The World of Economics Since 2008

If you go to http://www.pelicanweb.org/solisustv11n09page4.html, this is what you will find. Your comments are most welcome.

The World of Economics Since 2008

Carmine Gorga

September 2015

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With the welcome addition of billionaires to the chorus, nearly everyone agrees that we are on the verge of a new financial catastrophe. The question that is still open is when, not if. What is the state of preparedness of the economics profession?

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The state of preparedness of the economics profession

Unless they are keeping it a secret, or the journals are not publishing it and the press is not reporting it, nothing has changed in academia since 2008. The world of economic theory is still where the renowned Nobel Prize Laureate and New York Times columnist, Paul Krugman, found it in 2014:

“The economics profession has not, to say the least, covered itself in glory these past six years. Hardly any economists predicted the 2008 crisis — and the handful who did tended to be people who also predicted crises that didn’t happen. More significant, many and arguably most economists were claiming, right up to the moment of collapse, that nothing like this could even happen.” Professor Krugman added: “Furthermore, once crisis struck economists seemed unable to agree on a response. They’d had 75 years since the Great Depression to figure out what to do if something similar happened again, but the profession was utterly divided when the moment of truth arrived.”

This is not an idiosyncratic position. More surprisingly perhaps, due to his voluminous investigations, and perhaps just because of them, Thomas Piketty has forcefully made the utter truth explicit: “There is no such thing as an economic science.”

What is indeed the status of economic theory? Too many discussions of public affairs are driven by the assumption that grave economic decisions are taken on the basis of sound economic theory—certain, overpowering economic theory, as opposed to pure ideology. This is an assumption as widespread in secular as in religious corridors. It is a fundamental misconception.

A continuing state of crisis

The naked truth is that economic theory has been in a state of crisis ever since the publication of Adam Smith’s Wealth of Nations in 1776. What else do major upheavals in the history of economic theory since then signify? Why did we pass from classical economics to neo-classical economics to the marginalist revolution to the economics of Keynes to Keynesian economics to post-Keynesian economics to monetarism to neo-neo-classical economics to real business cycle theory to behaviorism—let alone Marxist economics or Austrian economics or Georgist economics or Kelsonian economics; indeed, let alone the splinter programs of research within each major school of economic thought?

These efforts are not accretions to basic scientific knowledge; they are revolutionary attempts to start the economic discourse anew ever and again. They are failed attempts to describe the mechanics of the economic process.

Philip Pilkington has nailed this complex issue down: “Mainstream economics moves forward not through logical development and integration, but through forgetting.”

These quotations confirm the validity of steady accusations of irrelevance launched at mainstream economic theory from within and from without the economics profession.

Intellectual irrelevance has not yet translated into political irrelevance. Quite the contrary. If so many economic doctrines come and go, it is because—in accordance with the winds of the moment—they tend to justify the status quo from the right or the left or even the center of the political spectrum. They invariably seem to rationalize the economic behavior and policies of the “powers that be.”

We are at a breaking point

But we have now reached a point in which the system is not working for the powers that be either. No one is benefiting from the workings of the system in which we are entrapped. Certainly, the system is not serving the poor; and it has undoubtedly caused a collapse of the middle classes. It is hard to conceive of the case, but we have reached a point at which the rich, perhaps, suffer most from the breakdown of the system—at least from a purely psychological and arithmetical point of view, the rich undoubtedly suffer most.

The rich deserve more attention than they have been given during the last couple of hundred years. As against the general scapegoating of the rich, there is the Biblical assertion that the creators of poverty are, not the rich, but the “wicked.” What a politically liberating verity.

From a practical point of view, here is a little parable to unpack. You go to bed with the assurance that your portfolio is worth $3.0 million—not too much money, by today’s standards. You wake up in the morning to discover that, because of shenanigans in a far away land, your portfolio is now worth $1.5 million. How will you feel?

And what if, as the rich frequently do, you had borrowed $1.5 million yesterday. That is the condition that pushes some rich through glass windows. Isn’t that true?

Wait. Do the poor, do members of the middle class, ever lose $1.5 million overnight? They—we—are blessed with not having that much “capital” to start with. We are not in such danger. Our hearts tremble less at gyrations of the Stock Market.

There must be a better way to run the country. And, in fact, there is. But alternative ways to run the country cannot be discovered from within the strictures of mainstream economics. One must abandon that paradigm.

As we have seen above, mainstream economics has repeatedly been proved to be a faulty system by the very academic profession that tries to sustain it. Why wallow in error? Einstein put it straight: To expect different results from repeatedly taking the same steps is not rational; actually, he said, it is “insanity.”

The difficulty, of course, resides in choosing the alternative to mainstream economics. The difficulty is that there is a wealth of alternatives, some more serious than others; some better grounded in reality than others; some experientially proven to produce more positive results than others, even though necessarily piecemeal results, for not being thoroughly and consistently applied. And we are all biased toward our own personal preference.

We confuse ourselves and, what is worse, we misdirect our representative politicians by sending them in a hundred different directions. We are clearly at an impasse. To say the least, the impasse is created by analysis paralysis.

