• To correct the item from last week's News from the Network, the start of project "Celtic Cornucopia" was delayed until this week. On Tuesday, December 16, 2008 we sent 226 e-mails, one to each member of Dáil Éireann and Seanad Éireann (the Irish House of Representatives and Senate, respectively). On Thursday, December 18, 2008, we sent out a press release to 81 Irish and Irish American newspapers and other media (such as RTE). As of this morning, we have received 10 acknowledgments from various Deputies in the Dáil (including Mr. Brian Cowen, the Taoiseach, or Prime Minister), and only 9 of the press releases were returned as "undeliverable," which is a very good rate, considering that we located the media e-mails more by guess and hit-and-miss than anything else. The 10 responses from the Deputies indicated that they (or their staffs) had read the e-mails, at least in part, and were simply acknowledging receipt. This was much more than we expected, for none of them have any idea what this "Center for Economic and Social Justice" might be, or what business Americans might have in offering unsolicited advice on the Just Third Way to the Irish government. In the future, however, there are at least ten people connected with the government of Ireland who might recognize the term "Capital Homesteading" (especially if it appears in a newspaper), and may remember it as a possible solution to the current crisis as the economic situation continues to deteriorate. We hope to get out bound copies of Capital Homesteading for Every Citizen to the Taoiseach and various party leaders either today or in the coming week, with the hope that such seed-dropping will bear fruit when the legislature reconvenes after Christmas.As usual, there are a great many other news items that we haven't heard about because you haven't submitted them. If you're tired of reading about what we're doing, let's hear from you. If you have a SHORT item about how you are advancing the Just Third Way, send us a note about it at mgreaney [at] cesj [dot] org.
• We received the "proof" copy of our edition of The Emigrant's Guide by William Cobbett, the early 19th century journalist and political commentator whom G. K. Chesterton considered the "apostle of distributism." Cobbett, however, is much more than an obscure precursor of a "romantic" economic theory (as some rather dyspeptic critics have termed Chesterton and Belloc's brainchild). The Emigrant's Guide, almost unknown since its original publication in 1829, contains a wealth of information about early 19th century America that not only distributists, but followers of Henry George and, especially, admirers of Alexis de Tocqueville's monumental Democracy in America and libertarians will find extremely fascinating. Although we've added a lengthy foreword and have heavily annotated the text, in addition to compiling a bibliography and index, the book makes for a relatively quick "read," and at a little over 200 pages, is much easier to digest in a single sitting than de Tocqueville's masterpiece. The foreword in particular provides the reader with a necessary orientation to a world that now seems almost alien to the average American, while the book itself serves as an invaluable guide not only for people emigrating from England to America in the 1830s, but for serious de Tocqueville scholars today. Like all of Cobbett's writings, however, the book was written for ordinary people, and is extremely entertaining, as well as a source of first-hand early American history. High school students in particular should find the book interesting, as Cobbett habitually questions unthinking authority and urges people to make their own decisions, albeit with proper respect and deference to thinking authority. The book should be available for sale on Amazon and Barnes and Noble by the first week of January 2009. Be sure, however, that you obtain our annotated edition, ISBN 0-944997-01-5, although the other editions out will, of course, have the full text of Cobbett's original.
• We haven't obtained a copy yet, but we received an e-mail that mentioned the December 12, 2008 issue of The Wanderer, a national Catholic newspaper, made some very favorable comments about the Just Third Way (the movement, not the blog) in its "From the Mail" column, along with information about the social thought of Reverend William J. Ferree, S.M., Ph.D., one of the co-founders of the Center for Economic and Social Justice. When Father Ferree died in 1985 he was termed "America's greatest social philosopher" by Reverend Andrew F. Morlion, O.P., Ph.D., founder of the International University of Social Studies in Rome. If you have a copy of the "From the Mail" column from the 12/12/08 Wanderer, we'd be grateful if you'd send a photocopy to CESJ at P. O. Box 40711, Washington, DC 20016.
• In light of the above news item, we are pleased to report that we are making progress in our ongoing effort to republish the works of Father Ferree. Of course, both Introduction to Social Justice (1948) and the transcript of his series of talks on social charity are available as free downloads on the CESJ web site, www.cesj.org, but we expect within the next couple of months to publish both in a combined volume, with a foreword and annotations to explain the large number of topical references Father Ferree made in the course of the seminar on social charity he presented in 1966 after he returned from Rome. We also hope to republish Father Ferree's doctoral thesis, his revolutionary analysis of the social doctrine of Pope Pius XI, The Act of Social Justice, from 1942. If we get the time, we also hope to begin editing two manuscripts Father Ferree left incomplete at the time of his death, Forty Years After . . . A Second Call to Battle, and Administration and Social Ethics, as well as revise Introduction to Economic and Social Development (1966) in light of the development of Louis Kelso's binary economics, of which Father Ferree was unaware when he wrote the book.
• As of this morning, we have had visitors from 24 different countries and 35 states and provinces in the United States and Canada to this blog over the past two months.
THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.
Friday, December 19, 2008
News from the Network, Vol. 1, No. 17
With the end of the year coming fast on us, things are slowing down both politically and economically. Many people believe that the current situation in both areas is due to inherent flaws in the Bush administration (if not Mr. Bush himself), but we tend to think that virtually the whole of the mess can be traced directly to reliance on an outdated and inadequate paradigm of political economy. Thus, even as there is frantic activity directed toward fixing the system and repairing specific failures of institutions, little or nothing is done to correct the underlying flaws; the system itself is badly in need of a drastic overhaul and restructuring. In light of this overwhelming need to address a desperate situation, we have been making various efforts to wake people up to the need for reform.
Thursday, December 18, 2008
Lord Keynes, Reverend Malthus, Dr. Moulton, and Monsieur Say
A pillar of Keynesian economics is the rejection of "Say's Law of Markets." Say's Law (named for the French political economist Jean-Baptiste Say, who seems to have expressed it most clearly) is a principle of classical economics that supply generates its own demand, and demand, its own supply. According to Keynes (Marx rejected Say's Law for different reasons), the existence of market gluts — goods that cannot be cleared at market prices — disproves Say's Law. According to Keynes, the only way to clear "excess production" is for the State to print money, inflate the currency, and thereby redistribute purchasing power.
Evidently the Reverend Thomas Malthus, author of the noted Essay on Population (1797), agreed with Keynes, at least in rejecting Say's Law. In 1821, then, a series of letters Say wrote to Malthus were translated into English and published. In the very first chapter we find the following response to Malthus' rejection of Say's Law. Read the following extract carefully, for not only does the slightly archaic language confuse the meaning somewhat to our modern understanding, but the concepts appear radically different to minds conditioned by nearly two centuries of Malthusian doctrine, and almost a hundred years of Keynesian dogma. Critical passages are highlighted.
Keynesian remedies, therefore, concentrate on redistributing existing purchasing power. This is done either through the tax system, or by inflating the currency and increasing government expenditures and welfare payments. Remedies based on Say's Law, however, concentrate on creating new purchasing power without redistributing existing wealth.
The only problem is that Say did not take potential or actual barriers to engage in production into account. He assumed as a matter of course that anyone who wanted to could produce, whether by means of labor, land, or capital, "capital" meaning productive assets other than natural resources; all natural resources were grouped as "land." (Kelso and Adler — below — group all non-human productive assets into the category of "capital.") Say did not acknowledge, or (possibly) realize that there could be barriers to becoming an owner of capital, any more than he could imagine barriers to employing one's labor.
Clearly, however, there are barriers to becoming an owner of productive assets if you do not already own something that you can pledge as collateral or use to purchase capital outright. Worse, as technology advances and human labor becomes relatively less valuable as a factor of production, a significant barrier appears limiting the ability to employ one's labor as a means of engaging in the production of goods and services. Given a free choice between a relatively less expensive machine or expensive human labor, an employer will choose the machine.
Nevertheless, Say's Law remains valid. The problem is that factors that are not inherent in the economic process interfere with its ability to function. The fact that capital is becoming increasingly productive over time and human labor less productive in comparison is irrelevant to Say's Law, for people do not produce only by their labor, but also "through the means of their capital or their land."
To Say, then, the solution to "overproduction" was obvious: produce more. Those who are not producing must produce, and thereby create the purchasing power to clear inventories of existing goods at market prices.
The problem, then, is that the malfunctioning of Say's Law is not a problem of economics. On the contrary, it is a problem of how capital formation is financed. Keynes assumed that capital could only be financed by cutting consumption, saving, then investing. Keynes' assumption requires that ownership of the means of production be as concentrated as possible. Owners receive far more income than they can possibly spend on consumption. The excess is necessarily reinvested to create jobs for people who own nothing.
If people earn too little money from their labor, unsold production can be cleared by having the State print money, thereby redistributing purchasing power through the "hidden tax" of inflation. If people earn too much money from their labor, the State will tax the excess away. The former technique is Keynesian "monetary policy," while the latter is Keynesian "fiscal policy." Both techniques require a large outstanding and permanent national debt and a currency backed exclusively by that debt in order to facilitate State manipulation and control of the currency and the price level.
Unfortunately, both techniques lead ultimately to national bankruptcy. The national productive capacity becomes concentrated in fewer and fewer hands. Because the need to form new capital is not determined by economic consumer demand (necessarily decreasing as increasing amounts of consumption income are diverted to reinvestment), but by the political need to "create jobs," national productive capacity eventually becomes alienated from what the consumer wants, needs, and can afford. Planned obsolescence, massive advertising, colossal increases in the need and demand for consumer credit, tax cuts, stimulus packages, bailouts, and stock speculation on an immense scale replace the genuinely productive activity on which Say relied to make his "Law" function.
This is why the problem of Say's Law not working is financial not economic. Keynes' incredibly convoluted solutions to economic problems were and remain necessarily wrong because he was trying to fix a problem of corporate finance (a microeconomic job) with macroeconomic tools. It's like trying to drive in a screw with a sledgehammer. The screw will go in, certainly, but the damage will be heavy, and may destroy whatever is being constructed or repaired.
