The Just Third Way: Green Growth, Prosperity and Global Peace
The Just Third Way
How We Can Create Green Growth,
Widespread Prosperity and Global Peace
By Norman G. Kurland, Dawn K. Brohawn, and Michael D. Greaney
The Just Third Way
How We Can Create Green Growth,
Widespread Prosperity and Global Peace
By Norman G. Kurland, Dawn K. Brohawn and Michael D. Greaney
© 2008 Center for Economic and Social Justice (http://www.cesj.org)
We are called to be architects of the future, not its victims.
- R. Buckminster Fuller
Humanity in the 21st Century faces a conundrum: we have escaped the bonds of earth's gravity and left our footprints on the moon. We have created new agricultural and manufacturing techniques that can feed and clothe billions using a fraction of the labor once needed. We have connected every corner of the world via communications technologies, allowing us to share a wealth of knowledge and information, promote global commerce and exchange, and bring together diverse people and cultures in the marketplace of ideas.
Yet we peer into an abyss, largely of our own making: the scourge of war threatening to spread from countries to regions to the world . . . the horror of global terrorism and weapons of mass destruction . . . a plague of global epidemics from HIV/AIDS and malaria, to cancer and other illnesses born from a poisoned environment . . . the seemingly insurmountable gap in economic power and ownership between the rich and poor of nations, and between rich and poor nations. Millions left starving, homeless and with little hope for their futures. As a Chemical & Engineering News "Special Report" posited in 1972,
Environmental degradation, affluence that is only an illusion for many, war, the capital-labor conflict, a system that forces a man to fight for a job on an environmentally destructive project, unresponsive institutions, and a consumer who can't afford to pay for the pollution control costs that will inevitably be passed on to him. That is a good statement of the problem, which is inevitable under one-factor economic theory.
Even within the richest and most powerful nations, many people are feeling increasingly vulnerable to loss of jobs and income, and trapped by consumer debt. A vast majority of citizens have become powerless wage slaves, workers who are now merely disposable assets in the global economy.
At this crossroads in world civilization, we have to ask ourselves: are we missing something? Is it time to rethink our paradigms, assumptions and systems? Are there fundamental principles that could guide us in restructuring the laws and institutions that govern our lives, to bring about peace, prosperity and a healthy environment for every person on the planet?
2. A "System Failure" in Global Society
Under every economic system operating today, most human beings suffer under a common defect of both capitalism and socialism, and their various permutations. Simply put: Most people own no share in the world's productive capacity. Lacking ownership of the means of production, they cannot produce enough to purchase the productions of others. As Jean-Baptiste Say pointed out nearly two centuries ago in a response to the Reverend Thomas Malthus:
I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said - As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit - That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce.
Most people on the planet have no legitimate ownership claim to, and have insufficient means to purchase, what technology's phenomenal productive capacity can generate. On the other hand, the small minority of people who own and control most of the productive instruments of society end up producing more than they can humanly consume. As "Say's Law of Markets" explains: "The power to produce overwhelms the power to consume."
Rising levels of consumer credit mask this imbalance somewhat by creating a temporary burst of purchasing power within non-owners, but this rapidly increases the debt burden on individuals and households. Future disposable income is reduced to pay off consumer credit extended in the past, and more must then be borrowed to make up the increasing shortfall - like trying to get out of a hole by digging yourself in deeper.
Flawed paradigms lead to false dichotomies, leaving us to wonder, for example, "Can environmentalism be reconciled with economics?" Under today's systems, the only solution to a perceived failure of the "free market" appears to be for the State to apply its coercive powers of regulation and redistribution. This still, however, fails to address a fundamental problem:
With productive power and purchasing power drastically out of balance, wealth must be redistributed to keep the economy going. Government performs this function, primarily through the graduated personal income tax and the corporate income tax. These are necessary devices, . . . but are not effective in accomplishing what should be their primary goal: preventing monopolistic concentrations of capital.
Further hampering our ability to untangle and resolve today's global problems is a common tendency to confuse principles with expedients - constructing solutions based on what the problem-solver judges to be politically acceptable given current circumstances. By ignoring basic principles, many of today's policy- and decision-makers fail to cure the root causes, and are left to address long-term or systemic problems with stopgap measures and band-aids. Eventually expedients can create problems of their own.
The viability and sustainability of solutions to global crises cannot be divorced from the application of logically consistent and morally sound principle, regardless of any expedients that may be necessary in the short-term to move toward a desired change. In this paper we will seek to define and apply sound logic and universal principles, in order to offer effective, long-term and comprehensive solutions to current global crises.
Addressing Environmental Damage ... Effectively
What happens in a world where the power to produce is rising rapidly due to technological advances, but the power to consume marketable goods and services is shrinking, or confined to a stagnant or shrinking consumer base? Producers are forced to cut costs in order to make their goods and services affordable to more consumers. This can result in substandard production processes and shoddy goods that harm the environment, as price rather than quality determines whether a sale is made.
Damage to the environment, with its "hidden costs," exacts a toll on the economy in terms of rising health costs and other unforeseen consequences of poor stewardship of our land and natural resources. But when the choice is between "the environment" and being able to purchase what you need at a price you can afford, true costs of production are often swept under the rug:
Faced with an impoverished public, industry must produce ever cheaper goods. This explains why many of our industrial heroes are the cost cutters. . . . An all-out effort to cut costs inevitably leads to environmental degradation, taking advantage, perhaps unwittingly, of nature to keep the economy running.
Most forms of pollution are potentially useful resources that are wasted or "out of place." Applying appropriate technologies, pollutants could be recaptured and turned into productive resources. In a healthy economy where purchasing power is widespread, consumers would be able to pay the added cost of technologies for preventing or remediating pollution. Government would play its proper role in preventing "nuisance" and imposing pollution fines to encourage producers to add technologies that would prevent harm to others and the environment. In those cases the added costs would be internalized in the prices charged by the producers.
