The four previous postings on this subject — why so-called mainstream economists reject Binary Economics — we have looked at 1) Lack of Empirical and Econometric Support, 2) Heterodox and Non-Conventional Framework, 3) Criticism of Core Concepts, Particularly “Productiveness”, and 4) Negative Reception by Prominent Economists. This last, the “negative reception” by prominent economists, is possibly the weakest reason given.
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| Louis Kelso |
Today’s reason — perceived policy risks and inflation concerns — are the easiest to respond to, if only because the mainstream economists contradict themselves on them:
5. **Perceived Policy Risks and Inflation Concerns**:
- Kelso’s policy proposals, such as using central bank-issued, interest-free loans to fund employee-owned firms, were criticized for their potential to cause inflation. Critics like Timothy Terrell argued that such policies could lead to “massive inflation” by flooding the economy with credit without adequate controls. This concern is particularly significant given mainstream economics’ focus on monetary stability.
- The reliance on government-backed insurance schemes and constituency trusts to distribute capital ownership was seen as impractical and risky, further distancing Kelso’s ideas from conventional economic policy discussions.
The first of these reasons is almost simplistic in its naiveté and complete lack of understanding of the science of finance and the principles of banking, to say nothing of the failure to agree even on a common definition of inflation. We’ll take the failure to understand the principles of banking first, because virtually all so-called mainstream economists do not recognize anything other than banks of deposit, which are defined as financial institutions that take deposits and make loans.
Banks of deposit, however, are not the type of bank on which Kelso’s theories are based, for they deal with only one kind of money: currency or currency substitutes, and do not take into consideration the first principle of finance. There are two other types of banks that deal specifically with the kind of money used in Kelso’s theories. These are banks of issue (which deal with mortgage-type, “past savings” securities), and banks of discount (which deal with bill of exchange-type, “future savings” securities).
This brings in the first principle of finance which is completely ignored by so-called mainstream economics and thus by so-called mainstream economists. That is to know the difference between a mortgage and a bill of exchange . . . and Kelso’s theories are based on this principle which the three so-called mainstream schools of economics very carefully ignore.
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| A Bill of Exchange |
To explain, mortgages and bills of exchange are the two most basic forms of money, “money” defined here as “all things transferred in commerce.” The difference between a mortgage and a bill of exchange, the two forms of money, is that a mortgage is based on wealth currently owned by the issuer of the mortgage.
In contrast, a bill of exchange is based on wealth not currently owned by the issuer of the bill of exchange but which the issuer reasonably expects to own within the specified time, i.e., when the bill matures. As for currency and currency substitutes (such as checks), which many people consider the only “real” money, it can be backed by either a mortgage (or, as with a gold coin, for example, be a mortgage), or a bill of exchange. It does not matter to the holder of the currency whether it is backed by a mortgage or a bill of exchange, only that the issuer of the currency redeems it when presented by a holder in due course.
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| Checks are currency substitutes |
“Mortgage money” is therefore “past savings based” as Kelso might have put it (but didn’t), while “bill of exchange money” is “future savings based.” Currency and currency substitutes (and there are too many currency substitutes to list here), being backed by mortgages, bills of exchange, or both, can therefore be past savings money representing existing wealth in the possession of the issuer of the mortgage backing the currency, future savings money representing wealth the issuer of the bill reasonably expects to have in his possession on maturity of the bill, or both.
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| Bill of Credit used directly as currency. |
. . . or neither, as is the case when governments back their reserve currencies with their own debt. The form of government debt used to back reserve currencies is a special kind of bill of exchange called a “bill of credit” or “anticipation note.” Bills of credit are ostensibly backed by “anticipating” future tax collections which allegedly will be used to redeem the bills of credit. Under Keynesian and Chicago/Monetarist economics, “bill of credit money” is backed by the general wealth of the economy . . . which the government does not own unless it is socialist. So-called mainstream economics — and thus every so-called mainstream economist — is therefore acquiescing in socialism, although they usually call it capitalism. The framers of the U.S. Constitution deleted the ability to emit bills of credit from the enumerated powers of Congress, although that deletion is universally ignored under today’s Keynesian hegemony.
