From : Norman Kurland <thirdway@cesj

From : Norman Kurland <thirdway@cesj.org>

Reply-To : thirdway@cesj.org

To : COG Ownership <ownership@cog.kent.edu>, COG Monetary Reform <monetaryreform@cog.kent.edu>, "Ryan, William B." <william_b_ryan@hotmail.com>

CC : "Lane, Michael" <OAssoci508@aol.com>

Subject : Kelso & Douglas, how different are they?, Part I

Date : Fri, 14 Dec 2001 21:01:54 -0500

Bill Ryan,

Sorry I had to re-send this posting again to COG. It's been slightly revised from yesterday's version.

This is part I of two parts in my initial response to your points comparing the binary economics of Louis Kelso with the social credit economics of Major Douglas, two intellectual giants.

As Michael Lane has pointed out in his letter to me of November 12, 2001, there are many important common themes in Louis Kelso's binary economics and Major Douglas' social credit economics. While their precise language and their means for achieving their goals might differ, Douglas and Kelso would probably both agree with changes in national economic policy that would:

1) recognize the increased productiveness of the instruments of technology as a basis for national income maintenance policies,

2) discourage redistributive taxation and any form of concentrated power,

3) support the monetization of private sector economic growth,

4) provide access to credit as a fundamental right of citizens,

5) favor full production over full employment policies,

6) favor market-based determinations of wages and prices,

7) protect private property rights,

8) stress the importance of leisure and

9) focus on overcoming artificial scarcity (poverty) and planning for shared abundance.

Reasonable people can engage in fruitful debates over differences between Kelso and Douglas in their respective systems logic and means of implementing their shared objectives. Such positive interactions might possibly lead to a combining of their "people power" networks to challenge the defenders of the hopelessly flawed economic policies coming from the left, the right and the muddled middle of Washington thinktanks and academia generally. Given the many strengths that would result from an alliance between binary economists and social creditors, I hope that my responses below will lead to a mutually respectful and continuing dialogue with you, Vic Bridger and others, initially separate from mine with Michael Lane.

Below I will intersperse my responses to your reactions to some quoted excerpts of mine in a recent exchange with Michael Lane, who, like yourself, is committed to the teachings of Major Douglas. Many of my responses flow from my paper, "A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation," which is confirmed for publication in The Journal of Socio-Economics and can be downloaded by clicking on

http://www.cesj.org/binaryeconomics/price-money.html

But I want to acknowledge that most of the responses below were initially prepared, before my inputs and editing touches, by my colleague, Michael D. Greaney, a CPA and MBA who serves as volunteer director of research for our Center for Economic and Social Justice. However, I accept total responsibility for this e-mail posting and any changes from Michael's draft.

In an earlier message to COG's Economics of Ownership Discussion Group "William B. Ryan" wrote:

<<Norman,>>

<<In response to your dialog with Michael [Lane].>>

<<1. First, a note to Michael [Lane]:>>

<<"Labor displacements" was the subject heading of a message

from someone else that I replied to. It is not mine. My

preferred term is "labor displacement" as a general concept.

Douglas' term was "labour replacement." The following is

excerpted from The Monopoly of Credit: >>

<<"The factor which is probably at the root of the problem...has

during the past few years been a matter of acrimonious

controversy. On its physical or realistic side, it is intimately

connected with the replacement of human labour by machine

labour.">>

Why is this point significant? As far as I can see, there is no relevant difference for purpose of our exchange between “labor replacement” and “labor displacement.” "Productive capital," "tools of production," "procreative capital," or what Backminster Fuller called "energy slaves" would have also been appropriate for describing the substitution of human work with productive technology. I’m not sure Douglas would have made an issue of the language in this instance.

<<2. You make a number of gross misstatements of fact which

no doubt derive from an unfamiliarity with the subject.>>

<<Kurland: "...there would be no point in placing limits on profits

as Douglas proposed.">>

<<Douglas never proposed that there should be limits on profits.

The Dividend itself, a broadly encompassing concept, is to be

funded with new credit and not diverted or confiscated profits

or taxation.>>

This whole argument is a non sequitur, that is, it does not follow from the point being made, which is that Norm Kurland made “gross misstatements of fact” stemming from his “unfamiliarity with the subject.”

The quote is irrelevant. Major Douglas specifically stated that capital (the non-human factors of production, in which Kelso includes natural resources and technology, the “means of exploiting” natural resources) should be owned in common, i.e., by the collective. The entrepreneur (the “improver of process”) was only due a certain pro rata return. Everything above that level constituted the “national dividend” and was owned by everybody equally:

To quote from Douglas himself: “(1) Natural resources are common property, and the means for their exploitation should also be common property. . . . (3) The payment to be made to the improver of process, including direction, is to be based on the rate of decrease of human time-energy units resulting from the improvement, and is to take the form of an extension of facilities for further improvement in the same or other processes.” (Douglas, “Economic Democracy” pp. 110 –111.)

This is an explicit limitation on the return to the owner of capital. Douglas limited profit-taking to what would recompense the entrepreneur for his time and effort, measured in their value in “time-energy units,” along with whatever was needed to form new capital. This is a variation on Ricardo’s “labor theory of value,” which Marx congealed into a dogma. A mere shareholder who did not contribute labor or “human time-energy units” to the productive process would receive only enough to replace his original investment. This is also, by the way, identical to Marx’s proposal that the capitalist was due back only the original cost of the capital. Douglas thus treated any residual (which Marx called "stolen labor" and others call "surplus profits) would belong to the collective as the “National Dividend.”