If we assume, however, that capital can be financed without first having to cut consumption, save, and then invest, the functioning of Say's Law can be restored. In 1935, Dr. Harold Moulton, then president of the Brookings Institution, demonstrated that Keynes' most basic assumption — cut consumption, save, invest — is wrong. Dr. Moulton's short monograph, The Formation of Capital, proved that in the United States from 1830 to 1930 by far the bulk of new capital formation was financed not by cutting consumption, saving, and then investing, but by commercial banks creating money out of the inherent productive capacity of future capital. That is, capital formation was not financed by existing savings, but by the creation of new money by the banks through the extension of credit for capital projects that would pay for themselves out of future income — the projects were "self-liquidating."
The only thing Dr. Moulton left out of his analysis was the key factor that Say took for granted: that people who did not produce because they were unable to employ (or simply didn't have) labor, capital, or land, would, in fact, somehow produce. This remained a conundrum for the next 20 years, until Louis Kelso and Mortimer Adler published The Capitalist Manifesto in 1958, and followed it up with The New Capitalists in 1961. The subtitle of the latter book is perhaps the most significant issue when asking the question how people who currently lack access to the means of acquiring and possessing capital are to be empowered to do so: "How to Free Economic Growth from the Slavery of Savings."
Kelso and Adler's position was that Say's Law could be restored 1) by financing all new capital formation through the extension of bank credit and collateralizing the loans by using capital credit insurance (paid for by using the usual "risk premium" charged on all loans as an actual insurance premium), 2) making certain that people who currently own little or nothing in the way of capital are able to purchase self-liquidating investments in new capital financed through such extension of bank credit, and 3) use all income from new capital first to retire the loan by means of which the capital was acquired in the first place, then afterwards for consumption.
Thus, it is possible to solve the seemingly impossible economic problems of today if we free ourselves from the "slavery of savings" (or, more accurately, the slavery of Keynesian economics), and restore the functioning of Say's Law of Markets in a way that enables everyone to participate in the economic process, both as owners of labor, and as owners of capital.
Evidently the Reverend Thomas Malthus, author of the noted Essay on Population (1797), agreed with Keynes, at least in rejecting Say's Law. In 1821, then, a series of letters Say wrote to Malthus were translated into English and published. In the very first chapter we find the following response to Malthus' rejection of Say's Law. Read the following extract carefully, for not only does the slightly archaic language confuse the meaning somewhat to our modern understanding, but the concepts appear radically different to minds conditioned by nearly two centuries of Malthusian doctrine, and almost a hundred years of Keynesian dogma. Critical passages are highlighted.
All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce.Keynes' solution to a declining or stagnant economy is found in the highlighted passage in the final paragraph: "That instead of continually producing, one ought to multiply barren consumptions, and expend the old capital instead of accumulating new." That is, people should first purchase existing inventories before producing anything more. Say's analysis, however, was that if goods remain unsold by some people, it is because other people aren't producing.
To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.
From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce.
I know that this proposition has a paradoxical complexion, which creates a prejudice against it. I know that one has much greater reason to expect to be supported by vulgar prejudices, when one asserts that the cause of too much produce is because all the world is employed in raising it. — That instead of continually producing, one ought to multiply barren consumptions, and expend the old capital instead of accumulating new.
Keynesian remedies, therefore, concentrate on redistributing existing purchasing power. This is done either through the tax system, or by inflating the currency and increasing government expenditures and welfare payments. Remedies based on Say's Law, however, concentrate on creating new purchasing power without redistributing existing wealth.
The only problem is that Say did not take potential or actual barriers to engage in production into account. He assumed as a matter of course that anyone who wanted to could produce, whether by means of labor, land, or capital, "capital" meaning productive assets other than natural resources; all natural resources were grouped as "land." (Kelso and Adler — below — group all non-human productive assets into the category of "capital.") Say did not acknowledge, or (possibly) realize that there could be barriers to becoming an owner of capital, any more than he could imagine barriers to employing one's labor.
Clearly, however, there are barriers to becoming an owner of productive assets if you do not already own something that you can pledge as collateral or use to purchase capital outright. Worse, as technology advances and human labor becomes relatively less valuable as a factor of production, a significant barrier appears limiting the ability to employ one's labor as a means of engaging in the production of goods and services. Given a free choice between a relatively less expensive machine or expensive human labor, an employer will choose the machine.
Nevertheless, Say's Law remains valid. The problem is that factors that are not inherent in the economic process interfere with its ability to function. The fact that capital is becoming increasingly productive over time and human labor less productive in comparison is irrelevant to Say's Law, for people do not produce only by their labor, but also "through the means of their capital or their land."
To Say, then, the solution to "overproduction" was obvious: produce more. Those who are not producing must produce, and thereby create the purchasing power to clear inventories of existing goods at market prices.
The problem, then, is that the malfunctioning of Say's Law is not a problem of economics. On the contrary, it is a problem of how capital formation is financed. Keynes assumed that capital could only be financed by cutting consumption, saving, then investing. Keynes' assumption requires that ownership of the means of production be as concentrated as possible. Owners receive far more income than they can possibly spend on consumption. The excess is necessarily reinvested to create jobs for people who own nothing.
If people earn too little money from their labor, unsold production can be cleared by having the State print money, thereby redistributing purchasing power through the "hidden tax" of inflation. If people earn too much money from their labor, the State will tax the excess away. The former technique is Keynesian "monetary policy," while the latter is Keynesian "fiscal policy." Both techniques require a large outstanding and permanent national debt and a currency backed exclusively by that debt in order to facilitate State manipulation and control of the currency and the price level.
Unfortunately, both techniques lead ultimately to national bankruptcy. The national productive capacity becomes concentrated in fewer and fewer hands. Because the need to form new capital is not determined by economic consumer demand (necessarily decreasing as increasing amounts of consumption income are diverted to reinvestment), but by the political need to "create jobs," national productive capacity eventually becomes alienated from what the consumer wants, needs, and can afford. Planned obsolescence, massive advertising, colossal increases in the need and demand for consumer credit, tax cuts, stimulus packages, bailouts, and stock speculation on an immense scale replace the genuinely productive activity on which Say relied to make his "Law" function.
This is why the problem of Say's Law not working is financial not economic. Keynes' incredibly convoluted solutions to economic problems were and remain necessarily wrong because he was trying to fix a problem of corporate finance (a microeconomic job) with macroeconomic tools. It's like trying to drive in a screw with a sledgehammer. The screw will go in, certainly, but the damage will be heavy, and may destroy whatever is being constructed or repaired.
If we assume, however, that capital can be financed without first having to cut consumption, save, and then invest, the functioning of Say's Law can be restored. In 1935, Dr. Harold Moulton, then president of the Brookings Institution, demonstrated that Keynes' most basic assumption — cut consumption, save, invest — is wrong. Dr. Moulton's short monograph, The Formation of Capital, proved that in the United States from 1830 to 1930 by far the bulk of new capital formation was financed not by cutting consumption, saving, and then investing, but by commercial banks creating money out of the inherent productive capacity of future capital. That is, capital formation was not financed by existing savings, but by the creation of new money by the banks through the extension of credit for capital projects that would pay for themselves out of future income — the projects were "self-liquidating."
The only thing Dr. Moulton left out of his analysis was the key factor that Say took for granted: that people who did not produce because they were unable to employ (or simply didn't have) labor, capital, or land, would, in fact, somehow produce. This remained a conundrum for the next 20 years, until Louis Kelso and Mortimer Adler published The Capitalist Manifesto in 1958, and followed it up with The New Capitalists in 1961. The subtitle of the latter book is perhaps the most significant issue when asking the question how people who currently lack access to the means of acquiring and possessing capital are to be empowered to do so: "How to Free Economic Growth from the Slavery of Savings."
Kelso and Adler's position was that Say's Law could be restored 1) by financing all new capital formation through the extension of bank credit and collateralizing the loans by using capital credit insurance (paid for by using the usual "risk premium" charged on all loans as an actual insurance premium), 2) making certain that people who currently own little or nothing in the way of capital are able to purchase self-liquidating investments in new capital financed through such extension of bank credit, and 3) use all income from new capital first to retire the loan by means of which the capital was acquired in the first place, then afterwards for consumption.
Thus, it is possible to solve the seemingly impossible economic problems of today if we free ourselves from the "slavery of savings" (or, more accurately, the slavery of Keynesian economics), and restore the functioning of Say's Law of Markets in a way that enables everyone to participate in the economic process, both as owners of labor, and as owners of capital.
Wednesday, December 17, 2008
Addressing the Financial Crisis in Ireland
Yesterday, at the suggestion of Mr. Chris O'Connor, Financial Secretary of the local division of the Ancient Order of Hibernians, we sent out a letter via e-mail to each member of Dáil Éireann and Seanad Éireann (the House of Deputies and the Senate of Ireland, respectively). As of this posting, we've gotten 9 responses, one even being from the Taoiseach, or Prime Minister, Mr. Brian Cowen. We don't know if it will lead to anything, but at least the effort has the potential to inform the leadership of a country that an alternative exists to the traditional reliance on bankrupt and bankrupting Keynesian solutions. Today we followed up with a press release to a number of newspapers in Ireland, as well as some Irish American publications. If you are in Éire, you might want to send your own note to your Deputy and Senator asking him or her to look into Capital Homesteading as a serious alternative to current attempts to address the situation. If you're in the United States or another country, please feel free to adapt the text to your particular situation, and send something to your own representative.
Dear Sir/Madam (we inserted the actual names):
The world financial disaster has thrown into chaos every economy across the face of the globe. As serious as the situation is, however, this crisis presents a unique opportunity to explore new economic ideas, sound policies and practical applications that will allow the people of Ireland to grow their economy and attain a more just, prosperous and sustainable future for themselves and their families.
I am writing you as a concerned citizen of the United States of America and President of the Center for Economic and Social Justice (CESJ), based outside of Washington, D.C. Founded in 1984, CESJ is a non-partisan, non-profit think tank that disseminates concepts and applications for universalizing citizen and worker access to ownership of productive assets. Information on CESJ's concepts, achievements and global network is provided on our web site at www.cesj.org.
Our scholars have been following the housing, pension and credit crises in Ireland, which share the same institutional roots as the economic crises in the U.S. As you know, today's economic collapse cannot be fixed by employing the same tired tools and methods that brought about the crisis in the first place. Only an economic program based firmly on common sense, with principles that respect the dignity and promote the empowerment of each and every human person, can succeed in turning this situation around.
Because of your responsibilities as a policymaker and decision-maker, we wish to bring to your attention an innovative approach called "Capital Homesteading." What is Capital Homesteading?
