Thursday, January 31, 2013

The Death of Reason, IX: Economics as a Science Instead of a Religion

--> In yesterday’s posting, we decided (that is, I decided, and you presumably went along with it if you’re still reading this blog) that we can’t afford to go around basing our economics on anything other than reason — which is what we do in binary economics.  The other schools of economics in some degree get away from reason, usually either to justify or get around what Louis Kelso and Mortimer Adler called the slavery of past savings without ever really dealing with it.

Wednesday, January 30, 2013

The Death of Reason, VIII: Economics and the Natural Law

A great many eyebrows undoubtedly went up while reading in yesterday’s posting when we claimed that much modern economic thought is not based on the natural law, but on a rejection of it; that of the schools of economic thought of which we are aware, only binary economics takes the natural law into account.

Tuesday, January 29, 2013

The Death of Reason, VII: A Little More Demonic Advice

In yesterday’s posting we got some advice from “Screwtape,” given in letters to his nephew, Wormwood, an Assistant Tormentor.  Above all, Screwtape tells Wormwood, for the hate of Satan, don’t let your victim (“patient”) use anything that resembles reason or logic.

Monday, January 28, 2013

The Death of Reason, VI: Some Diabolical Advice

In the previous posting in this series — the one on the meaning and purpose of life v. swill stroganoff — we made the point that the point of life is to become more fully human, not simply to meet material needs.  Reducing the meaning of life to working in order to have the money to buy food in order to have the strength to work is the road to madness, for it takes all meaning out of existence.

Friday, January 25, 2013

News from the Network, Vol. 6, No. 04

We think we’ve figured out why the Just Third Way hasn’t (yet) captured the popular imagination to any great extent.  The Onion hasn’t parodied us, and Mad Magazine has implemented a strict “hands off” policy.

Thursday, January 24, 2013

The Death of Reason, V: Swill Stroganoff

In Episode 501 of The Muppet Show (“With our very special guest star, Gene Kelly, yay!”) the starship Swinetrek in the “Pigs in Space” segment approaches the End of the Universe.  As Dr. Julius Strangepork informs the other members of the crew, Captain Link Hogthrob and First Mate (Miss) Piggy, as soon as they reach the End of the Universe (in one minute), the Meaning and Purpose of Life will be revealed.

Wednesday, January 23, 2013

The Death of Reason, IV: How Not to Make Your Case

Recently we posted our reasons why we chose not to review John Mueller’s book, Redeeming Economics (2010).  In retrospect, we probably could have made everyone’s life a little easier by demanding that if you expect us to review a book, the least you can do is send us a complimentary copy.  It wouldn’t even have to be new, just as long as it is legible.

Tuesday, January 22, 2013

The Death of Reason, III: Motive, Means, and Opportunity

You can’t read mystery novels, especially of the “police procedure” subgenre, without knowing the three things you must always look for when solving a crime are motive, means, and opportunity.  (Unless, of course, you’re the title character in a crime comedy melodrama like Adrian Monk, and can solve the crime by looking through your hands and finding some obscure fact or go on a gut feeling.

Monday, January 21, 2013

Who Owns Social Security?

Short answer?  You don’t.  Neither do I.  The fact is that the money you and your employer pay into Social Security is a tax to fund a government benefit program, not payments you make to some kind of personal savings plan or an insurance scheme.

Friday, January 18, 2013

News from the Network, Vol. 6, No. 03

All the world (or, at least, that portion of it getting its news from the latest item to go viral) is talking about Manti Te’o and the story that he was ostensibly the victim of a cruel hoax.  Opinion seems to be divided between those who think there’s something vaguely suspicious about the whole thing, and those who feel that Manti Te’o might be more deserving of sympathy now than when his fake girl friend allegedly died.

Thursday, January 17, 2013

The Death of Reason, II: The Plot Thickens

It’s probably appropriate that this short series on the mysterious death of reason started off with a brief discussion of a mystery novel, The Daughter of Time, by “Josephine Tey.”  We had re-read the book on a recent weekend simply because we were hunting for something in our library that wouldn’t take too much thought, and it fell off the shelf at our feet.

Wednesday, January 16, 2013

The Death of Reason, I: 2 + 2 = 5. Maybe 3. Would You Believe 7?

A short time ago we reread Josephine Tey’s last novel, The Daughter of Time (1950), about Richard III and the Princes in the Tower.  The Crime Writers’ Association voted it the greatest mystery novel of all time in 1990, leading us to suspect a little Shakespearean punning going on.

Tuesday, January 15, 2013

Let’s Make a Deal, IX: Osawatomie, Kansas, 1910

The United States was in serious trouble in the early 20th century.  The land frontier was effectively closed, and it had not been replaced with democratic access to other forms of capital.  The financial system was structured in a way that forced small businessmen and farmers to finance growth with past savings, while permitting large corporations to create money at will for growth by offering bills of exchange to banks and other businesses.  Ownership of commercial, industrial and agricultural capital was becoming increasingly concentrated, while the “Trusts” (monopolies) were exercising immense financial and political power.

