After a recent conversation with Arindam Basu, it occurs to me that there is yet another method of explaining the Douglas Social Credit approach to our financial and economic systems for the benefit of newcomers. This has to do with the notion of constraints. There are natural constraints, i.e., constraints that are built into the very nature of things and are of a physical or metaphysical nature, and then there are artificial constraints, i.e., constraints that arise merely because of arbitrary (or not so arbitrary) human conventions that can be, at least in principle, abandoned, replaced, or altered at will.
Now, before we talk more about constraints, the two categories I have adumbrated here, and how these apply to finance and to the economy, it is first necessary to bring the concept of purpose, indeed the concept of a true or normative purpose, into the discussion. If we take as our point of departure the idea that the financial system is a tool that was designed by human beings in order to serve some purpose, we can ask: what is that purpose?
Perhaps one of the easiest ways of answering that question is by way of analogy; i.e., we can compare the financial system with another tool, one that we are all very familiar with: a thermometer. The purpose of a thermometer is to read the temperature, whether it be of a room, a turkey in the oven, or a human body, etc. In line with the teaching of Aristotle on functionality we can note that a good thermometer would be one that fulfills that purpose, the reading of the temperature, well, that is to say, accurately. If it is 27 degrees Celsius outside and the thermometer reads 27 degrees, then we have an accurate reading and the thermometer is functioning well and serving its purpose. It is a reliable instrument which can then enable us to make appropriate decisions, like dressing appropriately according to the temperature reading when going outside.
In the same way, a good financial system would read the physical economic reality accurately. More specifically, a good financial system would provide sufficient producer credit to catalyze all desired goods and services so that the population can survive and flourish. If there are 100 million dollars’ worth of goods and services that fall into that desired category and the economy is physically capable of delivering that volume, then the financial system should automatically supply the money needed to catalyze it and to thereby bring it into being. In the same way, a good financial system would ensure sufficient consumer buying power (without inducing any excess or surplus debt) to cover in full the remunerative prices of the goods and services that are being delivered to the consuming public. If 100 million dollars’ worth of good and services are coming on to the market, then 100 million dollars in income should be distributed directly or indirectly (on behalf of) consumers so that business can meet all of their costs of production and consumers can clear the market of all desired goods and services.
Unfortunately, not all thermometers are good thermometers, just like not all financial systems are good financial systems. A thermometer which systematically, because of some faulty design or malfunction, underestimated the temperature it was intended to measure would be a faulty thermometer. If, instead of reading 27 degrees Celsius when the temperature outside is indeed 27 degrees, a thermometer read 17 degrees Celsius, it would be providing us with false information and, on the basis of that false information (which we might take to be real if we didn’t have any way of, or any reason for, double-checking the thermometer’s reading) we could make inappropriate decisions, such as wearing spring clothing when what is needed is actually summer attire. The thermometer that reads 17 degrees in place of 27 degrees is a bad thermometer that fails to fulfill its due purpose well.
Unfortunately, our present financial system is like this faulty thermometer. Because of the way it is designed, the picture that it paints of the physical economic reality in the virtual world of numbers systematically underestimates our real capacity to produce goods and services, as well as our ability/desire to consume freely in full whatever it is that we do produce (i.e., without necessitating the contracting of more debt and hence of more work in the future in order to pay off that debt). The financial constraints projected by the financial system do not mirror the real constraints, but instead they anticipate prematurely the real constraints by painting a false and limiting picture of the physical world. When we look at the world through the lens, or the medium, of this artificially limiting and distorting financial system, it imposes alien constraints that are not there in reality. As a direct result, we are hamstringed in our economic activity. So we limp along, when we could and should be, metaphorically speaking, ‘flying’. In fact, it is worse than that, because the system also makes us do things we would not otherwise be doing and so to ‘artificial limitation’ we must add the misdirection of our economic activities and the consequent misdirection of everything else which depends on those activities (i.e., the political, social, and cultural spheres, and indeed life itself). The waste and sabotage involved in this misdirection is colossal.
To make matters more concrete, consider the following illustrations of what we have been talking about. The current financial system works like this: instead of automatically providing the sufficient financial credit needed to catalyze the 100 million dollars’ worth goods and services that fall into the desired category from our previous example, the current financial system may only supply enough producer credit to catalyze 60 million dollars’ worth. And, further, of that 60 millions dollars’ worth that has been produced, it might only automatically supply say 40 million dollars in consumer income with which that 60 million could be bought. The system typically compensates for this gap by relying on some economic agent: governments, businesses, or consumers to borrow the remaining 20 million that is needed into existence from the banking system. That is the condition for distributing the flow of real wealth in full and for covering all the costs that businesses must recover in sales if they are to remain in business. Because we assume that the ‘thermometer’ of the financial system is telling us the truth, we are then forced to make decisions in line with, or rather on the basis of, those underestimations and to try to compensate for them in the only ways which the system will allow. It is from this attempt to ‘make up’ for the deficits of the system using the only means made available by the system that the misdirection arises.
