CCXX – Defining And Refining

My previous two articles introduced an off-the-cuff idea and expanded upon it, that the true measure of an economy has less to do with money and more to do with resource transformation. I introduced a lot of terms so I want to take a moment to pin down what I mean by these terms so that I can remain consistent as I continue to think about this idea. Next, I would like to state as simply as possible the model I’m thinking of and see if it’s logic still holds up.

First, let’s talk about terms.

MONEY – A highly (perfectly) liquid instrument for transferring value.
RESOURCE – An illiquid instrument for storing value over time
NATURAL RESOURCE – A resource which is produced and distributed according to nature.
RAW MATERIAL – A natural resource which serves as the object of the transformation process.
VALUE – The desirability of a thing to some party (an individual, organization, society).
POTENTIAL VALUE – The possible future value of a thing after it has been transformed
ACTUAL VALUE – The value of a thing that can be realized in exchange or storage.
FACE VALUE – The stated measure of value of a thing.
WORTH – The perceived value of a thing.
TRANSFORMATION – The conversion of Raw Materials into Products through the application of Work
WORK – The specific means of transformation
MANUFACTURING – The species of work where labor is applied to resources to transform raw materials into products
SERVICES – The species of work where labor is applied to problems to transform those problems into solutions.
PRODUCT – A Raw Material which has been transformed into something useful and/or desirable.
TRANSFER – The one-way movement of Money, Resources, or Value from an owner to a buyer, or from one place to another place.
STORE – The ability for a thing to retain value over time.
EXCHANGE – The sum of two transfers, one from owner to buyer, the other from buyer to owner.
LIQUIDITY – Measures the ease that stored value can be transferred.

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Lets look at some examples. A friend of mine worked as an engineer in a metals mine. His company would extract the raw materials, transform them into some product, and exchange the product for money. His company was able to exchange the product for money because the product was valuable to the counterparty.

The United States has a strategic oil reserve. This oil was in part taken from raw materials extracted domestically, and transformed into usable product-forms of oil. The strategic reserve has several varieties of these oil products just in case–it is far better to store the actual oil than their cash equivalent because the oil stores value longer than cash does.

In the colonial period, the Belgian Congo was known for it’s plentiful natural resource of Rubber. Congans would do the work of extracting the raw material and transforming it into some product. Belgians would then transfer that product to other parts of the world, where it would be exchanged for money.

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Lets make a simplistic example. You and three friends have 10 blocks of wood. I have a knife which I can use for whittling. I agree to pay you $1 for one block of wood. I whittle it into a gnome, and I sell the gnome for $2. The end result of this series of transaction is that you and your three friends have one fewer block of wood, you are up by one dollar, and I am up by one dollar. Everyone exchanged goods for an agreed upon price, so economics is working as designed.

However: If our frame of reference is just you and your three friends, your collection of ten blocks has been depleted by one, and income inequality between you has grown by one. In real world examples, what tends to happen is those with money in developing countries leave and go to developed countries. So lets say the same thing happens here. Now there are only your three friends, 9 blocks of wood, and me with my whittling knife.

Any skills that you originally had, left. Any income you earned, you took with you out of your group of friends, and the resource has been transformed and so cannot be returned.

I am suggesting that a better way of going about things would be for me to sell you my whittling knife, and teach you how to carve gnomes. One of your friends sells you the block for $1. You carve it into a gnome. You sell it to another friend for $2. The resource and the product stay in the group, and the economic activity remains as well. The full life cycle is preserved. After the fact, the friend with the gnome could sell it internationally–at that point, the resource has left but the economic gains relating to it have already been preserved.

So the principle appears to be that the first exchange of transformed resources must be within the host country. After that the end product can go anywhere, but the economic benefit of extracting, transforming, and exchanging a resource and product remains in the same place.

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I don’t have a good segue for this next bit, it’s the result of an earlier draft the substance of which I didn’t want to keep except for this one point:

Lets take a moment to talk about services. Service is the species of work wherein not resources but problems are transformed from problems to solutions. The solutions to problems are valuable, so Solutions are a species of actual value, while Problems are a species of potential value. This is why Entrepreneurship can generate value from creative problem solving.

More to come on this whole topic!

