Yesterday we looked at a few problems with Harold G. Moulton’s vision of the future. They were not very important, and are easily corrected simply by adding expanded capital ownership along the lines developed by Louis O. Kelso and Mortimer J. Adler.
|Labor Theory of Value|
Today we conclude by getting to Moulton’s main point, and his importance to the Just Third Way. Unfortunately, this is not explicit in the article from 1949, but it is essential if the article is even to make any sense.
Of course, another caveat must be issued. The final part of the article assumes the validity of the labor theory of value, which we know is not correct. Fortunately, however, the labor theory of value is incidental to the main point Moulton was making, even if it isn’t immediately obvious:
What the good doctor is saying is simply that, before wealth can be shared, it first must be created. And in our economy, the production of goods and services is our wealth.
It doesn’t solve our problem to say that, because a certain corporation is making big profits, it should raise wages. Or, that it should distribute its gains in lower prices, so as to increase purchasing power.
Dr. Moulton says we can do both, and still provide enough more in profits to make it attractive to industry.
In his projections for the future, Dr. Moulton says we need continuing increases in productivity, development of new tools, willingness of labor to use more efficient methods and adequate incentives (pay and benefits).
His arguments seem all the sounder because they cut across the conventional divisions of thought. Like labor, he favors a progressive expansion of mass purchasing power. Like business, he wants “at least a fair degree of assurance” with respect to the perpetuity of the private enterprise system.
|Keynes: "You can't form capital without past savings"|
Did you see the point? It’s that enterprises can make big profits and at the same time pay higher wages and lower prices — an impossibility in Keynesian economics.
It makes perfect sense in Moulton’s paradigm, however, because Keynes took for granted the very thing that Moulton proved was wrong in The Formation of Capital (1935). That is, Keynes believed that if you paid high wages, then you must raise prices because the only source for financing new capital is retained earnings, i.e., earnings that are neither paid out to the workers as wages or profit sharing, nor distributed to the shareholders in the form of dividends.
Moulton believed that financing for new capital formation came not from past savings (retained earnings), but future savings, i.e., future anticipated profits that can be turned into money now by the expansion of bank credit, and then repaid out of the future profits of the new capital that was financed. In other words, new capital can be “self-financing,” paying for itself without the need to restrict consumption, raise prices, or keep down the cost of wages and benefits.
|Kelso: "Dear John, You're talking through your hat."|
And there’s the problem. If a company increases wages, it increases the costs of production. It might not at first, if the company has a large accumulation of profits, but wages and benefits are easier to raise than to lower. If the company has contracted for higher wages, and profits fall, it has to increase sales or raise prices to the consumer, which reduces mass purchasing power.
Making workers into part owners as Kelso proposed, however, gets around this problem, especially if dividends are tax deductible at the corporate level. This not only generates mass purchasing power, keeps prices and costs down, and is a free market way to increase income, it gives workers true, direct production-based incentives to work better and more efficiently — regardless whether it’s the labor or the capital that’s responsible for production. After all, in the Kelso paradigm, it doesn’t matter which does the actual production as long as the worker-owner owns both labor and capital.
The importance of Moulton to the Just Third Way, then, is not his theory of labor. It’s that he answers the question that pops into most people’s heads when they first hear about this: “Where’s the money to come from?” Where? From the capital itself.