Monday, January 14, 2013

Let’s Make a Deal, VIII: “A Series of Unfortunate Events”

One of the more burning issues of the presidential campaign of 1912 was the need for fundamental monetary and fiscal reform.  The Panic of 1893 had revealed serious weaknesses in the financial system.  The push for reform, however, was sidelined by the drive to involve the government in direct relief efforts (e.g., Coxey’s Army), and — even more so — by the “Silver Question” during the presidential campaign of William Jennings Bryan.  When the country pulled itself out of the Great Depression of 1893-1898 (by the fortuitous — for America — circumstance of crop failures in Europe and bumper crops in the United States), the push for financial reform was marginalized and forgotten in most circles

Friday, January 11, 2013

News from the Network, Vol. 6, No. 02

Not to worry.  Scientists have let us know that the asteroid Apophis (which sounds suspiciously like the name of the super-villain Apothis from Stargate SG-1) will not be hitting Earth in twenty years or so.  We can get back to worrying about the economy, the size of the national debt, and the ever-growing Social Security funding deficit that was recently estimated at $84 trillion.

Thursday, January 10, 2013

Full Employment v Inflation

In Keynesian economics there is a presumed necessary trade-off between employment and inflation. The theory is that if you want full employment, you have to inflate the currency to increase demand. This increases the demand for new capital formation, and results in job creation.

There are a number of assumptions underlying this theory. For one thing, Keynes assumed as a given that, in order to finance new capital formation, it is essential to cut consumption in order to accumulate enough cash to finance the new capital.

Keynes also assumed that "money" consists solely of bills of credit emitted by the government, and represents a "general claim" that the government has on all the wealth of society. In effect, this understanding of money assumes that the State is the ultimate owner of everything.

For example, consistent with the thought of Thomas Hobbes in Leviathan, this means that taxation is not a grant from the citizens to the government. Taxation is, instead, an exercise of the ultimate right of property vested in the State.

Given this understanding of money, Keynesian economics is socialism in all but name. There are, of course, other reasons for classifying Keynesian economics as a form of socialism, such as State-controlled allocation of resources and permitted rates of return to business (General Theory, VI.24.iii), but we've covered those in previous blog postings.

Consistent with these theories, the trend of the economy must be inflationary. Prices have to increase in order to ensure that consumption will decrease. At the same time, there must be constant infusions of additional purchasing power to restore and maintain effective demand at adequate levels.

This is one of the many contradictions in Keynesian economics. The theory requires that consumption both increase and decrease at the same time. Similarly, the Keynesian "money multiplier" requires that checks both clear and remain on deposit at the same time.  There is also the claim that a rise in the price level both is and is not inflation, and so on.

The issue today, however, is something a commentator on our FaceBook page raised. He asked, "Does the minimum wage hurt workers?"

This is a reasonable question. The minimum wage is a cornerstone of Keynesian economic policy. Since wages and State benefits are the only form of income available to the non-owning workers, they must necessarily be at such a level as to 1) allow the wage earner/welfare recipient to meet needs adequately. 2) The level of wages and benefits — effective demand — must be such as to provide sufficient consumption power to clear goods and services at market prices.

One Keynesian solution is for workers to be paid to produce goods for which no market exists (Keynes used the example of cathedrals and pyramids as totally useless goods, logical choices for an atheist), or to produce goods destined for destruction, such as war material. Either produces goods that do not add to the supply of marketable goods and services. Instead, they generate effective demand that keeps prices up, transfers savings from consumers to producers, and doesn't require that goods be consumed in order to fulfill their purpose.

This gets around the "problem" in classical economics caused by the insistence that the purpose of production is consumption. No, in Keynesian economics, the purpose of production is to generate effective demand and provide adequate financing for new capital formation.

This is because Keynes did not consider "supply" a problem. He therefore focused on "demand." This renders the laws of supply and demand irrelevant — but only if you ignore reality.

It also laid the groundwork for the pointless conflict between "supply side" and "demand side" economics. "Supply siders" claim to accept "Say's Law of Markets." "Demand siders" say they reject Say's Law. Both supply siders and demand siders, however, distort and misstate the concept, basing their theories on the logical fallacy of a straw man argument.

Minimum wage legislation sidesteps these problems. Unlike the case in binary economics, which proposes that "future savings," i.e., future increases in production instead of past reductions in consumption be used to finance new capital formation, today's mainstream schools of economics presuppose that the only way to finance new capital formation is by cutting consumption.

