MONETARY: Binary Economics & Social Credit: Part III

[Norman Kurland <thirdway@cesj.org>]

BINARY ECONOMICS AND SOCIAL CREDIT: AN EXCHANGE WITH MICHAEL LANE, PART
III

NOTE: This is the last part of the point-and-response presentation
between Michael Stephen Lane, editor of the monthly publication, TRIUMPH
OF THE PAST, Columbus, Ohio, and Norm Kurland of the Center of Economic
and Social Justice.  Excerpts from Mr. Lane’s letter of November 12,
2001are enclosed by       <<        >>.  Mr. Kurland’s response of
December 2, 2001 follows each of the segmented points in the order
presented by Mr. Lane.  Mr. Lane has given permission to make this
exchange available to interested persons.  Of course, both writers will
have the opportunity to make further comments in the interest of
promoting a scholarly dialogue and deeper mutual understanding between
those advocating the binary economic theory of Louis Kelso and the
social credit theory of Major Douglas.



<<There is one more thing: the amount of the dividend.  Based precisely
on
the technological change that is the justification for binary economics,

Douglas argues that Say’s Law fails.  I cannot put it more concisely
than I
did in “The Social Credit of the Left”:>>

<<. . . all businesses in the system should be able to start paying out
a third
less at time t2.  Yet prices at time t2 will reflect the higher costs at
time
t1.  Therefore, the price of boots at time t2 will exceed the money
distributed by the boot industry at time t2. . . . A system that is not
continuously self-liquidating at time t1 and time t2 and time t3 is not
self-liquidating at all.  (Triumph of the Past, October 2001, p. 1, col.
1f.)>>

(11)  I will discuss the t1/t2 lag below.  But before you conclude that
Say's Law fails,
let's review what Say's Law of Markets means.  Say's Law is a mathematic
identity.  It
is double entry-bookkeeping carried to the level of a national
market-based economy.
The simplest statement is that, under conditions of equal access to the
market, capital
credit and ownership opportnities, supply will create its own demand and
demand will
create its own supply.  A little more detailed definition is that the
market value of goods
and services produced is equivalent to the aggregate purchasing power
distributed to
participants in production.  A more detailed definition of Say's Law is
"Gross National
Product, for a given time period, computed by aggregating all costs of
production of
goods and services (i.e., payments for labor workers' inputs and capital
owners' inputs)
into production EQUALS income automatically distributed from production
to the
individuals who participate in production as labor workers or as capital
owners or both."

(12)  I agree with Kelso (and Marx for that matter) that Say's Law will
not work under
conditions of concentrated capital ownership, where workers have only
their labor to sell
in competition with labor-displacing technologies or with workers
willing to take less pay
for the same work and where owners cannot consume all their incomes from
capital
and can only invest it in more capital.  Supply of consumer goods will
not automatically
generate its own demand, certainly not for the poor or technologically
displaced
workers.  Kelso, as Milton Friedman said, turns Marx on his head by
financing that new
capital by monetizing self-liquidating capital credit so that the poor
and displaced
workers can directly access the profits from that new capital, first for
paying off the
credit and then as indendent incomes from their dividends.

(13)  Self-liquidating Credit

I think I understand your point regarding the t1/t2 lag.  Yes, as a
result of continuing
technological improvements (i.e., new capital investments), the higher
costs at t1 will be
reflected in the prices at t2 but the incomes distributed at t2 will be
less than the costs at
t1.  Workers will be displaced by more productive machines, reducing
wage incomes at
t2.  Douglas addresses this gap through a "social credit dividend."

Kelso’s system does have a way of making up the “lag,” as does ordinary
finance.  It’s
called “depreciation,” and it spreads the cost of any productive asset
over the life of the
asset.  An asset that doesn’t wear out would not have depreciation
taken.  Land, for
example, is assumed never to wear out and is presumed to have perpetual
value.  You
can’t depreciate land.  You can only have a depletion allowance if you
are removing
something, such as ore or oil, that is not renewable.

