Building the Ownership SocietyBy John Médaille for FRONT PORCH REPUBLIC
This is, at last, the last chapter of my new book, Equity and Equilibrium: The Political Economy of Distributism. I post it here because so many questions have arisen on this site as to whether distributism is just another kind of socialism. This chapter, I hope, clarifies the relationship between distributism and the state.
Distributism and the Current Crisis
Discussions of what to do about the current crisis commonly take the form of an argument between “socialism” and “capitalism.” However, such a discussion is flawed in both of its terms. Real socialism collapsed in 1989, and few would want to return to that horrific system. What is less well understood is that pure capitalism itself collapsed in 1929, never to rise again anywhere in the world. There are few citizens with any living memory of real capitalism, and the memories they have are generally unfavorable. Capitalism collapsed for the same reason as communism, a victim of its own internal contradictions that caused chronic instability. Workers found the system unacceptable, to be sure, but so did the capitalists themselves, and few were very sorry to see it go. Pure capitalism had proved itself toxic to both capital and labor, just as Belloc predicted it would in 1913.
The first task in reforming the system to understand the system that we have, the system that is in full failure, and understand apart from the ideological terms commonly used to describe it. The system that replaced capitalism was first a hyper-active Keynesianism, brought about by World War II and which lasted until the late 70’s; Keynesianism itself was then replaced by a pure mercantilism, the system which combines private privilege with public power and which so incited the wrath of Adam Smith. It is this mercantilism which finds itself in the midst of a full-blown collapse. Both the Keynesianism which replaced capitalism, and the mercantilism which replaced Keynesianism, depend on massive government controls and subsidies which are no longer practicable or sustainable. Nor can we go back to the capitalism of the 1920’s without reliving the instability of that turbulent period.
If capitalism is not a viable alternative, if it represents a system that no living man has seen, why then do the arguments in its favor carry such weight? I believe the reasons are mostly ideological. Capitalists are quite willing to trot out libertarian arguments when dealing with some regulation or tax that they find odious, but they are just as willing to put such arguments aside when they seek some privilege or subsidy from the government. In this way, the most well-meaning of the libertarians serve as the fellow-travelers and useful idiots of the mercantilists. And although I have a great deal of respect for the libertarian arguments in general, in practice these arguments do not function apart from well divided property, as the older, pre-Austrian libertarians realized.
However, it would be totally unjust to critique the libertarians if the distributists did not have something of their own to offer, and something more than mere platitudes or even principles. Something programmatic and concrete, and applicable to our actual situation is required. Distributists have an advantage in this regard, since, unlike capitalism or libertarianism, there are actual distributist systems on the ground and working (Chapter XVI) and we can examine them for practical lessons to apply to our own troubles.
Distributism and Government
Critics of distributism often charge that the theory is no more than a variety of socialism. This charge is odd for two reasons: One, socialism is the theory that there should be no private property, while distributism is the theory that property ought to be spread as broadly as possible; the two are precisely opposite. Two, the actual practice of distributism, in Mondragón and other places, is more “libertarian” than anything the libertarians have been able to accomplish. Nevertheless, the critique cannot be passed off lightly because the very term “distributism” conjures up the specter of “re-distribution,” the idea that some committee of bureaucrats will decide who will, and who will not, own property.
But in the main, distributism is not so much about what the government ought to do as about what it ought to stop doing. The claim of the distributist in this regard is not much different from the claim of the pure libertarian: It is government which fosters the accumulation of property into fewer and fewer hands. Indeed, without the aid and protection of government, the piles of capital could not have grown as high as they have. And the higher the piles of private capital grow, the thicker the walls of public power necessary to protect them. Big government and big capital go together, and this is a simple fact of our history, beyond all reasonable dispute.
That being said, there are clearly cases where government must, in fact, redistribute property. The case of Taiwan comes to mind, where the population was held in virtual slavery to a few landowners. The remarkable prosperity of that island is traceable to the decisive action of the land-to-the-tiller program, which made most of the sharecroppers into independent farmers. Those who would defend the landowners and the sanctity of property over the misery and poverty of the people corrupt the very notion of property. Property is a sacred right, but not an absolute one. Every proper right is known by its limits, and an absolute right is not a right at all, but the seedbed of tyranny. Property that depends on the slavery of others is certainly not legitimate property. And in such egregious cases, the government can indeed take egregious action.