Many people assume that the way things are is the way things have to be. This assumption is a major problem in the world today. It allows bad or inadequate ideas to shape our opinions and condemn us to a status quo that imposes an inhuman and environmentally damaging system on all of us.
Economic Globalization: A Boon or Disaster for Humanity?
Conventional development frameworks are based on the "win-lose" assumption that scarcity is inevitable and shared abundance is impossible. R. Buckminster Fuller, a post-scarcity thinker, architect, and engineer, rejected the conventional wisdom. He asserted, "There is only one revolution tolerable to all men, all societies, all political systems: Revolution by design and invention."
Fuller's deep understanding of the synergistic potential of advancing technology to create universal prosperity, and of the continuing process of doing-more-with-less human energies and natural resources, suggests to those seeking solutions to problems rooted in economic injustices: "Don't try to reform human nature. Reform the environment." And, as Fuller might put it, "redesign your tools."
In contrast to Fuller's optimistic approach to global development, there is widespread hopelessness around the world. This pessimism has been fueled by the growing awareness of a force greater than that of any nation state in the world - the force of economic globalization. In his 1998 book, One World, Ready or Not: The Manic Logic of Global Capitalism, best-selling author William Greider concludes that economic globalization - driven by a financial elite with the power to shift billions of dollars almost instantaneously from one country to another - is a reality and will not go away.
The subordination of most world political leaders to the controllers of money was predictable at least a century ago when one of the world's earliest financial capitalists, Baron Mayer Anshel Rothschild, was quoted as saying, "Permit me to control the issuance of a nation's money and credit, and I care not who makes the laws."
For most people, however, economic globalization means a growing gap between rich and poor, technological alienation of the worker from the means of production, and the phenomenon of "wage arbitrage." It means an environment in which global corporations and strategic alliances can force workers in high-cost wage markets to compete with labor-saving tools and lower-paid foreign workers.
Even the United States, which has long enjoyed economic strength and stability, is showing these effects of globalization. Along with an historically high trade imbalance and a declining dollar, the U.S. continues to have one of the widest gaps between the "haves" and "have-nots." American business has the widest pay gap between CEOs and ordinary workers. While unemployment has remained relatively low, there is an accelerating displacement of workers by technology and cheaper foreign labor, resulting in greater economic uncertainty and shakier retirement incomes for the average citizen.
Why isn't Global Capitalism Working?
Most people in general, and academics in particular, can describe problems. They flounder, however, when it comes to developing comprehensive solutions for countering threats to regional and global peace, freedom and the rule of law. Many agree that economic growth equitably shared is necessary for overcoming poverty - the taproot of conflict, revolutions and war - within and among nations. Few, however, ask new questions that could reveal systemic flaws in current development models that have failed to significantly reduce poverty in a world capable of producing economic sufficiency for every person.
If "ownership is a sine qua non of sustainable development," as expressed by former World Bank President James Wolfensohn, why have the strategies of Western development experts failed to create nations of owners, from the bottom-up? What in the current system of economic globalization produces an ever-widening and dangerous gap in economic power and economic self-determination between haves and have-nots, among nations and within all nations in the global marketplace?
Can free markets, free trade, private property, and limited government be compatible with economic and social justice? What practical systemic changes could be introduced to transform the globalization process into a blessing, especially for the poorest of the poor in Iraq, Gaza, the West Bank, Afghanistan, Kashmir, Indonesia, the Philippines, Chechnya and other breeding grounds of human hopelessness, group hatred, and the next rounds of suicide terrorism?
The First Challenge: Overcoming Bad Ideas
Our first hurdle is one of ideas, especially in the field of economics and other "soft sciences," which shape the "invisible social environment" that ultimately determines the quality of life for each of us. This invisible environment consists of our laws, institutions and "social props" that determine how we as individuals are connected to - or too frequently are alienated from and possibly victimized by - the physical technologies and structures that our scientists, inventors, architects and engineers create.
Today's systems of capitalism and socialism, and their various permutations, share the same fundamental flaw. The laws and institutions of these systems all concentrate power and property in the hands of a few, whether in a private elite, or in the State and its bureaucratic elite. Even in so-called "democratic capitalist" systems, access to the ballot has no economic counterpart to empower the individual through equal access to the common good. Underlying this flaw is a moral omission: the current economic paradigms lack a defining principle of justice that is universal, inclusive and practical for guiding development in the Age of Super-Technology.
This paper explores the idea of the "Just Third Way," a new paradigm of political economy centered on "Justice," a universal value that is largely misunderstood in the modern world. The Just Third Way argues that all sovereignty within the social order should begin with each human person, not social institutions or any elite. Underlying its universal conception of justice is the dignity of every human person.
In contrast to prevailing capitalist, socialist, and mixed economic systems, the Just Third Way defines specific principles of economic and social justice for restructuring laws and basic social institutions, particularly money and credit. In this way, power and property can be spread systematically to every human being, thereby enabling purchasing power to match productive power, and the real cost of production - including repair and maintenance of the environment - to be passed on to the consumer at a fair and just price.
3. A New Paradigm of Political Economy
Media pundits continue to refer to a "Third Way," but none of them seems to know quite what it is. People on the left who are positive toward the idea present it as socialism with a capitalist whitewash; people on the right present it as capitalism with a socialist veneer.
Many skeptics, correctly in our opinion, view the "muddled middle" formula for the "Third Way" (such as the version formerly espoused by Tony Blair and Bill Clinton) as an attempt to give moral legitimacy to the Wall Street capitalist approach to economic globalization. This formula attempts to blend political democracy with economic plutocracy, an inherently unstable mix. The Washington Post on August 30, 1998 editorialized that "there is in fact no third way."
