On February 14, 2013, Steve Kates writes in the Quadrant Online:
It is good to see a bit of attention being focused on the most important economic issue of our time, the disappearance of Say’s Law at the center of economic theory. Its absence has been a catastrophe but, alas, a catastrophe of which almost no one is presently aware. In fact, if anything, mainstream economic theory still congratulates itself for having finally seen its way past what it presumes to call a fallacy.
“If the economics profession did understand Say’s Law we would have been spared from lopsided economics.” Louis Kelso.
The following is pertinent and is abridged from the writings of my mentor and partner, Louis Kelso, in Agenda 2000 Incorporated, an economic justice advocacy firm founded in the late 1960s. Both Kelso and his writing partner Patricia Hetter Kelso have been an inspiration to me throughout my entire life.
First, it is critical and significantly relevant to distinguish between wealth and income. That wealth consists of “large possessions; abundance of things that are objects of human desire; abundance of worldly estate; affluence; riches; abundant supply; large accumulations; all property that has a money value or an exchangeable value; all material objects that have economic utility.” Just as in physics it is necessary to study matter in order to arrive at an understanding of antimatter, in economics one can only understand poverty by considering what wealth is an where it comes from.
Most people have the puzzling view that:
• Work, indeed, is the root of wealth, even of the genius that mostly resides in sweat.
• The only dependable route from poverty is always work, family and faith…in order to move up, the poor must not only work; they must work harder than the classes above them.
• Indeed, after work the second principle of upward mobility is the maintenance of monogamous marriage and family.
• An analysis of poverty that begins and ends with family structure and marital status would explain far more about the problem than most of the distributions of income, inequality, unemployment, education, IQ, race, sex, home ownership, location, discrimination, and all the other items usually multiply regressed and correlated on academic computers. But even an analysis of work and family would miss what is perhaps the most important of the principles of upward mobility under capitalism–namely, faith.
Why is productive capital ownership omitted from this list? Surely, the most effective cure for poverty is to be born or marry into one of the less than five percent of American families, which own virtually all of the economy’s productive assets. The next most effective cure would be to acquire one’s own viable capital estate in the same way that the rich have always done. The rich do not get or stay that way primarily through hard work, monogamy, procreation, and gullibility but through access to capital credit, which enables them to buy and pay for productive capital out of its earnings.
Unbelievably, political leaders and their conventional economist advisors appear to know nothing of business, corporate finance, or property law. They show no awareness of how virtually all new productive capital is financed in the American economy, and are entirely oblivious to the effects and implications of a system of finance which relentlessly makes existing significant stockholders and productive capital owners richer, while effectively barring all new entrants other than geniuses or extraordinarily lucky people into the productive capital-owning class.
Instead, they are fixated on the old Puritan savings myths, or what economist John Maynard Keynes called “the principle of accumulation based on inequality.” Its central argument is that the savings of the rich, and hence the rich as a class, are essential to the operation of a “capitalist” economy. By “sacrificing” present consumption to acquire savings, and then by putting them “at risk” to finance new enterprise and technological innovation, the rich perform a service bordering on the heroic.
Their concept of “supply” is nothing but an extended metaphor for rule by the few who own virtually all of the economy’s productive capital today, and who will own even more of it tomorrow no matter which economic faction gains control of national economic policy or which political party is in power. Business finance is designed to make the rich richer, and it does just that.
Inconveniently for plutocrats, however, the United State is still a political democracy committed constitutionally to economic democracy. Wealth concentration is repugnant not only to democratic ideals and sensibilities but to several guarantees of the Constitution itself. It is also structurally antagonistic to the private property, free market economy that is the proper economic complement of political democracy. Therefore, the reigning princes of plutocracy–the same interests President Franklin D. Roosevelt called “economic royalists”–find it necessary to repackage for political resale the old myths, which rationalize their virtual monopoly of productive capital ownership.
Plutocrats also have a psychological problem in a political democracy. There is a phenomenon called wealth-guilt, which the German sociologist Hemut Schoeck analyzes most perceptively in “Envy: A Theory Of Social Behavior.” It is not enough to be rich; the possession of wealth must somehow be justified in a social context where the overwhelming majority of people are poor and, as far as the “system” is concerned, destined to perpetual poverty. Riches must somehow be deserved, merited, sanctified. Thus, the apologist for wealth concentration must frame his defense with the sensibilities of the plutocrat mind, as well as those of the larger society.
