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Monday, March 12, 2012

Equity and Equilibrium: The Political Economy of Distributism

From Anamnesis:


Equity and Equilibrium: The Political Economy of Distributism
Written by John C. Médaille   


“When 'capital' becomes an 'ism,' it also becomes an ideology.”
James T. McCafferty
According to the venerable National Bureau of Economic Research, the organization charged with dating recessions, the most recent recession ended in June of 2009, or 22 months ago, and we are now in a period of growth. But with all due deference to that august body—and I do respect their work—I would like to suggest that, far from being over, the recession hasn't properly started. While we cannot ignore the work of such an important body, we can note, nevertheless, that an economy which has a persistent 9.8% unemployment rate 22 months after the start of the  “recovery” is not a healthy economy. And that number is the optimistic “U3” estimate; the U6 estimate is 16.1%.
To complete this rather dismal picture, I would like to suggest that there is no way out of our current difficulties within the bounds of current institutional arrangements, and certainly no solutions within the range current political discussions. We have reached that point in systems complexity where everything done to fix the situation will only make it worse. Raise the taxes to the sky, or eliminate them entirely; reduce the debt to nothing, or increase the stimulus, the results will be the same. The real issues are not being addressed, therefore the real problems will not be solved. Suppress the unions, end Medicare, default on the pension obligations, nothing will help.
What I will attempt to show is that economic order, that is, the rough balance between supply and demand known as equilibrium, is dependent upon equity. Indeed, it is the very lack of equity that makes equilibrium impossible and inefficiencyinevitable, and the failure to recognize this makes economic science impossible. Three things are necessary for a scientific and ethical economics: one, to situate economics, or rather, Political Economy, in its proper place in the scientific hierarchy; two, to show why distributive justice is necessary to economic order, and; three, to show that property, the most basic of economic relationships, lies at the root of distributive justice. Taken together, these three points add up to the economic philosophy known as “distributism.” However, I wish to point out that this “distributism” is not some new theory of economic order, not another ideology, not an alternative “ism” in a marketplace of “isms,” but rather an historic reality which occurs over and over again, and occurs today. Our task is not one of invention, but of discovery; it is not to invent new systems, but rather to discover the roots of economic order which are always operative, and to apply them to new situations. Our originality comes not from invention, but from application. Indeed, political economy is the practical science par excellence, and is hence governed by the practical reason, which has at its first principle that “the good is to be done and evil avoided.” And since it is a practical science, our first task is to locate political economy within the scientific hierarchy.
Equity and Economics
Equity and Equilibrium
When people come together in families or firms to produce things, they add wealth to the economy; in fact, this is the only economic way to add wealth. If they and others also get an equitable share of the output, or the wealth they create, there will be enough purchasing power in the economy to buy all the things the firms produce. This is the much-maligned “Say’s law of markets,” which states that “supply creates its own demand.”  Say’s Law is much criticized because if you examine it closely, it says that recessions are impossible; there will always be enough purchasing power to clear the markets. Clearly, we purchase things in terms of other things. The total number of things created equals the total number of things that can be used for purchasing the other things.  And yet, recessions do happen, quite obviously. Long ones. Deep ones. Serious ones. And they happened more so in Say’s day, the heyday of the laissez-faire economy, than in ours. So, what is wrong with Say’s “Law”?
To understand the problem, we have to look at the sources of demand in a money economy: wages, and  profit. Wages are, of course, the rewards of labor and profit the reward of capital. In another sense, however, these are the same rewards, since capital is merely “stored-up” labor, or things produced in one period to be used to continue production in the next period. For example, if a farmer wishes to have a crop next year, he must save some seed-corn from this year’s crop. Now, the corn he consumes and the corn he saves are the same corn from the same crop. But by saving some corn for seed, it becomes “capital.” Hence, the return on this capital is really a return on his prior-period labor, just as his wages are a return to current-period labor. Clearly the returns to capital and labor, profit and wages, spring from the same source (labor). Capital, then, ought to have roughly the same rewards as labor, plus some premium for saving.
If wages and profits are normalized to each other, economic recessions are unlikely to be protracted or serious. There will be enough purchasing power distributed equitably to clear the markets. In capitalist economies, the vast majority of men are not capitalists; that is, they do not have sufficient capital to make their own livings, either alone or in cooperation with their neighbors, but must work for wages in order to live. And since the vast majority of men and women work for wages, then the vast majority of goods will have to be distributed through wages. In conditions of equity, this will not be a problem; so long as there is equity, there is likely to be equilibrium, and periods of disequilibrium are likely to be brief. But it may happen, and quite often does, that profit and wages are not normalized to each other. Usually, this means that capital gets an inordinate share of the rewards of production.  This, in turn, means that the vast majority of men and women will not have sufficient purchasing power to clear the markets, and the result will be a disequilibrium condition, that is, a recession.