The National Dividend would be monetized and distributed by having the government issue non-repayable credits in equal amounts to every citizen. Douglas declared that the money supply available for consumption purposes could only consist of loaned money that had not yet been paid back to the banks from which it had issued:

Douglas argued: “The impossibility of a balanced budget within a closed system of credit must be from the foregoing sufficiently obvious. Without going into details which still further complicate the situation, such a proposition means that the only surplus purchasing power at the disposal of the individuals comprising the nation would be the excess of bank loans over bank repayments, i.e. debt.” (Douglas, “The Monopoly of Credit” p. 58).

The only solution to Douglas' perceived lack of purchasing power would be to make loans (social credit) to the citizens that did not have to be repaid. These would be considered increments of the National Dividend, payable as dividends on shares held individually, representing a portion of the National Debt. As the National Dividend belongs to everyone, the people would, in essence, be loaning money to themselves. It would thus be foolish to repay the loans as you would only be paying them back to yourself. The loans, necessarily in the form of new money, would be spent to clear consumption goods and services at market prices, not to perform the self-defeating act of repaying the social credit loans:

Again from Douglas: “The provision of a National Dividend is merely to place in the hands of each one of the population, in the form of dividend-paying shares, a share of what is now known as the National Debt, without, however, confiscating that which is already in private hands, since the National Credit, is, in fact immensely greater than that portion of the National Debt which now provides incomes to individuals.

“The practical effect of a National Dividend would be, firstly, to provide a secure source of income to individuals which, though it might be desirable to augment it by work, when obtainable, would, nevertheless, provide all the necessary purchasing power to maintain self-respect and health. By providing a steady demand upon our producing system, it would go a long way towards stabilizing business conditions, and would assure producers of a constant home market for their goods.” (Douglas, “The Monopoly of Credit” p. 102).

If declaring that only a specific return on capital is legitimate and everything else belongs to the collective is NOT a limitation on profits, then nothing can be construed as a limitation on profits. It follows then that there can be no argument, because there is no agreement on the meaning of the concept “limitation” or “profit.” The issue here, as in the comment above, is purely semantic.

<<This does not necessarily require action by the government.

In principle, it could be accomplished by the banking system

on its own initiative through its own facilities. Nor does it

necessarily require "money." It could be accomplished by the

mechanism of a generalized accounting adjustment in

augmentation to effective demand.>>

Similarly, Bill, let's examine these statements of yours: “Nor does it [the

National Dividend] necessarily require ‘money.’ It could be accomplished by the mechanism of a generalized accounting adjustment in augmentation to effective demand” is an exercise in semantics. While I consider Douglas’ definition of money somewhat limited, his definition was explicit enough to include as “money” any such “mechanism of a generalized accounting adjustment in augmentation to effective demand.”

If you are arguing that “augmentation to effective demand” in any form does NOT constitute “money” as understood by Douglas, doesn't that make your definition of "money" more narrow than that of Douglas. Am I wrong?

According to Douglas: “Money is essentially an order system. It has been defined by Professor Walker as 'any medium no matter of what it is made or why people want it, no one will refuse in exchange for his goods.' That is to say, a given denomination of money may at any time be exchanged for any article bearing a price figure corresponding to this denomination of money, and it is a simple extension of this proposition to say that the power of creating money is a guarantee of the power of acquiring goods or services to a total proportion of the whole stock of goods and services equal to the percentage of existing money which can be created.” (Douglas, “The Monopoly of Credit” pp. 17 – 18.)

<<The Social Credit Movement, from its inception to its wane,

was always staunchly pro-individual enterprise and against

centralized power in any form. This extensive excerpt is from

Economic Democracy, published as a book in 1919 after an

earlier serialization in Orage's journal, at the very beginning of

Douglas' public career:>>

<<"We are thus led to inquire into environment with a view to

the identification, if possible, of conditions to which can be

charged the development of servility on the one hand, and the

discouragement of possibly more desirable characteristics on

the other, and in this inquiry it is necessary to avoid the real

danger of mistaking effects for causes; and, further, to beware

of seeing only one phenomenon when we are really confronted

with several. >>

<<"For instance, that from the misuse of the power of capital

many of the more glaring defects of society proceed is certain,

but in claiming that in itself the private administration of

industry is the whole source of these evils, the Socialist is

almost certainly claiming too much, confounding the symptom

with the disease, and taking no account of certain essential

facts. It is most important to differentiate in this matter,

between private enterprise utilizing capital, and the abuse of

it.>>

<<"The private administration of capital has had a credit as well

as a debit side to its account; without private enterprise

backed by capital, scientific progress, and the possibilities of

material betterment based on it, would never have achieved

the rapid development of the past hundred years; and still

more important at this time, only the control of capital, which

on the one hand has degraded propaganda into one of the

Black Arts, has, on the other, made possible such crusades

against an ill-informed or misled public opinion as, for

instance, the anti-slavery campaign of the early nineteenth

century, or the parallel activities of the anti-sweating league

at the present day. The very agitation carried on against

capitalism itself would be impossible without the freedom of

action given by the private control of considerable funds.>>

<<"The capitalistic system in the form in which we know it has

served its purpose, and may be replaced with advantage; but

in any social system proposed, the first necessity is to provide

some bulwark against a despotism which might exceed that of

the Trust, bad as the latter has become. In our anxiety to

make a world safe for democracy it is a real urgency that we

do not tip out the baby with the bath water, and, by discarding

too soon what is clearly an agency which can be made to

operate both ways, make democracy even more unsafe for

the individual that it is at present.>>

<<"The danger which at the moment threatens individual liberty

far more than any extension of individual enterprise is the

Servile State; the erection of an irresistible and impersonal

organization through which the ambition of able men,

animated consciously or unconsciously by the lust of

domination, may operate to the enslavement of their fellows.