The rationalization of wealth concentration in a political democracy involves, first, diverting public attention from the phenomenon itself. Just as the apologist for war dislikes photographs of the slaughtered and wounded, the wealth apologist dislikes statistics depicting the distribution of wealth and income. He or she dislikes rigorous distinctions about what wealth is and what it means in the lives of real people, and what its absence is like. He or she is not about to divulge the source of wealth even if known. It is also necessary to maintain the illusion that the road to wealth in the existing order of things is not a footpath as narrow as that leading through the eye of the needle, but a highway broad enough to accommodate all manner of hopeful folk.
True, wealth and income is a taboo subject in polite society–i.e., society inhibited by the wealth–ignorance of the rich. Wealth statistics in the United States today are almost as crude as mortality statistics before Pasteur forced medicine to become a science. Wealth is virtually never defined but left to one’s own perception. However, enlightening statistics may be had. In 1977, Senator Russell Long, in an introduction to a symposium on Employee Stock Ownership Plan (ESOP) financing, stated:
“Despite all the fine, populist oratory and good intentions of great men like Franklin Roosevelt, Harry Truman, Dwight Eisenhower, John Kennedy, Lyndon Johnson–the distribution of the net worth among Americans today, in relative terms, is about the same as it was when Herbert Hoover succeeded Calvin Coolidge. The distribution for adult population is as follows: .001 percent of the population have a net worth of $1,000,000 or more; .002 percent have $500,000-$1,000,000; 2.4 percent have $100,000-$500,000; 1.7 percent have $60,000-$100,000; 3.1 percent have $40,000-$60,000; 6.5 percent have $20,000-$40,000; 10 percent have $10,000-$20,000; 13 percent have $5,000-$10,000; 13 percent have $3,000-$5,000; 50.2 percent have less than $3,000.”
Our political leaders and their conventional economic advisors evidence a “mechanical concern” with wealth and income distribution, an unfortunate “distributionist mentality” which has afflicted conventional economics since Ricardo. This mode of thinking is “forever counting the ranks of rich and poor and assaying the defects of capitalism that keep the poor always with us in such great numbers.” Poverty body counts give the rich a bad image by implying that wealth creates poverty. But most menacing, they impute that the system is unfair, that the deck is stacked. Thus, the distributionist mentality “strikes at the living heart of democratic capitalism (sic).” It challenges “the golden rule of capitalism.”
Conventional economists regret that even the great champions of capitalism such as Friedrich von Hayek, Ludwig von Mises, and even Milton Friedman, have not seen fit to give “capitalism a theology” or even “assign to its results any assurance of justice.” Their praise has been pragmatic and technical. Capitalism is good because it produces more wealth and liberty than its competitors. None of these defenders “cogently refutes the thesis that the greatest of capitalists–the founders of the system–were in some sense ‘robber barons.’ None convincingly demonstrates that the system succeeds and thrives because it gives room for the heroic creativity of entrepreneurs.”
Students of monopoly capitalism have long observed the tendency of this system to confirm one of the Bible’s many double-entry bookkeeping truths, Matthew 25:29, which promises: “Unto everyone that hath shall be given, and he shall have abundance; but from him that hath not shall be given, and he shall be taken away even that which he hath.” This is the golden rule of plutocracy. He who owns the economy’s productive capital today will own even more tomorrow, thanks to conventional business finance. And he or she who does not own productive capital, but who must make his productive input through labor, will be robbed of his or her little labor productiveness by the technological change, which eliminates him or her and makes productive capital owners even more productive. But though it fits the facts, this golden rule is not calculated to vindicate the ways of plutocracy to man. They are eager to portray the rich not only as wealth-bearers, but as wealth-creators and wealth-dispensers. This is the golden rule of capitalism.
They claim to derive the golden rule of capitalism rule from the few valid truths in conventional economics–Say’s Law. If the economics profession did understand Say’s Law we would have been spared from lopsided economics. But ever since Jean-Baptiste Say discovered the truth that bears his name, economists have circled it blindly, like moths around a flame. They intuit its importance without being able to decipher its meaning.
Say’s Law, compressed into an aphorism–“Supply creates its own demand”– is, as everyone knows by now, the battle cry of the Supply Lopsiders, who have fabricated a rebellion against the Demand Lopsiders, representing the opposite side of Say’s equation. The goal of each is simply power over national economic policy, which neither can hold for long unless the public is persuaded that there is some ideological or practical difference between the two impostures, which there is not.