Is There a "Just Third Way"?
In contrast to the intellectual fuzziness now pervading high policy circles, this paper asserts that no so-called "third way" is a true third way or a "Just Third Way" if it:
• Does not economically empower the people,
• Keeps economic and social power, especially over advanced technologies, concentrated in the hands of an elite,
• Keeps most people in a status of servile dependency on the State or other people,
• Lacks a coherent theory and principles of economic justice to guide policy makers,
• Lacks a structured system for closing the gap between the rich and the poor within the evolving global marketplace,
• Forces the environment to absorb costs that, if consumers had adequate purchasing power, could be reflected in a just price for goods and services,
• Ignores the central role of such "social tools" as money, capital credit and central banking in determining how all people can acquire access to assets and economic power in the future, and
• Remains trapped by inherently bankrupt pay-as-you-go Social Security and other income redistribution schemes, instead of encouraging asset-backed systems to link future consumption incomes with future wealth production.
We can, however, conceive of a "Just Third Way" that goes beyond the traditional answers supplied by the right and left. It offers a new vision and alternative model of development for countries of the world in which they can succeed to their fullest potential within the framework of a global marketplace.
Looking Beyond Socialism and Capitalism
Power will always exist in society. If we accept Lord Action's insight that "power tends to corrupt and absolute power corrupts absolutely," our best safeguard against the corruptibility of concentrated power is to decentralize power. Furthermore, if Daniel Webster was also correct that "power naturally and necessarily follows property," then democratizing ownership is essential for democratizing power.
In the economic world, property performs the same power-diffusion function that the ballot does in politics. It does more. It makes the ballot-holder economically independent of those who wield political power. Socially, private property defines a comprehensive - and comprehensible - system of relationships that regulate how we as members of society relate to one another with respect to our possessions, rights, and status. Proposals to abolish private property by redefining it undermine the stability of society by attacking the validity of the defined relationships that constitute the social order, potentially throwing society into chaos.
Both socialism and capitalism concentrate eco¬nomic power at the top. It makes little difference that under capitalism the concentration is in private hands and under socialism the concentration is in the hands of the State. Both systems are excessively materialistic in their basic principles and overall vision. Both, in their own ways, degrade the individual worker. Both engender economic systems that ignore and hinder the intellectual and spiritual development of every member of society.
Amalgams of the two systems, as in America's so-called "mixed economy" or the Scandinavian Welfare State model, differ only in their degree of social injustice, corruption, economic inefficiency, human insecurity and alienation which permeate each level of class-divided societies. What then would be a genuinely alternative economic model for moving toward a more free, just and economically classless society?
4. Defining the Just Third Way
The "Just Third Way" is a free market system that economically empowers all individuals and families through direct and effective ownership of the means of production.
From the standpoint of moral philosophy, this new paradigm views healthy self-interest as a virtue (i.e., where individual good is directed toward, or in harmony with, the common good). It views greed and envy, on the other hand, as vices, both destructive of a moral and just society. In contrast to capitalism that institutionalizes greed (creating monopolies and special privileges), or socialism that institutionalizes envy (through coerced leveling and artificial barriers to creative initiatives), the "Just Third Way" institutionalizes justice, tapping on the full creative potential of every human being.
The Architects of the Just Third Way: Kelso, Fuller, Ferree, and King
The Just Third Way, understood as a holistic paradigm, synthesizes the binary economic theories and principles of economic justice developed by the late lawyer-economist Louis O. Kelso, the social justice principles developed by Pius XI and Rev. William J. Ferree, the world design science concepts of R. Buckminster Fuller, and the non-violent activism of the Rev. Martin Luther King, Jr.
The Just Third Way starts with the view that all dignity, sovereignty and rights within the social order begin with the individual human being, not with institutions including, and particularly, the State. As the Rev. Martin Luther King, Jr. stated:
Man is not made for the State; the State is made for man. To deprive man of freedom is to relegate him to the status of a thing, rather than elevate him to the status of a person. Man must never be treated as a means to the end of the State, but always as an end within himself.
The Just Third Way is guided by, as King put it, "the conviction that the universe is on the side of justice" and " a deep faith in the future." In contrast, today's predominant paradigms -whether capitalist, socialist or mixed - are based on "win-lose" assumptions that scarcity is inevitable and shared abundance is a fairy tale. Under such assumptions, conflict is the natural outcome of our economic systems, and peace a momentary lull between bloodshed and war. The mass of humanity is relegated to the role of victims, pawns and tools, whose futures are largely dictated by the will of a tiny elite.
In parallel with Buckminster Fuller's concepts of synergy, "ephemeralization" ("doing more with less"), and design science - and sharing Fuller's win-win orientation and acceptance of human nature - Louis Kelso provided within economics a theoretical and moral framework for creating a truly classless society and world of universal affluence where human potential could flower in a healthy environment. Kelso's redesign of how we finance growth and development answered the inescapable question: "How do we pay for it?"
Recognizing both the individual and social nature of human beings and the inherent dignity of the human personality (the reason for which we create our social institutions), the social philosopher Fr. William Ferree refined the concept of Social Justice, as defined by Pope Pius XI in his revolutionary encyclical, Quadragesimo Anno. Ferree asserted that as historical creations of human society and civilization, institutions such as tax systems, money, credit, corporations and property, can and must be reformed through "acts of Social Justice" when they fail to support the dignity and empowerment of each person.
