salvation through inflation the economics of social credit phần 5 pptx

Inother words, Social Credit rests on the argument that there is a separation between production and consumption under talism, and that the State has an obligation - not a moral obli-gat

Who Represents ihe Consumers? 103Major Douglas, like virtually all of capitalism’s critics, did notunderstand the doctrine of consumers’ sovereignty He honestlybelieved that producers dictate terms of sale to consumers Hewrote:

Let me repeat - the only true, sane origin of production isthe real need or desire of the imiividual consumer If we are tocontinue to have co-operative production, then that productivesystem must be subject to one condition only - that it deliversthe goods where they are demanded If any men, or body ofmen, by reason of their fortuitous position in that system, at-tempt to dictate the terms on wl~ich they will deliver the goods(not, be it noted, the terms on which they will work), then that is

a tyranny, and the world has never tolerated a tyranny for verylong~b

There are indeed tyrants in the capitalist economy theconsumers They are merciless They keep asking producersthis question: “What have you done for me lately?” And thisquestion: “What can I expect from you tomorrow?” But MajorDouglas saw the producers as the tyrants He therefore failedutterly to understand capitalism’s system of economic represen-tation: the owners of capital must serve the consumers or sufferthe consequences, namely losses or forfeited profits It is theproducer’s opportunity to make a profit that serves the con-sumers as their hammer: share owners are pressured to electmanagers who serve consumers well - with the least waste ofscarce resources

Because Major Douglas misidentified the bankers as the truemasters of the economy, he misidentified them as the hiddentileves in the system Central brokers - those who use the State

to gain a monopoly over the control of money and credit were indeed thieves, and remain thieves But this is not becausethey are bankers - agents of private depositors who lend mon-

-46 Control and Dislribuiioa of Productmn, p 13.

104 SALVATION THROUGH INFLATION

ey This is because the State has used its authority to create aprivate or semi-private monopoly over money Douglas neverunderstood the difference between commercial banking andcentral banking He therefore never proposed a workable rem-edy for the evils he perceived In the name of pragmatism -

“workability,” as he put it47

- he offered a reform that couldnot possibly solve the problem he identified, as we shall see

Summary

1 Jesus told Satan that man lives by the word of God

2 Magic is not the way to wealth

3 Obedience precedes rewards: the way to wealth

4 Douglas focused on society’s bread, not God’s word

5 He announced that he was not bringing a moral criticism ofcapitalism, merely a practical one: pragmatism

6 Douglas said: “That is moral which works best.”

7 Christianity teaches: “That which is moral works best.”

8 There is no moral neutrality

9 Pragmatists are secret moralists

10 Someone has to be the boss

11 Capitalism says that the consumers are the boss

12 Corporations establish that shareholders are the legal ers

own-13 Shareholders, in order to profit, must hire managers whoserve consumers well

14 Shareholders exercise control by voting: at shareholdermeetings (legal control) and by selling their shares (economiccontrol)

15 The stock market is a giant auction

16 Producers compete against other producers

17 Consumers compete against other consumers

18 There are two forms of ownership: legal and economic(stewardship)

47 Ibid., p. vii.

Who Refiresents the Consumers? 105

19 Douglas did not understand consumers’ sovereignty

20 He thought bankers are sovereign

21 He did not believe in majority political rule

22 He opposed Christian law irl society

23 He blamed the financial system for unsold goods

24 He did not blame the 1920 recession on prior monetaryinflation: sending false signals to producers

25 When the monetary inflation ended, the recession began

26 It ended less than two years after his book appeared

Who should control distribution? This question has dividedeconomists almost fi-om the beginning We need to ask our-selves several questions Which people should we trust? Statebureaucrats who can rarely be fired if they price things incor-rectly? Or producers who lose their own money if they pricetheir output incorrectly? Which group possesses greater power

to coerce consumers, a monopolistic government bureaucracy

or competing producers? Which group poses the greatest threat

to our freedom? Which group is more likely to play God? Inother words, who should be trusted by consumers: profit-seek-ing producers or Civil Service-protected bureaucrats?

