On Usury and Other Dishonest Profit, Part V

The question is what to do about Keynesian economics. Keynesian economics is based on the assumption that people can spend what they have not earned, and consume what they have not produced or for which they have not traded their own production of goods and services. People can, presumably, be absolutely secure with respect to their incomes, with no risk other than the danger that the people who manage to produce will continue to play along.

The answer is . . . nothing. The fact is, Keynesian economics is based on false assumptions and profound misunderstandings of reality, especially the fundamental virtue of justice. No one can justly spend what he or she has not earned (charity is a separate case), nor can anyone justly consume what he or she has not produced or for which he or she has not traded his or her own production of goods and services. There can be no elimination of risk, an urge that is at the heart of usury. The usurer attempts to shift risk completely to the other party in his or her quest for completely risk-free gain.

Further, entitlements and fixed wage and benefits packages (low or high) — the backbone of a Keynesian system — violate distributive justice. As such, they are inherently usurious, if not (in some circumstances) actually usury. High fixed costs that are otherwise avoidable by shifting them to variable costs and spreading the risk violate justice by allowing others to take more than their due, and thereby destroy the basis of a stable social order. Low fixed costs that would otherwise result from a shift to variable costs and risk sharing violate justice by forcing others to take less than their due, and thereby destroy the basis of a stable social order.

Unfortunately, the system is arranged so that unions work tirelessly to achieve a situation where fixed costs for wages and benefits are high, often in excess of what the free market would determine to be fair and just, and there is no risk at all. On the other hand, the relatively few remaining capitalists work with equal dedication to drive fixed costs for wages and benefits below what a free and just market would determine, and eliminate their risk. In neither case is there any acceptance of the need to join together in solidarity and share both risk and rewards equitably. Greed and envy, two of the ugliest "seven deadly sins," are built into the system.

The problem is that many people do not see how things can be arranged differently. Given Keynes' assumptions, Chesterton's "Utopia of the Usurers" is not only here to stay, it must be continually extended, or face disaster. On the other hand, a system based on usury — distribution of production to people who have not earned it and who are not due it in either justice or charity (among which we must include non-dependents receiving wages or benefits in excess of their just due) cannot survive, either. Disaster seems inevitable, no matter what you do. In the next posting in this series, we will look at two unworkable, yet strangely popular solutions that are frequently recommended.

On Usury and Other Dishonest Profit, Part IV

Defined benefit pension plans seem like a great idea — when the economy is doing well and times are good. "Everybody knows" that "the corporations" have lots of money. It is only the muscle of organized labor backed up by the coercive power of the State that forces the capitalists to unclench their greedy fists and pay workers the wages and benefits they need to live in a decent manner.

Unfortunately, when the economy goes into a downturn, the high fixed wages and benefits which labor was able to wrest from capital can force into bankruptcy the companies that are legally obligated to make good on the wage and benefits packages. The result is that the companies can no longer meet their obligations. If the qualified plan is insured by the Pension Benefits Guarantee Corporation, or "PBGC," that agency takes over the administration of the plan and guarantees the Plan Participants a minimum level of benefits.

If too many companies get into trouble, however, and are forced to turn matters over to the PBGC, the obligation is imposed on the taxpayer . . . meaning the workers who no longer have jobs and can no longer pay taxes. The stock market declines in response to the greater demands on rich taxpayers who must divert investment capital to taxes. This, in turn, means few (if any) jobs are created, consumption declines further, and more companies are forced into bankruptcy, keeping the cycle spiraling downward.

The picture is equally grim for those companies that do not go bankrupt — immediately. Saddled with declining profits and high fixed costs, many companies begin to default on the required payments to retirement trusts. This causes a serious underfunding problem. The problem is made worse by the decline in the stock market, which drives down the value of the assets held in the trust.

To make up for the decline in the value of trust assets, the sponsoring company must increase payments to the trust to meet the fixed benefit obligation — out of profits it isn't making. This drives share values down even further as the underfunding problem increases in magnitude. This increases the non-productive liabilities of the sponsoring companies at a time when they cannot meet the ordinary liabilities incurred for productive purposes. Eventually this, too, ultimately results in bankruptcies, adding downward pressure on the economy.

Government bailouts and "stimulus packages" can take some of the pressure off for a while and even create the illusion that the problem is being solved. Unfortunately, that is not the case. A diseased economy, however well the technique might work for some medical problems, is not cured by treating the symptoms. An economy is "cured" by correcting the underlying problems. Government action can even add to the problem, not the least by decreasing incentives to search for financially feasible and politically viable solutions.