How can we ever get out of the current spectrum of opinion?

The most dangerous opinions are these two, and unfortunately they occupy a large sphere of the center of the political spectrum: Most people are somehow satisfied with the status quo; with much overlap, most other people, while spending huge amounts of energy, seek tiny changes to the system. They do not yet see the wisdom of William Jennings Bryan, whose words resonate even more strongly today: “When we have restored the money of the Constitution, all other necessary reforms will be possible, but until this is done there is no other reform that can be accomplished.”

Then, of course, there are the realists who believe it is a waste of time talking truth to power. The subset is composed of people who are afraid of talking truth to power.

A special niche is occupied by the small subset of fanatics who will not lift a finger to avoid the impending disaster because they believe that, amidst the eventual rubble, they stand a better chance to concentrate the people’s attention on their pre-ordained solution.

Even granted by the relatively few that we must concentrate our efforts on the weaknesses of the monetary system, efforts are still splintered around this inner circle of ideas: some want “to end” the Federal Reserve System (the Fed), the central bank of the United Sates; many others—intentionally or not—want to subvert its might by creating competitive, local currencies. Two such currencies close to this writer’s home are BerckShares and rCredits. There are about 6000 local currencies in the world, at last count. Many want to add one more currency, the one on which they have spent months if not years of effort.

Those who want to “end the Fed” ought to consider what do they want to replace the Fed with. Many of them say: “The Gold Standard.” The Gold Standard by itself does not necessarily deny the necessity for a central bank. The major reservations against the gold standard are two: Gold has been and is constantly subject to abrupt changes in valuation; gold is scarce. We need stability in the monetary system; we need sufficiency in the monetary system.

If there are real resources available, if there are real needs to be met, why are resources not utilized? Why are real needs not met? The common explanation is “For lack of money.” Well, no. The real explanation is, “For lack of a well functioning monetary system.” The money supply is capable of expanding to meet the availability of real resources. Indeed, in a well-functioning monetary system the money supply is always sufficient to meet the real resources of a country.

Those, on the opposite pole, who want to create a new local currency ought to consider whether any local group has the intellectual and financial resources to create, administer, and safeguard a better physical currency than the state’s currency. And yet, the growing call for the creation of local currencies must be encouraged, not only because of the incomparable ability of local currencies to teach the “nature” of money, but especially because—if and when the financial collapse of state currencies occurs—our lives will rely on barter and local currencies.

What is amiss with all current national monetary systems?

That said, we must be certain about what is amiss with all current national monetary systems. The answer lies, not in the administration of monetary policy, but in the inner conception of monetary policy. The two key questions concern the creation and distribution of the money supply. This is an area in which two diametrically opposed conceptions prevail: one is the European conception in which money is assumed to be created and hence to be controlled by bankers; the other is the American conception which assumes that, since the value of money is created by the blood, sweat, and tears of all the people in a nation, the process of creation of money ought to be controlled by the people, and its distribution ought to benefit all the people. New money created on the basis of national credit ought to benefit the common good. New money created by central bankers is not their money; it is our money. Within duly specified conditions, we as sovereign citizens—on a decentralized, democratic basis—have the right of access to loans issued on the basis of national credit and the responsibility to repay such loans.

On this basis, the monetary policy advocated here, and the fiscal policy advocated elsewhere, does not call for even one cent of redistribution of wealth.

The beginning of wisdom seems to suggest the fastest possible implementation of the following two petitions that are currently circulating on the Internet. They are designed in accordance with the American conception of money—with its deep roots in the Mosaic conception of the Jubilee. They evolve from Concordian economics, whose essential elements have recently been published or republished in the pages of Mother Pelican. The first petition especially is in full accordance with the best thought of John Maynard Keynes, the British economist of world-wide renown who tried in vain to have the idea of a public bank operating in the common interest of the nations of the world implemented at Bretton Woods.

1. A patriotic petition to restructure the Fed

To be delivered to Janet Yellen, Chair, Board of Governors of the Federal Reserve System In order to function as a public bank, the Fed should

(1) Issue loans ONLY to create real wealth, such as tables and chairs and professional services;

(2) Loans at cost;

(3) Loans to benefit everyone (by funding—through local banks—individual entrepreneurs, cooperatives, ESOPs, and public entities with taxing power, so that loans can be repaid).

PETITION BACKGROUND

The monetary system is broken—the world over.

It is not working for the poor.

          It has led to the collapse of the middle class.

It is not working well for the rich, except in an illusory and transitory way.

We have to turn the Fed from serving the few, rather badly, to serving everyone well.

If the proposed structure is in place, let Wall Street tremble or financial behemoths collapse; Main Street will continue to prosper.

