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Tuesday, September 7, 2010

Say's Law of Markets, Part VI: The Role of the State

Many people have commented favorably on the wonders of science and the higher standards of living that advancing technology make possible. This sometimes takes the form of turning technology and the sciences into a virtual pantheon of new gods and goddesses. Many others have demonized science and advancing technology — even, on occasion, reason itself — blaming them for all the ills of humanity. They assert that anything so beyond "human scale" must be anti-human. It must therefore be cut down to size or destroyed. The instrument inevitably chosen to carry out this program is the State.

A Limited Role of the State

For centuries there has been a struggle as to which view of the State would become dominant. The older idea of the State — albeit rarely achieved, however much lip service might be paid to the ideal — is based on a concept of the natural law as derived from God's Nature reflected in humanity.

That is, the State is a social tool made necessary by man's political nature. The State's proper role is to care for the common good. The common good is that complex network of institutions within which man as a moral being carries out the task of becoming more fully human, that is, pursuing happiness: acquiring and developing virtue. In order to carry out its task, the State necessarily enjoys a monopoly within its sphere of influence. This is a monopoly over the instruments of coercion, the only true "natural monopoly." Without this, the State would be unable to carry out its functions of providing a level playing field wherein all enjoy equal opportunity, policing abuses, adjudicating disputes, and thereby promoting the general welfare.

The monopoly that the State enjoys over the instruments of coercion makes the State, regardless how necessary it might be, a very dangerous tool. For that reason, the State's role in general must be limited to providing the framework within which each citizen pursues his or her own interests. The State's job is to secure the common good, the general welfare, not the individual good or particular welfare of any person, group, or class.

There may be instances in which, for the sake of expedience, the State does provide for the particular good of individuals, groups, or classes — especially (for the purposes of this discussion) in times of economic turmoil — but these must be recognized as allowed expedients to address emergencies, not blueprints or prescriptions for an ideal society. Economically and politically speaking, the State's role is necessarily limited.

Like the natural law itself, which gives general norms only and leaves specific laws to be determined by human wants, needs, social conditions, and so on, humanity's political nature requires the existence of the State in order for the human person to develop more fully as a person, that is, to pursue happiness. The need for the State is part of human nature. A particular State, however, is a human construct. Based on conditions, the wants and needs of individuals, groups, and the people as a whole, even climate and physical surroundings, a State is designed to assist people in meeting those wants and needs in the manner deemed most suitable under the given parameters — the most important of which is the framework of the natural moral law, especially the rights to life, liberty, private property, and the pursuit of happiness (the acquisition and development of virtue).

With respect to money and credit, the State's role must be limited to setting the standard of value for the medium of exchange. This must never be taken as restricting people to that standard if they agree amongst themselves to use a different standard. If a dispute arises, however, between parties to a transaction as to the value of what is being exchanged, the State would likely toss out the arbitrary standard and require the parties to reach a new agreement using the general standard established and maintained by the State.

A standard of value is, after all, the result of agreement among people for the sake of convenience, not a mandate from God, or God in the person of the State. Asserting otherwise is merely an example of a confused understanding of money and credit. (Vide James Hookway, "Malaysian Muslims Go for Gold, But It's Hard to Make Change," Wall Street Journal, 09/03/10, A1-A14.) As long as the matter of a contract is legal, there is no unfair advantage taken, and all parties are satisfied, people may use any standard of value they please.

Say's Law of Markets and the real bills doctrine assume this understanding of the role of the State. "Money" being an abstract concept, the symbol, by means of which people convey private property rights in the present value of existing and future marketable goods and services, they can make a contract — draw a bill — on any terms they please, and no one else has any legitimate concern or say-so in the matter as long as the parties are satisfied. Money is anything that can be used in settlement of a debt, and "anything" means anything.

The Authoritarian State

This understanding of the role of the State changes completely once the basis of the natural law shifts from Intellect — Nature — to Will. Within this framework of understanding, the role of the State changes from guardian of the common good traditionally understood, to provider of each individual good. This is because the definition of the common good shifts from the complex network of institutions within which individuals pursue happiness, to the aggregate of all individual goods. Given this redefinition, if God, the State, the Will of the People, etc., has declared that each person must have thus-and-so, then each person must have it, by divine fiat . . . as understood and carried out by those in charge of the State.

In this new understanding of the role of the State, the State's job as guardian of the aggregate of the individual goods of every citizen is to ensure that each person does, in fact, have thus-and-so, whether it be a wage paid at a level sufficient to meet human needs adequately, universal health care, food, clothing, shelter, education, and so on. Unlike the institutional understanding of the common good within which each person has the opportunity to pursue his or her individual goods as he or she sees fit, and the State's role is limited to maintaining (though not necessarily providing) equality of opportunity, the list of individual wants and needs that the State must provide under the new understanding of the role of the State is effectively endless, limited only by bureaucratic imagination.

