Thursday, May 31, 2012

Catholic Social Teaching and Economic Justice, I: Introduction

Any reader of The Capitalist Manifesto should be familiar with the three principles of economic justice developed by Louis Kelso and Mortimer Adler. They are explained in Chapter 5. As analyzed by Kelso and Adler, the principles of economic justice are firmly rooted in the precepts of the natural law as understood within an Aristotelian framework. They are therefore fully compatible with (for example), the social doctrine of the Catholic Church based on the thought of Thomas Aquinas, the social teachings of Judaism from the perspective of Moses Maimonides, and of Islam within the school established by Ibn Khaldûn.

Consistent, yes, but to what degree are the principles themselves either implied or explicitly stated in, say, the social teachings of the Catholic Church, especially since Rerum Novarum was issued in 1891? Other than to cite the analysis of capitalism by Leo XIII and Pius XI, Adler doesn't make direct references to Catholic social teaching. Instead, he made it clear that the principles in The Capitalist Manifesto are consistent with the natural law on which Catholic social teaching — and that of Judaism and Islam — is based.

Unfortunately, far too many people today are unable to "connect the dots." Unless a truth is stated explicitly to them (and then only if it does not contradict an opinion they hold), they seem incapable of grasping the obvious. Further, as Adler pointed out in Ten Philosophical Mistakes (1985), many people have rendered themselves unable to distinguish between knowledge (that which is manifestly or self-evidently true and can be verified), and opinion (that which we hold because we believe it, although it lacks the absolute certitude of knowledge).

Definition is sometimes an important part of knowledge. If we (using Adler's example) define a triangle as a three-sided plane figure, then any three-sided plane figure is necessarily a triangle. Further, we cannot (at least honestly) decide that, while you may continue to languish in ignorance and call a three-sided plane figure a triangle, we in our advanced state of being are going to call a three-sided plane figure a rectangle, and a four-sided plane figure a triangle. By doing so we effectively "abolish" both triangles and rectangles, for we, like Humpty Dumpty in Through the Looking Glass, have made their definitions — and thus the terms — meaningless.

Opinion and knowledge are not in any way inferior to one another. They are different ways of apprehending reality. A true opinion is just as true — and is true in the same way — as knowledge. There are not different kinds of truth, even though different types of knowing apply to different areas of human thought. The difference is that an opinion is not true knowing, but one form of apprehension, because an opinion is not, and cannot be, necessarily true.

Using definition is another way of saying that whether something is knowledge or opinion sometimes rests on the principles or assumptions we make. Thus we can say (somewhat tautologically) that if we define a triangle as a three-sided plane figure, then a three-sided plane figure is necessarily a triangle.

The corollary to using definition in knowing is that if we reject a certain definition, we cannot justly or fairly (or even intelligently) judge the conclusions or position of those who continue to adhere to the old definition, regardless how right we think we are in changing the definition. As G. K. Chesterton observed in The Dumb Ox, his short biographical sketch of St. Thomas Aquinas, we can always prove somebody else wrong on our principles, including our definitions. The key to honest debate is to prove the other wrong on his principles or definitions.

Consequently, no one can say (for example) that a Catholic's belief in the Real Presence (the belief that Christ is physically present in the Eucharist) renders a Muslim's proof of a mathematical theorem invalid, or a Jew's economic analysis false. Nor does a Catholic's belief in the teachings of his or her faith render his or her scientific theories valid or invalid. These are different systems, usually called "faith" and "reason," employing different principles, assumptions and definitions. The fact that the principles differ between the two systems does not mean that the one is false in terms of the other. All it proves is that they are different in terms of the other, and cannot be judged by the same principles.


Wednesday, May 30, 2012

Conspiracy of Silence

By Mark Douglas Reiners, Guest Blogger

At the close of his Friday, May 4th 2012 weekly PBS/News Hour appearance, while discussing the important subject of structural economic challenges confronting this country, columnist/journalist, David Brooks, issued the following observation and challenging question: ". . . companies are doing a good job of producing stuff, they're just not using people to do it. Well who has an answer for that? I wish I knew."

Assuming that the generally laudably fair-minded Mr. Brooks meant this closing question to be more than merely a rhetorical nod of futility to the impossible, it is well past time that it be taken as seriously as it deserves to be taken. At the risk of inviting charges of economic heresy from the academy, I would like to answer Mr. Brooks' question not at all rhetorically, first by emphatically asserting that indeed there is "an answer for that"; the "who" I will get to shortly. But first, let me issue a prefatory note of alert: truly hearing the answer requires an ability and willingness to consider a theoretical perspective about capitalist/market economics which a.) asserts that our current econo-theoretical orthodoxy suffers from several deeply fundamental oversights in dire need of correction and, therefore, b.) falls outside the province of what is sanctified by inclusion in economic textbooks.

Tacitly embedded in Mr. Brooks' comment is clearly the prevailing labor-centric productivity presumption of conventional economic theory. Why is this important? Because associated with this presumption is the virtually blindly reflexive belief that there is no other viable mechanism for the mass distribution of income/wealth — and please note that I did not say 're-distribution' — other than labor. Wrong!

And while the conventional economic concept of productivity — labor-centrically defined, as generally obtains — is certainly not wrong, per se, there exists a little-known alternate characterization of economic production of profound importance in this context which beautifully illuminates why the presumption that only labor constitutes a viable mechanism for the mass distribution of wealth is wrong. And when coupled with the relatively modest financial and monetary institutional enhancements needed to operationally embody and effectuate it on a mass level, it has the most profound, promising and constructive social and economic implications. This alternate — or, more accurately, complementary — but conceptually quite distinct characterization of production is called productiveness. In lucid exposition based on the founding insights of the late Louis Kelso, here is how Syracuse University Professor, Robert Ashford distinguishes them:

"Productivity is the ratio of the output of all factors of production, divided by the input of one factor, most usually labor. In contrast, productiveness may be thought of as total work done by each factor. In relative terms, it can be expressed as the percentage of total output attributable to the productive input of each independent factor. (Emphasis added.)

"To explore the concept of productiveness and its relationship to productivity and growth, assume that in a pre-tool age, a person could dig a hole in four hours by hand. After the invention of a shovel, she can dig the same hole in one hour. In traditional economic terms, she has four times the productivity because she can perform four times as much work in the same time period. In binary economic terms, the productiveness has changed from 100% labor before the invention of the shovel, to 25% labor and 75% capital after the employment of the shovel. In terms of producing the hole, the worker contributes only one-fourth as much productive input, so her labor productiveness per hole has been reduced to only one-fourth of its former value. Seventy-five percent of the worker's former productiveness has been replaced by an equal amount of capital productiveness. Therefore, in this example, although capital may increase human productivity, more significantly, in binary terms, it replaces labor productiveness per unit of output." (Emphasis in the original.)

Reverting to Mr. Brooks' comment, since companies demonstrably are doing a remarkably good job of producing stuff, but increasingly able to do so sans people, the real and deeper structural challenge we face lies in the misguided resistance to recognizing this simple, subtle, but very powerful conceptual/theoretical distinction for the historic breakthrough that it is, and in having elevated an anachronistic and virtually theological adherence to the idea that only the single factor of labor is a legitimate means for the mass distribution of income/wealth to the level of the incontestably sacrosanct. That is not merely mistaken, but in a world of ever increasingly more sophisticated and productive technology, this oversight constitutes the very marrow of systemic risk.

Given that reality, the real question becomes why in the world we have chosen to conceive, design and operate a financial and economic system in a manner which ignores these insights, and perpetually reinforces a regime where the ownership of productive assets resides almost entirely in the hands of a tiny percentage of the population, rather than conceiving, and institutionally designing and operating a system where substantive, significant participation in the ownership of productive assets is universalized? And that is a question which completely transcends conventional political/economic labels of left and right.

The time is well past due for that transcendence to be embraced rather than trivialized, marginalized and ignored as has occurred now for over five decades; amounting to a de facto conspiracy of silence. With thanks to Mr. Brooks for asking the question, the answer lies in finally accepting that only a system predicated on the long-overdue recognition that income/wealth distribution needs to be universally binary in nature, and not — heresy of heresies — only about the singular factor embodied in "jobs, jobs, jobs", offers the prospect of being simultaneously systemically balanced, productively efficient and socially just, fundamentally.


Tuesday, May 29, 2012

Own or Be Owned — Capital Homesteading Now

In 1862 Abraham Lincoln signed the Homestead Act, allowing people to acquire and possess landed capital in return for a promise to make the land productive. The amount of land, however, is limited. Not everyone who wanted to own capital could do so.

