As we again stated in the previous posting on this subject, five situations need to be addressed in order to carry out a program of restructuring the social order. As we noted, there may be more, but these are the ones we think are key to carry out a just, effective, and sustainable restructuring of the social order:
· 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.
In the previous posting we looked at what Louis Kelso and Mortimer Adler called “the slavery of savings.” This doesn’t mean that saving is bad, but that it’s been misused, especially in Keynesian economics, which recognizes only past reductions in consumption as savings, not future increases in production.
To summarize, many problems in the social order can be traced to the belief that only past savings can be used to finance economic growth. This puts control over economic growth in the hands of those who control past savings. In effect, that limits power to the private sector rich who can afford to save, and to the State, which can control money. In what Hilaire Belloc called “the Servile State,” the private sector and public sector élites combine and — whether or not they intend to do so — keep everyone else dependent on wages and welfare to meet their consumption needs.
That is why the world has seen a shift over the past 250 years or so. Where once the orientation was for everyone to be able to produce for consumption, whether by means of capital or labor, with the advent of advanced productive technology requiring human input to maintain, the focus became for everyone to have a job and production became for consumption and reinvestment.
As technology became so advanced that direct human input began to be removed altogether, production and consumption became completely separated in many cases, with production carried on as an end in itself for reinvestment; the focus became for everyone to have an income provided by government, which produces nothing. Thus the evolution of the economic process was:
|John Maynard Keynes|
· Expensive human labor supplemented with inexpensive capital ownership to produce goods for consumption (full production), to
· Expensive capital ownership supplemented with cheap human labor to produce goods for consumption and reinvestment (full employment), to
· Expensive capital ownership for a few, with consumption by non-producers financed by government debt (full income).
Obviously, the way to get the global economy back on track is to reconnect production and consumption, not like the Great Reset, which changes from the Keynesian goal of full employment to the new goal of full income. The problem, of course, is that since advanced technology can conceivably produce enough to meet all consumption needs, everyone needs to own capital . . . but how?
In the previous posting we saw how to solve this problem: use future savings instead of past savings for economic growth, and use past savings instead of future savings for consumption. This would bring everything back into balance, “everything else being equal,” as the economists like to say.
It sounds simple — and it should be — to make the shift and start using the different types of savings properly. Just pass the Economic Democracy Act, right?
|Even Evil Spock is Logical|
If people were logical, yes. Unfortunately, especially in our day and age, many people have a tendency to confuse theory and practice. How economic growth is financed is practice . . . and unfortunately the most commonly accepted theory — that of Lord Keynes — seems to have been developed to justify practice instead of to describe what is really going on.
What Keynes did was come up with a series of sophistries and contradictions to justify a rather ramshackle theory known as “the Currency Principle.” Most simply stated, the Currency Principle is that the amount of money in the economy determines the level of economic activity. The job of government is to decide how much money there needs to be in the economy, ostensibly for economic goals, but these quickly become political since politicians make the decision.
Expressed mathematically, this monetary theory can be seen in the interpretation of “the Quantity Theory of Money Equation” developed by Irving Fisher,
M x V = P x Q
where M is the quantity of money, V is the “velocity” of money (the average number of times each unit of currency is spent in a year), P is the price level, and Q (sometimes T) is the number of transactions.
The validity of the equation as an equation is pretty self-evident to anyone who remembers basic high school algebra. It’s when we get beyond the basics and start to interpret and apply the equation that we run into trouble.
Going by the Currency Principle — that the quantity of money in an economy determines the level of economic activity — we can identify M as the “independent” or “determinate” variable in the equation, what your algebra teacher called the “known.” This, obviously, means that V, P and Q are the “dependent” or “indeterminate” variables, what Teach called the “unknowns,” what you’re told to solve for.
And that’s a big problem. One of the things you learn in algebra is that you can have only one unknown variable per equation or the problem can’t be solved with a single answer or in most cases at all. Too much information is missing.
For example (and still treating the equation as a pure equation and nothing more), suppose you are told M is 5. You are asked to solve for V, P and Q.
It can’t be done. The best you can do is say that (P x Q)/V = 5, which tells you no more than you knew before.
You see the difficulty. If you start plugging in values for P, Q, or V, you just went outside the parameters of the equation by changing dependent or indeterminate variables to independent or determinate variables. In other words, you cheated.
|Irving Fisher didn't understand his own equation.|
We necessarily conclude either that the Quantity Theory of Money Equation is in error — which we can see is not the case — or our analysis and understanding of the equation is in error, which is more likely. The Currency Principle is, obviously, not the proper way to understand the Quantity Theory of Money Equation.
So what is the proper way? We think it is the “Banking Principle.”
To explain, the Currency Principle is that the quantity of money determines the level of economic activity. The Banking Principle is that the level of economic activity determines the quantity of money.
The same equation is used, but with an enormous difference. Where the Currency Principle requires three dependent variables (V, P, Q) in a one equation — which is mathematical nonsense — the Banking Principle is limited to one dependent variable (M) in one equation: basic algebraic theory.
|Henry Thornton explained the real bills doctrine|
Thus, under the Currency Principle a guess is made as to how much money — construed as a commodity created by government — is needed (meaning how much the politicians can get away with spending), and it is created, backed by government debt. Under the Banking Principle, money cannot be created until there is an existing private sector asset that has real value, or a capital project with a real present value (a contract to produce something has real value) — why it's called "the 'real bills' doctrine."
Only when something of real value already exists can money be created under the Banking Principle, either by a commercial bank, or two businesses agreeing to accept each other’s notes, or even two people coming to an agreement. Under the Banking Principle, the quantity of money is — and can only be — determined by actual economic activity. Economic activity creates money, money does not create economic activity.
In other words, where under the Currency Principle you must have government debt or there won’t be any money, under the Banking Principle government debt would be an indication that there is a serious problem somewhere.
The bottom line is that “the money question” is pivotal when we’re talking about roadblocks to social justice, because one of the problems is how people who are not productive can become productive. Since advancing technology makes human labor relatively less productive, and in an increasing number of cases today is removing human labor entirely from production, people who cannot use their labor to produce must use technology . . . which means they must be able to purchase the technology, which is what we’ll look at in the next posting on this subject.