Recently we re-read New America (1983) by the late Poul Anderson, a compendium of four related science fiction novellas tied together into a coherent whole. It was, as is typical of Anderson’s work, well-written, fitted within known science and social trends at the time it was published, and dealt with serious themes in a thoughtful yet entertaining manner.
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| Poul Anderson |
Anderson’s story was also dead wrong on two key points where what is believed about economics differs from truth, that is, from conformity with reality. Fully half the book falls apart completely and becomes almost nonsensical (at least from an economic perspective — it remains entertaining and well-written) to anyone familiar with the principles of what Louis O. Kelso called “the Economics of Reality.”
Specifically, the first two chapters(?) — “My Own, My Native Land” and “Passing the Love of Women” — deal with the struggle of the individual and the social natures of the human person colliding in the political realm. This involves the art of politics, which in the Aristotelian view consists of achieving a working balance between the individual and society, optimizing freedom and the acquisition of virtue (“the pursuit of happiness”) while protecting the rights of others and the integrity of the common good. These stories would work well regardless of the setting; science fiction just makes the points more strongly than would otherwise be possible.
The latter two chapters (for want of a better word . . . perhaps “episodes” would be more descriptive?) — “A Fair Exchange” and “To Promote the General Welfare” — take as given certain disproved economic and financial assumptions upon which modern mainstream economics and finance are based. These assumptions have caused immeasurable damage to individuals and society, both in fiction and in the real world. Specifically:
· The Past Savings Assumption, which dictates the only way to finance economic growth and form new capital is to cut consumption and save, and
· The Sole Ownership Assumption, which dictates that a single individual must be the sole owner of a single enterprise; one individual may own many enterprises, but many individuals cannot own one enterprise.
In “A Fair Exchange” the plot involves the problem of the people of the large “lowland” rural districts of a newly colonized planet wanting to develop economically. Unfortunately, they are seemingly prevented by the lack of existing savings and the prospect of better returns for investors in the tiny “highland” urban districts.
Rigid adherence to the constraints imposed by the past savings assumption and gold as the sole money supply means there simply isn’t enough money to develop the lowlands economically. Consequently, the people of the lowlands will remain in economic servitude to the residents of the highlands.
A lowland pioneer reluctantly turned politician pulls a fast one on a highland financier . . . who in an interesting plot twist might not have been fooled after all. The highland financier saves the day through altruistic investing instead of implementing a more rational monetary and financial system to allow the development of all feasible projects.
In “To Promote the General Welfare” the colonists have received word that a new wave of colonists is on the way and should arrive in twenty years or so. They are worried, because being fresh from Earth (fresh frozen for the decades-long trip, that is), the new arrivals will not be able to live in the high-pressure lowlands and will both crowd the uplands where most people are living.
The uplands, however, are already owned by the original colonists who are not adapted to lowland conditions and those of their descendants who can’t take the lowland pressure. The influx would create an instant and self-perpetuating proletarian class, which would disrupt the social order and lead to conflict and (presumably) create a welfare state of the kind the original colonists left Earth to escape.
Again the decision is made to risk it and hope the principles of individual liberty will allow the new arrivals to integrate peacefully and assimilate . . . cross your fingers. Nothing is said about instituting a program of expanded capital ownership which would allow the new arrivals to participate on an equitable basis in the future growth of the colony or the institution of a monetary system that would facilitate such a program.
The modern corporation and modern methods of corporate finance — as well as history — have proven both the Past Savings and the Sole Ownership Assumptions false, but Modern Monetary Theory (MMT), much business practice (especially when decisions are made based on taxation considerations), and virtually the whole of every government’s monetary, fiscal, and economic policy are absolutely determined by the rigid insistence that they are unquestionably and undeniably true without exception.
