Future Savings Money

      As we saw in the previous posting on this subject, “usury” is not all profit or interest, but profit (or interest) taken when no profit (or interest) is due).  It is justified by the presumed need to accumulate savings before financing new capital formation.

Investment v. Speculation

In the previous posting on this subject, we pointed out a few foibles of socialism, noting especially the idea that the only legitimate way to have an income is a wage system job, which over the past century or so has been gradually displaced by the idea that people should just get an income whether or not they have jobs.

But Is It Usury?

 

In the previous posting on this subject, we noted that the difference between interest per se and usury is that interest is a legitimate sharing of profits on some equitable basis, while usury consists of taking a profit where no profit is due.  Complicating understanding of this difference is the confusion between past savings and future savings, and the different types of money derived from each of them.

Is Interest Evil?

As we saw in the previous posting on this subject, the type of money determines its proper use.  Money that is created by reducing consumption in the past should be used for consumption in the present or the future, not to increase production.

From Need to Greed

In the previous posting on this subject, we noted that usury has become so embedded in our economic thinking that it’s accepted as normal.  Paradoxically, some proposals to abolish usury are themselves usurious, e.g., the government should simply issue the money it needs and abolish taxes.  It’s accepted as normal for a government to back its own currency with its own debt and constantly change the value.

On Usury

In the previous posting on this subject, we noted that it seems to be a part of human nature that people like to be useful and engage in productive activity.  The Great Reset and similar proposals, however, appear to be far more concerned with meeting people’s material needs by any means necessary, with no attention paid to whether or people become productive and useful.

Distributism and Say’s Law

We’ve been getting into some interesting discussions on FaceBook about the similarities between the rather vague system that G.K. Chesterton and Hilaire Belloc called “distributism,” and the more specific proposal we call “Capital Homesteading” within the context of the Just Third Way.

What’s Wrong With This Story?, I: Is Profit Evil?

Last week the Wall Street Journal carried one of its more or less cute human interest stories.  You know, the ones that appear on the front page and tell you more than you really want to know about turtle ranching in Tasmania, the world’s champion string collector, or the most prolific novelist in history — “Corin Tellado,” pen name of Maria del Socorro Tellado Lopez (1927-2009), with more than 4,000 (not a typo) novels, and total sales of over 400 million.  Most prolific living novelist? Japanese-Brazilian Ryoki Inoue, with more than 1,100 novels to his credit, having turned out as many as three in one day.

The Problem of Rent

In Medieval (Scholastic) philosophy, “rent” is what is due the owner of a thing for the use of something that is not “consumed by its use.” Thus, if the owner of, say, a tool such as a hammer or saw, loans someone that hammer or saw as a commercial transaction, the owner is due a reasonable fee for that use.

Usury Question and Answer

As loyal readers may have noticed, we like to get those softball questions to answer . . . you know, the kind from people who clearly don’t know what they’re talking about, but who “jus’ gotta” show somebody else up.  Next best, of course, are those who make a snarky comment asserting something that we know isn’t true.  Take for instance the following comment we got in response to someone coming across our ideas on monetary reform, i.e., interest-free money and the Banking Principle:

A (Very) Short Discourse on Interest

It’s appropriate that we take a look at interest today, because the way interest rates have been manipulated in modern times is one of the biggest April Fool pranks in history.  Since the invention of central banking in 1694 with the institution of the Bank of England, the public has been mulcted by having to pay interest on the loan of “pure credit” (i.e., not based on past savings) money.

On Usury and Other Dishonest Debate

The online edition of Crisis magazine recently (December 8, 2014) had an article on the perennial problem of usury, “Did the [Catholic] Church Change Its Doctrine on Usury?“  Although it might seem like re-plowing old ground, we thought we’d weigh in again with a few brief thoughts.

Islamic Banking

Recently we came across a question in a LinkedIn group asking about "Islamic Banking." Since most of the responses were "half answers" — i.e., getting some of it right, but leaving out a few things — we decided to throw in our two cents.

How Governments Play the Market

We recently came across someone who was looking at the prospects for growth in "the water market." Why, the enquirer asked, has water been overlooked as an investment instead of being traded as a commodity like energy and metals? What are the prospects for growth in the market? At the end of a list of series of questions was, "What is the best way for an investor to play the water market right now?" "Play the market" is "Wall Street Speak" for speculation and manipulation.

Back in 1907, the president of the Knickerbocker Bank and Trust got the third largest bank in New York City into very big trouble by speculating in copper. He and a small consortium used the resources of the bank to try and "corner" copper. A "corner" is a market manipulation, a speculative monopoly of a stock or commodity created by purchasing or having an option to purchase all or most of the available supply.

If successful, a corner allows speculators to set the price of the commodity and make enormous profits. If unsuccessful, the speculators stand to lose everything and more. The president of the Knickerbocker and his friends were unsuccessful, went bankrupt, and the "Panic of 1907" resulted.

Lacking enough cash (accumulated savings) to make a purchase outright, speculators usually take out options or futures contracts. An option — a form of contract — is the right to buy something on certain terms. If the option is not exercised, the holder loses the "consideration," the thing of value that he put up to induce the other party to offer the option. A futures contract is a commitment to purchase a commodity at a specific price on a certain date. Options and futures are often negotiable instruments, and serve as part of the money supply.

Both options and futures were "invented" as an aid to commerce. In the ordinary course of events, there isn't any more opportunity for the speculators to make money off of them than there would be if they dealt in the actual commodities instead of contracts involving the commodities. Commodities brokers serve a useful purpose by intermediating between producers and their customers, buying contracts at "wholesale" and selling them at "retail," making life easier for parties on both sides of the transaction.

Farmers often need futures contracts — "pre-sales" — to get financing for the year's crop. They protect themselves against crop failure or wide swings in prices by taking out insurance that allows them to meet the terms of the contract if something happens. Processors and manufacturers use options and futures to lock in future resources at a current fixed price.

By offering and accepting options or futures contracts, parties to the agreements create money without the necessity of first having to come up with the marketable good or service they are buying or selling, that is, without first having to "save" — defining "save" as Keynes does: past reductions of consumption. It is thus possible for both producers and their customers to create money based on the present value of a future transaction by offering and accepting contracts, sell, discount, or use the contracts directly as money, and use the proceeds to form capital, e.g., buy land and equipment or build a factory.

Parties to the contracts can then start producing the goods and services needed to redeem the contracts when they fall due — all without first having to come up with the cash to start the process. This defines "save" more correctly as either "past reductions in consumption" or "future increases in production" (the latter being something Keynes claimed is impossible, yet which happens every day in commerce).

