The Death of Reason, IX: Economics as a Science Instead of a Religion

In yesterday’s posting, we decided (that is, I decided, and you presumably went along with it if you’re still reading this blog) that we can’t afford to go around basing our economics on anything other than reason — which is what we do in binary economics.  The other schools of economics in some degree get away from reason, usually either to justify or get around what Louis Kelso and Mortimer Adler called the slavery of past savings without ever really dealing with it.

The Death of Reason, VIII: Economics and the Natural Law

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A great many eyebrows undoubtedly went up while reading in yesterday’s posting when we claimed that much modern economic thought is not based on the natural law, but on a rejection of it; that of the schools of economic thought of which we are aware, only binary economics takes the natural law into account.

The Death of Reason, VII: A Little More Demonic Advice

In yesterday’s posting we got some advice from “Screwtape,” given in letters to his nephew, Wormwood, an Assistant Tormentor.  Above all, Screwtape tells Wormwood, for the hate of Satan, don’t let your victim (“patient”) use anything that resembles reason or logic.

The Death of Reason, VI: Some Diabolical Advice

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In the previous posting in this series — the one on the meaning and purpose of life v. swill stroganoff — we made the point that the point of life is to become more fully human, not simply to meet material needs.  Reducing the meaning of life to working in order to have the money to buy food in order to have the strength to work is the road to madness, for it takes all meaning out of existence.

News from the Network, Vol. 6, No. 04

We think we’ve figured out why the Just Third Way hasn’t (yet) captured the popular imagination to any great extent.  The Onion hasn’t parodied us, and Mad Magazine has implemented a strict “hands off” policy.

The Death of Reason, V: Swill Stroganoff

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In Episode 501 of The Muppet Show (“With our very special guest star, Gene Kelly, yay!”) the starship Swinetrek in the “Pigs in Space” segment approaches the End of the Universe.  As Dr. Julius Strangepork informs the other members of the crew, Captain Link Hogthrob and First Mate (Miss) Piggy, as soon as they reach the End of the Universe (in one minute), the Meaning and Purpose of Life will be revealed.

The Death of Reason, IV: How Not to Make Your Case

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Recently we posted our reasons why we chose not to review John Mueller’s book, Redeeming Economics (2010).  In retrospect, we probably could have made everyone’s life a little easier by demanding that if you expect us to review a book, the least you can do is send us a complimentary copy.  It wouldn’t even have to be new, just as long as it is legible.

The Death of Reason, III: Motive, Means, and Opportunity

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You can’t read mystery novels, especially of the “police procedure” subgenre, without knowing the three things you must always look for when solving a crime are motive, means, and opportunity.  (Unless, of course, you’re the title character in a crime comedy melodrama like Adrian Monk, and can solve the crime by looking through your hands and finding some obscure fact or go on a gut feeling.

Who Owns Social Security?

Short answer?  You don’t.  Neither do I.  The fact is that the money you and your employer pay into Social Security is a tax to fund a government benefit program, not payments you make to some kind of personal savings plan or an insurance scheme.

News from the Network, Vol. 6, No. 03

All the world (or, at least, that portion of it getting its news from the latest item to go viral) is talking about Manti Te’o and the story that he was ostensibly the victim of a cruel hoax.  Opinion seems to be divided between those who think there’s something vaguely suspicious about the whole thing, and those who feel that Manti Te’o might be more deserving of sympathy now than when his fake girl friend allegedly died.

The Death of Reason, II: The Plot Thickens

It’s probably appropriate that this short series on the mysterious death of reason started off with a brief discussion of a mystery novel, The Daughter of Time, by “Josephine Tey.”  We had re-read the book on a recent weekend simply because we were hunting for something in our library that wouldn’t take too much thought, and it fell off the shelf at our feet.

The Death of Reason, I: 2 + 2 = 5. Maybe 3. Would You Believe 7?

