THE Global Justice Movement Website

THE Global Justice Movement Website

Monday, August 19, 2013

The Slavery of Past Savings, I: How to Finance Growth

Last week a member of the network forwarded a link to an article on cooperatives.  The article details many of the advantages of worker ownership, but then dilutes the effect.  It does this by making an unconscious assumption that has had a very negative effect on economic growth in general, and widespread, democratic ownership of that growth in particular.  This assumption is what ESOP-inventor Louis O. Kelso and Aristotelian philosopher Mortimer J. Adler called the “slavery” of past savings.

There are two ways to finance economic growth.  One way is to withhold production from consumption, i.e., “save.”  Financial instruments can be created backed by these accumulations, and used to finance growth.

There are two flaws with this method.  The first is that the rate of economic growth is limited by what has been withheld from consumption in the past.  If everything is consumed, there are no savings, and there can be no growth — but if there is no consumption, there is no reason to finance growth!  The most fundamental precept in all of economics is that the purpose of production is consumption.

If, instead, there is production that is intended not for consumption, but saving, then the economic equation is thrown out of balance.  In a rational system, all production must be for consumption, not saving — and there must be some means to sustain mass purchasing power to justify that production.  Setting aside income to save rather than to use for consumption defeats the whole purpose of producing a marketable good or service in the first place.

The second flaw is that, if we respect the traditional understanding of private property as a natural right, inherent in each person, albeit limited in its exercise, reliance on past savings as the only source of financing for economic growth necessarily means that only those people who can afford to cut consumption will receive the benefits of economic growth as owners instead of wage or welfare recipients.

To all intents and purposes, that means that, as technology advances and the scale of economic growth becomes too expensive for the resources of average people, only the rich will own the enterprises that generate the bulk of production.  This is capitalism.  Everyone other than the rich who own capital is limited to wages or sub-economic microenterprises, unless the rich decide to be generous and voluntarily surrender some of their wealth so that others can own capital, too.

Within this past savings paradigm, the alternative to having a few rich people monopolize ownership is to change what “ownership” means.  There is a strong hint of this in the article.  By changing what ownership means, the State (whether the central government or the local community) decides what and how much of the fruits of ownership go to those who hold legal title, and what and how much is distributed in some fashion to others in the local community or the nation at large.  This makes title a meaningless concept, abolishes private property, and is socialism, by whatever label.

Thus, if we restrict financing of economic growth to what can be withheld from consumption out of what has been produced in the past, we are necessarily trapped into either capitalism (concentrated private ownership of capital) or socialism (concentrated State ownership or control of capital).

There is, however, a way out: a source of financing economic growth that does not depend on how much consumption can be reduced.  This seriously impairs the feasibility of new capital formation in any event, making it less likely that new capital will be financed in the first place.

Instead of using the present value of past reductions in consumption to finance economic growth, it is possible — even preferable — to finance economic growth using the present value of future increases in production.  In other words, shift from a “past savings” system, to a “future savings” system.