And then there is the case of the entities deemed “too big to fail,” or more accurately, too big to succeed without generous drafts from the public purse. It is quite legitimate to break up such companies and to distribute them either to the local or regional banks or to the employees. The same principle applies to the failed industrial giants that require public life support. They can be broken up and turned over to the workers through the simple expedient of placing contractual obligations for pay and pensions on the same level as the contractual obligations to the bondholders. Then we can see if the workers can run these factories any better than the geniuses in Detroit. If the similar experience in Argentina is any guide, they might do very well indeed.
Finally, we can note that as long as capitalism endures, distributists may legitimately call on the power of government to limit its manifold excesses. For example, so long as there are monopolies, price-controls are a legitimate public response. Ideally, we would want to eliminate such monopolies that are not strictly necessary, but as long as the government protects monopolies, it is reasonable to ask for protection from monopolies.
All that being said, our main interest in dealing with government is to deal it out of the game. It is not that there would be no government—we are not anarchists—but compared to the size and scale of the current mercantilism, it would look a lot like “no government.” Still there are functions which are properly left to the community and these would be left in place. Anyone who objects to any government whatsoever as a form of socialism ought not to pull that socialist lever in their home, the one that makes their waste disappear in a whirlpool into the socialized sewage treatment plant.
I present a “distributist program” not because I think our future will unfold programmatically; rather, it is likely to be chaotic, even violent, as such transitions often are. But one must be hopeful and hope for peaceful change, and even have a plan to accomplish that change. Most of the proposals presented here have already been discussed in detail in the previous chapters. Here in the last chapter it is appropriate to bring them all together and summarize them. I will refer to the chapter where each was discussed more fully.
Building an ownership society involves both political and economic goals. The political goals are based on the principles of subsidiarity and solidarity (Chapter XIII). The economic goals are built on the principle that justice is intrinsic to economic order, and not some added extra or exogenous feature (Chapter VI).
You Say You Want a Devolution?
Devolution as a Fiscal Problem. Conservatives express great frustration with the egregious violations of the Constitution by the legislatures and the courts, violations which ensure that power gravitates to the federal government, while the states become mere bureaucratic subdivisions of the federal apparatus rather than partners in a political union. In response, they call for a devolution, a return of power to the states. Many historical, political, and philosophical reasons could be advanced for the centralization of power, but at base this turns out to be a fiscal problem. Power follows property, as Daniel Webster noted. The political equivalent is that power follows funding, that it gravitates towards that level of government that has the most money to spend. When the federal government acquired the power to tax incomes with the 16th Amendment in 1913—a source of funds with no natural limit—the rest of the constitution gradually became irrelevant.
The income tax makes the feds the most important source of funds, and hence the source of power. Local and state officials tend to kick problems “upstairs” to the largest funding source. Thus it comes as no surprise that a senator can run for vice-president on the claim that he “put 11,000 cops on the beat”; that is, that he did a job the city councilman should have done. But the councilman was happy to kick the job up to the senator, since the senator controlled the money. If you want the councilman and the senator to do their proper jobs, then you must cut the funding of the one and enhance the funding of the other. You cannot change the powers without changing the funding.
Income taxes are paid by capital and labor. Now, the more you tax a thing, the less you get of it. Yet labor and capital are things we want more of, not less. They should be taxed the least, if at all. Further, income taxes tend to degenerate into labor taxes, with the burdens shifted down the income scale, or forward to the next generation. The rich may claim that they pay the majority of incomes taxes, but this number is reached only by excluding the social insurance taxes, which only apply to the first $100,000 of income, and certainly don’t include the taxes they shift onto their children and grandchildren.
In order to implement subsidiarity in government, we must also have subsidiarity in the funding of government. That is, funding must start at the local level and be dispersed upward, rather than the other way round. Further, we must tax that which has no economic value, that is, the tax should fall primarily on economic rent and externalities (Chapter XV). Economic rent can be confiscated with no negative economic consequences (except for the rentiers) and many positive ones. Externalities (the costs of a transaction charged to a third party not involved in the transaction, e.g., pollution) should be charged with the full cost of their mitigation. With any luck at all, the government will be sufficiently inefficient at mitigating externalities that businesses will prefer to perform the mitigation themselves and not pay the tax.
