As we noted in the previous posting on this subject, there are five situations that need to be addressed in order to carry out a program of restructuring the social order. While there may be more — even many more — we think these are the key institutions that need to be targeted first in order to carry out a just, effective, and sustainable restructuring:
· The Misunderstanding of social justice,
· The “slavery of past savings,”
· “Currency Principle” versus “Banking Principle,”
· The effect of advancing technology, and
· Belief that solutions can’t work as a system.
As we said, the last time we looked at the problem of misunderstanding of social justice. To recap briefly, social justice is not the provision for any individual good, regardless how many people benefit directly. That is to say, social justice is not a replacement or substitute for the failure of individual virtue.
Social justice is, rather, something specific and identifiable of its own: the particular virtue directed to the reform of the institutions (social habits or artificial persons) of the common good. Perhaps most simply put, the job of social justice is to enable the individual virtues, not replace them.
|Louis O. Kelso|
Today we look at a roadblock which in a sense is only one-half of a particular problem, but that will become clear when we look at the other half of the problem. We refer, of course, to what Louis Kelso and Mortimer Adler referred to in the subtitle of their second book as “the slavery of savings.” As they put it, the book — The New Capitalists — is “A Proposal to Free Economic Growth From the Slavery of Savings.”
Not surprisingly, the subtitle of the book requires a little explanation. First, both Kelso and Adler (as well as everyone in CESJ) recognizes that savings are absolutely essential to finance economic growth. There is no getting away from the necessity of savings.
The problem comes in with how you define “savings.” In our opinion, the definition used by John Maynard Keynes has done more harm indirectly to people’s lives and quality of life than anything else, even though he didn’t develop it (he just made certain that no other definition would be accepted). We’re not really picking on Keynes, just stating a fact.
We specify “indirect harm,” because — of course — direct harm (e.g., war, poverty, sickness, etc.) is more immediate and devastating in its effects. As we saw with social justice, however, properly structuring our institutions (such as our understanding of savings) to remove the causes of direct harm will make things like war, poverty, and sickness less likely. Even the best restructuring will never achieve a perfect society, however, because human beings are not perfect and cannot create perfection, even with the best of intentions.
So what is Keynes’s definition of savings and why is it bad? In his General Theory of Employment, Interest and Money (1936), Keynes asserted, “Amidst the welter of divergent usages of terms, it is agreeable to discover one fixed point. So far as I know, everyone is agreed that saving means the excess of income over expenditure on consumption.” (II.vi.ii.)
Interestingly, after making
that declaration, twenty or so pages later Keynes went to great lengths to
ridicule anyone who didn’t accept his definition of savings. This was possibly Keynes’s backhanded attack
on the work of Dr. Harold G. Moulton in The
Formation of Capital (1935), which completely demolished Keynes’s understanding
of savings with logical argument and empirical evidence . . . which drew from
Keynes only a sneer.Dr. Harold G. Moulton
As Moulton pointed out, however, there are two potential sources of savings for financing economic growth, not just the one that Keynes assumed — and which happens to be worst one to use.
This is because there are two types of money, corresponding to the two types of savings. “Past savings,” the only kind that Keynes recognized, consists of unconsumed production. If you assume that savings can only come from not consuming as much as is produced, it inevitably happens that there must be a group of people — the smaller in number, the better — who are so rich that they can’t possibly consume all that they produce. They accumulate this in the form of money savings and use it to finance economic growth. As Keynes declared, flatly contradicting the facts of history,
“The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably.” (John Maynard Keynes, The Economic Consequences of the Peace (1919), 2.iii.)
When the rich invest their savings, this creates jobs to generate income for the rest of us. The problem, of course, is that the unconsumed production of the rich must be turned into money or it can’t be reinvested, but if it’s not consumed, it can’t turn into money. Keynes said that the government should just create money and spend it. This turns production into consumption by the poor, and into profits for the rich.
Of course, it also increases debt, promotes consumerism, and a number of other things, but full employment was Keynes’s goal, not long-run stability or viability. As he said, “In the long-run, we’re all dead.”
It also creates a paradox that no Keynesian or anyone else has ever been able to resolve. If (as Keynes states as an iron law of economics) it is impossible to produce anything unless you have first withheld something you produced from consumption to finance it . . . .where did the original production come from? Which came first, the chicken or the egg? In the Keynesian universe, you can’t have consumption without production, and you can’t have production without first saving . . . but you can’t save until and unless you’ve produced something out of which to save!
Then there is “future savings,” which Keynes said cannot even exist. Where past savings consists of decreases in consumption in the past (which must then be consumed before they can be used for anything), future savings consists of increases in production in the future (which must be produced before the circle can be completed). Interestingly, where using past savings to finance economic growth causes problems, using future savings to finance consumption creates even bigger problems.
On the other hand, if past savings are used to finance consumption, and future savings restricted to financing economic growth, many of the problems associated with using the wrong kind of savings for consumption or investment simply disappear. This is consistent with Say’s Law of Markets (which Keynes and Marx rejected), which is based on the first law of economics, that (as Adam Smith put it) “Consumption is the sole end and purpose of all production.”
Future savings solves the problem of original production. Anyone can become productive and make something to consume by using future savings instead of past savings. It works like this:
|"We agree to future save"|
Two people have nothing, but want dinner. One says to the other, “I know where some rabbits are, but I don’t have any rocks to kill them.” The other says, “I know where to get some rocks, but I don’t where any rabbits are.”
After thinking a bit, the two people realize that if the one who knows where to get rocks knows where the rabbits are, and if the one who knows where the rabbits are knows where to get rocks, their problems are solved.
They agree to create a joint venture, each one supplying what the other needs and receiving half the rabbits that end up dead. Future savings were created by promising to deliver value out of a future increase in production. The Keynesian paradox is resolved by realizing that there are two kinds of savings, and each one must be used properly if problems are to be avoided or if the system is even going to make sense.
This does not solve all the problems, however. There is an underlying conceptual problem regarding money — which we will address in the next posting on this subject.