THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Monday, October 19, 2009

The Slavery of Past Savings

We're starting to hear more about how "Obamanomics" has failed. It's tempting, of course, to blame Mr. Obama for the problem, just as he and others blamed Mr. Bush, but let's face facts. Mr. Obama is no more to blame for the current state of affairs than Mr. Bush was. Each one was and is operating within a seriously flawed paradigm. Because the basic premise is flawed, it's not going to make any difference what is done. Whatever is done will only be the right thing by pure chance, and chances (especially for the majority of people) are getting slimmer by the hour.

Making matters worse is the fact that, even within the seriously flawed Keynesian paradigm Mr. Obama's programs do not make sense. You don't bolster the status quo by pouring money into failed companies or sponsor direct government takeovers of private companies. Instead, the State engages in indirect takeover of private industry by regulating investment returns, the tax rate, inflation, and (above all) artificial job creation that puts money directly into the hands of people who will spend the money not on investment or to bring their asset portfolios back up to previous inflated values, but on consumption, thereby increasing effective demand through full employment.

The flawed basic premise that underlies all of today's monetary and fiscal policy, as well as the bedrock of modern economic thought, is the fixed belief that capital formation can only be financed out of existing accumulations of savings. Held as a virtual religious dogma by academic economists and the politicians and Wall Street speculators and gamblers they advise, what Kelso and Adler called "The Slavery of [Past] Savings" has shackled economic growth, fostered envy and greed, nurtured widespread poverty, and plunged the great mass of people into a condition accurately described as "a yoke little better than that of slavery itself." (Rerum Novarum, § 3)

The following short piece is extracted and condensed from the draft of an upcoming book, tentatively titled "What is Money?" by Norman G. Kurland and Michael D. Greaney. It highlights the seriousness of the problem, and helps us understand Aristotle's observation in De Coelo that a small error in the beginning leads to large errors in the end as it applies to today's confused understanding of the role of existing accumulations of savings in the economy.

The Slavery of Past Savings
By Norman G. Kurland and Michael D. Greaney

Most of modern economics and finance is based on a false assumption: the presumed necessity of existing accumulations of savings to finance capital formation. Prescriptions based on this assumption end up being the wrong thing to do to stimulate a recovery, foster full employment, or achieve sustainable economic development without inflation or deflation.

In their book, The New Capitalists (1961) Louis O. Kelso and Mortimer J. Adler question this basic assumption, thereby earning them the opprobrium of the economics establishment for making (as their subtitle put it), "A Proposal to Free Economic Growth from the Slavery of [Past] Savings." Building on the work of Dr. Harold G. Moulton in his 1935 classic treatise, The Formation of Capital, Kelso and Adler show how capital acquisition for the great mass of currently propertyless people can be financed out of future, rather than past savings by democratizing and monetizing capital credit through commercial bank loans by discounting such loans at a central bank, thereby accelerating private sector growth. Moulton, president of the Brookings Institution, authored The Formation of Capital as part of a series presenting an alternative to the Keynesian New Deal.

The problem as Kelso and Adler saw it was that, given the immense cost of capital in a developing or developed economy, only the people who are already rich, that is, who already own capital, can afford to cut consumption and save. In fact, capital assets are so productive in comparison with mere human labor that the capitalist finds it impossible to consume all the income generated by the capital he or she owns and which accrues to the owner as one of the fundamental rights of private property.

Acting rationally, the capitalist reinvests unconsumed income as a matter of course. This accelerates the generation of increasing amounts of income that cannot be consumed. This in turn causes those who already own far more productive capital than is necessary to provide for all their wants and needs to become increasingly wealthy at an accelerating rate.

In a paradox that has puzzled economists and social scientists for centuries, the very means by which immense quantities of marketable goods and services are provided for the world — the financing of the formation of increasingly efficient and productive capital — is what keeps most people relatively poor and unable to consume everything that is produced. The world is faced with the inexplicable problem that people are in want, even starving and in dire need at a time when there is more than enough unrealized capacity to take care of everyone on earth.

The solution is for those who own little or nothing in the way of capital to become owners of a capital stake sufficient to generate an income that will allow them to meet common domestic needs adequately. Unfortunately, it has become fixed in people's minds that the only legitimate way to become a capital owner is to cut consumption, save, then invest — or to confiscate and redistribute wealth. The former is clearly an impossibility for those whose wages, even opportunities for selling their labor, diminish and in some instances disappear altogether in competition with advancing technology or cheaper labor elsewhere. Some term the latter the equivalent of theft.

Kelso and Adler's answer is to apply basic principles of finance to the science of economics. Thus, if people lack ownership of the means of production other than human labor, and capital is replacing human labor as the predominant factor of production, it seems logical that the solution is to turn people who do not own capital into people who do own capital.

Still, if only existing accumulations of savings can be used to finance capital formation, people who do not own the capital that generates the bulk of income in a developed economy cannot acquire capital. You cannot cut consumption and save unless you own capital, and you cannot own capital unless you cut consumption and save.

As Kelso and Adler discovered, however, a more viable solution is found implicitly in the definition of "money" and in the power of a central bank to monetize and democratize capital credit by discounting non-recourse loans extended by commercial banks for productive projects and collateralized with capital credit insurance, and repay the loans out of future income. Money is anything that can be used in settlement of a debt. "Money" therefore takes the form of a promise to deliver value on demand or at some future date (maturity) to settle the debt. If a promise is "good," that is, we trust the individual or group making the promise to keep his or her (or its) word, then the promise has a current or "present" value.

To acquire ownership of capital, then, a potential owner who lacks an existing accumulation of savings to finance the purchase of capital or to serve as collateral to obtain a loan for the purchase of capital need "merely" make a good promise to pay for the capital in the future. To keep the system in balance, the repayment should preferably come out of the income generated by the capital itself. This promise — asset-backed money — can be made transferable, and used throughout a community as "currency" (current money) until the promise comes due and the holder in due course redeems the promise.

CESJ has developed a proposal, "Capital Homesteading," that is a plan for getting ownership, income, and power to every individual. Adaptable to any economy in the world, Capital Homesteading is an analogue of the 1862 Homestead Act. Capital Homesteading expands the vision of Lincoln to include ownership of land, natural resources, advanced technologies, and infrastructure, including management, marketing and distribution systems, through equity shares in enterprises capable of competing without special protections within a free and just global economy. The idea is that everyone would have a tax-sheltered trust account, similar to an ESOP, financed by non-recourse loans on credit, in which to accumulate income-generating assets. The income from these assets would first be used to repay the acquisition loans with "future savings," then supplement and, eventually, replace income from selling labor, and provide for a secure retirement.

Assuming that only existing accumulations of savings can be used to finance capital formation locks us into a condition of permanent dependency on the rich. The alternative under the past savings assumption is a State that claims the power to manipulate the money supply for its own advantage, or take what belongs to the rich for redistribution among those whom the State finds acceptably poor or deserving. Neither is acceptable from the standpoint of essential human dignity — or basic economic justice.