A Rich Contribution To The Debate

Reviewing my friend John Médaille's Toward a Truly Free Market: A Distributist Perspective on the Role of Government, Taxes, Health Care, Deficits, and More, Gerald J. Russello writes:

With the economic crisis continuing, the major parties continue their kabuki theater about the way forward. Democrats offer increased taxes, more regulation, and condemnations of “greed,” while bailing out Wall Street and assisting the large health insurance conglomerates that control the health care industry. Meanwhile, Republicans utter platitudes about innovation and smaller government, while also bailing out Wall Street and signing over their constituents’ assets for generations to come for military adventures. Then just in time for election season, both sides pretend to care about the middle class and what it might take to create a stable and just economic society. The financial and political elites would prefer that the nation forget that almost everyone from Alan Greenspan to Robert Rubin failed to predict the crisis — or provide any reasonable solutions to it. That such men remain the economic talking heads speaks to the malaise of our current system.

John Médaille looks at the crisis through the prism of what he calls a “distributive” perspective. Distributism is a loosely-defined school of thought that has its roots in Aristotle and the medieval economists, but received new life with the social encyclicals of the Catholic Church, beginning in the nineteenth century with Leo XIII’s Rerum Novarum. Until recently, however, too few contemporary economists have embraced its principles, and the term has been burdened with a rhetorical nonsense surrounding its principles and claims. Distributism, as its name implies, requires the broad distribution of property as a safeguard both for individual liberty and stable economic growth. It is not opposed to innovation, or the proper returns on capital, nor does it require government intervention to equalize property.

Distributism is often misconstrued as a “third way” between capitalism and socialism, taking the best of both but modulating their excesses. This is incorrect. As Médaille shows, distributism is not so much — indeed not at all — a “third way” between different approaches but a different road entirely. This is in part because capitalism and socialism are not themselves separate ways. Marx and Hayek both contended, for example, that should their views be adopted, the state would wither away. Instead, under either communist regimes or capitalist economics, the growth of the state has increased, and with it has come increased reliance on centralized power and a crushing debt burden. That a similar result occurs under putatively “free market” or “socialist” policies derives from the fact that both views rely on a similar view of the human person as only an atomistic, consuming entity.

Dissatisfaction with this distorted view is building. Médaille’s work joins other recent economic thinking that is challenging the very basis of the contemporary economic order, such as Stefano Zamagni’s work on the “altruistic” economy and his critiques of the standard economic models of human behavior. Writers like Timothy Carney have shown in detail how, contrary to accepted nostrums, big government and big business go together, and indeed that business prefers bigger government to keep out competition and increase their access to subsidies and other benefits. Neither supports real economic growth or the protection of liberty.

Similarly, Médaille argues that capitalism and big government must go together. Without government intervention, capitalism is unstable. Since 1953, Medaille argues, the economy has been in recession approximately 15% of the time, as opposed to almost 40% in the preceding century. The dividing line, he argues, is the imposition of consistent Keynesian policies to balance aggregate supply and demands. Greater amounts of government intervention were needed to stabilize the economy over the last five decades. As current events may be bearing out, this situation is untenable. Some other solution is needed.

This might suggest that Médaille is in favor of government intervention, but he is not — at least, not exactly. His bias is always for the smaller and more local, so smaller communities can contain costs, reduce corruption, and not cede their liberty to a larger state. Médaille begins with the community of the family and not, as is typical of modern economic thought, with an atomistic, utilitarian individual. Modern economic theory, Médaille argues, improperly rests on the “stork principle”; that is, economics begins with full grown workers and does not ask how they got there. Despite the protestations of the conservative movement, this makes capitalism fully compatible with a Rawlsian secular liberalism, for whom the adult, rational citizen simply emerges from behind the “veil of ignorance.” Because of this glaring error, economics cannot accurately distinguish production for exchange from production for use. Indeed, “economic theory simply has no way to account for production for use, even though it is actually the whole point of production for exchange.” Most activities within the family are production for use — providing dinner, safety, and education for children for example — and are almost invisible to most economic analyses.

This is not some disguised paean to “family values,” but a sound economic argument that supports liberty. Communities like families provide a buffer to the state. They also represent mini-economies of themselves, ones not based on financial exchange but on altruism and affection and, more importantly, mini-economies that go unacknowledged by contemporary economics. For Médaille this dooms the modern economic project almost from the beginning; any further conclusions must themselves be misguided.

The deep interconnection between big government and big finance is also evident in his treatment of money, one of three “fictitious commodities” with labor and land. Fictitious commodities are those that do not follow the demand and supply curves required by neoclassical economics. The variety of reasons and conditions under which people labor does not fit within standard economic theory; there is no “equilibrium point” between supply and demand that would exist if labor were any other commodity. Similarly with land, Médaille adds the further point that land has its initial and intrinsic value not from the individual owner, but from the community around it. Infrastructure improvements and population growth benefit the landlord, but were accomplished without the landlord. Médaille, incidentally, sees this as a potential injustice, and so proposes ground rents – and almost only ground rents – as the preferred method of taxation.

With real commodities, the relative supply and demand for a good depends on its price. As the price increases, demand drops. With money, the last fictitious commodity, the “price” is the interest rate. As that increases, demand drops, but so does the supply — which Médaille construes as the availability of credit. This is because “credit is not ‘sold’; it is allocated in a bureaucratic process. Commodities are sold; anyone with the money may by them, and the shopkeeper does not examine your credit or your planned use of the commodity. Bankers, on the other hand, lend only to those who are likely to pay them back.” In a high-interest rate environment, the more reliable borrowers exit the market, leaving fewer reliable borrowers. As a result, lenders pull back, reducing supply as well as demand. In circumstances where this does not occur — as when, for example, government forces business to keep the supply of credit high to riskier buyers of home mortgages — economic incentives are further corrupted.

The usual critique of fiat money is that it is not based on any intrinsic value, but solely on the backing of the government, which in turn rests on belief in government to honor it. But Médaille has a further point. Ours is just as much a credit economy as a monetary one, and credit is almost always created by private financial institutions. The consequence is that banks are the true creators of money, but they have no way to determine whether the supply of credit they are extending matches the demand for actual goods and services; “[i]ndeed, it is in the banks’ best interest to create as much money as they can, regardless of what is happening in the rest of the economy.” Médaille ‘s libertarian solution is to let a thousand currencies bloom. There is no reason for one central government — or central government or quasi-public entities like the Federal Reserve — to dominate monetary policy. Localities should issue their own currency, designed for local projects.
In a distributist system, in other words, there would be no bank “too big to fail,” because nothing would be that big, or that necessary. And, as Médaille notes, there are relatively large-scale commercial enterprises operated on these principles, in Europe and elsewhere, that show such principles can work. It is only our current economic absolutism that does not let us see them, and so we seesaw between a government-regulated capitalism, and a market-infused state socialism. Neither is satisfactory.

Toward a Truly Free Market applies its basic insights into taxation, health care, deficit spending, an numerous other topics. It represents the best alternative economic thinking in a long time. Not all of its prescriptions will go unchallenged, but it is a rich contribution to the debate.