AMDG

CCXIX – Developing Economic Resources

There’s a point I arrived at in my previous article which I would like to expand upon. This is the comparative utility of money and resources.

In that article, I talked about how the corporate exfiltration of resources from developing countries in exchange for money was not an equal exchange: The party that receives money is the worse for it. There’s a few aspects to this idea so lets take them bit by bit.

The first aspect we need to make sure we understand is the nature of money and the nature of resources. Money is the means of exchange–we know it intuitively as the cash in our wallets, even if writing a formal definition is not very simple. Resources are raw materials which can be transformed by work into goods which can be brought to market. We understand this concept intuitively as well, even if the formal definition is wide ranging.

Money is useful as a medium for transferring value. If I own a house, I cannot carry that house with me and exchange pieces of it for goods. We use Money as this proxy. Money once was used in exactly this way when we had a Gold Standard–money represented actual, tangible portions of Gold and at any time could be exchanged for the equivalent quantity. Fiat currency is more complicated than I have the time or patience to get into here, but in short let us just say that a fiat dollar is money which is backed by a government rather than by a resource.

Resources are useful as a medium for storing value. I can store a house or I can store a pile of cash for thirty years. The pile of cash will not change in value, the house might appreciate in value based on the market. Raw materials are resources which store potential value. A gold deposit isn’t useful to anyone, but can be made into something useful for someone, and it is that potentiality that gives it value. A golden ring has actual value–the raw gold has been transformed into something that people want and are willing to exchange value for. Both the golden ring and the gold deposit will still be valuable in thirty years, but the cash–the money–will only ever be worth it’s face value. No one exchanges value for money, but people do exchange money for value.

This is an important preface to this next aspect. The developed world uses money to measure everything. This is because money is constantly being transferred, value is constantly being created, and the developed world interacts with itself on roughly equal footing. You can compare two developed nations by comparing their Gross Domestic Product (GDP)–a measure of the total money that changed hands within their borders. Gross Domestic Product doesn’t say anything about the value that is being transferred, but it does say how much money is being transferred. A “Rich” nation has lots of money. A “rich” person may not even have any resources or assets–just vast sums of money. This is all well and good, but a complete picture of financial health should capture some view of resources.

The developing world does not have much in the way of money. They are generally abundant in resources, either actual or potential, but want for money. Because the developed world measures everything by money, they see these nations and think them to be “poor” and so begin as best as they can the flow of money from the developed to the developing world. This is all well and good–but money is useful for transferring value, not for storing it. When money changes hands, value is transferring one way or another. Typically, money will be used to secure access to the potential value stored in the untransformed resources of developing nation. Then typically a company will transform those resources, and transfer them through their supply chain around the world, where they will transfer that value for more money than it required to make the transformation. The end result is a net flow of stored value out of developing nations, and a net increase in money for a company.

Why is this bad? The goal is that we want developing nations to become developed nations, through improvements to the standard of living and quality of life of the citizens of those nations. For a developing nation to really fuel their economic dynamo, they need the ability, technology, and cultural will to extract resources and transform potential value into actual value. The process of doing that will result in concrete improvements to the quality of life and standard of living.

A logical next question would be–well, why haven’t they done that? When the first movers went global, they gained the ability to negotiate with developing nations as if money was the most valuable resource, and made deals based on that. On paper such deals look fine: everyone is exchanging goods or services for money at an agreed upon price, everyone is happy! But when foreign actors enter a developing nation, secure the rights to their resources, and perform the transformation, they are denying the domestic actors the ability of acquiring that skill and expertise. The cultural will to develop their own competencies is muted and the technology is brought in and utilized by external parties, so the ability is not developed. Developing nations must be able to Extract, transform, and transfer value on their own to improve their economic welfare. Third parties can help with this process, but the process must be effectuated domestically.

This is why we see isolationist or high tariff policies working extremely well to incubate industries. This method was deployed by Japan and Korea in the technology industry, and by preventing foreign parties from interfering, developed their own competencies and are now highly skilled in that industry.

GDP is only effective at comparing like nations. Germany and the United States can be compared on industrial power and consumerism using money as a proxy. Developing nations can be compared using money, but it would be most useful if there was some measure of the amount of value transformations which are taking place. If we compare disparate nations by a measure that is not well suited to them, we will misdiagnose the problem and so prescribe an incorrect remedy. If the problem is relieving poverty, raising the standard of living, improving the quality of life around the entire world, it first involves understanding how value can be transformed and retained within developing nations.