At this point, the neoclassical economist might object that the division of rewards doesn't matter, since there will still be the same amount of purchasing power in the economy; even if capital gets more and labor less, there will still be the same amount of money, and hence of purchasing power. Alas this is not true. The CEO or Managing Director may get 500 times what the line worker gets, but he cannot wear 500 times the shoes, eat 500 times the food, or live in a 500 bedroom manor. Nor can he productively invest the excess, because the very fact of receiving the excess narrows the market, which is always measured by the number of solvent consumers in that market. Hence, instead of productive investment, the investor finds no use for his money and he turns to speculative instruments like the CDOs, MBSs, CDSs, and the whole alphabet soup of financial gambling instruments with which we have become all too familiar. Thus, both purchasing power and investment funds leach out of the economy to produce structural shortfalls. When this happens, societies look tonon-economic ways of restoring equilibrium.
Non-Economic Equilibrium
The major non-economic means of restoring equilibrium are charity, government spending, and consumer credit (that is, usury). Each of these methods transfers purchasing power from one group, which  has an excess, to another, which has a deficit. The first method, charity, will always be necessary to some degree because even in the most equitable economies, there will always be people who are incapable of making a decent living, perhaps because of mental impairment, moral deficiency, or physical handicap. One hopes that there is enough generosity and benevolence in society to voluntarily cover these needs. However, when low wages become widespread, and when self interest becomes the dominant motivation in society, it is likely that charity will be insufficient, and other means must be used.
The second non-economic method is government spending, by which the government seeks to re-establish equilibrium conditions either by supplementing the income of some portion of the population, or simply by increasing its spending to create more jobs and thus add more purchasing power to the economy. This strategy is at the heart of Keynesian economics.
Despite the fact that Keynesian transfers now consume a huge portion of the public expenditures, these transfers have been, for some years now, insufficient to balance supply and demand, and for some time now the economy has depended chiefly on the third method, usury or consumer credit. This is the plastic economy, an economy based on credit cards. And to the extent that an economy depends on consumer credit, it is, quite literally, a house of cards, and will be as unstable as those structures usually are. In fact, usury is the most destructive way of increasing demand, since a borrowed dollar used to increase demand today must be paid back tomorrow and hence decrease demand in a future period by that same dollar—plus interest. This requires more borrowing, which of course only makes the problem worse. Eventually, the system falls of its own weight, as credit is extended to an increasingly weakened consumer, and a credit crisis results.
Power, Property, and Justice
The “Standard” Model
If the relationship between equity and equilibrium is so obvious, why have most economists missed it entirely? The truth is, they haven’t missed it, but they use a different model of “fairness” in wages. Without going too deeply into this model, we can note that it states that in a perfectly competitive, free-market environment, wages would tend to reflect accurately the productivity of both  labor and capital, and that each side would get the wealth it actually produced, and so equilibrium would be reached. The most famous proponent of this theory, called “marginal productivity,” was J. B. Clark, who put it this way,
Where natural laws have their way, the share of income that attaches to any productive function is gauged by the actual product of [that function]. In other words, free competition tends to give labor what labor creates, to capitalists what capitalists create, and to entrepreneurs what the coordinating function creates.1
Another way to state this theory is to say that wages determined by free-market bargaining will be “just wages,” and equilibrium conditions will be satisfied. While time does not permit a complete critique of this theory, we can note that it depends on treating all things as commodities manufactured for the market with a supply regulated by the price. But labor (that is, human beings) is not a “commodity” whose supply is regulated by price, Thomas Malthus to the contrary.  However, the theory of marginal productivity is very easy to test empirically. According to the theory, wages should rise with productivity. And occasionally, this actually happens. But not always, and not even generally.
For example, over the last 40 years in the United States, productivity has exploded in all categories of labor, but the median wage  has not changed since 1973. (Women and minorities have experienced some real gains, but from a much lower base.) Hence, the marginal productivity theory is falsified in practice. Clearly, workers are producing more, but they are not getting any of the benefits; the rewards of increased productivity are going to a few people at the top, while the mass of men have seen no improvement. However, it is obvious that if people are producing more but earning the same, they cannot from their earnings consume all that they produce, and hence the economy will have to rely on the non-economic sources of demand; usury and welfare will replace economic justice as the means to equilibrium.
Why doesn't free bargaining produce equitable wages? Adam Smith gave the answer a century before Clark proposed the theory. Concerning any dispute over wages, Smith says,
It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily. …In all such disputes, the masters can hold out much longer. ... Many workman could not subsist a week, few could subsist a month, and scarce any a year without employment.2
In other words, Smith recognized that it was power, and not productivity, that determines the outcome of wage negotiations, and power will generally favor “the masters.” But if it is power that is arbitrated in a wage contract, then the solution is to redress the balance of power between the parties. To do this, we must look at the primary source of economic power, namely property.