Yes, new capital can be financed by cutting consumption, and often is. Reducing consumption to finance new capital, however, also means that the new capital will likely not be financially feasible, and new jobs will not be created. As Harold Moulton expressed this "economic dilemma,"

"The dilemma may be summarily stated as follows: In order to accumulate money savings, we must decrease our expenditures for consumption; but in order to expand capital goods profitably, we must increase our expenditures for consumption." (Harold G. Moulton, The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 28.)

Moulton resolved this dilemma by pointing out that the definition of "saving" is not, despite Keynes's dogmatic and somewhat disingenuous assertion to the contrary, exclusively defined as "the excess of income over expenditures on consumption." (General Theory, II.6.ii.) (Keynes undermined his own claim by the fact that twenty or so pages after he declared that "everyone is agreed" on this definition of saving, he spent several more pages "proving" — by mere assertion — that the people who thought that new capital could be financed without first cutting consumption were wrong, implicitly acknowledging that "everyone" was not agreed.)

As Moulton demonstrated, new capital can be — and, during periods of rapid capital growth, frequently is — financed by increasing production in the future, not decreasing past consumption in the past. Reliance on past savings (labeled "slavery" by Louis O. Kelso and Mortimer J. Adler in the subtitle of their 1961 book, The New Capitalists) can and should be replaced with reliance on future savings.

Keynesian economics tries to circumvent this contradiction in its theory by setting minimum wage levels (thereby instituting "cost push" inflation), and by printing money, inducing "demand pull" inflation. Both types of inflation reduce consumption by raising the price level artificially.

Raising nominal wages by mandating minimum wage levels creates the illusion that wage workers are getting more when they are actually getting less. Nominal wages may be increased, but the goods and services that can be purchased with those wages decreases.

Producers — capitalists — benefit by making more profit from less production. The State benefits by being able to spend the present value of future tax collections now rather than in the future.

The drop in demand by wage earners is made up by consumer credit. It is no coincidence that widespread use of credit cards came in just as the wartime wave of prosperity that resulted from government spending in the Korean War was winding down, or that the "Great Society" began pumping effective demand into the economy to take up the slack left by insufficient use of consumer credit.

So, to answer the question, yes, minimum wage legislation hurts workers. At the same time (such are the contradictions inherent in Keynesian economics), legislating minimum wages gives the illusion that wage earners are somehow better off. Inflation and the rapid expansion of consumer credit pays for the illusion — at least until the bills come due.

There is a way out. One, finance new capital out of non-inflationary future savings, not past savings — especially the Keynesian "forced savings" that rob the poor to give to the rich through inflation. Two, vest wage workers with capital ownership so they can increase their income without raising the price level.

This can be done by implementing an aggressive program of expanded capital ownership — such as Capital Homesteading — at the earliest possible date.


Wednesday, January 9, 2013

How to "Redeem" Economics

Last week someone commented on one of our postings asking for a review of John Mueller's book, Redeeming Economics: Rediscovering the Missing Element (2010). According to the commentator, the book "exposes the deficiencies of Classical and Neoclassical economics which stem from the deterministic Stoic philosophy of Adam Smith." Again according to the commentator, Mueller "points out that the Scholastic philosophy of Aquinas's works, whereas the 'Father' of economics produced unworkable economic theory."

According to information gleaned from the internet, Mueller is the Lehrman Institute Fellow in Economics and Director of the Economics and Ethics Program at the Ethics and Public Policy Center in Washington, DC. His writings have appeared in the Wall Street Journal, the Weekly Standard, the Washington Post, and the Harvard Business Review.

We have not read Mueller's book — but then, he evidently hasn't read any of ours, either. Everything in this posting is based on the very brief assessment of the commentator. Mueller, however, appears to be a "Chesterton scholar" (he is a founder of the G. K. Chesterton Institute, now located at Seton Hall University in New Jersey), and the commentator's assessment of Mueller's book appears to be consistent with neo-distributist thought.

Astonishingly for someone familiar with the thought of Chesterton and (presumably) Hilaire Belloc, Mueller embodies a fatal flaw in his argument — still assuming that the commentator reported it accurately. Mueller avoids the issue of whether what Adam Smith said is true, and focuses instead on Smith's reasons for saying it. This falls into the trap against which Chesterton warned in Saint Thomas Aquinas: The "Dumb Ox," his biographical sketch of the Angelic Doctor:

"At the top of his fury, Thomas Aquinas understands, what so many defenders of orthodoxy will not understand. It is no good to tell an atheist that he is an atheist; or to charge a denier of immortality with the infamy of denying it; or to imagine that one can force an opponent to admit he is wrong, by proving that he is wrong on somebody else's principles, but not on his own. After the great example of St. Thomas, the principle stands, or ought to have stood established; that we must either not argue with a man at all, or we must argue on his grounds and not ours. We may do other things instead of arguing, according to our views of what actions are morally permissible; but if we argue we must argue 'on the reasons and statements of the philosophers themselves'." (G. K. Chesterton, Saint Thomas Aquinas: The "Dumb Ox." New York: Image Books, 1956, 95-96.)