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| Ludwig von Mises, Austrian school |
To do them justice, most Austrian economists protest this arrangement, and insist the reserve currency must either be itself a mortgage (i.e., gold and silver coin) or be backed by existing wealth (usually gold or silver). Adherents of the Austrian school thereby manage to be half right about money where the Keynesians and Monetarists are all wrong.
The different kinds of banks deal with the different kinds of money. Banks of deposit deal only with currency and currency substitutes and cannot “create money,” although so-called mainstream economics has come up with a demonstrably fallacious explanation, easily disproved, on how the alleged experts think banks of deposit create money.
Banks of issue deal only with mortgage-type, past savings money. They take existing wealth in the possession of the borrower and by issuing a promissory note turn existing wealth into currency or currency substitutes. This in a sense “creates money.”
Banks of discount deal only with bill of exchange-type, future savings money. They take the present value of wealth a borrower reasonably expects to have in the future and by issuing a promissory note turn the present value of future wealth into currency or currency substitutes. This too, in a sense, “creates money.”
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| Irving Fisher, Chicago/Monetarist School |
Commercial banks combine the three kinds of banks and can therefore take deposits, make loans, and issue promissory notes (“create money”) backed with both existing and future wealth — past and future savings. Central banks are (in a sense) commercial banks for commercial banks, and are designed and intended to provide a uniform, “elastic,” asset-backed reserve currency to provide the private sector with sufficient liquidity for agriculture, commerce, and industry. The (re)discount window of a central bank accepts bills of exchange from commercial banks, while “open market operations” buy and sell mortgage type securities to ensure sufficient circulating media in the economy.
Or that’s the idea, anyway. Governments soon realized they could use central banks to monetize their own deficits and control the economy by emitting bills of credit and forcing central banks to accept them. It’s a long story how that happened and is not directly relevant to this discussion, however.
So, yes, it is true Kelso proposed “using central bank-issued, interest-free loans to fund employee-owned firms.” “[T]heir potential to cause inflation,” however, depends on how you define inflation.
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| John Maynard Keynes |
To an Austrian economist such as Timothy Terrell, “inflation” means any increase in the money supply. Period. It doesn’t matter if the price level rises, lowers, or stays the same. It is the increase in the money supply itself that constitutes inflation. Thus, Terrell and other Austrians are absolutely correct within their framework “that such policies could lead to “massive inflation” by flooding the economy with credit,” although completely wrong about there being no controls. It is the Austrian framework that is incorrect, being completely past savings based.
As for Keynesian economists and their definition of inflation . . . it is not even consistent within its own framework. We’ve covered this quite a few times on this blog (and this isn’t intended to be an intensive research paper, anyway, but a — d’oh — blog posting), but the “pure Keynesian” definition of inflation is a rise in the price level after reaching full employment. Rises in the price level before reaching full employment are due to “other factors.” No, really, you can look it up in Keynes’s General Theory of Employment, Interest and Money. It’s right there in black and white, even if it doesn’t make any sense.
At least the Monetarist definition of inflation makes sense (and is the one used in Binary Economics): a rise in the price level resulting from too much money “chasing” too few goods and services. The monetarists don’t define money with complete accuracy, but that is the understanding of inflation used in Binary Economics, at least when we’re talking about the demand-pull variety (cost-push is a different animal).
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| Louis Kelso |
So, why will “Kelso’s policy proposals” NOT “cause inflation”? Because if you define inflation as too much money “chasing” too few goods and services, then by matching increases and decreases in the money supply to increases and decreases in goods and services, the price level and the currency will remain stable, all other things being equal. Kelso’s policy proposals and money creation processes are designed and intended to do just that.
As for “reliance on government-backed insurance schemes and constituency trusts” . . . uh, in the first place, Kelso suggested using government-backed insurance to collateralize capital acquisition loans, he did not rely on them. Later Binary Economists, such as Dr. Norman Kurland, reject using government-backed insurance, maintaining as much as possible should be handled by the private sector.
As for “constituency trusts” . . . what is a qualified pension plan? What is an IRA? Why are these bad when Kelso proposes them, but good when so-called mainstream economists do exactly the same thing? There seems to be something of a double standard in place here.
The bottom line here is we can disregard “Perceived Policy Risks and Inflation Concerns” as valid reasons for rejecting Binary Economics.
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