Under such a system the ordinary citizen might, and probably

would, be far worse off than under private enterprise freed

from the domination of finance and regulated in the light of

modern thought...>>

<<"In attacking capitalism, collective Socialism has largely failed

to recognize that the real enemy is the will-to-power, the

positive complement to servility, of which Prussianism, with its

theories of the supreme state and the unimportance of the

individual (both of which are the absolute negation of private

enterprise), is only the fine flower; and that nationalization of

all the means of livelihood, without the provision of much

more effective safeguards than have so far been publicly

evolved, leaves the individual without any appeal from its only

possible employer and substitutes a worse, because more

powerful, tyranny for that which it would destroy.>>

<<"...It is notorious that the State Socialists of Germany,

commonly known as the Majority Party, were of the greatest

possible assistance to Junkerdom in carrying out its plans for a

Prussian world hegemony; while in England the bureaucrat

and the Fabian have, on the whole, not failed to understand

each other; and the explanation is simply that both, either

consciously or unconsciously, assume that there is no

psychological problem involved in the control of industry just

as the Syndicalist is, with more justification, apt to stress the

psychological to the exclusion of the technical aspect.>>

<<"Because the control of capital has given power, the effect of

the operation of the will-to-power has been to accumulate

capital in a few groups, possibly composed of large numbers of

shareholders, but frequently directed by one man; and this

process is quite clearly a stage in the transition from

decentralized to centralized power. This centralization of the

power of capital and credit is going on before our eyes, both

directly in the form of money trusts and bank amalgamations,

and indirectly in the confederation of the producing industries

representing the capital power of machinery. It has its

counterpart in every sphere of activity: the coalescing of small

businesses into larger, of shops into huge stores, of villages

into towns, of nations into leagues, and in very case is

commended to the reason by the plea of economic necessity

and efficiency. But behind this lies always the will-to-power,

which operates equally through politics, finance or industry,

and always towards centralization.>>

<<"If this point of view be admitted, it seems perfectly clear that

to the individual it will make very little difference what name

is given to centralization. Nationalization without

decentralized control of policy will quite effectively install the

trust magnate of the next generation in the chair of the

bureaucrat, with the added advantage to him, that he will

have no shareholders' meeting.">>

The real issue, however, is not whether Douglas stated he supported private property. By his own words, as you quoted him above, that is a given. This is a declaration he made many times and which, apparently, he believed. The real issue is whether Douglas’ understanding of property and the program he developed do, in fact, respect and protect private property the way he claimed. This, and I'm sure all binary economists would agree, would not appear to be the case.

The issue is also not whether Major Douglas opposed centralized power in any form. He did, repeatedly. The issue is whether his program’s effect on property rights would inevitably increase the centralized power of government. Here is how Douglas distinguished social credit from socialism:

“It seems difficult to make it clear that the proposal for a National Dividend, which would enable the products of our industrial system to be bought by our own population, has nothing to do with Socialism, as that is commonly understood. The main idea of Socialism appears to be the nationalization of productive undertakings and their administration by Government departments. Whatever merits such a proposal may have, or may not have, it does not touch the difficulty we have been considering.” (Douglas, “The Monopoly of Credit” p. 101.)

The passage quoted directly above is followed immediately by the statement that “The provision of a National Dividend is merely to place in the hands of each one of the population, in the form of dividend-paying shares, a share of what is now known as the National Debt” (see above). Douglas also previously stated that common ownership applied to both natural resources and the means of exploiting them.

It becomes impossible to reconcile the claim that social credit is NOT socialism given Karl Marx’s definition of communism, the most extreme form of socialism, in “The Communist Manifesto”: “In this sense, the theory of the Communists may be summed up in the single sentence: Abolition of private property.” This is made clearer when Marx elaborates on this statement, declaring that personal property is not his object, but property in the means of production — that which Douglas had declared belonged to the collective. Such a program (as well as Douglas’ stated aim in “Economic Democracy” of “changing human personality”[!] by overcoming the “will-to-power”) requires, as the communists discovered, increasing government control and domination. Instead of “withering away,” the state becomes ever stronger.

And contrast how Douglas would temper and restrain the "will-to-power" with that proposed by Kelso and other binary economists, who would reduce the potential abuses of concentrated power by decentralizing economic power through universal access to capital ownership. (Social credit also raises the question as to the degree of oversight required by a central authority to keep entrepreneurs from ratcheting up their salaries to replace profits diverted to the National Dividend, just as they do today to avoid the double taxation on corporate dividends.)

Before I studied the law, I must confess that I did not understand the nature of "property." After meeting Kelso and reading his superb critique of Karl Marx's Das Kapital, I deepened my understanding of property and its political significance for broadly diffusing economic power.