Frankly, whether Smith was a deterministic Stoic, Christian, or Satan worshiper is irrelevant. If we base our acceptance or rejection of classical economics — or anything else — on something other than its objective truth or falsity, then we have violated the fundamental precept of reason embodied in the natural law. That is, good (truth) is to be done, evil avoided.

By basing our science upon anything other than what we can prove by reason to be true, we have committed the "ultimate crime" against both faith and reason.  We did this by shifting the basis of the natural law from what we can discern about human nature (in Catholic thought, a reflection of God's unchanging and unchangeable Nature, self-realized in His Intellect), and therefore discernible by the natural force of human reason alone, to something we accept as God's Will.  This "Will" usually turns out to be our personal opinion, or our opinion of something that someone else with a bigger club says is God's Will.

Consequently, far too many people today, especially economists, base their science on religion, and their religion on science. They thereby corrupt both science and religion. This may be one reason why so many physical scientists claim that economics is not a science. Economists themselves feed into this when they base their thought on something they accept on faith, not reason, e.g., disproved Keynesian dogma, particularly the false idea that it is impossible to finance new capital without first cutting consumption.

The misapplication of faith to reason, and of reason to faith is (at least according to Pope Pius XII) the greatest danger to Catholic doctrine today:

"Disagreement and error among men on moral and religious matters have always been a cause of profound sorrow to all good men, but above all to the true and loyal sons of the Church, especially today, when we see the principles of Christian culture being attacked on all sides.

"It is not surprising that such discord and error should always have existed outside the fold of Christ. For though, absolutely speaking, human reason by its own natural force and light can arrive at a true and certain knowledge of the one personal God, Who by His providence watches over and governs the world, and also of the natural law, which the Creator has written in our hearts, still there are not a few obstacles to prevent reason from making efficient and fruitful use of its natural ability. The truths that have to do with God and the relations between God and men, completely surpass the sensible order and demand self-surrender and self-abnegation in order to be put into practice and to influence practical life. Now the human intellect, in gaining the knowledge of such truths is hampered both by the activity of the senses and the imagination, and by evil passions arising from original sin. Hence men easily persuade themselves in such matters that what they do not wish to believe is false or at least doubtful." (Pius XII, Humani Generis ("Concerning Some False Opinions Threatening to Undermine the Foundations of Catholic Doctrine"), 1950, §§ 1-2.)

Naturally, this also goes in the other direction. As Dr. Leo Alexander pointed out in his article "Medical Science Under Dictatorship" in the July 1949 New England Journal of Medicine, forcing your science to be based on faith doesn't do too much for science, either — or the people who do not accept the State religion, but who are forced to accept the programs based on such "science" that comes into direct conflict with their faith.

It comes as no surprise that, in order to make a faith-based economics work, there is always — always — a resort to coercion in one form or another.  This is almost invariably by the State, or something (or someone) that takes the place of the State. This is consistent with the observations of both Mortimer Adler (Mortimer Adler, "The Nature of Natural Law") and the solidarist Heinrich Rommen (Heinrich Rommen, The Natural Law.  Indianapolis, Indiana: Liberty Fund, Inc., 1998, 134-138) that turning away from reason and basing your science on faith leads directly to totalitarianism.  This is an observation borne out by Harold Moulton in his analysis of the fantasy that government debt can continue to grow without bounds without any danger to the economy or political stability (below).  Thus we should not be surprised when a public, bureaucrat-controlled "dictatorship of money" replaces the despotic private dictatorship of money controlled by private interests (Pius XI, Quadragesimo Anno ("On the Restructuring of the Social Order"), 1930, §§ 105-106).

We see the results of this "one twist to the mind" (i.e., the shift from reason to faith as the basis of the natural law) in the political ideas of Walter Bagehot (The English Constitution), who sneered at Magna Charta and complained that the U.S. Constitution is flawed because it doesn't allow for a dictator, and, especially, the economics of John Maynard Keynes, Bagehot's disciple, who advocated government control of the economy (General Theory of Employment, Interest, and Money, VI.24.iii.), and claimed, in the opening passages of the first volume of his Treatise on Money (1930) that the State has the power to "re-edit the dictionary" (!). The Keynesian New Deal economist John M. Clark headed a chapter in The Social Control of Business (1939), his "unique textbook," "If I Were Dictator" (520-525), while Adolph Berle agitated for years for effective government takeover and the abolition of private property in capital. More recently, one so-called "Catholic economist" published an article declaring how he could straighten everything out . . . if he were just given absolute power . . . (Rupert J. Ederer, "If I Were King of Poland," Fidelity magazine, May 1990.) Faith-based economics cannot work otherwise, and usually not even then, as recent events have demonstrated.