Is there a way out of this seeming paradox? We will look at that tomorrow by examining the work of four great thinkers who appear to have been ignored, brushed aside with no consideration, or attacked without reason or argument. This is because, in large measure, their conclusions differ from those of the powers-that-be, hypnotized by the glamour of Keynesian economics, which promises everything, and delivers nothing but failure. I refer to Jean-Baptiste Say (1767 to 1832), Harold Glenn Moulton (1883 to 1965), Mortimer J. Adler (1902 to 2001), and Louis O. Kelso (1913 to 1991).

On Usury and Other Dishonest Profit, Part III

Much of the confusion surrounding the "sudden" spate of bankruptcies to which high wage and benefit packages seem to have made substantial contributions has to do with widespread misunderstanding of something called "Say's Law of Markets." Say's Law, named for a late 18th, early 19th century political economist, Jean-Baptiste Say, states what some economists regard as a "near tautology," but which embodies a profound reality in its seeming simplicity. That is, "product = income."

Once we think about this simple equation, we realize the truth of it. Every time a "production" (i.e., a good or service) is sold, it represents income for the seller. The raw materials or supplies used by the seller to produce a good or service also resulted in income for the producer of the raw materials or seller of the supplies, and so on down the line. Thus, everything that is sold in the aggregate generates the aggregate demand to purchase it. Say's Law of Markets can therefore be expanded by saying that "supply generates its own demand, and demand its own supply."

Unions often characterize wage and benefits packages as labor's fair share of production. This is incorrect. Unless a worker supplying labor is also an owner, he or she is not entitled to a share of production, fair or otherwise. The wage contract is an agreement by an employer to purchase a worker's labor. The wage contract does not entitle a worker to anything more, or the employer to anything less:

"Of these duties, the following bind the proletarian and the worker: fully and faithfully to perform the work which has been freely and equitably agreed upon; never to injure the property, nor to outrage the person, of an employer; never to resort to violence in defending their own cause, nor to engage in riot or disorder; and to have nothing to do with men of evil principles, who work upon the people with artful promises of great results, and excite foolish hopes which usually end in useless regrets and grievous loss. The following duties bind the wealthy owner and the employer: not to look upon their work people as their bondsmen, but to respect in every man his dignity as a person ennobled by Christian character. They are reminded that, according to natural reason and Christian philosophy, working for gain is creditable, not shameful, to a man, since it enables him to earn an honorable livelihood; but to misuse men as though they were things in the pursuit of gain, or to value them solely for their physical powers — that is truly shameful and inhuman. Again justice demands that, in dealing with the working man, religion and the good of his soul must be kept in mind. Hence, the employer is bound to see that the worker has time for his religious duties; that he be not exposed to corrupting influences and dangerous occasions; and that he be not led away to neglect his home and family, or to squander his earnings. Furthermore, the employer must never tax his work people beyond their strength, or employ them in work unsuited to their sex and age. His great and principal duty is to give every one what is just." (Rerum Novarum, § 20).

The cost of labor under a wage contract is an expense of doing business, and the worker is thereby compensated for his or her contribution. It is not an investment in the business on the part of the worker. A wage contract does not, therefore, entitle the worker to a share of the income generated by production after the payment of a wage. To make that claim is to fall into the trap against which Pope Pius XI warned when he stated,

"It is wholly false to ascribe to property alone or to labor alone whatever has been obtained through the combined effort of both, and it is wholly unjust for either, denying the efficacy of the other, to arrogate to itself whatever has been produced." (Quadragesimo Anno, § 53)

Further, asserting that the worker is due a fixed return from production, whether in the form of wages or benefits, is to put the worker in the position of a usurer. A borrower who must repay a fixed return on a loan, regardless whether the loan proceeds were invested in something that generated sufficient income to repay the loan, is paying usury, an unjust share of profits that may not even exist.

Similarly, an employer who pays a just, market-determined wage, and then is forced to pay an added fixed amount out of what would otherwise accrue to him or her as profits (if any) as additional compensation or into a defined benefit pension plan, is paying usury — and on the specious grounds that the worker is entitled to more than a just wage simply because he or she needs more, wants more, or can force the employer to pay more. This is binding not only on the employer: "the rich must religiously refrain from cutting down the workmen's earnings, whether by force, by fraud, or by usurious dealing," (Rerum Novarum, § 20), but on the workers when "by force, by fraud, or by usurious dealing" they cut down the employer's earnings by taking an unjust share of the profits.