A short time ago we reread Josephine Tey’s last novel, The Daughter of Time (1950), about Richard III and the Princes in the Tower.  The Crime Writers’ Association voted it the greatest mystery novel of all time in 1990, leading us to suspect a little Shakespearean punning going on.

Let’s Make a Deal, IX: Osawatomie, Kansas, 1910

The United States was in serious trouble in the early 20^th century.  The land frontier was effectively closed, and it had not been replaced with democratic access to other forms of capital.  The financial system was structured in a way that forced small businessmen and farmers to finance growth with past savings, while permitting large corporations to create money at will for growth by offering bills of exchange to banks and other businesses.  Ownership of commercial, industrial and agricultural capital was becoming increasingly concentrated, while the “Trusts” (monopolies) were exercising immense financial and political power.

Let’s Make a Deal, VIII: “A Series of Unfortunate Events”

One of the more burning issues of the presidential campaign of 1912 was the need for fundamental monetary and fiscal reform.  The Panic of 1893 had revealed serious weaknesses in the financial system.  The push for reform, however, was sidelined by the drive to involve the government in direct relief efforts (e.g., Coxey’s Army), and — even more so — by the “Silver Question” during the presidential campaign of William Jennings Bryan.  When the country pulled itself out of the Great Depression of 1893-1898 (by the fortuitous — for America — circumstance of crop failures in Europe and bumper crops in the United States), the push for financial reform was marginalized and forgotten in most circles

News from the Network, Vol. 6, No. 02

Not to worry.  Scientists have let us know that the asteroid Apophis (which sounds suspiciously like the name of the super-villain Apothis from Stargate SG-1) will not be hitting Earth in twenty years or so.  We can get back to worrying about the economy, the size of the national debt, and the ever-growing Social Security funding deficit that was recently estimated at $84 trillion.

Full Employment v Inflation

In Keynesian economics there is a presumed necessary trade-off between employment and inflation. The theory is that if you want full employment, you have to inflate the currency to increase demand. This increases the demand for new capital formation, and results in job creation.

There are a number of assumptions underlying this theory. For one thing, Keynes assumed as a given that, in order to finance new capital formation, it is essential to cut consumption in order to accumulate enough cash to finance the new capital.

Keynes also assumed that "money" consists solely of bills of credit emitted by the government, and represents a "general claim" that the government has on all the wealth of society. In effect, this understanding of money assumes that the State is the ultimate owner of everything.

For example, consistent with the thought of Thomas Hobbes in Leviathan, this means that taxation is not a grant from the citizens to the government. Taxation is, instead, an exercise of the ultimate right of property vested in the State.

Given this understanding of money, Keynesian economics is socialism in all but name. There are, of course, other reasons for classifying Keynesian economics as a form of socialism, such as State-controlled allocation of resources and permitted rates of return to business (General Theory, VI.24.iii), but we've covered those in previous blog postings.

Consistent with these theories, the trend of the economy must be inflationary. Prices have to increase in order to ensure that consumption will decrease. At the same time, there must be constant infusions of additional purchasing power to restore and maintain effective demand at adequate levels.

This is one of the many contradictions in Keynesian economics. The theory requires that consumption both increase and decrease at the same time. Similarly, the Keynesian "money multiplier" requires that checks both clear and remain on deposit at the same time.  There is also the claim that a rise in the price level both is and is not inflation, and so on.

The issue today, however, is something a commentator on our FaceBook page raised. He asked, "Does the minimum wage hurt workers?"

This is a reasonable question. The minimum wage is a cornerstone of Keynesian economic policy. Since wages and State benefits are the only form of income available to the non-owning workers, they must necessarily be at such a level as to 1) allow the wage earner/welfare recipient to meet needs adequately. 2) The level of wages and benefits — effective demand — must be such as to provide sufficient consumption power to clear goods and services at market prices.