The proper use of options and futures contracts (like all forms of money) is thus to facilitate transactions and store value using a common and stable standard of value. Used as intended, such instruments allow the economy to grow at a rate determined by the current and future productive capacity of the economy, not what has been withheld from consumption in the past. This shifts the orientation of the economy from insufficiency to abundance.

The goal of the speculator is different. He tries to move the market for a commodity from abundance to scarcity.  In a market economy, the price of anything tends to fluctuate naturally, based on the "laws" of supply and demand. Broadly speaking, if something is in short supply but nobody wants it, the price will be low. If something is so abundant that everyone can have what he or she wants without effort, the price will be extremely low, sometimes non-existent: an "economically free" good. On the other hand, if something is in short supply and everyone wants it, the price will be high, especially if the thing is essential to survival.  The goal of a producer in a market economy is to move from an insufficiency of a marketable good or service, to an abundance of that marketable good or service, and to make a profit by supplying that abundance.

Shortages tend to occur more or less naturally. Crops fail, veins of ore run out, production costs rise, and so on. These things happen, and are the reason farmers take out crop insurance and processors and manufacturers buy options and futures contracts. An honest speculator, like any other good gambler, makes a more or less educated guess as to whether a shortage will occur, and buys accordingly, hoping for a change in the price favorable to him, depending on whether he bought long or short.

A dishonest speculator, like a crooked gambler, tries to stack the deck by creating an artificial shortage in order to take advantage of it. He is not, in fact, a true gambler, but a cheat, a card shark, nicking aces, marking cards, slipping holdouts up his sleeve, dealing from the bottom of the deck, and so on. He commits himself to purchase massive quantities of something at or above market in order to lure owners to sell to him at an inflated price . . . so that the speculator can sell it back at an even more inflated price.

The president of the Knickerbocker tried to do this, buying up options and contracts on shares in copper companies at a furious rate. He used depositors' money, the bank's capitalization and, worst of all, issued promissory notes drawn on the bank's creditworthiness — created money — in the hope that he would be able to buy enough future copper production at a high price to be able to set an even higher price and make a few hundred million dollars in speculative profit. The promissory notes of the Knickerbocker, like the bulk of today's "M2" money supply, were backed by the present value of a bet, that is, the hope that a gamble would pay off, not by the properly vetted present value of existing and future marketable goods and services.

The president of the Knickerbocker bet that he would be able to contract to purchase enough copper to control the market and set the price. He accepted "fictitious bills" drawn on the speculative future increase in the price of copper, and issued promissory notes based on the assumption of an even greater speculative rise in price to pay for the bills. He was, in effect, promising to make good on a possible loss out of resources he would have only if the bet paid off. He broke the first rule of gambling: don't play if you can't pay.

Similarly, the vast amount of government debt on the books (the national debt) as well as off (projected "off budget" future Social Security and Medicare benefits) is not backed by the present value of existing or future marketable goods and services. Government does not produce marketable goods and services. The government cannot, therefore, back its promises with what it does not own or to which it does not have an identifiable and enforceable claim.

What backs M2 and stands behind the trillions of dollars of government debt and off-budget Social Security and Medicare projections is not the present value of existing marketable goods and services that the government owns, or the present value of future marketable goods and services that the government reasonably expects to produce. Again, the government does not own or produce these things, and so cannot promise to redeem its promises with wealth it does not have and will not produce.

Ultimately what stands behind today's M2 is the government's ability to collect taxes in the future, thereby covering yesterday's spending with tomorrow's revenues. That is, the government is betting that citizens will be sufficiently productive to:

• Provide for current needs of themselves and their dependents,

• Make voluntary (charitable) contributions to cover others' needs,

• Set aside a reserve for emergencies,

• Save for anticipated future needs (e.g., education, retirement), and

• Have a surplus out of which to pay the cost of government,

to name a few of the more important. At the same time, the government — the servant of the people, not its master — is betting that citizens will:

• Be willing to grant taxes at a level sufficient to pay for government,

• Actually grant the taxes necessary to pay for government,

• Have a surplus large enough to be able to pay taxes at a level sufficient to pay for government, and

• Actually pay the taxes.

This last is simply an aspect of human nature. It is far easier to get people to agree to a tax if they believe that they won't be taxed. Thus, "the rich" are a favorite target, because few people really believe themselves to be "rich." The ideal people to tax, of course, are future generations. They don't yet exist, so they can't vote or complain.

There are thus at least nine things that have to happen before a government can win its bet — and the very fact that the government is gambling to try and cover its costs means that, in effect, it is betting on itself, which is much more risky than betting on something else that you can be more objective about. This becomes evident when we realize that the huge increase in national debts and ballooning budgets are the result of governments attempting to provide for the needs of citizens, supply what private charities formerly covered, meet emergencies, and guarantee education and retirement.

In consequence, governments throughout the world are, at one and the same time,

• Spending to make up for what the citizens aren't producing, and

• Hoping that the citizens produce enough to

- Meet their own needs,

- Pay current costs of government, and

- Pay past costs of government.

No matter which way you add up the numbers, or even what numbers you plug in, you cannot make such a system work. It is impossible to spend more than you produce and at the same time generate a surplus to cover the deficit.  That is why moral philosophers condemn things like speculation (gambling on price changes of something instead of investing in the present value of the stream of income it produces) and usury (taking a profit when no profit has been produced).

Some forms of speculation and usury are tolerable, even morally indifferent, e.g., a broker or dealer who inadvertently realizes a profit from an increase in the value of his inventory held for resale in the ordinary course of events, or a government that must pay interest in order to induce people to lend their existing savings so that can continue operating. This does not, however, include a dealer who deliberately holds goods off the market to drive up the price, or a government that emits bills of credit — pledges future tax collections — to meet current expenditures.

Is there a way out of this mess? As regular readers of this blog are aware — yes. It's called "Capital Homesteading." If you want to support the push for a Capital Homestead Act, you might want to attend the annual Rally at the Federal Reserve in Washington, DC on Friday, April 20, 2012 from 11:30 am to 1:30 pm.

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"On Usury and Other Dishonest Profit"

Last week or so (it might have been two weeks ago) we came across a posting in a LinkedIn group to the effect that Pope Benedict XIV's 1746 teaching, Vix Pervenit ("On Usury and Other Dishonest Profit") "proved" — consistent with the poster's interpretation of the vaguely cited work of the solidarist Father Heinrich Pesch, S.J. — that all interest is forbidden by Catholic social teaching. Since the posting verged at times on the incoherent, we ignored it, although we were briefly tempted to respond.