In other words, what the Academics, Business Executives, and Politicians insist is the way things work consistently violates the first principle of finance by which the real world operates . . . poorly it is true, but only because the economy and the financial system keep trying to self-adjust to the constant undermining of the first principle of finance. This happens when governments engage in what Irving Fisher called “legal counterfeiting” for public finance and the consumer credit industry does the same for the private sector.
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| Benjamin Anderson |
Which raises the question, What is the first principle of finance? As Benjamin Anderson explained, it is to know the difference between a mortgage and a bill of exchange. And what does that mean? It is really quite simple . . . if you don’t confuse the limited (and limiting) use of the term mortgage to refer only to home mortgages, or think a bill of exchange is a bill of foreign exchange, which is completely different from a bill of exchange, despite the name:
· A mortgage is a past savings financial instrument, “money,” backed by existing goods in the possession of the issuer of the mortgage; the issuer must deliver the goods or the value thereof when the instrument matures. Mortgages pay interest.
· A bill of exchange is a future savings instrument, again, “money,” backed by the “creditworthiness” of the issuer of the bill of exchange; the issuer must deliver the goods or the value thereof when the instrument matures, although he or she need not have the goods or value until it is demanded. Bills of exchange do not pay interest but pass at a discount or premium below or above the face value of the instrument, respectively.
Then there is the underlying social and economic dogma which many people know is false, but accept anyway, and which has led to the past savings and sole ownership assumptions. This is the idea labor alone is productive. That being the case, the only legitimate way to earn income is through wages or by redistributing the “non-earnings” of capital — illegitimate, but essential to finance the capital which doesn’t produce but which provides the environment within which labor can produce (don’t try to understand that Keynesian contradiction).
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| John Maynard Keynes |
Paradoxically, most academics and politicians both accept and reject this presumably unquestioned dogma. Ask an academic or a politician to name the factors of production, and many, if not most, will say there are three: labor, land, and capital. Then ask those same academics how people are to gain income, and virtually all of them will say by having a job, ignoring the possibility of owning land or capital, the two other traditional factors of production.
If there aren’t enough jobs to go around, the politicians must pay businessmen to create them. If the jobs don’t pay enough to live on, the politicians must force businessmen to increase pay and benefits. When all else fails, the politicians must create money to stimulate the economy (or “prime the pump” as John Maynard Keynes put it), which will increase demand, create jobs, and raise wages. Ironically, Keynes convinced many politicians of the 1930s to adopt his ideas by ridiculing anyone who followed the ideas of “defunct economists,” and Keynes long ago joined their ranks, becoming the greatest of all defunct economists misleading people with his theories.
This system of three factors of production in theory and one factor of production in practice has been slowly bankrupting the global economy since its inception nearly a century ago. It was never sound to begin with, but capital was able to generate the enormous quantities of production essential to support un-productive labor and non-productive other people through redistribution and inflation, all the while maintaining the illusion that labor alone was producing the incredible amounts of goods and services the billions of people on Earth required even as advancing technology replaced labor in production at an accelerating rate.
The sun is now setting on the Keynesian delusion, ironically (a word that occurs much too frequently when discussing Keynesian theory and practice) at the end of the century Keynes declared was essential to hoodwink people into believing his theories would work until they did work through the magic of self-deception; foul did not become fair, and Utopia is further away than it has ever been, despite Keynes’s prediction. As he declared in an essay, “Economic Possibilities for Our Grandchildren,” first published in 1930 and republished in his collection, Essays in Persuasion (1931),
For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.
The AI revolution, which apparently only science fiction writers, readers, and other Cassandras foresaw, has revealed that the economic emperor has no clothes . . . to mix metaphors horribly. AI has stripped Keynes’s theories of whatever plausibility they might have had, and the Great Defunct Economist is (figuratively) running around buck naked in public view . . . even as the public, academics, and the politicians still insist we just need to try harder and implement failed programs at greater and greater cost . . . and greater and greater government deficits.
What can be done about it? That is what we will address in the second part of this piece.
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