Every once in a while we get a question that we answer and then realize we’ve written a blog posting. On Friday of last week we had such a happy occurrence. As someone asked in a forum discussing “Thomist Philosophy,” that is, the philosophy of St. Thomas Aquinas,
I think that the Austrian theory of the business cycle is more correct than any other, but I find much to like in the Distributist approach to economics in general. Additionally, most Distributists are, at heart, Thomists. Aristotelian or Aristotelian-leaning Austrians tend to incorporate assumptions or ideas from Suarez. I don’t like Suarez.
Now, one thing that we liked is the fact that the individual spelled all his words correctly. The other thing we liked is that this sort of thing is a “softball pitch.” Not real softball, of course. Real softball pitchers are worse than those in hardball. They are out for blood, and they often get it.
Anyway, we started out by commenting that both Austrians and distributists are locked into the Currency School, as Ludwig von Mises made no bones about, but which most distributists simply do not understand. (That’s not a slam, just fact.) And the difference? In simplest terms, the Currency Principle is that money is a commodity, and the amount of money determines the “velocity” of money (the average number of times a unit of currency is spent in a year), the price level, and the number of transactions. The Banking Principle is that money is the medium of exchange, and that the velocity of money, the price level, and the number of transactions determines the quantity of money.
That being said, the Austrian emphasis on an asset-backed currency is, per se, the strongest and most logical of all the mainstream schools of economics. As Currency School economists, however, they assume as a given that only existing wealth in the possession of the issuer can back the currency, and don’t recognize anything except currency and currency substitutes as money. In financial terms, the Austrians recognize only mortgage type securities, not bills of exchange, i.e., only past savings not future savings.
The modern business cycle is a Currency Principle phenomenon, so it makes sense that the Austrians would have a better handle on it, since they are the most consistent of the Currency School economists. The business cycle has its roots in the “violation” of Say’s Law of Markets. It is caused by the failure to link the money supply directly to the amount of marketable goods and services in the economy, and to have the means of production broadly owned. The combination of these two factors is catastrophic, as the panics and Great Depressions since 1825 have demonstrated.
By recognizing that a bill of exchange can back the money supply — or be a part of it, if “accepted” (that is why such instruments are called “bankers” or “trade” acceptances) — an Austrian could easily be brought to recognize future savings as legitimate, and lead naturally into the need for an “elastic” asset-backed reserve currency; right now any change in the money supply to an Austrian is automatically inflation or deflation.
To confuse matters, to a Keynesian, inflation can’t exist until full employment is reached; rises in the price level are due to “other factors.” Yes, in more rational terms, a rise in the price level IS inflation, but that did not fit Keynes’s theories. He needed to account for a rise in the price level before reaching full employment, so he decided to redefine inflation!
Distributism is much more flexible than Austrian economics, since it is a concept rather than a theory. G.K. Chesterton was careful to keep his definition of distributism minimal (possibly to piss off G.B. Shaw): a policy of widely distributed ownership with a preference for small, family owned farms and businesses. When enterprises must be large, they should be owned on shares by the workers.
That’s it. All the “small is beautiful” rhetoric and modernism, socialism, and the New Age, are accretions that Chesterton and Hilaire Belloc rejected. Unfortunately, Belloc ultimately cut the ground out from under his own feet by trying to make specific recommendations. It was fine rhetoric, but lousy economics and finance.
Because of its flexibility, however, distributism can be made viable by adding a future savings component that doesn’t rely on ownership of existing wealth to finance new capital formation, and by recognizing that widespread ownership of large enterprises is as legitimate as ownership of small enterprises. Latter day distributists just need to shuck their dependence on Fabian socialists and socialism, and its offshoots, especially R.H. Tawney, Msgr. John A. Ryan, Henry George, and so on, social credit, guild socialism, etc., etc., and now “democratic socialism.”