Posted on: January 04, 2015 by M. Oliver Heydorn

Category: Social Credit Views

It's Time for an Economic Copernican Turn


     The modern, industrial economy (and civilization at large) is in dire need of a Copernican-style transformation: society’s financial credit must be subordinated to its real credit. The Social Credit monetary reform provides both the policy and the appropriate mechanisms to make this superior possibility a reality.

 

     After many years of intensive study, I have become convinced that the Social Credit ideas of Major Clifford Hugh Douglas (1879-1952) are the key to understanding what is wrong with the economy and what needs to be done in order to fix it.

     Perhaps the easiest way of grasping what the economics of Social Credit is all about is by way of an analogy. Just as there are two basic and opposing models of the solar system: the geocentric model and the heliocentric model, there are also two basic and opposing ways of organizing the financial system: the ‘chrematocentric’ (i.e., money-centred) model and the ‘oikocentric’ (i.e., provision-centred) model. Whereas, the present financial system is chrematocentric, the Social Credit system, and hence the Social Credit economic order, is oikocentric.[1]

     In order to properly understand the difference between the two models, one must first identify the specific variables that are at play. Every economy that incorporates a monetary system of some type or the other in lieu of barter is composed of two distinct elements. There is, on the one hand, what Douglas refers to as the ‘real credit’: the capacity to deliver goods and services, as, when, and where required with the least amount of trouble to everyone. This is the economy’s useful productive capacity, and it is purely a function of the physical factors of production (land, labour, the unearned increment of association, and real capital) in combination with the consumers’ real demand. There is, on the other hand, what Douglas refers to as the ‘financial credit’: the capacity to deliver money as, when, and where required. This is society’s ability to symbolically represent and command the real credit, and it directly depends on how well that society’s financial system (its banking and accounting systems) have been designed and how well they function.

     The financial system can relate these two elements to each other in one of two ways. On the chrematocentric model, the real credit is subordinated to the financial credit. This is achieved by maintaining financial credit in a state of artificial scarcity. The conventions that are presently in force, for example, guarantee that there is never enough money to catalyze all of the useful or independently desired production and there is never sufficient consumer income to liquidate all of the costs of any production that may be realized. On the oikocentric model, by contrast, the financial credit is subordinated to the real credit. This is achieved by ensuring that the financial system is properly designed to accurately reflect both the potential of the real or physical economy, as well as the changes that it undergoes when actualized.

     The two models are not of equal worth.

     Whenever the real credit is subordinated to the financial credit, it is because money has been transformed into a scarce commodity that is valued as an end in itself, a commodity that is bought and sold via the charging of interest. Instead of functioning as an informational tool, a mere means, money becomes an instrument that can be used to reward and punish in view of financial objectives that are, to a greater or lesser extent, divorced from the real economy. As a direct consequence, when it comes to making economic decisions under a chrematocentric financial system, financial credit becomes the principium, the determining factor, while the real credit becomes the principiatum (the determined factor):

     Individuals must use economic products, and they can only obtain those economic products by the means of money. If they are short of money, terms on which they obtain money can be imposed upon them; if they are not short of money those terms cannot be imposed. And it therefore follows that the existence of a money control necessitates a condition of economic scarcity, ....[2]

     To continue with our analogy, a chrematocentric financial system forces the economy's real credit to revolve around the 'sun' of its financial credit, and, by extension, around those who have cornered the market in financial credit. This is the arch-problem with the existing economic system. Instead of being the humble servants of a society’s desire to actualize its real credit, money, the money system, and the operators of the money system, have become the masters of the economic order. As a matter of fact, since the dawn of the post-'enlightenment' era, the financial system has occupied the place of religion in secular society: the economy has been consecrated to the worship of Mammon.

     What are the consequences of this unnatural arrangement? Any economy that inverts the due order between the real credit and the financial credit cannot fulfill its true and original purpose, i.e., the delivery of goods and services as, when, and where required with the least amount of trouble to everyone, to the extent that this fulfillment is physically possible.[3] The artificial scarcity of money in conjunction with the enthronement of money as the economy’s principium restricts and distorts economic activity such that the real credit cannot be fully or efficiently actualized and even that proportion of it that is realized requires the massive misdirection of economic resources. In place of the satisfactory consummation of the economic task, the chrematocentric financial order delivers poverty in the midst of plenty, servility in place of freedom, the recurring cycle of boom and bust, continual inflation (both cost-push and demand pull), economic inefficiency, waste, and sabotage, forced economic growth, an ever-increasing mountain of societal debt that is, in the aggregate, unrepayable, heavy and often increasing taxation, the usurpation of the unearned increment of association by the private banking system, the centralization of economic wealth, privilege, and power in fewer and fewer hands, social conflict, forced migration, cultural dislocation, environmental degradation, and international economic conflict leading to war, etc., etc.