Depreciation generates additional cash flow that could be used to
generate purchasing
power at t2.  Depreciation is a non-cash expense that shifts capital
costs from one
period to another.  It results in additional cash that could be used for
many purposes by
the enterprise, e.g., to pay additional salaries and wages, bonuses, or
dividends to
existing shareholders; to purchase capital with internal cash; or to pay
pretax dividends
to the poor and workers with personal Capital Homestead Accounts (CHAs)
(established at local banks and financial institutions) to pay off loans
for shares sold to
them at t1 when the company added its new productive assets.  Note that
Douglas
would add the social credit dividend at the back end, whereas we would
inject low-cost
monetized capital credit at the front end when the demand for new
capital is needed to
raise the productive levels of all enterprises of the economy to their
fullest capacities.

<<The social credit dividend would be paid week by week and would
represent
the difference between total disposable (after-tax) personal income for
the
week and total price of consumer goods and services coming onto the
market
that week.  The former represents all wages, salaries, and dividends
paid
that week; and the latter represents all past costs incurred, plus
profit, on
all goods and services that come onto the market that week.>>

Inflationary effect of social dividend.

(14)  It seems to me that adding new purchasing power at the back end
(t2) through
social credit dividends, adds new money in the system which is not
backed by new
goods and services or new capital assets at t2.  Please explain to me
how that could be
anything but inflationary.  Note that under Kelso's system the new money
and credit are
always backed by newly added real assets, thereby lubricating the
processes of new
capital formation at t1 and providing a means by which that new money
can be retired
as the self-liquidating assets begin to produce the goods that will
generate dividends that
may begin to pay off the capital acquisition loan at t2 and thereafter
generate additional
purchasing power for the new capital owners.

Inflation results when there are more units of currency "chasing" the
same amount of
goods and services in the economy.  Deflation, on the other hand,
results from
diminishing units of currency "chasing" the same amount of goods and
services.
(Inflation and deflation are dependent on changes in the money supply;
whereas
appreciation and depreciation are dependent on changes in the amount of
goods and
services.)  Kelso’s system is predicated on the assumption that all new
capital formation
is financed by newly-created money, which, through the restoration of
Say’s Law,
thereby provides the income matched to the increased money supply to
clear from the
market the very production which the new capital formation brings into
being.

What determines how much and what kinds of new capital assets will be
added at any
time by a particular firm?  Basic principles of finance say that any
company or business
enterprise that wants to optimize profitability must continue to form
new capital, valued
at the present value of all anticipated future production, until the
“plus” factor of the
present value of all anticipated future production revenues equals the
“minus” factor of
the present value of the costs of financing the formation of that
capital.  That is, the
present value of future revenue inflows and the present value of future
cost outflows
added together equal zero.  If there is a “plus” residual, you are
underutilizing
resources.  If there is a “negative” residual, you are wasting
resources.  Profits are
allowed for by factoring a rate of profits into the discount rate to
arrive at the present
value of inflows and outflows.

As the production is purchased under our Capital Homesteading scenario
and the
monetized loan that financed the formation of the capital is paid off,
the money is
“destroyed” (or “retired” or “cancelled”) by subtracting it from the
money supply.  From
my understanding both Douglas and Kelso agreed on this point of
monetized capital
credit.  The money has served its functions.  It financed the formation
of new capital for
new owners to invest in self-liquidating assets and cleared the
production.

Under our monetary reforms, the new money would first flow to Capital
Homestead
Accounts, whereupon the Capital Homesteader exchanges the cash for newly
issued
“full payout” company shares from the company through his personal
account in a
democratically structured ESOP, CSOP, CIC or, under the latest scenario,
the CHA.
Following the trail, the money then “goes out” from the company when the
new capital
was formed, and “comes back” to the company in the form of revenues when
the
production of the capital was purchased by consumers.  This “returned”
money is then
turned over to the “Capital Homesteader” through his account in the
ESOP, CSOP, CIC
or CHA in the form of full payout dividends.  Thereupon, the Capital
Homesteader uses
the dividend cash for debt service (as long as he has an outstanding
stock acquisition
loan) and turns it over to the lender to retire the capital
acquisition/formation debt.  The
new money will then be eliminated from the system.  This avoids the twin
evils of both
deflation and inflation.

When the loan is repaid or the dividends received by the Capital
Homesteader exceeds
the debt service, the dividends enable him to purchase more consumer
goods.

