Tuesday, October 23, 2012

Is Binary Economics "Practical"?

Many people think that the principles and overall theory of binary economics sound good, and it would be nice if everyone could own enough capital to provide him or her with an adequate and secure income, but it can't happen. The system just doesn't work that way, and you can't change the system.

That's not entirely correct. True, the economy is in such bad shape that a quick fix is no longer possible. There are, however, some things that could be done immediately. First, the Federal Reserve should stop monetizing all discretionary government spending. Ideally, there would be no monetization of government debt, but it can't be eliminated overnight.

Second, the Federal Reserve has the power right now to provide all the liquidity necessary to supply the private sector directly, not through increases in government spending, with all the financing the private sector needs for new and replacement capital. It can do this by rediscounting bills from commercial banks for financially feasible new and replacement capital, not speculation in the stock market, bailouts of failed companies, or purchase of toxic assets.

Frankly, the stimulus packages are like a gunshot wound to the economy. Returning the Federal Reserve to its original mission of providing liquidity to the private sector would apply a bandage and stop much of the bleeding.

We stress, however, that even returning the Federal Reserve to its original purpose is only a temporary, short-term measure. Unless a Capital Homestead Act or something very similar is passed at the earliest possible date, the economy will not be able to sustain itself. There must be widespread capital ownership if the economy is to survive.

That's what can be done at the "macro level," that is, at the level of the overall economy. At the "micro level," that is, at the level of a single company, a little more can be done. Under current law in the U.S., it is possible to reorganize a company as a Subchapter S corporation so that, if it is 100% owned by the workers through an ESOP trust, it pays no corporate income tax. In and of itself, this makes the company better able to survive during an economic downturn.

If the profits are paid out to the workers instead of being retained in the company, the local economy — and thus the company — benefits by the increase in consumption power. If the company implements what we call "Justice-Based Management" or other participatory management system, and combines it with profit sharing and worker ownership, studies by the National Center for Employee Ownership in Oakland, California, have shown that a company measurably increases its profitability, sometimes by as much as 150%.

As we said, though, this is all short-term. Without a Capital Homestead Act very soon, and the monetary, tax, and financial reforms that the global economy desperately needs, we don't see any hope for any lasting improvement.



Scott Holmes said...

Are you familiar with the books of David CaY Johnston? He outlines how the lawmakers have over the decades created a tax system that squeezes the 90 percent to actually subsidize the ultra wealthy. To be honest it's so complicated, I need help following him. Like the alternative minimum tax and many other little tricks. I'd like your review of "perfectly legal"

Michael D. Greaney said...

I had not heard of him, although he teaches at Syracuse, where Dr. Robert H. A. Ashford teaches in the law school. On looking him up (mostly on Wikipedia), I concluded that he has performed a brilliant analysis of the effects of attempting to use the tax system for political purposes, i.e., other than for raising revenue to meet legitimate government expenditures.

This has complicated the tax code beyond belief, and where there are complications, there are going to be people who will figure out how — in a perfectly legal manner — to manipulate the system to their own advantage, as Johnston points out in "Perfectly Legal." In "The New Philosophy of Public Debt" (1943) Moulton warned of the dangers of this, claiming that financing the government on debt and attempting to use the tax system "for other purposes" would lead to the imposition of a totalitarian system or the complete chaos that accompanies inflation, as it did in Germany and Austria-Hungary following WWI:

"It will be necessary to make a choice. With unlimited debt expansion we cannot prevent inflation without the use of totalitarian methods of control. No compromise or half-way measures can adjust the difficulties. The choice is between regimentation and inflation." (p. 88.)

This is, in part, the result of the Keynesian proclivity for "re-editing the dictionary," which is simply another form of the moral relativism that, as Heinrich Rommen pointed out, leads straight to nihilism . . . and the formation (as both Rommen and Adler explained) of totalitarian governments — a self-justifying system based on bad ideas about money, credit, banking and finance.

Consequently, regardless how "unpastoral" such a warning might seem, and how much it upsets preconceived notions, the insistence of groups like the distributists, Keynesians, social credit supporters, georgists, and others in shifting the basis of the natural law from reason (lex ratio) to will (lex voluntas), and in effectively abolishing private property (despite their insistence that they are really trying to preserve it . . . by changing its definition!), are doing neither themselves nor anyone else any favors.

The "It's not our way" mantra by which they reject the solutions offered by binary economics and the hysterical attacks on and accusations leveled at anyone who presents such solutions for consideration, while frequently having no basis in fact, are unquestioned.

Last night, for instance, I gave a short talk on the Federal Reserve. Most of the people were utterly baffled by the proofs presented that the Federal Reserve is not unconstitutional, a conspiracy, or even originally intended to be the primary source of funding for government — or any government funding at all. They could not grasp the fact that, contrary to popular belief, Congress does not have the right to create money. Regulate, yes, create, no.

The essential problem that Johnston and others do not see is that the massive confusion, even hysteria about money and credit, ownership, and even life and liberty that permeates modern society can be traced in large measure to adherence to the labor theory of value and the related absolutely fixed (and false) idea that the only way to finance new capital formation is to produce something with your labor, and instead of consuming it, use it to finance new capital.

Refusing to deal with the reality that capital is independently (but not autonomously) productive, academics and politicians twist the tax code into weird and wonderful shapes in an effort to redistribute the products of capital to people without capital, and at the same time let the rich keep enough savings to finance new capital.

In other words, the complications in the tax code that permit the injustices noted by Johnston are caused in large measure by the belief that you can have your cake and eat it, too.