- A system that allows low-income citizens to attain ownership of their homes.
- A system that allows citizens to become shareholders in corporations and owners of other businesses and enterprises with real assets and income.
- A system that delivers justice and hope to those most affected by the financial crisis.
- A system that grows the economy over the long-term, but offers some immediate solutions to the current crisis.
Capital Homesteading is based on the principle that every human being has a natural and equal right to the legal and institutional means to acquire and possess capital assets sufficient to provide an adequate and secure income. A policy summary of Capital Homesteading is available at: http://www.cesj.org/homestead/summary-cha.htm. A more complete proposed blueprint for turning an economy around can be accessed at: http://www.cesj.org/homestead/capitalhomesteading.pdf
One practical application that may be of immediate interest to you addresses the housing and credit crisis. You can access this proposal at: http://www.cesj.org/homestead/strategies/national/homeequitycorp.htm. We hope that every member of Dáil Éireann and Seanad Éireann, as well as all members of the government and everyone interested in the welfare of the citizens of Ireland will consider Capital Homesteading and its related proposals.
If you have any questions or if CESJ can assist you in these matters, please feel free to contact me directly at thirdway@cesj.org or by telephone at 703-243-5155.
Respectfully,
Norman G. Kurland, President
Center for Economic and Social Justice
Dear Sir/Madam (we inserted the actual names):
The world financial disaster has thrown into chaos every economy across the face of the globe. As serious as the situation is, however, this crisis presents a unique opportunity to explore new economic ideas, sound policies and practical applications that will allow the people of Ireland to grow their economy and attain a more just, prosperous and sustainable future for themselves and their families.
I am writing you as a concerned citizen of the United States of America and President of the Center for Economic and Social Justice (CESJ), based outside of Washington, D.C. Founded in 1984, CESJ is a non-partisan, non-profit think tank that disseminates concepts and applications for universalizing citizen and worker access to ownership of productive assets. Information on CESJ's concepts, achievements and global network is provided on our web site at www.cesj.org.
Our scholars have been following the housing, pension and credit crises in Ireland, which share the same institutional roots as the economic crises in the U.S. As you know, today's economic collapse cannot be fixed by employing the same tired tools and methods that brought about the crisis in the first place. Only an economic program based firmly on common sense, with principles that respect the dignity and promote the empowerment of each and every human person, can succeed in turning this situation around.
Because of your responsibilities as a policymaker and decision-maker, we wish to bring to your attention an innovative approach called "Capital Homesteading." What is Capital Homesteading?
- A system that allows low-income citizens to attain ownership of their homes.
- A system that allows citizens to become shareholders in corporations and owners of other businesses and enterprises with real assets and income.
- A system that delivers justice and hope to those most affected by the financial crisis.
- A system that grows the economy over the long-term, but offers some immediate solutions to the current crisis.
Capital Homesteading is based on the principle that every human being has a natural and equal right to the legal and institutional means to acquire and possess capital assets sufficient to provide an adequate and secure income. A policy summary of Capital Homesteading is available at: http://www.cesj.org/homestead/summary-cha.htm. A more complete proposed blueprint for turning an economy around can be accessed at: http://www.cesj.org/homestead/capitalhomesteading.pdf
One practical application that may be of immediate interest to you addresses the housing and credit crisis. You can access this proposal at: http://www.cesj.org/homestead/strategies/national/homeequitycorp.htm. We hope that every member of Dáil Éireann and Seanad Éireann, as well as all members of the government and everyone interested in the welfare of the citizens of Ireland will consider Capital Homesteading and its related proposals.
If you have any questions or if CESJ can assist you in these matters, please feel free to contact me directly at thirdway@cesj.org or by telephone at 703-243-5155.
Respectfully,
Norman G. Kurland, President
Center for Economic and Social Justice
Tuesday, December 16, 2008
The Unions Forever?
Dinosaurs ruled the Earth until (as some paleontologists believe) a large comet or meteor hit the planet, causing massive climatic change that destroyed the great lizards' food supply, allowing mammals to gain a foothold and eventually dominate the world. Similarly, labor unions ruled the economic world until accelerating technology and cheaper foreign labor caused unions to seek State support to maintain their position. As State-imposed solutions rarely if ever work, union membership has declined to the point where only 7.9% of the private sector workforce was unionized in 2004, down from a high of 34.9% in 1949, according to statistics published by the Labor Research Association. That means that for the past half century, private sector union membership has declined by an average of 0.48% per year. Assuming the decline continues at a steady rate, there will be no private sector union membership by 2021.
That, of course, is unrealistic. One of two things will happen before private sector unions fade away like old soldiers. One, the government will step in and offer its protection. Backed up by the coercive power of the State, union membership will become a virtual mandate if anyone wants to secure a job in America's disappearing industrial base. Effectively socialism, this will allow the State to control both employers and employed in a self-defeating and panic-stricken effort to "save American jobs" and the remnants of the once-great industrial powerhouse.
By redistributing an increasing share of a shrinking pie to unions and their members, today's union leadership and the country's policymakers believe that they will somehow achieve progress and economic growth by undermining an essential aspect of human nature. That is, the only reason people invest and form capital is to derive the "fruits of ownership" from their productive assets. In a rational universe, people do not invest their time, effort, and ownership in something to secure an adequate income for others, especially when they and their dependents have not secured an adequate income.
This brings us to the other thing that could happen. Union leadership and the country's policymakers could wake up to the fact that human labor since the Industrial Revolution has been responsible for less and less of the total production of goods and services that takes place. "Capital" and "labor" are two independent variables in the production equation. Neither one can do without the other, but the coefficients of capital and labor have been changing as technology advances.
A "coefficient" is the number by which a variable is multiplied that expresses how the variables relate to one another. For example, in the equation 2x + y = z, there has to be twice as many "x"es as there are "y"s — regardless how big y or small x is — or the equation will no longer equal z. Over time, capital's coefficient has been getting rapidly larger, while labor's has been just as rapidly decreasing to keep the equation equal. (Of course, under the illogic of Keynesian economics, the equation has been distorted to such an extent by artificial manipulation of the system by the State that it is not equal, but that is a different issue, and is causing its own problems.)
Faced with the mathematical certainty that as the coefficient of capital increases, that of labor must decrease, the obvious solution is to cut labor in on some of the returns to capital. Keynesian economic policy does this by redistribution, inflation, job creation, and various other expedients that do nothing to increase the coefficient of labor, and, in fact, probably operate to increase the coefficient of capital at a faster rate, as owners of capital seek to replace increasingly expensive labor with more cost efficient capital.
A more direct means of getting some of the returns to capital legitimately to labor is to ensure that sellers of labor are also owners of capital. Workers would then derive the fruits of ownership (income and control) by right, rather than by expropriation or other coercive and illegitimate means.
If America's labor unions would grasp the reality of the situation, they would leap at the chance to expand their sphere of influence from mere labor, to ownership. Within an economy in which the rights of labor are becoming negligible due to the diminished importance of labor in the production equation, the rights of ownership are left without any organized movement to make certain that the ownership rights of ordinary workers are recognized, secured, and protected.
By concentrating exclusively on the rights of labor, unions are letting a much broader field of activity lie fallow. As the role of human labor decreases, there are fewer and fewer workers to protect, and thus less perceived need for unions. Potentially, however, as the role of capital increases, the number of owners whose rights need to be protected is limited only by the number of people. There can, after all, be only one person per job, but a single asset can be owned by an effectively infinite number of people.
There is only one obvious course of action for America's unions, and after them the unions of the world. They must transform themselves from organizations protecting the extremely limited and decreasing number of people who sell their toil, to the potentially infinite number of people who can own the means of production.
That, of course, is unrealistic. One of two things will happen before private sector unions fade away like old soldiers. One, the government will step in and offer its protection. Backed up by the coercive power of the State, union membership will become a virtual mandate if anyone wants to secure a job in America's disappearing industrial base. Effectively socialism, this will allow the State to control both employers and employed in a self-defeating and panic-stricken effort to "save American jobs" and the remnants of the once-great industrial powerhouse.
By redistributing an increasing share of a shrinking pie to unions and their members, today's union leadership and the country's policymakers believe that they will somehow achieve progress and economic growth by undermining an essential aspect of human nature. That is, the only reason people invest and form capital is to derive the "fruits of ownership" from their productive assets. In a rational universe, people do not invest their time, effort, and ownership in something to secure an adequate income for others, especially when they and their dependents have not secured an adequate income.
This brings us to the other thing that could happen. Union leadership and the country's policymakers could wake up to the fact that human labor since the Industrial Revolution has been responsible for less and less of the total production of goods and services that takes place. "Capital" and "labor" are two independent variables in the production equation. Neither one can do without the other, but the coefficients of capital and labor have been changing as technology advances.
A "coefficient" is the number by which a variable is multiplied that expresses how the variables relate to one another. For example, in the equation 2x + y = z, there has to be twice as many "x"es as there are "y"s — regardless how big y or small x is — or the equation will no longer equal z. Over time, capital's coefficient has been getting rapidly larger, while labor's has been just as rapidly decreasing to keep the equation equal. (Of course, under the illogic of Keynesian economics, the equation has been distorted to such an extent by artificial manipulation of the system by the State that it is not equal, but that is a different issue, and is causing its own problems.)
Faced with the mathematical certainty that as the coefficient of capital increases, that of labor must decrease, the obvious solution is to cut labor in on some of the returns to capital. Keynesian economic policy does this by redistribution, inflation, job creation, and various other expedients that do nothing to increase the coefficient of labor, and, in fact, probably operate to increase the coefficient of capital at a faster rate, as owners of capital seek to replace increasingly expensive labor with more cost efficient capital.
A more direct means of getting some of the returns to capital legitimately to labor is to ensure that sellers of labor are also owners of capital. Workers would then derive the fruits of ownership (income and control) by right, rather than by expropriation or other coercive and illegitimate means.
If America's labor unions would grasp the reality of the situation, they would leap at the chance to expand their sphere of influence from mere labor, to ownership. Within an economy in which the rights of labor are becoming negligible due to the diminished importance of labor in the production equation, the rights of ownership are left without any organized movement to make certain that the ownership rights of ordinary workers are recognized, secured, and protected.
