Monday, October 15, 2012

"The Social Question"

Do we redistribute wealth now to take care of people, or do we invest in new capital formation to create more wealth in the future to take care of them tomorrow? It seems that there is a necessary tradeoff between consuming what we want today, or using to produce something to consume tomorrow — and there doesn't seem to be an answer.

The issue can be resolved, however, once we realize that social teaching of most religions addresses two distinct, if related issues: 1) How do we keep people alive in the current unjust arrangement of society? 2) How do we reform the system — and to what "end" — in order to remove the injustices?

The first is something of a no-brainer. If people are in need, you are morally obligated to give them alms. In extreme cases, this becomes an obligation under justice, and can enforced by the State through redistribution of existing wealth (Rerum Novarum, § 22) . . . although most of the means by which this is done today and the scale on which it is done suggests that what is permitted in extremis has itself been carried to extremes.

There's a big problem, however. You can't redistribute forever, as many governments today are discovering. Eventually 1) the bill for yesterday comes due, and 2) people have to produce something.

As Lous Kelso and Mortimer Adler (and somebody named Leo XIII) pointed out, private property in capital is a natural right, i.e., a matter of justice, not charity. The ordinary means by which we are to make a living is ownership of capital, not mere human labor. That is why Leo XIII summed up the whole program in Rerum Novarum as "The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (§ 46.)

The question is, how?

Kelso and Adler, building on the work of Dr. Harold G. Moulton, president of the Brookings Institution from 1928 to 1952, gave the answer. Moulton proved that, contrary to the assertions of the Keynesians, Monetarists and Austrians, that it is not only possible to finance new capital formation without cutting consumption and accumulating money savings, it is better if you don't.

In fact, Moulton proved that, in periods of rapid capital formation (e.g., the U.S. between 1865 and 1893), financing did not come from past savings, but future savings. These were realized by discounting and rediscounting bills of exchange based on the present value of the future marketable goods and services to be produced by the capital being financed — that is, the expansion of commercial bank credit for capital financing, not consumption or government debt.

Kelso and Adler pointed out that, if the rich could do this, so could the poor, and replace declining labor income with increasing capital income, financed on credit, and repaid with the future earnings of the capital itself. You could also replace traditional collateral with capital credit insurance and reinsurance.

You don't have to redistribute existing wealth except as a temporary expedient. Once people have the opportunity to own capital on favorable terms, you will see the end of the current phase of the Great Depression and an elimination of the business cycle.

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