In the previous posting on this subject, we noted that there was another question about the financing of new capital formation that we hadn’t addressed. We did note the presumed existence of the economic dilemma, however . . . which turned out to be ephemeral, as Harold G. Moulton noted.
|Harold G. Moulton|
Most people (“the experts”) believe that first money must be saved to have enough money to invest, or (in other words) that people consume more only after new capital has been formed because consumption income has been diverted to new capital investment. This means that consumption must be reduced before new capital can be formed, and that new capital formation must be reduced in order to have more to spend on consumption.
Instead, Moulton found something else. As he discovered,
The traditional theory that an expansion of capital construction and consumptive output occur alternatively . . . finds no support whatever in the facts of our industrial history. . . . We find no support whatsoever for the view that capital expansion and the extension of the roundabout process of production may be carried on for years at a time when consumption is declining. The growth of capital and the expansion of consumption are virtually concurrent phenomena. (Harold G. Moulton, The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 47-48.)
This finding, as we said, raises another question. If periods of rapid capital expansion are not preceded by periods of saving to finance new capital instruments, but instead by dissaving to finance the increase in consumption, how is new capital financed, especially on such a vast scale? The answer is, By the proper use of the commercial banking system (invented for just that purpose) backed up with a central bank:
Funds with which to finance new capital formation may be procured from the expansion of commercial bank loans and investments. In fact, new flotations of securities are not uncommonly financed — for considerable periods of time, pending their absorption by ultimate investors — by means of an expansion of commercial bank credit.” (Ibid., 104.)
|John Maynard Keynes|
If, therefore, all current income is used either for consumption purposes, or to retire loans made out of the expansion of commercial bank credit for capital formation, production and consumption will be in balance, and there will always be enough effective demand to purchase all production. If, however, income that should be spent on consumption is diverted to reinvestment, there will be insufficient demand to clear all the goods and services produced.
Keynes’s solution of backing new money with non-productive government debt in order to stimulate demand artificially only made the imbalance worse. This is because the price level rises in response to the addition of new money not backed either by new productive capacity or existing inventories. This cuts consumption even more and requires further stimulus in a fruitless effort to catch up and bring the economy back into equilibrium.
Moulton had partially solved the problem of insufficient demand by recognizing that current income should be used for current consumption, not set aside to increase future production, and that financing for new capital formation should come out of new money specifically created for that purpose. That potentially removed one cause of imbalance in the economy but left the second: the problem of income distribution. The income existed in the form of production, but how could that income be realized and gotten into the hands of people who would use it for consumption instead of for reinvestment?
|Pope Leo XIII|
That was the question Moulton addressed in the final volume of the study, Income and Economic Progress. It was also the question he was not able to answer, even though Part II of the book, pages 87 through 165, is devoted to a discussion of various means of distributing income more equitably.
Suggestions included taxation and redistribution, public works, increases in the minimum wage, price reductions, and profit sharing. Moulton dismissed all of these as solutions after more or less careful consideration, although he believed a few of them (price reductions and profit sharing) would have beneficial, if limited, effects, and should be implemented, although he cautiously refrained from suggesting any specific means for doing so.
Surprisingly, Moulton did consider an effective solution but dismissed it on specious grounds. This was expanded capital ownership, which both Leo XIII and Pius XI had identified as the answer to “the Labor Question.” Moulton simply assumed as a given that a program to distribute capital ownership broadly necessarily meant a government program to redistribute capital ownership broadly:
It will be readily apparent that if such a plan is to be administered fairly, with a view to giving equality in ownership to everyone, it must be done by the government, and on a wholesale basis. That is to say, it would be necessary for the government to pool all the wealth of the country and then issue ownership certificates to all the people, giving each his proportionate share. This would involve confiscation procedure, since it would obviously be impossible to levy and collect taxes equal to 100 per cent of the value of railway properties, factories, mines, farms or even household effects. As a prerequisite a constitutional amendment would thus be required. (Harold G. Moulton, Income and Economic Progress. Washington, DC: The Brookings Institution, 1935, 76.)
Moulton never said why it is “readily apparent” that widespread capital ownership necessarily means confiscation and redistribution by the State. Neither did he say why all new capital ownership must come out of old capital — savings — other people already owned.
This was a puzzling omission, since in his previous book, The Formation of Capital, Moulton had shown how it is possible to finance future production without restricting consumption, and thus without relying on the savings of the rich who could afford to cut consumption. In a most unusual move for him, Moulton took a page out of Keynes’s book and simply asserted that widespread capital ownership is impossible without some form of redistribution.
And that raises yet another question: What to do about it?