Both sides invoke the authority of Say’s Law, which holds that in a market economy, if government will refrain from interference with market forces, the purchasing power generated by production will be sufficient, over a given time period, to enable the purchase of all that is produced. In effect therefore, Say’s Law states that if government does not interfere with the operation of the free market forces, depressions cannot occur. But depressions do occur, and they have been occurring ever since the burden of production began to be transferred to productive capital–machinery, land, and structures–at an accelerated rate in the opening stages of the Industrial Revolution.
Conventional economists, as a whole, fail to understand the workings of a market economy, and of Say’s Law as an interpretation of the relationship between production and consumption in a market economy, Their lack of understanding is grossly defective, including the Demand Lopsiders.
In the first place, Say’s Law does not relate to production, use, financing, acquisition, or disposition of producer goods or products, i.e., productive capital goods or products, in any way. Nor does it relate to the production, use, financing, or acquisition of military goods and products which are not “consumed” in any sense contemplated by Jean-Baptiste Say. The production, use, financing, and acquisition of productive capital goods or products are governed by capital theory, as Kelso and Adler pointed out in (1958) “The Capitalist Manifesto,” and again in (1961) “The New Capitalists––A Proposal To Free Economic Growth From The Slavery Of (Past) Savings.”
Economist Adam Smith, whose words Jean-Baptiste Say was interpreting when he announced his famous law, made this clear:
“Consumption is the sole end and purpose of production: and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it.” (Adam Smith, GBWW, Vol. 39. p.287.)
Furthermore, Say’s Law, by its own terms, is inapplicable to any modern industrial economy, for in every such economy, the price of one of the two factors of production–labor–is usually distorted beyond recognition. Government, by authorizing and encouraging unions coercively and repeatedly to adjust upward the price of labor, and business, by acquiescing in such an adjustment as long as the costs can be passed on to the consumers, have simply made useless the most basic law of market economies.
This observation should not be interpreted as an anti-labor remark. It is merely anti-economist. The economist’s face-saving liturgy that treats labor workers as the only true producers of products and services, and productive capital as a mere mystical catalytic agent that makes labor more productive, is simply a “big lie” in the Hitlerian sense. The result of it has been that labor workers, along with the unemployed, underemployed and the unemployable, have been prevented from becoming productive capital owners as productive capital input grew to its overwhelming predominance through technological change–that is to say, they have been prevented from sharing in the production of products and services as productive capital owners and from legitimately (i.e., through production) sharing in the consumption of such capital-produced consumer products.
In light of this, the sad and disturbing reality today is that conventional economist continue to be intellectually dishonest and sycophantic as in to propagate stall-tactics on behalf of the plutocracy to suppress the spread of productive capital ownership to the 95 to 99 percent of consumers in the United States economy who do not own it now.
In his own day, Adam Smith observed that the productive capital owners (the “mercantile class”) were already beginning to exploit the capital-less consumers–that, in the “mercantile,” i.e., capitalist system:
“…the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.” (Smith, op. cit., p.287.)
Thus the Supply Lopsiders carry on an old, though hardly honorable, tradition.
For many years, the supporters and advocates for the Just Third Way believed that society’s steadfast refusal to perceive that productive capital owners are themselves a factor of production and a creator of “value,” in the identical sense that labor workers are, was an unconscious anachronism whose corrective was a higher level of consciousness. We still assert this to be true in the case of the general public. But the owners of concentrated wealth, we have belatedly come to understand, have a vested interest in keeping the capital factor un-comprehended by the capital-less many. Their allies and confederates in this endeavor are the professional economists. Once it is admitted that productive capital owners make productive input in exactly the same ways–functional, moral, political and economic–that labor workers do, the macroeconomic game of productive capital monopoly will be over, and methods of finance that make the rich ever richer and keep the capital-less––capital-less, will end.
Then the question of who owns the productive capital plant will be understood as crucial and vital to the capitalist economy’s health, as well as to economic justice and opportunity. In a private-property economy, the income which a labor worker or a capital owner (worker) produces belongs to him or her. Thus the principle of distribution of a capitalist economy to be deduced from Say’s Law is: “From each according to his production, to each according to his production.” But this rule, applied to the concentrated owners of his or hers productive capital instruments, means that the few can produce everything required by the many, and therefore, because of Say’s Law, the many will be rendered underproductive or nonproductive, and thus forced to live partially or completely as wards of redistribution, boondoggled, welfare, or charity, supported by taxation, debt, and inflation.