Property: The Source of Economic Power
Property relations are the most basic economic relations, and all other economic outcomes will depend in large measure on the nature of the basic property relations. As Daniel Webster noted, “Power follows property,” and this is a simple truism that cannot be denied. We tend to take the modern form of property for granted, but in fact it is a relatively recent innovation, dating back to 1535 and the seizure of the monasteries, an act which created a new form of property. This modern form of property was not codified in law until 1667 in the Statute of Frauds, and the dominant form of modern property, the limited-liability corporation, did not gain its current status and powers until 1886, in a bit of U. S. Supreme Court legislation known to history as Santa Clara County v. Southern Pacific, a decision which made the corporations practically independent and sovereign nations.
Before the reign of Henry VIII, property tended to be a wide-spread condition throughout society. Technically, only the king was a property-holder, in our sense of the term, while everyone else was tenant, either a tenant-in-chief (a duke or other great lord) or a sub-tenant. We associate “tenants” with “renters,” people who normally have only thin, contractual, and precarious rights to the property they occupy, and who pay for these limited privileges the highest amount that the market will bear, an amount called “economic rent.”  But this was not so then. Rights in tenancy were nearly as strong as outright ownership is today, and rents were not “economic,” but customary. That is, they were not related to the economic value of the land, but to the value of the services provided to the land: defense, improvements, courts, etc. They were more like a tax than a rent, and did not vary from year to year. We tend to think of a 15th-century peasant as powerless and perhaps starving, a mere serf (slave). But that was not the case. Wages were, in fact, quite high. An artisan could provision his family with 10 weeks of work, while a common laborer could do so in 15, wage levels that were not seen again until the late 19th century.3
However, after the seizure of the monasteries, wages collapsed so that, at the close of the 16th century, it took an artisan 35 weeks and a laborer 42 weeks to provision his family.4 The seizure of the monastic lands and the enclosure of commons had dispossessed most of the peasantry of their traditional lands and rights. They became landless proletarians crowding into cities, which often could not provide them with sufficient work, or brigands on the highway, stealing to support their families. Rents became economic, with landlords squeezing out the last penny of value from the now weakened renters.
This brief history shows the power of property to completely change wage relationships. Men who have property—that is, the means of production—are free to negotiate a wage contract, or not, as they wish. But a man with no other means of support must accept the terms offered. In this latter case, the wage contract becomesleonine, that is, based on the inequality of the parties, and leonine contracts are always about power.5
We should be careful to note here that the issue is not about private property per se, but about the form and extent of that property. Property is natural to man, we might even say it is proper to him. It is as natural for a man to say, “This is my house” or “This is my land,” as it is for him to breathe. Indeed, when a man cannot say, “This is mine,” then he really is less of a man; he might even find it difficult to breathe, or at least draw a fee breath; his rights and freedoms have been truly compromised. The socialists correctly analyzed the problem in terms of property, but they analyzed it in the wrong direction. Having ascertained that there were too few owners, they tried to ensure that there would henceforth be no owners. But the distributist takes the problem in the other direction; he wishes to make the mass of men more properly human by giving them what is proper to a man, namely property.
Restoring Distributive Justice
The primary justification for private property is that it ensures that each man gets what he produces. As R. H. Tawney put it, “Property was to be an aid to creative work, not an alternative to it.”6 But when property becomes aggregated into a relatively few hands, when only a few control the means of production, property loses its proper function, and “ownership” becomes divorced from use. In our day, “ownership” is frequently in the form of a corporate share, which loses most of the qualities of actual ownership to become attenuated to a mere lien on a certain portion of the profits, or not, as the managers decide.7 Oddly enough, this puts not only the worker, but the investor at a disadvantage, as power passes to a new group, theüber-managers, who sit on each other’s boards and set each other’s salaries. As John Bogle, the founder of the Vanguard investment funds, notes, the managers take an increasing share of the profits, leaving scraps for those who actually put their money at risk.8 The result is that the returns to both kinds of labor, actual labor and the stored-up labor of capital, are reduced, while “management” and speculation get the lion’s share of the profits.
The whole point of distributism is the restoration of distributive justice to its proper place in economic science, and this means, at the practical level, the wider distribution of property. Only a man who has his own property—the land, tools, and training to make his own way in the world—only such a man can fairly negotiate a wage contract. If he has alternatives to what is being offered, then the resulting contract is likely to be fair, that is, to fairly represent his contribution to the productive process. Nor is this conclusion really at odds with standard neoclassical economic theory, if only the economists would take their own theory seriously. For at the base of all the standard economic theory stands the “vast number of firms” assumption, which presumes that the production of any commodity is spread over a vast number of firms such that none of them has any pricing power. They should all be price-takers and not price-makers. But the precondition of the “vast number of firms” assumption is that property be widely dispersed throughout society; without the latter you cannot have the former. If economists took their own assumptions seriously, they would be the first to protest in front of firms like Wal-Mart or Exxon. But they do not take their own theories seriously, because if they did they would become distributists or something very like it. Indeed, they would note the obvious: that the modern corporation has collectivized production beyond the wildest dreams of any Stalinist bureaucrat.