All the seminal thinkers of the Just Third Way recognized that poverty and powerlessness are an affront to human dignity and freedom. They all foresaw the impact of technology, systems and environment on human development. And as systems thinkers, they all understood the dangers of concentrated power, and sought to diffuse it to all members of the community. Noting the deficiencies in the two governing paradigms of capitalism and socialism, King called for a new synthesis:
[T]ruth is found neither in Marxism nor in traditional capitalism. Each represents a partial truth. Historically capitalism failed to see the truth in collective enterprise, and Marxism failed to see the truth in individual enterprise. Nineteenth century capitalism failed to see that life is social and Marxism failed and still fails to see that life is individual and personal. The Kingdom of God is neither the thesis of individual enterprise nor the antithesis of collective enterprise, but a synthesis which reconciles the truths of both.
What is Justice?
As Pope Paul VI reminded us, "If you want peace, work for justice." Unfortunately, definitions of "justice" are as many and as varied as the people you ask. Before we can apply its principles, we need to ask ourselves, what is "justice"? Here is a classical definition of "justice" by Louis O. Kelso (the intellectual father of "the Just Third Way") and his co-author Mortimer J. Adler, the eminent Aristotelian philosopher:
Justice, in its most general formulation, imposes the following moral duties or precepts upon men who are associated for the purposes of a common life: (1) to act for the common good of all, not each for his own private interest exclusively; (2) to avoid injuring one another; (3) to render to each man what is rightfully his due; and (4) to deal fairly with one another in the exchange of goods and in the distribution of wealth, position, status, rewards and punishments.
Understanding Social Justice and Social Charity
In his seminal work, The Act of Social Justice (1943), the late Marianist priest Father William Ferree, a co-founder of our religiously and spiritually pluralistic center, explained how Pius XI viewed the dignity of the human personality as the basis of any sound theory of justice:
For Pope Pius XI [in his 1931 Encyclical, Restructuring of the Social Order], the theory of justice is based squarely on the dignity of the human personality. His position is that charity regulates our actions toward the human personality itself, that Image of God which is the object of love because it mirrors forth the Divine Perfections, and in the supernatural order shares those perfections. The human personality, however, because it is a created personality, needs certain "props" for the realization of its dignity. These "props" or supports of human dignity, that include such things as property, relatives and friends, freedom and responsibility, are all objects of justice. To attack a human person in his personality itself, as by hatred, is a failure against charity; but to attack him by undermining the supports of his human dignity, as by robbery, is a failure against justice.
Ferree pinpointed Pius XI's philosophical breakthrough in defining the "social" virtues, particularly "social justice." Preserving the classical concepts of "individual justice" and other individual virtues that guide interactions between individual human beings, Ferree recognized a corresponding set of virtues in the "social" realm, guiding how we as individuals should interact with our institutions and as members of society. In discussing the basis of social justice, Ferree wrote:
The human community, as such, shows forth the perfections of God in ways that are not open to individuals. This fact is very clearly stated in paragraph 30 of the Encyclical Divini Redemptoris:
"In a further sense it is society which affords the opportunity for the development of all the individual and social gifts bestowed on human nature. These natural gifts have a value surpassing the immediate interests of the moment, for in society they reflect a Divine Perfection, which would not be true were man to live alone."
Society itself, therefore, as thus revealing further the perfection of God in His creatures, is worthy of love: of a love directed not only towards the individuals who compose the society, but also toward their union with each other. This love is social charity.
Moreover, as society thus makes available to man the further perfection of his potentialities of mirroring the Divine Perfection, it is also a support for these perfections, and hence is an object of the virtue of justice. This justice, Social Justice, which is directed at the Common Good itself, requires that the society be so organized as to be in fact a vehicle for human perfection.
These fundamental concepts of justice are embedded in the founding ideals of America and the UN's Universal Declaration of Human Rights, as well as in the moral tenets of Judaism, Christianity, Islam, and other great spiritual traditions.
Understanding Economic Justice
If social justice consists of organizing with others to perfect social institutions, then the pursuit of economic justice is an indispensable part of social justice. Principles of economic justice deal with all institutions affecting the production, consumption and distribution of economic goods and services. They deal with the more urgent, material needs of human beings - in contrast to the higher spiritual, intellectual, cultural and social needs that must be satisfied for the fullest development of every person. Since institutions are artifacts created by human beings, all institutions are capable of being transformed and perfected by human beings. Indeed, as Ferree reminds us, organizing with others to transform and perfect our institutions is a continuing responsibility of each of us, once we share a common vision and common principles of effective action.
Among all the writings on the subject of economic justice, the clearest set of principles we have encountered is in a 1958 book, The Capitalist Manifesto, co-authored by Louis O. Kelso and Mortimer J. Adler. While the book was a bestseller when published, most scholars never got past its cover (undoubtedly because the word "capitalist" had negative connotations in many academic circles at the time). Kelso and Adler challenged basic assumptions of conventional paradigms of political economy. Even more, they developed a simple yet profound theory of economic justice that sheds new light on the impact of technology on human work and the development of modern civilization. They described the political and moral flaws of national "full employment" policies and how today's global economic order creates an ever-expanding gap in economic power, opportunity and incomes between a wealthy elite and propertyless workers.
As a lawyer Kelso saw that the design of our "invisible" institutional environment and social tools (especially methods of corporate finance) determines the quality of people's relationship to technology. Such intangible things as our laws and financial systems determine which people will be included or excluded from access to economic opportunity, power and capital incomes.
Access to capital ownership, Kelso argued, is as fundamental a human right as the right to the fruits of one's labor. Kelso demonstrated that the democratization of money creation and capital credit is the "social key" to universalizing access to future ownership of productive wealth (particularly in corporate equity). This social key could enable every person, as an owner, eventually to gain income independence through the profits from one's capital.
