Monday, December 1, 2014

Incompatible Capitalism

One of the more bizarre accusations people make against the Just Third Way and Capital Homesteading is that it’s socialist.  How a proposal that calls for expanded capital ownership can be socialist is beyond us, frankly.  Socialism is defined as the abolition of private property in capital.  The Just Third Way means extending private property to everyone.

Thus, when someone recently hinted that binary economics is socialism or collectivist, we were baffled, but not surprised.  What did surprise us was when the critic stated that he relied on the invisible hand and the multiplier to run the economy in a capitalist way.

The critic mixed up a number of incompatible elements, and was not clear on them individually, much less in combination:

The Invisible Hand

As described in Adam Smith’s Theory of Moral Sentiments and The Wealth of Nations, the invisible hand is a metaphor for an economic system that has human labor as the primary factor of production.  The argument is that since even the richest man cannot satisfy even his most inordinate appetites except by employing the poor, the wealth of the earth will be divided as equitably as if ownership of the earth were broadly distributed.

Thus, even if the rich man is “greedy and rapacious,” he must spend his money generously in order to satisfy that greed and rapacity.  Indeed, some have even argued that on this basis “greed is good” because it creates jobs.

Smith, by the way, never said greed was good or even acceptable.  He clearly defined it and selfishness as vices.  His point was that a labor-centric economy would operate in spite of, not because of greed and rapacity, and that “do-gooding” attempts to circumvent the system were generally ineffective — charity cannot replace justice.

The problem is that we live in an advanced economy in which human labor is not the primary factor of production.  Capital is.  The greedy and rapacious rich man can satisfy his appetites by employing technology, not human labor.  Those who have only their labor to sell are left out in the cold.

Thus, a slight “course correction” in Smith’s analysis is necessary in order to restore the functioning of the invisible hand, which is actually a roundabout way of describing Say’s Law of Markets.  Kelso noted that capital is replacing labor at a tremendous rate.  The solution is not to redistribute or create unnecessary jobs, but to make owners of labor (and, eventually, everybody) owners of capital as well.

According to Smith, even the richest man will not be able to satisfy his most inordinate desires except by purchasing not what labor alone produces, but what labor and capital produce.  If ownership of “the earth” is, in fact, broadly distributed, the market — the system — will function for the benefit of all, not just for the owners of capital.

The Multiplier

The critic’s combining Keynesian multiplier theory with Smithian classical economics was . . . baffling.  Smith was one of the founders of what became known as the British Banking School of Economics and Finance.  Keynes is the “highest” development of the British Currency School of Economics and Finance.

The “Banking Principle” is essentially that “money,” which is anything that can be accepted in settlement of a debt, consists of contracts conveying a property right in both past and future savings.  The “Currency Principle” is that “money” consists exclusively of claims on past savings.

As Harold G. Moulton demonstrated in The Formation of Capital, the Keynesian money multiplier (and, by extension, all the different multipliers developed by Baron Kahn) consists of double counting checks as both cash reserves and demands for cash.  The elephant in the icebox of multiplier theory is that a check accepted for collection cannot at the same time be held as reserves and loaned out by the accepting bank.  It is presented through the clearinghouse system to the bank on which it is drawn.  Reserves are taken from the bank on which the check is drawn, and transferred to the bank that accepted the check.  There is no net increase in the quantity of money, only a change in the identity of the depositors.


Bonus round.  The critic seemed to be equating the Just Third Way with collectivism.  How he reached this conclusion is not clear.  We adhere to Aristotle’s characterization of man as a political animal, that is, individual rights within a social context.  Unfortunately, without direct access to the common good, there is a conflict set up between what is good for the individual as an individual (bios theoretikos) and what is good for society, i.e., the life of the citizen in the State (
bios politikos).

Aquinas simply asserted that the common good could be directly accessed.  Leo XIII assumed that the conflict could be resolved, and declared that widespread capital ownership would solve many of the problems (Rerum Novarum, §§ 46-47).  Pius XI showed how to resolve the conflict between the bios theoretikos (individual ethics) and the bios politikos (social ethics) with the act of social justice.  Kelso and Adler showed how to make it effective by combining the banking principle with the need for expended capital ownership without redistribution, and articulating the three principles of economic justice.



Anonymous said...

How about calling it everyone a stockholder?

Michael D. Greaney said...

Good point, but that would imply that people can only own capital through a joint stock corporation. There are other forms of ownership, such as coops, partnerships, and, of course, the sole proprietorship is till the largest form of business ownership around. Capital Homesteading would provide credit for any financially feasible capital project, regardless of the specific form of organization, as long as ownership is shared.