Appended is William Krehm's review of Rodney Shakespeare's and Peter Challen's recent book.
Mr. Krehm disagrees on several important points peculiar to the theory of Louis Kelso, including the "labor" theory of value, the "indepedent productiveness" of capital, etc.
I invite Rodney (who remains a list subscriber) to post a reply. --
Review of a Book by Rodney Shakespeare and Peter Challen, New European Publications, London, 2002
"Seven Steps to Justice" by William Krehm
This little book opens minds to the erosion of yesterday's topographies. "All people are invited to forget, for just a moment, their own view of things to try and see if there is something which helps them think about broadening their ideas, and so, join up a little more with others. Some people like to have views on books without bothering to read them."
A charming aid towards this is the book's format--a chairperson, objections in the audience to the last speaker's views, audience members sent out to check moot points at sources. There are even coffee breaks until the answer comes in. It is a lesson in courtesy to others' opinions. For all this credit goes to Plato's Symposium.
"In the world as a whole, 20% of the population have only $1 per day to pay for everything, 20% have only $2, and a further 15% have $3. 25,000 die each day have been estimated as a result of dirty water."
That raises the question of money creation, and why some 97% of our money supply should be interest- bearing credit created by private institutions in a system that has eliminated all traditional quantity controls. This has left interest rates the one means of reining in perceived inflation.
"A member now arose saying that there was some unpleasant historical information to impart. Two US presidents had understood that governments could create their own interest-free money and--would you believe it?--had been assassinated. The chairperson thanked the member. In respect of Kennedy, she had heard that Executive Order 11,110 [supposedly providing the motive for his killing] was a technical amendment, which has been misunderstood. It did not create authority to issue new money. However, she wished to add that assassination was only one of a range of powerful weapons by powerful interests-- "blackmail, bribery, and besmirching of characters are often used." The gently imparted message was that reformers must not overstate their evidence. Their privilege is to be in a position to avoid this. At times you almost feel like pitying those in power who don't dare utter what they are up to.
Example: "Why can't a state, instead of borrowing for its capital spending, create its own money and pay no interest?" To find an answer, the chair suggested they return to the letter from the Governor of the Bank of England, which read in part, 'It is perfectly true that governments may borrow money from banks-- or indeed from the central bank--and in that sense they can perhaps be seen as "creating money." But to the extent this does happen, it reduces the funds available for borrowing by the private sector given the overall constraint.
"Very clearly, the Governor allows that a government may borrow from the banking system (and so have to pay interest). Equally clearly, he allows that it could borrow from the central bank, which would not be allowed to charge interest. Odd that the Governor fails to mention that point.
"'Now wait a minute,' protested a man who worked in the City, 'the Governor isn't saying that. He says that when governments borrow from private banks, or even from the central bank, it reduces the amount available for borrowing by the private sector. As everybody knows, the private sector runs things efficiently and the state wastes money. That's what it's all about.'
"'Rubbish!' snapped a voice. 'The Governor knows that in any society there is always a large amount of public capital spending. It should be done at the lowest possible cost, i.e., without interest. That in no way crowds out the private sector. It only means that when public capital spending is done, it should be done cheaply, instead of expensively.'
"In the discussion that followed it became clear that the crowd-out-the-private-sector argument is very weak. There is always going to be a large amount of public capital spending. That spending can go to private companies who put up the buildings, construct the waterworks or lay the roads, but those companies don't have to be paid with money that has interest attached to it. We must stop the rip-off."
That brings the discourse to the creation of interest-free money by the state. It is extended from public investments to private ones. It could become possible for all individuals "over time, to have a substantial independent income from their ownership of some capital, if all really did mean all-- including those providing care, the retired, the sick, the unemployed, women, children and men. Then poverty would be banished."
To achieve this S&C favour Binary Economics, developed by Louis and Patricia Kelso in their Democracy and Economic Power (1991). "Most important is the view of who or what actually creates wealth. People will always be in poverty because they own little or no capital.
"So where does the idea that labour does all the work come from? It comes from Adam Smith who did his thinking before the industrial revolution. As a result, Smith got something wrong. Quite simply, Smith said that labour creates all wealth."
Now the time has come for us to catch the chairperson's eye and express our dissent. First, the labour theory of value is one thing about the real Adam Smith that the "free market" supporters rarely mention. Over a century ago their intellectual ancestors abandoned that theory, because it helped socialists draw attention to the inequities of the "free market" just as S&C are doing today. They flocked instead to the marginal utility theory that was devised to recognize no value other than the price of the latest market transaction, not only of useful goods, but of wagers on the future price of corporation shares. However, demand for such gambles can be manipulated more easily than Saddam Hussein stuffs his ballot boxes.
We must then appeal to the Chairperson to ask why S&C who so deplore our casino economy would endorse Binary Economics? From their description of it, it utilizes the quantity theory of the "self-balancing market" with an implant of capital made available (under the name of "Capital Homesteading") by the government to all citizens to be paid for by interest-free loans. Such loans are to be held until redeemed by future installments of such government grants.
The idea of such grants is fine. But they should not be tied down to their being invested to make capitalists of their beneficiaries. Not all people have the knowledge or talent for investing. They would become dependent on brokers and consultants. And that would contribute to another bubble to match the one that so recently burst to shake the world. To keep their unsustainable system going Wall St. and Lombard St. ransacked every pool of capital in sight. They would do it again with those juicy escrowed "Capital Homesteading" accounts.
Wouldn't it be better, Ms. Chairperson, to offer everybody a freely disposable "second income." Should they feel entrepreneurial urge stirring within them, they could buy shares and bonds. But should they prefer, they could use it as an aid to dropping out of the rat race and adopting an alternate life style. That would diversify society, enrich it, and make it less vulnerable.