Kelso's Economics of Ownership
At the heart of what Kelso called "binary economics" or "the economics of reality" is a simple but revolutionary proposition: Own or be owned. Today most political and business leaders and academic economists assume that the mass of people can only earn a living through their work, and where that is insufficient, through welfare or charity. They, like most people, remain blind to the reality that accelerating technological progress makes it possible, even necessary, to solve the income distribution problems of our global economy through the widespread ownership of the labor-saving technologies that Buckminster Fuller called "energy slaves." Kelso asserted that people could legitimately create economic value through two (thus binary) factors of production:
• Labor (which Kelso defined as all forms of economic work by people, including manual, intellectual, creative, and entrepreneurial work, and so-called "human capital"), and
• Capital (which Kelso defined as anything non-human contributing to the production of marketable goods and services, including tools, machines, land, structures and infrastructural improvements, management systems, and patents).
Kelso attributed most changes in the productive capacity of the world since the beginning of the industrial revolution to technological improvements in our capital assets, and a relatively diminishing proportion to human labor. Capital, in Kelso's terms, does not "enhance" labor productivity, i.e., labor's ability to produce economic goods. It makes many forms of labor unnecessary. Furthermore, according to Kelso, productive capital is increasingly the source of the world's economic growth and therefore should become the source of added property incomes for all.
Kelso's revolutionary insights helped him to solve an economic enigma: how Say's Law of Markets - rejected both by Marx and Keynes - could achieve sustainable and balanced growth in a modern global economy. His legal background enabled him to see how the structuring of basic laws and institutions creates a system that either concentrates or decentralizes ownership and economic power, that encourages participation by all or sets up barriers to participation. Kelso invented "soft technologies" - including monetary and tax reforms, and financial tools like the ESOP - for lifting up the world's poor without pulling down the world's rich or damaging the environment.
The Three Basic Principles of Economic Justice
Kelso based his ideal market system on three essential and interdependent principles of economic justice:
(1) Participation, the input principle. If both labor and capital are interdependent factors of production and if capital's proportionate contributions are increasing relative to that of labor, then equality of opportunity demands that the right to property (and access to the means of acquiring and possessing property) must in justice be extended to all.
(2) Distribution, the out-take principle. Property rights require that income be distributed based on the value of what one contributes to production - one's labor, one's capital, or both. Assuming that capital ownership is spread broadly, the free and open market under Kelso's system becomes the most democratic and efficient means for determining just prices, just wages and just profits. If both sales revenues and all labor costs are set by globally competitive market forces, then profits - the revenues left over after all labor costs and the costs of all suppliers of an enterprise are subtracted - represent a market-based return to capital in the form of profits to be shared among all the firm's co-owners.
The principle of distribution for the virtue of charity (according to need) complements the distributive principle for the virtue of justice (according to contribution). Charity, however, should never be a substitute for justice. Without justice people will not be motivated to produce enough wealth for themselves and to engage in charitable acts for the needy, and the needy will never become self-sufficient.
(3) Limitation, the feedback or, in moral terms, the anti-greed principle (which some Kelsonians call the principle of "Harmony" and others call "Restorative Justice" or "Social Justice"). This principle, exercised through organized efforts to transform unjust institutions, guides the restoration of balance between "participation" (input) and "distribution" (out-take) when either principle is violated. For the sake of harmony, personal freedom and equality of opportunity, the just social order puts limits on monopolistic accumulations of capital and other abuses of property.
The Four Pillars of a Just Market Economy
Common to all economies of the world - whether capitalist, socialist or mixed - is a set of premises and logical framework called the "wage system." In general the wage system assumes that the vast majority of people will earn their basic sustenance through wages or welfare, while the bulk of productive capital will be owned and/or controlled by a tiny elite or the State that employs the laboring masses.
All wage systems ignore one or more of what can be called the "Four Pillars," the essential principles for building a more just economy:
• Universal Access to Capital Ownership - The Moral Omission
• Limited Economic Power of the State
• Free Choice and Open Market Competition
• Private Property
Leaving out any one of these pillars, particularly during a period of economic reform, weakens the entire fabric of the economy and leads to eventual conflict or collapse. Applying the Kelso-Adler theory of economic justice, the four pillars offer a policy framework for transforming "wage systems" into "ownership systems."
Universal Access to Capital Ownership - The Moral Omission
One of the most crucial problems that Marx addressed in his economic theories was that ownership of productive assets - "capital" - was limited to the very few. As a result, no technologically advanced market system could possibly produce sustainable growth, since working people would have only their labor to sell in direct competition with labor-displacing technology and a growing world population of workers willing to work for lower wages.
Unfortunately, Marx's solution to this mismatch between the rising productiveness of technology and market-based consumption incomes was to abolish the institution of private property in technologies, natural resources and all other forms of wealth-producing assets, shifting power over capital assets from capitalists to state ownership and control. This resulted in enormous concentrations of wealth and power in the hands of whatever new elite gained control of the state.
The real problem that Marx faced, however, was not private ownership of productive property, but systemic concentration of private ownership. Turning Marx "upside down," Kelso proposed making every worker an owner of a growing property stake in income-producing assets. This would achieve economic justice for all, make economic power universally accessible and democratically accountable, and produce optimal rates of market-determined growth based on a balance between the productive capacity of the economy and the power of consumers to purchase what the market produced.
Only when society reforms its laws and economic institutions to address this "moral omission" and lifts systemic barriers to equal citizen access to capital ownership opportunities, will now-propertyless citizens support politically the three other essential pillars of the Just Third Way, which free market, limited government theorists since Adam Smith have been advocating with little political impact.