(Click on KARL MARX: The Almost Capitalist By Louis O. Kelso. or

http://www.cesj.org/thirdway/almostcapitalist.htm)

Despite his obvious brilliance, Major Douglas, like Marx and many intellectuals, failed to fully appreciate the nature and political significance of property. Stated simply, property is not a thing. It is a set of relationships. It is the rights, powers and privileges that a person has to and over a thing, in relation to everyone else in the world. These rights include one that Douglas correctly considered all-important. That is the right of access to the means of acquiring and possessing property. Unfortunately, his concern for this universal and absolute right "to" property appears to have caused him to overlook the equally important rights "of" property.

Above all, the rights of property mean the right of full enjoyment of “the fruits of ownership.” Primary among “the fruits of ownership” is the full stream of income generated by that which is owned. If you own an apple tree, you have the right to do with as you please all the apples grown on that tree, as long as your “doing” respects the rights of others and the common good.

It is important to note in this respect that “the common good” does not include title to the fruits of ownership that derive from private property, but organized society may place limitations how those fruits are used. That is, care must be taken that others’ rights are not violated, but their rights do not give others the right to use the fruits of ownership that belong to you, at least not without your consent. Organized society can prevent you from hurling green apples at the heads of passers-by, or to punish you if you do such a thing. But government does not have the right to steal apples from trees belonging to private individuals that adjoin a public thoroughfare.

Whether you own yourself, land, an apple tree or some other form of capital, the rights of property demand that you receive the fruits thereof, without infringement, or society is unjust to that extent. You own the wages generated by your labor, the crops from your land, the apples from your tree, and the revenues-less-costs resulting from the sale of products generated by your machinery — in their entirety. The functional definition of slavery, a perversion and dehumanization of property rights, is that the fruits of one's labor belong to someone else. Consequently, with the abolition of slavery, no one else, especially the state, has any legitimate claim on your property. (There are certain exceptions, especially in cases of dire necessity, but these are exceptions, not the rule, and we are here discussing a mandatory rule, not allowed expedients.)

Some, such as Thomas Hobbes and Robert Filmer, have protested that individuals only have private property against other private individuals, not against the state. By Hobbesian logic, taxation is an exercise of property in the goods of the subjects by the sovereign who is the ultimate owner of everything. Locke (and Sidney, Bellarmine, Aquinas, et al.) disagreed with this assessment. Where the people are sovereign, taxes are a grant from the people to their duly appointed rulers for the purpose of meeting the expenses of government, and cannot be levied legitimately without the consent (implicit or explicit) of the governed.

Back to Major Douglas. His social credit program requires that some central authority determine the amount of production above what is “due” to producers for their legitimate efforts, “monetize” that amount as a payment on the “National Dividend,” and distribute it to every citizen in the form of “new credit.” (Remember that in “The Monopoly of Credit” Douglas declared money and credit identical.) This “National Dividend” would rapidly become virtually the sole source of income for the majority of people:

Douglas offered his vision: “That the distribution of cash credits to individuals shall be progressively less dependent upon employment. That is to say, that the dividend shall progressively displace the wage and salary, as productive capacity increases per man-hour.” (Douglas, “The Monopoly of Credit” p. 151.)

While social credit proponents claim to be uncomfortable with centralized power, giving a central authority such power over individual incomes is a recipe for virtually unlimited power in the hands of whomever determines the appropriate rate of return on invested capital, which in turn will determine the amount of the “National Dividend.” This is true whether the central authority decides to peg the rate of return to the cost of capital or some other measure. The fact remains that the decision is essentially arbitrary and, if enforced even by the indirect means of the National Dividend, tyrannical. It forces a subjective “what should be” on to an objective “what is,” the “what is” already having been determined by the functioning of the market.

However a National Dividend is accomplished, whether direct or indirect (i.e., through direct taxation of what some called "surplus profits" or "unearned profits" and subsequent redistribution, or through monetization and issuance of new currency or credit in ways that result in inflation, a form of indirect taxation), the effect is the same. Debilitating inroads will have been made on the institution of private property. To claim that the amount of the National Dividend belongs to the collective is to destroy private property.

Douglas equated the “National Dividend” with what he called the “cultural heritage” and what Mortimer Adler called the “goods of civilization.” I call them "social goods." Kelso and Adler considered the “goods of civilization” as equally accessible to every educated person and available to be incorporated in all forms of productive capital. Just as the air we breathe or laws or ideas are not subject to the laws of property, the same goes for the “cultural heritage.” (Money, credit and the political ballot are also "social goods" that should be equally accessible under the same conditions to all. Like other parts of the "cultural heritage," money as a medium of exchange, credit as a form of promise, laws, and ideas are not subject to the laws of property, but they are vital to enable individuals to acquire property rights and be free of dependency on others. I think that, on the subject of property rights, Kelso and Adler were on sounder ground than Douglas.

Based on Douglas' erroneous view of property rights in the "cultural heritage", the social credit position argues that what was generated by my property does not belong to me, but to everyone to the degree that it exceeds what is “due” me under that particular arrangement of society. While I may retain legal title, I retain rights to nothing above an amount of profits determined by the central authority, which by that act alone is exercising property in my capital goods, and thus assumes effective (though not legal) title to my assets. As Henry George, another brilliant economic thinker, pointed out in “Progress and Poverty,” the state doesn’t need to take legal title to land and natural resources if it can take the income — the outcome is exactly the same:

Henry George said something regarding the treatment of profits from land use that closely resembles Major Douglas' treatment of the "cultural heritage." George said, “I do not propose either to purchase or to confiscate private property in land. The first would be unjust; the second, needless. Let the individuals who now hold it still retain, if they want to, possession of what they are pleased to call THEIR land. Let them continue to call it THEIR land. Let them buy and sell, and bequeath and devise it. We may safely leave them the shell, if we take the kernel. IT IS NOT NECESSARY TO CONFISCATE LAND; IT IS ONLY NECESSARY TO CONFISCATE RENT…. What I, therefore, propose, as the simple yet sovereign remedy, which will raise wages, increase the earnings of capital, extirpate pauperism, abolish poverty, give remunerative employment to whoever wishes it, afford free scope to human powers, lessen crime, elevate morals, and taste, and intelligence, purify government and carry civilization to yet nobler heights, is — TO APPROPRIATE RENT BY TAXATION." Henry George went on to say, “In this way the State may become the universal landlord without calling herself so, and without assuming a single new function. In form, the ownership of land would remain just as now. No owner of land need be dispossessed, and no restriction need be placed upon the amount of land any one could hold. For, rent being taken by the State in taxes, land, no matter in whose name it stood, or in what parcels it was held, would be really common property, and every member of the community would participate in the advantages of its ownership.” (Henry George, “Progress and Poverty” pp. 405 – 406.)

(Norm Kurland responses to Bill Ryan continue in Part II .)

From : Norman Kurland <thirdway@cesj.org>

Reply-To : thirdway@cesj.org

To : COG Ownership <ownership@cog.kent.edu>, COG Monetary Reform <monetaryreform@cog.kent.edu>, "Ryan, William B." <william_b_ryan@hotmail.com>

CC : "Bridger, Vic" <socred@ecn.net.au>, "Lane, Michael" <OAssoci508@aol.com>

Subject : Kelso & Douglas, how different are they? Part II

Date : Fri, 14 Dec 2001 23:17:41 -0500

Bill,

This is the second of two parts in my initial response to your points comparing the binary economics of Louis Kelso with the social credit economics of Major Douglas, both giants in post-scarcity economic thought.

Our exchange starts with a letter to me dated November 12, 2001 from Michael Lane who pointed out that there are many important common themes in Louis Kelso's binary economics and Major Douglas' social credit economics. While their precise language and their means for achieving their goals might differ, Douglas and Kelso would probably both agree with changes in national economic policy that would:

1) recognize the increased productiveness of the instruments of technology as a basis for national income maintenance policies,

2) discourage redistributive taxation and any form of concentrated power,

3) support the monetization of private sector economic growth,

4) provide access to credit as a fundamental right of citizens,

5) favor full production over full employment policies,

6) favor market-based determinations of wages and prices,

7) protect private property rights,

8) stress the importance of leisure and

9) focus on overcoming artificial

scarcity (poverty) and planning for shared abundance.

I remain encouraged that reasonable people can engage in fruitful debates over differences between Kelso and Douglas in their respective systems logic and means of implementing their shared objectives. Such positive interactions might possibly lead to a combining of "people power" networks to challenge the defenders of the hopelessly flawed economic policies coming from the left, the right and the muddled middle of Washington thinktanks and academia generally. Given the many strengths that would result from a strategic alliance between binary economists and social creditors (perhaps together with the followers of Henry George), I hope that my responses below will lead to a mutually respectful and continuing dialogue with you and Vic Bridger, initially separate from mine with Michael Lane.

Below I will intersperse my responses to the last half of your reactions to some quoted excerpts of mine in my recent exchange with Michael Lane, who, like yourself, is committed to the teachings of Major Douglas. Many of my responses flow from my paper, "A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation," which is confirmed for publication in The Journal of Socio-Economics and can be downloaded by clicking on

http://www.cesj.org/binaryeconomics/price-money.html

Again I want to acknowledge that most of the responses below were initially prepared, with my inputs and editing touches, by my colleague, Michael D. Greaney, a CPA and MBA who serves as volunteer director of research for our Center for Economic and Social Justice. However, I accept total responsibility for this e-mail posting.

<<"William B. Ryan" wrote:>>

<<Norman,>>

<<In response to your dialog with Michael (Lane).>>

<<3. Kurland: "Depreciation generates additional cash flow that

could be used to generate additional purchasing power...">>

<<Depreciation, in double-entry accounting, is charged against

sales. It contributes neither to "cash flow" or "purchasing

power" but subtracts from profit. See my comments below.>>

Not to keep saying it, but depreciation is a non-cash expense. It therefore, in that sense, “contributes” to cash flow and purchasing power by having an expense item recorded which does NOT use cash, thereby freeing up the cash which otherwise would have been so used for other purposes, such as working capital. Depreciation does “improve” the cash flow picture to that extent because virtually every business in the developed world uses ACCRUAL accounting. Depreciation permits the “transformation” of a long-term asset (capital) into a liquid asset (cash) via expensing a pro-rata portion of the capital over time WITHOUT paying out the cash at that time. It’s the same as if you were purchasing the asset with cash as you used it, but you’ve already laid out the cash — now you’re purchasing it, but without having to put out the cash. Over the long term, depreciation does not generate cash, but in the short term, on a period by period basis, it does.

<<4. Kurland: "Say's Law is a mathematical identity. It is

double-entry bookkeeping carried to the level of a national

market-based economy...">>

<<It is nothing of the kind. It has nothing whatever to do with

double-entry accounting.>>

I have difficulty understanding your conclusions regarding Say's Law as refined by Kelso's binary economics. You do not seem to take into consideration the fact that Say’s Law constitutes an equation. As such it is analogous to the basic “accounting equation” (“assets – liabilities = owner’s equity,” which is stated on an income statement as “sales – costs = profits”). This is where Kelso derived his comparison. In context, this is perfectly legitimate. Under Say’s Law, purchasing power is assumed only to the extent of production — not beyond or in addition to production. If production increases, so does purchasing power. If production decreases, so does the ability to purchase that production. This is consistent with the principles of double-entry bookkeeping.

