Monday, September 9, 2013

The Problem with “Social Credit”, I: The Critique

In response to a recent “plug” for Capital Homesteading we inserted in a FaceBook posting about “living wage” legislation now before Congress, somebody responded, “What we need is Social Credit and the Universal Unconditional Basic Income Guaranteed.”

That sounds nice, but there might be one or two problems there.  Before we go into that, however, we should understand what “social credit” is.  As described in the Wikipedia entry on social credit,

Social credit is an interdisciplinary distributive philosophy developed by C. H. Douglas (1879–1952), a British engineer, who wrote a book by that name in 1924. It encompasses the fields of economics, political science, history, accounting, and physics. Its policies are designed, according to Douglas, to disperse economic and political power to individuals. Douglas once wrote, ‘Systems were made for men, and not men for systems, and the interest of man which is self-development, is above all systems, whether theological, political or economic.’ Douglas said that Social Crediters want to build a new civilization based upon "absolute economic security" for the individual, where ‘they shall sit every man under his vine and under his fig tree; and none shall make them afraid.’ In his words, ‘what we really demand of existence is not that we shall be put into somebody else's Utopia, but we shall be put in a position to construct a Utopia of our own.’”

Douglas’s theory is that, while anyone can own capital, the fruits of ownership belong to the people as a whole.  This is because production is the result of accumulated human knowledge that belongs to everyone.  So that everyone can receive the benefit of production and that purchasing power can be kept at a par with production, the government decides how much money to create periodically and uses it to meet costs of government, with the balance distributed to each person as a guaranteed “National Dividend.”  This will, at one and the same time, abolish taxes and ensure that all production is consumed, bringing the economy back into balance and ending the business cycle.

As we said, there are a few problems here, but before we begin our brief analysis, we should note that “Social Crediter” is not a misspelling.  It is spelled that way to distinguish a social crediter from the ordinary meaning of “creditor.”

Hilaire Belloc’s Analysis

Let’s start with the Chesterbelloc that, in its heyday, struck fear into the hearts of socialists everywhere.  (Today’s neo-distributism, as it must be termed, has degenerated into another form of socialism.)

Hilaire Belloc’s take on “the Douglas Scheme” as he called social credit in An Essay on the Restoration of Property (1936) is that it was flawed because it focused only on income, not on the critical issue of production and who owns the means of production.  In this, as in other matters, Douglas’s analysis is Keynesian, while Keynes’s analysis developed out of the “chartalism” of Georg Friedrich Knapp, and described (in English; Knapp published his theories in German beginning in the 1880s) in The State Theory of Money (1924).

Yes, social credit would “guarantee” everyone an income, but — especially given the fact that Douglas recognized that the purpose of production is consumption — the income would not be tied in any way directly to production.  The disconnect between production and income would not be restored as Douglas believed, but exacerbated.

As we have seen recently, in a chilling replay of the massive non-productive money creation for speculative purposes that preceded the Crash of 1929, huge amounts of debt-backed government money are being poured into the stock market.  This gives the illusion of “growth” as prices go up and the Dow soars.

At the same time, businesses are being starved for credit.  The productive capacity of the country is being undermined as jobs and capital shift to other countries with lower wages.  Yes, the Douglas scheme would provide people with a “guaranteed” income, but that income would purchase less and less as productive capacity continues to deteriorate.  Like Keynes, Douglas thought production would take care of itself.  It doesn’t.

Dr. Harold G. Moulton

The analysis of Dr. Harold Moulton of the Brookings Institution is that Douglas took a “one-sided” view of money and credit, and applied it to a “fallacy of composition” that equated an entire economy with a single business enterprise; the “A + B Theorem” falls apart because it fails to take into account that a dollar expended in one area is also a dollar of income in another.  As Moulton explained,

“The fallacy in Major Douglas’ analysis is that he concentrates attention upon a single business rather than upon the national economy as a whole.  These ‘external’ payments to other organizations do not involve sending the money outside the country, and hence their disbursement is a part of the national income as a whole.” (The Formation of Capital, 1935, p. 180.)

The Natural Law

With respect to a natural law analysis, social credit redefines what it means for something to be “owned.”  By issuing money backed only by the government’s promise that it is worth something, the government takes away the usufruct, i.e., enjoyment of the fruits of capital ownership.  It does this by manipulating the currency, treating “money” as a non-repayable debt the nation owes itself, which is theoretically unsound; a “non-repayable debt” is an oxymoron.  Since property is not the thing owned, but the right to be an owner, and the rights to control the thing owned and enjoy the income it generates, social credit effectively abolishes private property.