What of the case in which an employer is paying a just, market-determined wage to workers who freely contracted for that wage without coercion, but they still need more in order to live in a manner befitting the demands of human dignity? The employer is, in that case, morally bound in charity — but not legally bound in justice — to pay the worker more: "It is a duty, not of justice (save in extreme cases), but of Christian charity — a duty not enforced by human law." (Rerum Novarum, § 21)

The unions, therefore, put themselves in the position of violating justice twice when raising wages and benefits above a free market-determined rate. They do this once by demanding a share of production to which they are not entitled, and once by using collective bargaining backed up by the coercive power of the State to demand more than what they are due in strict justice.

What of the "extreme cases" to which Pope Leo XIII refers? Unfortunately, the "extreme case" has become all-too-common today, especially in light of the declining value of human labor as an input to production. The consequence of this is that it is increasingly difficult for a worker, in competition with advancing technology and cheaper foreign labor, to generate an adequate and secure income through the sale of labor alone.

In that case, the worker has, in a sense, become the dependent of the employer. He or she is no longer an "independent other," capable of contracting freely — or of justly organizing with others to coerce higher wages and benefits. A worker who has no other recourse but to work for that employer, no other means of generating an income than the sale of his or her labor, and who is trapped within a system that inhibits or prevents the worker from supplementing his or her income in some just and equitable manner is, in substance, a slave without effective economic rights. When that is the case, the employer owes the worker enough for the worker and the worker's dependents to live on in a manner otherwise befitting human dignity.

We must specify "otherwise," for keeping an adult in a dependent relationship (e.g., treating him or her as a child or slave) when there is no justification such as mental incapacity or criminal acts, is an explicit offense against human dignity. The problem becomes what to do about the situation when an employer cannot pay a worker enough without one side or the other violating justice. Either the employer or the system violates justice by maintaining workers in a condition of unjustifiable dependency, or the workers or the system violate justice by forcing employers to pay usurious compensation unrelated to production — and without assuming any of the risks of ownership that would otherwise entitle workers to an equitable share of the profits . . . if any.

This sounds like an impossible situation — and it is . . . within the existing framework of economic analysis provided in large measure by Lord Keynes. The solution (assuming there is one) must lie outside the Keynesian paradigm, elsewhere, in a framework based on essential human dignity and that takes economic reality into consideration. We will look at such a framework, that of binary economics, beginning tomorrow.

On Usury and Other Dishonest Profit, Part II

Eons ago — a few decades, anyway — G. K. Chesterton wrote about the "Utopia of the Usurers." Chesterton, of course, was looking at the people who were, in his opinion, in charge of the financial system. These were the ones castigated by Pope Pius XI in Quadragesimo Anno in 1931,

105. In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.

106. This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.

The irony of yesterday's disclosure that the Pension Benefits Guaranty Corporation has accumulated a deficit of $33.5 billion — $22 billion of it in the past six months — is that the people whom Chesterton considered most oppressed by usury's utopia, the ordinary worker, is now in the position of being (next to the State itself) the chief of usurers. Like Shylock, workers have contracted for a pound of flesh, the payment of which is killing off the companies that employ them. As we noted yesterday, companies are being forced to borrow money or sell new equity just to meet the enormous burden of fixed retirement benefits instead of investing in new plant and equipment that could generate profits to meet a more just retirement arrangement.

The double irony — or perhaps a paradox of the sort in which Chesterton delighted — is that it is not the workers who are destroying the companies that employ them, thereby destabilizing their chances of continued employment and wrecking the economy. The culprits in this institutionalization of worker usury (from which, incongruously, the workers derive no real benefit) are the unions, those organizations intended to look after the best interests of the workers.

Obviously something is wrong. The problem is what to do about it.

On Usury and Other Dishonest Profit, Part I

Back in 1745, Pope Benedict XIV issued Vix Pervenit, an encyclical condemning the charging of interest on loans of money made for consumption or speculation, that is, spent on things that do not generate an income to repay the loan. Often misunderstood as a condemnation of all interest, Vix Pervenit left intact the scholastic distinction between investment (loans made for projects that resulted in the production of goods and services), and consumption and speculation (loans made to purchase goods and services that are consumed instead of used to produce other goods and services, and loans made to gamble).

The confusion over interest and usury results from the fact that the pope did not address the issue of loans made for productive purposes. That had always been legitimate, a positive good, so there was no need to justify it again. Genuine investment has a "built in" ability to repay a loan by its nature, as the lender shares in the risk, and only gets back what is his or her due in justice as a share of production. The pope's concern, however, was the many ways people had devised to circumvent the moral prohibitions against usury by disguising loans of money made for consumption or speculation, as loans made for investment.