By concentrating exclusively on the rights of labor, unions are letting a much broader field of activity lie fallow. As the role of human labor decreases, there are fewer and fewer workers to protect, and thus less perceived need for unions. Potentially, however, as the role of capital increases, the number of owners whose rights need to be protected is limited only by the number of people. There can, after all, be only one person per job, but a single asset can be owned by an effectively infinite number of people.
There is only one obvious course of action for America's unions, and after them the unions of the world. They must transform themselves from organizations protecting the extremely limited and decreasing number of people who sell their toil, to the potentially infinite number of people who can own the means of production.
Monday, December 15, 2008
Keynes' Ponzi Scheme
Everyone (or almost everyone) on Wall Street is running around trying to save capitalism from the Madoff scandal, without first asking the question as to whether capitalism is worth saving. (They also fail to ask whether what we've got in place under the iron rule of Lord Keynes is "capitalism," or something that looks, walks, and quacks like a socialist duck.) Consequently, we sent the following blast to the Wall Street Journal today. Lest anyone should think we're ignoring the problems that the UAW is presenting, effectively betraying the legacy of the late Walter Reuther — we're working on our response to their self-defeating "victory" in trying to force the country into a socialist wage-slave system. It's just that the Madoff situation is so obviously the fruit of the Keynesian model that it was difficult to pass up. You always pick off the easy targets first.
The only real mystery surrounding Bernard L. Madoff's Investment Securities scandal is why people are so mystified at how he was able to pull it off. A flurry of articles in today's Wall Street Journal ("Losses in Madoff Case Spread," A1; "In Palm Beach, Investors Assume Worst," A16; "Investors May Have to surrender Gains," A16; "SEC Had Chances for Years to Expose Madoff's Alleged Ponzi Scheme," A16; "Review & Outlook: Madoff and Markets," A18) all reveal a basic lack of understanding of what is really going on.
Madoff's success is easily explained. A Ponzi scheme is, after all, only Keynesian economics in microcosm — if a $50 billion graft can be referred to as "micro" in scale. People have been conditioned since the New Deal to believe unquestioningly in the Keynesian dogma that we can have what we want today, and let future generations pay for it. They, in turn, pass the debt on to their children, and so on. As long as nobody questions the basic assumption — that people, institutions, and governments can continue making promises they can't possibly keep — everything is fine. We only need to keep bringing in new investors/taxpayers to pay out old investors/taxpayers.
The projected deficit in Social Security and Medicare, the national debt, the growing burden of consumer debt (ironically highlighted in "This Year, More Than Ever, It's Tough to Be a Compulsive Shopper," A1), the subprime mortgage crisis (the list is becoming endless) all rely on finding more and more people in the future to bring in to foot the bill for today's expenditures. When fewer people come in than expected, credit dries up, or the social surplus proves insufficient to fund the scheme, the system collapses under the weight of its own illogic.
The alternative is to implement an economic system based on common sense instead of the desire to get something for nothing that underlies Keynes' system. Such a program is called "Capital Homesteading for Every Citizen," from the book with the same title. Increasing regulation and forcing government to do jobs it was not designed or intended to do is not the answer. It didn't work to stave off Madoff’s stunt, and it won't save a Keynesian economy from itself. The only solution is to try something based on the belief that true justice consists only in receiving what you are due, not in sticking it to generations unborn.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
The only real mystery surrounding Bernard L. Madoff's Investment Securities scandal is why people are so mystified at how he was able to pull it off. A flurry of articles in today's Wall Street Journal ("Losses in Madoff Case Spread," A1; "In Palm Beach, Investors Assume Worst," A16; "Investors May Have to surrender Gains," A16; "SEC Had Chances for Years to Expose Madoff's Alleged Ponzi Scheme," A16; "Review & Outlook: Madoff and Markets," A18) all reveal a basic lack of understanding of what is really going on.
Madoff's success is easily explained. A Ponzi scheme is, after all, only Keynesian economics in microcosm — if a $50 billion graft can be referred to as "micro" in scale. People have been conditioned since the New Deal to believe unquestioningly in the Keynesian dogma that we can have what we want today, and let future generations pay for it. They, in turn, pass the debt on to their children, and so on. As long as nobody questions the basic assumption — that people, institutions, and governments can continue making promises they can't possibly keep — everything is fine. We only need to keep bringing in new investors/taxpayers to pay out old investors/taxpayers.
The projected deficit in Social Security and Medicare, the national debt, the growing burden of consumer debt (ironically highlighted in "This Year, More Than Ever, It's Tough to Be a Compulsive Shopper," A1), the subprime mortgage crisis (the list is becoming endless) all rely on finding more and more people in the future to bring in to foot the bill for today's expenditures. When fewer people come in than expected, credit dries up, or the social surplus proves insufficient to fund the scheme, the system collapses under the weight of its own illogic.
The alternative is to implement an economic system based on common sense instead of the desire to get something for nothing that underlies Keynes' system. Such a program is called "Capital Homesteading for Every Citizen," from the book with the same title. Increasing regulation and forcing government to do jobs it was not designed or intended to do is not the answer. It didn't work to stave off Madoff’s stunt, and it won't save a Keynesian economy from itself. The only solution is to try something based on the belief that true justice consists only in receiving what you are due, not in sticking it to generations unborn.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Friday, December 12, 2008
News from the Network, Vol. 1, No. 16
As the holidays approach, we spend more time setting up opportunities for the New Year and completing routine annual tasks than we do "accomplishing" definable tasks. In light of deteriorating economic conditions, this could be considered an accomplishment in itself — but it is clearly not enough if we are to succeed in bringing the Just Third Way to the attention of political leaders and policymakers. For that reason, each of you might want to consider how, in the New Year, you can make the effort to open at least three doors, create three opportunities, or carry out three discrete tasks directed toward advancing understanding, acceptance, and implementation of Capital Homesteading and other Just Third Way programs.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
• Early this week we reconnected with Dr. Damian P. Fedoryka, a past president of Christendom College in Front Royal, Virginia. Dr. Fedoryka wrote an in-depth review of CESJ's 1994 compendium Curing World Poverty: The New Role of Property, that was published in the July-August 1994 issue of Homiletic and Pastoral Review. We are meeting with Dr. Fedoryka later in December to discuss ways in which he might be able to use his contacts to help advance the Just Third Way — and perhaps do another review, this time of Michael D. Greaney's book, In Defense of Human Dignity. If you have entry into any newspaper or other periodical, you might want to consider writing a review. You can obtain a .pdf review copy by sending an e-mail to CESJ at thirdway [at] cesj [dot] org. If you are a blogger, you are especially encouraged to take advantage of this, particularly if you have as much trouble as I do in coming up with interesting postings on some slow news days.As usual, there are a great many other news items that we haven't heard about because you haven't submitted them. If you're tired of reading about what we're doing, let's hear from you. If you have a SHORT item about how you are advancing the Just Third Way, send us a note about it at mgreaney [at] cesj [dot] org.
• Project "Celtic Cornucopia" begins its first outreach effort today with e-mails sent to each member of Dáil Éireann and Seanad Éireann (the Irish House of Representatives and Senate, respectively). The e-mails will contain links to the .pdf version of Capital Homesteading for Every Citizen and other descriptive material. Regular bound copies along with some other Just Third Way enclosures will be sent to the Taoiseach (Prime Minister) and some of the major party leaders, as well as Gerry Adams of Sinn Fein to show that there is an economic program available that will solve the current financial crisis as well as provide a sound foundation for building a lasting peace and eventual unification through common interests.
• Eventually the Irish — north and south — might want to look into our latest book, In Defense of Human Dignity. Sales remain steady, although not spectacular. While the book is written from a Catholic perspective, it seems to be resonating with people from other faith traditions, reinforcing the fact that the natural law is the common denominator and provides the universal principles on which society must be restructured. The book can be ordered from Amazon and Barnes and Noble.
• CESJ friend and supporter Walter Fauntroy is still working at introducing the Just Third Way to the future movers and shakers in the new administration. Walter thereby demonstrates Number 17 in the Code of Ethics in an exemplary manner.
• Speaking of persistence, persistence, and persistence, the Washington Post's otherwise excellent writer and analyst Steven Pearlstein is continuing to chastise the powers-that-be (good), but without offering anything substantive to correct the situation (bad) ("Just One Real Leader, and We Could Have Avoided This Mess," Washington Post, 12/12/08, D1). Assuming we get the time today, we'll send off (another) letter to the Post and Pearlstein reminding both of them that neither of them has given serious consideration (or any consideration at all, for that matter) to our Just Third Way solution.
• As of this morning, we have had visitors from 27 different countries and 37 states and provinces in the United States and Canada to this blog over the past two months.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Thursday, December 11, 2008
Is the United States Now a "Command Economy"?
The political pundits all seem to be in agreement this morning that the automakers' bailout is in trouble. It has passed the House, but now seems stalled in the Senate. Wall Street and the financial markets are unsure which way to jump, or even whether to buy long or sell short to make as much money as possible on other people's uncertainty. ("Wall Street lower amid auto bailout worries," AP, 12/11/08)
Once again the political and the financial powers-that-be are missing the point — just as they've missed the point for over a century on the difference between credit extended for consumption, speculation, and government expenditures ("bad credit"), and credit extended for self-liquidating capital investment ("good credit"). There is a very deeply superficial understanding about ends and means in this country, possibly the result of the riptide of moral relativism that has inundated human thought and behavior for more than a hundred years. If the end appears good, e.g., greater consumer buying power, meeting government deficits without recourse to taxation, saving the automobile industry — whatever — how it is done matters very little, if at all.
The problem is that choosing the wrong means to achieve even a greatly desired, even necessary end can result in the opposite of what was intended. The restrictions proposed for the auto industry make sense in light of the method chosen to bail them out — but is a bailout the best or only way to accomplish the desired end? With the State dictating what products shall be developed, how much can be produced, setting compensation, and so on, what results is a "command economy," more popularly known as socialism or communism. We are faced with the supreme irony that, given the Keynesian economic framework, the only way to save the free market is to destroy it, that is, change it from a free market into a centrally-planned "command economy."