Economic rent is primarily embodied in ground rents (Chapter IX). Treated as a tax, ground rents are most efficiently collected at the local level, and indeed the bureaucracy to do so already exists. Obviously, there has to be national agreement on the methods used to value and assess ground rents and on the “split” between local, state, and the federal governments. But lower levels of government will then have an incentive to accept more responsibilities, rather than kick problems upstairs, because this justifies claiming a larger portion of the revenues, revenues which they themselves collect. Politically, the problem with a “ground rent tax” is that it sounds like a “property tax,” and that scares people. However, once it is understood that we are trading off the income tax for the ground tax, most people, I suspect, will see the advantage. They will have a tax easily predicted, easily collected, local, and all without the government prying into the details of their lives.
This would not entirely eliminate labor taxes, since there are still the social taxes. However, these taxes should be used solely for direct services to workers and their families, mainly unemployment and medical insurance, welfare, and old-age pensions. They should not be, as they are now, over-collected and used to subsidize the general fund, which requires that in a very few years the general fund will be required to subsidize the social funds, and this will prove to be impossible under the current system; the general fund is already broke and destined to get broke-er.
The social taxes are efficiently collected (at least in regard to wages) because they are a flat tax paid by businesses in behalf of the employees and which require no complex filings. The income limitations ought to be removed, and the tax made steeply progressive for the top 2% or 3% of incomes (since there is an implied economic rent in these cases), but otherwise, there is surprisingly little that needs to be done. The problem is a bit more complex when dealing with non-wage income, but I believe those problems can be solved efficiently.
Devolution and Deficits. A ground rent tax would collect about 20% of GDP on the best estimates. However, current government expenditures at all levels total closer to 35%. Hence there will be a shortfall under a ground rent scheme. Whether this is an advantage or not depends on whether the budget can be cut. We cannot use the “starve the beast” strategy that has characterized Republican Party policy. Such a strategy does not curtail the growth of government: it enables it. Cut off from any fiscal restraints whatever, it breeds a “deficits don’t matter” mentality that divorces the budget from any fiscal reality. Further, tax cuts without spending cuts are not really tax cuts at all; they are tax shifting, mainly from the current to the future generation. Spending our children’s money is both economically unsound and morally reprehensible.
Moreover, it is not just the problem of getting government to live within reduced means, there is also the problem of the enormous debt that must be paid off (or significantly reduced) if both sanity and subsidiarity are to be restored. The federal debt is, as I write this, $11.8 trillion and rising rapidly. The interest on that debt exceeds half a trillion dollars; after the defense budget, it is the largest expenditure of the federal government and will soon be the largest. These are monies that must be paid out before a single bullet is bought or a single bridge rebuilt. Thus, we seem to face intractable problems. On the one hand, we would like to reduce both taxes and the expenditures of government, and on the other we must pay a seemingly insurmountable debt from these reduced revenues. Nor is that all. Our infrastructure is aging and much of it needs to be rebuilt, at enormous expense. The freeway system, for example, was begun in the 1950’s, and many parts are nearing the end of their useful life. And the same goes for many other parts of the infrastructure, such as levees and dams. This will put enormous pressures on any attempts to rein in the budget.
To add to the problems, we are about to face the retirement of the post-war baby boom generation, which will arrive like a fiscal tsunami on the Social Security and Medicare budgets. In the face of all these problems, it would seem that we need not lower taxes, but higher; not a devolution to the states, but an even more powerful central government empowered to tackle these enormous and growing problems. However, this would be to gorge on the medicine that made us sick in the first place, which can only make us sicker. How then should we confront these problems?
In regard to the federal budget, we argued in Chapter XIV, not only would it be relatively easy to cut one third or more from the general fund, it could be done without reducing (and usually enhancing) any essential services. I will not here rehearse that argument, but only mention that some of the measures are obvious, such as abolishing pointless departments like education and ending subsidies, recalling the military to our shores (do 700 overseas bases really enhance our security?) and shifting from taxes to fees wherever there is an easily identifiable group of users for a service.
Eliminating the Debt. But the largest line item, after the defense budget, is the interest on the debt. No real progress can be made if this debt is not eliminated, or at least substantially reduced. In thinking about the debt, one has to think about money itself. In Chapter VII we noted that the creation of money is the private monopoly of the banks. This money is created out of thin air, and represents no prior savings or production. Yet, it forms a claim against things that have been produced. In the case of government debt, the banks lend money they invent, but demand payment in the equivalent of real goods and services. Hence, the government must tax real goods and services and turn over the money to the creditors. But this will become increasingly less of a possibility in the near future.