AMDG

CCXVIII – Corporate Imperialism vs Poverty

Any system, if planned and performed by properly formed Catholics, can work to good and the glory of God. Any system. Communism or Capitalism, if effectuated by properly formed Catholics, can both serve to benefit society and the glory of God. Classical Liberalism or Authoritarianism, same deal. Properly understanding the world requires accepting this point. A shovel can be used to dig a hole to plant a tree, or a shovel can be used to bludgeon someone to death. A shovel is not inherently good or evil, but it’s uses can be good or evil. Likewise these complex systems.

The reason this point is important is because it explains why these different ideologies and systems can be so popular. Call it idealism: if performed perfectly, it would work great. The differences and problems come when our fallen human nature is factored in. Disagreements about how human nature behaves, exactly, lead to disagreements in ideology and differences in outcomes between comparable yet independent systems.

The thing that got me thinking about this is the idea of poverty around the world. There will always be a class of people who have less than the class of people who have more; it is also possible for the baseline of poverty to rise over time. Access to basic human necessities like food and water, access to clothing and shelter, access to sources of income. These are basic necessities and over time their scarcity can be mitigated.

The causes of this poverty are manifold. Poverty may happen regardless, but it’s important to make sure we (both individually and as a society) do not contribute materially to making it worse. We would prefer to make the situation better, but we can settle for at least not making it worse. So one cause that I had in mind was Corporate Imperialism. Substantively, this is just another brand name for Globalism, but the latter has become political jargon and so is an ideological shibboleth, therefore is meaningless; the former is colored by historical imperialism and colonialism and so shocks the senses by linking two seemingly disparate concepts.

When I talk about Corporate Imperialism, what I mean is the ability for individual corporations to negotiate with governments for favorable treatment, to receive that favorable treatment, and to operate in that nation as long as favorable treatment persists, operating just above the average standard of living. The theory is that the presence of a given corporation is better than their absence, it provides work to people and allows money to flow into the country for infrastructure investment and increases the standard of living. This is true! Good things can and do happen when Corporations operate in low-cost nations. However: I believe much of this impact is incidental and not deliberate. A good amount of Corporate Altruism is engaged in the service of the Bottom Line. A firm might invest in roads because they want to ship their goods faster and in better condition. A de minimis benefit of having good roads is an improvement in the quality of life for everyone else who can use those roads. It is better to have an incidental benefit than no benefit, but it is better still to make a deliberate benefit.

If we imagine a world in which every nation were perfectly isolationist, their economies would grow organically and achieve the size and scale supported by their culture, their available technology, their government/society, and their resources. A culture that does not value entrepreneurship will not creatively exploit their available resources and so will have a lower economic maximum than if that same culture did value entrepreneurship. This is not to say entrepreneurship is a virtue as such, just that entrepreneurship is the means by which value is generated by creative problem solving.

Cultures cannot change except on the timescale of centuries, and can only change if there is an internal will to change. Cultures cannot be changed through external means, because if an unwanted change is imposed upon a culture they will rebel against it given enough time. Governments and Society are derivative of culture, they are emergent systems that reflect and reinforce the culture in which they emerged. Technology can be given to a society, but a society must find a use for it or else it will not be widely adopted. Resources can be added to a society but likewise with technology, that society must find a use for it. Resources can be taken away from a society, and that will guarantee they cannot be used by that society, and so will not be to their benefit.

The approach to the relief of poverty so far seems to be adding the resource of money to a given society, but typically this is in exchange for the exfiltration of resources, which is why this is a task generally performed by Corporations. The addition of money in exchange for the subtraction of resources is not an equal exchange, because money cannot be used the same way or drive the same creative insight as some raw material. Money has the additional property of being highly liquid, which encourages corruption. A corrupt individual would rather have money than a barrel of oil, for example. Throwing money at poverty serves to increase corruption and so poisons society; exchanging money for resources serves to reduce the availability of resources and so deplete that society of economic fuel.