The Practice of Distributism
Having said all this, I think it necessary to examine the question of whether this theory works in practice, and the only test of this is to find functioning examples. Practical science should have a practice, and a real fear of abstractions for which there are no practical examples.
So, does distributism function in practice? In fact, it does, and there are many large and long-standing examples that we may examine. Many examples could be advanced, but some of the more prominent ones include the Mondragón Cooperative Corporation of Spain, the cooperative economy of Emilia-Romagna in Italy, the Grameen Bank, which pioneered micro-lending, Employee Stock Ownership firms, and cooperatives and mutual banks and insurance companies of every size and description. Let me say just a few words about each of these.
The Mondragón Cooperatives were founded sixty years ago in the Basque country of Spain, a region that had been devastated by the Spanish Civil War. The founders were inspired by the works of their parish priest, Don Jose Maria Arrizmendiarrieta. Today it is a collection of 250 cooperatives and one of the largest corporations in Spain, with over 80,000 worker-owners doing more than $24 billion in sales. But Mondragón is not just a business; it operates schools, research institutes, a university, training institutes, a social welfare system, and a credit union, all of which are self-funded. Such a huge enterprise requires no outside investment but the commitment and dedication of its own workers and its community.
In the Emilia-Romagna region (the area in Italy around Bologna) worker cooperatives provide 40% of the GDP. Wages are about twice the average for Italy and the standard of living is among the highest in Europe. Moreover, they have pioneered a new process of industrial production which involves networking among small firms to cooperate on large projects, a feature which allows them to maintain small and medium-sized companies, but to compete internationally on big jobs.
The Grameen Bank, which began in the impoverished countryside of Bangladesh, makes very small loans to very poor people. With these loans, typically in the range of $50-$200, the poor are able to become independent business owners and support their families. What is especially instructive about Grameen is just how little capital it takes to unleash the creative power of the poor, a power that history, and economics, have largely ignored.
But we need not look to exotic forms of organization to see the principle of distributive justice in action. In this country, we have many examples of employee-owned enterprises. One prominent firm is the Springfield Remanufacturing Corporation, which was founded in 1983 when a group of employees bought out a failing unit of International Harvester. Its president, Jack Stack, set out to create a corporate culture of employee ownership and involvement. This involved not merely distributing shares of the company to the workers, but creating an environment of open-book management and of continuous education, which Stack calls “The Great Game of Business.” Stack is seeking not just to grow his company, but to grow his employees as well. Not only is this a successful business, but Stack claims that his informally educated employees are the equivalent of MBAs from the best schools.
I could give many other examples. But it should be clear by now that distributive justice is not a mere set of platitudes or an unobtainable ideal, but rather a principle embodied in existing and successful business practices, practices which we need to examine and to incorporate in our economic systems, particularly in this time of great uncertainty.
In this presentation, I have attempted to show the connection between justice and economics, and specifically to show that justice is not some external restraint, but rather the practical principle which makes political economy possible, which gives it a standard of action and enables it to be a rational discipline and overcome the absurdity of the “equity/efficiency” trade-off. And I have attempted to show that the question of justice cannot be divorced from the question of property, and that distributive justice, as a purely practical matter, rests upon a proper understanding and division of property.
Finally, I leave you with this point. There is an old platitude that says, “If you wish for peace, you must work for justice.” The economic equivalent is, “If you wish for equilibrium, you must work for equity,” for equilibrium is economic peace and equity is economic justice, and you will never see the one without the other.

Works Cited:
1. J.B. Clark, The Distribution of Wealth: A Theory of Wages, Interest, and Profits(New York: Augustus M. Kelly, 1899), 3. Italics in original⁠.
2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Amherst, New York: Prometheus Books, 1991), 70.
3. J.E.T. Rogers, Six Centuries of Work and Wages: The History of English Labour (New York: G. P. Putnam's Sons, 1884), 390.
4. Ibid.⁠
5. H. Belloc, The Servile State (Indianapolis, Indiana: Liberty Classics, 1913), 111.
6. R.H. Tawney, The Acquisitive Society (Mineola, New York: Dover Publications, 1920), 59.
7. Ibid., 62
8. J.C. Bogle, The Battle for the Soul of Capitalism (New Haven & London: Yale University Press, 2005)⁠.

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