree of control that amounts to de facto ownership. The economy is manipulated to achieve political ends.

The solution to the problems seen in both capitalism and socialism was given by Leo XIII in 1891 in Rerum Novarum: "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (§ 46.)

This, however, gets us right back where we started . . . if we assume that the only way to finance new capital formation is to cut consumption and save. Most people clearly cannot afford to save. They don't even have enough income on which to survive now. The pope, therefore (so the reasoning of both capitalists and socialists goes) must have been giving a prudential suggestion, because what he's talking about is impossible . . . if we assume that the only way to finance new capital formation is to cut consumption and save.

The argument between socialists and capitalists can never end, because both sides make valid points — but points based on a false assumption: that in order to finance new capital formation, you must cut consumption and save.

Fortunately, there is a way out. As Adam Smith explained in Book II of the Wealth of Nations (1776), Henry Thornton in The Paper Credit of Great Britain (1803), Jean-Baptiste Say in his Treatise on Political Economy and Letters to Malthus (1821), and Harold Moulton in his counter proposal to the New Deal, The Formation of Capital (1935), the optimal method of financing new capital formation is not to reduce consumption.

Reducing consumption to finance new capital actually makes the new capital less feasible. Consequently, a rational investor will not put his or her money into capital that is not expected to make a profit. Socialists substitute State subsidies, punitive taxation, and other measures to make it profitable (or at least less economically harmful) to finance new capital and thereby presumably create jobs, but that misses the point. If capital will not pay for itself out of future profits, it is contrary to common sense to finance it.

If, however, it is reasonably certain that the new capital will pay for itself out of future profits, then the present value of those future profits can be "monetized" by drawing up a contract to deliver a portion of those profits when they are realized to someone who will accept that contract in exchange for what is necessary to form the new capital. This contract is called a "bill of exchange." It can either be used directly as money, or taken to a commercial bank and exchanged for the bank's promissory note. To ensure a uniform and stable currency, commercial banks should have their own bank, a central bank, so that all the member banks use the same standard(s).

Because capital can be (and usually is) financed in this way instead of by cutting consumption and saving (retained earnings are, one, not cash, but ownership of assets of the business, and two, used as collateral, not direct expenditure for capital), anyone who can come up with a financially feasible project can become an owner, simply by using increases in production in the future ("future savings") rather than decreases in consumption from the past ("past savings") to finance the capital.

The remaining problem is collateral. That can be solved by using capital credit insurance in place of traditional collateral in the form of accumulated wealth.

A proposal that integrates these principles is called "Capital Homesteading." Capital Homesteading is an analogue of the nineteenth century American programs enacted to bring about a broad distribution of the ownership of land. Capital Homesteading expands the concept to include ownership of advanced technologies, including management, marketing and distribution systems, through equity shares in enterprises capable of competing without special protections within a free and just global economy.

Under "Capital Homesteading," a citizen's tax-sheltered capital asset accumulation account, similar to an Individual Retirement Account (IRA). Each capital homesteader's account would be able to receive annual allocations of interest-free, productive credit and new asset-backed money issued by the central bank and administered by local commercial banks. This new money and credit would then be invested in feasible private sector capital formation and expansion projects of businesses that would issue new shares to be purchased and sheltered in the citizen's Capital Homestead Account. After the "future savings" (future profits) generated by the productive assets paid off each year's Capital Homestead investment (loan), the citizen would continue to receive in the form of dividends the incomes generated by those capital assets.

The goal of Capital Homesteading is the enactment of a Capital Homestead Act. Such an act would be a national economic policy based on the binary growth model, designed to lift barriers in the present financial and economic system and universalize access to the means of acquiring and possessing capital assets. A Capital Homestead Act would allow every man, woman and child to accumulate in a tax-sheltered Capital Homestead Account, a target level of assets sufficient to generate an adequate and secure income for that person without requiring the use of existing pools of savings or reductions in current levels of consumption.

#30#

No comments: