The Global Debt Crisis, II: The Story Behind the Problem

Paradoxically, before we can understand how the U.S. federal government — and virtually every other government on earth — became burdened with such a gigantic mountain of debt, we have to understand how the United States tried to reform its financial system and get out of debt in the wake of the Panic of 1893, the Great Depression of 1893-1898, and the Panic of 1907.

The Panic of 1893 revealed (among other things) serious weaknesses in the National Bank system that had been in place since 1863. The amount of the currency was fixed — "inelastic" — and backed by government debt. When push came to shove (as it did with the "money famine" of 1894), the system very nearly gave way under the strain. A debt-backed fixed currency was inadequate to the demands put on it by an advanced commercial and industrial economy.

Efforts to make the currency more elastic by increasing the amount of government debt were recognized as being both financially unsound and politically unwise. The country was in the middle of the worst economic crisis it had ever faced, and debauching the currency was seen as a step toward financial suicide. In any event, the country had worked for two generations to restore the faith and credit of the government following the Civil War.

Added to that was the fact that many people realized that if the government could finance itself with debt instead of taxes, politicians would become unaccountable to the citizens. As Henry C. Adams explained,

"As self-government was secured through a struggle for mastery over the public purse, so must it be maintained through the exercise by the people of complete control over public expenditure. Money is the vital principle of the body politic; the public treasury is the heart of the state; control over public supplies means control over public affairs. Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit. Under ordinary circumstances, popular attention can not be drawn to public acts, except they touch the pocket of the voters through an increase in taxes; and it follows that a government whose expenditures are met by resort to loans may, for a time, administer affairs independently of those who must finally settle the account." (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)

The presidential campaign of 1896, however, diverted calls for reform of the financial system by bogging down in William Jennings Bryan's "free silver" proposal, viewed by many as "silver socialism" and a serious danger to the recently restored credit of the country. The bumper crops of 1897 and 1898 in the United States at the same time there were crop failures in Europe ended agitation for reform by seeming to solve the problem.

The lull was only temporary, however. The Panic of 1907, caused by bank speculation in the stock market and manipulation of the system by J. P. Morgan, renewed demands for reform. The presidential campaign of 1912 centered on the need for a true central bank to replace the National Bank system, and an income tax to ensure adequate revenue for the federal government raised in a way that would not pass the tax burden of the rich on to those in lower income levels.

Taft did not lose the election because Theodore Roosevelt split the Republican Party. By 1906 the G.O.P. had effectively diverged into an ultra-conservative wing under the control of Nelson Aldrich and J. D. Rockefeller, and a leaderless progressive wing. Woodrow Wilson managed to win most of the moderate Democrats back from Roosevelt by gaining the support of William Jennings Bryan and adopting a progressive stance toward financial reform that copied Roosevelt's. Wilson's campaign made a good thing of characterizing Roosevelt's protégé Taft as Aldrich's stooge, firmly in the pocket of the "Money Trust" headed by J. P. Morgan.

In this, Wilson had more than a little inadvertent assistance from Roosevelt. Roosevelt was outraged at what he saw as Taft's betrayal of the progressive cause, and made no bones about letting everyone know it. The only Democrats who failed to go over to Wilson were a sizable number of progressives who distrusted Wilson's flip-flopping and lack of experience and stuck with Roosevelt, and the more radical socialists and populists who rejected Wilson because of Wilson's earlier support for laissez faire capitalism.

Having won the election largely on the strength of his promise to implement immediate and sweeping changes to the monetary and tax systems, however, Wilson began waffling. The combined efforts of Representative Carter Glass of Virginia and Secretary of State William Jennings Bryan were needed to get Wilson moving to fulfill his campaign promises.

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News from the Network, Vol. 5, No. 18

Whether it's baited or bated, the global financial markets are waiting with it to see how the elections in Greece will either reinforce or counter the poor jobs report that came out this morning. Whichever way it goes, you can bet on one thing: everyone will miss the significance of a leading economic indicator (stock prices) reacting to another leading economic indicator (unemployment) that in Keynesian economics depends on the rate of capital investment, which in turn depends on the interest rate that has an inverse relationship with stock prices and which is determined by the rate of inflation (unless the interest rate is held artificially low or high) . . . stop me if any of this makes sense.

The bottom line here is that, if you follow the train of conventional reasoning from start to finish, it pulls into the same station from which it left. You end up right where you started. Stock prices rise because they rise. People are unemployed because they can't find work. And so on. In logic we call this a "circular argument." It's the sort of thing people say when they have no idea what they're talking about . . . like today's economists and politicians.

We won't even address the issue of categorizing the value of outstanding commercial and industrial loans as a lagging economic indicator.

Okay, you've convinced us. In binary economics, based on the banking principle (Say's Law as applied in the real bills doctrine), the amount of financing for new capital investment with future savings should be a leading, not a lagging economic indicator . . . but that would require abandoning the idea that capital can only be financed out of past reductions in consumption, not future increases in production.

In the past savings paradigm, you can only finance new capital if you or someone else has already produced more than others can consume, and the excess can be invested in new capital formation. That is, you can finance new capital because somebody did well enough to be able to save by cutting consumption and lent you the money, or the savings were transferred to you through the magic of inflation that forced others to pay you a higher price for less value, thereby increasing your profits that you can invest in more capital (Keynesian "forced savings"). Thus, in that Krazy Keynesian Paradigm, the amount of financing for new capital investment is a sign that the economy has done well.

In binary economics, an increase in outstanding commercial and industrial loans is an indication that investors think the economy will do better in the future, not that it has necessarily done well in the past. In the real world, investors finance new capital formation because they see consumer demand rising, not because they see people cutting consumption to save. The demand for new capital is derived from consumer demand for goods and services, not the other way around.

That being the case, increasing investment in new capital, and ensuring that the ownership and the full rights of property are vested in people who will use the income from the capital first to pay for the capital, then for consumption, should be a leading, not a lagging economic indicator. Binary growth is, in a sense, a self-fulfilling prophecy, not an indication of past performance.

Obviously it would be much more rational to examine the principles of the Just Third Way (the Kelso-Adler principles of economic justice, the four pillars of an economically just society, etc.) especially their proposed application in Capital Homesteading. The problem there, of course, is that the practitioners of Hysteria Journalism wouldn't have anything to write about, and would be limited to actually reporting the news — as we will now proceed to do:

• Dawn B., CESJ's poet laureate, had better look to her laurels. CESJ member Mark Reiners has just come out with A Kind of Speaking, The Metaphysic of Listening. Obviously we haven't had a chance to read it, and at 274 pages we're not going to be getting to it any time soon. This is just an announcement that the book is available from Café Press in trade paperback for $19.22. We encourage our readers to buy the book. If you want to review it, we'll consider publishing the review on this blog if you keep it under 500 words. You might, however, first want to explore getting a review into your local newspaper to get more exposure. For some reason, print book reviewers seem to have a greater credibility than bloggers.

• We're starting to get a little intellectual ferment and action from the annual Rally at the Fed and the CESJ celebration. Everyone tends to look a little like a deer in the headlights after it's over for another year, then wilts for a week before the energizing renewal starts to take root and the action can begin. We hope to have a short guide for advancing the Just Third Way drafted by the next Executive Committee meeting in a couple of weeks.

• After many years of service, Harriet Epstein has announced her retirement from the CESJ Board of Directors. While there is certainly no dearth of board members who work daily to advance the Just Third Way, Harriet will be sorely missed.

• The article by CESJ's Director of Research, Michael D. Greaney, in this month's Inside the Vatican, "Catholic Teaching and the Elections," seems to have generated quite a bit of positive comment and feedback. There has, in fact, only been one negative comment from a disgruntled economist seemingly wedded irrevocably to the discredited Keynesian past savings paradigm, and it was painfully obvious that he either hadn't read or didn't understand the article! The editor of Inside the Vatican has requested four more articles that, if accepted, will appear over the summer.

• As of this morning, we have had visitors from 63 different countries and 51 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Australia. People in the Netherlands Antilles, Mexico, the Philippines, France, and the United States spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Guide to Capital Homesteading," "Aristotle on Private Property," "The Keynesian Cargo Cult: Rot Bilong Keynes," and the Network News from February 4, 2011.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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The Global Debt Crisis, I: What is the Problem?

The world is awash in debt — credit extended for which there is no reasonable hope of repayment. Gross government debt as a share of GDP is uncomfortably (read "terrifyingly") over 100% for Greece and Italy. It is galloping toward that percentage for France, Germany and the United States. Governments are falling all over Europe as outraged government employees and public pensioners riot to protest cuts in spending. Spain's debt crisis is (in the words of one report from a socialist) "pushing [the] global economy to the brink." There are "renewed fears" of a European debt crisis. The global economy seems ready to implode.

According to conventional Keynesian thinking, none of this should be happening. In conformity with the principles of Georg Knapp's "chartalism" (more widely known today under the euphemistic label, "Modern Monetary Theory"), the State should be able to emit all the money (bills of credit) it needs without any problem. More money in circulation means more money for investment, more effective demand to stimulate that investment, more education that will foster creativity and growth, and so on, so forth.

Theoretical support for a large public debt is rooted in the fixed belief that an expanding debt is essential for prosperity. That being the case, the larger the debt is, the better off we are. As Dr. Harold G. Moulton analyzed this Keynesian doctrine in his short book, The New Philosophy of Public Debt (1943), the perceived necessity for a large public debt is due to three factors:

• The Mature Economy Thesis,

• The Phenomenon of "Excess Savings," and

• Corporate Independence of the Capital Markets.

The Mature Economy Thesis
In response to the decline in the rate of population growth during the Great Depression of the 1930s, Keynesian economists believed that there would be insufficient demand to keep the economy going. There would simply be not enough people to consume all that the economy was capable of producing. As Moulton summarized this argument,

"The argument that the United States has recently reached economic maturity and that in consequence further growth (under private capitalism) must be very slow starts with an assumption — namely that economic progress is primarily dependent on rapid growth in population and the opening of new productive areas. Conversely, it is held that a declining rate of population growth and the disappearance of frontiers will check economic growth." (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 21-22.)

The Phenomenon of "Excess Savings"

In The Formation of Capital (1935), Moulton analyzed the "economic dilemma." That is, assuming that the only way to finance new capital formation is to cut consumption and accumulate cash, there is no justification for new capital investment.

No rational investor will purchase new capital if there is no existing or reasonably anticipated increase in effective demand to justify additional marketable goods and services. If savings increase, in fact, even existing capital becomes redundant as consumption declines. The "dilemma" an investor faces, then, is that if consumption is reduced to finance new capital formation, there is no reason to finance new capital formation.

Increasing public debt allegedly solves this problem. As Moulton explained,

"The phenomenon of money savings in excess of investment outlets is related in one way to the mature economy conception. If, because of the disappearance of frontiers and an arrested rate of population growth, further private capital expansion were impossible, then obviously we would have no private investment outlets for the current money savings of the people. But independently of a mature economy, it might still be possible that the volume of current money savings had become greater than could be absorbed in productive capital investment. It is contended that the evidence supports the thesis that henceforth money savings are always likely to exceed productive outlets in private enterprise; hence public flotations must fill the breach." (The New Philosophy of Public Debt, op. cit., 30.)

Corporate Independence of Capital Markets

The experts continually remind us how important Wall Street is for the allocation of credit. Wall Street, however, is supposed to be the private sector. The Federal Reserve seems to be in the business of handling government debt, although that was not the original intention. This is endemic throughout the world, as central banks have shifted away from private sector financing and gotten into financing government.

The Keynesian argument during the Great Depression, however, was that, because business corporations presumably had no need of raising funds in the financial markets, there were insufficient new issues to absorb people's savings. At the same time, business corporations simply weren't financing new capital. As Moulton explained,

"The investigations of the Temporary National Economic Committee endeavored to show that in recent times business corporations have largely freed themselves from the necessity of raising funds in the financial markets, the bulk of the investment funds required now being obtained from their own internal resources. Accordingly, even if private business enterprise were reasonably thriving, it would still be necessary for the government to provide outlets for current money savings of the people through continuing flotations of government bonds. This conclusion has been widely accepted in government circles." (Ibid., 35.)

Despite these theories, the crisis continues to mount, yet at the same time demands become more strident to increase the level of government spending to stimulate economic recovery. Even the socialists and laissez faire capitalists are in agreement on this one. As one capitalist source put it, "[T]he IMF says that the United States and Japan have no plan to ever stem their deficits and record borrowing, creating 'latent risks include disruption in global bond and currency markets as a result of high budget deficits and debt in Japan and the United States'." ("Global Government Debt Crisis Emerging" New American)

When the John Birch Society and the Socialist Party can agree on condemning something, somebody ought to be reconsidering just how well the program is working.

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Social Justice, V: Where Do We Go From Here?

Over the past week we've been looking at how the Just Third Way can be effective in spreading the word about these revolutionary ideas. We've come to the conclusion (or at least restated it to our own satisfaction) that the only effective way to implement the principles of economic justice is to follow the principles of social justice — properly understood.

That means that each of us has a personal responsibility to organize with others in a coordinated way on sound principles to work together to restructure the social order. As Father Ferree concluded Introduction to Social Justice,

"The completed doctrine of Social Justice places in our hands instruments of such power as to be inconceivable to former generations.

"But let us be clear about what is new and what is old. None of the elements of this theory are new. Institutions, and institutional action, the idea of the common good, the relationship of individual to common good, — all these things are as old as the human race itself. There is nothing more new in those things than in the school boy's discovery that what he has been speaking is prose; nor must we ever believe that God made man a two-legged creature, and then waited for Aristotle to make him rational. Moreover, much of the actual application of these principles to practical life is to be found in older writers under the heading 'political prudence.'

"When all that is admitted, there is still something tremendously different and tremendously important in this 'new' understanding of social virtue in general, and social justice in particular. The power that we have now to change any institution of life, the grip that we have on the social order as a whole, was always there but we did not know it and we did not know how to use it.

"Now we know.

"That is the difference."

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Social Justice, IV: The Characteristics of Social Justice

Yesterday we looked at the "laws" of social justice as articulated by Father Ferree. These are critical, because as any architect (whether for buildings or a social system) knows, "form follows function." If a chair doesn't look like a chair, then people won't know to sit in it. Or even on it. Is that enough, however? Hardly. Not only must a chair look like a chair, it must be a chair.

This sounds obvious, but in our society many people confuse form and substance. They conclude that if something looks the way it should, then it must be the way it should. As we saw in our analysis of Keynesian economics and the Cargo Cults of the South Pacific, however, appearances can be grossly deceiving. Just because you build an airstrip or a landing dock, raise the flag and march around doesn't mean that planes and ships are going to come in bringing Spam and Coke, any more than mandating education, a high wage economy, welfare, Social Security, or anything else establishes and maintains a sound economy.

Social justice is not ensuring that people have enough to eat or a just wage or government benefits or any other thing like that. Those are all matters of individual justice or charity, not social justice. Social justice is the virtue directed not at any individual good, however great or essential, but at the common good, that network of institutions within which humanity as moral beings acquire and develop virtue by exercising our natural rights of life, liberty (freedom of association/contract) and property.

To oversimplify somewhat, social justice is not about having the State provide desired results, but in equalizing opportunity and means for people to achieve the desired results through their own efforts, with the assistance of the State if necessary to pass laws restructuring the institutions of society, but the primary responsibility rests with us. As Leo XIII pointed out, "There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (Rerum Novarum, § 7.)

Understanding that, we can move on to examining the characteristics of social justice.

First Characteristic: Only By Members of Groups

The first mark of social justice is that it cannot be performed by individuals as individuals, but only by individuals as members of groups.

That is extremely important, because virtually everyone misunderstands it. The "efficient cause" (the "actor" or "agent" who carries out the act) of all social virtue is the individual as a member of a group, not an individual on his own ticket. Father Ferree considers this so important that he spends four full pages on getting the idea across.

As a college professor for more than forty years, he found that this was the single largest hurdle to understanding Catholic social teaching. It is not collectivism, nor is it any individual act of virtue carried out with a vague intention to benefit the common good indirectly.

Second Characteristic: It Takes Time

Social justice moves slowly and gradually. It requires organization, consensus building, more organization, solidarity, attention to the principle of subsidiarity — all the troublesome little details of working with actual human beings rather than abstract concepts.

Personally, I have found that this characteristic causes the most frustration to people, particularly those activists who demand immediate results. It is easy to argue that society is unjustly structured, and instant results are not only desired, but absolutely necessary. The temptation in the face of social injustice is to demand that "they" (usually the State or a power elite of any institution) Do Something — and Do It Now!

One problem with this approach is obvious. The activist is absolved from all responsibility! Once he has condemned those in power and everybody else in the immediate vicinity for failing to correct the situation, his job is done. He can go home and comfort himself with a feeling of enormous virtue. He has "raised consciousness," and can leave the dirty, tiresome and frustrating work of actually reforming the system to Somebody Else.

There is another problem. Those in power are comfortable with the operational habits of the status quo, and those not in power are ... powerless. The former have a built in resistance to change, while the latter don't think it can help matters. The problem is that the State (among other forms of government — all "organization" requires governance) is the quasi-efficient cause ("quasi" because the State, as an artificial and not a natural person, cannot be the efficient cause of anything) not of social justice, but of legal justice. Legal justice is not a particular virtue like social justice, and thus is not our direct responsibility. As the State cannot "act" (in a philosophical sense) directly on anything, it's pretty much pure chance whether the desired results will be obtained by passing laws — unless the passage of laws has been preceded by acts of social justice — which is our responsibility, not the State's.

Third Characteristic: Nothing is Impossible

In social justice there is never any such thing as helplessness. As Father Ferree stated, "No problem is ever too big or too complex, no field is ever too vast, for the methods of this social justice. Problems that were agonizing in the past and were simply dodged, even by serious and virtuous people, can now be solved with ease by any school child."

Fourth Characteristic: Eternal Vigilance

The work of social justice is never finished. This is not the same as saying that social justice takes a long time! It refers to what Pius XI called "the radical instability of society." This means that human beings change, conditions change, and our institutions — our human response to the task of being what Aristotle called "political animals" — must be restructured and reformed to meet the new conditions. This change is always happening, therefore the work of social justice is continuous.

Fifth Characteristic: Effectiveness

Work for the common good — the material cause of social justice — must be effective. You can't just do something and hope it works, or go about chanting that it would work if only people weren't human. A mere "good intention" that the common good be benefited is simply not good enough.

Sixth Characteristic: You Can't "Take it or Leave It Alone"

As Father Ferree states, "Another corollary of this characteristic of social justice (that it is never finished) is that it embraces a rigid obligation." That means that each of us is directly and individually responsible for the common good — and we must organize with others for the common good.

Now that we know (or at least have become somewhat acquainted with) the laws and characteristics of social justice — the form and substance of the virtue — our next step is, logically, to ask, "Where do we go from here?" We'll take a look at that tomorrow.

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Social Justice, III: The Laws of Social Justice

Last week we posted some comments from a correspondent regarding the effectiveness of the Just Third Way movement in getting things in place and changing the system. We pointed out what we thought was the wrong way to go about these things, so this week we'd like to lay out the right way to bring about revolutionary social change.

Given the adherence of CESJ to the principles of both economic and social justice, our tactical and strategic initiatives must not only be directed to the end of establishing and maintaining an economically just society, but be in conformity with what Father Ferree called the "laws and characteristics of social justice." Absent that, we are no better than anyone else who yields to the temptation to declare that (for us at least, because our goals are right, just, etc.) the end justifies the means.

CESJ cannot, therefore, abandon any of its principles, either of economic or social justice, without, like the hero in a Greek tragedy or today's global economy, bringing about its own destruction by the means chosen to preserve it.

Ideally, every member of CESJ should have read and internalized not only The Capitalist Manifesto and The New Capitalists, but Father Ferree's Introduction to Social Justice. We have summarized the basic principles here — but this is not a substitute for reading Father Ferree's pamphlet:

THE LAWS OF SOCIAL JUSTICE

Like any other human activity, social justice must operate within certain parameters, or it ceases to be social justice. It may be something very good, or it may even be something bad, but if it does not adhere to the "laws" of social justice or conform to its characteristics, it is not social justice.

I. That the Common Good Be Kept Inviolate

In all private dealings, in all exercise of individual justice, the common good must be a primary object of solicitude. To attack or to endanger the common good in order to attain some private end, no matter how good or how necessary this latter may be in its own order, is social injustice and is wrong.

II. Cooperation, Not Conflict

Given the uniqueness of each human person, the particular good of each individual is different. Any particular good that is falsely made into an ultimate principle must necessarily be in conflict with every other particular good. Only cooperation, organization for the common good, can make a real society. This does not mean overriding or ignoring individual goods, but integrating them into the whole effort.

III. One's First Particular Good is One's Own Place in the Common Good

The first particular good of every individual or group is that that individual or group find its proper place in the common good. As Father Ferree put it, "It must be admitted that this is not the way most of us think at the present time, but that is because we have been badly educated. It must be admitted also that to carry out such a principle in practice looks like too big a job for human nature as we know it; but that is because we are individualists and have missed the point. Of course it is too big a job if each one of us and each of our groups is individually and separately responsible for the welfare of the human race as a whole. But the point is that the human race as a whole is social." (We think "political" in the Aristotelian sense is a better word here, but let's not quibble.)

IV. Each Directly Responsible

Every individual, regardless of his age or occupation or state of life, is directly responsible for the common good, because the common good is built up in a hierarchical order. That is, every great human institution consists of subordinate institutions, which themselves consist of subordinate institutions, on down to the individuals who compose the lowest and most fleeting of human institutions.

Since every one of these institutions is directly responsible for the general welfare of the one above it, it follows that every individual is directly responsible for the lower institutions which immediately surround his life, and indirectly responsible for the general welfare of his whole country and the whole world. This is the principle of subsidiarity.

V. Higher Institutions Must Never Displace Lower Ones

No institution in the vast hierarchy that we have seen can take over the particular actions of an institution or person below it. This, too, comes under the principle of subsidiarity, although this is the aspect most often ignored.

VI. Freedom of Association/Contract (Liberty)

If every natural group of individuals has a right to its own common good and a duty towards the next highest common good, it is evident that such a group has the right to organize itself formally in view of the common good. This is yet another aspect of the principle of subsidiarity . . . but this should be obvious by this time.

VII. All Vital Interests Should be Organized

All real and vital interests of life should be deliberately made to conform to the requirements of the common good.

But wait! There's more! Tomorrow we will look at the characteristics of social justice, that is, move from the form to the substance. In other words, in social justice, we must not only look good, we must actually do good.

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News from the Network, Vol. 5, No. 17

This cycle's crop of candidates for office seem to be more intent on proving how evil and stupid The Other Guy is than in coming forward with something that will solve the growing problems we face today, both in the United States and abroad. That being the case, it is important that everyone in the Just Third Way movement start looking to see if there's any way to start opening doors to prime movers or potential prime movers — or even to people who can get us to people who can open the door to a prime mover. In our efforts to leave no stone unturned in our quest for economic and social justice, here's what we've been doing this week:

• This has been mostly a winding down week from the intense activity of last week that had the eighth annual rally at the Federal Reserve, the annual meeting and celebration of CESJ (Twenty-eight years and still going) and our usual client work and other mundania.

• We are preparing an informal guide to help people focus on the door-opening initiative so critical to bringing the Just Third Way to the attention of prime movers and potential prime movers. We hope to have something drafted next week.

• We are initiating contact with some of the local colleges and universities to discuss the possibility of having interns, either during the summer or during the school year. Especially in an election year we have a number of projects from which both CESJ and the interns would benefit greatly.

• A number of new contacts have come forward interested in how to advance the Just Third Way within the current system. At present, this means the "JBM S-Corp ESOP," the closest thing in the law to the Just Third Way, somewhat analogous to a Capital Homestead Act within a single company. We hope to prepare a guide showing the advantages a JBM S-Corp ESOP has over regular S-Corp ESOPs and C-Corp ESOPs.

• Reaction to many of the recent postings on this blog has been very favorable, and is reflected in a measurable increase in readership.

• As of this morning, we have had visitors from 63 different countries and 51 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, India, and Pakistan. People in the Netherlands Antilles, Mexico, France, the United States, and Hong Kong spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Guide to Capital Homesteading," "Aristotle on Private Property," Network News, and "The Keynesian Cargo Cult: Rot Bilong Keynes."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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Social Justice, II: Individualism, the Wrong Path

Yesterday we looked at some commentary on CESJ's effectiveness in getting the "One Percenters" even to discuss the Just Third Way. The problem with the critique, however, was that while it focused more or less on the principles of economic justice, it ignored the principles of social justice. We have to keep in mind at all times that the end does not justify the means.

For example, some people think that the way to achieve a society characterized by widespread ownership of capital is to take from the rich and give to the poor. That's one way . . . except that you don't establish a society in which we restore property for some only by violating it for others. Others redefine capital or private property or liberty or some other natural right — or the natural law itself — thereby achieving the desired goal by establishing it as a fiction.

No, you can only achieve the desired end of the Just Third Way by making sure that your means are fully consistent with your ends. You can't take short cuts, even with the best motives in the world. Thus, the strategy our commentator from yesterday laid out is a virtual archetype of the sort of social activism against which CESJ co-founder Father Ferree warned, and which he saw was ultimately ineffective.

Is it useful? Yes — in its place, but it is not the panacea for social ills that the activists of the 1960s or the Tea Partiers or Occupiers of today believe. It is a short cut that can lead to a permanent detour as people start to focus more on maintaining "the movement" or preserving "the organization" than in reaching the goal the movement or organization was established to reach. As Father Ferree explained,

"The favorite 'social technique' of our own time is the 'peaceful' demonstration, especially when media coverage is likely or can be arranged. Subsidiary aspects of the demonstration are boycotts, sit-ins, organized lobbying pressures, single-issue 'advocacy' and then — crossing an invisible line which is hard to define and harder still to hold — civil disobedience, violent demonstrations, and, ultimately, terrorism!

"Despite the social intent of all such techniques, and their almost universal arrogation to themselves of the terms 'Social Justice' or 'Justice and Peace,' these techniques are all radically individualistic. There are several criteria which can be applied to test this:

"1) They are directed immediately to some specific solution already determined in the mind of the 'activist'; they are never a willingness to dialogue with other and differing opinions on what the problem really is.

"2) They are always intensely concerned with the methodologies of pressure, not with those of competence in the matter in question.

"3) They all require 'time out' from the day-to-day social intercourse of life, and raise the question of how many objects one can juggle at any one time without dropping some or all.

"4) Any 'demonstration' is by definition a demand on someone else to do something. It takes for granted that whatever is wrong is the personal work of someone else, not the common agony of all; and it always knows exactly who and where the someone is.

"All this can be summed up in the observation that the 'social activist' as we have seen them so far, is an earnest amateur by profession.

"This is not to say that such 'professional amateurism' is always wrong. It is wrong as a normal methodology. If it obeys the same principles which would permit a just war, or the insurrection against an entrenched tyrant, more power to it! But it is a hopeless and hence unjust substitute for the patient and full-time organization of every aspect of life which we have seen in the necessary implementation of Social Justice." (Rev. William J. Ferree, Forty Years After. . ., p. 38.)

Was our critic wrong, then? No — but he or she wasn't completely right, either . . . and it's that "completely" that renders the effort ineffective, as we shall see when we pick up this series again next week.

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Social Justice, I: Introduction

Most of the postings on this blog have dealt with the binary economics aspect of the Just Third Way. Having just had our eighth annual rally outside the Federal Reserve and the twenty-eighth CESJ annual celebration, the question came up as to the effectiveness of the effort to implement the Just Third Way, especially a Capital Homestead Act. As one correspondent declared rather forcefully (names have been changed to protect the guilty),

"Why, I ask, are we not part of this national debate on economics? After 40 years, we are not even mentioned as a potential or even possible solution. We do not have the attention of the system! Why can we not see that? We are less than ignored. We are ridiculed! Even the impressive Russell Long victory was really not a victory for democratic economics as it was ultimately perverted by the crooked Congress (funded by the 1%). We cannot beat them without calling them out to the American people.

"WE HAVE TO OUT THE 1% AND CALL THEM WHAT THEY ARE . . . ROBBER BARONS! We should publish a list of them . . . brand them for what they are . . . break down our argument for change into individual elements. See them for what they are, a faceless minority hiding behind even more faceless corporations doing their bidding. We should be working hand in glove with the 99% converting them over from socialism to binary economics. That is where our time should be spent . . . not in trying to get their leaders to pass the litmus test, of ideological purity according to CESJ. We should become a virus in the system and not a flea crawling across its back."

This is a fairly accurate statement of the goal of economic justice and the standard means chosen to reach goals in our society. The problem here, however, is that the strategy and the tactics do not take into account the fact that CESJ is the Center for Economic and Social Justice. People can be up to speed on the Kelsonian principles of binary economics and the necessity of implementing and maintaining the four pillars of an economically just society.

To refresh our memories, the three principles of economic justice are,


  • Participation (the input principle which demands as a fundamental human right, equal opportunity for every person to contribute to the production of society's marketable wealth both as a worker and as an owner of productive assets),

  • Distribution (the outtake principle which holds that the contribution of labor to the economic process should be compensated at the market-determined rate (or "just wage") for each particular type of human contribution to the production of marketable wealth. This principle dictates that the contribution of capital should be compensated by the "just profit" generated by the project or enterprise), and

  • Harmony (the feedback principle that balances and restores participation and distribution within the economic system. This principle was referred to by Louis Kelso and Mortimer Adler as the "principle of limitation" and by others as "social justice," as it calls for the restructuring of the economic system to restore participative and distributive justice),

The four pillars of an economically just society are:

  • A limited economic role for the State,

  • Free and open markets within an understandable and enforceable legal system as the best means for determining just wages, just prices, and just profits,

  • Restoration of the rights of private property, especially in corporate equity and other forms of business organization, and

  • Widespread direct ownership of capital, individually or in free association with others.

So, you say, what's the problem? That is what we'll look at tomorrow.

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A Better Way to Save, V: Capital Homesteading for Every Citizen

We've addressed this particular issue from so many directions and in so many ways that it starts to get a little difficult to try and pique people's interest and get them excited about the Just Third Way. That being the case, we hope we'll be forgiven if we simply outline an alternative to what Louis Kelso and Mortimer Adler called the slavery of past savings. If the previous postings on this blog or in this series haven't done the trick, we'll need a little more time to see what can hook you.

The basic problem with using past savings to finance new capital formation is that, by definition, existing accumulations are a virtual monopoly of the wealthy. That being the case, traditional rights of private property dictate that whoever finances new capital owns the new capital. Obviously, then, under the current system the rich are going to get richer, and the poor are going to get poorer.

That is, unless you take the dishonest expedient that underpins Keynesian economics and "re-edit the dictionary," changing what it means for a right to be a right. This makes everything simple. If someone else has something you want, you just re-define his or her rights, stick a gun or the equivalent in his or her face, and claim it for your own. As Keynes explained the simplicity of his philosophy,

"It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of money has been reached that Knapp's Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized." (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)

Any Aristotelian or Thomist will instantly grasp the incredible, even breathtaking scope of Keynes's claim. If true, Keynes's declaration not only abolishes private property, but free association — liberty — by claiming that the State can alter the terms of any "money contract" at will simply by changing the definition of a thing. Keynes was evidently unaware that all contracts are "money contracts," involving the exchange of the present value of existing or future marketable goods or services — "consideration" — or no contract exists.

The power to change the definition of a thing is the power to change the thing's "substantial nature" — its essence. Keynes was, in effect, claiming that the State, if not a god per se, is at least something with the power of God to change truth through transubstantiation.

This has led to the situation in which the great mass of people has become convinced that all benefits flow from the State. No recourse is to be had from any other source for anybody or any thing. The fact that this declaration directly contradicts Catholic social teaching is deemed irrelevant. As Pope Leo XIII clearly stated, ""There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body." (Rerum Novarum, § 7.)

As we have seen, flawed ideas about money, credit and private property prevent people from implementing a viable solution to today's economic crisis and the increasing State control over their lives: "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (Ibid., § 46.)

By supporting a "Capital Homesteading" program that would enable every child, woman and man to acquire capital that pays for itself out of future profits on credit without redistributing existing wealth, we can empower people to resist the unjust inroads of the State. That, of course, leads us into a brief description of Capital Homesteading.

Capital Homesteading is an analogue of the nineteenth century American programs enacted to bring about a broad distribution of the ownership of land. It expands the concept to include ownership of advanced technologies, including management, marketing and distribution systems, through equity shares in enterprises capable of competing without special protections within a free and just global economy.

A "Capital Homestead Act" would be a national economic policy based on the binary growth model, designed to lift barriers in the present financial and economic system and universalize access to the means of acquiring and possessing capital assets. A Capital Homestead Act would allow every child, woman and man to accumulate, a target level of assets sufficient to generate an adequate and secure income for that person without requiring the use of existing pools of savings or reductions in current levels of consumption.

The chief means for doing this would be a tax-deferred "Capital Homestead Account." Under "Capital Homesteading," a citizen's tax-sheltered capital asset accumulation account, similar to an Individual Retirement Account (IRA). Each capital homesteader's account would be able to receive annual allocations of interest-free, productive credit and new asset-backed money issued by the central bank and administered by local commercial banks. This new money and credit would then be invested in feasible private sector capital formation and expansion projects of businesses that would issue new shares to be purchased and sheltered in the citizen's Capital Homestead Account. After the "future savings" (future profits) generated by the productive assets paid off each year's Capital Homestead investment (loan), the citizen would continue to receive in the form of dividends the incomes generated by those capital assets.

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A Better Way to Save, IV: The Purpose of Production

Last week we saw that Keynes was faced with something of a conundrum. How, at one and the same time, do you decrease consumption to accumulate savings to finance new capital, and increase consumption to justify new capital investment? Harold Moulton gave the answer to this "economic dilemma" in his counter-Keynesian monograph, The Formation of Capital (1935), but we suspect that Keynes — while he probably read it — completely ignored it because it pointed out the fallacies of the past savings approach.

Keynes had his own solution: produce goods and services that are not marketable! Classical economics assumed as a matter of course that if someone engaged in productive activity, it was with the intent of bettering him- or herself. As Pope Leo XIII agreed,

"It is surely undeniable that, when a man engages in remunerative labor, the impelling reason and motive of his work is to obtain property, and thereafter to hold it as his very own. If one man hires out to another his strength or skill, he does so for the purpose of receiving in return what is necessary for the satisfaction of his needs; he therefore expressly intends to acquire a right full and real, not only to the remuneration, but also to the disposal of such remuneration, just as he pleases. Thus, if he lives sparingly, saves money, and, for greater security, invests his savings in land, the land, in such case, is only his wages under another form; and, consequently, a working man's little estate thus purchased should be as completely at his full disposal as are the wages he receives for his labor. But it is precisely in such power of disposal that ownership obtains, whether the property consist of land or chattels. Socialists, therefore, by endeavoring to transfer the possessions of individuals to the community at large, strike at the interests of every wage-earner, since they would deprive him of the liberty of disposing of his wages, and thereby of all hope and possibility of increasing his resources and of bettering his condition in life." (Rerum Novarum, § 5.)

Keynes said (in essence), baloney. Screw the market. Liberty and private property? Feh. The private sector isn't in charge, anyway. The State is in charge of everything, and has been (according to Keynes) for at least 4,000 years. State save us! The purpose of production is not consumption. Neither Adam Smith nor the popes knew what they were talking about. The purpose of production is to pile up wealth to reinvest in capital to provide jobs to realize effective demand to justify the capital that produces the wealth to pile up. As Keynes pontificated,

"The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (John Maynard Keynes, The Economic Consequences of the Peace (1919), 2.iii.)

Of course, there has to be enough production of marketable goods and services to keep people sufficiently contented not to overthrow the government or start burning economists at the stake. The problem is to get sufficient effective demand into the hands of consumers to allow them to buy the marketable goods and services that keep them alive, and yet decrease consumption to provide savings.

Yes, but how?

Simple. By creating money that pays for production of non-marketable goods and services! Paying for the labor to produce non-marketable goods and services increases the effective demand that allows consumers to buy needed goods and services, but does not increase the supply of those same goods and services. Further, you can create all the money you want to do this and it won't cause inflation because the new money is only paying for goods that aren't sold! The fact that the price level rises is, according to Keynes, due to "other factors." It's not "true inflation."

That's the theory, anyway.

Okay, what sort of non-marketable goods and services did Keynes say we should produce in order to get the economy rolling again? Oh, anything, just as long as the goods are not meant for use, or were to be destroyed in some fashion after manufacture without adding to what is available in the market — pyramids, cathedrals, even war if the politicians can't think of anything sufficiently useless on which to spend money.

The massive waste of lives and resources that such a program entails is irrelevant as long as you gain your immediate end. Mounting debt, depleted resources, ruined lives — these are long run problems. We're only interested in the short term. In the long run, as Keynes claimed, we're all dead. Screw tomorrow. We Want It Now.

Of course, we could always address the Great Savings Dearth by doing something that actually helps people save instead of allowing the government to waste. We'll take a look at one possibility starting tomorrow.

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News from the Network, Vol. 5, No. 16

Despite the wild fluctuations in the stock market (and everything else — shall we have another discourse on "The Great Hotdog Hoodwink" now that a 69¢ one-pound package of hotdogs is a $1.79 12-ounce package?) there are definite signs of hope. People seem to be waking up to the need for some serious reform, although they remain unsure what to do about it. To let them know that there are things that can be done, we've been continuing our efforts:

• The Rally at the Federal Reserve Board of Governors building today in Washington, DC went very well. There was only a moderate number of hitches (meaning the things that went wrong were either someone else's fault, or happened to someone else). The event opened with remarks by Rev. Robert Brantley, leading into a rousing rendition of "16 Bills" sung by Dr. Scott Holmes, which (if you haven't heard it), can be found here. (If you don't care for protest songs, tune in to this, which is pretty cool, too.) Scott followed with "People and Things," a piece, like "16 Bills," by Dawn Brohawn.

• Scott's songs were followed by a dramatic reading of a skit by Barbara Olson of Las Vegas, Nevada, "Abraham Lincoln and Miss Liberty." Michael D. Greaney read the part of Abraham Lincoln, while Jackie Woodman of Cleveland read Miss Liberty, appropriately garbed as the Statue of Liberty.

• Bob Brantley then introduced the keynote speaker, Norman G. Kurland, president of CESJ. Norm gave a brief statement as to why we need a Capital Homestead Act and read a statement of support from Pollant Mpofu, an advisor to the Labour Party in the United Kingdom.

• Dave Hamill of the Coalition for Capital Homesteading gave a talk on how Capital Homesteading would help the "small" businesses that provide the bulk of production of marketable goods and services throughout the world, and how it would stimulate effective and lasting — unsubsidized — job creation.

• Monica Woodman gave a presentation of what adoption of a Capital Homestead Act would mean for solving the home mortgage crisis. While some things could be done in the current legal and economic environment, a permanent and just solution to the problem will be found only in Capital Homesteading.

• Joseph Recinos, back in town briefly from traveling in Central America, gave his reflections on why Capital Homesteading is needed globally as a way of establishing and maintaining economic justice for all on a basis of liberty and private property.

• CESJ's "Poet Laureate" Dawn Brohawn then gave a talk on how just "one simple act" — specifically, signing and introducing the Declaration of Monetary Justice to legislators and politicians at all levels of government for adoption as a non-binding resolution — would greatly advance the Just Third Way.

• Jerry Peloquin then gave a brief reflection on the need to revive Washington, DC economically, especially Ward 8 and other distressed areas.

• Scott Holmes finished off with a rendition of "The Just Third Way," accompanied by Jerry on drums.

• According to the Krause Publications e-newsletter, the economy is so bad that coin collectors are divesting themselves of relatively scarce items to make ends meet. Not the great rarities, of course — few ordinary collectors have those — but the "key" items around which someone typically builds a collection. While there's always the hope that it can be replaced when things get better, you have to realize the significance of people selling their "trophies of the hunt" — half the fun of collecting anything is the search for a scarce item and the pride of having a complete set of something. This is a better economic indicator than anything coming from the economists or government, and argues that the so-called "recovery" is an illusion.

• The American Catholic bishops have castigated Representative Paul Ryan's budget proposal for not having a provision that provides adequately for the poor. (The Washington Post, 04/18/12, A2.) While we agree that Mr. Ryan's proposal doesn't address either the needs of the poor or the nation as a whole, it's at least better than the current system — with or without any mandates that violate individual consciences. Not being raised is the possibility that there might be a proposal — such as Capital Homesteading — by means of which the poor can take care of themselves, capital ownership for all can be financed without government subsidy or redistribution, the tax base rebuilt, government spending brought within reasonable limits and the debt paid down.

• ACS Books ("American Chesterton Society Books"?) has published The Hound of Distributism, edited by Richard Aleman, president of the Society for Distributism. Hound appears to be available only in Amazon's "Kindle" at the notorious $9.99 price. According to the one posted review (as of 04/18/12), the book is a collection of essays that rehash old material to the point of redundancy, or (as the reviewer put it), "I was left with the feeling this is a book by Distributists, published by Distributists, sometimes focused on Distributists and, I suspect, for Distributists." If you have $10 you want to invest in reading something you can get for free from other sources by doing a little searching on the internet, you might want to buy The Hound of Distributism, but be warned. Judging from our past experience with a number of the authors whose approach to the natural law is somewhat flexible, their thought is not completely consistent with the Just Third Way. We're just letting you know, however. You can form your own opinion.

• As of this morning, we have had visitors from 63 different countries and 50 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Pakistan. People in the Netherlands Antilles, France, the United States, the United Kingdom, and Indonesia spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Guide to Capital Homesteading," "Aristotle on Private Property," "Why Did Nixon Take the Dollar Off the Gold Standard?" and "The Situation in Greece."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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A Better Way to Save, III: Keynesian Forced Savings

Well, tomorrow is the Big Day. Not for taxes . . . that was Tuesday. If you've been following this blog, you will have seen one or two postings urging you to come and support the push for a Capital Homestead Act at a rally in front of the Federal Reserve Board of Governors building on Constitution Avenue from 11:30 am to 1:30 pm. We'll be demonstrating in favor of monetary and tax reforms to correct the problems caused by adherence to the principles of Keynesian economics and, to a lesser degree, all the schools of economics that accept the "currency principle" as a given.

We have graphic evidence in the form of the condition of the global economy that manipulating the money supply in accordance with the principles of chartalism or Modern Monetary Theory does not work. It is a variety of socialism based on redistributing existing wealth through inflation, leading inevitably to the Servile State.

We define inflation as a rise in the price level resulting from more units of currency "chasing" the same or a declining amount of production relative to the increase in the money supply. Yes — we are fully aware that Keynes defined "true" inflation as a rise in the price level only after full employment had been reached. That's nice. Ordinary people end up paying more for less whether the inflation is "true" or not.

Inflation by any name, however, is a key element in Keynesian economic policy. Taking as a given (as Keynes did) that new capital formation cannot be financed except by cutting consumption, the problem becomes how to both increase consumption to justify the new capital, and reduce consumption to pay for it? This is the past savings paradox that Harold Moulton termed "the economic dilemma" in The Formation of Capital (1935).

Keynes believed he had solved the problem with inflation, even if he refused to call it that — an example of his creative "re-editing of the dictionary." It (allegedly) works like this. A rise in the price level forces consumers to pay more for less. Since Keynes defined "saving" solely as reductions in consumption, this qualifies as "saving." Keynes called it "forced savings."

The consumers, however, do not realize the benefit of this type of "saving." Instead, the "savings" accrue to producers in the form of increased profits. (If producers realize too much profit, however, the government taxes it away to redistribute back to consumers in the form of entitlements, job subsidies, legally mandated wage and benefits packages, and welfare.) Producers then (allegedly) use the savings to finance new capital formation. This (allegedly) creates new jobs that (presumably) generate enough effective demand to keep the economy running at full employment.

The problem that even Keynes saw with this was that you cannot continue on a course of producing more and consuming less forever. It doesn't make sense, as even he acknowledged. Whether or not Keynes wanted to admit it, however, Moulton knew what he was talking about. You can't cut consumption and increase consumption at the same time. The numbers just don't add up.

Never fear. Keynes had an answer. We'll conclude this series next week — after the rally tomorrow at the Federal Reserve.

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A Better Way to Save, II: Keynesian Looking Glass Land

Yesterday being "Tax Day," the vast bulk of "Human Interest Stories" centered on the personal income tax. Typically these stories have focused on how much of each year an average person has to work before he or she stops working for the government and starts working for him- or herself — "Tax Freedom Day."

This year something new has been added: How people are being stupid to use the tax system to "force savings" by overpaying to get a big refund. According to a flurry of articles that appeared in newspapers and on the internet, there is a big push on to nip this sort of thing in the bud. Without even bothering to google the subject, we've seen "IRS Uses Tax Day to Push Consumers to Save" which despite the title argues against using the tax system to accomplish the desired end. Then there was the condescending "Admit It — It Feels Good."

The bottom line here is that we have to overcome a national savings dearth . . . but ordinary people shouldn't use the tax system to save. As one of the articles concluded,

"None of this is going to solve the national savings dearth. Most personal saving in the U.S. will continue to be done by people with lots of money to spare. These experiments, instead, are aimed at making individuals a bit more financially secure, a creative attempt to promote a culture of saving in a country with too little of it."

Why? This doesn't make sense. If the tax system has been distorted to encourage saving, why is the IRS upset when people use the tax system to save?

Actually, it makes perfect sense. Under the currency principle illusion that the only way to finance new capital formation is to cut consumption and save, the more or less logical conclusion is that only the rich have the capacity to save in the amounts required by increasingly expensive advanced technology. If the poor or non-owning classes save, this reduces consumption, and makes the new capital financed by the rich less feasible.

In the Looking Glass Land of Keynesian economics, the tax system and the monetary system are combined in the joint endeavor to reach full employment — of labor, not of all resources. The primary task of private industry (under government control, if necessary) is not to produce marketable goods and services that, in accordance with Say's Law of Markets as applied in the real bills doctrine, can be exchanged through the medium of money for what others produce. Rather, private industry's job is to create jobs in order to sustain effective demand to absorb what technology produces.

This requires a little sleight-of-hand in a number of areas. Okay, a lot of sleight-of-hand. This is relatively easy to do when you base science on faith, or vice versa. Contradictions can be explained away by accusing anyone who raises a question of being either a knave or a fool, probably (and illogically) both at the same time.

For starters, because no normal person wants to admit that what he or she does is useless, "productivity" is always measured in terms of labor hours. Always. It doesn't matter that technology (capital) is responsible for the bulk of production. The belief that "productivity" can be measured by dividing output by labor hours leads to the ludicrous conclusion that human labor is infinitely productive when it isn't even there. This would be the case in a fully automated factory: (Total Output)/0 = Infinity . . . an irrational number (except in Keynesian Looking Glass Land).

Then there's the assumption that the job of the non-owning masses is . . . to have a job. If "the masses" own, they'll just do something stupid with their capital incomes, like spend the money on food, clothing and shelter. This is why Keynes called for the "euthanasia" of the small "functionless" (his words) investor who doesn't reinvest his or her capital income. If they spend, there won't be enough savings to finance new capital formation to provide jobs for everybody.

Given the assumption that the only way to finance new capital formation is to cut consumption and accumulate money savings (and we're not taking the time right now to prove just how false and damaging this assumption is), economic growth relies on having a small class of rich people, the smaller, the better, who cannot possibly consume all the income their capital produces. Being logical, such people reinvest their excess consumption income in new capital, thereby creating jobs.

Alas — the effect of technology is to replace human labor in the production process. The government is forced to step in and either mandate or subsidize job creation somehow, or there won't be enough effective demand to allow the new capital to pay for itself out of future profits, and then provide more savings to finance new capital formation and create jobs. Thus, in the Keynesian Looking Glass universe, useless jobs are created so that there will be more useless jobs created. The goal of job creation is the redistribution of income/effective demand from the technology that produces marketable goods and services away from the human beings who own the capital and who have a right to the "fruits of ownership," to the human beings who don't own capital, but who consume the marketable goods and services produced by capital.

This creates another problem. If income is redistributed through job creation, then the rich don't have enough savings to finance new capital formation and create jobs. Adding to this Catch-22 is the fact that if non-owners consume the income from their "jobs," then they, ipso facto, aren't saving either. If owners aren't saving, and non-owners aren't saving, then there aren't any savings to finance new capital formation and create the jobs that inhibit or prevent saving.

Houston, we have a problem.

This seems an insoluble paradox, but Keynesian economics is equal to the task . . . if we don't look too closely at the system or ask too many questions. Tune in tomorrow for the next exciting episode in our examination of the magic of Keynesian economics.

In the meantime, consider joining CESJ and the Coalition for Capital Homesteading this Friday, April 20, 2012, for a rally in front of the Federal Reserve Board of Governors building on Constitution Avenue from 11:30 am to 1:30 pm to demand a little tax sanity and monetary justice.

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A Better Way to Save, I: Why Things are Complicated

Regular readers of this blog know that our position on the Internal Revenue Code is that it is unnecessarily complex. Including all the regulations 'n stuff, the whole thing totaled more than 72,000 pages — more than 5.5 million words — in 2011. The reason (at least in our opinion) is that the tax code has been "hijacked" to conform to the demands of Keynesian economics. People must be forced to save so that there will be sufficient financing for new capital formation that will create jobs.

What makes tax paying and tax collection so taxing (sorry) is that Congress has to balance several contradictory demands. Contrary to the principles of chartalism ("Modern Monetary Theory") embodied in Keynesian economics, the tax system has to raise some of the money to run government. It cannot discourage productive activity too much. It has to encourage people to cut consumption and save. It can be (and is) used to distribute pork and encourage politically desirable behavior.

All of this makes for a pretty shaky tightrope to walk. It should come as no surprise that the rope is close to breaking and will (in all likelihood) soon drop the country into bankruptcy — and the safety net has rotted away.

As readers of this blog are aware, things would be much simpler if the tax system were used exclusively to raise money for government to meet legitimate expenses, leaving it to people to meet their own needs through their own efforts. The only exception is in emergency situations when it is expedient (politically prudent) to make a redistribution of existing wealth to keep people alive and in reasonably good health.

To allow people to meet their own needs through their own efforts, the Federal Reserve was established. The original mission of the central bank of the United States was to provide the private sector — "the people" — with an asset-backed elastic currency by rediscounting qualified bills of exchange accepted by member banks representing the present value of future industrial, commercial and agricultural capital. This was to be supplemented with limited "open market operations" in bills accepted by non-member banks or drawn by businesses or individuals.

To prevent the government from being able to use the Federal Reserve to finance operations, the bank was not empowered to accept or purchase government securities, except to retire the National Bank Notes of 1863 to 1913, which were backed by government debt. Within two years, however, the government had figured out a way to monetize its deficits by getting the Federal Reserve to purchase secondary government securities ("bills of credit") on the open market, and by the 1930s had effectively stopped all financing of private sector projects, except for politically motivated bailouts.

The bottom line here is that the income tax that was intended to finance government operations is now being misused to generate savings for private sector investment, while the Federal Reserve that was intended to provide financing for private sector investment is being used exclusively to finance government and politically motivated investment. Consequently, the private sector is starved for financing, and the government has (arguably unconstitutionally) been creating money at a furious rate backed only by its power to collect taxes from a rapidly decaying private sector economy. The question becomes what to do about it.

In the short term, you can join CESJ and the Coalition for Capital Homesteading at the Federal Reserve Board of Governors building on Constitution Avenue in Washington, DC this Friday, April 20, 2012, at 11:30 am to 1:30 pm to rally in support of reforming the monetary and tax systems and the passage of a Capital Homestead Act. In the longer term, you can learn more about the Just Third Way by tuning in to this blog tomorrow.

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"Changes in Income Inequality and Economic Growth"

The last couple of days seems to have generated quite a bit of discussion in the media about how to (re)establish income equality and achieve sustainable economic growth.  The focus seems to be on showing how the proposals currently out of the table really don't do anything other than perpetuate the unjust system that caused the problem in the first place.  The obvious thing to do, then, is to start looking at solutions that are not out on the table (crazy thought) . . . and to join us this Friday outside the Federal Reserve Board of Governors building in Washington, DC (on the Constitution Avenue side) from 11:30 am to 1:30 pm . . . and bring some Spam, Coke, and Hershey Bars to share.

Or you could write letters to the Wall Street Journal and other periodicals to alert them to the fact that there is an alternative to the present system (and send CESJ some donations for Spam, Coke and Hershey Bars):

Dear Sir(s):

Kamran Dadkhah has the right of it in his letter in today's Wall Street Journal addressing "Changes in Income Inequality and Economic Growth." Increasing tax rates to try and equalize income and stimulate economic growth puts the cart before the horse by implying that the economic growth has already taken place so that it can be redistributed — an illogical assumption at best.

I disagree, however, that education works toward equalizing income. On the contrary, education results from having a surplus to spend on education. It does not itself cause the surplus. We would otherwise not have the spectacle of students burdened for decades with unrepayable loans taken out to finance education.

The real key to unleashing people's entrepreneurial potential is to open up equality of access to the means of acquiring and possessing private property in capital: capital (not consumer) credit. The venture capitalist is essential for financing startups and speculative ventures. The way to sustainable economic growth, however, is to finance expansion by discounting and rediscounting bills of exchange drawn on the present value of future marketable goods and services. To generate the mass purchasing power necessary to keep the economy going, it is also essential that ownership of the capital that will produce this wealth is broadly and directly owned by people who will use the income first to pay for the capital, and then for consumption, not reinvestment.

Yours,
Blah, Blah

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News from the Network, Vol. 5, No. 15

The big news this week is next week: the annual "Rally at the Fed," co-sponsored by the Coalition for Capital Homesteading and the Center for Economic and Social Justice. The event will be on Friday, April 20, 2012 in front of the Federal Reserve Board of Governors building on Constitution Avenue from 11:30 am to 1:30 pm. If you are in the area, be sure to drop in. If you'd like to carry a sign or hand out literature, you're more than welcome. If you happen to look like Abraham Lincoln . . . have we got a job for you in this year that marks the 150th anniversary of the original 1862 Homestead Act. By next week all the brouhaha over the centennial of the Titanic going down will be old news, and we can concentrate on keeping this country and the rest of the global economy from hitting the skids. In other news this week:

• CNBC analyst Rick Santelli, evidently the inspiration for the Tea Party movement, seems to have an inkling of what's going on, but evidently has never heard of Capital Homesteading. As reported in The Blaze ("CNBC Analyst Loses It Over Obama's Buffett Rule: 'Absolutely Not!'" Jonathan M. Seidl, 04/12/12), Santelli went on what came across as a rant: "People don't really want to hear solutions. They want to change the dialogue, bait and switch, so we get more worried about what people pay, what's fair! You know what, how are my kid's opportunities affected by how many millionaires there are? I don't see that their opportunities are affected! You know what I see that's going to affect their opportunities? 15.6 Trillion!" As readers of this blog are aware, we're run the numbers, and nothing that anyone is proposing does anything to address the real problem which from a tax point of view can be stated as "erosion of the tax base." In English, people aren't making enough from labor to pay taxes, and the government is creating money to cover deficits. Capital Homesteading would solve the problems and more — but only if it's implemented.

• In the Washington Post today, Charles Krauthammer once again sounded as if he's been reading this blog. We always figured Dr. Krauthammer had something on the ball, and that would tend to prove it. If your paper carries his column, you can read what he says (ignoring the Titanic reference; on principle we're disregarding all of them until after April 15th) about "Free-Lunch Egalitarianism." If you get the Post, it's in the 04/13/12 issue, page A17.

• In today's Wall Street Journal, Anne Hendershott and Christopher White (co-authors of the upcoming Beyond the Catholic Culture Wars from Encounter Books — it's not out, we already looked) had an article, "Traditional Catholicism is Winning." (04/13/12, A11.) What is it "they" are "winning"? As the authors explained, after talking about the Young Turks who have turned into the Old Guard, "[I]t [the "aging generation"] is being replaced by younger men and women who are attracted to the church [we figure the editors changed it from "Church"] because of the very timelessness of its teachings. They are attracted to the philosophy, the art, the literature and the theology that make Catholicism countercultural." This is good news for the Just Third Way and its foundation built on the natural law. Frankly, all religions have been afflicted with a tsunami of relativism from both "left" and "right," all based on redefining natural rights and even the natural law itself, all in a fruitless effort to try and force the teachings of the Catholic Church and other faiths and philosophies to conform to the principles of Keynesian economics or some other currency principle school of economics.

• If you haven't read this month's issue of Inside the Vatican, do so. The article "Catholic Teaching and the Elections" is getting some attention in a few quarters, and it looks to get more.

• If you’re upset by the price manipulation of e-books, give yourself a break and download one of the new titles from Universal Values Media available for 99¢, or splurge and get Don’t You Wish! for $2.99.

• Don't forget the Rally at the Federal Reserve Board of Governors building in Washington, DC on Friday, April 20, 2012, from 11:30 am to 1:30 pm. If you can't attend in person, consider sending a sentence or two of support for Capital Homesteading to thirdway [at] cesj [dot] org that (if we have time) could be read at the Rally.

• As of this morning, we have had visitors from 56 different countries and 48 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, India, and Pakistan. People in the Netherlands Antilles, the United Kingdom, the United States, Indonesia and Pakistan spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Guide to Capital Homesteading," "Aristotle on Private Property," "Why Did Nixon Take the Dollar Off the Gold Standard?" and "The Situation in Greece."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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The Keynesian Cargo Cult, IV: The Remedy

Cargo Cultists expend enormous energy building fake airplanes without engines in the hope of obtaining Spam, Coke and Hershey Bars. Keynesians use up vast resources printing money with nothing behind it that undermines economic growth and redistributes existing wealth in the hope of bringing full employment. While both groups are obviously sincere and convinced of the truth of the systems they espouse, the fact is that nothing they are doing is guaranteed to or even reasonably certain of bringing about the desired results. It is as dangerous to apply faith to matters of reason, as it is to try to force reason into a framework determined by faith alone. In desperate situations, it changes the basic orientation from hoping for miracles, to relying on them.

This sounds pretty grim, but there is a way out — the Just Third Way. A proposal like Capital Homesteading, while it relies on people being inspired by their faith to work for justice, does not try to force economics or any other science into a predetermined box — any more than science (even Keynesian economics) can be used to dictate purely religious beliefs or doctrines, or "re-edit the dictionary" to change the precepts of the natural law, despite Keynes's declaration.

Through restructuring our institutions, especially our money and tax systems, Capital Homesteading has the potential to make it possible for every child, woman and man to acquire a capital stake sufficient to generate income to meet normal living expenditures. This becomes critical as advancing technology eliminates increasing numbers of wage system jobs, and those with wealth become increasingly resistant to redistribution. Further, current methods of financing new capital formation not only maintain the current position of the wealthy and shut out virtually everyone else from the chance of acquiring and possessing private property in capital, they operate to concentrate ownership of almost all new capital in fewer and fewer hands.