To sign this petition, please go to the petition website

In theory and practice, we are so far away from the American conception of money, with its deep roots in the Mosaic conception of the Jubilee, that it is worth spending a few words and dedicating some attention to the topic. In addition to the restitution of the land to the original owner on the 50th year, the year of the Jubilee, Mosaic Law prescribed the cancellation of debts among Jewish people every seven years. The reasons are many, and all valid. The most important one can be found in the very nature of money: money has real value only at the moment of the exchange; money in my pocket is just paper. If money is concentrated in a few hands, the circulation of money is reduced. When the circulation stops, namely when there is a financial crisis, the value of money is reduced to zero. Chaos ensues. Is not so much more rational to face these issues in a timely fashion in order to avoid certain disaster?

2. The Jubilee Solution: A systematic reduction of zeros

To be delivered to Every creditor of the world and Every Government of the world

Reduce all debt to zero in seven years.

Start with a 30% reduction the first year, and reduce all debt by 10% per year every year for seven year.

At the end of the seventh year, start the process anew.

THIS PROPOSAL TRULY CALLS FOR A SYSTEMATIC REDUCTION OF ZEROS.

Wealthy people will remain wealthy, as at the beginning of the escalating creation OF ZEROS to their accounts — because wealth is a RELATIVE thing.

Just be alert: Find ways to isolate the smart ones, who might not join you at first.

PETITION BACKGROUND

The next financial collapse is going to be dreadful. Knowledgeable people are talking of the collapse of $100 trillion. It is the MONETARY system of the world, not the financial system involving a few corporations, which will collapse.

The modern, prevalent solution of letting the taxpayer come in and save the “too big to fail” corporations might not be available at the next meltdown.

Sequestering the deposits of individuals and perhaps even corporations in banking institutions might not be sufficient for the creation of money to run apace with the growth of interest.

General knowledge is gradually growing that charging interest on a loan sets up an impossible race between growth of real wealth and growth of financial wealth.

No matter how much new money is ever created, it is never enough because interest—especially in the form of compound interest—grows inexorably at a faster rate.

Money can never keep up. Interest always wins. But its victory is ephemeral. Bankruptcies result.

Next time around, not even the Fed might have enough latitude to fill the gap.

To sign this petition, please go to the petition website

Please, analyze these petitions. If you have questions, feel free to contact me atcgorga@jhu.edu. If you feel you can, please add your signature to them—and ask your friends and relatives to do the same.

To put it very briefly, with the implementation of these petitions, we might avert the impending financial catastrophe that we all know is coming—or at least be in a better position to pick up the pieces afterwards.

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ABOUT THE AUTHOR Carmine Gorga, President of The Somist Institute, is a Former Fulbright Scholar and recipient of a Council of Europe Scholarship for his dissertation on the “Political Thought of Louis D. Brandeis.” Using age-old principles of logic, he has foundedConcordian economics, Somism, and Relationalism. Dr. Gorga has fundamentally transformed the linear world of economic theory into a relational discipline in which everything is related to everything else—internally as well as externally. He was assisted in this endeavor by many people, notably for twenty-seven years by Professor Franco Modigliani, a Nobel laureate in economics at MIT. Mr. Gorga is the author of numerous publications, including The Economic Process: An Instantaneous Non-Newtonian Picture, 2002, a book that was reissued by The University Press of America in an expanded paperback format in 2009.

A challenge to Rio+20 participants

A challenge to Rio+20 participants: if you are stymied on how to achieve your goals, you may want to look into the tools provided by Concordian economics.

Some of this work has been published at http://rio20.net/en/documentos/ethics-in-concordian-economics and http://rio20.net/en/propuestas/a-declaration-of-economic-interdependence. You can see a more comprehensive presentation of Concordian economics at http://www.a-new-economic-atlas.com and http://www.modern-moral-meditations.blogspot.com.

For immediate relief from monetary ills, you may want to implement recommendation included in "Monetary Policy from the Bottom-Up" that is available at http://www.somist.org/id30.htm.

Give Modern Moral Capitalism a Chance Part Two – The Land and the Corporation

Since the issue of land reform has been taken over by extremists, the topic has been expunged from the list of admissible conversations in polite economics discourse. And we have to be clear that extremists seem to have dominated the discussion forever: think of the Gracchi revolt in Rome and the pheasant revolts all throughout the Middle Ages—not only in Europe, but in Japan and China and Latin America as well—up to the present day; it ought to be sufficient to mention the simple name of Karl Marx to prove the point in a definitive way. And those who have not advocated outright national confiscation and redistribution of the land, starting with the Apostles of Jesus Christ and continuing to today with the efforts to organize kibbutzim in Israel and Base Catholic Communities throughout the world, have in a more gentle voice clamored to put the land in “common” ownership.

This is a request to which that supreme realist, St. Thomas Aquinas, gave a definitive answer in the 13^th Century: things held in common are not managed efficiently. (Yet, it must be noted that St. Thomas Aquinas never advocated the closure of the commons, but that is another story.)

So, these are the terms in which the discussion about land policy has traditionally been held. It seems foolhardy to even try to enter the discussion. And yet, the issue is so basic, so important that we must find a way to balance the various issues involved in land policy in a way to discover what is the proper balance, the moral compass, to guide us.