As Dr. Harold G. Moulton pointed out in The New Philosophy of Public Debt (1943), his short analysis of the effect of Keynesian monetary and fiscal policy on the American economy, that as long as we absolutely insist on maintaining the Keynesian system,

"It will be necessary to make a choice. With unlimited debt expansion we cannot prevent inflation without the use of totalitarian methods of control. No compromise or half-way measures can adjust the difficulties. The choice is between regimentation and inflation." (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 88.)

As Moulton concluded his pamphlet after pointing out the fatal flaws in Keynes's faith-based system (faith in Keynes and His Inner Light, that is), "Unless a stable system of public finance is maintained in the United States, and also in other countries, the foundation stone for international reconstruction will rest on quicksand." (Ibid., 93.)

The neo-distributists seem to be among the worst offenders with respect to basing their model economic system on faith, i.e., subjective opinion instead of objective knowledge. (Cf. Mortimer Adler, "Knowledge and Opinion," Ten Philosophical Mistakes: Basic Errors in Modern Thought. New York: Macmillan Publishing Company, 1985, 83-107.) Neo-distributists
tend to insist that the system they advocate — usually bearing little, if any, resemblance to what Chesterton and Belloc were talking about as a result of the neo-distributists "fudging" the natural law — is a (or, more offensively, the) only true "Catholic" economic system. This gives neo-distributists the essential crutch they need to support their model and justify forcing their system on others.  It also provides their inevitable fallback position when they find their system cannot work due to being based on past savings and a fundamental redefinition of the natural law: it's because the faith of those others isn't strong enough, the others are dissenters, heretics, and probably pinch babies and kick dogs.

The fact that the Catholic Church explicitly repudiates the idea that there can be a "Catholic" system of economics is utterly ignored. (John Paul II, Centesimus Annus ("On the Hundredth Anniversary of Rerum Novarum"), 1991, § 43.) As the solidarist economist Franz Mueller stated, "[S]trictly speaking, it would be as incorrect to speak of Catholic sociology as to speak of Catholic economics." (Franz Mueller, "Preface" to Dr. Wilhelm Schwer, S.T.D., Catholic Social Theory. St. Louis, Missouri: B. Herder Book Company, 1940, vii.)

It is not, however, due to a lack of faith that the economy isn't working, or because Adam Smith was a "Deterministic Stoic," or any of the "reasons" adduced so readily by people who never learned how to reason. These are all excuses — and, no matter how you slice them, bologna.

The real reason neither the present system nor any of the faith-based systems demanded by the intellectually flabby don't work is because the principles of the system are inherently flawed, i.e., not true. As St. Thomas Aquinas explained in his closing of his treatise on the Unity of the Intellect, don't come prating to him that you are proving matters of science based on "documents of faith." Instead, prove your case "using the arguments and teachings of the philosophers themselves":

"This then is what we have written to destroy the error mentioned, using the arguments and teachings of the philosophers themselves, not the documents of faith. If anyone glorying in the name of false science wishes to say anything in reply to what we have written, let him not speak in corners nor to boys who cannot judge of such arduous matters, but reply to this in writing, if he dares. He will find that not only I, who am the least of men, but many others zealous for the truth, will resist his error and correct his ignorance." (St. Thomas Aquinas, De Unitate Intellectus Contra Averroistas, § 124.)

In other words, present your evidence and give a sound argument. Vest your case with logical consistency and empirical validity. Don't rely on delivering some tirade against people with whom you disagree and about whom you can invent "facts" and insinuate unspecified crimes, but cannot give any rational basis for your hatred. "Non amo te, Sabidi" is not a reason, but a cop out, and intellectually dishonest. Calling someone a bad Catholic, Jew, Muslim or anything else because his or her economics doesn't suit you or your religious beliefs, or because his or her religion doesn't agree with your economics, is utter nonsense, and is against the principles of the Catholic Church and good science in any event.


Tuesday, January 8, 2013

Avoiding the "Fiscal Cliff"

All the brouhaha over the "fiscal cliff" has obscured the only real solution that exists — understanding what is really happening with the tax and monetary systems of the world so that such a situation cannot happen.

Yes, believe it or not, in a very real sense the problem is not so much with the system as in how the system is being (mis)used, and in the definitions of money, credit, banking, taxation, and property that have gained currency (if you'll pardon the expression). Mess up just one of those institutions, and the others inevitably become corrupted.

The global financial system is in a shambles. The commercial and central banks of the world are designed to operate in accordance with one set of principles, but are being used — mostly by politicians who have political, not financial or economic goals in mind — as if another, entirely different set of principles were the basis of their operation.