To carry out this new role the State requires absolute power. Humanity's political nature is subsumed into an all-powerful State. Politics, properly speaking — i.e., the acquisition and development of social virtue — is abolished; there is only individualism and collectivism; there remains only the individual and the collective. The State in abstract ceases to be the natural expression of humanity's political nature and becomes an artificial construct contrary to nature. Depending on someone's orientation, this may be a good thing, an expedient thing, or a bad thing, but the arrangement requires a redefinition of substantial human nature. This redefinition, of course, makes no sense if we accept either Aristotle's dictum that man is by nature a political animal or that the basis of human nature, being made in God's image and likeness, is God's unchanging and unchangeable Nature.

The Destructive Response

The currency crisis of 1797 forced a number of developing situations to come to a head. The American Revolution had effectively countered the growing trend toward dividing humanity into individualist and collectivist schools by laying the foundation of a truly "new order" — in America. This was the recognition of man as a "political animal," that is, a natural person with inalienable rights, the exercise of which are defined by the legitimate wants and needs of one's self, other individuals, groups, and the common good as a whole.

As a result, humanity's social development made a great leap forward on the American continent, as recorded in the first great work of sociology, Alexis de Tocqueville's Democracy in America. The achievement of the American Revolution was so great an advance that a century or so later that Francesco Cardinal Satolli, first "Apostolic Delegate" from the Holy See to the United States and an important figure in the revival of Scholastic philosophy (especially that of Aquinas), declared that the Magna Charta of humanity comprises the Gospels and the United States Constitution. (Vide Heinrich Rommen, The State in Catholic Thought. St. Louis, Missouri: B. Herder Book Co., 1947, 370.)

Unfortunately, this advance affected only America — and has been in decline there since the loss of the widespread opportunity to acquire and possess private property in the means of production with the effective end of homesteading in the 1890s as the land frontier closed down. Even the French Revolution, ostensibly inspired by the American Revolution, rejected the sovereignty of the individual under God and took the new view of the State: an entity of absolute power from which all rights and all other goods derive.

At the same time, the Industrial Revolution, through the hyper-productivity of technology relative to human labor, was laying the foundation of a new economic vision for the future. For the first time in history, technological progress promised abundance for all and release from the debilitating constraints of insufficiency and erroneous concepts of scarcity.

There was just one problem. Unfortunately, this problem was of so great a magnitude as to counter the progress made in the social and physical sciences. Despite the great advances that had taken place in the century prior to 1797, the powers-that-be, both political and financial, by and large jettisoned advanced financial techniques, and adopted what can only be described as a profoundly reactionary position.

That is, money and credit began to be viewed more consistently as a commodity, a pool of existing wealth — accumulations of savings — on which the creator of credit or the issuer of money draws. Within this framework, and in accordance with the laws of supply and demand, expanding bank credit, striking more coin, or printing more banknotes — inflation — decreases the value of each unit of currency. Reducing the number of "markers" — deflation — divides the pool of existing wealth up into fewer parts, making each unit more valuable. It is therefore the State's obligation, as the sole legitimate issuer of money (and thus tacit owner of everything) to try and regulate the "value" of the currency — understood as the whole of the money supply — by inflating the number of units when the economy needs more money (i.e., needs to redistribute existing savings), and deflating the currency when there is too much, that is, there are too many "markers" in circulation for the productive sector to satisfy at desired price levels.

All of these new things combined to convince most people that things are definitely out of control, that the individual is helpless before amorphous and terrifying social, economic, and political powers. The only answer is surrender to collectivism, or revolt to preserve individualism.

A Socially Just Solution

Not considered is the more socially just orientation of the poet Terrence (Publius Terentius Afer), "I am a man. Nothing human is alien to me." The proper approach to human creations such as the State, the economy, technology, corporations, even — or especially — the institutions of money, credit, banking, and finance — is not to deify them, making them more than human. Nor can we maintain with any logical consistency that such things are inherently or objectively evil, therefore less than human, and target technology and science for destruction.

Being made by man, man being a creature that in the Aristotelian/Thomist framework participates in an analogously complete capacity to acquire and develop virtue with an all-good Creator, things cannot be objectively evil, only the use to which we put the things. All institutions can be used or applied in ways that are objectively evil. The social good of organizing for the general welfare as applied, for example, by the Nazi Party was in some respects objectively evil. The current trend to redefine — transubstantiate — natural rights such as life, liberty, property, and the pursuit of happiness, while an application of the right of free association and the principle of participation, is objectively evil in that it attempts to redefine what it means to be human.

No, things — including our institutions — are not objectively evil in and of themselves, regardless how much we misunderstand them or become confused by them. Still, it is a very human tendency to lash out at what we think is causing our problems, seeking to destroy that which we do not understand rather than integrate our human creations into their proper role in human life — as tools to assist humanity in acquiring and developing virtue, thereby becoming more fully human.

The problem comes in when our institutions seem to be getting out of hand, and our methods of control seem either to be ineffective or non-existent. Unable or unwilling to face the fact that we, as human beings, have failed to develop socially or (more accurately) politically in a manner calculated to keep up with technological advances, people begin asserting that technology must, therefore, be evil, or (as one commentator put it in a lecture attended by this writer), man is building machines he cannot control.

