Peoples’ Capitalism
A Plan for Prosperity and Economic Justice
by
James S. Albus, Ph. D.
http://www.PeoplesCapitalism.org
Why can’t we use what we have to produce what we need?
Why doesn’t our economic system employ the industrial technology that is available to produce what is needed to eliminate poverty? No one doubts that modern industry has the capacity to produce more goods and services than it does. To many it seems obvious that the world’s industrial capacity could be expanded to produce enough wealth for everyone to have enough to eat, a safe and decent place to live, good sanitation, adequate medical care, and a basic education. But there are no plans to do this. Why not? Why can’t the world’s industrial capacity be expanded to meet the needs of the world’s people?
The modern capitalistic economy has certainly demonstrated its ability to produce goods and services more efficiently and in greater quantity and better quality than any other type of economic system. Yet the poor do not share in the benefits. 2.8 billion people in the world today live on less than $2 per day. At the other end of the scale, corporate executives earn upwards of $1,000,000 per day. This at least suggests that there may still be some wrinkles to iron out in the fabric of the capitalistic economic system.
The reason capitalism doesn’t produce more is certainly NOT that it lacks production capacity. It is because it lacks customers. Walk into any shopping mall or supermarket in the country and look around. What you see are shelves crammed with an abundance of goods, attractively packaged to entice consumers to spend money. Businesses compete fiercely for customers. There are plenty of goods available, and manufacturers could easily increase production if there were sufficient customer demand. The most prevalent reason for businesses failure is lack of customers.
Yet the world is filled with people in desperate need. The 2,800,000,000 people living on less than $2 per day need everything! This is a vast untapped market. These are potential customers. All they need is an income. If poor people had money to spend, industry would happily expand to supply them with goods and services.
So why does poverty persist?
When there is so much potential capacity for wealth production, and so many potential customers, why are so many still poor? Why doesn’t a growing economy benefit us all? Why doesn’t a rising tide lift all boats? Why doesn’t wealth trickle down to the poor? Why don’t the needs of the poor translate into consumer demand that stimulates production of goods and services?
An obvious answer is that the poor don’t have enough income. A less obvious answer lies hidden within the fundamental capitalist institutions of wealth distribution and monetary policy. Within both of these institutions there are major structural defects.
Structural defects of capitalism
1) The first set of structural defects derives from the contradiction that wages and salaries are the primary mode of wealth distribution for the vast majority of the population -- while labor is becoming less and less important in the production process.
- Most people derive most of their income from the sale of their labor, or their intellectual skills. Without a job, the average person has few legal sources of income other than welfare or charity.
- For the poor, unemployment is epidemic. Most of the very poor have few marketable skills, and many have restricted access to the labor market.
· For many in the middle class, incomes are stagnant or declining. Globalization is producing a race to the bottom for wages and salaries, while productivity enhancing technology is reducing the demand for human labor in many blue collar and white collar jobs. As a result, the average worker has little bargaining power in the labor market. Wages and salaries account for a declining percentage of the wealth created by the modern industrial economy.
· For the less-than-rich, there is limited access to credit for investment in ownership of the means of production. Banks are eager to provide credit to the poor for consumption, but not for investment. As a result, it is very difficult for the non-rich to acquire ownership of wealth producing capital assets.
These structural defects virtually guarantee that the poor will remain so. In a world where there are strong downward pressures on the value of human labor, the ladder out of poverty is sinking faster than most people can climb.
They also assure that those who live by selling their labor in the future will receive a smaller and smaller percentage of the wealth created by the modern post-industrial economy.
2) A second set of structural defects derives from the fact that using monetary restraint as a tool for controlling inflation is inherently contradictory.
Investment is the primary engine of economic growth -- but monetary restraint acts to reduce investment in order to control inflation. This is perverse. It fights inflation by slowing productivity growth and reducing economic growth. Monetary policy has only an indirect and slow acting influence on consumer prices. The time delay between changes in interest rates and changes in consumer prices can exceed 6 months. Success in fighting inflation comes only after months of delay during which economic growth has been slowed to the point where inflationary pressures are “wrung out” of people’s expectations. This is a hugely inefficient and costly procedure for controlling inflation. The cure is in many ways worse than the disease.
The economy is an enormous dynamic system with multiple feedback loops. It is well known from control theory that feedback delay is a potential source of instability. Thus, economic growth must be kept unnecessarily slow to prevent instability. Economic wisdom has it that 3% is the maximum rate of economic growth that can be sustained without instability. This is far below what could be achieved if a better tool were available for controlling inflation, and economic growth were to become the singular goal of monetary policy.
It has been demonstrated in many countries that economic growth rates in excess of 6% are sustainable for many years. There is little doubt that economic growth in the United States could be sustained above 6%, provided the Federal Reserve had an alternative to monetary restraint for controlling inflation, and could focus its policy solely toward stimulating economic growth.
The above two structural defects in the capitalist system are fundamental causes of poverty. If not remedied, poverty will almost certainly persist for many decades, if not centuries, into the future.
Peoples’ Capitalism is a plan to remedy both defects
To remedy the first set of structural defects, Peoples’ Capitalism would make credit available to every citizen for investment in productive enterprises. The ultimate goal would be to make everyone into a capitalist, i.e., to assure that everyone has an income floor based on ownership of capital assets.
The amount suggested is sufficient to effectively double the current national investment rate. The mechanism for accomplishing this would be for the Federal Reserve to open its discount window and issue credit to member banks for loans to individuals for investment in approved enterprises. Approval would be based on criteria similar to those routinely employed by the investment banking community. Details of this mechanism are described by Kurland et al. in the book Capital Homesteading.