Land used to be conceived as a common good. In a theocratic society such as organized under Mosaic Law, this conception was accepted as axiomatically true and therefore indisputable. Nor was this simply an abstract conception; rather, it was rendered quite useful and practical through the institution of the Jubilee. Any plot of land that might have been sold by the original steward for any reason whatsoever, on the fiftieth year was returned—at no cost—to the original steward. Notice that, except for this prescription, the steward of the land enjoyed all the benefits that today are associated with private ownership of the land.

This policy prevented the accumulation of large tracts of land in a few hands. The policy prevented the hoarding of the land. The policy also prevented a split between ownership and management; hence, it assured a smooth running of the economy as a whole.

The Roman law and any system of law thereafter lost sight of this basic policy. The ownership of large tracts of land was accumulated in a few hands. And poverty was born. Accumulations of vast tracts of land in a few hands were called latifundia. Latifundia are still with us today to plague us: there is not one sound moral, or economic, reason to keep them still in existence—except that their owners have inordinate political power which keeps even the discussion of the topic off the table.

And then there is another fundamental reason that keeps this discussion off the table. To dismantle the latifundia would be an immoral and ultimately an economically ineffective act. The arguments against the dismemberment of the latifundia stand as tall as those against projects of redistribution of wealth in general. Some of the unanswered and unanswerable questions faced by the redistributionist are these: from whom, to whom, how much, how often.

Excluding government confiscation and forced redistribution, what is left then? As Brandeis would say, the best is left. We can control the latifundia through a fiscal policy that is just and efficient.

We have to tax land values.

Why? Let me count the reasons. It is just to tax land tax values, because the value of the land is composed of two entities: the natural value of the land and the communal value of the land. A rock in Arizona is valueless; a rock in Manhattan in worth zillions. The value to the rock in Manhattan is given by the system of roads surrounding it, the public transit system, the Metropolitan Museum, the cluster of universities. Yes, even the New York Times.

It is proper to tax the land, because the community recovers part of the value it contributed to making the land as valuable as it is.

The second major reason for taxing land values is this. Every year, the amount to be raised by taxation is fixed. If landowners do not contribute their fair share, other people will have to meet the slack. In simpler terms, amounts not paid by landowners are amounts stolen from other taxpayers.

The issue of the amounts to be raised is important, but beside the point. We will take it up at a more opportune moment.

Another reason for taxing land values resides in the simple arithmetic that the more is raised from the land, the less can be raised from incomes and other improvements on the land. We do not want to penalize activity and enterprise, do we?

By taxing the land, landowners will be free to choose between paying the taxes and selling a part of their landholdings. Thus would a policy of disaggregation of the latifundia be set in place—gradual and organic disaggregation of the latifundia.

The following three are for me the most important reasons for taxing land values: hoarding of the land will be curbed; poverty will be abated though a program of economic development combined with spreading the ownership base of the country; and an organic urban development will ensue.

Remember that the most dangerous forms of land hoarding are not those that occur in the midst of the wilderness. The most deleterious effects arise from land horded in small parcels in the downtown of our cities and towns. The next set of nefarious effects occurs because of land hoarded in large concentric swats away from center city.

It is to skip over these bands of land hoarded that people, in search of lower land prices, create housing and commercial developments away from the downtown.

Then public transportation collapses; costly utility provisions and safety demands dominate our municipal expenditures; lines of communication and transportation are overstretched; nerves are frayed; latest research shows links between vehicle exhaust, brain-cell damage, and increasing rates of autism. Ultimately, unless we change our policies of urban development our goals of energy independence will always be unattainable.  

Who owns the land? Who is responsible for paying taxes on land values? Precise numbers are hard to come by but it can be safely assumed that, all over the world, corporations today are the owners of much land and perhaps most latifundia. That is the first level at which corporations come into the search for moral capitalism. Let them pay taxes on the values of the lands they own and much of the inordinate power which they irresponsibly enjoy today will be cut at its root. Let us simply remember that the technical definition of land includes not only what lies under the surface of the earth, but also what lies above the earth up to the stratosphere. Thus the oil companies, the information companies, and most of the media companies are enjoined to pay their fair share of taxes on the natural resources that they use.

But if the beginning of the search for obligations that will make corporations full participants of moral capitalism starts with their responsibility to pay their fair share of tax on land values, the search does not end there. The entry points into the discussion are legion, and they mostly spring from the short term need of the corporation to show a profitable bottom line. Thus too many corporations foster what I am compelled to call “Termite Capitalism”. Let us chew all the goodness out of the land as fast as we can. And let us move onto the next profitable line of activity. Let “the community” fix all the damage we leave behind. The easiest targets of rapacious corporations are common goods such as land, money, water, and air—as in airwaves. These are common goods that have been under attack for the last five hundred years or so. Common goods are never properly defended by naturally disorganized and mostly unaware communities.

