In yesterday’s
posting we noted that even if social credit could deliver on every promise it
makes, and every individual received a basic subsistence income from the State
in the form of the National Dividend, it would be “unwise” to give the State
that much power over the lives of its citizens.
Power corrupts, as Lord Acton quoted, and absolute power corrupts
absolutely.
It’s almost a
side issue — we said almost — that
social credit has some serious theoretical problems that preclude it from ever
functioning as advertised. The fact is,
social credit simply can’t work, and here’s why:
Major Douglas did
recognize the first principle of economics.
He acknowledged that the purpose of production is consumption. He also realized that there is a significant
problem in how production is distributed under the capitalist system.
Douglas then made
a critical error. He alleged that the
reason that there is a disconnect between production and consumption is that there
is insufficient money in the system to clear all goods and services produced at
market prices.
Douglas did not
realize that existing and future marketable goods and services are money or can have money issued
against them by drawing mortgages or bills of exchange. Not understanding the true nature of money,
Douglas concluded that there is far more being produced than people have the
money to purchase.
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| Ultimately, ALL exchanges are "barter." |
This is
impossible under Say’s Law of Markets.
Production is money; to say
that there is more production than money to clear it does not make sense.
Not surprisingly,
John Maynard Keynes (who rejected Say’s Law) made the same observation as Douglas
in his General Theory (John Maynard
Keynes, The General Theory of Employment,
Interest, and Money. New York:
Harcourt, Brace & World, Inc., 1965,
I.3.ii. III.8.iii.). At the same
time, Keynes spoke very disparagingly of Douglas (and any other economist who
didn’t happen to be Keynes): “The detail of his [i.e., Douglas’] diagnosis, in particular the so-called A + B
theorem, includes much mere mystification.” (Ibid., VI.23.vii.)
In common with
Keynes and other “Currency School” economists, Douglas did not realize the true
significance of Say’s Law — that we do not purchase what others produce with “money.” Rather, we purchase what others produce with what we
produce. “Money” is simply the medium
through which we exchange our production for the production of others.
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| Henry Dunning Macloed |
Thus the real
problem is not scarcity of “money.” As
long as people can produce, there can always be enough money — assuming that
producers are permitted to offer their own money for acceptance by issuing
mortgages and drawing bills of exchange, that is, are permitted democratic
access to the social good of credit. As
Henry Dunning Macleod noted, “Money and Credit are essentially of the same
nature; Money being only the highest and most general form of Credit.” (Henry
Dunning Macleod, The Theory of Credit.
Longmans, Green and Co., 1894, 82.)
The underlying
problem is that people lack ownership of the means to produce. As technology advances, capital replaces
labor as the predominant factor of production — and most people lack
significant ownership of capital. They
are thus unable to produce marketable goods and services that they can exchange
for the goods and services that others produce.
To solve the
presumed problem of scarcity of money, Douglas started with the wrong
definition of money, as did Keynes. He
defined money as “purchasing power” instead of “the medium of exchange.”
Money, however,
is not purchasing power. Rather, money has purchasing power. Money is
anything that can be used in settlement of a debt.
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| A crippling understanding of the true nature of money. |
Douglas then
compounded his error by proposing that a national monetary authority be
established to determine the amount of new money that should be created each
year to distribute to the citizens of a country as a “National Dividend.” (C. H. Douglas, Credit-Power and Democracy.
Melbourne, Australia: The Social Credit Press, 1933, 4, 108.)
Creating money in
this fashion would, according to social credit authorities, abolish taxes and
provide every citizen with an adequate and secure income. Goods and services would be subsidized to bring
the price down to the presumed real price via a mechanism called the “Compensated
Price.” (Ibid.)
While abolishing
all taxes sounds good, however, it is more than a little dangerous. When the politicians doing the spending have
to go to the taxpayer to get money, they are going to pay attention to the
taxpayer. When politicians figure out
ways to finance their projects without going to the taxpayer, suddenly they can
spend much more on what they want without accountability . . . as long as they
are careful to convince the electorate that the National Dividend or other
entitlement will decrease or even disappear if you don’t reelect them.