The notion that everybody must become a capitalist is a morbid one. It stems, I believe, from the bizarre notion of the Binary Economics people that machinery itself produces wealth. It doesn't.
The machinery that Binary Economy contrast for its superior productivity over labour is itself entirely the product of human labour. What distinguishes it from current spending is that its usefulness will go on for many years, unless human effort and talent conceives still more productive machinery to render it obsolescent. And not only was it built by human effort, but the capital accumulations and the social framework that made it possible can be traced to the contributions of generations of slaves, serfs, thinkers, martyrs, burned, mangled or hanged, navigators, philosophers, scientists. We must, accordingly not dehumanize, indeed deify technology as something that has replaced human effort.
C.H. Douglas, the founder of Social Credit, summed up the situation in his concept of "social heritage." He, too, proposed a sort of "social dividend," but one that would encourage citizens to cultivate alternate ways of living. The Argentine disaster is proof of the wisdom of that. There the improvisations of such gropings such as barter and community currencies in a great crisis are adding up to an impressive promise to save society's future.
There are several misunderstandings that have led S&C into the facile vision of everybody becoming investors. Believe that machines have replaced humans as the ultimate source of value, and there is no need for concern about these things.
Let me, add in justice, that S&C do a magnificent in exploring "these things," but then without realizing if they have left a gaping hope for the "free market" fanatics to come back and take over.
A key factor in this weakness of the fine S&C book is that they have underestimated the deadly compulsion that the existing system is under due to its built-in agenda of insane expansion. Like so many monetary reformers they have mistaken compound interest with exponential growth that puts our financial elite under the need to shred everything--morality itself --in its desperate urge to survive (page 108).
In reality exponential is infinitely more high- powered than compound interest. Let me resort to a parable beloved of monetary reformers. Had the Virgin on the birth of Christ deposited single shekel in a bank that paid 6% and didn't go broke, its value today would exceed all the silver mined and unmined in the world. The point, however, is that the Infant would have had to wait 2000 years for such a result. Hiroshima, visited by a bomb of exponential power, reached an infinity of destruction in seconds. Unlike compound interest, which works at a fixed rate of interest, the exponential function is artfully designed as an infinite series with a rate of growth that always moves up to equate the value already attained by the function itself. Say that, and you are saying that the rate of acceleration (second derivative of the function) keeps step and all the higher derivatives of the growth rate do likewise.
What has this to do with our Stock Market Unbound model? Simply this: the rate of growth--real or faked--already attained by a stock is extrapolated on an ever exploding base into the indefinite future, and then discounted at a fixed rate for present value and incorporated into the share price. That done, the stock must continue to move up at the same increasing rate and at the same rate of growth that determined the share price already reached. Failing the whole game collapses.
It is not that the numerous CEOs who were role models in the recent planned boom planned becoming criminals. It was just that, without quite realizing what they were letting themselves in for, they made a deal with the Devil. "I will grant you your greatest success on the stock and option markets," said the Great Persuader, "but on one condition, you must match that success on your own year after year. Sign here." Under such a compulsion, the Decalogue is a lost cause.
And into this jungle the Binary people will send the downtrodden masses with their Second Income to do their investing.1
A further word on the perils of misused mathematics. The Binary people inject a new item "Capital Homesteading Plan" into the standard Quantity Theory equation relating the quantity of money, its velocity of circulation, price and the quantity of product. But the Quantity theory is posited on the notion of a self-balancing market. Money creation today is not confined to the demure promises of the Quantity Equation. With statutory reserves that banks had to hold with the central bank as a modest collateral quota to back their money creation abolished or almost so depending on the country, banks can create unlimited money. That power is regulated with little but the Bank for International Settlements Risk- Capital Requirements. Instead of creating credit to lend out, they used it to buy brokerage houses, derivative boutiques insurance companies. That is why so many huge banks became holding companies. But the statutory reserves were in legal tender; the BIS constraints that have almost wholly displaced them throughout the world are in capital not cash. And the US and other law courts are jammed investigations concerning the fictions of capital devised by accountants and others to put capital on the books that never existed, and keep liabilities off the books. What could result for the "Capital Homesteaders" is likely to be a replay of that immortal classic "The Slaughter of the Innocents."
Paying for the "Capital Homesteading" will inevitably give rise to a deeper layer of taxation in price. I have called such price increases that reflect not an excess of demand over supply which is real inflation, but the redistribution of income to "internalize" essential public services, a "structural price increase." Such public services have been declared "externalities" by the quantity theory and other models incorporating the dogma of a self-balancing market.
Likewise, the surprising S&C's adoption of Say's Law, that holds that every commodity creates a market for itself by the very act of its production. Obviously, this blows up just about everything that S&C deal with in the excellent portion of the book out of the water--forced unemployment, the maldistribution of wealth and so forth.
An apology, Madam Chairperson, because I have already taken more than my allotted time. The moral of all this is important. Never was a more persuasive book written on the need to reform this crumbling, unjust and unworkable social system. But to walk the seven steps to justice that the authors identify, we need a radical mind-cleaning of the dogmas of the system in power. Otherwise what well-intentioned reformers throw out through the door, will come back to mock their efforts via all windows and the chimney. The limitations of space have led me to list some serious misconceptions of this partly excellent little work, instead of celebrating its many virtues. The Seven Steps to Justice is good enough to merit at least seven editions. But for the second of these they must address the weaknesses I have listed. We trust that can be done at future sessions of your excellent Symposium. Count me in for its sessions.
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1. For a simple examination of the Exponential Function, with the high-school or freshman maths needed, see my Towards a Post-Autistic Economy � A Place for Society at the Table, COMER Publications, 2002, p. 99.
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