Thursday, April 20, 2017

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.
"Oy, weh. They're confusing ends and means again."
Admittedly, a large number of comments are from people who are focused on the means rather than the end.  As George Bernard Shaw once reported of the Fabian Society, they are more caught up in promoting their specific program or technique without bothering to fit it into the larger picture of the goal of the “Distributist State,” the framework of the natural law, or simple practicality.
Fortunately there are exceptions, such as this comment about the proper use of wealth:
Chesterton or Belloc — can’t remember which — did point out at several turns that the Distributist State would not be a place for those who wish to invest simply with the aim of building wealth. Wealth in a Distributist society would come from property, either real or intellectual, and the fruits of labor done with that property. Unless I’m remembering wrong.
We didn’t know the source either, but it sounded right. Further — shocking many people — the comment agrees with the first principle of economics as stated by Adam Smith, the economist you love to hate.  As he put it in The Wealth of Nations (1776), “Consumption is the sole end and purpose of all production.”
"Consumption is the sole end and purpose of all production."
Putting this together with what he wrote in The Theory of Moral Sentiments (1759), we realize that, as far as Smith was concerned, wealth accumulation simply to accumulate wealth is useless and stupid. Production is for consumption, nothing else, not wealth accumulation, job creation, money manipulation, trade advantage, . . . just . . . consumption.
Smith recognized the fact that you can’t consume what hasn’t been produced, and that the only reason, therefore, to produce is to consume.  Or, at least, somebody has to produce something before it can be consumed.  And that leads directly into “Say’s Law of Markets,” to which Chesterton and Belloc unconsciously seem to have conformed.
Say’s Law is pretty straightforward for an economic law, although it has been misstated, oversimplified, and (consequently) misunderstood.  Even Joseph Schumpeter thought it was a “near tautology,” but that was because he based his analysis on Say’s conclusion and not on Say’s explanation.
Say’s Law (A Just Third Way Statement)
"Supply generates its own demand, and demand its own supply."
·      Absent charity or theft (redistribution by duly constituted authority as an expedient in an emergency is a special case), the only way to consume is to produce.
·      You must either produce directly for your own consumption, or produce indirectly for your own consumption by trading what you have produced for what someone else has produced.
·      The only way to produce is by means of your labor or your capital.  “Capital” is here defined as all non-human factors of production; “labor” is all human factors of production.
·      Money, defined as anything that can be used to settle a debt (“all things transferred in commerce”), is the means by which one person exchanges what he produces, for what others produce.  All money is therefore a contract, just as all contracts are, in a sense, money.
·      When some goods remain unsold, it is because other goods are not produced for which they can be exchanged.
Thus, as Say concluded — and as Say’s Law is usually expressed — since (ideally) production equals consumption, we can say that supply generates its own demand, and demand its own supply.
*          *          *          *
Malthus hiding after losing argument with Say.
The solution to poverty, therefore, is not to redistribute existing wealth, or (as Say put it in his Letters to Mister Malthus) “multiply barren consumptions” (the Keynesian solution).  Rather, the solution to poverty is to make it possible for people who are not productive to become productive, whether by their labor, their capital, or both.
Given this understanding of Say’s Law, it is easier to see that the store of wealth aspect of money is secondary to the main function of money.  The primary function of money, as Aristotle pointed out, is to be spent, that is, to facilitate consumption.
That, incidentally, is why usury — defined here as taking a profit when no profit has been earned — is wrong.  Usury is a charge for the use of money as money, the wrongful taking of interest.
Not all interest is usury, of course, although all usury is interest:
·      If borrowed money is used to purchase a capital good that is put to use profitably, or is used in commerce and generates a profit (as in buying goods wholesale and selling them retail, thereby providing a valuable service to consumers), the lender is in justice due a share of those profits.
·      If borrowed money is used for consumption, no profit is generated, and the lender is due back only the value of what was lent.  Taking interest on such a loan is usury.  (This becomes problematical in a modern Keynesian economy, because the currency has no fixed value.  Interest on a non-productive loan may take on aspects of being paid back what was lent, the increase due not to unjust profit-taking, but to the decrease in value of the currency as a result of government-induced inflation.)
"Redistribution is charity, not justice."
Thus — in strict accordance with Say’s Law of Markets and Adam Smith’s first principle of economics — accumulating wealth just to accumulate wealth is contrary to the way a justly structured economy should run.  People should produce what they want to consume, either directly for their own consumption, or indirectly to trade with others for what they want to consume.
This is not to say that redistribution is not necessary at times.  As Leo XIII explained, however, except when the common good itself is in danger, it is charity, not justice (Rerum Novarum, § 22). The ordinary way to have something to consume is to produce something to consume.
 “But” (say the accumulators) “how is new capital formation to be financed if there aren’t only a few rich people — and the richer, the better — who can afford to cut consumption and save the massive amounts of money needed in an advanced economy to finance growth and create jobs?  We must, therefore, accumulate, and it is virtuous to do so; greed is good!”
No, greed is bad — and we’ll show you why on Monday.

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