Instead of Keynes, then, the economic and political powers-that-be should be looking at Kelso and Adler, and studying the possibility of saving the automakers — and the rest of the economy — by means of applications based on the principles of Kelsonian Capital Homesteading and ownership, not Keynesian full employment and inflation.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Once again the political and the financial powers-that-be are missing the point — just as they've missed the point for over a century on the difference between credit extended for consumption, speculation, and government expenditures ("bad credit"), and credit extended for self-liquidating capital investment ("good credit"). There is a very deeply superficial understanding about ends and means in this country, possibly the result of the riptide of moral relativism that has inundated human thought and behavior for more than a hundred years. If the end appears good, e.g., greater consumer buying power, meeting government deficits without recourse to taxation, saving the automobile industry — whatever — how it is done matters very little, if at all.
The problem is that choosing the wrong means to achieve even a greatly desired, even necessary end can result in the opposite of what was intended. The restrictions proposed for the auto industry make sense in light of the method chosen to bail them out — but is a bailout the best or only way to accomplish the desired end? With the State dictating what products shall be developed, how much can be produced, setting compensation, and so on, what results is a "command economy," more popularly known as socialism or communism. We are faced with the supreme irony that, given the Keynesian economic framework, the only way to save the free market is to destroy it, that is, change it from a free market into a centrally-planned "command economy."
Instead of Keynes, then, the economic and political powers-that-be should be looking at Kelso and Adler, and studying the possibility of saving the automakers — and the rest of the economy — by means of applications based on the principles of Kelsonian Capital Homesteading and ownership, not Keynesian full employment and inflation.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Wednesday, December 10, 2008
Increase Consumer Income and Stimulate Economic Growth
Here is today's blast to the Wall Street Journal. It is becoming more evident every day that few people realize the difference between good credit (credit used to finance self-liquidating capital projects) and bad credit (credit used for consumption, speculation, and government spending). Even worse, the predominant economic theory holding the world in thrall today is that of Lord Keynes ... who appears to have had a very tenuous grasp (if any) on money, credit, and banking, despite the involved and confusing explanations in his General Theory.
Mr. Harvey Golub's op-ed piece in yesterday's Wall Street Journal ("Getting Out of the Credit Mess," WSJ, 12/09/08, A17) provides a necessary wakeup call to those who still mistakenly believe in the Keynesian dogma that the State can spend the country out of recession and depression. He is absolutely correct that credit — when it is used at all — must be used for sound, financially feasible loans that carry a reasonable expectation of repayment. Mr. Golub is also correct that only increasing consumer earning power through economic growth and decreasing (ideally eliminating) loans made for projects that do not generate their own repayment or are insufficiently collateralized with existing hard assets will bring us out of the current crisis.
We would add that, consistent with the findings of Dr. Harold Moulton in his iconoclastic monograph The Formation of Capital (1935) and the work of Dr. Louis O. Kelso and Dr. Mortimer J. Adler in The Capitalist Manifesto (1958) and The New Capitalists (1961), we cannot limit our understanding of "consumer earning power" solely to the ability to sell labor for wages. We must add in the natural right that each human person has to own productive assets — capital — and derive an income therefrom. If, in accordance with sound central banking theory we use the commercial banking system and the central bank to create money exclusively to finance capital formation, and stop money creation for consumer purchases, speculation, and government spending, there is no need to divert capital incomes (dividends and capital gains) from consumption to reinvestment. If all newly-formed capital is owned by people who finance its acquisition with such "new money," and who use both their labor incomes and capital incomes for consumption, dramatically increasing consumption, the economic growth that we need to get out of debt will occur.
The only issue that remains is how to initiate the process of capital formation so that people who currently own little or nothing in the way of income-generating assets will have something to purchase with the credit extended for such purposes. As Dr. Moulton demonstrated in 1935, the demand for capital is derived from consumer demand; typically before periods of intense capital formation, there is an upswing in consumer demand. This increase in consumer demand depletes savings, leaving little or nothing left to finance the formation of capital, hence the need to use the banking system to create money for that purpose.
The problem today is that savings have already been depleted and enormous debt incurred, not for the legitimate purpose of capital formation, but for consumption, speculation, and government spending. This has severely curtailed the lending capacity of financial institutions, while the central bank is busily following standard Keynesian dogma by creating ever-increasing amounts of money for consumption, speculation, and government spending — a classic case of trying to get out of a hole by digging it deeper.
The solution to this conundrum is the concept of financial feasibility. Typically a business will only invest in new capital formation if there is a perceived consumer demand for the product or service. Thus, consumer demand serves as a type of collateral or insurance for a business loan, backed up with sound market projections and a good business plan. As Kelso and Adler point out, however, it is possible to replace the "universal collateralization requirement" with capital credit insurance, using the risk premium assigned to all loans as an insurance premium.
To provide the initial insurance pool and a "failsafe" reinsurance pool, wealthy investors can provide the liquidity, using the funds that can no longer be used for new capital formation, having been replaced with new money created by the banking system. This pool can be treated the same as bank reserves and invested in government bonds, on which (as the government will no longer have access to the discount window for either primary or secondary issues) the rate will necessarily be close to the fair market cost of financial capital.
Given a reasonable reassurance that the loans will be repaid, either out of future income generated by the newly-formed capital or out of the insurance proceeds in the event of default by the borrower, lenders will make loans for capital projects. This will create jobs and increase consumer demand as well as expand the tax base. By putting more people to work, demand for social welfare payments will decrease, lessening the amount the government requires at the same time tax revenues increase. The surplus can be directly applied to debt reduction.
Such a program will require a reorientation in both citizen and government thinking. The State is not there to provide for all our needs, even when we cannot take care of ourselves. Perceived in that way, the State inevitably starts to arrange things so that it must take care of everyone, thereby extending its power and assuming incompatible functions. No, the role of the State is to make it possible for us to take care of ourselves.
A proposal called Capital Homesteading for Every Citizen, from the book with the same title, details a solution to our current situation. It should be taken seriously at all levels of government, but most especially by the new administration, seemingly locked into the self-defeating Keynesian paradigm.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Mr. Harvey Golub's op-ed piece in yesterday's Wall Street Journal ("Getting Out of the Credit Mess," WSJ, 12/09/08, A17) provides a necessary wakeup call to those who still mistakenly believe in the Keynesian dogma that the State can spend the country out of recession and depression. He is absolutely correct that credit — when it is used at all — must be used for sound, financially feasible loans that carry a reasonable expectation of repayment. Mr. Golub is also correct that only increasing consumer earning power through economic growth and decreasing (ideally eliminating) loans made for projects that do not generate their own repayment or are insufficiently collateralized with existing hard assets will bring us out of the current crisis.
We would add that, consistent with the findings of Dr. Harold Moulton in his iconoclastic monograph The Formation of Capital (1935) and the work of Dr. Louis O. Kelso and Dr. Mortimer J. Adler in The Capitalist Manifesto (1958) and The New Capitalists (1961), we cannot limit our understanding of "consumer earning power" solely to the ability to sell labor for wages. We must add in the natural right that each human person has to own productive assets — capital — and derive an income therefrom. If, in accordance with sound central banking theory we use the commercial banking system and the central bank to create money exclusively to finance capital formation, and stop money creation for consumer purchases, speculation, and government spending, there is no need to divert capital incomes (dividends and capital gains) from consumption to reinvestment. If all newly-formed capital is owned by people who finance its acquisition with such "new money," and who use both their labor incomes and capital incomes for consumption, dramatically increasing consumption, the economic growth that we need to get out of debt will occur.
The only issue that remains is how to initiate the process of capital formation so that people who currently own little or nothing in the way of income-generating assets will have something to purchase with the credit extended for such purposes. As Dr. Moulton demonstrated in 1935, the demand for capital is derived from consumer demand; typically before periods of intense capital formation, there is an upswing in consumer demand. This increase in consumer demand depletes savings, leaving little or nothing left to finance the formation of capital, hence the need to use the banking system to create money for that purpose.
The problem today is that savings have already been depleted and enormous debt incurred, not for the legitimate purpose of capital formation, but for consumption, speculation, and government spending. This has severely curtailed the lending capacity of financial institutions, while the central bank is busily following standard Keynesian dogma by creating ever-increasing amounts of money for consumption, speculation, and government spending — a classic case of trying to get out of a hole by digging it deeper.
The solution to this conundrum is the concept of financial feasibility. Typically a business will only invest in new capital formation if there is a perceived consumer demand for the product or service. Thus, consumer demand serves as a type of collateral or insurance for a business loan, backed up with sound market projections and a good business plan. As Kelso and Adler point out, however, it is possible to replace the "universal collateralization requirement" with capital credit insurance, using the risk premium assigned to all loans as an insurance premium.
To provide the initial insurance pool and a "failsafe" reinsurance pool, wealthy investors can provide the liquidity, using the funds that can no longer be used for new capital formation, having been replaced with new money created by the banking system. This pool can be treated the same as bank reserves and invested in government bonds, on which (as the government will no longer have access to the discount window for either primary or secondary issues) the rate will necessarily be close to the fair market cost of financial capital.
Given a reasonable reassurance that the loans will be repaid, either out of future income generated by the newly-formed capital or out of the insurance proceeds in the event of default by the borrower, lenders will make loans for capital projects. This will create jobs and increase consumer demand as well as expand the tax base. By putting more people to work, demand for social welfare payments will decrease, lessening the amount the government requires at the same time tax revenues increase. The surplus can be directly applied to debt reduction.
Such a program will require a reorientation in both citizen and government thinking. The State is not there to provide for all our needs, even when we cannot take care of ourselves. Perceived in that way, the State inevitably starts to arrange things so that it must take care of everyone, thereby extending its power and assuming incompatible functions. No, the role of the State is to make it possible for us to take care of ourselves.
A proposal called Capital Homesteading for Every Citizen, from the book with the same title, details a solution to our current situation. It should be taken seriously at all levels of government, but most especially by the new administration, seemingly locked into the self-defeating Keynesian paradigm.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Tuesday, December 9, 2008
Keynesian Economics: Socialism Lite
According to an article in the December 8, 2008 issue of the New York Times — itself facing some serious financial problems — Russia's leaders are seizing the opportunity offered by the current economic crisis to re-impose socialist central planning and control on the economy. ("Kremlin Rules: In Hard Times, Russia Tries to Reclaim Industries") Meanwhile, back in the United States, presumed capitalist capital of the world, Congress and the White House are debating not whether to impose central planning, but how far to extend increasingly levels of State interference in the economy (e.g., "Congress, White House nears deal on auto bailout").