Yesterday, however, we got a request from the "owner" of the Catholic Financial Professionals LinkedIn group (not where the posting appeared) to give our opinion on this understanding of Vix Pervenit. He had evidently come across the same or a similar posting, and thought that some discussion on the subject in a group that at least knew the fundamentals of money, credit, banking and finance might be more useful than the broad condemnation issued by people unfamiliar with the subject.

The main problem with condemnation is that Father Pesch's economics — and the social teachings of the Catholic Church, as well as Judaism and Islam — is based on Aristotelian philosophy . . . and Aristotle did not condemn all interest as usury.

Here's the thing. Discussion on Vix Pervenit pops up every couple of years, especially when economic conditions take a downturn. The problem is that most people lack the framework to understand what the document says. This is due to the general decline in understanding of Aristotelian/Thomism, especially with respect to private property, contract, and thus money and credit.

We have the claim that Vix Pervenit "proved" that all interest is usury, and therefore dishonest. On the contrary, "interest" — which comes from "ownership interest" — is, in classical economics, the profit due to the owner of capital. Consistent with the classical division of the factors of production into land, labor, and capital, "rent" is the profit for the use of land, and "wages" are the profits accruing to labor.

Consequently, to claim that all interest is usury and therefore dishonest is the same as saying that all profit from capital is dishonest — which we know is not the case, or the natural right of private property would be completely meaningless. "Property" is not the thing owned, but the natural right to be an owner, absolute and inherent in each human person, and the bundle of socially determined and necessarily limited rights that define the exercise of property within a specific society.

An important right of property is the right to receive the fruits of ownership — the "use" or the "usufruct." This means that the owner of a thing has a right to control the use of the thing, and to receive the benefit of its use, whether directly in the form of whatever the thing is used to produce, or indirectly by receiving the income generated by what is produced. If an owner lends a thing to be used by another, the owner is entitled to a share of the profits that result from the use of the thing — though not all, just a market-determined rate representing the owner's pro rata contribution to production by allowing the use of his or her capital.

Thus (avoiding the long argument showing the linkage between money and property), if someone has accumulated savings in the form of money, and lends the money to another to purchase capital or otherwise engage in an activity designed to produce a marketable good or service, the owner of the savings is, in moral philosophy, a partner of the borrower, and is entitled to share in the profits — and suffer the losses — resulting from the investment. This share is called "interest," and is a legitimate right of property.

It happens all too frequently, however, that investments do not pay off. Also, before the reinvention of commercial banking in the 16th century and the ability to monetize the present value of future production, which financed the Industrial Revolution, borrowing for investment (i.e., capital formation) was relatively rare. Most borrowing was for consumption, not investment.

Neither failed investments nor borrowing for consumption generate a profit. In that case, no profit is due to the lender. More, for a failed investment, the lender may even lose the principal lent, while for a loan for consumption, the lender is due in justice only what was lent. If the lender still insists on taking a profit in that case, he or she commits an injustice. This taking of a profit when no profit has been justly earned is called "usury," for by means of it, a lender of money exacts what he or she has not earned — because nothing has been earned. The profit taken is dishonestly gained.

Vix Pervenit was issued in the mid-18th century soon after the invention of central banking made commercial banking more sound, and thus an important factor in the economic growth that characterized the period and stimulated invention and expansion of commerce and industry. Unfortunately, the human tendency to try and get something for nothing led many people to manipulate the new financial institutions and contracts to circumvent traditional teachings on usury and take a profit at every opportunity, whether or not a profit was made.

Vix Pervenit was issued to clarify Church teaching on the difference between honest interest (profit) and dishonest interest in light of the advances that had been made in finance. This accounts, in part, for the extreme complexity, even confusing nature of the document for the modern reader.

Adding to the difficulty of understanding it is the fact that the document assumed as a given that all investment and spending is financed out of existing accumulations of savings. That is not, in fact, the case. Commercial banking — the oldest type of banking, dating back to the dawn of civilization — has a special function. A commercial bank is defined as a financial institution that takes deposits, makes loans, and issues promissory notes. A promissory note is an obligation that the bank issues when accepting a "bill of exchange." A bill of exchange is an offer of the present value of future marketable goods and services. It becomes "money" — a contract — when accepted.

Because a bill of exchange is not based on past savings (that is, savings already accumulated by cutting consumption), but on future savings (increases in production in the future), a lender, be it a bank or another business or individual who accepts a bill of exchange, is not due interest. Instead, the lender is due a fee for accepting the bill, based on the present value of whatever is to be delivered in the future, and a risk premium based on the creditworthiness of the drawer of the bill. This "discount rate" — which usually includes the risk premium — is the difference between the face value of the bill and its present value — again, not an interest rate because it is not based on a share of profits.

Thus, Vix Pervenit tried to address a system based on both past and future savings, but from within a framework that assumed that all loans came out of past savings. Nevertheless, the principles hold true, even if understanding them and applying them properly calls for a deeper analysis and understanding than the teaching is usually accorded by the simplistic modern commentator.

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Pure Credit Redux

One of the best things about belonging to an internet group that puts together journalists and (other) writers with (more or less) expert sources is that when you respond to a query from a reporter, you can frequently adapt it as a blog posting as well. That is what we were able to do yesterday with our posting on "Pure Credit for Student Loans."

It's even better when somebody responds at great length to the posting. This has two benefits. One, it demonstrates that somebody is actually reading the posting instead of merely sneaking a quick look to be able to claim familiarity with the most erudite and scholarly blog on the internet. Two, it saves us the trouble of actually having to write anything.

Thus, when early this morning we opened our e-mail and found the following response from Dr. Robert Crane, we rejoiced exceedingly. Dr. Crane raises some points to which, if we handle this right, our response can serve as tomorrow's posting. That will bring us up to Friday and our initial News from the Network for the year . . . and, voilá — our blog is written for the week!

So — here is Dr. Crane's e-mail, edited a couple of places to correct spelling 'n stuff (evidently, some servers still don't have spell check, and some people are too busy with real work to upgrade).

Dr. Bob's E-Mail
(We're Not Indenting as a Quote Because That Messes Up the Home Page)

In reference to yesterday's posting on "Pure Credit for Student Loans," the conflict between "bad" pure credit and "good" pure credit, which has erupted into a worldwide war, could, I believe, be solved by adding a third category of credit in between. I don't know what good English words would be for the three categories, but there are a number of choices in Arabic, which is a much richer language for nuances.