Unfortunately, the discussion was extremely technical, and the language and concepts used were unfamiliar to many people. The problem was exacerbated by the fact that the discussion brought in financial, legal, and philosophical terms without clearly distinguishing between them. The bottom line, however, was the unstated point that honest or legitimate interest consists of a share of the profits to a lender, based on the pro rata value of the loan to the production of goods and services. If, for example, a lender's contribution was determined to be, say, 10%, the lender was due in justice 10% of the profits realized from the project, or had to bear 10% of the losses. A fixed rate of interest on the principal was deemed usurious, if not actually usury. Any rate of interest on a loan of money for something that did not result in the production of goods and services was deemed usury, regardless of the finagling, word games, or other circumlocutions involved.

The reason for bringing this up is the release of news story by the Associated Press that the Pension Benefits Guaranty Corporation, the PBGC, the institution charged with insuring "defined benefit" retirement plans, is projecting a deficit in the billions as a result of the economic downturn and resultant flood of bankruptcies. ("Deficit surges at agency that insures pensions")

A "defined benefit plan" means that a plan participant is legally guaranteed a specific level of benefits on retirement, regardless of the value of the assets in the retirement trust or the ability of the Plan Sponsor to fund the obligations of the trust. "Defined contribution plans," which do not come under the PBGC, are obligated to pay out only what exists in the trust.

In accounting terms, a defined benefit plan is a "fixed cost," while a defined contribution plan is a "variable cost." Thus, a defined benefit plan has an inherent usurious character, while a defined contribution plan, by sharing in the risks of ownership, takes on the character of genuine investment.

When things are going well and a company is making large profits, a defined benefit plan is more advantageous to the company if they can keep worker or union demands for increased retirement benefits within reasonable limits. As demonstrated by the PBGC current deficit of $33.5 billion (three times the accumulated deficit of six months ago) and the projected underfunding of defined benefit plans in the hundreds of billions, however, high fixed costs for retirement plans are bankrupting companies at an accelerating rate. Companies are being forced to borrow money, take government bailouts, or sell new equity to finance not investment in new plant and equipment to generate future profits, but to pay accrued costs for something that did not result in the production of goods and services even when they were incurred.

This has put America's companies — and thus the jobs they provide the majority of workers — in serious and immediate danger of going bankrupt, with the resultant loss of jobs. The problem is that everybody seems to be blaming everybody else for the situation, with the result that nobody really knows what to do about it. Without knowing how this situation came about, however, a solution becomes impossible.

Free Choice, Union Style

On March 23, 2009, we received the following e-mail from someone who (for obvious reasons) I will not name. The website referred to is the "American Auto Worker Ownership Committee" ("AAWOC").

A volunteer went to work today at Toledo Jeep, and placed information on tables referring workers to our website. Another worker told him that at the monthly union meeting a couple of weeks ago our Union Chairman stated that any employee passing information out about the employee ownership will be disciplined.

Within the last 36 hours, we got a telephone call from another individual associated with the AAWOC. This individual presented the outline of the buyout plan to individuals in management. Their reaction was to ridicule the plan, and label it "communism." They did not explain how, when the plan is for workers to have direct private property stakes in the means of production, it could possibly be described as "communism"!

Frankly, the push for a government bailout is communist. When a company is considered "too big to fail," the plain truth is that, ultimately, that company is too big to exist in terms of the free market. The idea that a company can be "too big to fail" in effect argues that it has placed itself beyond the constraints of the free market and is now an integral part of the common good, and thus subject to direct control of the State for the benefit of everyone. This is called "communism." Management (or at least some of them) is ridiculing the free market and advocating communism by turning the language upside-down, just as George Orwell predicted in 1984.

As Karl Marx himself declared in The Communist Manifesto (1848), "The theory of the communists can be summed up in the single sentence: the abolition of private property." Evidently the union leaders don't share the late Walter Reuther's openmindedness, while management lacks his knowledge of communism and private property.

With these examples of union pressure and management ridicule before us, it casts grave doubts on the honesty of those campaigning to abolish the secret ballot when voting whether to unionize, and in some cases abolish elections altogether. If the behavior reported to us is any indication, the so-called "Employee Free Choice Act" would simply provide limitless opportunities for union thugs and shoulder strikers to bully and browbeat workers into surrendering their natural rights of liberty and property to the union, while management looks on and cheers.