What happens when the loan is in default?  When dividends are less than
required to
pay off the debt, then the loan must be renegotiated or the time to
repay the loan must
be stretched out.  And when there are no profits to pay dividends and
the loan is in
default, capital credit insurance and reinsurance tap into their premium
pool to perform
the same role as dividends in canceling out the new money issued for
purchasing the
new capital.  Again, this avoids both deflation and inflation.

There does not appear to be any such mechanism in social credit.  New
money is
created and pumped into the system week after week or on a monthly
basis.  It “clears”
production, but there is no way to retire the money once it has done its
job.  This leaves
“excess” money in the system that can only be removed by individuals
engaging in
saving at such a rate as to obviate the possibility of clearing
production (the dilemma of
Keynesian economics), or by having the government tax away the money and
spend it
on non-productive projects (another hole that Keynes got himself into).

<<The Bureau of Weight and Measures standardizes the value of the inch,
the
pound, the gallon, and so on:  we do not have “market gallons,” varying
from
one business to another.  Just so, a price control mechanism should set
maximum profit as a percentage over cost, varying for different
businesses
according to risk.  That way-and only that way-the dividend will be real

purchasing-power and a self-liquidating system achieved.  This puts
flesh on
your “national policy to maintain stable or lower prices” (p. 21).>>

(15)  Market price versus “market gallon.”

Actually, at one time people had different opinions as to what a gallon,
a foot, or a pound
was, but that’s not the point.  A unit of measurement is an agreed-upon
means of
comparison:  “This string is a yard long.  A yard is 36 inches, as
agreed upon by
everyone operating within this system.  Therefore I know exactly how
long this piece of
string is.”

In that “example,” the unit of measurement is a yard.  What is being
measured is the
string.  Similarly, when commercial transactions are carried out, the
unit of currency is
the unit of measurement (that’s why the Constitution groups the monetary
system in
with weights and measures), but the thing being “measured” is the value
of the thing, not
the thing itself.  That is, price is the agreed-upon value of the thing
under consideration,
whether it is a good or a service.  Price can be stated in terms of any
objectively
determined standard of value, such as ounces of gold, head of cattle,
kilowatt hours, the
hourly wage of the economy's lowest-paid able-bodied worker, and so on.

Price is not itself, however, an objectively determined standard of
value, any more than
every string by the fact that it is string must be a yard long.  How
long a string is
depends on many factors, including the subjective opinion of the person
doing the
cutting.  Similarly, the price of something cannot be determined
objectively.  There are,
of course, a number of objective factors that must be considered, such
as how much it
cost the producer to make and how much money the consumer has.  These
influence,
but do not determine price.

Price is strictly a matter of opinion, based on the perceived utility to
the consumer (the
“value” of the product) and how much he is willing to pay for that
utility.  A “market
price” is a more or less idealized aggregate of the sum total of all
these individual
opinions within a market about the value of a specific product.  It will
satisfy most
people without being exactly the right price for anyone.  As opinion,
price can never be
objectively determined, unless you want to turn people into machines
with programmable
wants, needs and values.  A government that attempts to set prices, no
matter how
many objective factors are considered, is, essentially, telling people
what their opinion is
and mandating the outcome of the explicit or implicit process of
bargaining of which
“price” represents the end result.

Price setting can be justified as an emergency measure, e.g., in a
famine to keep food
prices down so people can afford to stay alive.  This must, however, be
combined with
other interferences with the free market, such as rationing to make
certain everyone
gets enough or at least the same amount and speculators or hoarders
don’t take
advantage of the artificially low price.  Price fixing, however, is not
a way to run a just
economy because it interferes with free will and the basic dictum of
justice, which is, “to
each his own.”  The government or price fixing agency has pre-determined
what each
individual’s “own” is, regardless of everyone’s existing or future
rights.

I've already pointed out earlier in (5) why I oppose a "price control
mechanism to set a
maximum profit as a percentage of cost, varying according to risk."
Again, the market
price is the most democratic and objective measure of economic value.
It is the
aggregation of the subjective opinions of many buyers and sellers,
ideally all of them
equally informed and none of them under any compulsion to buy or sell
their goods or
labor.  Moreover, setting the wages of capital (profits) arbitrarily or
by some elite
committee constitutes a "taking of property", under some "original
intent" interpretations
of the Constitution.  It's not good for the poor or the workers who
become new capital
owners, and it certainly will be opposed politically by the owners of
old capital.  Finally,
to gain political acceptance to a comprehensive restructuring of the
monetary, tax and
ownership system generally, as we propose under the Capital Homestead
Act, those
committed to economic justice and economic empowerment for all must make
a case
that their plan will be win-win for all parties and totally consistent
with free enterprise
principles.