"Pure credit" is money loaned (or invested) based on expansion of credit without reference to existing accumulations of savings (retained earnings). As the lawyer-economist Henry Dunning Macleod pointed out, "money" and "credit" are simply two different aspects of the same thing.

Here are the three kinds with Arabic names:

1) Riba or usury. This kind of credit "is a charge of any amount on a loan of money for something that does not, in and itself, generate a profit", regardless whether or not interest as a fixed charge is involved. This kind of credit, whether for consumption or for investment in money (as in derivatives) rather than in real goods is bad (for all kinds of reasons), because money is merely a medium of exchange and a store of value — a contract — and really has no value in itself. Investing in debt by my definition is inherently a ponzi scheme. Some Islamic banks do it all the time by the back door of legal fictions, about which I wrote a 120-page book in 1982.

2) Minha al Kabira, the Great Minha. This is a loan or investment in either tangibles or intangibles that generate a profit but only over the long term and which cannot easily be calculated. Since this is new thinking, I have invented my own Arabic terms for the second and third kinds of credit. Manaha means both to grant as a favor and to invest for long-range return. This is not zakah or charity without any expected return at all.

An example of minha al kabira or minha al kamila (perfect minha) is money created for infrastructure projects or for education. It might even be eligible for housing, but only under special arrangements, because otherwise it would fit under consumption, for which in principle credit should never be given. It is interesting that the Japanese had no consumer credit cards until a couple of years before their economy crashed. Until then all Japanese insisted on debit cards, because they thought that consumer credit cards were inherently a fraud.

3) Tamar al Kabir. This is investment according to the real bills doctrine, which provides that the return on investment in real goods, i.e., productive capital, can be reasonably calculated in a profit and loss statement. Tamar is profit. The fourth form of the verb, tamara, means to bear fruit, and the tenth form, istamara, is the active form meaning to invest profitably.

The two latter categories could be called, respectively, minha al saghira, the lesser minha, and minha al akbar, the greatest minha. I would prefer, however, to restrict the term "greatest" to zakah, which stands for compulsory charity (not secular taxation) and for sadaqah, which means voluntary charity for the neediest in society (the miskin). The term zakah comes from the verb zakah, which as a religious term has many nuanced meanings, especially to increase or grow, to be suitable, and to be pure and just. By expanded meaning both minha al kabira and tamar al kabir are zakah. The growth in the pure zakah refers primarily to spiritual return, based on the concept that whatever one gives away in charity will return many fold in spiritual benefits, as well as perhaps materially.

Is it necessary to argue as purists about whether pure credit must be restricted to the third category or can also include the second category of long-range return on investment? There are good arguments both pro and con about both categories, but it would be better to address the pros and cons as policy issues rather than as dogmas. The application of all ideas must be contextual to fit time and place. In ideal times Category 3 would be the best choice, but in other times the better policy might include both.

Combining both flexibly is part of the term I invented decades ago for the binary output/input model of binary economics, namely, harmony, based on mizan or balance, which is central to the dialectics of the entire universe and to everything Islamic.

And for this unorthodox thinking, known in the Wahhabbi religion as bida', I may be strung up by all sides.

Justice through faith and rational thought,

Bob

* * * * *

We will assemble our lynch mob and prepare a response that will be posted tomorrow.

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Interest-Free Money, Part VIII: Good Credit v. Bad Credit

As we saw in the previous posting, a basic shift in the understanding of money and credit early on had a significant influence on how we understand the proper use of these uniquely social institutions and the role of existing accumulations of savings in financing new capital formation. As a result of the idea that "saving" consists exclusively of cutting consumption, the belief grew that money as money is somehow productive, and that interest is somehow the charge for the use of money, rather than a sharing in the profits of a productive enterprise. In consequence, lenders began asserting that, regardless whether the loan of money is put to a productive or non-productive use, the lender is due a fee for the use of the money.

Good Credit v. Bad Credit

This blurring of the distinction between different types of loans has led to the failure to distinguish between "bad" uses of credit and "good" uses of credit. To those with accumulated savings, all uses of credit are "good" because all yield a profit. To those without accumulated savings, naturally enough, all profit therefore tends to become bad.

This did not happen overnight. During the Middle Ages the idea had grown up that "good" doesn't consist of what we can figure out about God's Nature (Intellect) by observing humanity, but in the carrying out of what we believe to be God's commands revealed to us in some fashion. The basis of the natural law thereby shifted from God's Nature or "Intellect" (which by definition is unchanging) to whatever people believe to be an expression of God's Will, usually the Bible — and people's interpretations of anything, but especially the Bible, tend to experience a very high degree of change, as ministers, psychiatrists, and politicians are well aware.

Prior to the Reformation, with varying degrees of success, the three great Abrahamic faiths had uniformly and consistently condemned something called "usury." In Christendom, the authority of the pope backed up by the Magisterium (as the body of official Church teachings is called) supported the ancient ban on usury, which began at least as far back as Aristotle. As late as 1745, Pope Benedict XIV, the head of the Catholic Church, issued an encyclical titled "On Usury and Other Dishonest Profit."

What is "usury"? The easiest (and most correct) way to understand usury is in terms of "good credit" versus "bad credit." Aristotle's definition of usury, which is the systematized basis of the ban on usury in the three Abrahamic faiths (although not restricted to them, as we shall soon see), is straightforward. Usury is the taking of a profit from something that does not, by its nature, generate a profit:

Now money-making, as we say, being twofold, it may be applied to two purposes, the service of the house or retail trade; of which the first is necessary and commendable, the other justly censurable; for it has not its origin in nature, but by it men gain from each other; for usury is most reasonably detested, as it is increasing our fortune by money itself, and not employing it for the purpose it was originally intended, namely exchange. And this is the explanation of the name, which means the breeding of money. For as offspring resemble their parents, so usury is money bred of money. Whence of all forms of money-making it is most against nature. (The Politics, I.x)

As a result of the "usury war" we are about to relate, many translations substitute "interest" for "usury." The Medieval interpretation of what Aristotle said, however, was not that interest is wrong (for interest consists of taking a share of real profits), or that retail trading in goods in which a merchant sells for more than he or she paid is wrong (for that is providing a necessary and valuable service, and should, in justice, be compensated). What is wrong is dealing in money as a commodity or charging rent for it, or buying and selling goods in the hope of gaining by a change in the price (speculation). Charging for the use of money as money is what Aristotle condemned, not taking a share of the profits from a productive project financed by money that is lent by its owner.

