The following paper will be presented at the SCORAI conference at the University of Maine in June: http://scorai.org/scorai-2016/
In the period between the two world wars, a British engineer by the name of Clifford Hugh Douglas (1879-1952) developed a highly original economic theory. This theory constituted (at least from one point of view) the key component of what would gradually come to be known as ‘Social Credit’. Douglas asserted that the chief responsibility for the economic conundrum lay with society’s financial system, that is, with the standard conventions that govern banking and industrial cost accountancy. His remedy followed the diagnosis quite naturally: the restoration of a full and proper functionality to our economies would require the introduction of appropriate changes to the money system. Douglas’ carefully developed proposals for monetary reform were designed to meet this challenge.
The Economic Problem According to Social Credit Theory
The gist of the Social Credit analysis can be most easily understood by focusing on the putative ‘law of the markets’ that was first articulated by Jean-Baptiste Say (1776-1832).
According to Say’s law, or at least to the financial interpretation of Say’s law, the act of production disperses sufficient purchasing power to consumers such that the corresponding volume of production (composed of goods or services) can be bought in full.
Orthodox economics, alongside every heterodox economic theory and/or system with which I am familiar, are at one in accepting or tacitly assuming the validity of Say’s law. That is, they assume that if it is ever the case that there is insufficient consumer income to clear the market in consumer goods and services, it must be because a certain proportion of that income is being saved or re-invested and is therefore not available to fulfill its intended function of liquidating the flow of consumer prices.
Social Credit stands apart by insisting that even if no consumer incomes were being saved or re-invested and everything received in the form of incomes were being spent on consumables, there is never, under modern, industrial conditions, sufficient income being distributed in the first place to offset the prices that are simultaneously being generated. The basic diagnostic claim, in other words, is that there is a chronic deficiency or lack of proper consumer purchasing power, i.e., income that is derived from the corresponding production.[1] This deficiency plagues our economies, rendering them structurally anemic.
In order to illustrate this claim in more concrete terms, let us assume that a given society is organized in such a way that it will produce in the course of a year all the goods and services that the population can use with profit to themselves: shelter, food, clothing, education, health-care, transportation, etc. Nothing superfluous is being produced, nor are genuine needs going unmet. Douglas’ contention is that under existing economic conditions the production of these consumer goods and of the volume of capital goods necessary (either through new production or replacements) to deliver that consumer production will not distribute sufficient income to consumers to offset the corresponding costs and hence the prices that industry is obliged to charge in order to remain solvent. As a result, the aggregate prices attached to that consumer production cannot be liquidated in full with the purchasing power that is dispersed in the process of delivering that same production to the public.
The Cause of the Price-Income Gap
While it can be exacerbated by profit-making, savings, the re-investment of savings, and a variety of other factors, the structural gap between consumer prices and incomes is primarily due to the fact that, under existing financial conventions, real capital (machines and equipment, etc.) gives rise to costs that are not distributable as current income to consumers, either at all or in the same period of time and at the same rate as they are collected. In effect, consumers are forced to invest their money in industry because of the presence of capital charges in consumer goods. As technology improves and labour is being increasingly displaced by real capital in the production process, the portion of costs that is not distributable as concurrent income is continually growing.
Conventional Methods of Compensating for the Price-Income Gap
Naturally, the imbalance in the price system must be overcome if the economy is to attain equilibrium and to continue in operation. Unfortunately, the existing economic system has no means of distributing such ‘surplus’ production except via new or additional production. Even in the case where distribution of the ‘surplus’ is effected by the expedient of consumer loans (in the form of additional debt-money borrowed from private banks to facilitate consumption), this money is only lent on the condition that the recipients will be able to recover principal and interest from future earnings (wages, salaries, dividends, etc.) and is thereby tied to production.
The lack of consumer income combined with additional production as the only means (ultimately) of compensating for the gap means that there is always a financial incentive (ahead of, and possibly apart from, any independent desire for the resultant goods and services) for businesses to invest more producer credit (borrowed from the private banks) in the hopes of increasing market share or of finding demand for a new product at some point in the future. This business expansion (especially for capital production and production for export) increases the rate of flow of incomes with which existing goods and services can be bought without simultaneously increasing the prices that consumers must meet. The costs of new capital production will not filter into the consumer market for some period of time and even then will only be discharged gradually over many years. Production that is exported is even more advantageous because its costs will never have to be met domestically. Instead, foreigners will be relied on as a source of funding for the incomes and profits of the exporting businesses. When the private sector fails, the government, by borrowing money for the sake of public expenditures, can distribute additional incomes without simultaneously increasing the rate of flow of prices (in the form of taxes). Warfare, in which bombs and other military production are ‘exported’ to the enemy, constitutes a special case. Indeed, the universal deficiency of consumer buying power is the main and constant impetus behind international military conflict and the colossal waste and destruction uniquely characteristic of warfare. Because each country is incapable of automatically absorbing its own domestic production, countries are forced to compete with each other in the attempt to achieve ‘favourable’ trade balances. In this game there must be losers as well as winners. The translation of the commercial struggle into armed conflict is only a matter of time and opportunity. The bottom line is that the economy must continually grow at the required rate, as this is the condition of the possibility of maintaining an equilibrium between prices and purchasing power and of servicing past debts.