To remedy the second set of defects, Peoples’ Capitalism would withhold savings from consumer income in the amount required to achieve the desired effect on inflation. The savings would be placed in personal savings accounts as 5-year certificates of deposit, and would earn interest at market rates. The amount of saving withheld would be adjusted automatically by formula every two weeks based on the latest measure of inflation. This would provide a powerful inflation controlling mechanism that would be fast acting and completely separate from monetary policy. Withholding savings would enable the Federal Reserve to focus monetary policy entirely on investment designed to maximize productivity and economic growth.
Doubling the nation’s investment rate without inflation would dramatically increase the rate of economic growth. Estimates are that economic growth would increase to between 6% and 8% per year.[1]
Predicted Results
Figure 1 shows what could be expected to result from the Peoples’ Capitalism plan. Assumptions are that loans from local banks to individuals for investment in approved enterprises would be issued at 3% interest, and would be repaid over a period of 30 years. Pretax return on investment is assumed to be 8%. This is a conservative estimate under normal growth conditions. In an economy growing faster than 6% annually, return on investment would almost surely be higher.
Figure 1. Pretax income floor provided to every citizen by Peoples’ Capitalism under a variety of assumptions.
The lower curve assumes that the amount of investment capital made available to each citizen would be $3000 per year. This would amount to a 50% increase over the current investment rate. This curve assumes that monetary restraint is used to maintain economic growth at 3%. Under these assumptions, at the end of forty years, the per capita income floor would rise to $8,000. In fifty years it would rise to $12,000.
The middle curve assumes that the Fed does not tighten monetary policy, but relies on savings withholdings to control inflation, and allows increased investment to push the growth rate to 4.6%. Under this scenario, the income floor would rise to $11,000 in four decades. In five decades it would rise to $20,000.
The top curve assumes that the Fed provides sufficient capital to individuals to double the investment rate (i.e., about $6000 per capita), and allows the economy to grow at 6%. For this scenario, the income floor would rise to $29,000 per annum within forty years, and to nearly $60,000 p.a. within fifty years.
Bear in mind that Figure 1 shows only the income floor that would result from capital investments by individuals financed by credit from the Federal Reserve. Normal economic activity in the remainder of the economy would continue as usual, except at an accelerated pace. In each scenario, economic growth would be robust, interest rates low, jobs plentiful, and incomes from wages and salaries would rise. The influx of investment capital would raise the market value of traditional stocks and bonds. Everyone would benefit, rich and poor alike.
However, the effect on the poor would undoubtedly be the most profound. Within a single generation, poverty would cease to exist. An income floor for every individual of $29,000 per year is well above the poverty line. For a family of four, before the year 2050, the income floor would be $76,000 per year.
No Income Ceiling
People’s Capitalism is not a scheme to take from the rich to give to the poor. It is insteat a mechanism by which everyone, rich and poor alike, would have access to credit for investment in wealth producing capital assets. People’s Capitalism would not require taxes to be increased, and it would impose no ceiling on anyone’s income. Income above the floor could come from wages and salaries, rent, interest on savings, pensions, Social Security, and income from additional capital ownership just as it does today. The difference is that no one would be poor. There would be no need for welfare, and everyone could afford health insurance.
If the United States were to adopt Peoples’ Capitalism, within a generation every citizen would possess a substantial and growing level of disposable income from ownership of the means of production. This would generate a growing market for industry and business. Productivity growth would be rapid because of the high rate of investment. The ready availability of investment capital would keep interest rates low and economic growth high. Everyone would benefit at all levels of the economic system, rich and poor.
In the process, every citizen would become a capitalist. Everyone would own stock in the means of production. Everyone would derive a substantial income from ownership of the means of production. Everyone would own a piece of the action. And the capitalist system would create enough wealth to provide economic security and prosperity for all.
This is the promise of Peoples’ Capitalism.
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Acknowledgements
It should be noted that the basic concept of providing access to capital for investment is by no means unique to Peoples’ Capitalism. The idea of Social Credit was introduced by C. H. Douglas in the early 1920s. The Social Credit movement has been active in a number of places throughout the British Empire, with members of Parliament elected in the United Kingdom, New Zealand, and Canada. During the 1930s, a majority Social Credit government was elected in Alberta, Canada.
Lewis Kelso and Mortimer Adler issued a Capitalist Manifesto in 1957. Kelso and Hetter published the Two Factor Theory in 1967. Based on this theory, legislation enabling Employee Stock Ownership Programs (ESOPs) has been enacted into law by the U. S. Congress.
Over the past third of a century, Norman Kurland has been active in the promotion of ESOPs. He recently founded the Center for Economic and Social Justice to promote the notion of widespread capital ownership. His recent book Capital Homesteading suggests detailed mechanisms by which access to credit for capital investment can be made available to all.
A book and articles on Binary Economics by Robert Ashford and Rodney Shakespeare provide additional scholarly support for the concept of access to investment capital for all.
References
Albus, James S., Peoples' Capitalism: The Economics of the Robot Revolution, New World Books, Kensington, MD, 1976. Available on line at http://www.PeoplesCapitalism.org
Ashford, Robert H. A. and Rodney Shakespeare, Binary Economics: The New Paradigm, University Press of America; Lanham, Maryland, 1999
Douglas, C. H., Economic Democracy, First edition, 1920, Fifth edition, Bloomfield Publishers, Surry England, 1974
Kelso, Lewis and Mortimer Adler, The Capitalist Manifesto, Random House, New York, 1958
Kelso, Lewis O., and Patricia Hetter, Two Factor Theory: The Economics of Reality, Random House, New York, 1967
Kurland, Norman G., Dawn K. Brohawn, and Michael D. Greaney, Capital Homesteading for Every Citizen, Economic Justice Media, 2004