Monday, October 31, 2016

A Brief Discourse on Social Credit, VIII: The Analysis, Part Two

Last Thursday we looked at some of the flaws in Major Douglas’s social credit proposal, e.g., the wrong definition of money and abolition of private property by taking away the usufruct, to say nothing of allowing politicians to avoid accountability for their actions.  After all, is it really coincidental that as more and more of the government’s budget consists of money created by emitting bills of credit instead of tax revenues, the number of programs that go contrary to the fundamental beliefs of most people have proliferated?
C.S. Lewis: considered the "Douglas Scheme" a silly fad.
To return to what C.S. Lewis called “the Douglas Scheme,” however, Dr. Harold G. Moulton, president of the Brookings Institution from 1928 to 1952, gave what is probably the most economically devastating critique of social credit.  (Moulton also critiqued von Hayek a few pages later; none of the Currency Principle schools of economics really hold their own against binary economics.)
Moulton (whose four-volume study on the distribution of wealth and income in relation to economic progress is essentially a study of Say’s Law of Markets) identified Douglas’s mistake as one of omission: “Douglas arrives at the conclusion that the money income available for the purchase of commodities is deficient by a process which eliminates from the picture a large part of the national income.”  (Harold G. Moulton, The Formation of Capital.  Washington, DC: The Brookings Institution, 1935, 180.)
That is, Douglas did not take mortgages and bills of exchange into consideration in his definition of “money.”  This meant that all transactions involving these forms of money were simply ignored in Douglas’s analysis.  At the time Douglas wrote, between 70-80% of the U.S. money supply consisted of such “private sector money,” (Harold G. Moulton, Principles of Money and Banking.  Chicago, Illinois: University of Chicago Press, 1916, II.39) invalidating Douglas’s analysis on that basis alone.
Major C.H. Douglas
After quoting Douglas’s explanation of his “A plus B theorem” (Douglas, Credit Power and Democracy, op. cit., 21‑22.), Moulton restated Douglas’s extended analysis in simpler terms: “if the payments made by a given business under A amounted to one dollar and the payments made under B amounted to another dollar, the price of the commodity produced would be two dollars; but there would be only the A dollar available with which to buy it.” (Moulton, The Formation of Capital, op. cit., 180.) Moulton then applied the logic of Say’s Law to the “A plus B theorem”:
The fallacy in Major Douglas’ analysis is that he concentrates attention upon a single business rather than upon the national economy as a whole. These “external” payments to other organizations do not involve sending the money outside the country, and hence their disbursement is a part of the national income as a whole. That is to say, the payments for raw materials, bank charges, etc., are also disbursed to individuals by raw material producing industries and “other organizations” in the form of wages, salaries, and dividends. Taking the national economy as a whole the aggregate prices of goods and services simply cover the aggregate disbursements of wages, salaries, rents, commissions, and profits to individuals engaged in the processes of production. (Ibid., 180-181.)
In other words, in Moulton’s analysis it is not a question of there being insufficient money in the economy to purchase the goods and services produced.  On the contrary, as can be seen from reading The Formation of Capital, the problem is the diversion of consumption income into reinvestment.  (Ibid., 37-48.)  The money is there — it is just in the wrong place, and there might not be any means of accessing it by discounting bills or issuing mortgages to turn production into cash.
Jean-Baptiste Say
Nor is the rejection of Say’s Law the only error Douglas made — or the most profound.  According to Douglas, the justification for creating money backed by the incremental increase in annual production of marketable goods and services is that such production is created by means of the application of the inherited knowledge of humanity.  Ownership of production — the usufruct of capital — is therefore vested in the entire human race in common, not to the owner of the capital that produced the marketable goods and services.  Douglas never explained why the product of labor, which is due at least as much as the product of capital to the knowledge and skills inherited from prior generations, should not also belong to the human race in common once the State takes over effective ownership by exercising total control.
In any event, Douglas’s assertion of common ownership of production contradicted his claim that social credit is “practical Christianity.”  As we have pointed out on this blog more than once, “property” consists not of the thing owned, but the right to own, and the right to enjoy the “fruits of ownership.”  That is, property consists not only of the natural right to be an owner, but of control over what is owned, as well as receipt and free disposal of what the thing owned produces.  As Pope Leo XIII pointed out,
But it is precisely in such power of disposal that ownership obtains, whether the property consist of land or chattels. Socialists, therefore, by endeavoring to transfer the possessions of individuals to the community at large, strike at the interests of every wage-earner, since they would deprive him of the liberty of disposing of his wages, and thereby of all hope and possibility of increasing his resources and of bettering his condition in life. (Pope Leo XIII, Rerum Novarum (“On Capital and Labor”), 1891, § 5.)
In short, going by the traditional natural law understanding of private property, and accepting Marx’s definition of socialism as “the abolition of private property” (Karl Marx and Friedrich Engels, The Communist Manifesto.  London: Penguin Books, 1967, 96.), social credit is socialism under a different name, just as the Fabian and guild socialists contended.

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