The solution is to establish a national economic policy based on the binary growth model, designed to lift barriers in the present financial and economic system and universalize access to the means of acquiring and possessing capital assets — a "Capital Homestead Act." The Capital Homestead Act would allow every child, woman and man to accumulate a target level of capital assets. Using a tax-deferred "accumulation vehicle" similar to an IRA, the amount would be sufficient to generate an adequate and secure income for that person without requiring the use of existing pools of savings or reductions in current levels of consumption.

Each capital homesteader's account would be able to receive annual allocations of interest-free (but not cost-free), productive credit. This would begin the process of creating new asset-backed money through the central bank, administered by local commercial banks by investing in feasible private sector capital formation and expansion projects of businesses that would issue new shares to be purchased and sheltered in the citizen's Capital Homestead Account. After the "future savings" (future profits) generated by the productive assets paid off each year's Capital Homestead investment (loan) and canceled the money, the citizen would continue to receive in the form of dividends the incomes generated by those capital assets.

There is, of course, much more to it than that. An overview can be found on the website of the Center for Economic and Social Justice under "Capital Homesteading." Take a look at the proposal, and if you like it, join us Friday of next week at the Federal Reserve Board of Governors Building in Washington, DC, at a rally to be held starting at 11:30 am and going until 1:30 pm.

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The Keynesian Cargo Cult, III: Rot Bilong Keynes

Reading yesterday's posting, someone unfamiliar with the intricacies of Keynesian economics might have felt his lip curl a bit with contempt or have experienced a surge of condescension for such benighted beings as Cargo Cultists. After all, it seems the height of naiveté, if not absurdity to believe that prosperity can be restored by means of unthinking adherence to a set of incomprehensible ritual acts and chanting meaningless words. On reflection, however, we might suddenly realize just how closely Cargo Cultism — Rot Bilong Kako (the Way of Cargo) — and its arguments resemble the Keynesian economic analysis, the Way of Keynes.

Every Cargo Cultist can point to a specific time — the Second World War — when cargo flowed into their land in endless streams, and everyone enjoyed a virtual golden age. Even Europeans and Americans admit that cargo was shipped in massive quantities. Cultists conclude that it is only the selfishness of the whites that prevents them from learning the secret rituals of Cargo to be able to summon the unlimited wealth that flows from God's Cargo Workshops.

Cargo Cultists reject the arguments of non-believers because clearly those who profess to debunk the Way of Cargo have an interested motive and want to keep all the riches for themselves. If the Cultist is steadfast and his faith is unwavering, however, he will one day discover just the right formula to recite and the right structures to build to lure the ships and planes to land again and disgorge their wealth.

Similarly, adherents of Keynesian economics can point to a specific time — coincidentally that same Second World War — during which the economy was restored and universal prosperity was established through full employment. Earlier efforts to achieve full employment during the (second) Great Depression had been balked by the refusal of FDR and other leaders to perform the proper rituals and establish the necessary institutions, as Keynes complained in his famous open letter published in the New York Times on December 31, 1933.

Once the war was over, the Keynesian rituals to maintain full employment were continued, and seemed to work for a while. Cracks soon appeared, however, necessitating the development of new rituals. The strain of paying for both the Vietnam War and the Great Society increased the national debt enormously. Given the right formula, however, economists and politicians were confident that full employment (the developed nations' version of cargo), could be permanently restored.

Since the 1970s (when even Milton Friedman declared, "We are all Keynesians now"), much effort and tremendous resources have been expended to duplicate the outward forms of a prosperous society. Just as the Cargo Cultists build bamboo airplanes and warehouses, Keynesians create the usual accompaniments to full employment, e.g., plenty of money, high paying wage system jobs, the creation of gigantic corporations, welfare, entitlements, a well-educated citizenry, and so on.

Like adherents of the Way of Cargo, however, Keynesians fail to realize (for example) that education doesn't generate wealth. Wealth pays for education. The myth that has burdened millions of students with unrepayable debt is that education brings prosperity, rather than that prosperity allows people to become educated.

The problem is, the Cargo Cultists' airplanes, conning towers and docks only copy the outward form of the American military presence in World War II. They assume that these simulations will magically bring the cargo back. Similarly, Keynesians fail to focus on producing the marketable goods and services that bring about full employment naturally. Further, Cargo Cultists limit "cargo" to finished consumer products. Not only do they ignore the necessity of having engines in their bamboo airplanes, Cultists fail to realize that importing technology would enable them to fulfill their material wants and needs through their own efforts.

For their part, Keynesians limit "full employment" to full employment of labor, ignoring the capital ownership that would enable people to meet their own wants and needs without direct government assistance. Increasing government control of the economy presumably takes up the slack for the failure of the system. Keynesians attempt to impose desired results by performing new (and increasingly expensive) rituals that divert efforts and resources away from truly productive activity.

Clearly, what happened in America (and the rest of the developed world) is that, just as John From Jesus Christ became John From America, John From America became John From the Government. John From the Government now decrees what things will be. Mandating the trappings of prosperity and passing many laws will create full employment.

Like the Cargo Cultist who builds an airstrip or a dock, today's economist and politician is confident that if he or she gets a law passed mandating a desired end, or enough "money" (always understood as a State-issued or authorized general claim on the total wealth of society, not as a promise/contract that must be honored) is spent, the desired end will necessarily come to pass. If it doesn't, it's because the proper rituals have not been followed — excuse me! Enough laws have not been passed — there has been insufficient effort (money) put into the program, or a hidden conspiracy (the rich, the capitalists, the socialists, the neo-cons, the Jews, the Muslims, the Catholics, etc., etc., etc.) is preventing the program from working in order to keep all the wealth for themselves.

Pointing out that things like full employment, adequate wages, benefits, education and social welfare are not the causes of prosperity but the results earns the pointer-outer the pity and condescension of the economic and political establishment at best, its contempt and anger at worst. It is useless to explain that paying people for nothing, or increasing the amount of money before increasing the present value of existing and future marketable goods and services (current and future production) only debauches the currency and redistributes existing wealth without creating any new wealth. Noting that neglecting to establish widespread ownership of capital to replace disappearing wage system jobs as technology takes over the burden of production incites rage at such heresy.

All good Keynesians know that all production comes from human labor. Consistent with Holy Writ (Keynes's Old Testament or Treatise on Money (1930), and New Testament, The General Theory (1936)), it is only necessary to create jobs for production to appear. Chapter and verse can be cited to prove that government creates money that causes effective demand, and inflation transfers the savings that result from reduced consumption to producers so they can create more jobs. Anyone pointing out that, per Say's Law of Markets, you cannot purchase what others produce unless you produce something yourself to offer in exchange is considered insane. Keynesians know that government creates all money, or "the banks" do so illegally by usurping John From the Government's power. Consequently, viewing money as a mere symbol of existing or future wealth in which the issuer has a private property stake, as is the case in binary economics, is heresy. Rising prices on the stock market are not an indication of speculative fear or fever, but — again — the cause of prosperity and full employment.

As for the real bills doctrine (an application of Say's Law of Markets and the understanding of money as anything that can be accepted in payment of a debt), any Cargo Cultist could have developed the Keynesian money multiplier that allegedly refutes the doctrine. Instead of realizing that the money supply is increased by commercial banks accepting bills of exchange representing the present value of existing and future marketable goods and services, the government creates some money. The money is deposited, creating "excess reserves." The excess is loaned out, redeposited, loaned out again (less the required reserves), and so on, multiplying the amount of money in the system.

Keynesians ignore the obvious fact that, as explained, there is no actual increase in the money supply through the alleged operation of the money multiplier. There is only a transfer of existing money as checks are deposited, are presented for payment, and clear. The Keynesian money multiplier explains nothing. It is only useful in explaining away the operation of the ridiculed real bills doctrine. Reversing cause and effect and ignoring all evidence to the contrary, the unquestioned dogma is that increasing the money supply brings full employment. Keynesians and others deride the possibility that money is a result of creating a means to convey a claim on the present value of existing and future production — the real bills doctrine, a result of wealth creation, not its cause.

No, Keynesians remain firmly convinced that prosperity can only result if John From the Government establishes full employment (cargo) and the outward signs of prosperity by law, that is, by force. Then wealth production will presumably follow automatically, creating abundance for all. They fail to realize that if the tremendous effort and vast resources that have already been used to try and make Keynesianism work and get something for nothing had been put to productive use, the world economy would not be in the mess it is in today.

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