Social credit, however, violates the basic principles of accounting by adding to the system on one “side” without adding anything on the other. That is, the amount of existing production above a certain amount is declared to be a National Dividend, and new money created and inserted into the system in that amount.

Yes, social credit does clear that production, but leaves “excess” money in the system after its job has been done. Say’s Law posits a “steady state,” where the money supply is constant. Kelso refines this by providing that, through the use of the central bank, the money supply is pegged directly to the creation or liquidation and financing of new self-liquidating and ownership-expanding capital and production. New capital should be financed with what Kelso called "pure credit" and repaid with future dividends, thus creating "future savings" by people who have little or no assets or savings today.

Kelso's binary system would automatically provide sufficient demand to clear production and then retire the money IF all income generated is used either to retire the capital formation debt (and thus remove it from circulation, “liquidating” the capital) or for consumer purchases (liquidating the production) — from whence it passes as dividends to the new capital owner who uses it to liquidate his share of newly formed capital through repayment of his capital acquisition debt.

Social credit upsets the steady state of Say’s Law and violates the principles of double-entry bookkeeping by adding to one side while subtracting from the other side. Of course Douglas rejected Say’s Law — it CANNOT work in his system. The accounting equation underpinning double-entry bookkeeping and supporting Say’s Law demands that you either add to both sides, or subtract from both sides. Mixing the two results in permanent disequilibrium, as Keynes noted and, in fact, on which he based his system. You cannot solve the inherent flaw in Keynesian economics by exaggerating it. You can only do so by countering it and equalizing the situation as Say’s Law demands, and which Kelso figured out how to do.

<<Indeed, its reducio ad absurdum is Douglas' A + B theorem.>>

<<Except for these brief comments I'll not dwell too much on it

here. We are preparing a forthcoming discussion on the

subject that will go into great detail.>>

<<I refer you to the diagram attached, which you may have seen

before.>>

<<Consumer income "A" is depicted in the diagram by the curve

at T2. It is the flow of purchasing power being placed into the

hands of final consumers through salaries, wages and

dividends. But the costs of production in their totality (curve

T1 in the diagram) are "A + B" since payments are being

made into account balances held by firms as well as

consumers. "A + B" is always greater than "A" at every point

in time, assuming the condition of growth.>>

<<This dilemma is resolved in double-entry accounting by

delaying the expensing of costs through time so that costs

incurred today are charged against sales in the future which

are prospectively greater than sales today. The delay is

accomplished through various techniques such as

depreciation.*>>

<<The expectation of the entrepreneurs is that sales will exceed

expense allowing them to make a profit. That is their

incentive to invest and criterion of efficiency.>>

<<There exists, however, no mechanism in double-entry

accounting to accommodate the parametric shift of an

increasing ratio of "B" to "A" flowing from labor

displacement--increasing capitalization or "round-about-ness"

in production. Consumer income, in terms of purchasing

power, therefore is falling in comparison to the costs of

production. Since the costs of production are being charged

against sales (the curve at T3) into final consumption in their

totality, and since sales must comparatively fall if income is

comparatively falling, the rate of entrepreneurial profit must

commensurately fall--in perpetual discouragement to

production.**>>

Bill, you contend that <<There exists, however, no mechanism in double-entry accounting to accommodate the parametric shift of an increasing ratio of "B" to "A" flowing from labor displacement--increasing capitalization or "round-about-ness" in production.>> Again, for reasons explained above, cash freed up by accounting for depreciation can be used to close this purchasing power deficiency, even more so under a binary economic system where capital ownership and profit distributions are widespread.

<<What manifests is the increase in the variety of goods and

services continuously made available through the

implementation of science, technology and entrepreneurial

initiative.>>

<<But production for the masses is demand constrained.***>>

<<"Poverty" remains endemic amidst "Plenty.">>

Neither of the above two conditions would exist under a market economy that is structured according to binary economic principles. It will bring about rapid growth without inflation.

<<*Which is accounting bias against labor. If, for example, an

entrepreneur can increase productivity, say by ten percent at

the same cost, by either of two methods: 1. By improving

worker training; or 2. By purchasing a machine--he is inclined

to purchase the machine. It is more "profitable" for him to

purchase the machine since he is permitted to delay its

expensing through depreciation.>>

The presumed accounting bias against labor is a “non-issue.” If an entrepreneur can increase productivity ten percent either by purchasing a machine or hiring additional workers, both at the same cost, he is indifferent as to which he chooses. The decision is affected by other factors.

Assuming everything is exactly equal, e.g., he can hire one worker for one year for $10K, or purchase one machine that will work for one year for $10K, there is no accounting bias one way or another.

If he hires one worker for $10K/year for ten years, or purchases a machine for $100K with a useful life of ten years and straight-line depreciation of $10K/year, there is still no accounting bias one way or another. The CFO will advise the one making the decision that, as far as the numbers go, “Accounting” is completely indifferent. “Personnel” however might point out that machines don’t get sick, don’t demand pay increases and don’t go on strike. Any “bias” is not in accounting, but in industrial and human relations.

Human beings tend to make poor slaves. Machines make excellent slaves.