Not coincidentally, humanity's failure to develop politically has the same root cause as the rejection of Say's Law of Markets and the real bills doctrine: the change in the perception of reality that accompanied the shift in the basis of the natural law from "Intellect," that is, God's Nature, to what people with power take as God's Will. This shifted the whole concept of right and wrong and of natural rights from what humanity can discern through reason, to whatever the strongest is able to force on others.

Ownership is Control

Ironically, the individual making the claim that man is building machines he cannot control was a proponent of "distributism," a loosely defined system developed by G. K. Chesterton and Hilaire Belloc. Distributism is a system of widely distributed direct ownership of the means of production, with a preference (that some enthusiasts have turned in a mandate) for small, family-owned farms and artisan workshops.

What the commentator failed to realize was the paradox of promoting ownership at the same time he asserted that ownership is impossible; socially and legally, "ownership" and "control" are synonyms. (Kelso, American Bar Association Journal, loc. cit.) The socially just response to technology that people do not own/control is not to destroy that technology or abolish private property. Rather, the task of humanity becomes to restructure out institutions so that everyone has an equal opportunity and means to become an owner of that technology.

Following the drastic decline in gold reserves of the Bank of England and the suspension of convertibility of the Bank's notes into gold in 1797 with the Bank Restriction Act (37 Geo. III. c. 45), demands for reform began to rise, particularly in light of the "money question" and the growing concentration of ownership of the new machinery of the Industrial Revolution. The "close relationship" between the Bank of England and the government had led to the belief that the State somehow has the right to create money at will, with no regard to the essential direct link to the present value of existing and future marketable goods and services that private property provides. As Hildreth commented,
The Bank of England, now that it did not pay its notes in specie, was very much the same sort of thing with Mr. Law's Royal Bank. But though equally dangerous, it was managed with much greater prudence. At first, the Directors proceeded with very cautious steps. They made no attempt to increase their circulation; and the notes in consequence remained for some time nearly at par. The ministers and the practical men were surprised and delighted with the admirable working of their non-specie-paying-bank; and the opinion gradually crept in among them, that bank-notes were the same thing as coin; and that it was in the power of the Bank to manufacture money at pleasure; a truly comforting idea for people engaged in so expensive a war. This was precisely the opinion and the error of Mr. Law; and thus was revived a blunder which Adam Smith had most amply explained and refuted years before. Mr. Pitt boasted that he had never read the "Wealth of Nations," so that his being thus deceived is not so much to be wondered at; but that so many able and well informed men among the merchants and the land holders, should have fallen into the same mistake, is a most striking instance of the facility with which men suffer themselves to be deceived, when that deception is consonant to some fancied interest. (Hildreth, The History of Banks, op. cit., 28-29.)
The concentration of ownership of the means of production began to take on ominous significance as the predominate factor of production began to shift from labor to capital. Each person clearly owns/controls his or her own labor, and (just as clearly) is entitled to what that labor produces. In a society in which human labor is the predominant factor of production, even the extremely rich cannot satisfy their wants and needs without employing others. Human labor thereby serves to distribute the wealth of society more or less equitably, according to each person's labor input. This is the basic assumption of Adam Smith's "invisible hand" argument.

When, however, capital becomes responsible for the bulk of production, the invisible hand is no longer able to function. The income resulting from people satisfying their wants and needs flows not to owners of labor, but to owners of capital. Cut off from ownership of the means of production, people without capital become dependent on those who do own capital, as well as to those who control the means of acquiring and possessing private property — money and credit.

This condition of dependency is tantamount to slavery. As the early 19th century "radical" William Cobbett noted, "Freedom is not an empty sound; it is not an abstract idea; it is not a thing that nobody can feel. It means, — and it means nothing else, — the full and quiet enjoyment of your own property. If you have not this, if this be not well secured to you, you may call yourself what you will, but you are a slave." (William Cobbett, A History of the Protestant Reformation in England and Ireland, 1827, §456.)

Ownership of the means of production, whether labor or capital, is necessarily implied in Say's Law of Markets and the real bills doctrine. If people cannot produce "by themselves [labor] or through the means of their capital or their land" (Say, Letters to Malthus, loc. cit.), then they have no "produce" with which to purchase the productions of others. No one can legitimately draw a bill on the present value of existing or future marketable goods and services that he or she does not own. The propertyless worker is thereby cut off from access to the social good of money creation, and thus from the means of acquiring and possessing private property in the means of production.

Unfortunately, with the spread of the new idea of the State, a new idea of money and credit was also gaining widespread acceptance. That is, the whole of the money supply and available credit — the supply of loanable funds — consists of unconsumed production from the past: existing accumulations of savings. Based on this erroneous conception of money and credit, the belief was growing and would soon become unquestioned economic and financial orthodoxy that it is impossible to finance any capital in an amount greater than existing accumulations of savings, and, as is only just, that all new capital must be owned by those who provide those savings.