One Keynesian solution is for workers to be paid to produce goods for which no market exists (Keynes used the example of cathedrals and pyramids as totally useless goods, logical choices for an atheist), or to produce goods destined for destruction, such as war material. Either produces goods that do not add to the supply of marketable goods and services. Instead, they generate effective demand that keeps prices up, transfers savings from consumers to producers, and doesn't require that goods be consumed in order to fulfill their purpose.

This gets around the "problem" in classical economics caused by the insistence that the purpose of production is consumption. No, in Keynesian economics, the purpose of production is to generate effective demand and provide adequate financing for new capital formation.

This is because Keynes did not consider "supply" a problem. He therefore focused on "demand." This renders the laws of supply and demand irrelevant — but only if you ignore reality.

It also laid the groundwork for the pointless conflict between "supply side" and "demand side" economics. "Supply siders" claim to accept "Say's Law of Markets." "Demand siders" say they reject Say's Law. Both supply siders and demand siders, however, distort and misstate the concept, basing their theories on the logical fallacy of a straw man argument.

Minimum wage legislation sidesteps these problems. Unlike the case in binary economics, which proposes that "future savings," i.e., future increases in production instead of past reductions in consumption be used to finance new capital formation, today's mainstream schools of economics presuppose that the only way to finance new capital formation is by cutting consumption.

Yes, new capital can be financed by cutting consumption, and often is. Reducing consumption to finance new capital, however, also means that the new capital will likely not be financially feasible, and new jobs will not be created. As Harold Moulton expressed this "economic dilemma,"

"The dilemma may be summarily stated as follows: In order to accumulate money savings, we must decrease our expenditures for consumption; but in order to expand capital goods profitably, we must increase our expenditures for consumption." (Harold G. Moulton, The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 28.)

Moulton resolved this dilemma by pointing out that the definition of "saving" is not, despite Keynes's dogmatic and somewhat disingenuous assertion to the contrary, exclusively defined as "the excess of income over expenditures on consumption." (General Theory, II.6.ii.) (Keynes undermined his own claim by the fact that twenty or so pages after he declared that "everyone is agreed" on this definition of saving, he spent several more pages "proving" — by mere assertion — that the people who thought that new capital could be financed without first cutting consumption were wrong, implicitly acknowledging that "everyone" was not agreed.)

As Moulton demonstrated, new capital can be — and, during periods of rapid capital growth, frequently is — financed by increasing production in the future, not decreasing past consumption in the past. Reliance on past savings (labeled "slavery" by Louis O. Kelso and Mortimer J. Adler in the subtitle of their 1961 book, The New Capitalists) can and should be replaced with reliance on future savings.

Keynesian economics tries to circumvent this contradiction in its theory by setting minimum wage levels (thereby instituting "cost push" inflation), and by printing money, inducing "demand pull" inflation. Both types of inflation reduce consumption by raising the price level artificially.

Raising nominal wages by mandating minimum wage levels creates the illusion that wage workers are getting more when they are actually getting less. Nominal wages may be increased, but the goods and services that can be purchased with those wages decreases.

Producers — capitalists — benefit by making more profit from less production. The State benefits by being able to spend the present value of future tax collections now rather than in the future.

The drop in demand by wage earners is made up by consumer credit. It is no coincidence that widespread use of credit cards came in just as the wartime wave of prosperity that resulted from government spending in the Korean War was winding down, or that the "Great Society" began pumping effective demand into the economy to take up the slack left by insufficient use of consumer credit.

So, to answer the question, yes, minimum wage legislation hurts workers. At the same time (such are the contradictions inherent in Keynesian economics), legislating minimum wages gives the illusion that wage earners are somehow better off. Inflation and the rapid expansion of consumer credit pays for the illusion — at least until the bills come due.

There is a way out. One, finance new capital out of non-inflationary future savings, not past savings — especially the Keynesian "forced savings" that rob the poor to give to the rich through inflation. Two, vest wage workers with capital ownership so they can increase their income without raising the price level.