Corporations. Theory of markets. One cannot talk of one without the other. Corporations live in markets. Indeed they try to control markets, they try to achieve monopolistic control of the market because they want to take autonomous decisions—although for a large variety of reasons they will never be able to achieve this aim; at least, not for long. Apart from weak and ineffectual rules and regulations against monopolies, corporations are free to repeat this nat1ural mistake over and over again, no matter the havoc they leave in their wake. It is due to the inner logic of markets that corporations—or even individual entrepreneurs, for that matter—become victims of the herd instinct, the bulls, you know (or are subject to peer pressure, if you prefer). They have to do what other corporations do. They have to show at least similar bottom line results. It is not a question of greed; it is not even a question of rationality—or even irrationality. However cleverly couched and elegantly expressed the theories of the behavior of corporations in markets, and we have heard some doozies lately, such as efficient-market hypothesis, the reality of the competitive pressure of the markets makes the behavior of corporations less than perfect.

No. It is not greed and not even rationality or irrationality that controls the behavior of corporations. It is survival. If they do not do what the herd does, they will be left in the dust. Surely there always are a few contrarians, and they might even thrive over long periods of time if they do understand markets and are flexible enough to change their decisions in a timely fashion. The rule is fixed. The rule is survival.

Which means that corporations generally become too big for their own good—and, lately, it has been discovered that some financial and industrial corporations become too-big-to-fail. If society wants to avoid the horrible problems created by such corporations, rules have to be imposed on them to prevent them from becoming too big. The rules have to be preventive. Once corporations have become too big, they will have automatically acquired so much political—and cultural—power to resist any force that will try to make them stop just in time to avoid societal collapse.

This is the solution that I have designed after many years of intensive study of the issue. The rule is based on a fundamental understanding of the behavior of corporations. The rule is based on a fundamental distinction between internal organic growth and external growth-by-purchase. The first method should be left as free as possible; the latter should be prohibited in no uncertain terms. Nothing good ever comes out of this type of growth in the long run: some corporations are so wise as to change course in mid-stream and disentangle the tangles they have put together; but most of them do not. The shortest way for me to indicate that growth-by-purchase yields only negative effects is to characterize it as industrial murder. Growth-by-purchase means the annihilation of the entity that has been purchased.

The fair way to put this prohibition in place is to apply it for a year or so to the first 100 largest corporations, check whether the expected beneficial effects do indeed materialize, and then enlarge the range of application of the prohibition by applying it to the next batch of corporations, until one reaches the level of, let us say, intrastate affairs. The purpose of this prohibition is not only to avoid the too-large-to-fail set of problems, but even to free the corporations themselves from untoward peer pressure. Can you imagine how much good work can the heads of these large corporation do if they are freed of the need to look over their shoulders to see who is gaining up on them? By putting this prohibition firmly in place we will free the corporation to be a responsible member of society.

Through wise preventive regulations, let us develop a new generation of corporations, corporations that do not pursue Pac-Man games, the way of mergers and acquisitions that can more formally be grouped to form what might be called the “agglomeration process”. Who ever gains short term benefits from these games besides investment bankers, lawyers, and PR professionals?

But the community loses and loses badly. Oh, yes. Even the rich people lose in these games. Are not the rich going through a rough patch these days? Even the Wall Street Journal ran a headline recently by the title “The Wild Ride of the 1%”.

Corporations that ought to be sternly prohibited from pursuing Pac-Man games are corporations that grow internally and organically as large as they can, corporations that are owned by responsible stockholders.

So far we have looked at the bottom and the top of the living space occupied by corporations. What happens within that space? Through Employee Stock Ownership Plans (ESOPs), cooperatives, and individual entrepreneurship, I look forward to the day in which corporations will recognize and accept the benefits of economic democracy, respecting people as people and not only as valued consumers and disposable producers. I look forward to the day in which, as Emerson said, "Every man is a consumer, and ought to be a producer. He fails to make his place good in the world, unless he not only pays his debts, but also adds something to the common wealth."  I look forward to the day in which local business people, artists and inventors, who are long in ideas and short of cash, will be properly funded.

I look forward to the day in which, through Louis Kelso’s Consumer Stock Ownership Plans (CSOPs), buyers will not only receive products of high quality, but also a share of the profits they have permitted the corporations to earn. Do you see the day in which, young and old alike, we can all piece together a decent income, not only through the jobs we hold and the stocks we own, but also a share of the year-end profits that are distributed in accordance with a share of the value of our purchases at McDonalds, Target, and Neiman Marcus? If customers are included in year-end distribution of profits, the problem of gouging consumers is mostly eliminated. Even the vexing problem of monopoly is mostly resolved.

As it is written at http://imgur.com/a/U4FR4#0, “Corporations are needed; unethical behavior and corruption aren't needed.”

To fight “The System”, to fight “The Corporation” is a losing proposition. After intensive struggles we might win 10% of what we need, while The Corporation wins 90% and in the long run it wins 100%. The struggle is to control The Corporation to benefit all its stakeholders; the struggle is to make The Corporation a tool of freedom and justice for all. The present outline should be taken only as a superficial description of a long-awaited new world.

(c) 2012. Carmine Gorga, PhD, is president of The Somist Institute and author of numerous publications, including The Economic Process (2010).