Human wants and needs — and flawed institutions, such as tax and monetary systems — are the only effective limits to today's commercial and industrial frontier. Flawed institutions favor the rich, limit opportunity for the 99%, and concentrate capital ownership in the few.

Capital Homesteading is a 21st century proposal that would make it possible for people without existing savings or collateral to settle the commercial and industrial capital frontier on better terms than were available to those who settled the landed capital frontier in the 19th century. Without redistributing existing wealth, each year every citizen would be able to acquire an equal amount of capital to be formed that year on credit, collateralize the loan with capital credit insurance, and pay for the capital with the profits of the capital itself.

Capital Homesteading is neither capitalism, which concentrates capital ownership or control in the hands of a small private elite, nor socialism, which concentrates ownership or control in a State bureaucracy. Capital Homesteading is a Just, Third Way that transcends the failed systems of the past. It would make the American dream of a sovereign, independent people a reality. As Ronald Reagan said, "Could there be a better answer to the stupidity of Karl Marx than millions of workers individually sharing in the ownership of the means of production?"


Monday, May 28, 2012

To the Wall Street Journal

On May Day we composed a letter to the Wall Street Journal about Representative Paul Ryan's budget proposals. We haven't heard too much about that subject lately, what with President Obama and Probable Candidate Romney sniping at each other over who's worse. (Choosing between them is a little like asking someone if he'd rather be shot or hit with an ax.) No one is looking at the obvious, that profits are okay, great, in fact . . . but everybody should be in a position to be able to make profits, not rely on redistribution of what belongs to others, either directly through the tax system, or indirectly through inflation.

Anyway, on May first we took pen in hand and fired off yet another missive to the Wall Street Journal that we thought just might get through.  Since they haven't published it by now, we're assuming that they have no intention of doing so — and, since we hate to waste any of our immortal words (especially when coming up against a deadline), here's the letter as today's posting.  So it's a month late . . . .

Dear Sir(s):

In Rerum Novarum Leo XIII challenged the belief that the State has responsibility for every citizen's individual good: "There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (§ 7.) His Holiness explained that State provision for the poor "save in extreme cases" (§ 22) is a demand not of justice, but of charity, "a duty not enforced by human law." (Ibid.)

As William McGurn states in "Paul Ryan's Cross to Bear" (WSJ, 05/01/12, A13), you best help the poor by "breaking down barriers to ownership and opportunity." The pope concurred: "The law . . . should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (RN § 46.)

How to do this is the real question facing Mr. Ryan. Louis O. Kelso and Mortimer Adler proposed in The Capitalist Manifesto (1958) and The New Capitalists (1961) that ownership of new capital be spread out among those who currently own no capital, financing capital acquisition by monetizing the present value of future increases in production, not past cuts in consumption. As the subtitle of the latter book put it, "A Proposal to Free Economic Growth from the Slavery of Savings."

By financing capital acquisition by the poor with "future savings," the rich can be secure in their accumulations of past savings. "Capital Homesteading" is a proposed package of monetary, tax and legal reforms designed to accomplish this goal in a financially sound manner that is also consistent with the social teachings of major faiths and philosophies. Capital Homesteading has the potential to eliminate the basis of "Welfare Blackmail," by means of which people are persuaded to trade their birthright as free citizens for State entitlements and welfare.


Friday, May 25, 2012

News from the Network, Vol. 5, No. 21

The one question people aren't raising in the whole Facebook financial fiasco is why on earth was there a new issue of shares, IPO or not, when there was no need for a capital infusion? If the idea was to spread out ownership, they should have retired a portion of the currently outstanding shares, and put out a new issue for the public. Instead, they inflated their "company currency" (outstanding shares of stock) by issuing additional new shares without retiring any old shares. With no new capital investment or expansion of the company, the effect was the same as if the government just started printing money . . . like that's ever going to happen.

Oops. It did happen. And what happened to Facebook was entirely predictable if we apply common sense. Even the speculative gains were barely enough to offset the plunge in real value of the shares. When the market closed, share value was 23¢ above the issue price. Facebook's "currency," expected to rake in enormous speculative gains, only held its own. Now the gamblers want their non-gains made good.

In the more rational universe of the Just Third Way, interesting things have been happening that won't cause speculative losses (or non-gains) to anyone:

• A request for a meeting with Senator Mark Warner to discuss Capital Homesteading as a possible solution to the current economic situation was warmly received with a reassurance that "your views and those of your fellow Virginians are very important to me," and that "my office will review your comments carefully as I consider and vote on relevant legislation." We suspect a form letter.

• CESJ was mentioned in Irish American News, a Chicago-based website and paper newspaper on subjects of interest to Irish-Americans in northern Illinois, Indiana and Ohio. The article also mentioned Equity Expansion International, Inc., and its focus on justice-based succession strategies for small- to mid-sized companies using the "JBM S-Corp ESOP" model, the closest thing to Capital Homesteading that can be applied under existing law.

• An article by CESJ's Director of Research Michael D. Greaney, "Knowledge is Power, and Power is Knowledge," on the importance of capital ownership in securing personal power was highlighted as an "article of the week" on May 24, 2012 by the Helium Writers' Cooperative.

• The door opening strategy has surfaced a number of contacts that might result in some important meetings.

• That the current so-called economic recovery is only for a few is evident by the fact that, according to an Associated Press study, U.S. CEOs made an average $9.6 million last year.

• As of this morning, we have had visitors from 59 different countries and 53 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, India, and Australia. People in Mexico, the Philippines, Egypt, Switzerland, and Brazil spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "Book Value v. Fair Market Value," "The Global Debt Crisis I: What is the Problem?" and "The Homestead Act, Abraham Lincoln's Greatest Achievement."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.


Thursday, May 24, 2012

The Global Debt Crisis, XIII: Implementing the Solution

As we have seen it is a fundamental principle of natural law that the State was made for man, not man for the State. The State's proper role is to help people help themselves, not to provide for every conceivable want and need. The State's job is care of the common good, not every individual good. This is so that the individual may exercise his or her natural rights, thereby acquiring and developing virtue.

The normal means by which citizens acquire and develop virtue is ownership of capital. This not only empowers them economically, removing all justification for State control of the economy, it empowers them with the political power to resist growing State intrusion into their daily lives, whether domestic, through State bureaucrats dictating to parents, or religious, through dictating to organized religion.

The issue boils down to whether the State is the guarantor of all individual goods. If so, then what constitutes an individual good is a matter of opinion to be decided by whoever has the power to force others to comply — and who has control over money and credit to finance whatever they want, running up debt that can never be paid under current assumptions.

When ordinary people cannot afford to own the capital that is displacing them from their jobs, the State tries to take up the slack by guaranteeing jobs, wages, benefits, entitlements — whatever. This, as Goetz Briefs pointed out, ends up bankrupting the State, the fate hanging over the world today as governments try to spend their way out of the current debt crisis. The only way out is to make every person an owner of capital.

The problem with making it possible for every child, woman and man to have the opportunity to become a capital owner, however, is the fixed belief that it is essential to reduce consumption and accumulate savings before new capital can be financed. Advancing technology, however, both replaces human labor in the production process and, by its high cost, shuts out most people from ownership of capital instruments. This is because only the rich or the State have the capacity to save or create enough money to finance new capital.

Fortunately, the belief that new capital can only be financed out of existing accumulations is utterly false, as Dr. Harold Moulton, president of the Brookings Institution from 1916 to 1952, proved in The Formation of Capital, published in 1935 as the third volume in a four-part series presenting an alternative to the Keynesian New Deal. The vast bulk of new capital is not financed out of past reductions in consumption, but by future increases in production. The present value of future marketable goods and services is monetized and used to finance new capital that pays for itself out of future profits.

Because this method of finance does not rely on the ability to reduce consumption, but on the capacity to own capital, anyone can become an owner of capital without first reducing consumption and accumulating savings. One proposal that embodies this method of finance is "Capital Homesteading."

Capital Homesteading is a national economic policy based on the growth model of binary economics. It is designed to lift barriers to capital ownership 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 child, woman and man to accumulate capital in a tax-sheltered Capital Homestead Account. There would be 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.

Under "Capital Homesteading," a citizen would have a tax-sheltered capital asset accumulation account, similar to an Individual Retirement Account (IRA). Each capital homesteader's account would be the "vehicle" to accumulate 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.

By vesting each citizen with power over his or her own life through ownership of capital, both the means by which the State controls people's lives, the monumental debt that has accumulated, and the justification for such control and debt in the first place would be removed. The whole "austerity v. stimulus" debate would be moot.