All this means is that the American Economics Establishment is in dire need of a new apologetics. Between 1929 and 1932, the private property economy of the United States broke down because, as Kelso and Adler pointed out in “The Capitalist Manifesto” and “The New Capitalist,” the enormous productive power of the tiny minority (less than five percent) of the population who owned its productive capital could not provide adequate incomes to support the consumption of the labor workers, the unemployed, underemployed and the unemployable. As this became clear to the American people, they elected Franklin D. Roosevelt in the hopes that he would solve the problem. Relying on the demand lopside economics of John Maynard Keynes, they set to work to answer the question: “What can we do to alleviate the effects of poverty?” The result was the elaborate network of welfare and boondoggle channels that redistributed income from the middle-class labor workers and upper-class productive capital owners to the lower-paid workers and non-workers. Conservatives rail against such redistribution by the liberal demand lopside economists and their followers.
“When government gives welfare, unemployment payments, and public-service jobs in quantities that deter productive work, and when it raises taxes on profitable enterprise to pay for them, demand declines. In fact, nearly all programs that are advocated by economists to promote equality and combat poverty…reduce demand by undermining the production from which all demand derives…[demand] originates with productive work at any level. This is the simple and homely first truth about wealth and poverty. ‘Give and you will be given unto.’ This is the secret not only of the riches, but also of growth.” (Prosperity Gospel)
This “Essential insight of supply-side economics” happens to be false. The case for Supply Lopside economics cannot be built on the case against Demand Lopside economics. Without understanding that there are two factors of production that are in competition; that each individual needs to be productive through the ownership of both; that technological change, which continues day after day, has made production through productive capital ownership far more potent than production through labor; and that the individual freedom from toil which technology makes possible can be enjoyed only by productive capital owners, supply-side economics is as senseless as its demand-side counterpart. The Demand Lopsiders and the Supply Lopsiders are simply seesaw misinterpretations of the Jean-Baptiste Say equation.
Economists will continue to be baffled by Say’s Law until they realize that under it, distribution is a function of production by each consumer. Only after that insight does it become obvious that true capitalism must be a capitalism of the many, not of the few. Conventional economists do not know what capitalism is. Those of the Supply Lopside persuasion have made the Supply Lopside hoax credible. The concept of Social Capitalism or Democratic Capitalism or perhaps Personalism, a system which distributes purchasing power to all consumers as individuals as a result of their direct participation in production–either as labor workers or as productive capital owners–or both–is beyond their theoretical comprehension, as long as they cling to the obsolete doctrines that were, and still are, the subject of their doctoral dissertations.
Meanwhile, the propertyless many must somehow be provided with purchasing power. That was the only lesson the Great Depression taught. No conventional economist knows how to bring about this consumer demand except in the way which the Keynesians so thoroughly exploited: income redistribution (and debt). But the reality is that without capitalist tools like the Employee Stock Ownership Plan (ESOP) and those proposed in the Capital Homestead Act (see http://www.cesj.org/homestead/index.htm), government redistribution and ever-expanding debt will continue because it must. Such capitalists financing methods can substitute capital-produced incomes for welfare, social security, and boondoggle.
The Supply Lopsiders believe that to arrive at a truth, they need but invert a lie, and that the antidote to one wrong question is a different wrong question. They counter the question of the redistributive left, “How can we eliminate the effects of poverty?,” with the question of the capital-hoarding right, namely: “What can we do to revitalize the productive system?”
There is little in conventional economists thinking, dialogue and publishing to suggest this question, much less to answer it. In exposing many of the artful errors of the liberals, conventional economists, perhaps not intentionally, have undertaken to build a fortress around the institutions and policies that support the Divine Right of the Rich to Stay Rich and Get Richer, and to preserve the non-ownership of productive capital by the overwhelming majority.
John D. Rockefeller stated the golden rule of capitalism message far more honestly, and certainly more succinctly, in 1905. To a reporter who asked him how he became rich, he replied:
“I believe the power to make money is a gift from God…to be developed and used to the best of our ability for the good of mankind. Having been endowed with the gift I possess, I believe it is my duty to make money and still more money, and to use the money I make for the good of my fellow man according to the dictates of my conscience.”
http://www.quadrant.org.au/blogs/qed/2013/02/adding-the-value-of-nothing