Productive v. Non-Productive

Thus, lending money to finance capital formation is "good credit." Lending money to spend on consumption, speculation, or to cover government deficits is "bad credit." Taking interest on a loan of money used to finance capital formation is legitimate, as the interest represents the lender's just share of profits. This is due him or her in justice for contributing to the financing of the project out of his or her existing accumulation of wealth. As long as it is not excessive, that is, constitutes more than what the lender is due as his or her fair share, taking interest does not constitute usury or any other form of unjust profit.

Every culture oriented in accordance with the natural law has condemned usury, although this has been most strongly expressed in Hinduism, Buddhism, and the three Abrahamic faiths: Judaism, Christianity, and Islam. Ancient Vedic (Hindu) texts from India dating back 3,500-4000 years make several references to the Kusidin, or "interest taker," (Lakshmi Chandra Jain, Indigenous Banking in India. New York: Macmillan and Company, 1929.) although it seems clear that by "interest" is meant usury, for lending for a productive project was virtually unknown in the ancient world, east or west; "interest" is a poor translation.

Hindu Sutras from around 700-100 BC, and Buddhist Jatakas from 600-400 BC go into more detail and make it clear that the usurer was universally excoriated. The Hindu priestly and warrior castes were forbidden to engage in usury. The Laws of Manu from the second century AD refine the concept in a way that suggests that there can be legitimate interest taking, though not in excess, describing anyone who takes excessive interest as partaking of "pus and urine." (The Laws of Manu. London: Penguin Books, 1991.)

Monotheism and Usury

Judaism was strict on usury, at least in its teachings. The fact that there are so many prohibitions expressed against the practice suggests that it was as widespread as it was condemned. (Exodus 22:25; Leviticus 25:36-37; Deuteronomy 23:19-20.) Again, however, this is not a condemnation of profit, but of unjust profit, that is, taking a profit when no profit is generated.

The Islamic prohibitions against usury are very clear on the distinction between good credit and bad credit. Still, the Islamic attitude toward interest and usury puzzles people today unfamiliar with economic and philosophical history. There is a general refusal to take usury, or "riba," but usury is clearly distinguished from interest.

This requires a little explanation, for Islamic thought in this area is advanced and rather sophisticated, although fundamentalists have tended to obscure the Prophet's common sense teachings on the matter. There are two types of riba. The first is prohibited in the Qu'ran, and consists of an increase in financial capital without any services being provided. The second is prohibited in the Sunnah, and consists of commodity exchanges in unequal quantities. Both are obviously instances of taking a profit when no profit has been generated. Yet again, it is unjust profit-taking that is forbidden, not a just profit:

Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever. (Al-Baqarah 2:275.)

Condemnations against riba (as distinct from interest) are manifold in the Qu'ran:

God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280.)

O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-'Imran 3:130)

And for practicing usury, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)

The usury that is practiced to increase some people's wealth, does not gain anything at God. But if people give to charity, seeking God's pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)

Clearly, just as in Judaism, the problem of usury in Islam was widespread, but was nevertheless looked upon as vile, being universally condemned. Nor were matters any different in Christendom, and, before that, in Paganism. (See, e.g., Plutarch's essay, "Against Borrowing Money," available in Selected Essays and Dialogues. Oxford, U.K.: Oxford University Press, 1993.) The urge to take a risk-free profit, whether or not it is due in justice, is evidently very strong, regardless of your religious beliefs or lack thereof.

The problem is that nobody likes to be told he is doing wrong . . . especially when the wrongdoing is extremely profitable. In common with the modern urge to get rid of the guilt instead of the reason for the guilt, the Medieval proto-capitalist and usurer didn't want somebody sitting on a throne a thousand miles away in Rome condemning him.

The Effect of the Reformation

There were thus two very good economic reasons for "throwing off the yoke of Rome" in the 16th century. One, the Catholic Church's insistence on the personal sovereignty of each individual person prevented, or at least inhibited or ameliorated the drive to centralized, totalitarian rule by the political elite. Two, the Catholic Church's prohibition against taking a profit when no profit is generated interfered with the power of the rising moneyed classes to make as much of it as possible while risking as little as possible. Due to the false assumption that existing accumulations of savings are necessary to finance capital formation, combined with the demand for collateral in the form of existing wealth, the "new men" already had a virtual monopoly on all future ownership of the means of production.

Even before the Reformation the new doctrines of divine right and the incapacity of ordinary people to look after their own interests had resulted in an increasing concentration of ownership of land, the chief productive asset of the time. In Utopia (1516), Thomas More's biting satire on the abuses of the natural law prevalent in Tudor England, mocked the increasing trend toward concentration of ownership.

In several places in the first and second books of Utopia, More declared that the Utopians had carried Tudor policy to its logical conclusion and abolished private property. This has weirdly been reinterpreted by modern academics as advocating the very thing that More was satirizing! (Paul Turner, "Introduction" to the Penguin Books edition of Utopia. London, 1965, 11-12, 13.) Significantly, More put the whole story in the mouth of the "narrator" Raphael (One of the great philosophical problems of the Middle Ages was Raphael the Archangel, a patron of travelers, who tells a lie and deceives Tobit as to his origin and identity.) Hythloday, whose name signifies "Lying Traveler Who Speaks Nonsense." (Turner, op. cit., "Hythlodaeus means 'dispenser of nonsense." 8.)

As a lawyer as well as a student of the "new learning," More (as well as his readers) was fully aware that private property is the basis of civil society. To abolish private property was, as far as the people of that time were concerned, raving insanity. More's point, of course, was that the Tudor policy of concentrating ownership of the means of production was effectively the same as abolishing private property for the great mass of people, and, by destroying their livelihood by clearing agricultural land to raise sheep for the staple, destroying them. This was not only by giving people a justification for theft out of necessity, turning ordinarily honest people into thieves, but by taking away their means of making a living:

"But I do not think that this necessity of stealing arises only from hence; there is another cause of it, more peculiar to England." "What is that?" said the Cardinal: "The increase of pasture," said I, "by which your sheep, which are naturally mild, and easily kept in order, may be said now to devour men and unpeople, not only villages, but towns." (Thomas More, Utopia. New York: Alfred Knoph, Inc., 1992, 26.)

Today's interpretation of what may be one of the most important points in More's book would, in all probability (and taking into account his well-known love of a good joke) have reduced him to helpless, if wondering, laughter. (See the Lives of Saint Thomas More by William Roper and Nicholas Harpsfield, published in a single volume in Everyman's Library, London: J. M. Dent and Sons, Ltd., 1963.)