Wednesday, May 23, 2012

The Global Debt Crisis, XII: Pillars of an Economically Just Society

As we saw yesterday, simply knowing the basic principles does little good if we cannot apply them. Thus, Say's Law of Markets doesn't do anyone any good until and unless we can apply it in the real bills doctrine. We can produce our heads off, and so can our neighbor, but until and unless we can come together and have some shared basis for exchange, we won't be able to strike a bargain and no exchange will take place.

We discovered that the shared basis for engaging in exchange is the offer and acceptance of a contract, a "meeting of the minds," that we call "money." The application of Say's Law by means of which we can offer and accept contracts is called the real bills doctrine. The three principles of economic justice (Participation, Distribution and Harmony) ensure the operation of Say's Law of Markets in the real bills doctrine.

The question now arises as to how to apply the three principles of economic justice. A little reflection allows us to see what is essential to the functioning of the principles. Just as Say's Law of Markets can only be effective when applied in the real bills doctrine, the three principles of economic justice can only function within a system in which the "four pillars of an economically just society" are present. These are:

1. A limited economic role for the State,

2. Free and open markets within a strict juridical framework as the best means of determining just wages, just prices and just profits,

3. Restoration of the rights of private property, especially in corporate equity and other forms of business organization, and

4. Widespread direct ownership of capital.

Limited Economic Role for the State

This one is obvious if we stop to think about it. While the need for the State is built into human nature — as Aristotle said, "man is by nature a political animal" (a possibly unique combination of individual rights and social duties) — the State was made for man, not man for the State.

The primary job of the State is to care for the common good. That does not mean, however, that the State takes care of everybody. That is a matter of individual, not common good. Except in an emergency, the State has no business interfering in how people meet their own goods — their individual wants and needs — through their own efforts.

The common good is not the aggregate of individual goods. That would simply be to say that the State has the responsibility of taking care of everyone. Rather, the common good of all mankind, that is, the good that is common to every human being, is the ability to become more fully human. This is called the capacity to acquire and develop virtue.

Man being political by nature, we acquire and develop virtue within a social context, that is, in association with other human beings within organized bodies or "institutions." We can therefore say that the common good for which the State has responsibility is the vast network of institutions within which humanity acquires and develops virtue, thereby becoming more fully human.

The State has the responsibility of maintaining these institutions in reasonable working order so that everyone is free to participate in them as full members of society, that is, on an equal basis. The State's role is thus to ensure equality of opportunity, not some pre-determined result, and to police abuses of the system so that no one is unjustly prevented from exercising his or her rights.

That's important, because it is by exercising our natural rights (most notably life, liberty [freedom of association/contract] and property) that we normally acquire and develop virtue. If the State does not do its best to guarantee equality of opportunity, it is preventing people from becoming more fully human, and thus isn't doing the only thing that justifies its existence.

Free and Open Markets

If liberty (freedom of association/contract) and property are natural rights — and they are — then people must be free to associate, enter into contracts, and own their own labor and capital in order to acquire and develop virtue. The "free market" is thus a market to which all have equal and equitable access, not a "law of the jungle" situation in which anything goes and the weak are at the mercy of the strong.

On the contrary, for a market to be truly free — a condition that does not appear to exist anywhere on earth at this point — everyone must be free to own both labor and capital. Further, they must be free to enter into contracts and meet their obligations without interference. Finally, the State must provide a set of laws by means of which people know what the rules are and have the ability to comply with them without undue hardship.

Restoration of the Rights of Private Property

The right to own capital as the means of sustaining life is a natural right. It is important to realize that "property" is not the thing owned. It is, rather, the natural right every human being has to be an owner, and the socially determined bundle of rights that define how somehow may use what he or she owns. In general, this means not harming one's self, other individuals, groups, or the common good as a whole.

Today, most shareholders — owners of corporate equity — do not have their rights. "Ownership" includes the right to control, that is, being able to vote one's shares in an election for the board of directors. Ordinary shareholders usually have this.

There is, however, another right of ownership. That is the right to receive the fruits of ownership, the income generated by the capital one owns. In typical corporations today, shareholders do not receive the income attributable to their shares as a matter of course. They only receive a small portion of the income if the board of directors votes a dividend. Rather than justify retaining earnings, under the "business judgment rule," the board of directors can only justify paying dividends if they can show the money isn't needed for business purposes.

Widespread Direct Ownership Of Capital

This is the "fatal omission" from virtually every economy on earth today. The primary means of participation in economic, social and political life, and thus the chief support for human dignity, is direct ownership of capital. Under ordinary circumstances, it is virtually impossible to exist as a moral being without property. Heinrich Rommen, a student of Father Heinrich Pesch, S.J., and member of the Königswinterkreis discussion group, underscored this principle in The State in Catholic Thought (1947):

"Where the institution of property is completely abolished, as in Soviet Russia, man has ceased to be a person and has become a mere tool of the superstate, a mere cog in a non-personal machine. Rightly, therefore, Leo XIII (Rerum novarum) speaks of a slavish yoke that has been imposed on the propertyless modern proletarian.

"It is morally impossible to exist as a free person without property." (p. 189.)

Without property, we do not have power — the ability for doing. Without power, we can neither meet our material needs, nor participate in social life by exercising our natural rights and acquire and develop virtue (pursue happiness), thereby becoming more fully human.

The problem is that most people do not have access to the means of acquiring and possessing property in capital; the institutions of money and credit are closed off to them.


Tuesday, May 22, 2012

The Global Debt Crisis, XI: Principles for Solving the Problem

Keynesians continue to insist, in the face of all evidence to the contrary, that the debt crisis is really nothing to worry about. As a feature article in the Washington Post business section gushingly enthused a few months ago in its over-lengthy title, "It's Not as Bad as It looks. Worried About the Growing Deficit? [Yes, that was printed in red ink in the original.] Modern Monetary Theorists Say It's No Trouble, and in Fact It's Key to a Vibrant Economy." (February 19, 2012, G1, G4.) How this belief can be sustained in the face of reality is baffling, especially once we realize the true nature of money and credit, banking, and finance.

We start with the assumption that the purpose of economic activity — the production of marketable goods and services — is consumption. If we do not intend to consume something ourselves, or trade it to another for what he or she has produced and that we want to consume, we have no reason to produce it. All economic activity can therefore be summed up as "the purpose of production is consumption."

This is the basis of "money." (Credit is simply money in a different form.) Money is the medium through which we exchange what we produce for what others produce — the "medium of exchange." More simply put, money is anything that can be accepted in settlement of a debt. Money, as Louis Kelso noted, is not itself the thing of value, but a symbol of the thing of value, a way of measuring it, storing it, and conveying a private property stake in the thing among persons.

Thus, we do not really purchase what others produce with this thing called money. What we are really doing is exchanging what we produce for what others produce, using the abstraction known as money to make the process easier. This is "Say's Law of Markets," that we cannot purchase what others produce to a greater degree than what we have produced; that to consume, we must produce. This can be oversimplified somewhat by saying production equals income, therefore demand (income) generates its own supply (production), and supply, its own demand.

Say's Law assumes at least two things as given, however. One, there is nothing preventing someone from producing marketable goods and services with either labor or capital. If you need labor to produce something, nothing stops you from laboring with all your might. If you need capital, nothing prevents you from either building (forming) the capital, or purchasing it from someone else who has built it.

Two, if you need to purchase capital, nothing prevents you from entering into a contract, offering that contract to whoever has what you need, and having the contract accepted in payment of the debt incurred at the present value of the marketable goods and services you expect to produce in the future with the capital you are purchasing.

This is the "real bills doctrine." Contracts entered into that are based on the ability of the one offering the contract to make good on the contract at a specified time are called "bills of exchange." The ability to make good on a contract is called "creditworthiness." The one offering a contract doesn't have to have what is needed to meet the obligation at the time he or she offers the contract. He or she only has to have what is needed to meet the obligation at the specified time.

Thus, if someone buys a field and promises to pay for the field with half the value of the annual crop yield every year for thirty years, he or she doesn't have to have half the value of each crop now. He or she only has to have it at harvest time, and then only in the agreed-upon increments.

Obviously this can get more complicated. For example, the seller wants the full purchase price now. The buyer and the seller agree on the estimated present value of thirty years' worth of half yields, and strike a bargain. If the buyer hasn't saved up enough cash, he or she goes to a commercial bank and offers a contract to the bank giving half the yield over thirty years to the bank. The bank accepts the contract, and issues a promissory note.

This promissory note can be used to back other promissory notes called "banknotes," or a demand deposit — a checking account. The borrower takes the banknotes or demand deposit and hands over the agreed upon purchase price to the seller. At harvest time, the borrower gives the bank half the value of the annual yield, canceling the debt after thirty years. Thus, the real bills doctrine is that there can always be enough money to go around and people will be able to purchase capital if they can offer contracts for the present value of a future stream of income realized from the production of marketable goods and services.