Give us our cash

What are the conditions today? There is a pile of cash sitting idle with our large financial and industrial corporations. We are not creating nearly enough jobs. And with people not being able to pay their mortgages, our houses are losing value. 

Do we have a workable solution to our current economic crisis? I don’t think so. It seems that all proposals on the table suffer from such evident weaknesses that they are not being implemented and, likely, they are not going to be implemented any time soon.

Will the American people—and people in the rest of the world, for that matter—have the inner fortitude to wait patiently until our political and economic leadership finds an acceptable solution to the current world wide crisis? I don’t think so either.

Caught between these two realities, I would like to offer a two-step just and sustainable solution that will work at high speed—at no cost to taxpayers, without further loss in the value of our wealth, with minimal risk to fan the flames of inflation, and no government intervention.

Here is the bottleneck: Corporations have gummed up the system with their accumulation of cash—piles of cash which they cannot use, because there is not enough purchasing power in the system to recover costs of production and make a profit to boot. There you have a vicious loop: no jobs, no income, and no possibility to invest that cash.

Absence of sufficient purchasing power in the economic system is a cause of the bottleneck; lack of imagination on how and where to invest the abundance of cash in corporate coffers is another. The conglomeration of wealth into few large corporations compounds the problem; there is room for far too few minds at the top and these few minds cannot possibly have the range of expertise necessary to properly employ the surplus cash. What is lacking is a variety and diversity of opinion on how to invest most hoarded cash.

Here is the solution to this variety of problems. Step one: Lets us as a community determine that corporations will have six months to distribute a large percentage of their surplus cash—not indiscriminately, not in accordance with any ideology, but in accordance with rules of law, in accordance with existing lawful processes.

Lets us determine that corporations will have six months to distribute their surplus cash to their stockholders and bondholders: the rightful owners of that wealth.

In the United States, especially, the ownership of corporations is broadly based. If the cash accumulated in the coffers of a few large corporations is distributed among owners of all forms of investment and retirement funds holding those shares and those bonds, most cash will reach the people who know how to spend their money wisely.

Then corporations can make new investments because they can depend on consumers spending those distributions to satisfy pent-up demand.

But, clearly, since wealth is concentrated into a few hands, many stockholders and bondholders will receive so much cash that they will not know how to spend it properly. After all, there are just so many such conspicuous goods as Gucci and Pucci bags that one can show off, and spending sprees cannot last forever. Real people stop before they drop. The bottleneck will reappear downward.

For them, a second step of the proposal is ready to spring into action: this step involves investments into the local economy—either through personal connections or through the creation of Local Interdependence Funds.

Personal investments are an ancient practice. The constitution of Local Interdependence Funds is explained in some detail in To My Polis. Under the aegis of an all volunteer board composed of a banker, an investment banker, a lawyer, a business development expert, and an architect, all advised by an accountant, I presented the idea of the Gloucester Interdependence Fund to all the local bankers, first individually and then in a group meeting that lasted several hours. The bankers in Gloucester examined the mechanism of these funds and found nothing objectionable in it. But they are not going to implement the idea, just because a few people suggest it should be done. They need full community support from business, civic, religious, literary, artistic, and political leadership. Perhaps now is the time to give our local bankers all the community support they need.

Each community should consider the establishment of a local Interdependence Fund. These funds can even be established without waiting for the large corporations to disburse their excess cash.

Investors in such funds keep ownership and control of their investments. For proper administration of their wealth they can rely on the expertise and care of local banks where the cash is deposited. For proper utilization of their wealth—and further, gradual, orderly increase of their wealth—they can rely on lending only to local business men and women, artists, and inventors whom they know: people who are full of ideas and short of cash.

A useful postscript. If you need the safety blanket of theory to stiffen your determination, you cannot do much better than ponder these passages from Quadragesimo Anno, ## 105-106:

“…it is obvious that not only is wealth concentrated in our times [1931] but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.

This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.”

Not too surprisingly, liberated from the clutches of ideologues of the right as well as ideologues of the left, Pope Pius XI can be recognized as an eminent sociologist and economist.

For confirmation, read Adam Smith, The Wealth of Nations, B. III, Ch. 4: "All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind".

© 2011 Carmine Gorga, a former Fulbright Scholar, is president of The Somist Institute, a research organization in Gloucester, Mass. Through The Economic Process, To My Polis, and numerous other publications in economic theory and policy, he has transformed economics from a linear to a relational discipline. Dr. Gorga blogs at  http://me-a-new-economic-atlas-and-you/

Give Modern Moral Capitalism a Chance Part One – Money and Labor

Louis D. Brandeis, a Supreme Court Justice and prominent member of the Progressive Movement, at the height of the Great Depression was asked whether that was the worst of times. He answered: "[T]he worst happened before 1929." If we use our current travails as an opportunity to give roots to moral capitalism, we might truly say that the worst is behind us.