Usury, of course, is closely related to private property, but represents a serious distortion of the concept. The Catholic Church carefully distinguished between loans for consumption and investment in productive endeavors, the latter being legitimate and a positive good for individuals and the social order. This, however, did not satisfy the greed of those supporting the reformers. As one authority noted,

The denial of the legitimacy of interest was a natural evolution from conditions of the time. The rigors of the church were directed primarily against loans for consumption to persons in need. When saved capital was the exception, and opportunities for organized industry were rare, loans for productive purposes were the exception. When the time came for escaping the restrictions of the canonical laws, several ways were found of doing so. Already, as early as the thirteenth century, Albert le Grand conceded that "if usury is against the perfection of Christian law, it is at least not contrary to civic interests." Even St. Thomas admitted the loss resulting (damnum emergens) to the lender who was kept out of his money, and the interval of time and the value lost (quantum ejus intererat) gave birth to the word interest as a substitute for usury (usura). (Charles A. Conant, A History of Modern Banks of Issue. New York: G. P. Putnam's Sons, 1927, 14-15.)

Risk Sharing v. Risk Elimination

Getting out from under the censuring eye of Rome, the political and economic powers that backed the reformers were now free to demand a profit on a loan of money, regardless of the purpose of the loan. Just as is the case today, a loan of money for consumption was often preferred over a loan for productive purposes. A loan for a productive project was, being construed as a type of partnership, frequently non-recourse in effect, even if such was not specified in the loan agreement. This was because if a loan made for a capital project went into default, it was due to the fact that the project turned out to be worthless along with the collateral, or at least not quite as profitable as projected. Consequently, the lender shared in the loss just as he or she would have shared in the gain.

A loan for consumption purposes, on the other hand, left a borrower's collateral intact, as it was not at risk in a business. Further, a borrower for consumption purposes intended and generally had to prove that he or she could repay the loan out of his or her other resources, making it indifferent for what purpose the loan was made. Thus, a loan made for consumption purposes was, paradoxically, considered more certain than a loan made for a capital project that was intended to generate its own repayment and be subject to the risks of the market.

Consequently, both the political and the economic elites had good reasons for supporting the religious changes of the Reformation. There was sufficient flexibility in the new religious doctrines, especially those rooted in personal interpretation of Scripture, to allow anyone with a plausible argument to force through a desired change, especially if the change happened to be politically or economically to the advantage of the one pushing for the change. The eventual effect was that divine right theory undermined the idea of personal sovereignty and human dignity directly, while the new acceptance of usury undermined private property for the great mass of people, further eroding personal sovereignty and human dignity.

This was in spite of the fact that, by and large, the first generation of reformers made no essential changes in traditional moral philosophy, especially with respect to usury. (See, e.g., Martin Luther's A Treatise on Usury (1520) and On Trading and Usury (1524)) Instead, the changes in such areas as political philosophy and economics only began to make their appearance after people like Luther, Melancthon, and Zwingli, even Henry VIII Tudor, had passed from the scene. These men were, if anything, much more stringent and narrow in their interpretations of traditional moral philosophy than Rome had ever been, if only to allow them to demonstrate the alleged "laxity" of Rome in these matters and justify their break with the body of the Church.

Bending to Presumed Economic and Political Necessity

The problem, however, was that subsequent generations of reformers were in large measure far more dependent on the political and economic powers than their predecessors or Rome had ever been. At the start of the Reformation, the political and economic elite needed the support of the religious reformers to justify their political and economic break with the Empire and the Church. Afterwards, however, the reformers needed the politicians and the rich far more than the politicians and the rich needed the reformers.

There were reformers of the reformed churches, of course, who sought to return to the purity and faith of the original reformers, which they believed to be more consistent with primitive Christianity. The effect of these later reformers, however, was to foster the growth of non-conformist groups at odds with the new legally-established churches under the official control of the head of State, which then created their own conformity, and their own reformers, and so on.

Consequently, not only were there more political theories floating around than you could shake a stick at, views on finance, especially usury, were all over the map. Which view was accepted depended on who had the power to force his or her views on the rest of society — and that meant the political and economic elite, who could (as might be expected) be counted on to promote and maintain whatever theory gave them the most political and economic power over others.

It comes as no surprise that Sir Robert Filmer, who so avidly supported the divine right of kings, also came out strongly in favor of the idea that usury — bad credit — was no longer wrong, unless it exceeded just bounds . . . ignoring the question as to how taking a profit when there had been no profit generated could ever be just, regardless of the amount. That is, it is permissible to take interest on a loan of money as money, only don't exact too much. (Sir Robert Filmer, Quaestio Quodlibetica, or a Discourse, whether it may be lawfull to take Use for Money (1653).) Filmer was harshly criticizing a tract by Roger Fenton, a Bachelor of Divinity, who published A Treatise of Usurie in 1611. Reverend Fenton's treatise accurately defined usury in Aristotelian terms, demonstrating a much more thorough grasp of the subject than Filmer:

In the loane of money (of which principallie it is my purpose to write, being the most usuall and proper for these parts) be it thus concluded out of the premises; That gain or lucre which commeth not merely for loane; (such loane, which is before described) is no usurie. For the object of usurie is mutuum. It is no usurie, I say, if it be for other respective considerations, and not meerely for loane.

A man unskilfull in trading hath a stock of money, which he delivereth to a merchant or tradesman to imploy: receiveth part of gaine, and beareth part of hazard proportionably. This is no usurie, but partnership. No usury, because his money is not lent by mutuation, so long as he reserveth a propertie in it himselfe, in contracta societatis cessat obiectum usurae mutuum. In like manner the stocke of a widow or an orphant is in trust committed to a friend to imploy and use it in charitie, onely to their use: they have the benefit of the increase; which is no usurie; because the money is still theirs, it prospereth or perisheth to them, as to the right owners. (Robert Fenton, A Treatise of Usurie (1611), I.iiii.3.)

There were also commentators claiming that all interest is usury (Philippus Caesar (Philippus Caesar, A General Discourse Against the Damnable Sect of Usurers (1578). Also Sir Thomas Culpeper, A Tract Against Usurie (1621).)), and that no interest is usury (John Dormer (John Dormer, Usury Explain'd, or, Conscience Quieted in the Case of Putting out Mony at Interest (1695). Also Sir Francis Bacon, On Usury (1625).)). In the end, though, it didn't matter what the divines and philosophers said. Having the power (which, as Daniel Webster was to state a few centuries later, naturally and necessarily follows property (Massachusetts Convention of 1820.)), the rich were in the position to be able to dictate whatever truth was most expedient for them.