Of course, if anything interferes with people being able to produce by means of their labor or their capital, then Say's Law will not operate, and thus the real bills doctrine cannot be applied. Obviously, then, there must be three principles to ensure the just functioning of the market so that Say's Law will operate. We can call these the principles of economic justice: Participation, Distribution and Harmony.

The principle of Participation is that every person has the natural right to participate in the production of marketable goods and services by means of both labor and capital. As technology advances and capital takes over more and more of the burden of production, it becomes critical, as Louis Kelso observed, that people formerly dependent on their labor for income become owners of capital.

The principle of Distribution is that every person has the natural right to receive the results of production in proportion to his or her inputs. For example, if someone participates in production by contributing 10% of the inputs to production, he or she should receive 10% of the profits, or bear 10% of the losses.

The principle of Harmony is that when the system is flawed and people are unable to participate in production or receive a distribution commensurate with their inputs, the system must be restored to operate fairly once again.


Monday, May 21, 2012

The Global Debt Crisis, X: Limits to State Power or Debt

One of the more peculiar ideas to come out of "Modern Monetary Theory" is the belief that public debt is so different from private debt that it should not properly be considered "debt" at all. It should, rather, be considered an asset because it's a debt the nation owes to itself. It's only a question as to which pocket you're carrying the money in, not who owes what to whom. As Moulton explained this rationalization,

"The view that 'a public debt has none of the earmarks of a private debt,' and that 'it should scarcely be called a debt at all' arises from contemplation of the fact that the money collected as taxes flows back to the people as interest receipts." (The New Philosophy of Public Debt, op. cit., 54.)

In other words, the money that the government creates by emitting bills of credit it pays out to citizens in the form of interest payments, adding to their wealth. As Moulton concludes his summary of this position, "The same line of reasoning might be applied to the debt of a state or a city, if such debt were held wholly by the citizens of the particular state or municipality. And, if we consider our states and our cities as a collective whole, all state and local public indebtedness could be looked upon as not really debt at all. Moreover, if we view the corporations of the country collectively, their bonded indebtedness would not really be debt because the income collected from the American people for the services rendered is paid out to the American people as interest. In this way we get rid of all debt problems." (Ibid., 55.)

Really? The size of the debt — or debt itself in any amount — is a problem that solves itself? Keep in mind that Moulton was writing seventy years ago using facts that are readily available to the architects of the current debt disaster. As he continued,

"On second thought, however, it will be reflected that particular railroad companies or industrial corporations, or state or local governments, might find themselves in difficulty because they are unable to make financial ends meet. Likewise, one may reflect that the federal government might, under certain circumstances, find it impossible to collect sufficient revenues to meet its interest and other obligations. National governments have, in fact, frequently found themselves in serious financial difficulties. Thus the mere fact that in all cases the collection of revenues and the payment of interest 'merely shifts money around within the economic system' has not, as historical evidence shows, eliminated the debt problem." (Ibid., 55-56.)

Moulton's analysis continues for several pages showing — in direct, contradictory quotes from the same people — that whether public debt is supposed to be an asset or a liability depends entirely on the audience the politicians are attempting to convince. Those of us who do not have the privilege of being credentialed economists may be baffled by the fact that the experts first say one thing and then another that contradicts what they just said.

That, however, is because (trapped by common sense) we simply don't understand that the basic assumption of Keynesian economics is that the State is all-powerful. Through its power to re-edit the dictionary (as Keynes put it), the State has the ability to change white into black, good into bad, and assets into liabilities and back again, simply by saying so. Natural rights such as liberty (freedom of association/contract) and property are changeable through redefinition at the will of the State. In the end was the Word . . . of the State. So let it be written, so let it be done. As Moulton detailed this magical transformation,

"It was at this stage [in the implementation of the Keynesian New Deal] that the idea of double and multiple budgeting gained popularity — with capital outlays segregated from current expenditures — without too careful a definition of what might properly be included in capital expenditures. It was about this time that emphasis began to be placed upon the 'assets' created by public debts — whether such assets be in the form of tangible properties or intangible services, whether they yield revenues or are simply useful to society. Whatever their character all public outlays are in reality investments. From this point it was an easy step to the proposition that all increases in public expenditures represent income to someone and that all reductions in public expenditures represent loss to someone; and that 'costs and income are just opposite sides of the same shield'." (The New Philosophy of Public Debt, op. cit., 17.)

Thus today we have "investment" in education, new cars, clothes, lunch, or anything else you spend money on, as long as you spend it and expect some benefit from it.

The obvious corollary doesn't seem to occur to people. If the State can change the natural law at will by redefining humanity's natural rights, there is no effective check on State power. Permitting the State to control the economy (and thus people's lives) by controlling money and credit — the means of acquiring and possessing property — allows the State to acquire absolute power. Thus, by the simple expedient of controlling the definition of both the substantial nature and the exercise of rights presumably inherent in the human person, the State becomes supreme in everything. The State becomes to all intents and purposes a god.

This explains the basis for what Moulton called "the new philosophy of public debt," although (as we might expect), it was not something he investigated or discussed. Understanding this, however, we can understand how Keynesians can believe, all evidence to the contrary, that there need be no limits to the public debt. The power of a god is presumably without limit. That being the case, the exercise of that power is also without limit. Since public debt is simply an exercise of divine State power, there is no reason why there should be any limit to the size of the debt, or why it should even be regarded as a problem.

Nevertheless, Keynesian economists are nothing if not flexible. Having asserted that there is no known limit to public debt, they hedge their bets by saying that there might, after all, be limits. As Moulton related,

"Notwithstanding the contention that the public debt is not a real debt and that we can be at ease because there is merely involved a shifting about of money income, Mr. Hansen [Alvin H. Hansen, the "American Keynes"] has come to have some reservations with respect to the ultimate size of the public debt. In a recent article — although he still argues most of the time that the growth of the public debt is of no real significance — he finally reaches the surprising conclusion that 'the debt should cause no anxiety so long as it is kept within safe limits'." (The New Philosophy of Public Debt, op. cit., 65-66.)

The limit? Approximately twice GDP should be perfectly safe — at least according to Hansen. (Ibid.) The riots and demonstrations throughout the world today, however, tend to suggest that the idea that a limit to public debt of twice GDP might be a trifle optimistic.

Obviously something is seriously wrong with "the new philosophy of public debt" if it can bring the world to the brink of economic catastrophe. Nor is the habit of the experts and the politicians — all of whom have a vested interest in maintaining the current system, if only to save face — of denying that there is even a problem of any real help in coming up with a solution. What is needed is something new, something that breaks out of the current Keynesian box and gives us an entirely new approach on which to develop a solution.


Friday, May 18, 2012

News from the Network, Vol. 5, No. 20

In the film version of the musical play (technically an operetta) 1776 (1972), the John Adams character (played by William Daniels on both stage and screen) opens the show by declaiming, "I have come to the conclusion that one useless man is called a disgrace, that two are called a law firm, and that three or more become a Congress." He then goes on to say,

"For ten years King George and his parliament have gulled, cullied, and diddled these colonies with their illegal taxes: Stamp Acts, Townsend Acts, Sugar Acts, Tea Acts . . . and when we have dared to stand up like men they have stopped our trade, seized our ships, blockaded our ports, burned our towns, and spilled our blood — and still this Congress refuses to grant any of my proposals on independence even so much as the courtesy of open debate! Good God, what in the hell are you waiting for?"

The Congress then launches into a musical debate on the merits or lack thereof of opening a window, with the increasingly loud argument between the "Too Hot" and "Too Many Flies" blocs punctuated with demands that John Adams sit down and shut up, e.g., "John, you're a bore, we've heard this before," and so on.

Pretty much the only difference between this semi-fictional account of Adams's plaint against the inaction of Congress and ours against today's prime movers and academics is that the debate between the "Too Hot Not to Open a Window" faction and the "There're Too Many Flies" bunch at least had some relevance and connection with reality. The "Austerity v. Stimulus" adherents of today, being stuck in the slavery of past savings that locks an economy into pendulum swings between capitalism and socialism until it finally settles into the Servile State, are not even that much in touch with the real world . . . and still this Congress refuses to grant our proposals on Capital Homesteading even so much as the courtesy of open debate! Instead, let's waste our time by using the coercive power of government to promote gay marriage, contraception, and so on. They claim to have heard the Just Third Way position before, but not one of them can state it with even marginal accuracy.

Well, if they won't do anything, the least we can do is remind them of it, and perhaps shame them into action with our efforts:

• Michael D. Greaney, CESJ's Director of Research, has been appointed the new "Coordinator" of the Irish Special Interest Group of American Mensa. "SIGs" are informal groups within Mensa that pursue areas of common interest since Mensa as a whole has no opinions and takes no stand on anything other than a general agreement that it's probably good to have a high IQ. Sometimes. The Irish SIG is the oldest such group in Mensa, having been formed in 1977/78.