About 41% of the debt ($4.3 trillion) is owned by agencies of the government, mainly the Social Security Trust Fund. This portion of the debt can simply be monetized over a ten– to fifteen-year period. That is, the government will print the money to pay off the debt to the trust funds. Some may be shocked by the suggestion that the government be allowed to simply print money into being, but this is certainly preferable to having the banks lend it into being. Will it be inflationary? It might be mildly so, but if done over ten to fifteen years, it will be no more than simply converting the current interest payments into principle and eliminating both.
There isn’t much else that you can do with this debt. The only alternatives (other than just reneging on the commitment) are to raise taxes or increase borrowing. Up until now, the social security taxes have formed a vast subsidy to the general fund, with IOUs being placed in the fund. But in just a few years, the cash flow will go the other way: from the general to the trust funds; but the general fund does not have, and will not have, enough money to pay the trust fund. In order to pay off these IOUs, there would have to be a vast tax increase over and above the high social security taxes we now pay. Our children—and the economy—simply cannot tolerate that burden. Or we can simply borrow more money, but that is problematic, to say the least.
The next portion is the 29% owed to foreign governments, banks, and individuals. This portion of the debt could be monetized, but likely shouldn’t be. My belief is that paying this debt should be the responsibility of the financial sector. A small tax, about 0.25%, on the transfer of financial instruments such as stocks, bonds, CDOs, CDSs, etc. should be levied and placed in a sinking fund to pay the interest and principle on these debts. Such a small tax would be sufficient to pay off the foreign debt over a term of five to ten years.
That leaves only the 31% of the debt held by American citizens and institutions. This portion of the debt could be partially monetized (as financial conditions dictate), partially paid off by the sinking fund, or simply left in place and allowed to shrink as a proportion of the economy. What is critical, however, is that the debt not be allowed to grow. And this requires abolishing the Fractional Reserve System, whereby the banks get to create money for nothing. This is the fiat money that is “lent” to the treasury. Its origin is thin air and a legal monopoly, a monopoly that must be abolished.
Monetary Reform. One of the greatest forces for the unjust accumulation of property is this fractional reserve banking system, which grants a monopoly privilege to a small group of people, namely the bankers and their allies. These private citizens have the power to create out of thin air nearly all the money in circulation. Such a system is intolerable on both moral and economic grounds, and must result in periodic credit crises, as greed and necessity moves bankers to create more money than the economy needs or can be reasonably “repaid.” That last word is in quotes because you can’t “repay” what was never paid in the first place, to repay in real goods a “debt” that was only an accounting entry on the books of some bank.
I do not believe that an ownership society can be reconciled with such a money system. The creation of money is a public power, and the public ought to take it back. Coining money into being ought to be the sole authority of the federal government, or even the states that wish to do so (although this is not currently allowed in the Constitution).
There is no reason why the federal government should not create its own money and spend it into circulation for capital projects. Capital projects, in the main, create more wealth then they cost, hence there would be little inflationary effect. The Federal Government could also act as a banker to the states and cities to lend them money, at little or no interest, to finance their own capital needs. This would shift the power inherent in capital projects back to the states and cities. In any case, control of the money supply should not be in private hands; it is a public power, and the public should take it back.
Localizing the Economy
Industrial Reform. Political subsidiarity would mean little if the industrial system remained concentrated; it does no good to collect taxes locally if the production of goods, and therefore the production of taxable values, is not also widespread. In Chapter XVI, we noted the problems and inefficiencies of the current system, a system that is highly dependent on subsidies and externalized costs. Once these subsidies are removed, it is unlikely that the current production model could actually produce anything at a profit. Localized production will follow in the wake of the demise of the subsidies.
Indeed, the large corporations themselves have already opted for distributed production, divesting themselves of actual factories and seeking to retain centralized control through cheap transportation and legal control of the patents. The highly integrated, vertical model pioneered by Henry Ford has been in decline for some time; distributism is the order of the day in corporate America. Unfortunately, they have dispersed the factories around the world, rather than around the country. Nevertheless, this still plants the seeds of their own demise. One day, the workers in Vietnam making shoes for Nike will realize that they can ignore the patents, rip the swooshtika off the shoes, and sell them locally for a tenth of the price, while paying their workers three times the wages and still making twice the profit. Indeed, the Chinese have already discovered this, and all the talk of “piracy” will not change these facts.
This may help the worker in Shanghai or Hanoi, but it doesn’t do much for the worker in Des Moines or Sioux Falls. For these workers to be helped, they will have to have the same privileges as the Chinese and other foreign workers. Moreover, they will have to have a production system that respects localism. Distributism offers here not just abstract models, but functioning, stable systems that anyone can examine and adapt to their own situation. That is, distributism does indeed have a coherent and functioning industrial policy. Here we just summarize the elements of these systems as it was presented in Chapter XVI:
Flexible manufacturing able to shift between product lines as demand dictates
General purpose machinery instead of product-specific machines.