Depreciation does not influence the decision unless, through accelerated depreciation (which is more advantageous when taking into consideration the present value of money and the prospects of inflation), the expense of purchasing a machine can be loaded up front, that is, expensed closer to the actual time of purchase. “Front loaded” depreciation would thus make it more advantageous to purchase the machine rather than hire a human worker because it would NOT be spreading out the expense as much as possible. It’s more profitable to recognize an expense as fast as possible.

That is why the IRS has regulations prohibiting the practice as much as possible. It’s not easy to expense large purchases of capital that soon for tax purposes.

Accelerated depreciation allows permanent deferment of income taxes as the capital is replaced while still theoretically productive, but which has been fully depreciated — expensed — closer to the time of acquisition. That is why you sometimes find companies disposing of perfectly good assets, often at what is technically a loss. The tax savings make it profitable to buy new capital and depreciate it as fast as possible.

It costs money to delay recognition of an expense. If there is a choice between hiring ten workers to do a job that will take one year at $100K or purchasing a machine for $100K that will take one year to do the same job but be expensed over ten years, the bias is in favor of the workers — not the machine. Profits are greater the faster you can expense an item because of the time value of money.

<<**Which is why investment in the aggregate is not

"self-liquidating.">>

Investment in the aggregate would be self-liquidating in a binary economy, with capital credit insurance and reinsurance in place to offset the risk of non-performing debt and with rising capital incomes to absorb all marketable goods and services.

<<***Precluding the realization of productive potential.>>

Binary economics provides a logic for unleashing full productive capacity of any economy.

Social Credit and Inflation

The social credit program further erodes private property by not taxing profits directly, but does so indirectly. That is, the amount of the National Dividend is determined for the nation as a whole (“collectivized”), and general claims issued to the population in the form of new money (cash credits issued as dividends on the national debt and not repayable). Adding new money without linking it to the formation of wealth-producing assets or newly-produced goods is the classic definition of inflation. Social credit adds new money in the form of “dividend cash credits” (or, if you prefer, “a generalized accounting adjustment in augmentation to effective demand”) linked to the consumer goods resulting from current production, not , as Kelso proposed, to the amount of new capital needed to meet future consumer demand.

Were the money supply to remain unadjusted as productive output increased, prices would fall in obedience to the laws of supply and demand. In monetary terms, each individual’s holdings of currency and financial assets would be worth more, he would have an increase in purchasing power — each unit of currency would purchase more goods and services.

Were the central authority to monetize the amount of the National Dividend and distribute the new money to the citizens, the purchasing power represented by the new money would be shifted from existing financial assets in the proportion that the new money bears to the old. (Money is “fungible,” and you cannot have a sound economy anyway with different values assigned to currency depending on when or how it was issued; it’s been tried.) Everyone who had holdings of financial assets would have been subject to a hidden tax that removed the increased purchasing power that would otherwise have resulted from a lowering of the price level.

It was the declared intention of Major Douglas to abolish the income tax. The hidden tax of such an inflationary procedure would allow a social credit economy to carry out Douglas' plan. There would still be a tax, of course. It would, however, not be as obvious as the income tax. It would be the hidden tax of inflation levied on the property of holders of financial assets, i.e., assets that are measured in terms of current units of currency and are consequently not “inflation proof.”

Producers would remain with their wealth intact. Productive assets (“capital” in binary economic terms) are automatically “inflation proof.” This is because the prices for output can be increased to match increases in the price level (and thus the cost of production) —assuming, of course, that foreign producers don’t nip in and take advantage of being able to produce and take away domestic markets with the added advantage of their more stable currency. Douglas assumed that this would not happen under social credit because such warlike aggression would be eliminated by each country producing only for its own use. (Now wouldn't that be a great argument for America: for the sake of world peace, let's balkanize the global economy, close down the World Trade Organization and stop the globalization process in its tracks? Protectionists of the world unite!!) (See Douglas, “The Monopoly of Credit” pp. 95 – 105, ‘The Causes of War.’)

Owners of capital under social credit would receive higher prices for their goods and services. There would be a double incentive. Not only would there be greater profits in terms of more units of currency which caused the inflation, with the abolition of the income tax, producers would be immeasurably better off because their profits would not be taxed. This would increase their profits in real terms as well as in current currency unit terms.

Because the inflationary bias of social credit results in what is in effect a property tax on financial assets, the hidden tax burden of inflation that replaced the income tax would fall on anyone foolish enough to have saved money. Those with nothing or whose wealth was in some form of equity would be the beneficiaries. The former would benefit by receipt of their dividend checks, the latter by being relieved of the burden of direct income taxation. It would not be too long before people realized that the only ways to come out ahead would be to be born rich with significant holdings of productive assets, or to divest yourself of financial assets and labor income, i.e., spend your savings and quit work.

To do otherwise would be counter-productive. You would otherwise be in the position of earning money for somebody else to spend. As noted above, Douglas realized this and counted it a positive good that people would no longer “work” for their income, but derive it entirely from the National Dividend.

Any tax is automatically a disincentive to productive activity. The disincentive of inflation falls on people 1) whose wealth is in the form of financial assets, 2) whose income is fixed, or 3) whose income is dependent on something that is not directly responsible for the bulk of production. As a disincentive, inflation causes, respectively, 1) drops in savings rates and the accumulation of financial assets (spend it fast before it loses more value), 2) poverty among those with fixed incomes (the aged in the United States share with single mothers and their families the most rapid growth of poverty), and 3) lowering of the employment rate as people discover they cannot live on labor income, the bulk of which in today’s society is redistributed capital income, and producers hesitate to keep or add worker who they think represent a drag on the productive process. As inflation increases, people tend not to want to work for wages because the wage rate tends to lag behind the inflation rate. With the social credit plan, virtually any incentive to work for increasingly inflated currency units would be removed, particularly in that the hidden tax of inflation would be constant, and be taking an increasing proportion of labor income through the loss of purchasing power.