The Unity of Production and Distribution

One of the most important errors in economics is to imaginethat it is possible to separate free market production from

Who Should Control Distribution? 107distribution without affecting future production EconomistMurray Rothbard has said it well,: under capitalism, productionand distribution are an unbreakable process They are two sides

of the same coin

In the free market process, therefore, there is no separationbetween production and “distribution.” There is no heap some-where on which “products” arc arbitrarily thrown and hornwhich someone does or can arbitrarily “distribute” them amongvarious people On the contrary, individuals produce goods andsell them to consumers for money, which they in turn spend onconsumption or on investment in order to increase future con-sumption There is no separate “distribution”; there is onlyproduction and its corollary, exc:hange.1

If producers are not allowed to bargain with final consumers

or middlemen regarding the terms of sale, there will be nomic consequences on the p reduction side of the process.Whatever producers decide to produce is heavily dependent onthe nature of the distribution system It is not possible, there-fore, for thieves or government officials to confiscate privateproperty or exercise control over private property especiallycapital goods, without affectin{; the entire production system.Producers will seek to escape these controls, even if they mustcease producing As the old slogan goes, “You can’t redistribute

eco-it if there isn’t any.”

We ask: “Who owns this?” Here is the theoretical answer:

“The person who has the legal right to disown it.” If you cannotlegally sell it, you do not legally own it: At most, the so-calledowner may be allowed to consume it This kind of ownership

1 Murray N Rothbard, Man, Economy and State: A Twatise on Econornit Pnnci#es

(Princeton, New Jersey Van Nostrand, 1962), pp 408-9.

2 F A Harper writex “The corollary of the right of ownership is the right of disownership,” Harper, Liberty: A Path to Its Recoverj (Irvington, New York: Founda- tion for Economic Education, 1949), p 106.

108 SALVATION THROUGH INFLATION

subsidizes a particular kind of use: consumption, which is arestricted form of disownership

We ask: “Who’s in charge here?” The answer, in the field ofeconomics, is: “The one who is legally authorized to make thesale.” In most transactions, this means a seller of goods and aseller of money (called the “buyer”)

When we begin a search to discover those who have

econom-ic control over any institution, a familiar rule of thumb is this

one: follow the mong Those who collect the money (assets) and

distribute it are the representatives of the legal owner or ers In other words, the structure of institutional authority isintimately linked to lawful control over the use of the institu-tion’s assets

own-Is Capitalism an Inefficient System?

As is so often the case with the critics of capitalism, MajorDouglas’ criticism was that today’s capitalism cannot produce anabundance of goods and services The ftilure of capitalism, heinsisted, is the failure of its distribution system Capitalism’sindustrial efficiency is potentially very high, but this efficiencycannot be attained through free market ownership, he main-tained The failure is supposedly on the distribution side Inother words, Social Credit rests on the argument that there is

a separation between production and consumption under talism, and that the State has an obligation - not a moral obli-gation of course, as Douglas assured us repeatedly -to step inand correct the failure on the distribution side This is theargument of every socialist and every defender of the “mixedeconomy,” i.e., a mixture of private ownership and governmentcontrol

capi-Where Is the Evidence?

D6ug1as never offered any statistical evidence supporting hisargument that capitalism’s productivity is being significantly