This can be done by implementing an aggressive program of expanded capital ownership — such as Capital Homesteading — at the earliest possible date.

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How to "Redeem" Economics

Last week someone commented on one of our postings asking for a review of John Mueller's book, Redeeming Economics: Rediscovering the Missing Element (2010). According to the commentator, the book "exposes the deficiencies of Classical and Neoclassical economics which stem from the deterministic Stoic philosophy of Adam Smith." Again according to the commentator, Mueller "points out that the Scholastic philosophy of Aquinas's works, whereas the 'Father' of economics produced unworkable economic theory."

Avoiding the "Fiscal Cliff"

All the brouhaha over the "fiscal cliff" has obscured the only real solution that exists — understanding what is really happening with the tax and monetary systems of the world so that such a situation cannot happen.

Yes, believe it or not, in a very real sense the problem is not so much with the system as in how the system is being (mis)used, and in the definitions of money, credit, banking, taxation, and property that have gained currency (if you'll pardon the expression). Mess up just one of those institutions, and the others inevitably become corrupted.

The global financial system is in a shambles. The commercial and central banks of the world are designed to operate in accordance with one set of principles, but are being used — mostly by politicians who have political, not financial or economic goals in mind — as if another, entirely different set of principles were the basis of their operation.

Added to that is the fact that, in most cases, the people in charge can't tell the difference between banks of deposit based on past savings (e.g., credit unions, savings and loans, investment banks), and banks of issue based on future savings (e.g., mercantile and commercial banks and central banks).

Another serious problem is that most economists (whose theories provide the basis for the politicians' policies) couldn't tell you the difference between a mortgage and a bill of exchange (according to financial historian Benjamin Anderson, one of the first principles of finance), or the difference between a private sector bill of exchange and a government bill of credit.

That's why the world needs a massive reform of both its tax and its monetary systems. The world's tax codes are fantastically complicated. This is because they are being used for "social engineering" when the sole legitimate use of taxation is to raise money for governments to carry out their legitimate functions. The chief goals of such social engineering via the tax system are 1) Ensure that enough wealth is redistributed to take care of people, and 2) Prevent too much wealth from being redistributed so that the rich can finance new capital and create jobs.

As a child could see, these goals are incompatible, making for much of the chaos. The monetary system is similarly manipulated, the goals being 1) Inflate the currency enough to create full employment, and 2) raise prices to "force saving" and transfer wealth from consumers to producers so they can finance new capital and create jobs, but forcing consumers to pay more for less.

These goals, too, are incompatible. Sustainable jobs only result (except for those subsidized by government, and which therefore represent a drain on, not a gain to the economy) when there is sufficient demand to justify hiring more workers. Raising prices via inflating the currency, however, reduces demand, and thus reduces the need to create more jobs, and sometimes even eliminating jobs as aggregate demand falls.


There is also the paradox of politicians who try to repay past debt with cheaper currency by inflation.  Yes, you can transfer value from creditors to debtors that way very easily.  The problem is that when the government is the debtor and can control the money supply, politicians start believing that the inflationary loss to consumers represents profit to the government.  Not so.  By making people worse off by inflating the currency, the price level goes up.  Any "gains" get eaten up by higher prices paid for the same amount of goods and services.  Strike one.  Strike two: believing they're turning a profit when all they're really doing is redistributing wealth, politicians spend more money, getting less and less for more and more at a faster and faster rate.  Strike three: spending for social programs also starts to increase exponentially due to the fact that people's ability to live within their grossly depreciated means evaporates.


Reform of the tax and monetary systems must therefore go together, but if you're forced to choose, reform the tax system first — the harm of a bad tax system is more immediate and longer lasting than the problems of a bad money system.

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Ronald Reagan and Homesteading

Last year (we thought we'd better start work right away getting used to it), on December 27, 2012, George F. Will wrote a column in the Washington Post. There is nothing unusual in that, of course. Mr. Will is a columnist, and columnists write columns. What is of interest to the Just Third Way is that his column was on Abraham Lincoln's 1862 Homestead Act.