This explains why poverty is such an intractable problem: What is being done right now isn’t effective, what ought to be done isn’t easy. Cultural change can be facilitated by a third party but cannot be done by a third party. This involves finding out what exactly people need and working with them to identify solutions, and creating systems and structures to help them resolve their own needs. As the cliche goes, if you give a man a fish he will eat for a day, if you teach a man to fish he will be fed for a lifetime. If you teach a man that he won’t need to fish if he makes fishing rods and teach him to teach his peers, then you create a system that has added fishing rods to society without airlifting a pallet of fishing rods to them. There is no profit in this model, and there is no temporal reward in this model. But the effects are compounding and long lasting.

True poverty alleviation begins with the hyper-personal. Find one person and find out how to help them help themselves. Then tell them to show someone, while you find another person. Devise a system such that it is self perpetuating and works towards growth, and let it run for a century, and see what happens.

Corporate Imperialism can’t do this because Corporations don’t operate on a personal level: they deal in forecasts and models. This doesn’t mean Corporate Imperialism should stop outright–something is better than nothing–but if there was a way to incentivize the hyper-personal approach to encourage creative problem solving, then Corporations would be able to magnify whatever efforts they are already undertaking.

AMDG

CLXXXV – Imaginary Rai Stones

So in my previous musings on the stock market and my subsequent addendum, I walked through a scenario where Rai Stones were used as “Equity” and Fish were used as currency. This helped me to think about my ideas in the time since those posts, and I offer the fruit of that here.

(y) – Addendum Simpliciter

Economics is complicated because we are dealing with multiple variables measured by dollars. The Island of Yap uses giant stone toruses (Rai Stones) as currency. They are so big they can’t be moved, so they just record who owns which giant stone torus. Lets take a page from that book to create a simpler example.

CLXXXIII – Economic Thought Experiment

There’s a fallacy I may have described here which I call the “Dow fifty-thousand” fallacy, so named for a book written in the late 90’s predicting that the Dow Jones Industrial Average will reach fifty-thousand by the early 00’s. In 2001, the tech bubble burst, and that long-shot dream became the new poster-child of tragic ironies, replacing the unsinkable Titanic.

What this has taught me is that if all the trends are going up, the only safe bet is to wager it will go down, and eventually I’ll be right. I do this with a lot of things, and usually that means I’m an optimist, because if times seem hard, I’ll bet the opposite with high confidence.

But the interesting thing insofar as it pertains to the stock market is that we haven’t really seen a period of prolonged decline. The stock market does tend to rise over time. It will make gains over a decade and lose them all in a week. That tends to be the way of things, on the aggregate. If the man who wrote “Dow 50,000” moved his timeline to “sometime in the next century” instead of “sometime in the next decade” he probably would have been right.

Social Entropy

So that leads me to the thought experiment. What else tends to always increase? The first thing that came to mind is population. Populations tend to grow logistically. It makes sense that some portion of that population will invest in the stock market, and if the population is growing then the number of people investing will grow, and the amount of capital in equity markets will likewise grow. Thus, an ever-increasing stock market is something like a bet on an ever-increasing population.

This is true in the case of a single company, too. If Acme Anvil Co sells anvils to the entire United States, then it’s sales will increase as the population of the United States increases. As it’s sales increase, it’s equity increases, it’s stock price increases.

How strong is the correlation between the stock market and the population? We could do a basic statistical analysis to determine this, but I think there are other variables at play. A basic rule of thumb for post-industrial society is that the older a population is, the more free capital it has. So if the investing population skews older, then it will appear that the capital invested is increasing faster than the population.

We can also adjust for the amount of capital actually available to invest. When Government spends money, that money is injected into the economy and some portion of it, by a chain of custody, will end up invested in equity markets. This will also tend to bolster those markets against population-driven volatility.

So I think we can deduce that equity markets will tend to rise at a greater rate than the population simply based on the two variables of demography and government capital flow.

What I am interested to know is how much of the change in equity markets can be explained by these three variables. As population increases, I would expect the markets to increase by at least the same rate. As the elderly population increases or decreases, I would expect the markets to increase or decrease by some multiple. As Government spending increases, I would expect the markets to increase by some multiple.