Limited Economic Power of the State
Limiting the economic power of the State ultimately involves the goal of shifting ownership and control over production and income distribution from the State to the people. To do this, the economic power of the State should be specifically limited to:
• Encouraging sustainable and life-enhancing growth and policing abuses within the private sector, including environmental damage;
• Lifting barriers to equal ownership opportunities, especially by reforming the tax system and money-creating powers of the central bank to generate widespread access to low-cost capital credit as the key to spreading ownership and economic empowerment among all citizens and the full distribution of profits to repay the credit;
• Preventing inflation and providing a stable, asset-backed currency for sustainable development;
• Protecting property, enforcing contracts and settling disputes;
• Ending economic monopolies and special privileges, except for limited terms for holders of patents, copyrights and other intellectual property rights;
• Supporting advanced research and breakthrough technologies, making royalty-free licenses available for commercializing taxpayer-funded innovations;
• Encouraging democratic labor unions to become democratic ownership unions that organize to turn all citizens into owners and promote economic justice in the ownership, governance and management of all private-sector enterprises;
• Protecting the environment; and
• Providing social safety nets for human emergencies.
Within these limits the State would promote economic justice for all citizens. Coincident with this objective would be the goal of reducing human conflict and waste and erecting an institutional environment that would encourage people to increase economic efficiency and create new wealth for themselves and the global marketplace. Increased production would increase total revenues for legitimate public sector purposes, reducing the need for income redistribution through confiscatory income taxes and social welfare payments.
Free Choice and Open Market Competition
Artificial determinations of prices, wages and profits lead to inefficiencies in the use of resources and scarcity for all but those who control the system. Those in power either have too little information or wisdom to know what is right, or will set wages and prices to suit their own advantage. Just prices, just wages, and just profits are best set in a free, open, democratic and competitive marketplace, where consumer sovereignty reigns. Assuming economic democratization in the future ownership of the means of production, everyone's economic choices or "votes" on prices and wages influence the setting of economic values in the marketplace.
Establishing a free and open market would be accomplished by gradually eliminating all special privileges and monopolies created by the State, reducing all subsidies except for the most needy members of society, lifting barriers to free trade and free labor, and ending all non-voluntary, artificial methods of determining prices, wages and profits. (Here we recognize that competition among enterprises is the most rational alternative to monopoly, not something that negates cooperation within competing enterprises.) This would result in decentralizing economic choice and empowering each person as a consumer, a worker and an owner.
Wealth distribution assumes wealth creation, and technological and systems advances, according to recent studies, account for almost 90% of productivity growth in the modern world. Thus, balanced growth in a market economy depends on incomes distributed through widespread individual ownership of the means of production. The technological sources of productive growth would then be automatically linked with the ownership-based consumption incomes needed to purchase new wealth from the market. Thus, Say's Law of Markets - which both Marx and Keynes attempted to refute - would become a practical reality for the first time since the Industrial Revolution began.
Private Property in Productive Assets
Given the exclusionary and monopolistic nature of capitalism as it evolved from the beginning of the Industrial Revolution, Karl Marx and most socialists have never understood the political significance of the institution of private property. The connection between widespread distribution of property and political democracy, however, was evident to America's founders. This understanding was reflected in the 1776 Virginia Declaration of Rights, the forerunner of America's Declaration of Independence and Bill of Rights. Following John Locke's triad of fundamental and inalienable rights, the Virginia Declaration of Rights declared that securing "Life, Liberty, with the means of acquiring and possessing Property" is the highest purpose for which any just government is formed.
With the abolition of slavery and feudalism, the United States insured that no American would ever again become the property of another. Through this and other limitations on the rights of private property, a just government transcends the weaknesses of a pure laissez-faire approach to ownership rights. However, by fulfilling its duty to all its citizens to lift barriers to private property in the means of production, government builds a permanent political constituency for a sustainable free market economy.
Why is Private Property Essential to Justice?
Owners' rights in private property are fundamental to any just economic order. In the law, property is not the things that are owned. Property is the bundle of rights that determines one's relationship to things. (In the modern era, we recognize that property owners cannot legitimately treat other persons as "things," as in more dehumanizing cultures including America's own past.) Property secures personal choice, and is the key safeguard of all other human rights. By destroying private property, justice is denied. Private property is the individual's link to the economic process in the same way that the secret ballot is his link to the political process. When either is absent, the individual is disconnected or "alienated" from the process.
In his devastating critique of Das Kapital , Louis O. Kelso, who agreed completely with Marx's description of the structural flaws and injustices inherent in a laissez-faire, monopoly capitalistic system, found three fatal errors in Marx's analysis. One of these, according to Kelso, was "Marx's failure to understand the political significance of property":
Before examining Marx's second critical error, it may be helpful to take note of what the concept of "property" means in law and economics. It is an aggregate of the rights, powers and privileges, recognized by the laws of the nation, which an individual may possess with respect to various objects. Property is not the object owned, but the sum total of the "rights" which an individual may "own" in such an object. These in general include the rights of (1) possessing, (2) excluding others, (3) disposing or transferring, (4) using, (5) enjoying the fruits, profits, product or increase, and (6) of destroying or injuring, if the owner so desires. In a civilized society, these rights are only as effective as the laws that provide for their enforcement. The English common law, adopted into the fabric of American law, recognizes that the rights of property are subject to the limitations that
1) things owned may not be so used as to injure others or the property of others, and
2) that they may not be used in ways contrary to the general welfare of the people as a whole. From this definition of private property, a purely functional and practical understanding of the nature of property becomes clear.
Property in everyday life is the right of control. [Emphasis added.]
Property in Land. With respect to property in land, we need merely note that the acquisition of an original title to land from a sovereign is a political act, and not the result of operations of the economy. If the original distribution of land unduly favors any group or type or persons, it is a political defect and not a defect in the operation of the economy as such. A capitalistic economy assumes and recognizes the private ownership of land. It may, as under the federal and state mining laws and federal homestead acts, encourage private ownership of land by facilitating private purchasing of mining, timber, agricultural, residential or recreational lands.
Property in Capital. In a capitalistic economy, private ownership in all other articles of wealth is equal in importance to property in land. From the standpoint of the distributive aspects of a capitalistic economy, property in capital - the tools, machinery, equipment, plants, power systems, railroads, trucks, tractors, factories, financial working capital and the like - is of special significance. This is true because of the growing dependence of production upon capital instruments.