The move toward socialism in the United States may surprise many people unaware of the similarities between the two presumably opposed systems of capitalism and socialism, but centralized control over the U.S. economy by the State has been a fact of life since the New Deal, just as centralized control over the U.S. economy by private interests was a fact of life for two generations before that. Prior to that, widespread ownership of the means of production (usually in the form of agricultural land) was the rule, with the rapid takeover of the private sector by concentrated economic power forestalled for a time by Abraham Lincoln's 1862 Homestead Act.
Had it not been for the Homestead Act, the rapid industrialization of the North during the Civil War would have completed its hegemony over the economy in a very short time. Had it not been for the opening of the West, the vast federal lands would have remained under the control of wealthy ranchers, and Reconstruction would have maintained iron control over the South permanently. With the vast western lands broken up into small holdings, however, the power of the ranchers was broken at a time when the rising demand for western beef would have given them (as it nearly did) total control over more than half the land in the U.S., while the escape valve of the movement west kept the federal government from imposing absolute control over the South during Reconstruction.
Today, consistent with the dictates of Keynesian economics (General Theory, V.24.ii), there is virtually no small ownership left to compete with the large corporations, the ownership of which is concentrated in less than 1% of the population. Then, with the current financial meltdown (instead of taking the opportunity offered by the crisis to reform the system and open up capital ownership to ordinary people the way Lincoln opened up the opportunity to own land) the federal government is, instead, working feverishly to install and maintain central planning and control over the economy. This is predominantly by means of absolute control over money and credit, but now is moving to imposing direct State control of industry, beginning with the "Big Three" automakers.
Again, this is perfectly consistent with Keynesian economics. Keynes declared in The General Theory of Employment, Interest, and Money (1935) his rather turgid economic tome (composed, in the opinion of this writer, in a panic to undermine the findings of Dr. Harold Moulton in his brilliant, if iconoclastic monograph, The Formation of Capital, 1935), the State should control the "rate of interest" (i.e., return to capital), the rate of investment, and State "cooperation" with industry — to say nothing of working to eliminate small ownership gradually from the economy. To disabuse people of the idea that the level of State control he advocated was socialist, Keynes calmed people's fears first by writing in an obscure a manner as possible, then stating,
There is, nevertheless, time to reverse this trend, or even salvage some semblance of a human system in the event the current movement toward State control succeeds — which it appears very likely to do, as bankers and automakers rush to save themselves at taxpayer expense. A Capital Homestead Act can do for America and the world what Abraham Lincoln did with the Homestead Act of 1862.
More — a Capital Homestead Act would be of permanent benefit and effect a lasting restructuring of the social order. Land is by nature limited, while the amount of new capital investment is, for all intents and purposes, limited only by humanity's need for goods and services. Industrial and commercial hegemony over the economy was only made possible with the closing of the land frontier and the effective end of competition to concentrated economic (and thus political) power. It is time to restore the balance, and that balance can only be restored by opening up democratic access to the means of acquiring and possessing private productive property.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
The move toward socialism in the United States may surprise many people unaware of the similarities between the two presumably opposed systems of capitalism and socialism, but centralized control over the U.S. economy by the State has been a fact of life since the New Deal, just as centralized control over the U.S. economy by private interests was a fact of life for two generations before that. Prior to that, widespread ownership of the means of production (usually in the form of agricultural land) was the rule, with the rapid takeover of the private sector by concentrated economic power forestalled for a time by Abraham Lincoln's 1862 Homestead Act.
Had it not been for the Homestead Act, the rapid industrialization of the North during the Civil War would have completed its hegemony over the economy in a very short time. Had it not been for the opening of the West, the vast federal lands would have remained under the control of wealthy ranchers, and Reconstruction would have maintained iron control over the South permanently. With the vast western lands broken up into small holdings, however, the power of the ranchers was broken at a time when the rising demand for western beef would have given them (as it nearly did) total control over more than half the land in the U.S., while the escape valve of the movement west kept the federal government from imposing absolute control over the South during Reconstruction.
Today, consistent with the dictates of Keynesian economics (General Theory, V.24.ii), there is virtually no small ownership left to compete with the large corporations, the ownership of which is concentrated in less than 1% of the population. Then, with the current financial meltdown (instead of taking the opportunity offered by the crisis to reform the system and open up capital ownership to ordinary people the way Lincoln opened up the opportunity to own land) the federal government is, instead, working feverishly to install and maintain central planning and control over the economy. This is predominantly by means of absolute control over money and credit, but now is moving to imposing direct State control of industry, beginning with the "Big Three" automakers.
Again, this is perfectly consistent with Keynesian economics. Keynes declared in The General Theory of Employment, Interest, and Money (1935) his rather turgid economic tome (composed, in the opinion of this writer, in a panic to undermine the findings of Dr. Harold Moulton in his brilliant, if iconoclastic monograph, The Formation of Capital, 1935), the State should control the "rate of interest" (i.e., return to capital), the rate of investment, and State "cooperation" with industry — to say nothing of working to eliminate small ownership gradually from the economy. To disabuse people of the idea that the level of State control he advocated was socialist, Keynes calmed people's fears first by writing in an obscure a manner as possible, then stating,
In some other respects the foregoing theory is moderately conservative in its implications. For whilst it indicates the vital importance of establishing certain central controls in matters which are now left in the main to individual initiative, there are wide fields of activity which are unaffected. [Keynes doesn't list the "wide fields of activity" left to individual initiative.] The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation [i.e., manipulating the tax rate to increase or decrease disposable income], partly by fixing the rate of interest [i.e., by fixing the rate of return to capital], and partly, perhaps [!] in other ways [carefully not specified]. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. [i.e., control of the banks will probably not exercise adequate control over new capital formation] I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. [In other words, State control over who can invest and how much — which the communists called "central planning" — will not preclude the imposition of other controls by the State, as seems expedient.] But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. [Of course not — controlling who may own and how they may enjoy how much of the fruits of ownership is to exercise absolute control over the economy and the lives of individual citizens!] It is not the ownership of the instruments of production which it is important for the State to assume. [Ownership is control in all codes of law; Keynes is saying that it isn't necessary to take actual title for the State to own everything.] If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. [i.e., if the State is able to exercise absolute control over everything, it will have achieved its goal.] Moreover, the necessary measures of socialization can be introduced gradually and without a break in the general traditions of society. [Excepting only the "traditions" involving the natural law rights to life, liberty, property, and capacity to acquire and develop virtue.] (General Theory, V.24.iii)By actually reading what Keynes wrote and understanding its import, we realize that the end result of the Keynesian economic program is effective State ownership and control of virtually every aspect of human life. This is achieved by first controlling money and credit, and then by extending this control directly to industry and commerce. This is consistent with Lenin's approach to undermining the capitalist system: first debauch the currency, then seize direct control once private interests are too weak to resist. If the rot has spread far enough, the capitalists will even beg for State control — fulfilling Lenin's prediction that the capitalists will be so eager to save themselves from their own folly and still make a profit that they will sell the very rope that will be used to hang them.
There is, nevertheless, time to reverse this trend, or even salvage some semblance of a human system in the event the current movement toward State control succeeds — which it appears very likely to do, as bankers and automakers rush to save themselves at taxpayer expense. A Capital Homestead Act can do for America and the world what Abraham Lincoln did with the Homestead Act of 1862.
More — a Capital Homestead Act would be of permanent benefit and effect a lasting restructuring of the social order. Land is by nature limited, while the amount of new capital investment is, for all intents and purposes, limited only by humanity's need for goods and services. Industrial and commercial hegemony over the economy was only made possible with the closing of the land frontier and the effective end of competition to concentrated economic (and thus political) power. It is time to restore the balance, and that balance can only be restored by opening up democratic access to the means of acquiring and possessing private productive property.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Monday, December 8, 2008
News from the Network, Vol. 1, No. 15
(Technical difficulties prevented this posting from going up on Friday.) This week started off on a sad note when we received word on Monday of the death of Rich Biernacki, long-time CESJ member and Counselor. Rich's life, however, was well-spent, and serves as a continuing inspiration in our efforts to implement and maintain the Just Third Way. Thus, even though things tend to slow down at this time of year as people focus on other matters (especially the coming transition to a new president in the United States), there have been a few indications of progress, within the movement, if not without.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
• We are still receiving positive feedback from Norman Kurland's brief talk on Saturday, November 22, 2008 at the Washington, DC, "End the Fed" rally. A video clip of the event can be seen here.As usual, there are a great many other news items that we haven't heard about because you haven't submitted them. If you're tired of reading about what we're doing, let's hear from you. If you have a SHORT item about how you are advancing the Just Third Way, send us a note about it at mgreaney [at] cesj [dot] org.
• On Tuesday, December 2, 2008, we sent out a CESJ tribute on Rich Biernacki. This, too, has generated some very positive comments as people begin to realize the true significance of Rich's career, and the loss to the movement.
• Sales of our latest book, In Defense of Human Dignity, remain steady. While the book is written from a Catholic perspective, it seems to be resonating with people from other faith traditions, reinforcing the fact that the natural law is the common denominator and provides the universal principles on which society must be restructured. The book can be ordered from Amazon.
• In response to the posting on the crisis in the Irish pension system, CESJ friend Chris O'Connor, Financial Secretary of the Colonel John Fitzgerald Division, Ancient Order of Hibernians, suggested that we send copies of Capital Homesteading for Every Citizen (Amazon and Barnes & Noble) to members of Dáil Éireann (House of Representatives) and Seanad Éireann (Senate). This is the sort of creative suggestion we need and, although we cannot at this time afford to send hardcopies of the book, we are preparing an e-mailing to go out with links to the e-text. We will send bound copies of the book to half-a-dozen party heads, along with a small package of materials demonstrating that Capital Homesteading is not only based on sound principles, but that the principles have time-tested "real world" applications. Adoption of Capital Homesteading in Ireland would be an ideal way for the people of Ireland to "pay back" the United States for the traditional friendship, unity, and charity between the two republics, lighting the way to a more just social and economic order for America's more timid politicians and policymakers, and providing a rational (i.e., non-Keynesian) plan to end the current financial crisis.
• As of this morning, we have had visitors from 31 different countries and 42 states and provinces in the United States and Canada to this blog over the past two months.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Thursday, December 4, 2008
Keynes' Flawed Principles
Yes, as the title of this posting demonstrates, we're still picking on defunct economists and those who give them slavish obedience. For those of you not familiar with Keynes' General Theory — and your state is more blessed — that is a reference to Keynes' snide comment at the close of his turgid tome that, "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slave of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back." (General Theory, Bk. VI, Ch. 24, § v.) Today's most serious problem is that the defunct economist in question, and the source of the voice to which "madmen in authority" defer, is Keynes himself. Anyway, here's today's letter to the Wall Street Journal.