<<I have studied the mathematics part of your paper, but I do not find
that
it does justice to the main body.  In your defense, you are trying to
win
over orthodox economists by presenting binary economics in their
language,
and the fit is not perfect.>>

(16)  You're right.  I'm trying to present our case as best I can in
terms that orthodox
economists are familiar with.  I still think I did so.

<<For example, NNPF = C + I + G and NNPE = EL + EC + ET are said to be
expressions of Say’s Law, which should mean they make a substantial
assertion
subject to proof.  But they are also said to be definitions, which is
completely different.  If they are just definitions, there is a problem
with
later statements:  “All increases to the nation’s output (NNP) would
result
from added consumer spending (C) and expanded investment (I)” and “All
future increases in total national incomes or net national product (NNP)

would be tied directly to marketable production increases that take the
form
of increases in employment incomes (EL) and increases in ownership
incomes (EC
)” (pp. 17f.).   If these are just restatements of definitions, the
italicized expressions should read simply consist of.  On the other
hand, if
they are not definitions but a law, where is the proof of the law?  (And

where also is the definition of the term NNP, without which the law
doesn’t
mean anything.)>>

(17)  You're right. These are definitions and your suggestion to use
"consist of" adds
clarity.  We will not be able to prove that Kelso's revision of Say's
Law will produce
higher rates of sustainable growth until the legal and institutional
environment is
restructured to favor an expanded ownership system over the wage systems
being
perpetuated by current laws and short-sighted economic policies.

 <<Again, M appears only in the expression M x V, with V defined as NNP
÷ M.
 That means that M is irrelevant because no matter how big it is, it
always
cancels out.    This makes your later statement incorrect: “We can see
from
the formula M x V = P x Q that either the total supply of money in
circulation (M), or the velocity of circulation of money (V), or both,
would
have to increase in order to accommodate increased Q” (p. 21).>>

(18)  Michael, I still stand behind the quantity theory of money to
validate the proposition
that under the binary economic model, we can generate faster rates of
growth without
inflation.  I see nothing incorrect with my formula.

<<I am not too alarmed by these problems, however, as they don’t in any
way
diminish the validity of the Kelsonian model.  I just put them down to
your
heroic effort to fit a round peg in a square hole.>>

(19)  Michael, I've done my best to present our case in a way that I
hope will attract
others in to state the case for binary economics more clearly.  Robert
Ashford and
Rodney Shakespeare, who co-authored the book, "Binary Economics: The New

Paradigm" (see reviews on our web site) both offered high praises for my
paper.  When
I can get you and other open-minded social creditors together with
Ashford,
Shakespeare and some of us at CESJ, I think good things will begin to
happen and we'll
all learn from one another.

<<The concept of self-liquidating projects-“the job paid for out of the
Job”-in itself makes perfect sense (p. 5).  It makes perfect sense in
physical terms, but we can’t assume that credit will by osmosis take on
the
characteristics of the physical projects that it finances:>>

<<What makes capital credit special is that by nature it is procreative
or
“self-liquidating.”  That is, capital credit is restricted to the
purchase
of assets that are expected to pay for themselves out of the revenues
generated from the capital project which it financed, and thereafter
these
assets are expected to earn a continuing flow of profit for whoever owns
the
assets.  (“Third Way,” p. 15)>>

<<Whether a physically self-liquidating project will be financially
self-liquidating depends on whether your credit system has a mechanism
(like
the social credit dividend) to compensate for the t1/t2 lag.>>

<<It would give me no pleasure to show “where Kelso went wrong” (as you
put it to Ryan) when he went so far obviously right.  The fact that he
discovered the binary paradigm independently only confirms it the
better.
And you have brought in new ideas (two-tiered loan terms and capital
credit
insurance) that I think would complement the social credit dividend.>>