• A series of four articles on the Just Third Way as a possible sound basis for reviving the global economy has been submitted to Inside the Vatican magazine.

• An article based on the recent "Keynesian Cargo Cult" series on this blog, "Keynesian Economics: Science or Religion? Keynesianism and Catholic Social Teaching," has been accepted by Social Justice Review. The article should appear in the next couple of months. Social Justice Review is the official journal of the Central Bureau of the Catholic Central Union of America in St. Louis, Missouri.

• In the press of business following a series of events (the CESJ annual celebration, the Rally at the Federal Reserve, the ESOP Association Conference, and other things), the CESJ executive committee meeting this past week was confined purely to routine business matters. The executive committee will be reevaluating its time commitments and procedures to increase more effective participation without increasing the use of scarce resources devoted to such matters.

• Reverend Virgil Wood, an associate of Martin Luther King, Jr., has undertaken an effort to organize interfaith support for the Just Third Way at the highest levels. He helped initiate contact with a key individual in the United States Conference of Catholic Bishops. Follow-up will to continue to get the most out of this project.

• As of this morning, we have had visitors from 55 different countries and 53 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Australia. People in Mexico, the Philippines, Egypt, France, and the United States spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," News from the Network from April 20, 2012, "The Global Debt Crisis I: What is the Problem?" and "The Crimes of Mitt Romney."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.


Thursday, May 17, 2012

The Global Debt Crisis, IX: Is it Safe to Expand Public Debt?

Another issue addressed by Moulton was the question as to whether there were any circumstances under which the national debt could be gradually and safely expanded. Moulton conceded that there are two circumstances under which it would not necessarily be financial suicide to expand public debt. The first is where a large project needs to be undertaken for which financing does not exist in either the private or the public sector. The second is where the tax base is expanding and can support a greater amount of borrowing on the part of the government.

In the first instance, Moulton was very clear that the only time the government should go into debt to finance anything is if the project is expected to generate cash revenue sufficient to repay the cost of the project and thereafter cover its maintenance. In other words, as long as a project is expected to pay for itself out of future revenues, then the government can justify emitting bills of credit (the governmental form of bills of exchange) to pay for it.

Our response is to agree with Moulton — with a qualifier. The usual rationalization for having government undertake the financing (and thus ownership) of infrastructure such as bridges, roads, sewers, and so on, is that this sort of capital improvement is believed to be beyond the ability of the private sector to finance out of existing resources. It seems to have escaped the notice of the experts, however, that if the government needs to create money to finance the construction of such things, then the cost is obviously beyond the ability of the public sector to finance out of existing resources as well.

The solution to this conundrum is to allow the citizens of an area for the benefit of which the project is being constructed to finance its construction and become the owners of the capital, not the government. If a project can pay for itself out of future revenues, and there is no other reason for having the government own it except for the presumed inability of either the private or the public sector to finance out of existing resources, it is far better to have the citizens directly own than the government, financing the construction using future savings.

CESJ developed the "Citizens Land Bank" concept to devolve State-owned infrastructure to private ownership. This would allow every citizen and legal resident to be an equal, direct owner of the land, natural resources and infrastructure in an area. Ideally, government should own nothing.

The second instance Moulton cited is even harder to justify, even in traditional, non-Just Third Way terms. When the tax base is expanding, the State should not borrow money just because it can. No government should ever spend a cent of the taxpayer's money, or create money for which the taxpayer will have to foot the bill, if not justified by need.

As Moulton explained, while an expanding tax base could, in fact, support a greater level of government debt . . . why? When the tax base is expanding, taxes should be used to meet current expenditures and pay down existing debt, not run up a larger debt, taking away any potential cushion for the bad times that seem inevitably to follow the good times. Going into debt in good times just because you can is (although Moulton would never have expressed himself so crudely) stupid in the extreme. Part of the problem today was caused by the expansion of public debt far beyond the ability of many countries to repay under Keynesian assumptions, and only with extreme discipline under Just Third Way conditions.

The debt can be repaid, but only if discipline is exercised now. Following the Franco-Prussian War, Prussia imposed an indemnity on France that Bismarck believed sufficient to destroy the French economy, neutralizing France as a rival to his new Second Reich. Contrary to expectations, the French were able to repay the entire amount in less than three years, thanks in large measure to the immense production of marketable goods and services by an economy in which the most productive enterprises — the vineyards, farms and livestock that were the backbone of the French economy — were broadly owned. Immense public debt can be repaid, but it takes the political will combined with increased production in which all citizens participate through capital ownership, and adequate financing repaid not with cuts in consumption, but with increases in production. That is, not past savings, but future savings.

That, of course, is the basis of binary economics and the Capital Homestead Act. Financing new capital formation by printing money backed only by the "full faith and credit" of the government, as today's experts insist is the only way it can be done, is economic and financial suicide. The only sane and feasible way of financing the future is to turn the present value of future marketable goods and services into cash by discounting and rediscounting private sector bills of exchange, not by emitting bills of credit in the hope that somebody will use the money to invest in capital and create jobs to maintain propertyless workers in their present condition that Pope Leo XIII described as "a yoke little better than that of slavery itself."


Wednesday, May 16, 2012

The Global Debt Crisis, VIII: Is There a Limit to Public Debt?

In the backwash of the New Deal and the recovery from the Great Depression of the 1930s fostered by the Second World War, Keynesian economic theories were considered validated. One of the chief tenets of Keynesian theory promoted by Adolph Berle and Alvin Hansen was the conviction that government control of the economy through public indebtedness could be extended without limit with no danger to the economy, financial stability, or political security. Ironically, this was in the face of Keynes's own stated conviction that, given the full employment brought about by the need to supply the Allies with war material, the war should not be financed with increased debt, but with increased taxation.

In The New Philosophy of Public Debt (1943), Harold Moulton, too, disagreed with the belief that public debt could be expanded forever for any reason without any danger either to financial stability or political security. He didn't have to look into the future to see today's news reports about the latest episode in the PIIGS crisis to know what was wrong. Promises must be kept, regardless who makes them, or society falls apart. As Charles Morrison noted in 1854 in his Essay on the Relations Between Labour and Capital, nowhere is this more true than with respect to financial matters in an advanced economy.

Does this mean that the State should never, never, ever get into debt? No, that's not what Moulton was saying. The modern idea that if you don't agree completely with someone in precisely the right words you are necessarily completely opposed should be deposited in the same waste receptacle as the stunningly unscientific "modern science" that people cite to justify their own opinions. Because we say that private property in capital in an advanced economy is more critical in securing a just income than wages, are we claiming that wages should be abolished? No, of course not. Only a complete ass — or the very model of a modern major positivist who, like Humpty Dumpty in Through the Looking Glass, changes words to suit himself — would make that claim.

Before demolishing the idea that the State can increase its debt forever without any adverse consequences, Moulton made what the modern scientific Keynesian would claim are some damaging admissions, invalidating his entire hypothesis. First, must the budget always be in balance?

The first principle of taxation is that taxation must be "efficient." That is, the State should collect enough in taxes to run the country without borrowing. The corollary in finance is that the budget should be in balance. Does this mean that current tax revenues must always cover current expenditures? No. Emergencies happen. Prohibiting the State from borrowing to meet tax shortfalls or to deal with a national emergency is obviously suicidal. As long as the budget is usually in balance, and the State borrows out of existing savings no more than it reasonably expects to be able to cover out of future increased tax revenues, there should be no problem.

There is a very big problem, however, if, instead of limiting itself to current tax revenues and short term borrowing out of existing pools of savings, the State emits bills of credit — creates money — backed only by its own "faith and credit." Since the "amount" of faith and credit is limited only by an intangible — what people can be persuaded to accept — the sky is the limit for how much the politicians can create and spend. It only comes crashing down when (as is increasingly the case throughout the world today) a government makes far more promises than it can keep, and people start to catch on.

This is why, for example, the federal government in the United States under the enumerated powers of the Constitution is empowered to borrow money, but not emit bills of credit. The federal government has only been able to emit massive amounts of bills of credit by using financial sleight-of-hand.

For example, under Keynesian economics bills of credit are not considered money, and thus the debt they create is not real debt. The power that the Federal Reserve has to buy and sell bills of credit on the open market was intended to retire the government debt backing the National Bank Notes of 1863-1913. Private sector hard assets would replace government debt as the backing of the currency. Open market operations were intended to eliminate, not expand the debt, but the power has been used to expand government debt beyond all reasonable bounds.