Social credit would force most people into increasing income dependency on the state via the National Dividend, and the most logical activity will be doing nothing of economic value. Bad as the wage system is, absent a program of expanded capital ownership, it is the only legitimate means aside from charity whereby most people can gain income tied to productive inputs.

Social credit essentially divides up the financial savings of the economy and redistributes it among everyone.

Purchasing power will flow into new productive assets ("capital breeding capital") as the wealthiest producers receive property income and use it not for consumption, but for investment in new capital. Shrinking consumption incomes to invest in new capital reduces consumer demand in the economy. Social credit then increases the price level at the same time as the increased money supply made available via the National Dividend bids up prices. Productive capacity will increase, to the point of immense over-capacity, as producers invest income that cannot be used for consumption purposes. The increase of this investment pool will be driven in part by the greater profits available made through the social creditors’ abolition of the confiscatory income tax, profits that under the Keynesian system are in part taxed away to redistribute.

Ordinarily prices would decrease under over-production as goods failed to clear at market prices. The paradox inherent in Keynesian economics and reflected in social credit, however, means that the price level will increase due to the increase in the money supply via payment of the National Dividend. This will be exacerbated by the decrease in the value of the currency as the “backing” is removed when the consumer goods purchased with the National Dividend are consumed. While the “backing” is removed, the new money (or “cash credit”) remains circulating asset-disconnected within the economy. Prices will then increase even more rapidly, making it impossible to print enough money to purchase the production at the higher prices.

This is the classic scenario of “hyperinflation.” Hyperinflation differs from “ordinary” inflation in that ordinary inflation consists of adding to the money supply without increasing productive ability at the same time. This drives up prices, more or less in ratio to the amount of new money added to the system.

The rise in the price level is limited by the amount of new money printed.

Hyperinflation, however, results when backing is removed from a currency, prices rise in consequence of an increasingly valueless currency, and the currency-issuing authority attempts to “catch up” to the rising price level by supplying more and more currency to clear production at market prices.

Since the price level in a situation where a currency has effectively no value is infinite for all intents and purposes, the price level rises FASTER than money can possibly be created. To put it another way, regular inflation fuels the rise in the price level by causing increasing units of currency to “chase” goods and services that are decreasing, are not increasing, or are not increasing as rapidly as the money supply.

Hyperinflation fuels the rise in the price level by removing the value of the currency by taking away its backing. This breaks the link between the amount of money in circulation and the amount of goods and services on the market. The money no longer represents purchasing power. Sellers gradually realize that no matter how high they price their goods, the amount of currency they take in is worthless. The prices of goods and services will begin to skyrocket. The money-issuing authority, if it lacks the power to replace the currency with something that has value, attempts to keep up with the price level by creating more and more money, but that is irrelevant. How much money is in circulation becomes a non-issue because whether you have one unit or a 100 trillion, they are worth the same: nothing. In pure hyperinflation, where the currency has no value whatsoever, it wouldn’t matter how much currency you had, you couldn’t buy anything — the price would be infinite. You can determine a price level by dividing the total goods and services by the money supply, but if the money supply isn’t worth anything, you’re dividing by zero.

Such hyperinflation was observed in Germany in 1923 – 24, where the Reichsmark hit 14 trillion to the dollar on the black market before Schacht forced through his reforms to restore backing to the currency. Prior to that, the Allies had removed virtually everything of value from the country as war reparations and the Reichsmark, formerly backed by gold, had nothing to back it. The quasi-government had no power to tax (and there was nothing to tax anyway), and could not make good on the value stated on the face of the currency, regardless of the amount. The only brake on the hyperinflation was caused by the fact that people never completely lost trust in their currency, or they would simply have stopped using it.

Admittedly, this happened in many cases in Germany with a complete change to a barter economy and the issuance of “Notgeld” denominated in terms of commodities instead of Reichsmarken and Reichspfennigen.

There is a way to operate a social credit program and avoid hyperinflation: tax producers directly in the amount that the government wishes to distribute as a National Dividend. That is, openly admit that the National Dividend constitutes a serious inroad on the institution of private property, and take advantage of it by confiscating directly from the producers everything above the presumed legitimate return on capital in the form of income tax. This can then be redistributed as a National Dividend to the citizens without fear of inflation. Income that would ordinarily be turned into new capital would instead be used to pay the National Dividend tax. The disincentive to produce would be shifted back to the owner of capital and away from people on fixed incomes, those with financial assets, and workers dependent on wage income.

Obviously, the very logic of Major Douglas' vision would be undermined by resorting to redistributive taxation. Douglas and Kelso both advocated the democratization and monetization of credit and universal access to future profits from the productive capital to achieve faster rates of sustainable private sector growth, the only question is which one would achieve that goal without inflation, without redistributive taxation and most consistent with free markets, traditional rights of private property, and sound principles of economic justice. I think Kelso offers the best answer to that question.

Norm Kurland

Center for Economic and Social Justice

E-mail: thirdway@cesj.org

Web site: http://www.cesj.org