(20)  The capital credit insurance and reinsurance was Kelso's.  I added
a few wrinkles
to Kelso's plan but the overall theoretical model was Kelso's, and later
was refined by
Ashford and Shakespeare.  I hope I have also added a few refinements of
my own,
such as tying the model in with the quantity theory of money and the
100% reserve
plan.  There are a few other things I've added, such as the community
investment
corporation, and the bottom-up approach to launching the national
agenda, starting with
the CHA linked to a solution to the Social Security impasse.
Personally, I'm more
interested in political strategy and in applying the model and
implementing it at the
enterprise, community, national and global levels, especially for
addressing crises that
cannot be addressed through conventional paradigms.  I hope that serious
and
open-minded people in the social credit movement can begin to find
common ground
with those of us in the expanded capital ownership movement.  Together,
we can make
the world work better for everyone, especially for the most hopeless and
desperately
poor among us.  So much creative potential is being wasted.

<<All best wishes,>>

<<Michael Lane>>

<<P.S.  Ryan would have you believe that Douglas’s preferred expression
for
“productive capital” was  labor displacements, and you obligingly use
it.  I
know Douglas’s writings as well as anyone living, and I have never seen
this
expression.>>

<<cc:  Frances Hutchinson, Social Credit Secretariat>>

(21) Michael, please let me know if I have your permission to pass our
exchange on to
others, including those in the social credit movement.  You have my
permission to send
this out to whoever might benefit from our exchange.  Again, thanks for
putting so much
thought into your letter to me.

All the best,

Norm Kurland
Center for Economic and Social Justice
Web site://www.cesj.org


P.S.  Here's Kelso's footnote 27A that I mentioned above:

"Social Credit is an example of the ease with which even one with an
engineering
background can reach erroneous conclusions by reasoning in monetary
rather than real
terms.  Starting on the firm premises that labor or employment is a
means, not an end;
that our inability to eliminate poverty is due to institutional rather
than physical causes;
that the ideal goal is maximum production and minimum toil; that
manufacturers and
farmers are eager to expand production, and that the bloating of wages
and salaries with
welfare defeats the cause of general affluence by inflating prices,
Major C.H. Douglas
concluded that the whole problem of the purchasing power gap could be
eliminated by
the central government's printing money ("tickets" to consumption) and
distributing it in
monthly installments through the Post Office as a "national dividend."
The propriety of
this he defended on the theory (borrowed from Thorstein Veblen's "The
Engineers and
the Price System") that because the inventions underlying the industrial
arts are the
"cultural inheritance" of society as a whole, the ownership of the
non-human factor
(capital) or of an equity in it, should not entitle one to the wealth
produced by the thing
owned.  The fallacy of this idea has been explained by Kelso and Adler
in "The
Capitalist Manifesto."  (see pages 71-77.)  Having been misled into
believing that the
problem of inadequate purchasing power could be eliminated by means of a
superficial
monetary device, Major Douglas then was compelled, in the interest of
logical
consistency, to attack the most fundamental concepts of economic justice
and economic
motivation.  He stoutly asserted that as the non-human factor took over
more and more
of the productive burden, there need be no relation in the economy
between outtake and
input; that in a sound monetary system, money is not (imagine!) a
measure of value but
a mere information system for signaling the need for more or less
production; that the
legitimacy of the means by which he acquires his purchasing power is of
no concern to
the consumer; and that wealth produced by capital belongs not to the
owners of the
nonhuman factor, but to the society as a whole -- precisely what the
Marxists have
always maintained.

"Fortunately, the followers of Douglas' ideas, mostly in the Canadian
provinces of
Alberta and British Columbia, have been selective.  They have accepted
his sound
analysis of the defects of conventional economics, but rejected both his
corrective
measures and his unwitting attacks on private property in capital,
economic justice, and
economic motivation.  See C.H. Douglas, "Social Credit" (Hawthorne,
Calif.: Omni
Publications, 1924), fourth edition, 1966."

[Louis O. Kelso and Particia Hetter, "Two-Factor Theory: The Economics
of Reality"
Random House, New York, 1967, fn.27a on page 190; this book was
originally entitled
"How to Turn Eighty Million Workers into Capitalists on Borrowed Money
and Other
Proposals."]
--------