Consider The Following…

Theoretically we can create a model that tells us whether or not the markets are increasing relative our population. If the markets are increasing slower than (or decreasing relative to) our population, then that means that stock markets aren’t adding value so much as moving wealth around. If the markets are increasing faster than our population, then that means that stock markets are adding value for everyone involved.

How do I justify these conclusions? Lets imagine there is a population of ten-thousand individuals, some unknown number of whom are invested in a rudimentary stock market. The total equity is $10,000, so we can suppose that on average for every person has $1 in the market.

If this population increased by one-thousand individuals, and total equity increased to $11,000, this means that by doing nothing other than adding population, the markets increased 10%, exactly on par with our expectations.

If the population increased by one-thousand individuals and total equity increased to $10,500, then this raises questions. We don’t know who all is investing, but the total equity increased by less than $1 per person, so either the new individuals didn’t all invest one dollar, or the fraction of people who were investing weren’t investing very much, or the firms they were investing in were not in demand by the new population. There are a lot of ways to explain this behavior.

If the population increased again by one-thousand individuals to a total population of twelve-thousand, and total equity decreased to $9,000, then we have a new concern. On the whole, money is leaving the equity markets or value is being lost. This supports the idea that on the aggregate money has moved around our little population–though without knowing specific demography, we can’t know where.

If the population increases again by one-thousand individuals to a total population of thirteen-thousand, and total equity increases dramatically to $15,000, then we know that some value has been added from somewhere else–and because I’ve got imperfect information about this thought experiment, we don’t know where it is coming from but we do know it is a disproportionate addition.

The Price Is Right

This raises one last thought. I’ve been intentionally using the term equity and avoiding reference to stock price. Stock price behavior may or may not be rational, but the total equity is a reflection of the behavior of the marketplace.

Let’s put it this way. We have a market of ten-thousand individuals, and a firm goes public at a valuation of $10,000, and sells ten-thousand shares of it’s stock.

We have equity movements and we have price movements. Suppose a big institutional investor comes along and wants to buy 20% of the firm. They add $2,000 to the equity and acquire two-thousand shares of stock. The stock price remains one dollar. But lets suppose for whatever reason people suddenly think this firm has invented the next big craze, lets call it Widget 2.0. Demand for those ten-thousand shares increases and suddenly the stock is trading at $5 per share. Lets suppose our institutional investor sold his entire 20% stake at $5 per share. He sells two-thousand shares, receives $10,000. The firms total equity is now worth $50,000, but they only contributed $10,000, so they have an “unrealized gain” of $40,000.

That was a surprisingly complicated example, so let me break it down. Equity movements relate to ownership, and set a fixed starting point on what something is valued. Price movements reflect market conditions and not something tangible. The institutional investor made a $2,000 equity move, and then Widget 2.0 caused a stir and the price movement increased the value to $50,000.

TL;DR

Stock price reflects demand. If a population is increasing then demand will increase so a stock price will increase.

Total Equity reflects invested capital. If a population is increasing then the amount of money available to invest will increase so the amount of money actually invested will increase.

A stock price can decrease even if a population is increasing if the population doesn’t want that stock.

If Total Equity decreases it means money is being taken out of the markets, or the amount of money actually invested is decreasing. If this happens while a population is increasing then it means money is changing hands and/or social behavior is changing relative equity markets.

If Total Equity increases at a greater rate than the population, then that means that additional money is entering the markets from some other source, possibly the Government.

What I want to know is, how does our economy look when evaluated by this theoretical model?

AMDG

CLXXVI – Socionomics

I have mentioned occasionally that I am an accountant by trade so it’s actually surprising to me that I haven’t touched on financial topics more frequently. Like most people, I have thrown some monopoly money into the markets on occasion just to see what sticks. I’ve never really viewed it as anything other than gambling, since I have no detailed knowledge of the investments themselves and I have no reason to believe the markets will behave a certain way other than what I describe as my horse sense about the state of things.

Nevertheless, my inexperience and incompetence in the field doesn’t prevent me from speculating about why markets move the way they do. There are three axioms that serve as a starting point. 1) The timeless “Buy low, sell high”. 2) Markets are efficient. 3) Markets have all information built into the price.

