A Blog of the Global Justice Movement

Thursday, November 22, 2012

Something to be Thankful For (Keynesian Contradictions, IV)

As we saw in yesterday's posting, the paradox established by Keynesian monetary and fiscal policy cannot truly be resolved within the past savings paradigm. Nowhere is this better illustrated than in the otherwise sound proposal called "distributism."

In 1936 in An Essay on the Restoration of Property, Hilaire Belloc observed that the problem with something like "social credit" (that he called "The Douglas Scheme") — and, of course, the Keynesian assumptions on which "social credit" and, in large measure, distributism itself rests — is that it focuses on income, not property. The only thing that matters is to get income into the hands of people, whether by raising wages, increasing welfare entitlements, inflating the currency, or abolishing private property by redefining what it means to "own" something, i.e., to take away control and enjoyment of the fruits of ownership — the income — from nominal owners for redistribution among non-owners.

Belloc then astutely pointed out that focusing on widespread distribution of the income from capital is not the same as promoting the widespread ownership of capital. This is a distinction that today's distributists and others have ignored or forgotten . . . if they ever knew. Not understanding the potential inherent in financing new capital formation with the present value of future increases in production instead of past reductions in consumption ("future savings" v. "past savings") Belloc not unnaturally concluded that a restoration of property as a characteristic of a society was virtually impossible . . . unless, paradoxically, you effectively destroy private property by giving the State control over property to ensure that both the rich and the poor have an equally difficult time in obtaining credit out of past savings to finance new capital.

Belloc then undermined even that contradictory and self-defeating solution by pointing out that, since the rich control the State, there is little likelihood that they will use their power to divest themselves of wealth, and thus power. The only thing to do is to sit back, be personally virtuous, and wait for the current system to collapse so that a new, better order can be established on the ruins of the old.

Unfortunately, what usually happens in such an event is that the new system is worse than the old because it takes as a given the flawed assumptions of the old system and exaggerates them to achieve a presumably better order. This was why, for example, Pope Pius XI advocated reforming, not destroying the current system, starting with taking a hard look at the fundamental assumptions of the current order — which the Just Third Way does by calling into question the inerrancy of the past savings assumption.

All of this highlights the problems associated with trapping the economy and growth into what Louis Kelso and Mortimer Adler called the slavery of past savings — and there is no better way to put it, either. Enslaved by the bad assumption of the past that it is impossible to finance new capital formation without cutting consumption and accumulating money savings has led to the weirdness of Keynesian economics that ultimately robs the poor to give to the rich so that the rich can invest in new capital that eliminates human labor from the production process.

In CESJ's most recent book we show how Belloc's insightful analysis can be the basis for a viable solution once freed from his dependency on past savings: The Restoration of Property, but it's hard to convince people enslaved by the past savings assumption that things truly can be different — and you don't have to take revenge on others whose only crime is to be rich when you are poor.

That, however, does not address the desperation with which Keynesians and those who accept Keynesian assumptions without question resist coming to terms with necessary reforms, both in the monetary and fiscal systems and their own thinking. Keynesians and their followers become extraordinarily creative (and even more contradictory) when they defend their indefensible system.

Take, for instance, the contradiction inherent in the presumed tradeoff between inflation and employment. Some Keynesians try to argue both ways. If you focus on the inflationary effect of Keynesian monetary and fiscal policy, they claim, for example, that the money is being created to finance new capital formation and thus job creation, and that there is no real inflationary effect. Since job creation is the goal, what you think is inflation isn't true inflation.

This is because according to Keynes true inflation can only exist under conditions of full employment (General Theory, V.21.iv-v.) . . . just as consumption demand can only come from wages and welfare, and financing for new capital can only come from prior reductions in consumption. If you focus on the artificiality of temporary job creation, however, they then claim that the money is being created to obtain the increased consumption benefits of inflation.

The fact is that inflating the currency is presumably doing both at the same time. The fact is, however, that inflating the currency isn't doing either one.  The only way Keynesian policies can "work" is when the private sector is strong and is going about its business by carrying out transactions and financing new capital without recourse to existing savings except as collateral for pure credit transactions, and disintermediating from the commercial banking system — a tendency that has been accelerating as government control of M2 has increased.

As this writer recalls, a finance professor he had in the early 1970s claimed that disintermediation had really started in earnest in the mid-1960s, but the professor did not connect it with the adoption of Keynesian monetary and fiscal policies to finance the "Great Society." It's actually been going on from the dawn of civilization, but only became something "unusual" when the money supply began shifting to government debt backing instead of private sector asset backing during and after World War I.

The bottom line here is that when the private sector isn't strong enough to make up for the inherent contradictions and self-destructive policies of Keynesian economics, the economy takes a nose-dive, jobs disappear, the role of the State expands enormously, and everybody's life, liberty and property is endangered at the most fundamental level. The only proposal to reverse this trend of which we are aware that has any viability at all is Capital Homesteading. Maybe today, when so many people are giving thanks for what little remains to them, it's time to consider what they could have, and give thanks for the opportunity still left to us.

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