So, no, the budget doesn't always have to be in balance — but that is not the same as saying it must, therefore, be permanently out of balance.

The second "damaging" admission Moulton made was to agree that it was not absolutely essential that the public debt be paid off, that it is possible to have a sound economy without the government being completely out of debt. He noted that a number of times in the 19th century the debt could have been repaid, but it was thought necessary to have some debt outstanding to back the National Bank Notes (and the Treasury Notes of 1890) so that there would be an adequate currency, guaranteed by the government.

This is not, however, the same as saying we should have debt outstanding when it is possible to pay it off. Moulton made it clear in other writings that he considered an inelastic currency backed by government debt after the model of the British Bank Charter Act of 1844 to be unwise and fundamentally unsound. An inelastic, debt-backed currency is also grossly inadequate for a modern industrial, commercial and agricultural economy, as the events of 1873, 1893 and 1907 demonstrated. The problems of 1929, the 1970s, the 1980s and 2008 were caused in large measure by an elastic debt-backed currency. Obviously, although both are important, the critical problem is government debt backing, not currency elasticity.

If managed properly, Moulton said, it is possible to have a certain amount of government debt outstanding. Moulton also noted, however, that with modern methods of finance and commercial and central banking, what is the point? Our position is that by allowing a permanent outstanding debt, you are handing power over the economy to the politicians, who can be trusted to do what will get them reelected, not what is necessarily best for the country — and that means increasing spending to benefit their constituents.


Tuesday, May 15, 2012

The Global Debt Crisis, VII: Permanent Deficit Financing

If Keynesian economic analysis is correct, the size of the outstanding debt is nothing to worry about. Government debt is an asset. By emitting bills of credit backed by its own "faith and credit," the government increases wealth. For example, when people pay cash money into the Social Security Trust Fund, the Trustees prudently turn right around and purchase government bonds instead of holding on to sterile cash or throwing it away by buying worthless private sector securities with nothing behind them but the present value of existing and future marketable goods and services.

By this reckoning Social Security is fully funded for a decade or so. Even if the Trust Fund runs out of money, the government can bail it out, which it can do by creating more wealth, i.e., issuing more bonds to deposit into the Trust Fund, which can then be redeemed for cash by selling them on the open market to the Federal Reserve.

*      *      *      *

Obviously, there is something wrong with the Keynesian analysis. If government securities backed only by the faith and credit of the issuer are real wealth, every nation on earth would be richer than Croesus. Pick up the newspaper or watch the news, however, and most of the space and time is taken up with the fact that many governments have issued so many securities that there's no way they can conceivably make good on the promises they've made, at least within the current framework.

A large part of the problem is due to bad ideas about money and credit — and debt. Under Keynesian assumptions, all that's happening when a government emits bills of credit instead of borrowing money out of existing savings is that existing wealth (on which the State has a general claim through its ability to tax) is divided into smaller and smaller pieces.

With more money around, however, the price level starts to rise — inflation, or more units of currency "chasing" the same amount of goods and services. Since wages in general are reactive and rise more slowly than the price level, people who subsist on wage income alone are forced to reduce consumption. Only the fact that new jobs are created in aggregate in response to the transfers of purchasing power caused by unilateral government redistribution through inflation keeps up consumption — and then only so long as private companies use their profits to hire more workers, the government subsidizes hiring or hires people directly, or consumers can go into debt to purchase consumption goods and services.

This is because — according to Keynes — the only way to save is to reduce consumption and accumulate cash. This is, in fact, how Keynes defines savings: reductions in consumption. By inflating the currency and raising the price level, consumption is reduced below what it would otherwise be, but those reducing consumption do not receive the benefit of the "savings." Instead, there is a transfer of purchasing power to producers, who benefit at the expense of the wage workers. These "forced savings" are invested in new capital formation, creating jobs. Keynesian monetary theory is designed to benefit the wealthy at the expense of the poor.

The concept of "forced savings" is also the source of the Keynesian belief that there is a necessary tradeoff between inflation and unemployment. The idea is that without inflation you cannot create jobs (at least according to Keynes), but wage workers continually lose purchasing power the more money there is, and thus (presumably) the more jobs there are. If the system works the way Keynes said it does, there are more jobs, but wages become worth progressively less.

To make up for the loss in purchasing power that consumer borrowing doesn't cover, the government prints more money. This in turn allegedly creates more jobs as demand increases. The cycle can go on forever and debt increase without any danger. As Harold Moulton summarized the Keynesian theory in the passage we quoted previously in this series (and again here to save your having to hunt for it),

"The proponents of the philosophy that the only hope for full employment and continuing prosperity lies in permanent deficit financing recognize, of course, that this means a continuous expansion of the public debt. The economic implications of an ever-expanding public debt are, moreover, given consideration. We are advised that an internal public debt is not a menace and that we should not be 'intimidated' by it. 'On the contrary, instead of looking upon [it] with the sort of awe that was inspired by our savage ancestors by some incomprehensible phenomenon such as lightning, we must take a leaf out of the book of modern science. . . . It is, in fact, so different from what we commonly think of as debt . . . that it should scarcely be called debt at all.' An internal public debt 'has none of the essential earmarks of a private debt'." (The New Philosophy of Public Debt, op. cit., 49-50.)

Ancient science, philosophy and the common sense of primitive people all tell us that a debt is a debt — a promise is a promise — and must be kept. Contracts (another word for promise, as is "covenant") are so sacred that you call upon the gods to witness that you mean what you say, and to ensure that you will keep your word . . . with a cosmic "or else" hanging over you. Oath breakers don't fare well in the mythology of any people.

Some traditions view trickery in getting out of a promise with admiration. The key to getting along is to phrase your promise exactly right so that you leave no loopholes. Even this, however, is a manifestation of the sacredness of the promise itself. Once it is crystal clear what the promise is to all parties, it had better be kept — or else.

This can get irritating to people who put the spirit of the law above the letter, or to those who base the natural law on God's Nature, self-realized in his intellect. "Modern science," however, is equal to the task. As Arthur C. Clarke once claimed, any sufficiently advanced science is indistinguishable from magic. Nowhere is this more true than in the "Modern Monetary Theory" embraced by Keynesian economics. Since "MMT" is "modern science" (or at least claims to be), assertion is sufficient to justify the basic premises. If the basic premises, per ancient science, philosophy or primitive common sense, are shown to be untenable, that's only because you don't understand such controversial or complex matters. You only think it doesn't make sense because you're a primitive savage.

Or not. It might be that the Keynesians and others who claim that others just don't understand might be a little shaky themselves on the basics — especially money and credit, banking, finance, and law.


Monday, May 14, 2012

The Global Debt Crisis, VI: What is "Money"?

Last week, in the previous posting of this series, we said we'd look at money in the next posting. Since this is the next posting, and we want our promises (our money) to be good, here it is. This involves the first two false assumptions that have gotten the world into the debt crisis. As they are closely related, we'll look at the first two assumptions under a single heading. "Money" is not restricted to coin, banknotes and demand deposits, with some time deposits thrown in for good measure. That is currency — "current money" — and currency substitutes. On the contrary, money is anything that can be accepted in settlement of a debt.

Money is not a claim issued by the State against the general wealth of society. That would make the State the ultimate owner of everything — socialism. Taxation is not an exercise of property, nor is eminent domain, any more than a conscripted soldier is a slave of the State.

Money and credit — two forms of the same thing — can best be understood in terms of Say's Law of Markets as applied in the real bills doctrine. In light of the current global debt crisis, it is hardly surprising that all the mainstream schools of economics and most of the minor ones reject Say's Law or redefine it into meaninglessness, and all of them reject the real bills doctrine.

Say's Law states that we can only purchase what others produce to the limit of what we produce. If we have produced nothing that we can exchange for what somebody else has produced, then no exchange will take place. Thus, if some people produce marketable goods and services that they can neither consume themselves nor trade to others, the correct action to take is not to reduce consumption, but to increase production.

As Say put it, "As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce." (Letters to Malthus, 1821, 2.)

"Money" is simply the medium of exchange by means of which we trade what we produce for what others produce. It is a symbol of the present value of what we own. As Louis Kelso explained,

"Money is not a part of the visible sector of the economy. People do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector." (Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54-55.)

The real bills doctrine is an application of this understanding of money. Currency — banknotes and demand deposits, as well as token coinage and anything else that circulates as "current money" in an economy and is accepted in settlement of a debt ("money") — is backed by the present value of whatever is represented by the negotiable instrument for which the "money" is exchanged.