Of the three components of production land is the passive source of almost all material things except those that come from the air and the sea, while labor and capital are the active factors of production. Labor and capital produce the goods and services of the economy, using raw materials obtained, for the most part, from land. Just as private property in land includes the right to all rents, the proceeds of sale of minerals and other elements or substances contained in land, private property in capital includes the right to the wealth produced by capital. The value added to iron ore by the capital instruments of a steel mill becomes the property of the owners of the steel mill. This is the case with all other capital instruments.
Property in Labor. What is the relationship of the worker to the value that he creates through his work? It has been said that no one has ever questioned the right of a worker to the fruits of his labor. Actually, as was long ago recognized by John Locke and Jean-Jacques Rousseau, the right of the worker to the value he creates is nothing more than the particular type of private property applicable to labor. Each worker, they said, has a right of private property in his capacity to produce wealth through his labor and in the value that he creates.
Restoring the idea as well as the fact of private property - especially in corporate equity - Kelso advocated the reform of laws that prohibit or inhibit acquisition and possession of private property. This would include ensuring that all owners, including shareholders, are vested with their full traditional rights to participate in control of their productive property, to hold management accountable through shareholder representatives on the corporate board of directors, and to receive income from the full stream of profits produced by their share of productive assets, not subject to the discretion of corporate boards of directors or discriminatory double taxation by government. Private property links income distribution to economic participation - not only by owners of existing assets, but also by new owners of future wealth.
4. Rethinking the Fundamentals
The primary social means to bring about expanded ownership of productive assets involves the democratization of productive, self-liquidating credit.
By making productive credit available on a truly democratic basis, society could move people toward economic self-sufficiency and independence. A broad dispersion of wealth and power would serve as the ultimate check against abuse of power by the State or by the majority against minorities or individual citizens.
Money and credit systems are critical institutions in developing principles and methods for building a just market economy. Control over money and credit (i.e., financial capital) largely determines who will own and control productive capital in the future.
Access to New Money and Credit: A New Right of Citizenship
When the subject of money and money creation comes up, we sometimes forget that money is a man-made thing, and is morally neutral. Its goodness or badness depends solely on how it is created and how it is used. Like the secret ballot in politics, money is a uniquely "social good," an invention of modern civilization, a means for measuring economic values and enabling people to participate in a market economy.
Before we can transform our national and global economic systems, we need to have a common understanding and working definition of money. Louis Kelso explained:
Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector.
Today money is created and credit extended in ways that keep the rich wealthy, and the poor in their place. Consumer credit, for example, is available virtually to everyone, while access to capital (or "productive") credit is restricted to use by those who meet the universal requirement for collateral, i.e., the rich. Thus, the poor and middle-class get the most risky and highest cost credit, while the rich get the lowest-cost and least risky kind of credit. It is more than an outworn truism that you need money to make money - lenders will only extend capital credit to people who already have assets.
For example, let us look at the estimated $2 trillion of growth assets added each year in the US public and private sectors, consisting of new technology, plant and equipment, physical infrastructure and rentable space. Amounting to a growth increment of approximately $7,000 for every man, woman and child, these productive assets will be financed in ways that add almost no new owners. If capital credit were to become as universally accessible as the political ballot, capital assets could become a growing source of independent capital incomes for all persons and their families.
What makes capital credit special is that by nature it is procreative or "self-liquidating." That is, capital credit is restricted to the purchase of assets that are expected to pay for themselves out of the revenues generated from the capital project which it financed, and thereafter these assets are expected to earn a continuing flow of profit for whoever owns the assets. Capital credit is inherently counter-inflationary. Consumer credit, on the other hand, does not generate its own repayment, and any repayment must come out of the user's other resources. When used to any significant extent, consumer credit greatly reduces the purchasing power of the user.
Beyond the Wage Systems of Smith, Marx and Keynes
The object of the Just Third Way is not higher wages or the redistribution of income. The Just Third Way aims at restructuring the underlying system, bal¬ancing the demands of participative and distributive justice by lifting institutional barriers that have historically separated owners from non-owners. This involves removing the roadblocks preventing people from participating fully in the economic process as both workers and owners. More people could then begin earning higher incomes from their own capital, as well as from their labor, creating for the ordinary citizen what Michael Lind of the New America Foundation calls a "Capital Wage," as a supplement to the "Labor Wage" and the "Welfare Wage."
The Just Third Way provides every person full access to the common good - a legal system and the social means that will encourage all people to create their own new wealth and share in profits broadly and equitably. The Just Third Way offers a just free market system that economically empowers all individuals and families through the democratization of money and credit for new production. Widespread citizen access to money power would create universal access to direct ownership of income-producing capital.
Within the economic process of a market economy, widespread dispersion of capital ownership (and the powers of property) functions as the economic check against the potential for corruption and abuse by the government and by corporate and financial elites. Restoration of the full rights of property and extension of equal access to private property to every individual, serves as the basis for economic democracy, the necessary foundation for effective political democracy.
The Transformation of Human Work
In striving to "make every worker an owner," the Just Third Way recognizes that by nature every person is a worker. Under the wage system framework, the concept of "work" has been stripped of much of its dignity, consigned only to that portion of human endeavor dealing with "making a living." In its larger context, however, work involves physical, mental, entrepreneurial and spiritual forms of human activity, from manual labor to meditation.
Within the paradigm of the Just Third Way, the highest form of work is not economic labor, but unpaid "leisure work" - the work of building a civilization and improving the social order, work that no machine can perform.
Throughout history, creative work has mainly been engaged in by individuals with independent incomes, those who were supported by a patron or by someone else's labor. The Just Third Way provides a means whereby more people can engage in "leisure work," continue their lifetime learning and personal development, and be liberated from wage slavery by an independent capital income produced by their own labor-displacing "technology slaves."
