As we have seen in this series on the Death of Reason, the basic problem is not that Evil Economists like Adam Smith or even John Maynard Keynes are heartless fiends attempting to enslave the human race to the Cruel Capitalists or the Slimy Socialists. The problem is that 1) people either start with a false premise (or one that has become false over time), and apply it logically, if disastrously, 2) people start with a true premise and apply it incorrectly, or 3) people start with a false premise and apply it incorrectly.
Adam Smith, for example, started with a premise that was true when he did his work, but which has become false over time. That is that human labor is the predominant factor of production. Smith’s “invisible hand” argument, for instance, assumes as a given that the rich cannot satisfy their wants and needs, regardless how inordinate, unless they hire the poor to provide those wants and needs.
Given this assumption, Smith reasoned correctly that the wealth of the earth would be distributed as equitably throughout society as if capital (land and technology) had been broadly owned. Smith did not even consider what would happen if the rich could satisfy their wants and needs with cheap technology rather than expensive labor.
Hence, contrary to Mueller’s thesis, Smith’s economics is unworkable not because its morality is flawed, but because the system he described no longer operates according to the stated assumptions. Capital, not labor, is responsible for the bulk of production. If labor were still the predominant factor of production, the system would work pretty much the way Smith described.
The problem of Smith’s economics is exacerbated when his “banking principle” approach is analyzed in terms of the opposed “currency principle” — a process that, essentially, compares apples and oranges.
This is because the currency school starts with the wrong definition of money. To Keynesians, money is a peculiar creation of the State, a general claim on the wealth of society in which the State has the ultimate right of property. To Monetarists and Austrians, money is the symbol of wealth belonging to private individuals in which they, not the State, have property. To all three, money represents only existing wealth, accumulated or “past” savings, the present value of every marketable good or service that exists — but only what actually exists.
Given the correct definition of money — anything that can be accepted in settlement of a debt — we realize first that money represents not only the present value of existing wealth, but the present value of future, as-yet uncreated wealth. All money is a contract, just as (in a sense) all contracts are money.
Using the wrong definition of money distorts everything, and forces a conscious or unconscious change in the natural law. Under an Aristotelian/Thomist understanding of the natural law, every single human being who has emerged from the condition of dependency and has achieved the status of independent other (“adult”) has a full right to enter into contracts, that is, make and accept offers involving consideration. (All contracts consist of offer, acceptance, and consideration.)
Money is thus the “medium of exchange,” the means by which or through which independent others in civil society relate to one another. The job of the State is to maintain the common good — the common good being that vast network of institutions (laws, customs, traditions — “social habits”) within which humanity acquires and develops virtue through the exercise of rights by initiating (offering), accepting, and fulfilling contractual relationships — adjudicate differences that arise when there has not been a true “meeting of the minds” in a contract, protect the property that secures the exercise of rights by vesting the owner with the capacity (power) to enter into contractual relationships, and in general police the operation of the system.
In emergencies or as an expedient, the State may, in the short term, assume some of the rights and duties of domestic or religious society, e.g., education, redistribution of wealth in times of extreme need, but this can only be allowed in the short term under the principle of double effect, as it makes everyone in the State an effective dependent — “mere creature” — of the State, which is inconsistent with human dignity and a violation of the end of civil society itself: to provide the environment within which human beings acquire and develop virtue, thereby becoming more fully human. When the State provides for every need, people remain in a condition of dependency, children or slaves, and never realize their human potential; the State goes contrary to the very reason for its existence.
Thus, “all men are created equal” in regards to the capacity to enter into contracts. To be able to fulfill those contracts, “all men” have certain “inalienable” or “inherent” (natural) rights that, while necessarily limited in their exercise, may not be “disparaged” in their possession, i.e., society may not define the exercise of any natural right in such a way as to nullify the underlying right.
Changing the definition of money from “anything that can be accepted in settlement of a debt” (i.e., something in which every adult human being without a demonstrated incapacity or incompetence has a right to participate), and thus the symbol or medium of exchange for the present value of all wealth, current and future, to the symbol of or medium of exchange for existing wealth alone, automatically excludes those who do not have existing wealth or the means of producing wealth (labor and capital) from participation in the common good, and forces them into a permanent condition of dependency — childhood or slavery — which is inconsistent with human dignity.
Socialism is when the State claims the sole right to issue money, that is, act as an adult. Capitalism is when the currently wealthy claim the sole right to issue money. The Servile State is when the State and the private sector elite have joined forces (what Adam Smith called “mercantilism”) and between them claim the sole right to issue money. This claim does not have to be explicit, although Keynes did so in the opening passages of his Treatise on Money. It merely has to be effective — what Kelso and Adler justifiably called the slavery of past savings.
Dealing with a system based on the slavery of past savings is impossible if we leave the Aristotelian concept of the natural law intact. The analogously complete capacity that every human being has to acquire and develop virtue necessarily demands that every single adult who has not demonstrated an actual incapacity or incompetence must be able to enter into contractual relationships in order to exercise his or her natural rights and thereby acquire and develop virtue. He or she is otherwise prevented from or inhibited in his or her acquisition of virtue.
The problem is that, by controlling access to money and credit and thus dictating the patterns of capital ownership (and thus concentrations of power) in civil society, most people are denied effective exercise of their natural rights, and become susceptible to control by others, thereby being forced into a condition of dependency. In socialism, people become permanent dependents of the State. In capitalism, they become permanent dependents of the private elite.
Rather than address the underlying cause of the slavery of past savings — lack of democratic access to capital credit (money and credit being, as Henry Dunning Macleod pointed out, merely two different aspects of the same thing), ethical anti-capitalists (socialists) demand that the State be responsible for every individual good. The ethical anti-socialists (capitalists) acknowledge that the role of the State should be limited, but it must still guarantee results in some fashion if and when private efforts fail to provide sufficiently for everyone.
In neither case is there any acknowledgement that people not only should be allowed to take care of their own needs by themselves (with an assist when necessary), they must be allowed to take care of their own needs, or they will not grow in virtue and become more fully human. The exercise, even existence of a natural right such as life, liberty and property becomes contingent upon the will of another or conditioned on the occurrence of some event, and thus cannot be said to be truly a natural right any more.