As noted, this ‘compensatory’ production, if it is not exported, must eventually be sold (or otherwise charged) to the public. Some of it can be offloaded via easy credit in combination with manipulative advertising. Indeed, advertising is itself a whole industry that has grown out of proportion to any sane or rational need that it would serve in an economy that was not suffering from an artificial scarcity of purchasing power. Its overriding purpose is to induce as many people as possible to buy more than they really need or can reasonably make use of it, so that firms can continue to grow and profits and employment incomes can be maintained. Another proportion can be consumed by relying on the fact that the need for ‘compensatory’ production yields its own demand, similarly artificial, for goods and services that are required to make the compensatory work in that production possible or tolerable. Thus, additional production necessitates additional cars and roads, additional buildings, additional office furniture, equipment, services, and supplies, as well as wardrobes, convenience foods, and daycare, etc.
According to the Social Credit analysis of the economy’s financial infrastructure, it is impossible to turn our backs on consumerism and on the culture of consumerism, without jeopardizing the sustainability of the current economic order. We must remain on the economic treadmill and run ever faster on it under threat of economic collapse. Excessive and wasteful production, economic sabotage of all different kinds, is necessary for the purpose of distributing incomes and maintaining equilibrium.
The implications of this state of affairs for ‘sustainable consumption’ as an existentially, socially, aesthetically, and/or environmentally worthwhile policy should be clear. As beneficial and therefore as desirable as it may be to have a provision-centred economy that aims at delivering a sufficiency of goods and services so that people can survive and flourish, it is simply not practical under existing financial conventions.
The Social Credit Remedies
Social Credit also offers a solution, however, to the problem of chronically deficient consumer incomes and this solution, by eliminating the need for compensatory production as a method of filling the gap, would make sustainable consumption financially viable and economically realizable.
Instead of relying on governments, business, and or individual consumers to borrow additional debt-money from the private banks (which is money created by the banking system) in order to fill the recurring gap between prices and incomes, Social Credit proposes the establishment of a National Credit Office to determine the volume of compensatory credit that is needed to achieve equilibrium in each economic period, to create this credit free of debt or of any other costs, and to distribute it directly or indirectly to consumers. The direct contribution would take the form of a National Dividend or an income that would be granted to each citizen whether he be employed in the formal economy or not. The indirect contribution would take the form of a National Discount on retail prices, i.e., on the prices of consumer goods and services. These would be sold at the price that reflects the real costs of producing them and the difference would be made up to the retailers so that the latter can cover the full accounting costs associated with their wares.[2]
The continual and dynamic balancing of prices and incomes in accordance with Social Credit principles, i.e., the introduction of a self-liquidating price system, would render present consumption entirely independent of additional production as a necessary condition for obtaining full access to what the community has already produced. No pressure to overproduce means no necessity of finding or otherwise inducing a market domestically or of exporting the surplus. People could be free to enjoy in full what the efforts of the community make possible alongside increased leisure or the freedom from compensatory work that goes along with the need for compensatory production.
Though it may seem paradoxical, the Social Credit path to sustainable consumption requires that the consuming power of the community be brought into step with its productive power. In one sense people need to be given more, so that in another they can be satisfied with less. If people were financially enabled to automatically consume in full all that is produced, there would be no incentive to produce and consume many other things which are best described as waste. The economy could then begin to operate quite naturally on a smaller, more human scale that would, while being more satisfactory with respect to genuine needs and desires, also be more environmentally-friendly and socially responsible.
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[1] Proper consumer buying power designates purchasing power that can actually liquidate costs once and for all, rather than merely transferring them as debt-claims against future incomes connected with separate periods and cycles of production.
[2] Both forms of compensatory consumer credit, so long as they are issued at the correct rate, would be anti-inflationary, rather than inflationary. In the first place, they would be issued in lieu of all conventional palliatives; this would mean the elimination of excessive government and corporate debts and the complete elimination of consumer credit. The economy cannot be flooded with an excess of money if credit is only issued for wanted production, and prices and incomes are properly balanced in each period by the addition of the right volume of ‘debt-free’ credit. In the second place, and in contradistinction to what happens under the present practice of borrowing more and more to fill the gap, these consumer credits would not leave an inflationary trail of debt behind them. Finally, neither the dividend nor the discount funds will accumulate. They are issued precisely for the purpose of covering price-values in the cost structure of goods and services for which no purchasing power has been automatically distributed in the course of production. When businesses receive compensatory credit, it will be used, alongside the community’s regular flow of income, to pay off their production loans from the banks (or to replace their capital reserves), and will thus be cancelled as consumer purchasing power.
