Thursday, March 24, 2016

Financing Expanded Ownership

Yesterday we looked at how Louis Kelso proposed to restore Say’s Law of Markets, the economic “law” that says as a rule if you want to consume, you have to produce.  The restoration of Say’s Law, of course, makes no sense to anyone who thinks that labor alone is productive, for Jean-Baptiste Say assumed as a given that labor, land, and other forms of capital were all productive; limiting production to a single factor flew in the face of his common sense.

Kelso: Single factor thinking has captured economics.
The problem as Louis Kelso saw it was that “single factor” thinking had pretty much captured economics.  All the “best people” just assumed that labor produces everything.  At best, land is a “cost free factor of production” (David Ricardo), and thus a factor that is not a factor, while other forms of capital merely “enhance” labor, and are not themselves independently productive.
Kelso’s proposal to restore Say’s Law was to make it possible for everyone to be productive by owning both labor and capital.  Thus, it wouldn’t matter whether labor or capital were to be the predominant factor of production, anyone who have whichever one it is.
Nor was the idea of widespread ownership original with Kelso. The English Radical William Cobbett (1763-1835) was a strong proponent of expanded ownership of land, while in his 1854 Essay on the Relations Between Labour and Capital, the investment banker Charles Morrison insisted that workers must become owners if they were to enjoy adequate income. William Thomas Thornton, whose A Plea for Peasant Proprietors (1848) had set forth a reasonable plan to deal with the Great Hunger, also advocated worker ownership as essential to a just and stable society.  Heck, even the Gracchi brothers in ancient Rome wanted every family to own enough land to take care of common domestic needs adequately.
Cobbett: everyone an owner
The problem was that all these and more also insisted that the only way to finance new capital formation is to consume less than you produce . . . which tends to obviate the whole reason for producing something in the first place! As Dr. Harold G. Moulton summed up this “economic dilemma,” “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.)
Relying on Moulton’s work, Kelso rediscovered the Banking Principle that Sir Robert Peel had replaced with the Currency Principle with the passage of the Bank Charter Act of 1844. The Currency Principle is based in part on the assumption that the only way to finance new capital formation for the future is to cut consumption in the past.
The Banking Principle is based in part on the realization that financing for new capital formation to produce in the future can (and should) come from turning those same future increases in production into money by entering into contracts — agreements — to repay the financing once the new capital becomes productive. Consistent with Say’s Law, the proper use of past savings is to purchase goods and services that have already been produced and that thereby generated the income to purchase them. The proper use of future savings is to finance future production.
In other words, it is possible to finance new capital with future increases in production instead of past reductions in consumption. Kelso called this a shift from “past savings” to “future savings.”
So — how can we use what we know to make every child, woman, and man into an owner of capital?  We’ll look at that on Monday.

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