     By contrast, whenever the financial credit is duly subordinated to the real credit, it is because money or financial credit has been made to correspond isomorphically, in its nature, accounting, and use, to the real credit. Financial credit should adequately reflect the real credit as this is the very reason for which monetary systems were introduced to begin with. Correspondence with reality decommodifies money and divests it of the illegitimate controlling power that it presently wields. Under an oikocentric financial system, the desire to actualize the real credit would become the principium of our economic decisions and the financial credit would then play the role of the principiatum, a mere tool whose sole purpose is to facilitate the realization of intended and physically possible results. In other words, an oikocentric or honest financial system would force the economy's financial credit to revolve around the 'sun' of its real credit, and, by extension, around those who own the real credit, i.e., the common citizens who should be regarded as shareholders in their country's economic activities.

     What would be the consequences of establishing finance in its proper role as servant of the real economy? The economy’s real credit could be fully and efficiently actualized. Within the context of a modern, industrialized state, a properly designed oikocentric financial system would deliver absolute economic security for every citizen in place of poverty and the threat of poverty, increasing leisure in place of servility (i.e., freedom from wage-slavery, debt-slavery, and useless, witless and/or destructive employment), the decentralization of economic wealth and power to the individual, the elimination of economic waste and sabotage, continual reductions in prices instead of inflation, much lower taxes, much less government regulation and interference, economic co-operation instead of ruthless competition, social stability, the transformation of civilization based on the unfettering of the creative impulse and the flourishing of both folk culture and high culture, environmental protection, conservation, and repair, and mutually beneficial international trade providing a sound foundation for world peace.

     According to Social Credit theory, the core economic and indeed societal problem is that the reigning financial system is chrematocentric rather than oikocentric. It does not automatically equate the economy’s financial credit with its real credit; it is not an honest financial system (it does not accurately reflect reality).

     From this diagnosis, the Social Credit prescription follows quite naturally. The financial system must be suitably altered so that the financial credit will be relegated to its correct position and purpose and will henceforth revolve around the ‘sun’ of the real credit. The financial system must become ‘oikocentric’.

     To this end, Social Credit proposes the establishment of a National Credit Office, a politically independent organ of the state, that would be tasked with ensuring that the economy’s financial credit is always duly subordinated to its real credit. N.B., the NCO is a purely administrative device. Its activities are entirely determined by statistical data and that data is the result of the free decisions of private firms, governments, and individual consumers in conjunction with the physical facts of the economy's natural resources. In other words, the NCO merely registers facts; it does not control or determine those facts, Cf. http://www.michaeljournal.org/notstatemonopoly.htm. In this regard, it is also important to note that the Social Credit monetary reform is not socialist but distributist. Accordingly, the Social Credit economic order may be described as a species of free-market or free enterprise distributism, Cf. http://www.socred.org/index.php/blogs/view/why-social-credit-is-not-socialism.

     In the first place, the NCO must ensure that so long as there is a real demand for consumer goods and services, sufficient credit to catalyze production can be made easily available. The economy’s physical productive capacity must be adequately represented by producer credit to the extent that the individuals in a community wish to call on that capacity to satisfy their needs. No longer will advantageous private or public productive projects be left to stagnate on the drawing board because of ‘a lack of money’. Whatever is physically possible and desirable will become financially possible.

     In the second place, the NCO must ensure that whatever consumer goods and services are produced, there will always be, as a matter of course, sufficient purchasing power in the hands of consumers to liquidate the corresponding flow of prices. Because of a variety of factors [profit-making (including profits derived from interest charges), the re-investment of savings, deflationary banking policies, taxation, and the A+B factor, Cf. http://www.socred.org/index.php/blogs/view/the-core-of-the-core-of-douglas-a-b-theorem-and-hence-of-social-credit-s-economic-diagnosis], there is an underlying deficiency of consumer purchasing power in the economy.