Added to that is the fact that, in most cases, the people in charge can't tell the difference between banks of deposit based on past savings (e.g., credit unions, savings and loans, investment banks), and banks of issue based on future savings (e.g., mercantile and commercial banks and central banks).

Another serious problem is that most economists (whose theories provide the basis for the politicians' policies) couldn't tell you the difference between a mortgage and a bill of exchange (according to financial historian Benjamin Anderson, one of the first principles of finance), or the difference between a private sector bill of exchange and a government bill of credit.

That's why the world needs a massive reform of both its tax and its monetary systems. The world's tax codes are fantastically complicated. This is because they are being used for "social engineering" when the sole legitimate use of taxation is to raise money for governments to carry out their legitimate functions. The chief goals of such social engineering via the tax system are 1) Ensure that enough wealth is redistributed to take care of people, and 2) Prevent too much wealth from being redistributed so that the rich can finance new capital and create jobs.

As a child could see, these goals are incompatible, making for much of the chaos. The monetary system is similarly manipulated, the goals being 1) Inflate the currency enough to create full employment, and 2) raise prices to "force saving" and transfer wealth from consumers to producers so they can finance new capital and create jobs, but forcing consumers to pay more for less.

These goals, too, are incompatible. Sustainable jobs only result (except for those subsidized by government, and which therefore represent a drain on, not a gain to the economy) when there is sufficient demand to justify hiring more workers. Raising prices via inflating the currency, however, reduces demand, and thus reduces the need to create more jobs, and sometimes even eliminating jobs as aggregate demand falls.

There is also the paradox of politicians who try to repay past debt with cheaper currency by inflation.  Yes, you can transfer value from creditors to debtors that way very easily.  The problem is that when the government is the debtor and can control the money supply, politicians start believing that the inflationary loss to consumers represents profit to the government.  Not so.  By making people worse off by inflating the currency, the price level goes up.  Any "gains" get eaten up by higher prices paid for the same amount of goods and services.  Strike one.  Strike two: believing they're turning a profit when all they're really doing is redistributing wealth, politicians spend more money, getting less and less for more and more at a faster and faster rate.  Strike three: spending for social programs also starts to increase exponentially due to the fact that people's ability to live within their grossly depreciated means evaporates.

Reform of the tax and monetary systems must therefore go together, but if you're forced to choose, reform the tax system first — the harm of a bad tax system is more immediate and longer lasting than the problems of a bad money system.


Monday, January 7, 2013

Ronald Reagan and Homesteading

Last year (we thought we'd better start work right away getting used to it), on December 27, 2012, George F. Will wrote a column in the Washington Post. There is nothing unusual in that, of course. Mr. Will is a columnist, and columnists write columns. What is of interest to the Just Third Way is that his column was on Abraham Lincoln's 1862 Homestead Act.

Surprisingly for someone who was so closely connected with Ronald Reagan, Will apparently didn't realize that Reagan, too, wanted a Homestead Act — but extended to industrial and commercial assets instead of being limited to land. That being the case, we sent a letter to George:

Dear Mr. Will:

In a July 1974 speech to the Young Americans for Freedom, then-governor of California Ronald Reagan stated that what this country needs is an industrial homestead act to promote democratic ownership of America's expanding industrial and commercial frontier. Later, in August 1987, President Reagan gave a speech endorsing the work of the Presidential Task Force on Project Economic Justice.

The Task Force developed a plan to counter the spread of Marxism in Central America and the Caribbean Basin through an aggressive program of expanded capital ownership based on the ideas presented by Louis O. Kelso and Mortimer J. Adler in their two collaborations, The Capitalist Manifesto (1958) and The New Capitalists (1961). The Task Force did not receive one cent of taxpayer money, but was funded entirely with private donations.

Significantly, the proposal itself did not require the government to increase taxes, inflate the currency, or redistribute existing wealth. Instead of monetizing the present value of the government's ability to collect future taxes out of production that might never take place, democratic access to the annual "growth ring" of new capital formation would be gained by monetizing the present value of future increases in the production of marketable goods and services.

The backing of the money supply would thereby shift from government debt (bills of credit), to private sector assets (bills of exchange). This, as the subtitle of Kelso and Adler's The New Capitalists has it, constituted "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

Building on the work of Kelso and Adler, our Center for Economic and Social Justice (CESJ) under the leadership of Dr. Norman G. Kurland, has developed a proposal we call the "Capital Homestead Act." Dr. Kurland (with whom you met at the time) served as Deputy Chairman of the Presidential Task Force. In 2004 we published Capital Homesteading for Every Citizen. We addressed the growing problem of Social Security by presenting the book as "A Free Market Solution for Saving Social Security."

