18. The Expanded Ownership Revolution

Another instalment from Mr Greaney.

From The Just Third Way

As we saw in the previous posting in this series (we don’t actually begin every posting like that, but it saves us from trying to come up with a clever segue each time), the most effective counter to Keynesian economics and the New Deal came from Dr. Harold G. Moulton, president of the Brookings Institution from 1928 to 1952.  That is, the most effective theoretical counter came from Moulton.  He was never able to come up with a just and viable means of generating the mass purchasing power essential to a sound — and just — economy.

Louis O. Kelso

It was not until the work of Louis Orth Kelso (1913-1991) that anyone presented a viable solution.  Kelso combined the growing need to expand the base of capital ownership as advancing technology displaced human labor, with sound monetary theory to finance sustainable, non-inflationary growth.

Popes Leo XIII and Pius XI had assumed — incorrectly — that universal capital ownership must be financed using past savings.  They recommended workers be paid more (via a “living” or “family” wage) to enable them to save enough to purchase capital.

Unfortunately, in addition to increasing the costs of production and raising prices for consumers, this recommendation led commentators to mistake the means for the end.  They failed to realize that paying higher-than-market-valued wages was intended to serve two different purposes.  The first purpose was to address the immediate need to redistribute existing wealth in order to take care of people in the short term while a permanent solution was developed and implemented.  The second purpose was to provide the financing for a program of widespread capital ownership.

Pope Pius XI

Kelso’s idea was to finance widespread ownership of new capital or transfers of existing capital by expanding bank credit, just as Moulton advocated for the already wealthy.  Avoiding the presumed necessity of confiscation and redistribution to achieve his goal, Kelso realized that by purchasing new capital or transferring existing capital on credit and repaying the credit with the future profits of the capital itself, ordinary people could purchase capital without redistribution, restricting consumption, or taking cuts in pay or benefits.

Shifting from past savings (by definition a monopoly of the currently wealthy) to “future savings” — repayment of credit used to purchase capital with the future profits of the capital itself — makes it possible for anyone to own capital.  As Moulton had demonstrated, in the century preceding the Crash of 1929 and the Great Depression, the rich had typically financed new capital during periods of rapid growth by employing this concept of “financial feasibility” to purchase “self-liquidating” assets.

Still, the major advantage the rich enjoy over propertyless people is ownership of collateral. Collateral makes bankers willing to create money for the rich with as little risk as possible.

Since the issue is managing risk, Kelso advocated using capital credit insurance and reinsurance in place of traditional forms of collateral owned by the borrower.  The risk premium typically charged on all loans (except the allegedly “risk free” loans to government) could be used as the premium on an insurance policy that would pay off in the event of default, thereby taking the place of traditional forms of collateral.

Nor was Kelso’s idea simply a pragmatic application of advanced financial technology — although it is supremely practicable.  It is theoretically and philosophically sound as well.

Pope Paul VI and
Mortimer J. Adler

Kelso, a lawyer-economist, and Aristotelian philosopher Mortimer Jerome Adler (1902-2001), the “Great Books” advocate, presented the new paradigm in the two books they co-authored, The Capitalist Manifesto (New York: Random House, 1958), and The New Capitalists. (New York: Random House, 1961).  It should be noted that the titles do not accurately describe what Kelso eventually ended by calling “binary economics.”  This is in recognition of the fact that the two factors of production — labor (human) and capital (non-human) — when broadly owned bring the economy system back into balance, restoring Say’s Law.  In the two volumes, Kelso and Adler made a logical case for expanding the base of capital ownership and financing economic growth with future savings.

This, so Kelso and Adler argued, would not only vest “as many as possible of the people” with capital ownership, but emancipate humanity from “the slavery of savings.”  By shifting from past savings to future savings, savings would work for people, rather than people work for savings.  Kelso demonstrated the feasibility of his idea with the Employee Stock Ownership Plan (ESOP).

Lincoln drove the original
Homestead Act of 1862

By means of an ESOP, employees of a corporation can purchase shares of the company on credit and repay the loan out of the future pre-tax profits of the corporation.  Today in the United States millions of workers have become part owners of the thousands of companies that employ them without risking their personal savings or in most cases without taking any reductions in pay or benefits.

CESJ has proposed a “Capital Homestead Act” (that might be called an “Economic Empowerment” or “Economic Democracy” Act outside the U.S.), that would enable every person (even those who cannot work) to realize Kelso’s ultimate vision of equal access to capital ownership and private property as a fundamental human right.

Key to the “expanded ownership revolution” are the three principles of economic justice.  Kelso and Adler articulated these as interconnected systems principles in Chapter 5 of The Capitalist Manifesto.  CESJ later refined and integrated these principles into the social doctrine of Pius XI as analyzed by CESJ co-founder Father William Ferree.

Like the three legs of a tripod, the three principles of economic justice operate together, providing the framework for a just and stable economic order.  Like a tripod, if even one principle is missing or violated, the structure collapses.  As refined by CESJ, the three essential principles of economic justice are:

·      Participative Justice.  This principle defines how one makes input to the economic process in order to make a living. It requires equal opportunity in gaining access to private property in (control over, and enjoyment of the income from productive assets) as well as equality of opportunity to engage in productive work.  Participative justice does not guarantee equal results, but requires that every person be guaranteed by society’s institutions the equal human right to make a productive contribution to the economy, both through one’s labor (as a worker) and through one’s productive capital (as an owner).  This principle rejects monopolies, special privileges, and other social barriers to economic self-reliance and personal freedom.

Fr. William Ferree,
expert in social justice.

·      Distributive Justice.  “The most classical form” of distributive justice (Compendium of the Social Doctrine of the Church, § 201), the out-take principle, is based on the exchange or market value of one’s economic contributions.  This is the principle that all people have a right to receive a proportionate, market-determined share of the value of the marketable goods and services they produce with their labor contributions, their capital contributions, or both.  This respects human dignity by making every producer’s and consumer’s economic vote count.

·      Social Justice.  As the feedback and corrective principle, social justice governs participative and distributive justice, enabling both to operate properly.  Within an economic system, social justice restores balance between overall production and consumption.  It rebalances participative justice and distributive justice when the system violates either essential principle.  Social justice includes a concept of limitation that discourages personal greed and prevents monopolies and barriers to participation.

In general, social justice embodies the principles of solidarity and subsidiarity: every person has a moral responsibility to organize with others to correct organizations, institutions, laws, and the social order itself at every level whenever the principles of participative or distributive justice are violated or are not operating properly.  The application of social justice to the common good of specific economic institutions brings those institutions into conformity with the demands of the common good of all society.