What is moral capitalism? Moral capitalism is a financial system that operates with the deepest respect for the moral law. The root of the moral law in economics is the same as the root of the moral law in all other aspects of life: the principal rule is, do not steal. Rather than going through the sad and divisive litany of what constitutes stealing or who does the stealing in today’s society, let us spend our energies on how to prevent stealing in the future.

To obtain moral capitalism we need to enforce three rules: Give access to national credit to those who qualify for a loan; issue such loans at cost; expand the ownership base of the national economy when you issue such loans.

National credit is what the Federal Reserve System uses when it creates new money by making a loan to an applicant. An applicant under the proposed system can be an individual entrepreneur, a corporation, a cooperative, or a governmental unit with taxing power. To avoid swamping the Fed under such requests, loan applications should be chandelled through the existing monetary institutions: banks and other financial institutions would apply for loans at the discount window of the Fed. In this way, neither the Fed nor any political entity would influence the allocation of credit; it would be the market to make decisions as to apply or not to apply for a loan. And the essential precondition for the issuance of any such loans must, of course, be the ability to repay the loan. National credit is not a stream that comes from nowhere and goes into the pockets of a few chosen people. National credit is a pool of resources; a pool of common resources. Since such a pool is not made of inexhaustible resources but of necessarily limited resources, the pool must be replenished by the repayment of the loan. This way no inflation is created.

No inflation and no undue political influence is allowed in the proposed system also because, to qualify, these loans have to be issued exclusively for the creation of new real wealth, for the creation of new productive systems, new tools, new gadgets, new consumer goods. No such loans should ever be issued to buy financial instruments, goods to be hoarded, and consumer goods.

By not allowing access to national credit to purchase financial instruments, goods to be hoarded, and consumer goods, a repetition of the worst that has occurred during the past decades would be eliminated. The essential economic reason why such loans do not qualify under the proposed system is that the purchase of none of these financial or real goods assures the lender of the repayment of the loan. As old economists such as Adam Smith or Keynes would say, these are nonproductive loans; these are speculative loans. (For Smith, see pp. 300-340, especially pp. 339-340 from the Modern Library (Cannan) edition of the Wealth of Nations, and for Keynes see pp. 339-340 and pp. 351-353 of the General Theory). Application for these loans should be directed to private banks and loan sharks, not to such a vital institution as the administration of national credit. The Fed cannot take the risk of non-repayment of resources that are entrusted to its stewardship.

The moral reason for not allowing such loans under the proposed system is immediately realized: while capital credit liberates us, consumer credit enslaves us. Consumer credit destroys such virtues that are essential to citizenship as prudence and temperance. The moral reason does reinforce the economic reason and forms an indissoluble unit with the political reason: if we want a stable and just society, we cannot foster consumerism. Consumerism, based on envy, engenders social instability. Social instability cannot be fostered by public institutions. Let private banks deal with those base forces—while regulating them to prevent usurious interest rates and wild expansion of the money supply through modulated reserve requirements; let public institutions truck only in the realm of the higher values.

Capital loans should be issued at cost. To gain independence from the political realm, the Fed has been selling our national inheritance, our national credit, for a mess of pottage. The Fed has been making a profit on the loans that it has issued in the past. Well, the Fed has to realize that, by using a resource whose value is created by all the citizens of a nation, it cannot operate as a private institution. Its operations have to be transparent and have to be conducted for the benefit of all citizens. Not to make a profit on such loans, to make these loans at cost is performing the only public service to which it is entitled by its responsibilities. (We believe in the free market; and yet, we tolerate the Fed to set the most important price in the system: the interest rate, the price of money.)

And just because the value of money is created by all the citizens of a nation, the administration of the national credit can be exercised only for the benefit of everyone. But not everyone is an entrepreneur. That is true. The solution is this: qualifying loans are loans that are issued to individual entrepreneurs or to cooperatives, and to corporations that establish a Stock Ownership Plan (ESOP) for the benefit of all their employees.

It is only if employees become stockholders that they can be held accountable for all the operations of the corporation. That is our only hope to ever establish transparent accounting systems, ecological safe processes, and operations that are safe for humans. A socially responsible corporation is a dream of ideologues; what we need is a morally responsible corporation—a corporation whose every stockholder and every employee/owner is a morally responsible person.

What does this mean for the immediate future? It means that we were not able to solve issues of moral hazard in the past and we will not be able to solve them in the future. By avoiding the moral questions, we are laying the foundation for future failure. And future failures are going to be increasingly more painful. Under the proposed system, failed corporations, no matter how big, should be allowed to fail. If there is any value left in them, all employees, generally knowing the facts, will get together, form an ESOP, and purchase those assets. Being new—or renewed wealth—these loans would qualify to apply for a loan to be issued with national credit. That is the way to create the base for moral capitalism.

(c) 2011. Carmine Gorga, PhD, is president of The Somist Institute and author of numerous publications, including The Economic Process (2010).

Separate we are powerless. TOGETHER we can reach that point on the atlas. Please, go to the side bar if you need some inspiration.

Get Out of Business, America!

Do we dare to ask this question? Do we dare to answer this question? What is a Business? If we do, we might find the beginning and the end of our fiscal troubles: we might gradually get to a permanently balanced budget.