All money, however, is a contract — a promise — and, in a sense, all contracts are money. Obviously, a contract can be made that delivers the present value of existing wealth. We would not otherwise have gold and silver coin — money that delivers something of value on the spot instead of the bearer having to take the money to the issuer and demand whatever the issuer of the money promised to deliver.

You can also enter into a contract to deliver something at a future date that you do not currently possess. If, however, you have a reasonable expectation that you will possess whatever is promised when the contract falls due, and the other party to the contract believes you (that is, accepts your offer), you have created money between the two of you based on the present value of something to be delivered in the future — and that might not even exist at the time you entered into the contract.

The money is cancelled when the contract is fulfilled, that is, the maker of the contract delivers goods or services as stipulated in the contract. It is thus possible to expand and contract the money supply as needed in an economy by tying the creation and cancellation of money through private property directly to the marketable goods and services being exchanged.

Negotiable instruments fall into three broad categories. These are bills of exchange, mortgages, and bills of credit. Bills of exchange are backed by the present value of future marketable goods and services. Mortgages are backed by the present value of existing marketable goods and services.

Bills of credit, however, are backed by the ability of the government to collect taxes out of wealth that exists now, in the future, or (depending on the optimism of the politicians and their effectiveness at selling pigs in pokes to the voters) might never exist. Greece's immediate problem, for example, is due largely to emitting bills of credit to be redeemed by taxing wealth that, increasingly, people are becoming convinced will never be produced.

Like Say's Law, the real bills doctrine can be stated fairly simply. If all new money is backed by a private property stake in the present value of existing and future marketable goods and services — that is, by contracts representing a private property stake in something with real value — there will always be enough money in the economy, and there will be neither inflation nor deflation.

There are a large number of refinements that can go into a discussion of Say's Law and the real bills doctrine, but that's not our concern at this time. All we're interested in is the basic theory. Our next posting in this series will address the issue as to whether by creating money government is simply shifting existing debt around, and whether public debt is "real" debt, or something that can safely be ignored as a debt we owe to ourselves and that doesn't have to be repaid.


Friday, May 11, 2012

News from the Network, Vol. 5, No. 19

Back in 1907 the financial services industry was under the control of one man: financier J. P. Morgan. When the president of the Knickerbocker Bank and Trust got into trouble by using bank assets to speculate in copper shares, Morgan engineered a run on the Knickerbocker and was able to take it over — and cause a worldwide financial panic in the process.

The scandal forced Congress to refocus on the need for fundamental financial reform, something that had been shelved following the Panic of 1893 when William Jennings Bryan's presidential campaign of 1896 and the Boy Orator's "Cross of Gold" speech diverted attention away from financial reform by emphasizing the "Silver Question."  The end of the Great Depression of 1893-1898 seemed to quell the need for reform.

The result was the Federal Reserve Act of 1913, and the planned replacement of the "inelastic" National Bank Note currency of 1863 to 1913 backed by government debt, with an "elastic" Federal Reserve Note currency backed by the present value of private sector hard assets.

Unfortunately, the federal government figured out a way around the checks and balances built into the system designed to prevent the government from using the central bank to monetize its deficits, with the result that today the financial system is even more badly in need of reform than it was in 1907 — as demonstrated by the news this week that JPMorgan lost billions of dollars in "bad trades," to say nothing of the gigantic debt and Great Depression III. Fortunately, there is some good news on the horizon:

• The big news this week is the CESJ presence at the 35th Annual ESOP Association Conference in Washington, DC. We reconnected with some old friends, and were updated on some developments in one of the major institutions within the expanded ownership movement.

• The "buzz" at the ESOP Association Conference that seemed to be of most concern to attendees is the widespread misunderstanding of the benefits of worker ownership among both political parties. While the ESOP enjoys some strong support among a number of Representatives and Senators, the inability of either party to come up with an effective program (such as Capital Homesteading) that will deal with the deficit and the need to stimulate growth at the same time has led to targeting the ESOP as "corporate welfare." Since most Americans lack any significant direct ownership of corporate stock, targeting the ESOP seems like an easy way to score some points with voters while undermining what may be the most productive sector of the American economy.

• We spoke with some of the presenters about the need to rebuild an ownership culture in America. Our comments were well received. The financial professionals especially expressed interest in the effort to orient the financing of economic growth away from past savings funded by reducing consumption, and toward future savings funded by increasing production — what Louis Kelso called "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

• In the session on "ESOP Sustainability," our point about viewing the ESOP as an ownership vehicle similar to a partnership instead of a retirement plan expense to help in dealing with the repurchase obligation was positively received. The change in orientation is from treating it as an expense to be minimized, to regarding it as the value of a worker's partnership stake that reflects ownership to be secured and protected.

• As of this morning, we have had visitors from 62 different countries and 54 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Australia. People in Mexico, the Philippines, France, the United States and South Africa spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "The Keynesian Cargo Cult: Rot Bilong Keynes," News from the Network from April 20, 2012, and "The Keynesian Cargo Cult: Overview."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.


Thursday, May 10, 2012

The Global Debt Crisis, V: What's REALLY Going On?

In the May 4, 2012 "Money and Investing" section of the Wall Street Journal, there was a small article, almost a filler, on the last page, C10. The headline was "Watch Athens, Not Paris, This Weekend." There was a pie chart breaking down the Greek debt situation. Per the chart, private creditors hold 27% of Greece's "sovereign debt," leaving 73% held by "Official Creditors" — raising the side issue as to why private individuals, for whom, presumably, governments exist at all, rate as "unofficial."

Be that as it may, the article missed the true significance of the statistics. The big concern was whether the candidates from the thirty-two political parties contending for seats in the Greek legislature will upset the agreements reached with the IMF to cut spending in return for bailouts, triggering another round of the ongoing debt crisis in the euro-zone. There was not a word in the article about what stands behind the debt.

Debt sold to private creditors is the most immediately dangerous, yet — in theory, anyway — the soundest type of debt for a government to have if it is foolish enough to believe the Keynesian Great Lie. In Keynesian theory, the debt a government owes to private individuals or entities is "real" debt. It must be paid. Private debt cannot be repudiated, written down or rescheduled without bankruptcy. A government that floats debt to the private sector had better have a solid plan for retiring the debt, or it faces financial ruin when the bill comes due. This is because private debt is funded out of existing savings. Borrowing this money and not repaying it is clearly theft on a massive scale.

What about the "official debt"? In Keynesian theory, public debt that is absorbed by a nation's commercial or central banks is not a problem. No, sir. It's a debt we owe to ourselves, and are simply shifting money from one pocket to another — mere booking entries. There's some redistribution that goes on because of the inflation (necessary to shift wealth via forced savings from non-owners to owners to finance new capital investment), but, in the aggregate, it's all on paper, and it zeros out. Quoting Alvin Hansen of Harvard University, "The American Keynes," in Hansen's article in a Fortune magazine article in the November 1942 issue (page 166), Harold Moulton related,

"We are advised that an internal public debt is not a menace and that we should not be 'intimidated' by it. 'On the contrary, instead of looking upon [it] with the sort of awe that was inspired in our savage ancestors by some incomprehensible phenomenon such as lightning, we must take a leaf out of the book of modern science. . . . It is, in fact, so different from what we commonly think of as debt . . . that it should scarcely be called debt at all.' An internal public debt 'has none of the essential earmarks of a private debt'." (The New Philosophy of Public Debt, 1943, 49-50.)

See? There is nothing to worry about. Put off your primitive skins and beads, assume the Emperor's new clothes, and stop worshipping the false gods of fiscal sanity. Keynes — or at least his clone — declared that public debt (tee hee) isn't really debt! Paraphrasing Martin Luther's letter to Philipp Melancthon (August 1, 1521), Keynes does not save governments who are only fictitious spenders. Be a spender and spend boldly, but believe and rejoice in Keynes even more boldly. For Keynes is victorious over unemployment, debt, and the economy. As long as governments are here they have to spend. This life in not the dwelling place of thrift but, as Keynes says, we look for a new heavens and a new earth in which material happiness dwells. . . . Spend boldly — every government is a mighty spender.

Or we can apply a little common sense to the problem. Let's look at the assumptions we raised in the previous posting in this series:

• "Money" consists solely of coin, banknotes, demand deposits (checking accounts) and some time deposits (savings accounts) — M2.

• Money is a general claim issued by the State against the general wealth of society.

• By emitting bills of credit (creating money by issuing sovereign debt) the government is simply shifting around existing wealth with no change in the aggregate.

• Government debt paper is a debt the nation owes to itself and doesn't have to be repaid.

We'll look at money in the next posting in this series.