What are the nefarious consequences of the artificial limitations and subsequent misdirectioning which the current financial system imposes on our economic activities? They are legion: the instability of the business cycle, constant inflation (mostly cost-push, but also demand-pull), the misuse of economic resources, economic inefficiency, waste, and sabotage alongside forced economic growth, an ever-increasing mountain of societal debt that is, in the aggregate, unrepayable, recurring financial crises, heavy and often increasing taxation, wage and debt-slavery, servility, the usurpation of the unearned increment of association by the private banking system, the centralization of economic wealth, privilege, and power in fewer and fewer hands, forced migration, cultural dislocation, unnecessary stresses and strains, social conflict, environmental degradation, and international economic conflict leading to war, etc., etc.
So what makes the difference between a good thermometer and a bad thermometer, between a good financial system and a bad financial system? In a word, it is the truth that makes all the difference. A good thermometer tells us the truth; it accurately reflects the physical economic reality as regards to temperature. A good financial system would also tell us the truth; it would accurately reflect the physical economic reality as regards our capacity to produce and our ability to consume.
Another way of putting this is to say that under a good financial system, which would be a structurally honest financial system, financial constraints on production and consumption would automatically mirror the real constraints found to exist out in the physical world. This is the relationship between the financial system and the real world which Douglas (and common sense) would hold to be the true or correct relationship if we want a fully functional economy and a sane civilization, a civilization worthy of its name.
What it means is this: if there are no resources or insufficient resources to produce something, or the resources exist but there is no consumer demand for that thing (both capacity and need or desire are required for real credit to exist in the economy), then there is no justification for creating any money to catalyze the production of that thing. Similarly, if certain concrete goods and services have not been produced, or, having been produced, have been destroyed by accident, war, or an act of God, there is also no justification for distributing any additional consumer buying power so that what doesn’t exist or no longer exists can be distributed. However, if the resources and correspondent desire/need do exist, then sufficient money should be automatically issued to catalyze the requisite production up to the limit of those resources. Likewise, if the goods and services are available, the financial system should automatically provide enough consumer income to distribute that flow of real wealth and to meet the associated costs of production on the part of business owners in full. In all of the aforementioned cases, the financial constraints would be mirroring the real constraints; the virtual ‘facts’ would finally correspond to the facts of the real world.
The Douglas Social Credit monetary reform proposals are simply aimed at this: that the financial system should be transformed from a dishonest system, which imposes artificial restraints on production and consumption, into an honest system which accurately mirrors the real constraints of the physical economy. While artificial constraints on our physical ability to produce and consume make it impossible, in practice, for an economic association to fulfill its true purpose to the extent that this is physically possible: the delivery of goods and services that people need to survive and flourish with the least amount of labour and resource consumption, financial constraints that mirror the real constraints would free the economy, liberate it, so that it can fulfill its purpose to the full extent that this is physically possible. Finance would then become a humble servant of our real potential, rather than being the master who rations access to our real potential on self-serving terms at the cost of our own immolation.
What would be the beneficial consequences of an honest financial system which mirrors the physical constraints and thereby reads the physical economy accurately, just as a good thermometer reads the temperature accurately? Well, within the context of a technological advanced, modern society, where machines are continually displacing labour, steadily intensifying the price-income gap, and generating more and more technological unemployment, these benefits would include: the establishment of absolute economic security for every citizen in place of poverty and the threat of poverty, increasing leisure in place of servility (i.e., freedom from wage-slavery, debt-slavery, and useless, witless, and/or destructive employment), the elimination of society's chronic and unrepayable debt burden and the interest charges that accompany it, the decentralization of economic wealth and power to the individual, the elimination of economic waste and sabotage, continual reductions in prices instead of inflation, much lower taxes, much less government regulation and interference, economic co-operation instead of ruthless competition, social stability, the transformation of civilization based on the unfettering of the creative impulse and the flourishing of both folk culture and high culture, environmental protection, conservation, and repair, and mutually beneficial international trade providing a sound foundation for world peace.
What we are talking about here is an economic order that would finally fulfill the true purpose of economic association well, to the degree that this fulfillment is objectively possible given the nature of the real constraints. Whatever is physically possible and desirable should be financially possible. All that is required is to alter the financial system so that it accurately represents the physical facts and potential of the real economy.
