As we saw in the
previous posting in this series, the personalism of John Paul I set the
stage for that of John Paul II. Nor is
this surprising in light of the fact that Albino Luciani had Karol Józef Wojtyła as a friend and mentor at
a critical time. In contrast to the
flawed personalism of Emmanuel Mounier, Wojtyła had developed a specifically
Thomistic personalism that admits the validity of absolutes and the nature of
the human person as a “political animal.”
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| Karol Józef Wojtyła |
This is important because Wojtyła’s personalism refuted the anti-intellectual basis of the attack
on the natural law, philosophical, ethical, and legal problems that, in a sense, led up to the
Second World War as it did the First.
The Keynesian New Deal that preceded World War II and the economic order
that emerged following the war presented a serious challenge to a society that
had drifted away from acknowledging the importance of the dignity of each human
being.
Nevertheless, even in economics and finance there were
sound, natural law-based alternatives available to the new order. The most cogent argument
against the Keynesian economics that underpinned the New Deal and similar
programs was that presented by the Brookings Institution under the direction of
Dr. Harold Moulton, president of Brookings from
1928 to 1952.
In 1934 and 1935, Brookings published the findings of a
study funded by the Maurice and Laura Falk Foundation (1931-1964) of
Pittsburgh, Pennsylvania, Distribution of
Wealth and Income in Relation to Economic Progress. Moulton “foreshadowed” (his word) the study in a
series of articles published in the Journal
of Political Economy in 1918, which presented the theoretical framework and
tentative analysis.
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| Jean-Baptiste Say |
Results of the study were contained in four volumes,
which, without mentioning Say’s Law of Markets, broke it down into its component
parts. The first two volumes, America’s Capacity to Produce and America’s Capacity to Consume, came out
in 1934. The Formation of Capital and Income
and Economic Progress followed in 1935.
As Moulton explained, “The purpose of the investigation
as a whole is to determine whether the existing distribution of income in the
United States among various groups in society tends to
impede the efficient functioning of the economic system.” Not limiting the study to the cause of
business depressions, Moulton concluded that the fact of such depressions
“suggests that there must be some basic maladjustment which seriously impedes
the operation of the economic machine by means of which the material wants of
society are supplied.” (Harold G. Moulton, The
Formation of Capital. Washington,
DC: The Brookings Institution, 1935, 1)
As the result of an exhaustive study of the productive and
consumptive capacity of the United States in the early 1930s, Moulton decided there was sufficient capacity for both
to keep the economy in equilibrium.
Imbalance had to be due to other factors. As he summarized the issue,
The fact that business enterprises seldom produce at full
capacity, and that the greatest problem of business managers appears to be to
find adequate markets for their products, has raised in the minds of many
business men and economists the question, Is not the primary difficulty a lack
of purchasing power among the masses?
This leads at once to the correlative question, What is the bearing of
the distribution of income upon the demand for the products of industry? Concretely, if a larger percentage of our
annual income were somehow made available to the purchasers of consumption
goods, would not business managers find it profitable to utilize existing
capital equipment
more fully, thereby giving to the masses of people higher standards of living,
and at the same time promoting a steadier and more rapid rate of economic
progress? (Ibid., 1-2.)
After examining evidence from the early 1830s down to the
early 1930s, Moulton decided that the maladjustment between
production and consumption had two principal causes. One, how new capital is financed, and, two, how income is
distributed.
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| Dr. Harold Glenn Moulton |
With respect to how new capital is financed, Moulton noted that mainstream economists, especially
Keynes, insisted that new capital
can only be financed by restricting consumption below production levels
(“saving”). Assuming that new capital
formation requires previous reductions in consumption, however, creates an
“economic dilemma”:
The dilemma may be summarily stated as follows: In order to
accumulate money savings, we must decrease our expenditures for
consumption; but in order to expand capital goods profitably, we must increase our
expenditures for consumption. . . . [W]hen the managers of modern business
corporations contemplate the expansion of capital goods they are forced to
consider whether such capital will be profitable. . . . Now the ability to earn
interest or profits on new capital depends directly upon the ability to sell
the goods which that new capital will produce, and this depends, in the main,
upon an expansion in the aggregate demand of the people for consumption goods.
. . . if the aggregate capital supply of a nation is to be steadily increased
it is necessary that the demand for consumption goods expand in rough
proportion to the increase in the supply of capital. (Ibid., 28-29.)
