In the previous posting on this subject, we looked at Adam Smith’s “invisible hand” and how it fits into Smith’s first principle of economics, that “Consumption is the sole end and purpose of all production.” We concluded (tentatively) that production for a purpose other than consumption is a serious mistake.
|Waste is built into the Keynesian framework.|
For one thing, backing a currency with government debt means that the value of the currency is completely in the power of the government to maintain or manipulate. The government decides whether the dollar, peso, or pound that a worker was paid will have the same value when he goes to spend it as when he earned it.
To explain, if the government wants “more demand” infused into the economy, it prints more money, which shifts purchasing power from those who have managed to save money into the hands of those who receive payments from the government. If a government wants less demand in the economy, it retires debt, driving up the value of the currency, and making it harder for debtors to pay their debts.
No one really knows from one day to the next whether his money will be worth less, more, or nothing. Thus, governments act unjustly when they manipulate the currency, even for the best of reasons, because simple justice demands that a currency have a stable and uniform value so that what someone produces is the same value that he consumes.
Say began with Smith’s first principle of economics, as he noted in his responses to Thomas Malthus. As Say argued, absent charity, theft, or some other form of redistribution, there is only one way to consume, and that is to produce.
You must either produce for your own consumption, or to have something to trade to others for what they produce that you want to consume. When governments issue money backed with their own debt, they are consuming without producing, which violates private property. Thus, as Say concluded,
[I]n reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce. . . . It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land. (Jean-Baptiste Say, Letters to Malthus. London: Sherwood, Neely, and Jones, 1821, 2.)
The best, indeed, the only legitimate way to create money, then, is to convert “produce” into money. And that creates a problem.
|Say's Law (Ultrasimplified)|
In addition, consistent with the natural right of private property, the owner of capital owns what his capital produces in the same way as the owner of labor owns what his labor produces. At the same time, the power to produce is, per Say’s Law of Markets, also the power to consume. “Production equals income,” as Say’s Law is often summarized, “and therefore supply generates its own demand, and demand, its own supply.”
As the productive capacity of capital began greatly surpassing that of labor, owners of capital generated consumption power far in excess of their capacity to consume. Capital owners necessarily reinvested their excess consumption power in additional new capital.
|Marx: Capital is like a vampire (blah, blah!)|
At the same time, owners of labor were increasingly hard put to sell their labor for enough to provide even minimal subsistence for themselves and their dependents. As technology advanced and ownership of productive capital became ever more concentrated, private charities, especially the churches, became overwhelmed by the growing number of the poor and the degree of distress. Consistent with New Christian principles that substitute the collective for God, and the State for organized religion, governments began redistributing wealth, first through taxation, then through inflation.
The real solution to poverty, however, is not to “increase unproductive consumption,” (Jean-Baptiste Say, Letters to Mr. Malthus. London: Sherwood, Neely, and Jones, 1821, 3) whereby people are empowered to consume without producing. Rather, as Leo XIII pointed out in § 46 of Rerum Novarum, the only way to solve “the Labor Question” consistent with principles of natural law is to turn every producer into a consumer, and every consumer into a producer.
The question, of course, is how that can be done — but to understand how it can be done, we need to look more closely at the role of money in Say’s Law, which we will do in the next posting on this subject.