Wednesday, May 9, 2012

The Global Debt Crisis, IV: Understanding the Problem

A while back (September 16, 2010) we read an op-ed in the Wall Street Journal, "The Case for a Repeal Amendment," by Randy E. Barnett of Georgetown University and William J. Howell, Speaker of the Virginia House of Representatives. The authors claimed that the income tax has allowed government to overspend and get 'way over its head in debt. Get rid of the Sixteenth Amendment, they declared, and We, the People would once again be able to exercise control over government and rein in the wild spending that's been going on. As the authors stated,

"The 16th Amendment gave Congress the power to impose an income tax, allowing it to tax and spend to a degree previously unimaginable. This amendment enabled Congress to evade the constitutional limits placed on its own power by effectively bribing states. Once states are 'hooked' on receiving federal funds, they can be coerced to obey federal dictates or lose the revenue."

The argument was relatively well stated and argued — and completely wrong. What has allowed politicians to spend beyond our means to repay without substantial changes being introduced into the system is not the income tax, but the monetization of federal debt by the Federal Reserve. Ironically, the income tax was set up in part to ensure that the federal government had adequate financial resources to carry out its legitimate functions.

On the other hand, the Federal Reserve was established not to finance government, but to provide the private sector with an "elastic" and stable uniform currency backed with private sector assets. The idea was to replace the inelastic National Bank Note currency of 1863-1913 backed by government debt, with Federal Reserve Notes backed by the present value of existing and future marketable goods and services.

Unfortunately, the Federal Reserve was allowed to operate for only two years according to plan. The United States then entered World War I and, as politicians in every age have been tempted to do, decided to finance the war effort by floating debt to be repaid tomorrow, rather than by raising taxes to be paid today.

Even this would not have been too much of a problem had the government simply borrowed from the existing pool of savings. That is all the federal or state governments are empowered to do under the Constitution in any event. Creating money backed only by the faith and credit of the government is called "emitting bills of credit." This is explicitly prohibited to the states under Article I, Section 10 of the Constitution, and was specifically removed from the enumerated powers of the federal government under Article I, Section 8 during the debates in 1787 in light of the debacle of the Continental Currency under the First and Second Continental Congresses and the Articles of Confederation.

What happened, however, was that the first Liberty Loan drive drained virtually all existing savings out of the system. The Second Liberty Loan drive and the Victory Loan drive had nothing on which to draw. Faced with a bond issue that wasn't selling due to lack of liquidity in the system (thereby endangering the war effort), the commercial banks stepped forward and purchased the bonds.

Since the commercial banks didn't have either the capitalization or the savings on deposit to purchase the bonds, they turned around and sold the bonds on the open market to the Federal Reserve, as they were empowered to do to retire the government debt they held to back their issues of National Bank Notes. The banks then passed the newly created money on to the U.S. Treasury, pocketing a fee in the process. This kept within the letter of the Federal Reserve Act, but violated the Constitution, just as Salmon P. Chase had done more than half a century before to finance the Union war effort.

A generation later, in response to growing demands that "the government" "do something," what the government did was listen to John Maynard Keynes. Unfortunately, Keynes had a profound misunderstanding of money and credit, as well as the natural rights of freedom of association/contract (liberty) and private property. He even had a unique understanding of the natural law (one that, ironically, has become pervasive in our society), claiming that the State has the power to "re-edit the dictionary" when it came to liberty and property! (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)

The effects of this new orientation were profound and far-reaching. The "new philosophy of public debt" contained at least four false assumptions:

One, there was the belief that "money" consists solely of coin, banknotes, demand deposits (checking accounts) and some time deposits (savings accounts).

Two, "money" is a general claim issued by the State against the general wealth of society.

Three, by emitting bills of credit (issuing debt eventually purchased by the Federal Reserve on the so-called "open market") the government was simply cutting up the present value of existing wealth into smaller and smaller pieces to redistribute it.

Four, government debt paper is a debt the nation owes to itself and doesn't have to be repaid.

The falsity of these assumptions can easily be demonstrated, as we will see in the next postings in this series.


Tuesday, May 8, 2012

The Global Debt Crisis, III: The Roots of the Problem

After one of the biggest and most controversial battles ever to take place in both houses of Congress, the Federal Reserve Act of 1913 was passed. Stories about how the Act was passed in secret as the result of a hidden conspiracy are just that — stories. Not only were the issues debated for months in the public press, the testimony before both houses takes up several thousand pages in the Congressional Record.

The fixed belief popular among conspiracy theorists that a secret meeting of conservative Republican financiers led by Nelson Aldrich on Jekyll Island was the basis of the Federal Reserve can be totally discounted. Not only were a House and Senate controlled by the Democrats unlikely to pay any heed to a man they regarded as one of the prime movers behind the financial troubles of the country, Woodrow Wilson never would have signed such a bill. In any event, the Aldrich proposal that came out of the meeting on Jekyll Island was never adopted. As Harold G. Moulton explained,

"The Federal Reserve Act is a substantial improvement over the Aldrich plan. It should be chronicled here that the Federal Reserve Act is not a mere plagiarism of the Aldrich plan. In certain fundamental respects the new law is markedly different from and markedly superior to the Aldrich plan. . . . Subject to a great deal of hostile comment by the financial and business press during the period of its discussion before Congress, after passage the law very quickly became recognized at its true worth as the most constructive piece of legislation that had ever been placed upon the American statute-books. For once, at least, a vitally important, though technical, question had been resolved into its fundamental issues through public discussion, and in this instance a measure emerging into law did represent the best constructive thinking of the nation." (The Financial Organization of Society. Chicago, Illinois: The University of Chicago Press, Third Edition, 1930, 531-532.)

The Federal Reserve was to operate in a manner consistent with classic banking principles. The mechanism was to rediscount — "accept" (purchase) — eligible commercial, industrial and agricultural paper (bills of exchange) originally accepted by member commercial banks through the "discount window" whenever there was a need to increase liquidity. Rediscounting was to be supplemented by purchasing the eligible paper of non-member banks, businesses and individuals on the open, that is, secondary market. When there was too much liquidity in the system, the Federal Reserve would sell enough of its holdings of private sector paper to siphon off the excess.

Unfortunately there was a loophole in the Act. The National Bank Notes and the Treasury Notes of 1890 were backed by government debt. Any National Bank that wanted to issue banknotes to supplement its creation of demand deposits (checking accounts) and meet its daily transactions demand for cash had to purchase government bonds in an amount greater than the face value of the banknotes issued to ensure more than 100% coverage for the banknotes.

Incidentally, the requirement that National Bank Notes be backed by government debt gave rise to the myth that "the banks" were getting "double interest" on their note issues. This was presumably because the banks got interest on their holdings of government bonds that backed the National Bank Notes, and then interest again when they loaned out the notes to borrowers.

The facts fail to support this belief. The National Banknotes — along with the United States Notes ("Greenbacks"), Treasury Notes, Silver and Gold Certificates, and the gold, silver and base metal coinage — constituted by far the smaller portion of the money supply. The task of the currency was to meet the demands of everyday commerce.

The greater part of the money supply — approximately 80% in 1900 — consisted of various negotiable instruments: bills of exchange, mortgages of all types, promissory notes, demand deposits, and so on. When a commercial or mercantile bank (and the National Banks were commercial banks) made a loan on the strength of a collateralized contract (bill of exchange or mortgage), the bank discounted (accepted) the paper, thereby creating money. In return, the bank issued a promissory note that the borrower signed, which the bank used to back a new demand deposit.

The borrower was given a checkbook. If the borrower wanted currency — gold or silver coin or banknotes — he or she had to draw a check and cash it. The borrower paid the discount (the difference between the face value of the bill of exchange and the amount of money actually created by accepting the bill of exchange and put into the demand deposit), but usually nothing for the privilege of converting a portion of the demand deposit into National Bank Notes and using them in commerce. The bank was no more getting "double interest" on its banknotes than it was getting any interest at all on its holdings of United States Notes, Treasury Notes, Gold and Silver Certificates, or gold, silver, and base metal coins in its vaults.

Still, the National Banks were saddled with a large amount of government debt that the government did not have the capacity to retire all at once. Had the government called in all its debt at one time, it would have been redeemed at a considerable discount, causing enormous losses to the banks.

To get around this problem, the Federal Reserve was empowered to purchase the government debt from the National Banks over time. The Federal Reserve would hold the government paper, and the debt-backed National Bank Notes would be replaced with debt-backed Federal Reserve Bank Notes. As the government paid down its debt, the government debt-backed Federal Reserve Bank Notes would be replaced in turn with visually indistinguishable but private sector asset-backed Federal Reserve Notes.

To make certain that such "open market operations" would not tempt the government to monetize its deficits — the whole idea, after all, was to get rid of the national debt, at least that portion of it backing the currency — Congress adopted the Sixteenth Amendment to the Constitution: the income tax.