Who Should Control Distribution? 109

hampered by its distribution system He cited as economic fact

a rumor regarding the opinion of H L Gantt, one of the ples of scientific management picmeer Frederick Taylor Taylorwas the man who introduced time-and-motion studies in the1880’s Gantt invented the famous Gantt chart for diagramingprojects from start to finish Dou@as wrote: “The late Mr H L.Gantt, one of the most capable arid enlightened industrial engi-neers that A-nerica has producecl, is reported to have said thatthe industrial efficiency of the lJnited States was about 5 percent in 1919.”3 Reported by whom? Reported where? Douglasnever said

dkci-On the face of it, Gantt’s reported statement is preposterous

I have little doubt that Mr Gantt never said anything like this

If he did, his observation has never been substantiated by anyeconomic historian Taylor and his disciples would spendhours, even weeks, studying the motions of a single worker,trying to locate tiny inefficiencies, and then retraining him tofollow a new pattern These refinements did produce increases

in output, but nothing on the scale of twenty to one (5% ciency to 100%) To reduce a nation to five percent of its indus-trial efficiency cannot be accomplished by anything short of full-scale nuclear war Nevertheless, Douglas used this and otherequally preposterous estimates of industrial inefficiency againand again in his critique of capitalism

effi-Douglas expected his readers, to take his word for a series ofinconsistent facts regarding the underlying, “untapped,” pro-ductivity of modern capitalism He refused to present evidencefor his verbal estimates His line of argumentation was anythingbut scientific He had almost no information about the output

of capitalism in his era This seriously compromises his work

In book after book, Douglas repeated something like thefollowing: if the industrial system someday could operate at amere 75 percent of its potential efficiency, today’s level of pro-

3 Cmdit-hwer and Democracy (London: Cecil Palmer, 1920), p 16.

110 SALVATION THROUGH INFLATION

duction could be achieved by “the same number of personsworking one-fifteenth of the time they now work - i.e., aboutthirty minutes per day instead of about eight hours, or by one-fifteenth of the present number of persons working the samehours.”4 This means that the economic output of workerscould be increased by a factor of 15 to one by operating theeconomy at only 75 percent of its present unused potential.This statement is an example of Douglas’ totally unsubstantiatedrhetoric He offered no evidence of any kind Yet his followerscontinue to regard him seriously as the pioneer of a theory ofscientific pricing based on rigorous economic statistics

He made similarly outrageous and unsubstantiated claims inhis first book “It has been estimated by whom? - GN] that twohours per week of the time of every fit adult between the ages

of 18 and 45 would provide for a uniformly high standard ofphysical welfare under existing conditions .“5 Only twohours per week! Well, perhaps just a bit more A few pageslater, he wrote: “The exact figures are beside the point, butsomethhg over three hours’ work per head per day is amplefor the purpose of meeting consumption and depreciation of allthe factors of modern life under normal conditions and properdirection.”s Either two hours a week or three hours a day

“The Facts Are Iwelevant”

Notice his amazing admission “The exact figures are besidethe point.” Beside the point? Exact figures were absolutely vital

in proving his case that the free market is woefhlly inefficient.Without such evidence, he was an emperor with no clothes, acritic without proof This from the man who proposed, as we

4 Crsdit-Power and Democracy, p 17 “ the employment of not more than 25 per cent of the available labou~ working, let us say, seven hours a day.” The intro- duction- of a horse-power-hour of energy could “displace at least ten man hours.”

Social Credit (3rd cd.; London: Eyre & Spottiswoode, 1933), p 18.

5 Economic Dsnsocraq (2nd cd.; London: Cecil Palme~ [1920] 1921), pp 86-87.

6 Ibid., p. 105.

Who Should Control Distribution? 111shall see, that accurate statistics are absolutely crucial for eco-nomic planning by the administrators of the nation’s socialcreditkocial dividend: the State’s credit masters Major Douglaswas dressed in rhetoric, not science His followers have neverblinked an eye.