News from the Network, Vol. 6, No. 01

Although this has been a short (work) week, there have been a number of significant events. The Democrats and Republicans appear to have reached another meaningless compromise to avoid the "fiscal cliff" that the Just Third Way as applied in a Capital Homesteading has the potential to eliminate, possibly within a generation. More importantly, people around the world are being introduced to the ideas of the Just Third Way, with some serious attention being paid to the potential Capital Homesteading may have to bring an end to the current economic malaise:

• Amazon has (finally) put up the cover image for CESJ's latest publication, The Restoration of Property, which might help generate sales. Visit the webpage, buy a copy, and post a review.  (Bulk orders — ten or more copies — are available from the publisher; enquire at publications [at] cesj [dot] org.  We have distribution facilities in the U.S., U.K., and Australia.)

• On Thursday members of the CESJ core group met with a philosophy professor from a small Catholic college in the eastern United States. Most of the discussion focused on the compatibility of CESJ's "Just Third Way" with Aristotelian/Thomist philosophy and the social doctrine of the Catholic Church, especially the economic justice principles of Louis O. Kelso and Mortimer J. Adler, and the analysis of the thought of Pius XI by Rev. William J. Ferree, one of CESJ's co-founders. CESJ's "Justice University" was also discussed and having his college give JU classes, as well as the possibility of exploring the feasibility of forming a CESJ chapter as a student club on campus. The professor took copies of The Formation of Capital (1935), Introduction to Social Justice (1948), Capital Homesteading for Every Citizen (2004), In Defense of Human Dignity (2008), Supporting Life (2010), and The Restoration of Property (2012).

• The Global Harmony Association (GHA), headed by Dr. Leo Semashko and headquartered in St. Petersburg, Russia, has published three reviews of its book, The ABC of Harmony. Two of the reviews are by Michael Ellis, PhD, GHA Ambassador of Peace from Harmony for Australia, President, The Global Peace Center, Melbourne, Australia, and Matthew Gmalifo Mabefam, MPhl. (Social Work), Deputy to the Leader of Socio-group (GHA-Africa), Department of Social Work, University of Ghana; Legon, Ghana. The third review is by Michael D. Greaney, CESJ's Director of Research and Ambassador and Co-Director of the Embassy for Human Rights from Harmony and Justice.

• Some interesting discussions have taken place in a LinkedIn group focused on reviving business in Ireland. A gentleman in Dublin is trying to bring together a minimum of half a dozen people to discuss what to do about the current situation in that country. We have suggested some possible actions, such as organizing a focused effort to introduce members of the national legislature to the principles of the Just Third Way as applied in Capital Homesteading, and have offered the material on the CESJ website to support the effort, as well as making members of the CESJ core group available for consultation. Ireland would be ideal for a pilot project, with no language barrier, a compatible legal system, and a government that appears to be trying to make the shift to encouraging instead of discouraging business. The effort has received endorsements from a business coach in Boston, Massachusetts, and a librarian in Princeton, New Jersey.

• As of this morning, we have had visitors from 54 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 United Kingdom, Ireland, and India. People in Mexico, Malta, the United States, Brazil, and Portugal 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," "Islamic Banking," "Is Choice Unconstitutional?," and "The Turning Point, II: The Solution."

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.

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The Fine Art of Missing the Point

If there's one thing you learn about modern life, it's the ease with which people can get diverted from the main point.  There you are, thinking you're all on the same page, when someone who just walked in or who hasn't been paying too much attention lets loose with what he or she thinks is a zinger that renders everything you said meaningless or foolish . . . especially if it has nothing to do with the topic under discussion. . .

Islamic Banking

Recently we came across a question in a LinkedIn group asking about "Islamic Banking." Since most of the responses were "half answers" — i.e., getting some of it right, but leaving out a few things — we decided to throw in our two cents.