In short, no producer will invest in additional capital until and unless there is an increase in
consumption to warrant and justify the investment. Thus, instead of a decrease in consumption
prior to new investment in order to provide the financing, what Moulton found for the preceding century was an increase in consumption accompanying
every period of significant investment in new capital. As he concluded,
The traditional theory that an expansion of capital construction and consumptive output occur alternatively
. . . finds no support whatever in the facts of our industrial history. . . .
We find no support whatsoever for the view that capital expansion and the
extension of the roundabout process of production may be carried on for years
at a time when consumption is declining.
The growth of capital and the expansion of consumption are virtually
concurrent phenomena. (Ibid., 47-48.)
This finding raised another question. If periods of rapid capital expansion are not preceded by periods of
saving to finance new capital instruments, but instead by dissaving to finance
the increase in consumption, how is new capital financed, especially on such a
vast scale? The answer is, By the proper
use of the commercial banking system (invented for just that purpose) backed up
with a central bank:
Funds with which to finance new capital formation may be procured from the expansion
of commercial bank loans and investments.
In fact, new flotations of securities are not uncommonly financed — for
considerable periods of time, pending their absorption by ultimate investors —
by means of an expansion of commercial bank credit.” (Ibid., 104.)
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| John Maynard Keynes |
If, therefore, all current income is used either for
consumption purposes, or to retire loans made out of expanded commercial bank
credit for capital formation, production and consumption will be
in balance, and there will always be enough effective demand to purchase all
production. If, however, income that
should be spent on consumption is diverted to reinvestment, there will be
insufficient demand to clear all the goods and services produced.
Keynes’s solution of backing new
money with non-productive government debt in order
to stimulate demand artificially only made the imbalance worse. This is because the price level rises in
response to the addition of new money not backed either by new productive capacity
or existing inventories. This cuts
consumption even more and requires further stimulus in a fruitless effort to
catch up and bring the economy back into equilibrium.
Moulton had partially solved the problem of
insufficient demand by recognizing that current income should be used for
current consumption, not set aside to increase future production, and that
financing for new capital formation should come out of new money specifically created for that purpose. That potentially removed one cause of
imbalance in the economy but left the second: the problem of income
distribution. The income existed in the
form of production, but how could that income be realized and gotten into the
hands of people who would use it for consumption instead of for reinvestment?
That was the question Moulton addressed in the final volume of the study, Income and Economic Progress. It was also the question he was not able to
answer, even though Part II of the book, pages 87 through 165, is devoted to a
discussion of various means of distributing income more equitably.
Suggestions included taxation and redistribution, public works, increases in
the minimum wage, price reductions, and profit sharing. Moulton dismissed all of these as solutions after more
or less careful consideration, although he believed a few of them (price
reductions and profit sharing) would have beneficial, if limited, effects, and
should be implemented, although he cautiously refrained from suggesting any
specific means for doing so.
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| Pope Leo XIII |
Ironically, Moulton did consider an effective solution but
dismissed it on specious grounds. This
was expanded capital ownership, which both Leo XIII and Pius XI had
identified as the answer to “the Labor Question.” Moulton simply assumed as a given that a program to distribute capital ownership broadly necessarily meant a government program
to redistribute capital ownership broadly:
It will be readily apparent that if such a plan is to be
administered fairly, with a view to giving equality in ownership to everyone, it must be done by the
government, and on a wholesale basis.
That is to say, it would be necessary for the government to pool all the
wealth of the country and then issue ownership certificates to all the people, giving each
his proportionate share. This would
involve confiscation procedure, since it would obviously be impossible to levy
and collect taxes equal to 100 per cent of the value of railway
properties, factories, mines, farms or even household effects. As a prerequisite a constitutional amendment
would thus be required. (Harold G. Moulton, Income and Economic Progress. Washington, DC: The Brookings Institution,
1935, 76.)
Moulton never said why it is “readily apparent” that
widespread capital ownership necessarily means confiscation and
redistribution by the State. Neither did he say why all new capital ownership must come out of old capital — savings — other people already owned.
This was a puzzling omission, since in his previous book, The Formation of Capital, Moulton had shown how it is possible to finance future
production without restricting consumption, and thus without relying on the
savings of the rich who could afford to cut consumption. In a most unusual move for him, Moulton took a page out of Keynes’s book and simply asserted
that widespread capital ownership is impossible without some form of
redistribution.
Moulton’s assertion, of course, flatly contradicted what
both Leo XIII and Pius XI had said concerning the critical importance of
widespread capital ownership. The fact
that Moulton left everyone hanging, so to speak, left the basic problem how
ordinary people are to become owners unanswered.
Unanswered, that is, until the work of Louis O. Kelso the
generation following Moulton.
#30#