Why, then, has such a cornucopia of either leisure or

materi-al productivity not been attained under capitmateri-alism? He offeredthii answer: “As the economic dktribution system stands atpresent, such a condition of afkirs is impossible of attainment,because, although the goods wcluld be produced, the purchas-ing-power to buy them would not be distributed.’” So, it is a

luck of purchasing power in the had of consumers that is wholly to

blame He called this “sabotage: and labeled it “the ing feature of contemporary industry .“ He said this sabo-tage is “solely due to the blind effort to equate purchasing-power to production without altering the principles of price-fixing.”s (Not a very clear statement, is it?)

outstand-The Real Cause of Economic Contraction GovernmentThis criticism of the free market’s distribution system is atthe technical heart of his proposal to reform capitalism (Theethical heart is Douglas’ denial of the legitimacy of economicsanctions.)g There supposedly is insufficient purchasing powerwithin the capitalist economic system This is a fam~lar criticism

of capitalism in every era, but especially during periods ofeconomic depression The problem is, this criticism is wrong Itfails to identify the cause of low sales: setters’ ignorance about theproper price at which to sell their inventories

The problem of distribution is not a system-wide lack ofmoney or credi~ the problem is a general lack of accurate

7 Credit-Pmwr and Democracy, p 17.

8 Ibid., p 17.

9 See Chapter 11, below.

112 SALVATION THROUGH INFLATION

information about consumer demand and sellers’ tion,]o coupled with personal bull-headedness against loweringselling prices Economy-wide incorrect information is almostalways the result of previous policies of fiat money inflation by

competi-a ncompeti-ation’s centrcompeti-al bcompeti-ank.1 * A second ccompeti-ause of the contrcompeti-action is

an increase in tarifEs or import quotas.12 A third cause is thegovernment’s decision to pressure businessmen not to lowerselling prices and/or pressure not to lower wages.ls A fourthcause of stagnation: the government raises taxes, especiallytaxes on profits and capital gains, discouraging entrepreneursfrom creating new wealth and new jobs

In 1929-38, all four factors were present: prior monetaryinflation that came to a halt around 1929, plus a worldwidetariff war begun in 1930, plus government price floors, plushigher taxes (in the U S., under President Franklin Roose-velt) 14 This is why the Great Depression was the worst inmodern history In all four cases, the root cause of the econom-

ic contraction is either civil government or its licensed listic agent, the nation’s central bank

10 Fritz Machlup, The Economics of Sellers’ Competition (Baltimore, Maryland: Johns Hopkins University Press, 1952).

11 Ludwig von Mises, Human Action: A Treatise on Ecorunaics (New Haven,Connecticut: Yale University Press, 1949), ch 20

12 Jude Wanniski, The Way the WWId Winks (New York Basic Books, 1978), pp 125-42.

13 Murray N Rothbard, Amerkah Great Depression (Princeton, New Jersey Van Nostrand, 1963), ch 8.

14 Wanniski, World Worksp 145.

Who Should Cent’ol Distribution? 113 the market has shrunk In other words, ~alling demand is caused

by shrinking markets Let us put it another way: falling output is caused by shrinking markets It is the same process

Thk should not be difficult to understand If some militarysaboteur were to find a way seer etly to drug a nation’s workers

so that their output falls by half, what would happen to marketdemand in that nation (ignoring foreign bank credit and for-eign trade)? It would fall by approximately half Why? Becausemarket demand stems from men’s productivity If a worker has

less to offer for sale, his demand for goods is reduced tivity determines demand.

Produc-The same conditions of reduced productivity apply whenmarkets shrink When productivity falls, demand falls Produc-tivity falls because the division of labor falls Specialization ofproduction is reduced The more specialized a business or aworker, the more painful tht: readjustment when marketsshrink, except in those rare cases where demand stays high,such as brain surgery (People who need brain surgery cutbackspending in other parts of their budget.)

A free market economy is a gigantic auction Like an auction

in which many of the participants go home, and those buyerswho remain become fearful of makkg bids at the older, higherprice level, so are world markets It takes time for sellers ofgoods and sellers of labor to adjust psychologically to the newconditions We are all slow learners Economic losses and un-employment help speed up our learning process

Let’s Make a DealRecall my suggestion: whenever you are confused about howthe free market works, remember the two imaginary parrots.The economic theory parrot says, “Supply and demand.” Theeconomic policy parrot says, “High bid wins.” With this inmind, consider the “no sale” problem