Very briefly, the idea of "Capital Homesteading" is for each person to establish a "Capital Homestead Account." This is possibly best described as a high-powered IRA to accumulate newly issued shares financed on credit instead of reductions in consumption income, and paid for out of dividends received in the future on the new shares issued by corporations and purchased by the Capital Homesteader. By financing corporate growth with new equity paid for with "future savings" instead of debt or retained earnings, the need for businesses to retain earnings would be eliminated.

Special Capital Homesteading "full payout" shares would give the owners of the newly issued shares access to the full stream of income attributable to their ownership share. Tax deductibility of all dividends at the corporate level would encourage corporations to issue new shares to finance growth, while full payout of earnings would stimulate the economy naturally instead of through inflation. Corporations could avoid income taxes by paying out all earnings. Dividends would be taxed as regular income at the personal level unless used to make tax-deferred payments on shares held in a Capital Homestead Account.

If these ideas interest you, you might want to talk to Dr. Kurland again. He can be reached using the contact information on the CESJ website.

Thank you. We look forward to a most interesting and fruitful discussion.

Yours, etc., etc.


Friday, January 4, 2013

News from the Network, Vol. 6, No. 01

Although this has been a short (work) week, there have been a number of significant events. The Democrats and Republicans appear to have reached another meaningless compromise to avoid the "fiscal cliff" that the Just Third Way as applied in a Capital Homesteading has the potential to eliminate, possibly within a generation. More importantly, people around the world are being introduced to the ideas of the Just Third Way, with some serious attention being paid to the potential Capital Homesteading may have to bring an end to the current economic malaise:

• Amazon has (finally) put up the cover image for CESJ's latest publication, The Restoration of Property, which might help generate sales. Visit the webpage, buy a copy, and post a review.  (Bulk orders — ten or more copies — are available from the publisher; enquire at publications [at] cesj [dot] org.  We have distribution facilities in the U.S., U.K., and Australia.)

• On Thursday members of the CESJ core group met with a philosophy professor from a small Catholic college in the eastern United States. Most of the discussion focused on the compatibility of CESJ's "Just Third Way" with Aristotelian/Thomist philosophy and the social doctrine of the Catholic Church, especially the economic justice principles of Louis O. Kelso and Mortimer J. Adler, and the analysis of the thought of Pius XI by Rev. William J. Ferree, one of CESJ's co-founders. CESJ's "Justice University" concept was also discussed, as well as the possibility of exploring the feasibility of forming a CESJ chapter as a student club on campus. The professor took copies of The Formation of Capital (1935), Introduction to Social Justice (1948), Capital Homesteading for Every Citizen (2004), In Defense of Human Dignity (2008), Supporting Life (2010), and The Restoration of Property (2012).

• The Global Harmony Association (GHA), headed by Dr. Leo Semashko and headquartered in St. Petersburg, Russia, has published three reviews of its book, The ABC of Harmony. Two of the reviews are by Michael Ellis, PhD, GHA Ambassador of Peace from Harmony for Australia, President, The Global Peace Center, Melbourne, Australia, and Matthew Gmalifo Mabefam, MPhl. (Social Work), Deputy to the Leader of Socio-group (GHA-Africa), Department of Social Work, University of Ghana; Legon, Ghana. The third review is by Michael D. Greaney, CESJ's Director of Research and Ambassador and Co-Director of the Embassy for Human Rights from Harmony and Justice.

• Some interesting discussions have taken place in a LinkedIn group focused on reviving business in Ireland. A gentleman in Dublin is trying to bring together a minimum of half a dozen people to discuss what to do about the current situation in that country. We have suggested some possible actions, such as organizing a focused effort to introduce members of the national legislature to the principles of the Just Third Way as applied in Capital Homesteading, and have offered the material on the CESJ website to support the effort, as well as making members of the CESJ core group available for consultation. Ireland would be ideal for a pilot project, with no language barrier, a compatible legal system, and a government that appears to be trying to make the shift to encouraging instead of discouraging business. The effort has received endorsements from a business coach in Boston, Massachusetts, and a librarian in Princeton, New Jersey.

• As of this morning, we have had visitors from 54 different countries and 53 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the United Kingdom, Ireland, and India. People in Mexico, Malta, the United States, Brazil, and Portugal spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "Islamic Banking," "Is Choice Unconstitutional?," and "The Turning Point, II: The Solution."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.


Thursday, January 3, 2013

The Fine Art of Missing the Point

If there's one thing you learn about modern life, it's the ease with which people can get diverted from the main point.

Take, for example, a "discussion" we recently avoided in a LinkedIn group. It was getting very deep into the nature of human life, the roles of faith and reason (or faith v. reason) . . . all kinds of good stuff that we've addressed on the blog at one time or another.

The problem is that the group is supposed to be about helping people find jobs.

It's like the fast food clerk getting lectured on the greedy capitalist system and the deleterious health effects of too much fat in the diet when the question was whether the customer wants fries with that.