5. A Blueprint for a Sustainable Ownership Society
In the 1860s, Abraham Lincoln's Homestead Act turned thousands of people into owners of frontier land, the single most valuable productive asset at the time, by giving them the opportunity to earn ownership of one hundred and sixty acres. The land itself wasn't just given away. Each homesteader had to develop the land and work it for five years - the "quid pro quo." He or she was then granted title.
However, in today's world, ever-im¬proving technology accounts for most of the newly produced wealth. Thus, limiting every¬one to ownership opportunities in finite land and natural resources would merely result in a growing population dividing up a static amount of wealth into ever-smaller pieces, en¬suring poverty for themselves and their descendants. There are, however, social technologies that can be used to democratize individual ownership of a type of wealth that has no limits save human creativity and ingenuity. We are referring here to ownership of new tools of production constantly being added to the world's expand¬ing technological frontier.
Capital Homesteading: Tax, Credit and Other Macro-Economic Reforms
Louis Kelso invented the Employee Stock Ownership Plan (ESOP) for workers in the corporate sector as a first step toward a Capital Homesteading plan for all citizens. For the economic policies of government at any level to work for the greatest number of people, such policies have to build a universal political constituency for free enterprise growth. A Capital Homestead Act promotes such a broadened constituency by applying principles of justice at both the macro- and micro-economic levels.
Components of a national Capital Homesteading program are interdependent, supporting the total program like the legs of a tripod:
1) Reforming national monetary policy,
2) Simplifying the national tax, and
3) Linking tax and monetary reforms to the goal of expanded capital ownership.
Reforming National Monetary Policy
Central banks were invented to create money. Speaking somewhat flippantly, the economist Paul Samuelson calls central banks "legal counterfeiters." They can create good money linked to productive growth or bad money with no asset backing. Only the latter is inflationary.
Through Capital Homesteading reforms, economic growth would be freed from the slavery of past savings ("old money"), while creating a domestic source of new asset-backed, interest-free money and expanded bank credit to finance new capital repayable out of "future savings." To ensure that ownership of future private-sector growth and newly created wealth is universally accessible to every citizen, such newly created money and credit would only be available through economic democratization vehicles, administered through the competitive member banks of a well-regulated central banking system.
The creation of such new money and credit under Capital Homesteading would be non-inflationary and would simultaneously broaden purchasing power throughout the economy. To accomplish this, a key reform under Capital Homesteading is a two-tiered interest policy by the central bank that would sharply distinguish between productive and non-productive uses of credit.
Under the first tier, future increase in the money supply ("new money") would be linked to actual growth of the economy's productive assets, creating new owners of new capital through widespread access to interest-free capital credit repayable with future profits. The central bank would create (i.e., "monetize") interest-free credit, with lenders adding their normal markup as service fees above the cost of money, thus establishing an unsubsidized minimal rate for financing technological growth. This would provide the public with a currency backed by increasingly more efficient instruments of production, real wealth-producing capital assets, rather than over $9.5 trillion of unsustainable government debt.
The second tier would allow substantially higher interest rates for non-productive purposes, for which "past savings" or "old money" would remain available. The central bank would be restrained from future monetization of national deficits or encouraging other forms of non-productive uses of credit, causing upper-tier credit to seek out already accumulated savings at market rates.
Capital Homesteading would also provide through capital credit insurance a rational way to deal with risk, as well as an additional check on the quality of loans being supported by the central bank. Capital Homesteading would promote private-sector insurance and reinsurance pools to offset the risk that the enterprises issuing new shares on credit might fail to repay the loans. Such capital credit default insurance would substitute for "collateral" demanded by most lenders to cover the risk of non-payment, thus enabling the poor and others with few assets to overcome the collateralization barrier that excludes poor people from access to productive credit.
Simplifying the Tax Sys¬tem
Few Americans today would label the U.S. tax system as either simple or fair. Many Americans believe that tax breaks are mainly benefiting the extremely wealthy. While the top 5% of Americans account for more than half of all personal income tax revenues, through advantageous arrangements wealthy taxpayers frequently are able to avoid paying anything but a token amount of taxes on their capital incomes. The payroll tax and sales and excise taxes take a much bigger share of disposable income from middle and low income Americans than from wealthy Americans, according to the Institute on Taxation and Economic Policy.
Meanwhile, our current approach to taxation continues to be justified under the erroneous assumption that there is no other way than through supply-side tax incentives to stimulate new investments and create jobs.
A just tax system would encourage accelerated rates of sustainable and life-enhancing growth in wealth-producing assets, enable all citizens to become economically self-sufficient in the process through growing "Capital Homestead" accumulations, and tax every citizen's consumption incomes above a decent living level, at a rate sufficient to balance the government's budget.
A more realistic and just tax today would be a single rate imposed on all directly earned and so-called "unearned" incomes above a decent level needed to meet all one's basic living needs and savings for retirement. Thus, the burden of government would be spread proportionately among all taxpayers earning more than the exemption levels. A single tax rate would be administratively more efficient than a progressive or graduated tax. Ideally, the single-rate tax on individuals would cover all government expenditures each year, including welfare, defense, interest on the Federal debt, Social Security and Medicare obligations, unemployment and all other current spending not covered by user fees. Incomes exempted from taxes could also cover the cost of private-sector health insurance premiums under universal comprehensive health care coverage. Health vouchers would be supported through general revenues to enable the poor to choose among private-sector providers under the single-rate tax system.
This will allow for the gradual or immediate elimination of regressive payroll taxes on workers and companies, making the economy more competitive. And it would help make government vastly more accountable and transparent to the electorate. If tied into a vigorous national growth and expanded ownership strategy, one could easily imagine future candidates for publi