Probably the biggest mover is people’s attitudes about a stock. For example: If I believe a certain stock is priced low and will go higher in a time period I’m comfortable with, I will buy that stock. If everyone believes the same thing and they buy that stock, demand increases and so the price necessarily increases, and the price has gone from low to high. If I sell the stock after everyone has bought into it, I will have made some amount of money only because of the belief that it’s price will increase.

This same behavior plays out but you can substitute any predicate you want. If [some stimulus] and everyone buys [some stock] then the price will increase. You see this with some fad stocks, like Tesla or Apple: these are popular companies and so also popular stocks and their stock price is through the roof. Axiom #3 was most recently presented to me in a finance class and so presumed financial information. But there is Sociological information built into markets as well, including this fad phenomenon.

I am tempted to subdivide Axiom #3 into two parts: 3a) Markets have all information about the company built into the price; 3b) Markets have all the information about the investors built into the price. Neither diminishes the original axiom but clarifies what kind of information you might have. 3b in particular doesn’t get a lot of play.

This leads to situations where companies which produce actual products can have a lower overall market value than companies which are socially popular but don’t produce anything (compare Ford and Twitter, for example).

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I look at market news and see headlines speculating about why the market behaves the way it does. “Stock futures rise ahead of xyz” or “Markets open lower on concerns about pdq”. I usually have two questions I ask myself when I see these headlines: Why today? and What changed? A headline I saw this morning says “Stock futures drop on rising COVID-19, Economic risks” Why are these risks affecting the markets today? What changed about these risks today versus yesterday?

There’s no real answer to these questions. And those headlines usually are written by institutional investors who may be playing a sleight-of-hand game, directing our attention to one explanation when it may, in fact, be another. But no one can know how much the stock market moved because of a specific piece of news. How much lower are futures due to Covid risks alone? It’s impossible to quantify.

The bottom line is that it’s a horse-sense gambling game. More information doesn’t necessarily mean better outcomes, but I believe understanding how people react to information does. Economics, therefore is as much a sociological field as it is a financial one.

XCVII – Distributism for Beginners (No. 4)

Our previous post ended with a series of questions to guide our further analysis. Let’s begin with the most important one: What is the role of the worker?

What We Already Know

The worker is a human being, lets get that up front. Humans, as humans, have a few areas in their lives which they are worried about. This is essentially Maslow’s Hierarchy of Needs but I’m going to put a different spin on it. As I like to do, our Needs can be broken into three broad categories: Mind, Body, and Spirit. Bodily needs, for example, include food, water, shelter, safety, health, etc. Mental needs include education, stimulation, play, leisure, and work. Spiritual needs include community, family, sacraments, self-esteem and what Maslow calls “Self actualization”.

All three of these categories must be met or in progress of being met. I might structure it like a triple-venn-diagram, with “self actualization”^[1] in the middle.

If a worker has a family, he has to be concerned about the minds, bodies, and spirits of his spouse and issue as well. His spouse can help with this task, but the issue cannot until they reach a certain age. The dignity of the human person is the idea that every person deserves to preserve and protect the minds, bodies, and spirits entrusted to their care. It would be cruel to intentionally harm any of these, and indeed it’s possible that many people fail to uphold their duties insofar as these needs are concerned. But from the perspective of a third party, an employer for example, they must be concerned foremost about not hindering their employees pursuits as far as these are concerned. Perhaps even aiding, but I will not list this as a responsibility because resources are scarce, sometimes the best we can do is not hinder.

Because we’re talking about workers, lets spend a little more time on Employers. Employers have some responsibilities relative their workers as well, but it’s a looser responsibility. Employers must not hinder their bodily integrity. They must make a reasonable effort to preserve a workers safety; to provide wages for the workers welfare. Employers must not hinder their mental integrity. They must make a reasonable effort to allow time for a workers recreation, education, and, work. Employers must not hinder their Spiritual integrity, they cannot obligate an employee to forego their Sunday duty.

There is one area where the economic schools clash: Wages.

What Do You Wager

There are three schools of thought with wages. Some refer to it as a transaction: Employer needs x done, and is willing to pay z. Employee is capable of doing x, and is willing to accept z. Everyone walks away satisfied at the negotiated rate for x. This is your basic “supply and demand” function.

Others refer to it as a right: Employees cannot subsist on any less than z, and it is inhumane to offer anything less. This introduces a price floor to the supply and demand function. It might work in some cases, but there are many instances where it introduces problems.

