Monday, May 15, 2017

5. Man Versus Machine

From 1934 to 1935 the Brookings Institution published a four-volume set, Distribution of Wealth and Income in Relation to Economic Progress, analyzing what needed to be done in a recovery program for the Great Depression.  Unfortunately, FDR and his “Brain Trust” listened to John Maynard Keynes and went with the New Deal, rather than with something that made sense.
"Consumption is the sole end and purpose of all production."
The four books in the series are America’s Capacity to Produce (1934), America’s Capacity to Consume (1934), The Formation of Capital (1935), and Income and Economic Progress.  Without once mentioning Say’s Law of Markets, the set examines the U.S. economy in the early 1930s from a perspective that clearly assumes the validity of Adam Smith’s first principle of economics: “Consumption is the sole end and purpose of all production.”
The first two volumes from 1934 are somewhat dated, but present a valuable analysis of the American economy at the time.  The third volume is the masterpiece of the set, explaining how new capital must be financed if Say’s Law is to function . . . once you get out of the past savings trap.
The first three volumes deal with a situation with which many economists and politicians still struggle.  How is it, in an economy in which productive capacity is fully intact but greatly underutilized, and people need jobs in order to gain income to purchase consumption goods, things don’t seem to be working?
The capitalist answer was to concentrate on production: “supply side” economics.  Demand will take care of itself.  The socialist answer was to concentrate on consumption: “demand side” economics.  Supply will take care of itself.
Dr. Harold Glenn Moulton
Moulton, unfortunately, didn’t have an answer, except in general terms.  These, however, were better thought out than the prescriptions of Keynes.  Being Moulton, however, he was not the kind of academic who insisted on doing something because it ought to work, but because it had been proven to work.  The best he could do was to advocate passing cost savings on to workers and consumers through profit sharing and price reductions, respectively.
The problem was that Moulton just assumed, along with Keynes, that labor is the primary way in which most people are productive.  Moulton had part of Say’s Law down, that production and consumption will be in balance only if new capital is financed out of future savings, but he did not solve the other half of the equation: that production and consumption will only be in balance if everyone has democratic access to the means of becoming productive, whether labor or capital.
This is surprising on two counts.  First, Say was quite explicit that to be productive you must be able to use the means of production, whether labor or capital . . . and had expressly stated that the only reason anyone bought machinery was because it was cheaper and more productive than labor.  As technology advances, human labor is displaced from production; no jobs, no income.
Second, Moulton had analyzed the Great Depressions of 1873-1879 and 1893-1898 in some detail.  In each case recovery was the result of a great increase in production of wheat at a time when there were crop failures in Europe.  Accelerating the process in 1879 was failure of the cotton crop in India when there was a bumper crop in the United States.  Farmers were able to sell everything they could produce, which kick-started the economy.
Very little of the great increase in farm income in 1879 and 1898 was saved.  It was almost all consumed, first to pay down the debt incurred during the preceding depression, and then to meet ordinary consumption expenses.  Production, therefore, came very close to equaling consumption for one very good reason: those doing the consuming owned the capital that was producing.
During the 1930s, however, with a false recovery fueled by inflation, nothing really solved the problem until the great increase in demand due to the Second World War.  Keynes’s debt-and-inflation solution caused “the depression within the depression” of 1936-1937, and the war brought the country out of that.
Yet, with people starving in the streets of the United States, there was obviously the potential for more than enough consumer demand to keep the economy running at full pitch . . . if a means could be found to balance production and consumption by enabling people to own both labor that was becoming less productive, and capital that was becoming more productive.
Kelso: Make every child, woman, and man a capital owner.
Louis Kelso’s solution was obvious once the connection was made to the second part of Say’s Law that Moulton bypassed — and, remarkably, the same as that of Pope Leo XIII in Rerum Novarum (by sheer coincidence issued May 15, 1891): if a machine replaces a worker, the worker should own the machine (or, if you prefer more papal language,  "The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners" — Rerum Novarum, § 46).  Whether one produces by labor or by capital is (economically speaking) a matter of complete indifference as long as someone who wants to consume can produce.
The big problem, however, was how people without past savings can purchase capital . . . and that Moulton had already answered: by using future savings.  All Kelso had to do to make Say’s Law work again was put the two parts of the relationship together again.
Kelso’s idea is almost breathtakingly simple.  Anyone who needs or wants to become productive must identify a financially feasible capital project: something that will pay for itself out of its own profits and then generate consumption income.  On the strength of that, a bank can create money to purchase the new capital, and cancel the money when the loan is repaid.
What about collateral?  There Kelso had another breakthrough.  What is collateral?  Insurance that the lender won’t lose what is lent.  That being the case, Kelso saw that traditional forms of collateral could easily be replaced with capital credit insurance and reinsurance.
Every child, woman, and man can use Kelso’s techniques to finance new capital formation and become an owner of something that will produce so he or she can consume.  There is no need for all the Keynesian gyrations, inflation, greed-is-good, or anything else.
Why did Moulton not think of this?  We can’t answer that — but we only really need to know that Kelso somehow saw what Moulton did not, and that was enough.  Today the Center for Economic and Social Justice has applied Kelso’s ideas in a proposal called “the Capital Homestead Act” that has the potential, we thing, to turn the global economy around within three to seven years, and to make every country on earth free of unproductive government debt in less than a century.
It’s worth looking into — what have we got to lose?

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