As we saw in the
previous posting in this series (we don’t actually begin every posting like that, but it saves us
from trying to come up with a clever segue each time), the most effective
counter to Keynesian economics and the New Deal came from Dr. Harold G.
Moulton, president of the Brookings Institution from 1928 to 1952. That is, the most effective theoretical counter came from
Moulton. He was never able to come up
with a just and viable means of generating the mass purchasing power essential
to a sound — and just — economy.
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| Louis O. Kelso |
It was not until the work of Louis Orth Kelso (1913-1991) that anyone presented a viable
solution. Kelso combined the growing need to expand the base
of capital ownership as advancing technology displaced human labor,
with sound monetary theory to finance sustainable, non-inflationary growth.
Popes Leo XIII and Pius XI had
assumed — incorrectly — that universal capital ownership must be financed using past savings. They recommended workers be paid more (via a
“living” or “family” wage) to enable them to save enough to purchase capital.
Unfortunately, in addition to increasing the costs of
production and raising prices for consumers, this recommendation led
commentators to mistake the means for the end.
They failed to realize that paying higher-than-market-valued wages was
intended to serve two different purposes.
The first purpose was to address the immediate need to redistribute
existing wealth in order to take care of people in the short term while a
permanent solution was developed and implemented. The second purpose was to provide the
financing for a program of widespread capital ownership.
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| Pope Pius XI |
Kelso’s idea was to finance
widespread ownership of new capital or transfers of existing capital by expanding
bank credit, just as Moulton advocated for the already wealthy. Avoiding the presumed necessity of
confiscation and redistribution to achieve his goal, Kelso realized that by purchasing new capital or transferring
existing capital on credit and repaying the credit with the future profits of
the capital itself, ordinary people could purchase capital without
redistribution, restricting consumption, or taking cuts in pay or benefits.
Shifting from past savings (by definition a monopoly of
the currently wealthy) to “future savings” — repayment of credit used to
purchase capital with the future profits of the capital itself
— makes it possible for anyone to own capital.
As Moulton had demonstrated, in the century preceding the
Crash of 1929 and the Great Depression, the rich had typically financed new
capital during periods of rapid growth by employing this concept of “financial
feasibility” to purchase “self-liquidating” assets.
Still, the major advantage the rich enjoy over
propertyless people is ownership of collateral.
Collateral makes bankers willing to create money for the rich with as little risk as possible.
Since the issue is managing risk, Kelso advocated using capital credit insurance and reinsurance in place of
traditional forms of collateral owned by the borrower. The risk premium typically charged on all
loans (except the allegedly “risk free” loans to government) could be used as
the premium on an insurance policy that would pay off in the event of default,
thereby taking the place of traditional forms of collateral.
Nor was Kelso’s idea simply a pragmatic
application of advanced financial technology — although it is supremely
practicable. It is theoretically and
philosophically sound as well.
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| Pope Paul VI and Mortimer J. Adler |
Kelso, a lawyer-economist, and
Aristotelian philosopher Mortimer Jerome Adler (1902-2001), the “Great Books” advocate,
presented the new paradigm in the two books they co-authored, The Capitalist Manifesto (New York:
Random House, 1958), and The New
Capitalists. (New York: Random House, 1961). It should be noted that the titles do not
accurately describe what Kelso eventually ended by calling “binary
economics.” This is in recognition of
the fact that the two factors of production — labor (human) and capital (non-human) — when broadly owned bring the
economy system back into balance, restoring Say’s Law. In the two volumes, Kelso and Adler made a logical case for expanding the base of capital
ownership and financing economic growth with future
savings.
This, so Kelso and Adler argued, would not only vest “as many as
possible of the people” with capital ownership, but emancipate humanity from
“the slavery of savings.”
By shifting from past savings to future savings, savings would work for
people, rather than people work for savings. Kelso demonstrated the feasibility of his idea with
the Employee Stock Ownership Plan (ESOP).
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| Lincoln drove the original Homestead Act of 1862 |
By means of an ESOP,
employees of a corporation can purchase shares of the company on credit and
repay the loan out of the future pre-tax profits of the corporation. Today in the United States millions of workers have become part owners of
the thousands of companies that employ them without risking their personal
savings or in most cases without taking any reductions in pay or benefits.
CESJ has proposed a “Capital Homestead Act” (that might be called an
“Economic Empowerment” or “Economic Democracy” Act outside the U.S.), that
would enable every person (even those who cannot work) to realize Kelso’s ultimate vision of equal
access to capital ownership and private property as a fundamental human right.
Key to the “expanded ownership revolution” are the three principles of
economic justice. Kelso and Adler articulated these as interconnected systems
principles in Chapter 5 of The Capitalist
Manifesto. CESJ later
refined and integrated these principles into the social doctrine of Pius XI as analyzed
by CESJ co-founder Father William Ferree.
Like the three legs of a tripod, the three principles of
economic justice operate together, providing the framework for
a just and stable economic order. Like a
tripod, if even one principle is missing or violated, the structure
collapses. As refined by CESJ, the three essential principles of economic
justice are:
·
Participative
Justice. This principle defines how one makes input to the economic process in
order to make a living. It requires equal opportunity in gaining access to
private property in
(control over, and enjoyment of the income from productive assets) as well as
equality of opportunity to engage in productive work. Participative justice does not guarantee equal results,
but requires that every person be guaranteed by society’s institutions the
equal human right to make a productive contribution to the economy, both
through one’s labor (as a worker) and through one’s productive capital (as an owner). This principle rejects monopolies, special
privileges, and other social barriers to economic self-reliance and personal
freedom.
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| Fr. William Ferree, expert in social justice. |
·
Distributive
Justice. “The most classical form”
of distributive justice (Compendium
of the Social Doctrine of the Church, § 201), the out-take principle,
is based on the exchange or market value of one’s economic contributions. This is the principle that all people have a
right to receive a proportionate, market-determined share of the value of the
marketable goods and services they produce with their labor contributions,
their capital contributions, or both. This respects human dignity by making every
producer’s and consumer’s economic vote count.
·
Social
Justice. As the feedback and corrective principle,
social justice governs participative and distributive justice, enabling both to operate
properly. Within an economic system,
social justice restores balance between overall production
and consumption. It rebalances
participative justice and distributive justice when the system violates either
essential principle. Social justice includes a concept of limitation that
discourages personal greed and prevents monopolies and barriers to
participation.
In general, social justice embodies the principles of solidarity and subsidiarity: every person has a moral
responsibility to organize with others to correct organizations, institutions, laws, and the social order
itself at every level whenever the principles of participative or distributive justice are violated or are not operating properly. The application of social justice to the common good of specific economic
institutions brings those institutions into conformity with the demands of the
common good of all society.
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