In this they were helped immensely by the fixed idea that capital formation cannot be financed without first cutting consumption and saving, or (better) having far more income than can be consumed. When their capital produces far more income than they can consume, the rich are "forced" to reinvest the excess in yet more capital, or, more accurately, leave retained earnings in a business. This provides a greater store of collateral that can be used to secure the financing for more capital, and so on, at an accelerating rate. This, in turn, creates yet more income that cannot be consumed, concentrating ownership ever more closely in fewer and fewer hands. As Karl Marx observed, capital breeds capital:

Capital is money: Capital is commodities. [Capital is only money or commodities in the sense that money is a derivative of production and consists of anything that can be used in settlement of a debt, or (to put it another way) can be used to purchase goods and services, that is, "financial capital." Properly speaking, capital means assets that produce a good or service, and thus "brings forth living offspring" in the sense that it generates its own repayment, and provides the collateral for further capital expansion.] In truth, however, value is here the active factor in a process, in which, while constantly assuming the form in turn of money and commodities, it at the same time changes in magnitude, differentiates itself by throwing off surplus-value from itself; the original value, in other words, expands spontaneously. For the movement, in the course of which it adds surplus value, is its own movement, its expansion, therefore, is automatic expansion. Because it is value, it has acquired the occult quality of being able to add value to itself. It brings forth living offspring, or, at the least, lays golden eggs. (Karl Marx, Das Kapital (1867), I.iv.)

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Bring the Jubilee: A Possible Solution

Obviously, unilateral debt forgiveness could very well cause more harm than good. This would be both to the property rights of persons, and to the common good as a whole by convincing people that debts don't have to be paid. A morally sound (and thus practical) program of debt forgiveness would therefore have to prioritize debts on some consistent and reasonable basis.

Step I: Determine whether the debt was incurred for a productive or non-productive purpose.

There are two kinds of credit. There is "good credit" — credit extended for investment in capital projects that generate their own repayment — and there is "bad credit": credit extended for consumption, speculation, or government spending.

Step II: Determine whether the credit was extended out of existing accumulations of savings, or was created by means of the loan.

You can loan out money that you've saved, or you can loan money by creating it in exchange for a lien on someone's existing assets or the present value of future assets. If you make a loan out of savings and the loan is for a productive project, you are due interest as a right of property. If the loan out of existing accumulations of savings is for a non-productive project, you are not due interest, because "interest" is a share of profits, and a non-productive project does not generate profits.

If you make a loan by creating money, whether for a productive or non-productive project, you are not due interest as you had no property right before the loan created the money. In all cases, however, you are due the principal of the loan, that is, the amount you lent.

Step III: Categorize the Debts

Category 1: Into this category go all debts on which the borrower has the ability to make the payments, including interest, if due in justice. These debts should not be forgiven, and all principal and interest payments should be made as agreed.

Category 2: Into this category go debts on which the borrower cannot pay everything, but can pay something. These debts must be judged on a case-by-case basis.

• If the loan was made out of past savings for a productive purpose and the project is profitable, but not profitable enough to pay the principal and all the interest, the interest rate should be adjusted to reflect the lender's and borrower's just degree of risk sharing. All principal payments should be made.

• If the loan was made out of past savings for a productive purpose that did not make a profit, no interest should be paid, but the principal is still due.

• If the loan was made out of past savings for a productive purpose that made a loss, no interest should be paid, and only a pro rata portion of the principal should be repaid.

• If the loan was made out of newly-created money for a productive purpose, all previous interest payments above a service fee and a fair risk premium should be applied to the principal. If the lender has received anything above the total amount of the principal, a just service fee, and a fair risk premium, it should be refunded to the borrower as an overpayment. All future payments, if any, are applied only to the principal.

• If the loan was made out of newly-created money for a non-productive purpose, all interest payments above a just service fee should be applied to the principal. If the lender has received anything above the total amount of the principal, it should be refunded to the borrower as an overpayment. All future payments, if any, are applied only to the principal.

Category 3: Into this category go debts on which the borrower cannot make payments of any kind. These are written off in their entirety.

Step IV: Restructure the Financial System to Institute a More Just Distribution of Ownership Opportunities

This is the most difficult, but the most important step of all: making as certain as humanly possible that such a situation does not recur. This can best be done by implementing Capital Homesteading on a global basis at the earliest possible date. This does not have to wait until the debt crisis is solved. In fact, it is far better if Capital Homesteading is put in place immediately, and then the debt crisis can be dealt with without getting into a panic mode. In and of itself Capital Homesteading may empower people with the ability to service currently unpayable debt.

Thus, the program should be:

• Implement Capital Homesteading and place a moratorium on all currently unserviceable debt.

• Once Capital Homesteading is in place, categorize all unserviceable debt in accordance with the guidelines in Step III above, taking projected income from Capital Homesteading into account.

• Restructure and reschedule debt when possible, forgive debt when necessary.

• Increase credit voucher amounts to anyone whose property rights were harmed by debt forgiveness, permitting them to be made whole. This amount should not be so great that it materially diminishes the credit voucher amounts going to everyone else. When it is a corporate person who has suffered harm, the tax deduction for bad debt write-off should be changed to a tax credit, as long as the full amount of the tax credit claimed each year is paid out to the shareholders in the form of tax-deductible dividends. In both cases (additional credit and tax credit), the amount should be subject to an annual maximum until the harm has been repaired.

These suggestions will doubtless need refinement, but they appear to be a reasonable way of handling the debt crisis from the perspective of the Just Third Way.

Bring the Jubilee: The Issue

Over the last couple of weeks one of the participants in the Kelso Binary Economics discussion group has been looking into the problem of overwhelming debt. This is a difficult issue, and not one easily solved, especially by the unilateral solutions that are, more and more frequently, being proposed.

It's not, for example, merely a question of forgiving debt. Debts are owed to somebody. Every debt that is forgiven means, effectively, a loss to whoever lent the money, thereby harming or even destroying that person's property rights.

Nevertheless, the concept of Jubilee could be extremely useful in view of the current world situation — as long as we realize and understand that the push of debt forgiveness for some inevitably means a shove against the human rights of property for others. The question then becomes how we manage the former without undue harm to the latter.