My understanding of Distributism, as far as I could gather from ERN, is that Employers should pay what they called a fair wage. It seems to me this splits the difference. Understand the type of employee you hire, and pay them a fair amount to allow them to meet their needs. This is less about the supply and demand curve and more about the role of the employers as caretakers for their employees. Their employees well being is their responsibility, so they ought to pay a fair wage for their employees well being. Employers ought not impoverish themselves in doing so, and employees ought not take it upon themselves to demand more than what might be considered fair. The problem is that fair is a moving target.

All three of these schools of thought cannot be true, though all agree that employees ought to be compensated for their work. Proponents of the first would argue that the price negotiated is fair because all parties agreed to it. Proponents of the second would argue that the wage is fair because it’s established a universal minimum that employers cannot go below. It’s only the final model where the fair wage is not specified and so clearly subjective. Perhaps this is by design: Employers must, with their Christian Conscience, satisfy themselves that their wages are fair.

This is the key element, and the extremely unsatisfying element to economists: Decisions must be guided by Christian Conscience first, and by pragmatic supply and demand second. There is no rule that I could devise here that I could argue is a “fair wage” in all cases.

Get To Work!

This leaves us with a basic understanding of the employee employer relationship. The particulars of that relationship will have to wait until we understand the principles of distributism a little better. We will revisit this!

AMDG

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[1] – I’m going to keep using scare quotes because I don’t like the word but I don’t know what to replace it with.

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Part 1 | Part 2 | Part 3 | Part 4

XCVI – Distributism for Beginners (No. 3)

Before we go further on the comparitive economics, lets look at the Social underpinnings of Distributism. For this we turn to the foundational encyclical, Rerum Novarum.

Of The New Things

The first order of the encyclical Rerum Novarum (henceforth abbreviated ERN) is to establish that private property is a component of natural law. This makes it an inviolable law of God and principle of society, and furthermore is antecedent to affairs of State. In other words, The state does not own property, and allow citizens to own it privately; rather, the State is composed of private citizens who leverage their property for the same ends. Consequently, The fruits of that property naturally belong to the owner thereof. This may sound very libertarian, but the similarity ends there.

ERN carefully notes that the natural law extends only to ownership of property. The use of that property ought to be governed by the law of Christ, that man should not hoard but rather keep what he needs and give the rest to his neighbor, or to care for the poor. ERN elaborates on this principle at length, but it generally considers great accumulations of property a stumbling block to virtue; the soft vice of excess which weakens the moral foundations of society.

In terms of property, the State is properly ordered to facilitate the virtuous use of private property, not to administer that use. The State is, or ought to be, properly ordered towards God, and there are other encyclicals that deal with how citizens relate to the state which I am keen to look at but which may be tangential to this issue for now.

From all this, we can distill four guiding social principles for Distributism. First, that Private Owernship is naturally granted to us by God. Second, the fruits of our private property rightly belongs to us. Third, the State is a beneficiary of and facilitator to the virtuous use of private property, but has no standing to administer or distribute that property. Finally, the use of private property ought to be guided by a Christian conscience.

All of this spells out what we already knew: that Distributism is a Social Policy for the use and exchange of property, not an economic policy for the public good.

Why Is This Different?

All economic systems have a social aspect to it, but Distributism seems to me to have been the first to spell it out explicitly. Socialism is indeed intended to benefit the public good, but with the belief that the best party to determine and administer the public good is the State. It can’t be denied that Socialism is successful if that is it’s goal, but it fails at meeting the needs spelled out by ERN. Capitalism, likewise, comes from the libertarian belief that Economies will sort themselves in the most efficient way if they are given the space to do so, and the accumulation of capital and drive for innovation will, by necessity, benefit the public good. Likewise, Capitalism is successful in it’s stated goal. It’s the unintended consequences of both systems that necessitated a document like ERN. The exponential growth of Capital following the industrial revolution in the 19th Century was answered by the bloody rise of Socialism in the 20th. Laborers needed to organize to protect themselves from the former; society needed principles and structure to defend itself from the latter. After two world wars and a cold one, we find ourselves in the tense middle ground, wherein the State and corporations are in rivalry for power.