Rather than threats or ridicule, the UAW and management might want to try delivering justice to the workers and the public at large by reforming themselves as an "Ownership Union." They could trade a percentage of fixed labor costs for unlimited flexible supplemental incomes based on tax-free corporate incomes that flow into the pockets of workers in the form of dividends, productivity bonuses, additional shares of stock and eventually diversified assets. After paying off the credit for purchasing all buyout and modernization shares in the company through a leveraged Employee Stock Ownership Plan ("ESOP"), a portion of future company profits would be used to acquire a diversified tax-exempt portfolio of outside securities for enhancing the retirement security of ESOP participants.

Own or be owned. You have nothing to lose but your chains.

The Unions Forever?

Dinosaurs ruled the Earth until (as some paleontologists believe) a large comet or meteor hit the planet, causing massive climatic change that destroyed the great lizards' food supply, allowing mammals to gain a foothold and eventually dominate the world. Similarly, labor unions ruled the economic world until accelerating technology and cheaper foreign labor caused unions to seek State support to maintain their position. As State-imposed solutions rarely if ever work, union membership has declined to the point where only 7.9% of the private sector workforce was unionized in 2004, down from a high of 34.9% in 1949, according to statistics published by the Labor Research Association. That means that for the past half century, private sector union membership has declined by an average of 0.48% per year. Assuming the decline continues at a steady rate, there will be no private sector union membership by 2021.

That, of course, is unrealistic. One of two things will happen before private sector unions fade away like old soldiers. One, the government will step in and offer its protection. Backed up by the coercive power of the State, union membership will become a virtual mandate if anyone wants to secure a job in America's disappearing industrial base. Effectively socialism, this will allow the State to control both employers and employed in a self-defeating and panic-stricken effort to "save American jobs" and the remnants of the once-great industrial powerhouse.

By redistributing an increasing share of a shrinking pie to unions and their members, today's union leadership and the country's policymakers believe that they will somehow achieve progress and economic growth by undermining an essential aspect of human nature. That is, the only reason people invest and form capital is to derive the "fruits of ownership" from their productive assets. In a rational universe, people do not invest their time, effort, and ownership in something to secure an adequate income for others, especially when they and their dependents have not secured an adequate income.

This brings us to the other thing that could happen. Union leadership and the country's policymakers could wake up to the fact that human labor since the Industrial Revolution has been responsible for less and less of the total production of goods and services that takes place. "Capital" and "labor" are two independent variables in the production equation. Neither one can do without the other, but the coefficients of capital and labor have been changing as technology advances.

A "coefficient" is the number by which a variable is multiplied that expresses how the variables relate to one another. For example, in the equation 2x + y = z, there has to be twice as many "x"es as there are "y"s — regardless how big y or small x is — or the equation will no longer equal z. Over time, capital's coefficient has been getting rapidly larger, while labor's has been just as rapidly decreasing to keep the equation equal. (Of course, under the illogic of Keynesian economics, the equation has been distorted to such an extent by artificial manipulation of the system by the State that it is not equal, but that is a different issue, and is causing its own problems.)

Faced with the mathematical certainty that as the coefficient of capital increases, that of labor must decrease, the obvious solution is to cut labor in on some of the returns to capital. Keynesian economic policy does this by redistribution, inflation, job creation, and various other expedients that do nothing to increase the coefficient of labor, and, in fact, probably operate to increase the coefficient of capital at a faster rate, as owners of capital seek to replace increasingly expensive labor with more cost efficient capital.

A more direct means of getting some of the returns to capital legitimately to labor is to ensure that sellers of labor are also owners of capital. Workers would then derive the fruits of ownership (income and control) by right, rather than by expropriation or other coercive and illegitimate means.

If America's labor unions would grasp the reality of the situation, they would leap at the chance to expand their sphere of influence from mere labor, to ownership. Within an economy in which the rights of labor are becoming negligible due to the diminished importance of labor in the production equation, the rights of ownership are left without any organized movement to make certain that the ownership rights of ordinary workers are recognized, secured, and protected.

By concentrating exclusively on the rights of labor, unions are letting a much broader field of activity lie fallow. As the role of human labor decreases, there are fewer and fewer workers to protect, and thus less perceived need for unions. Potentially, however, as the role of capital increases, the number of owners whose rights need to be protected is limited only by the number of people. There can, after all, be only one person per job, but a single asset can be owned by an effectively infinite number of people.

There is only one obvious course of action for America's unions, and after them the unions of the world. They must transform themselves from organizations protecting the extremely limited and decreasing number of people who sell their toil, to the potentially infinite number of people who can own the means of production.