If I want to sell you something at twice what you are willing

to pay, is this the fault of capitalism? Put the other way round,

114 SALVATION THROUGH INFL4TION

if you want to buy something that I am selling, but for only half

of what 1 am asking, is this the fhult of capitalism? No, it is thefiult of ignorance Either I think it is worth too much or youthink it is worth too little Perhaps we are both correct

When I say “You are offering to pay me too little,” what do

1 mean? I mean that you have offered me less than what I believe sonwone else besides you is wihg to pay When you say “You are asking too much,” you mean that I am asking more than whut you believe an~one besides me is willing to sell it It is a question of beliefabout the conditions of the market, i.e., belief about the nextbuyer or seller A seller thinks there is another buyer justaround the corner A buyer thinks there is another seller justaround the corner

We may both believe incorrectly In any case, 1 can’t sell youthe item at my asking price So, 1 have six choices (1) I canconsume it myself (2) I can pay to put it in storage (3) I canspend money and advertise it (4) I can lower its price (5) I cangive it away (6) I can destroy it The sixth choice may seemcrazy, but if it costs me too much to store it or transport it, and

if the law does not allow me to give it away (e.g., food that hasnot been approved by a public health inspector), then it may besensible to destroy it The choice, however, is legally mine 1 amthe legal owneK

Different people will choose different solutions to this “nodeal yet” problem But one thing is certain: the problem is not

a lack of purchasing power in general My problem is a lack ofspecific demand for my product or service, given the presentarray of prices in the economy But this is not your problem asthe potential buyer Your problem is that 1 refuse to lower myselling price Our problem is individual It is not capitalism’sproblem in general

If the government or the banks print up a lot of new money,this may or may not help me to sell my particular item, but itsurely does not make everyone richer Only one thing canmake everyone richer: an increase in everyone’s productivity

Who Should Conhvl Distribution? 115

~Is comes through increased thrift and increased capital mation, especially knowledge Wealth does not come through amagic word or a magic pill It dcles not come from printing uppieces of paper with pictures of officials on them

for-The Problem According to Douglas

Douglas understood that productivity is crucial to prosperity

He believed that capitalism’s low productivity – incredibly lowcompared with what supposedly could be produced with thesame workers, raw materials, and machinery - is the result of aflawed system of credit He wrote: “The industrial machine is alever, continuously being lengthened by progress, which en-ables the burden of Atlas to be lifted with ever-increasing ease

As the number of men required to work the lever decreases, sothe number set flee to lengthen it increases.”15 What, then, istie economy’s problem? Simple, he said: “ owing to thedefective working of an outworn financial system, the lengthen-ing of the lever has been largely offset by artificial obstacles toits beneficent employ merit “ lti

Douglas began with the example of a factory A factory hastwo aspects, he said: (1) “a producer of goods”; (2) “a purelyfinancial aspect.”17 It distributes purchasing power to individu-als through “wages, salaries, and dividends”; it also serves as “amanufactory of prices - financial values.”18

Manufacto~ of Prices?

How a factory manufactures prices is unclear A hctory sellsgoods to buyers The selling price is initially established by thethose in the factory who are assigned this task, but what theysay is irrelevant if consumers refuse to buy A @“cc is ratified or

15 Credit-Power and Demamacy, p 20

16 }bid., p. 20

17 Ibid., p 21

18 Ibid., p. 21.

116 SALVATION THROUGH INFLATION

not ratified sokly by the buyers If the producer sets the price toohigh, he will see his profits reduced because of lost sales lf hesets the price too low, he will see his profits reduced because oflower total money income, since he will sell out his inventoryyet there will still be buyers waiting in line to buy more Aproducer sets prices only as the economic agent of consumers.Consumers can and will veto every fwice which they regard as unsatis- factory.

Consider a simple example A theater owner wants to makemoney by hiring a performer to perform on a particular date

At what price should he sell the tickets? At a price that willmaximize his income If he sells too low, there will be a line ofdisappointed ticket buyers He loses the money they wouldhave spent If he sells too high, there will be empty seats thatcould have been sold if the price had been lower He loses themoney that he might have gained by lowering the price So, theperfect price for seats is that price which fills every seat, getsthe maximum price per seat, and leaves nobody waiting out-side This price structure clears the market.