The business of America is business, it has famously been said.  That is the source of the mental confusion that has gradually led to our present troubles. Let us unpack this messy statement.

Is America a business? It seems to me this is a horrible statement. It is ugly, since is it leads to confusion. It is not true, since America is not a business.

America is many things to many people. For me, America is the embodiment of the ideal of a life lived to the fullest of one’s abilities. For me, America is the embodiment of life lived in the fullest of all possible liberties. And, yes, I do believe that to live a full life and to be free I have to have, not an extended hand, but a jingle in my pocket.

I do believe in private property.

I believe that private property has to be kept separate from public property; and I believe that common goods are to be kept out of the market.

Let us start from common goods. All goods that are essential to life are common goods. They are sacred and ought to be inviolable: air and water are two such goods. They become ours only when we use them.

Hence, no one ought to acquire control of common goods—no, not even the government ought to acquire control of common goods. They belong to the community as a whole. Hence they offer the opportunity of introducing economic democracy into the process of administering them: water systems ought to be owned and controlled by the local population.

The important distinction here is the ownership of water systems as distinguished from the ownership of water.

Are there public goods? Yes, of course. What are those goods? They are the goods that, by definition, are owned by the government.

All the property that is essential to conduct the obligations of a government is to be owned by the government. We cannot have landlords in public affairs. Landlords tend to intrude themselves into the lives of their tenants.

This is a huge discussion all by itself that needs to be postponed: What is an essential function of the government? Hence what is essentially to be owned by the government—any level of government.

The general prescription to our current woes then becomes quite simple and direct: America get out of business. The way America has gotten into business is two-pronged: granting subsidies and granting tax deductions. Both approaches have to be carefully scrutinized.

The list is long and complex. That is another way of saying that the list has been growing on the basis of great many rationalizations. Let us not waver in our resolve; let us be staunch.

The rule is simple. A business has to be financially self-supporting. It has to meet the so-called market test.

Here is where I would start on the road to sanity. First, on the elimination of subsidies granted to the nuclear industry. Clearly, this is an industry that has been growing from the get-go on the milk of government subsidies. And what do we get in return?

I submit that the nuclear industry is affecting questions of death. The dangers are enormous. The shortcomings are evident. When nuclear waste has a life-time of twenty thousand years, I ask the question: What is the government that has lasted twenty thousand years? Because, let us not kid ourselves, we need a government to send the man with a Geiger counter to check the status of that waste.

My next item is an industry that affects matters of life: the agribusiness. Why in the whole wide world have we gotten into the habit of paying farmers for not growing food? No, this is not a matter of survival. Once the government granaries are full, let the market decide whether the farmer has made a mistake in overproducing.

My third item is the oil and gas industry. Rather than letting them pay for using wealth that is common property of the entire nation, we give them subsidies in the form of oil depletion allowance.

The main rationale here is that without such subsidies, we are going to pay through the nose at the pump. Good, it’s my reaction. First, it might be cheaper to pay at the pump than to pay taxes to the government to keep the price at the pump low. There are too many leakages in this circuitous road to obtain a lower sticker shock at the pump.

Without subsidies and a higher price we might drive less. Is not that a big fat plus? Is not that a giant step toward energy independence?

Gas, oil, and the car have gotten a way of affecting our entire way of life, from birth to death and everything in between. Should the government make these choices for us? Or are we grown-up and responsible enough to make these choices for ourselves?

Talk of energy independence, and you touch upon a major sore point of our government policies today: In the name of chasing after energy independence, we have gotten quite dependent on a bunch of foreign nations.

The Fathers of our nation can only say: We told you so.

Then there is the reverse of this medal: if we do not give subsidies to our industries, other countries will overtake us. We will no longer be Number One.

Just stop and think. What does that mean in the first place? But then think seriously about the consequences. If we stop our corrupt and corrupting practices, and other countries step up on their gas pedal toward granting larger and larger subsidies to their industries, let them.

They will eventually reach the sorry state in which we are in today. Be sure about it. Good luck to them.

Two general issues. First, how much can we “save” by reducing subsidies? I would say that is the wrong question. Whether it is a dollar or a zillion of dollars, it does not matter. The issue is one of public policy.

And one dollar at a time, you surely reach zillion dollars.

Then there is a question of time. This is a most serious question. The proposed policy cannot be implemented overnight. But let the industry decide this question. Indeed, let us publicly ask of each specific private industry: How long do you need to be weaned of the government milk?

We can then double the amount of time requested and be most happy and effective with the decision.

All this would still recognize the need and the efficiency—if they are there—of Research & Development projects (that is science) as well as insurance projects (that is safety).

Get out of business, America. The market is not your place. The Acropolis, the City on the Hill, is your place.

(c) 2011. Carmine Gorga, PhD, is president of The Somist Institute and author of numerous publications, including The Economic Process (2010).

Separate we are powerless. TOGETHER we can reach that point on the atlas. Please, go to the side bar if you need some inspiration.