The question most people manage to avoid these days in their anxiety to show others how virtuous/smart/whatever they are (in comparison with those others, of course) is how people are supposed to be empowered so as to be able to resist all the greed, bad health, etc., etc., etc. that "they" impose on the rest of "us."

And if they avoid the question, you can imagine the hysteria over the answer.

The bottom line here is that power, as Daniel Webster and countless others have pointed out, naturally and necessarily follows property. Restructure the system so that, as Pope Leo XIII recommended, "The law . . . should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (Rerum Novarum, § 46.)

Yes, toilets in Harlem are important. World peace and ending hunger are important. The level of wages and benefits is important.

A lot of things are important . . . but what we're discussing on the Just Third Way blog is a way to solve all those problems and others through access to the means of acquiring and possessing private property in capital.


Wednesday, January 2, 2013

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.

Technically, it's not "Islamic banking," but Aristotelian. All the major religions have condemned usury, which is taking a profit on something that does not generate a profit, e.g., a loan of money as money.

Thus, taking interest on a loan to someone to purchase food or clothing, or to a government is usury, where taking interest on a loan to someone to purchase land for farming or to engage in a trading venture is not usury.

The lender in the former case is not due "interest" (from "ownership interest"), a share of profits, because there were no profits generated. The lender is due back only what was lent. In the latter case, if there was a profit, the lender is due in justice a share of those profits, as Aquinas, Maimonides, and Ibn Khaldûn all point out — or suffer a pro rata share of the loss. All usury is "interest," but not all interest is usury.

An exception is made in scholastic philosophy for loans made to a government. The rationale is that profit-taking is not evil per se ("objectively evil"), but only taking a profit when there is no profit. Government being necessary (so the reasoning goes), if it cannot raise enough revenue by taxation, it will not be able to carry out its proper function of keeping order — a very great evil indeed, and "objectively evil."

Under the "principle of double effect," then, the objective evil of government ceasing to function outweighs the lesser evil of taking a profit when there is no profit, so lending to a government at interest, while usury, is allowed in order to avoid the greater evil of a collapsing government — in the short run, and until the problem that is causing the shortfall in revenue or overspending is fixed.

A government that is permanently in debt is doing something wrong, however. The government's job in that case is to foster economic growth to rebuild the tax base and live within its means. One possible way of doing this in a modern economy is to get rid of the Keynesian fallacies that pervade modern thinking and adopt something like "Capital Homesteading,"

A lot of the confusion we see today in economics, finance and politics is caused by inadequate (and in some cases completely wrong) ideas about money, credit, banking and finance — and even what property is, and what government is supposed to be doing.

Even in a loan of money for a productive purpose, there is the danger of usury. Taking more than a fair share of the profits is usurious. The problem is how to determine how much a lender is due in justice.

The best answer is "the free market." A willing buyer and a willing seller each with good information can generally reach a bargain that approximates what each is due in justice. If, for example, most of the lenders in a community are letting borrowers have money to buy seed for farming at, say, 5% per annum, then (assuming an adequate number of competitive lenders and a large enough customer base of borrowers), a loan of money to buy seed for farming is probably worth 5% per annum. If it were worth more, lenders would be able to charge more. If it were worth less, borrowers would simply go to a more reasonable lender who would take a smaller share of the profits.

Of course, all this talk of interest rates is avoided if productive ("capital") projects are financed using "pure credit," that is, credit extended based on the present value of the future stream of marketable goods and services the borrower expects to produce. This present value can be conveyed by being embodied in a contract called a "bill of exchange," and offered to a bank or another individual or merchant at its current value. If the bill is accepted or "discounted," it is money, and can be used to finance new capital.

There is, however, a difference between bills of exchange and most other forms of money. Like other forms of money, the "instrument," that is, the contract, has a "face value." It is a contract valued at, say $100,000 — but it is rarely worth exactly $100,000 until presented for redemption and sometimes (if the issuer's credit is not good) not even then.

Instead, a bill of exchange almost always passes for money at its present value, not its future value. This is almost always a discount — and why having bills of exchange accepted as money is called "discounting" and "rediscounting."

The discount rate is not, however, an interest rate. It is a reflection of the opinion people who accept the bill have of the chance that it will be redeemed in full on maturity, and the value of having less than $1 today for immediate use versus having a whole $1 at some time in the future that you can't use until you have it.

This is the "time value of money." It's like saying you are willing to pay $1 now for a loaf of bread you receive now, but are only willing to pay 50¢ now for a loaf of bread that you will get next Saturday. As Wimpy used to say, "I will gladly pay you Tuesday for a hamburger today." Yes — but you're either not going to sell Wimpy that hamburger now at the same price you would if he was offering cash, or you won't sell to him at all if you expect he won't pay you on Tuesday. It's not "interest," it's what Wimpy's promises are worth on the open market.