Congratulations on Oliver Hart's and Luigi Zingales' editorial, "Economists Have Abandoned Principle" (WSJ, 12/03/08, A17). I would, however, quibble a little with Messrs. Hart and Zingales on one thing. The problem is not that economists have abandoned principle. Trapped in a Keynesian paradigm, and consistent with Keynes' principles, they keep trying to force the financial system to do the impossible: create something out of nothing. Keynes believed that it is impossible to create money through the banking system for financially sound, self-liquidating capital investment, but perfectly feasible for the State to print money without an asset backing to stimulate demand and redistribute wealth through inflation.
To anyone with even a modicum of common sense or basic knowledge of property, money, credit, and banking, Keynesian dogma comes across as financial insanity — or abandonment of principle. It is not, however, abandonment of principle (except essential principles of ethics and morality that should support and justify all human behavior), but slavish obedience to the wrong principles. To create money backed only by the State's promise to pay, for bailouts and other extremely speculative goals, is to debauch the currency and achieve Lenin's goal of the destruction of the capitalist system without a shot being fired.
A more realistic solution to the current financial panic can be found in a program called Capital Homesteading, detailed in the book, Capital Homesteading for Every Citizen. Capital Homesteading involves granting democratic access to capital credit to every citizen. Money is not created until and unless a financially sound investment has been identified and properly vetted. Capital Homesteading would result in an asset-backed currency, and a final release from false Keynesian principles that run counter to common sense.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Congratulations on Oliver Hart's and Luigi Zingales' editorial, "Economists Have Abandoned Principle" (WSJ, 12/03/08, A17). I would, however, quibble a little with Messrs. Hart and Zingales on one thing. The problem is not that economists have abandoned principle. Trapped in a Keynesian paradigm, and consistent with Keynes' principles, they keep trying to force the financial system to do the impossible: create something out of nothing. Keynes believed that it is impossible to create money through the banking system for financially sound, self-liquidating capital investment, but perfectly feasible for the State to print money without an asset backing to stimulate demand and redistribute wealth through inflation.
To anyone with even a modicum of common sense or basic knowledge of property, money, credit, and banking, Keynesian dogma comes across as financial insanity — or abandonment of principle. It is not, however, abandonment of principle (except essential principles of ethics and morality that should support and justify all human behavior), but slavish obedience to the wrong principles. To create money backed only by the State's promise to pay, for bailouts and other extremely speculative goals, is to debauch the currency and achieve Lenin's goal of the destruction of the capitalist system without a shot being fired.
A more realistic solution to the current financial panic can be found in a program called Capital Homesteading, detailed in the book, Capital Homesteading for Every Citizen. Capital Homesteading involves granting democratic access to capital credit to every citizen. Money is not created until and unless a financially sound investment has been identified and properly vetted. Capital Homesteading would result in an asset-backed currency, and a final release from false Keynesian principles that run counter to common sense.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Wednesday, December 3, 2008
Richard Gilbert Biernacki, 1934-2008
Our friend and counselor Rich Biernacki, retired CEO of the world-renowned, 100% worker-owned Fastener Industries of Berea, Ohio, died Friday, November 28, 2008. We'll leave it to the major media to give Rich his just due with respect to his multi-faceted career. This being a blog of the Just Third Way, we'd like to expand on the significance of what his obituary briefly described as "his dedication to employee ownership."
As others have noted, Rich Biernacki served as president of the ESOP Association and on the board of the National Cooperative Bank of Washington, DC. Under his leadership, Fastener Industries became the focus of much attention and the recipient of many awards, including CESJ's "Global Award for Value-Based Management" (renamed "Justice-Based Management"). In 1991 Rich received this award on behalf of Fastener Industries during a series of seminars at the Vatican. Along with the CEOs of two other ESOP companies receiving the award, he met His Holiness John Paul II during the weekly public audience. To the credit of Rich Biernacki's persistent vision, Fastener is the only company in that original group of awardees that still embodies essential principles of Justice-Based Management.
To describe Rich's accomplishment simply as being the former head of an employee-owned company says nothing about what made Rich Biernacki unique as a leader. When the family that owned Fastener Industries decided to sell, they offered Rich, the Chief Financial Officer, the opportunity to become sole owner of the company. The family probably had not even considered selling the company to the workers that had helped make the company a success.
Rich declined the original offer, insisting on giving every Fastener employee an opportunity to become an owner in the company. As a Certified Public Accountant, Rich was aware of a relatively new financial technology, the Employee Stock Ownership Plan (ESOP) invented by Louis O. Kelso. By setting up an ESOP trust, Rich and Fastener's management- and non-management workers were able to borrow enough money (capital credit repayable with the earnings of the company) to purchase Fastener Industries at the fair market value.
Rich then did something that runs counter to the top-down management philosophy practiced today in most companies, including ESOP companies. He made sure that the worker-shareholders were permitted under the ESOP to vote their shares. Rich believed "it's not ownership if you can't vote your shares." The worker-shareholders (management and non-management) nominated and elected the board of directors and Rich Biernacki was appointed CEO. Every year Rich put his job up to a vote; he won approval every year until he chose to retire. After he retired, Rich kept his shares in the company, rather than "cashing out" as is typical, demonstrating his continuing confidence in the company, its worker-owners and its Justice-Based Management culture.
The ESOP, as it now exists in the law, allows upper management to keep their fellow workers powerless. Ownership through an ESOP is considered "beneficial ownership," meaning that the legal ownership resides in the ESOP trust, and the trustees (who are usually upper management or a bank selected by management) pass through only as many of the rights of ownership as they see fit. The trustees of an ESOP often hold back many of the rights of ownership from other workers paternalistically "for their own good." It takes a rare leader, confident in his ability to educate, empower and enrich others to work for their common interest as owners, to use the ESOP as it was intended — to get the full rights, powers and responsibilities of ownership to working people.
Before Rich instituted a participatory ESOP, Fastener was probably like many family-owned companies that make every effort to treat their employees "like family." They set up programs and incentives to make their people "feel like owners." The problem with such an arrangement, however, is that it relies far too much on the goodwill of the small number of people in power. Non-family employees, well aware that ownership usually remains exclusively with family members, can become alienated when they see promotions and good assignments go to owning relatives with fewer qualifications than non-owning employees.
Such companies frequently hold back the final — and strongest — link in the chain that turns employees who merely "feel like owners" into genuine co-worker-owners with the property rights of ownership. Rich Biernacki did not simply create the appearance of participation at Fastener Industries. He did something far more meaningful. He instituted democratic governance and ownership participation by workers within a corporation.
In Fastener Industries, Rich Biernacki offered an example that other ESOP companies would do well to emulate — a successful and profitable approach to sharing power. Trustees can make certain that worker-owners have as many of the rights of real ownership as the law allows. They can reject the semi-honest "escape routes" the law offers trustees and upper management. These are ostensibly to protect workers from making "bad" decisions in their own interest as owners, but actually keep real control concentrated at the top. Like Rich, corporate executives can follow a justice-based leadership philosophy and start instituting justice-based management.
Rich Biernacki's life accomplishment was thus not to become a great man himself, but to assist his fellow workers in becoming great by working effectively with others. He was not the more-or-less wise and benevolent father figure, carefully shepherding his children through the vicissitudes of fortune and building a great company "single-handedly." No, Rich Biernacki was the quiet servant-leader, who gave working people the opportunity and the means to own, develop and succeed together. In the process, Rich Biernacki became great, not because he sought greatness for himself, but because he helped others to seek it in themselves.
As others have noted, Rich Biernacki served as president of the ESOP Association and on the board of the National Cooperative Bank of Washington, DC. Under his leadership, Fastener Industries became the focus of much attention and the recipient of many awards, including CESJ's "Global Award for Value-Based Management" (renamed "Justice-Based Management"). In 1991 Rich received this award on behalf of Fastener Industries during a series of seminars at the Vatican. Along with the CEOs of two other ESOP companies receiving the award, he met His Holiness John Paul II during the weekly public audience. To the credit of Rich Biernacki's persistent vision, Fastener is the only company in that original group of awardees that still embodies essential principles of Justice-Based Management.
To describe Rich's accomplishment simply as being the former head of an employee-owned company says nothing about what made Rich Biernacki unique as a leader. When the family that owned Fastener Industries decided to sell, they offered Rich, the Chief Financial Officer, the opportunity to become sole owner of the company. The family probably had not even considered selling the company to the workers that had helped make the company a success.
Rich declined the original offer, insisting on giving every Fastener employee an opportunity to become an owner in the company. As a Certified Public Accountant, Rich was aware of a relatively new financial technology, the Employee Stock Ownership Plan (ESOP) invented by Louis O. Kelso. By setting up an ESOP trust, Rich and Fastener's management- and non-management workers were able to borrow enough money (capital credit repayable with the earnings of the company) to purchase Fastener Industries at the fair market value.
Rich then did something that runs counter to the top-down management philosophy practiced today in most companies, including ESOP companies. He made sure that the worker-shareholders were permitted under the ESOP to vote their shares. Rich believed "it's not ownership if you can't vote your shares." The worker-shareholders (management and non-management) nominated and elected the board of directors and Rich Biernacki was appointed CEO. Every year Rich put his job up to a vote; he won approval every year until he chose to retire. After he retired, Rich kept his shares in the company, rather than "cashing out" as is typical, demonstrating his continuing confidence in the company, its worker-owners and its Justice-Based Management culture.
The ESOP, as it now exists in the law, allows upper management to keep their fellow workers powerless. Ownership through an ESOP is considered "beneficial ownership," meaning that the legal ownership resides in the ESOP trust, and the trustees (who are usually upper management or a bank selected by management) pass through only as many of the rights of ownership as they see fit. The trustees of an ESOP often hold back many of the rights of ownership from other workers paternalistically "for their own good." It takes a rare leader, confident in his ability to educate, empower and enrich others to work for their common interest as owners, to use the ESOP as it was intended — to get the full rights, powers and responsibilities of ownership to working people.