The innovation that Distributism offers is going to sound like common sense to Catholics, but it’s the idea of putting Human Beings first. How can we build an economic system that preserves human dignity first in owning property, then in using it, then in reaping its fruits?

As we move forward with our investigation of Distributism, we have three considerations now that we have our guiding social principles:

• What is the role of the worker, and how does he prosper?
• What is the role of the State, and how does it help the worker to prosper?
• What is the role of the market, and what form does it take given the new structure?

We press on! AMDG

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Part 1 | Part 2 | Part 3 | Part 4

XCV – Distributism For Beginners (No. 2)

Lets consider the basic economic principles involved in distributism.

[NB: I am not an economist. I am an accountant. I have a basic understanding of these things, but perhaps slightly more than a layman. You could consider me a Layman who read a book once. I’m no expert, but I read the book, so I can tell you what the book said.]

Markets work by Supply and Demand. Supply is produced by the Means of Production. Demand is produced by the inherent nature of inequality. Trade is how I get something that you have. Currency is how we compare the relative perceived values.

Capitalism is the idea that the Free Market is the most efficient means of moving resources between those who supply and those who demand. The person who produces the supply is entitled to keep the benefits from meeting the demand, and the person (or people) who do this the best will afford the ability to continue best serving demand and grow their operation. People that are unwilling or unable to meet demand will eventually exit the market because no one demands what they supply, or they supply what no one demands. Capitalism can be compared to Darwinism insofar as it suggests that the organization best fit to the market will succeed, and the organization unfit to the market will fail.

Socialism is the idea that the State is the most efficient means of moving resources between those who supply and those who demand. Because the person who produces the supply is the State, the State gets to keep the benefits from meeting the demand. This is borne from the belief that the State is always aligned to the public good. Therefore, suppliers who do not wish to commit their resources to the State, do not wish to commit their resources to the public good. Demand is infinite, and so everyone must contribute to increasing the State’s supply, in order to meet Demand.

Distributism then, is the idea that the public good is not considered by the pursuit of wealth, nor is the State a perfect arbiter of the public good. Therefore, the public Good is best left to the public. Markets are most efficient when they are small and local.

Digging in

We can learn more about Distributism by discussing what it isn’t. There are two pillars of our current economic system which violate Distributist principles as I understand them right now. First: A national market. Second: Absolute Competition.

Second point first. Absolute competition means any given business is in competition with every other business for bodies and dollars. The first competitive goal is against businesses in the same field. Lets say, shoe makers. If a shoe making innovation comes to town and suddenly a dozen shoe makers pop up, they will all oppose each other, strive for advantage. There is only so much shoe business to be done in town, so they scrap over the dollars in the market and the ones that can’t sustain their business slowly drop out. Competition is designed to reduce every industry to one or two major players. When there’s only one shoe business left, every dollar in the shoe market goes to that business, and they begin to behave like a monopoly. If there is a big rival, then they go back and forth and the market forces begin to be about what the two companies want, and less about what the market actually needs.

The National market, then, is when that local shoe business gets big enough to compete in the next town over. then the next state over. Then it’s National Shoes Corp, and suddenly it’s rivalry all over again. If National Shoe Corp can make enough money catering to profitable coastal metropoli, it is going to sell Small-townie Missouri whatever it has left. The national market reduces proximity to consumer, and so proximity to need.

These two forces combine with the following effects: Capital concentration in the shareholders of the two main rival corporations, and a monopolist market that can dictate demand.

Distributism poses a contrast to this. By promoting local marketplaces, it ensures the people who are buying are able to actually communicate their need to the people who are selling. By encouraging artisanal “guilds”, it ensures the profits in a given market don’t consolidate in one organization. Capital doesn’t concentrate.

Further Study

The questions that remain, for me, are all variations of, “How?”

• How do Guilds work, how do we prevent the current problems with Labor Unions?
• Is there still a competitive factor in a distributist market? How do they prevent capital concentration while still preserving competitive market forces?
• Do Distributist markets actually serve the market more efficiently, or is the advantage just that, while not optimized, it does ensure less capital concentration which serves the public good?

These questions will be addressed in a subsequent issue!

AMDG

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Part 1 | Part 2 | Part 3 | Part 4