The fact is, the theater owner is not a manufacturer of

pric-es He is “a seller of seats,” meaning he is a provider of ment for performers and a provider of entertainment to con-sumers He is a deal-maker, a “putter together” of buyers andsellers So is a factory manager He is a putter-together of work-ers, raw material owners, and buyers of products He sets initialprices, but only as an economic agent of consumers He islegally authorized to set prices, but the consumer is legallyentitled to announce, “Not today, mate!”

employ-Consumer Sovere@ty: Economics

The consumer has the upper hand, economically speaking.There are lots of things he can buy with his money He is flexi-ble How many things can a producer do, personally with apile of unsold inventory? ~ong is defined by free market econ-

Who Should Control Distribution? 117

omists as the most marketable good.lg This highly marketablegood is what the consumers own This is not what producersown Producers own highly specialized goods These goods arevaluable only in a limited market Producers are more inflexiblethan consumers in the use of their assets because these assetsare useful only in very narrow areas of consumer satisfaction.Consider a pair of custom-made shoes What if the intendedconsumer decides not to buy? There is a very limited marketfor this specific pair of shoes Because the consumer owns mon-

ey, the most marketable commodity, he is economically eign, not the producer

sover-Factory managers do not control distribution Consumerscontrol it by buying from one producer and not another, or bysaving money rather than buying from anyone The consumer

is sovereign in a free market economy This is what SocialCredit denies It does so, as we shall see in Appendix A, on thebasis of something called the A.+ B Theorem

ConclusionMajor Douglas asserted without proof that today’s capitalism

is about 95 percent inefficient He stated without proof thatunder Social Credit, families could live comfortably if the head

of the household worked only three hours a day Or perhapstwo hours a week This was total utopianism He never offered

a shred of statistical proof for all of this

The cause of economic contraction is government tion into the economy: prior intervention (increasing the moneysupply) and present intervention n (raising taxes and tariffs, andestablishing mandatory price floors) Goods and services will beexchanged when buyers and sellers voluntarily decide that theprice is right It may take time fm buyers or sellers to persuadethe others that the deal is a good one This is because we do

interven-19 Ludwig von Mises, The Tlseou of Money and Credit (new cd.; New Haven Yale University Press, 1953), p 32 This book was first pubtished in 1912.

118 SALVATION THROUGH INFLATION

not have perfect knowledge We may hesitate to buy or sellbecause we expect to get a better deal shortly When this hope

is thwarted long enough, we will usually make the deal

Producers do not set prices except tentatively, to test themarket The consumers are sovereign If consumers refbse tobuy at listed prices, it does not matter that producers have thelegal authority to set prices A listed (i.e., hoped-for) price is anadvertisement to sell; until a sale takes place at the legally an-nounced price, this price is nothing more than an offer to sell.Only a consumer can translate this offer into a realized sale.Thus, the consumer is sovereign, not the producer The con-sumer has the ability to say “no.”

summary

1 To discover economic control, follow the money

2 Douglas claimed that capitalism operates at 5 percent ofmaximum efficiency

3 There is no proof of any such estimate

4 He blamed the distribution system for this failure

5 The problem is a lack of purchasing power

6 This criticism is wrong

7 The reason goods do not sell is as follows: (1) buyers refuse

to buy at the price asked by the sellers; (2) sellers refise tolower the price (Same argument, stated two ways.)

8 Government causes economic contractions: prior monetaryinflation, tariffs and import quotas, price floors, and new taxes

9 This shrinks markets and therefore shrinks productivity

10 There are six things a seller can do when an item does notsell

11 A permanent lack of sales has nothing to do with a lack ofcredit, but instead with a failure of sellers to lower prices

12 Printing money will not increase everyone’s wealth