Before Rich instituted a participatory ESOP, Fastener was probably like many family-owned companies that make every effort to treat their employees "like family." They set up programs and incentives to make their people "feel like owners." The problem with such an arrangement, however, is that it relies far too much on the goodwill of the small number of people in power. Non-family employees, well aware that ownership usually remains exclusively with family members, can become alienated when they see promotions and good assignments go to owning relatives with fewer qualifications than non-owning employees.
Such companies frequently hold back the final — and strongest — link in the chain that turns employees who merely "feel like owners" into genuine co-worker-owners with the property rights of ownership. Rich Biernacki did not simply create the appearance of participation at Fastener Industries. He did something far more meaningful. He instituted democratic governance and ownership participation by workers within a corporation.
In Fastener Industries, Rich Biernacki offered an example that other ESOP companies would do well to emulate — a successful and profitable approach to sharing power. Trustees can make certain that worker-owners have as many of the rights of real ownership as the law allows. They can reject the semi-honest "escape routes" the law offers trustees and upper management. These are ostensibly to protect workers from making "bad" decisions in their own interest as owners, but actually keep real control concentrated at the top. Like Rich, corporate executives can follow a justice-based leadership philosophy and start instituting justice-based management.
Rich Biernacki's life accomplishment was thus not to become a great man himself, but to assist his fellow workers in becoming great by working effectively with others. He was not the more-or-less wise and benevolent father figure, carefully shepherding his children through the vicissitudes of fortune and building a great company "single-handedly." No, Rich Biernacki was the quiet servant-leader, who gave working people the opportunity and the means to own, develop and succeed together. In the process, Rich Biernacki became great, not because he sought greatness for himself, but because he helped others to seek it in themselves.
Tuesday, December 2, 2008
Ireland: Pension Plans "Close to Collapse"
According to the Irish Independent of December 1, 2008, there is mounting fear that many defined benefit pension plans are "close to collapse," and that, with the pension deficit approaching €30 billion as financial chaos spreads, as many as half the plans could fail within a year's time. There are approximately 67,000 defined benefit pension plans in Ireland, of which 90%, or more than 60,000, are expected to report funding deficits to the Pensions Board in the current period.
Nor can pensioners expect the government, already in serious financial trouble, to bail out the plans. There is thus a high likelihood that benefits will be severely curtailed, despite whatever was promised. There are approximately 340,000 people covered by private defined benefit pension plans in Ireland, or around 250,000 active workers and 90,000 retirees.
We have made a number of approaches to the Irish government over the past couple of years, but only received a single, rather mild e-mail reply that someone's assistant would "look into it," "it" being the Just Third Way as detailed in Capital Homesteading for Every Citizen (2004). A Capital Homesteading program for Ireland would be relatively easy to implement, and both swift and effective in its beneficial effects. The only problem we face is getting someone to listen to us — ironically, the same problem that has virtually halted visible progress in the United States. Slavish adherence to Keynesian economics and assumptions virtually ensures that nothing can — or will — be done.
If they wish to regain effectiveness and stabilize the economy, the government of Ireland should immediately appoint a commission to study the implementation of Capital Homesteading at the earliest possible date. The alternative is to make Ireland as bankrupt as the Keynesian system into which the country seems locked.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Nor can pensioners expect the government, already in serious financial trouble, to bail out the plans. There is thus a high likelihood that benefits will be severely curtailed, despite whatever was promised. There are approximately 340,000 people covered by private defined benefit pension plans in Ireland, or around 250,000 active workers and 90,000 retirees.
We have made a number of approaches to the Irish government over the past couple of years, but only received a single, rather mild e-mail reply that someone's assistant would "look into it," "it" being the Just Third Way as detailed in Capital Homesteading for Every Citizen (2004). A Capital Homesteading program for Ireland would be relatively easy to implement, and both swift and effective in its beneficial effects. The only problem we face is getting someone to listen to us — ironically, the same problem that has virtually halted visible progress in the United States. Slavish adherence to Keynesian economics and assumptions virtually ensures that nothing can — or will — be done.
If they wish to regain effectiveness and stabilize the economy, the government of Ireland should immediately appoint a commission to study the implementation of Capital Homesteading at the earliest possible date. The alternative is to make Ireland as bankrupt as the Keynesian system into which the country seems locked.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
Monday, December 1, 2008
The Keynesian Monopoly Over Life and Income
The financial industry is becoming extremely worried that consumers will not be able to borrow enough money to keep what's left of the economy running. According to a Reuters news report released this morning, Monday, December 1, 2008, "Credit card industry may cut $2 trillion of lines: analyst," "The U.S. credit card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending."
According to banking analyst Meredith Whitney, the consolidation of banking institutions leaves consumers little choice for sources from which to obtain consumer credit: "A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity. . . . Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable. . . . Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view."
This is the sort of backwards Keynesian thinking that got us into the current mess in the first place. If people are losing jobs and are forced to use credit to meet consumption needs, how are they supposed to pay back the credit? Consumer credit was growing at an unprecedented rate when people had jobs, so how is increasing consumer credit when jobs are decreasing supposed to make things better?
The basic problem is that the financial experts are taking Keynes' basic assumption for granted: the demonstrably false claim that the only way to finance new capital formation is by cutting consumption, saving, then investing. This disregards centuries, if not millennia* of time-tested central banking theory that explains how to create sound money for investment in self-liquidating capital projects — not consumption.
Given Keynes' rejection of central banking theory and sound practice, investment in new capital can only be financed by a class of extremely rich people who cannot consume all their income and are forced to reinvest it. This restricts the great mass of people solely to wage income, establishing and maintaining an effective monopoly over the most critical feature of life: how people are permitted to live.
To try and level out the inevitable swings in the business cycle as consumption income is diverted to investment, Keynes advocated the State print money to meet consumer needs. This would redistribute wealth through inflation and clear the unconsumed goods and services, resulting in "full employment" . . . at wage system jobs. Small ownership of the means of production must be discouraged because small owners tend to use their ownership income for consumption instead of investment. If more economic stimulus is needed, the State needs to print more money, creating inflation, and (hopefully) resulting in "full employment" that (again, hopefully) will offset the effects of inflation. This also increases the burden of debt left as a legacy to future generations.
Of course, Keynes never could explain why money could be created for non-productive government debt, but not for investment in new capital. Once we realize that new capital can be (and has been) financed by the banking system instead of out of past savings, then, Keynes' entire system falls apart — just as our economy is collapsing under the weight of Keynesian illogic. People do not need to cut consumption, which reduces the number of jobs . . . which must then be made up by artificially stimulating the economy and adding to the burden of debt by means of which we rob future generations of their hope and their livelihood.
Instead, through a program like Capital Homesteading, new capital can be financed by the extension of bank credit to people who currently own little or nothing in the way of productive assets (capital). This would end the diversion of income from consumption to investment, level out the fluctuations in the business cycle naturally instead of artificially, increase aggregate wealth instead of government debt, and break the monopoly of control over people's incomes now held in an iron grip by the wage system and the consumer credit industry. As Pope Pius XI explained in Quadragesimo Anno, a document that speaks to everyone trapped in unjust economic structures, not just Catholics,
*Some historians trace the beginnings of classic central banking theory back to the financial markets of Alexandria in Ptolemaic Egypt.
Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).
According to banking analyst Meredith Whitney, the consolidation of banking institutions leaves consumers little choice for sources from which to obtain consumer credit: "A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity. . . . Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable. . . . Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view."
This is the sort of backwards Keynesian thinking that got us into the current mess in the first place. If people are losing jobs and are forced to use credit to meet consumption needs, how are they supposed to pay back the credit? Consumer credit was growing at an unprecedented rate when people had jobs, so how is increasing consumer credit when jobs are decreasing supposed to make things better?
The basic problem is that the financial experts are taking Keynes' basic assumption for granted: the demonstrably false claim that the only way to finance new capital formation is by cutting consumption, saving, then investing. This disregards centuries, if not millennia* of time-tested central banking theory that explains how to create sound money for investment in self-liquidating capital projects — not consumption.
Given Keynes' rejection of central banking theory and sound practice, investment in new capital can only be financed by a class of extremely rich people who cannot consume all their income and are forced to reinvest it. This restricts the great mass of people solely to wage income, establishing and maintaining an effective monopoly over the most critical feature of life: how people are permitted to live.
To try and level out the inevitable swings in the business cycle as consumption income is diverted to investment, Keynes advocated the State print money to meet consumer needs. This would redistribute wealth through inflation and clear the unconsumed goods and services, resulting in "full employment" . . . at wage system jobs. Small ownership of the means of production must be discouraged because small owners tend to use their ownership income for consumption instead of investment. If more economic stimulus is needed, the State needs to print more money, creating inflation, and (hopefully) resulting in "full employment" that (again, hopefully) will offset the effects of inflation. This also increases the burden of debt left as a legacy to future generations.
Of course, Keynes never could explain why money could be created for non-productive government debt, but not for investment in new capital. Once we realize that new capital can be (and has been) financed by the banking system instead of out of past savings, then, Keynes' entire system falls apart — just as our economy is collapsing under the weight of Keynesian illogic. People do not need to cut consumption, which reduces the number of jobs . . . which must then be made up by artificially stimulating the economy and adding to the burden of debt by means of which we rob future generations of their hope and their livelihood.
Instead, through a program like Capital Homesteading, new capital can be financed by the extension of bank credit to people who currently own little or nothing in the way of productive assets (capital). This would end the diversion of income from consumption to investment, level out the fluctuations in the business cycle naturally instead of artificially, increase aggregate wealth instead of government debt, and break the monopoly of control over people's incomes now held in an iron grip by the wage system and the consumer credit industry. As Pope Pius XI explained in Quadragesimo Anno, a document that speaks to everyone trapped in unjust economic structures, not just Catholics,
105. In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.With such control established by these "dictators of money," shouldn't we be asking why they are so anxious for ordinary people to remain propertyless and dependent on wages, welfare, and consumer credit . . . so anxious that they willingly extend more and more consumer credit, knowing full well that there is little if any chance it can be paid back? For a way out of the wage, debt, and welfare slavery that far too many politicians and financiers work to convince us are "freedom," read Capital Homesteading for Every Citizen, available on Amazon and Barnes and Noble, as well as for free as an e-text.
106. This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.
*Some historians trace the beginnings of classic central banking theory back to the financial markets of Alexandria in Ptolemaic Egypt.
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