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.
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| 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.
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| 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.
#30#