Demand-pull rather than supply-push manufacturing
Local supply chains wherever possible
Widespread worker ownership and open book management
Scalability, production techniques that are scalable from the level of the family farm right up to the large factory.
Agrarian Reform. Distributists are frequently accused of being romantic agrarians. We are agrarians, but we are not romantics. “Agrarian” means, in this context, not “moving everybody back the farm,” but “restoring the proper relationship between town and country.” Contrary to corporate opinion, a tomato does not taste better if it is picked green and shipped a thousand miles before it is consumed. But apart from the question of flavor, there is the economic inefficiency inherent in such a system, inefficiencies that are covered up by subsidies.
One thing is for certain: neither the environment nor the economy will tolerate much longer the current system of factory farming. The cabbage grown in Oregon and consumed in Texas consumes more energy in its growing, picking, transportation, and marketing than it supplies in calories. If the energy inputs—the chemical fertilizer, the heavy equipment, the fuel for machinery and transportation, and so forth—were properly priced and the subsidies removed, this transcontinental cabbage would not be a paying proposition. And it will not be in the very near future. Even today, the system depends on an easily exploitable workforce that does not participate in the benefits offered to the rest of society, creating a vast underclass whose legal status is ambiguous, even as their numbers proliferate.
Trade Reform. Trade is a basic part of the human condition; no family, firm, city, or nation can or should be self-sufficient. But trade is only good when it really is trade, that is, when you earn enough to buy the things you purchase. A “trade” that is based on borrowing to finance consumption is not really trade at all, but the prelude to bankruptcy. This is a basic fact overlooked by our trade policies, which are based on a doctrinaire application of the basic “free trade” theory, called the Theory of Comparative Advantage. However, the people who argue the theory most strenuously seem to be the ones least familiar with the actual theory. The theory is valid only under three conditions: one, that capital is relatively immobile; two, that there is full employment in both countries; and three, the trade is balanced between both countries (Chapter XVII). Absent these conditions, a doctrinaire “free trade” makes both parties poorer, as the poor in both countries are played off against each other. In the United States, it has resulted in a hollowing out of our industrial base. But no country can expect to grow prosperous except by making things; if we lose this ability, we guarantee ourselves and our children a life of dependence and poverty.
Without the necessary conditions, an insistence on free trade ceases to be a useful economic paradigm to become a mere political ideology. When conditions are less than the ideal of the pure theory, then trade between nations must be managed, just as trade between firms is managed. We should make those deals which make sense, and reject the others.
Distributism and Reform
Since the current system is not sustainable, it will be reformed, one way or the other. The only question is whether we shall get out in front of the collapse and begin an informed movement towards sanity. Since the Enlightenment, the world has experimented with laissez-faire capitalism, socialism, communism, Keynesianism, and mercantilism. While each of these systems contains some partial truth, they are all insufficient to the whole truth. All of these systems have been weighed in the balance of history and found wanting. It is time to return to a more natural system, and that is system is, I believe, distributism, or something very like it.
For the past few decades, distributists have mostly withdrawn from the purely economic debates to rest their case on moral and social claims. This is, of course, a necessary aspect of the problem. However, these claims cannot be made credible unless there is also a credible economic argument behind them. As Cardinal Ratzinger (as he then was) stated,
A morality that believes itself able to dispense with the technical knowledge of economic laws is not morality but moralism. As such it is the antithesis of morality. A scientific approach that believes itself capable of managing without an ethos misunderstands the reality of man. Therefore it is not scientific.
My intention in writing this book is to demonstrate that distributism is a robust economic theory, demonstrated by actual practice, and is capable of tackling the difficult and sophisticated problems that we face. I hope that this book will enable the distributist to enter the debate and stand his ground against all comers: socialist, capitalist, Austrian, Keynesian, or whatever.
This is the distributist moment. We must seize this moment; it will not come again. We must arm ourselves with both the moral and technical knowledge that will be required to reform our world and preserve our freedom. For make no mistake, although all these other answers have been tried and found wanting, there is yet another answer: slavery. Slave societies have proven themselves stable over long periods of time, and so provide a solution, no matter how distasteful to our Christian heritage, to the problems of social and economic stability. In the end, the question will be, as Belloc predicted it would, between freedom and slavery.