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.
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| "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.
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| 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.
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| 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?
#30#