The concept of the "principle of double effect" is useful in this context. Most simply put, the principle of double effect allows us to do something that is not bad in and of itself, but which has bad consequences. In the case of debt forgiveness, writing off debt is hardly bad — but it does have the bad result of harming others' property rights.

The "requirements" of the principle of double effect are pretty straightforward:

• The act is itself good, or at least morally neutral;

• You intend the good effect, and not the bad either as a means to the good, or as an end itself;

• The good effect outweighs the bad effect in circumstances sufficiently serious to justify causing the bad effect, and you do all you can reasonably do to minimize the harm.

There is one more requirement in social justice. That is to organize with others to restructure the relevant institution(s) so that the situation is less likely to reoccur. How to do this is described in the pamphlet by William J. Ferree, S.M., Ph.D., Introduction to Social Justice.

That being said, how do we apply these principles to the issue of debt forgiveness? First, of course, we have to see if what we propose meets the requirements of the principle of double effect:

Is forgiving debt good or morally neutral? Absolutely.

Do we intend to harm others' property rights, or is direct harm to property rights (as opposed to debt forgiveness) our goal? Absolutely not.

Does the good of forgiving debt outweigh the bad of harm to property rights? That's harder to answer. Not all debt is unserviceable, and even debt that is unserviceable may not be entirely unserviceable. That leaves us with the problem of exactly how we might engage in debt forgiveness that is both fair and has a chance of accomplishing the desired goals.

On Usury and Other Dishonest Profit, Part XXXV

From the common list of "reasons" we hear why widespread direct ownership of the means of production "can't work" is because workers and other ordinary citizens can't handle the responsibility, can't handle the risk, can't handle the handle, and so on. The one thing that all of these objections have in common is that they typically come from people who are not workers or other real people, but are usually capitalists, academics, and politicians (or their hangers-on).

The answer to these and other objections can be found in an approach to corporate governance CESJ developed called "Justice-Based Management," or "JBM." This was previously called "Value-Based Management," but that term became associated with programs intended to maximize share values, a distantly-related but not entirely congruent approach that ignores the necessity of worker and citizen ownership. What follows is taken in large measure from "What is Justice-Based Management?" on the CESJ website.

Justice-Based Management (JBM) is a leadership philosophy and management system that applies universal principles of economic and social justice within business organizations. The ultimate purpose of JBM is to create and sustain ownership cultures that enhance the dignity and development of every member of the company, and to economically empower each person as an owner and worker.

JBM promotes a company's long-term profitability within the global marketplace by enabling all worker-owners to serve and provide higher value to the customer. JBM connects every worker's self-interest to the bottom-line and long-term success of the company.

The JBM process builds upon a written articulation of the philosophy and principles of the company's leader (typically the CEO or chairman of the board) and leadership core group, in terms of universal principles and core values of the company. JBM proceeds in stages to build a consensus upon these fundamental shared values and vision of the company within each work area of the company.

These articulated values provide the foundation for enhancing the productiveness of workers and company profitability, and include such structures as employee-monitored economic incentive programs, participation and governance structures, two-way communications and accountability systems, conflict management systems and future planning and renewal programs.

One of the main components of JBM is the "empowerment ESOP." While the Employee Stock Ownership Plan (ESOP) was originally invented as a means for providing working people with access to capital credit to become owners of corporate equity, most ESOPs are set up as just another employee benefit plan or tax gimmick, or as an employee share accumulation plan ("ESAP"). Most ESOPs today are not designed to treat worker-owners as first-class shareholders. The "empowerment ESOP," on the other hand, is designed to encourage workers to assume the responsibilities and risks, as well as the full rights, rewards and powers, of co-ownership.

Furthermore, all academic and government studies to date have concluded that ESOPs alone are not enough to affect individual and corporate performance. Within a JBM system, in combination with a regular gain-sharing program tied to bottom-line profits, and structured systems of participatory management, the empowerment ESOP stimulates everyone in the company to think and act like entrepreneurs and owners.

Justice-Based Management offers an ethical framework for succeeding in business. JBM balances moral values (treating people with fairness and dignity) with material value (increasing a company's productiveness and profits while enriching all members of a productive enterprise). JBM's three basic operating principles are:

1. Build the organization on shared ethical values — starting with respect for the dignity and worth of each person (employee, customer and supplier) — that promote the development and empowerment of every member of the group.

2. Succeed in the marketplace by delivering maximum value (higher quality at lower prices) to the customer.

3. Reward people commensurate with the value they contribute to the company — as individuals and as a team.

Justice-Based Management is guided by the concept of social justice, as articulated by the late social philosopher William Ferree, S.M., Ph.D., and summarized in Introduction to Social Justice. Social justice involves the structuring of social organizations or institutions (including business corporations) to promote and develop the full potential of every member.

JBM also embeds within an ownership culture the three principles of economic justice defined by the late lawyer-economist Louis Kelso and philosopher Mortimer Adler:

1) "participative justice," or the right to the means and opportunity to participate in the economic process as an owner as well as a worker;

2) "distributive justice," or the right to the full, market-determined stream of income from one's labor and capital contributions; and

3) "harmony" (or social justice), or the right and responsibility of each person to work in an organized way with others to correct the "social order" or institution when the principles of participative or distributive justice are being violated or blocked.

Within JBM the principles of social and economic justice provide a logical framework for defining "fairness" and structuring the diffusion of power within the corporation.
Structuring Ownership Participation

JBM is designed to systematize and institutionalize shared rights, responsibilities, risks and rewards within all company operational and governance structures involving:

• Corporate values and vision

• Leadership development and succession

• Corporate governance and future planning

• Operations (policies and procedures) and hardship sharing policies

• Communications and information sharing

• Training and education

• Pay and rewards

• Grievances and adjudication

A well-designed Justice-Based Management system sharpens and crystallizes the leader's philosophy around "universal" principles, providing a solid foundation for a corporate culture that enables people to internalize these guiding principles. JBM generates organizational synergy by connecting each worker-owner to the financial tools of ownership (i.e., ESOP and profit sharing), participative management systems, and a defined share of power in the governance of the organization. This in turn enables people to make better decisions, discipline their own behavior, and work together more effectively and cooperatively — because it is truly in their self-interest to do so.

Ultimately, no matter what your reasons (or lack thereof) for wanting a just economy, the only way to remove usury as a dominant force in a modern economy — or any economy, for that matter — is 1) to base economic activity solidly on the application of sound principles of the natural law, and 2) eliminate the myth that the only way to finance capital formation is through existing accumulations of savings from your thinking.