     A financial system which adequately reflects reality must fill this gap with additional purchasing power so that there is an equation between the rate of flow of final prices and the rate of flow of consumer purchasing power. Furthermore, it must fill it with purchasing power that is created free of debt or any other costs. Only then can the economy’s circular flow be restored to a self-liquidating balance, a real equilibrium, where all costs are finally paid each and every time they come forward for cancellation at the retail counter, Cf. http://www.socred.org/index.php/blogs/view/a-summary-of-the-social-credit-monetary-reform.

     The NCO would issue part of the compensatory credit in the form of a compensated price or National Discount on consumer items in keeping with an economy’s c/p or consumption/production ratio (as measured in financial terms). This would allow the price of consumer goods and services to reflect the average real costs of producing them (N.B., the true or real cost of production is consumption). The NCO would issue the remaining portion of the compensatory credit in the form of a National Dividend. Every citizen, whether he be employed or not, whether he be rich or poor, would receive an equal share, via additional purchasing power, in the societal profit or its surplus of consumer goods and services (i.e., those goods and services for which an insufficient volume of consumer incomes is distributed in the course of production). This issue of credit would adequately reflect the fact that, in an industrialized economy, each citizen is correctly regarded as an heir to the cultural heritage that made society’s real capital (its factories, machines, and equipment, etc.) possible and the fact that, because of technological advances as embodied in the real capital, the labour of every adult in formal economic processes is neither possible nor required. An economy that reflected physical economic facts would provide people with an income that was not linked to work and that was not funded by redistributive taxation or an increase in public debts but by a grant of ‘debt-free’ money, and would do so in such proportions as are necessary to equate the flow of consumer prices with the flow of consumer purchasing power. The superiority of the Social Credit dividend over any conventional basic income proposal should be self-evident, Cf. http://www.socred.org/index.php/blogs/view/the-big-difference-between-a-basic-income-and-the-national-dividend.

 

 

 

Postscript: Just as economies are in need of a ‘Copernican turn’ [named after the Polish mathematician, astronomer, and Catholic priest, Nicolaus Copernicus (1473-1543), who introduced the heliocentric theory], it is opportune to mention that the academic discipline of economics is likewise in need of a Copernican revolution. Orthodox economists (as well as many heterodox economists) study economic behaviour and try to predict economic outcomes, but they do this without properly understanding how money and the financial system actually function and without any regard as to how money and the financial system could and should function. A widely shared epiphany regarding the truth of these matters would turn the discipline on its head. Through the lens of a chrematocentric financial system, it may seem as if economics is correctly defined as the study of the choices that people make in allocating scarce resources in attempting to satisfy unlimited wants. In reality, many resources are not scarce but proliferate in great abundance and people's needs for goods and services are not unlimited but quite finite. An oikocentric financial system would make it clear that economics is properly defined instead as the study of the choices that people make in attempting to fulfill, within the context of an abundant world, the true purpose of economic association: the efficient delivery of that limited range of goods and services that people need to survive and to flourish.

 



[1] The distinction between chrematistics and oikonomia was introduced by Aristotle in Book 1 of his Politics. His position has been aptly summarized by Lucy Wadham: “A friend of mine – who happens to be a philosophy professor (bear with me) – recently explained to me a philosophical distinction, first made by Aristotle between two visions of money and its role in society. The one he (Aristotle) called oikonomia (economics) and the other he called khrematisike (chrematistics). The first, basically, is perceived as good and the second as bad. The first – economics – refers to the useful and beneficial function of money as related to the ‘natural’ process of producing and exchanging goods, while the second – chrematistics – refers to the ‘unnatural’ art of money begetting money and includes mechanisms like speculation and debt.” Cf. http://secretlifeoffrance.com/2009/06/20/le-culte-de-largent/.


[2] C.H. Douglas, Warning Democracy, 3rd ed. (London: Stanley Nott, 1935), 99-100.


[3] The physical potential of the modern, industrial economy is such that there should be no poverty whatsoever and all of us should be enjoying greater leisure time as machines do more and more of the work.

 

 

 

 


Comments

Posted: January 06, 2015

By: Jean-Nil Chabot

There goes the philosopher: Thorough and interesting analysis. The postscript and notes provide important clarification. One element of Douglas' Social Credit is the A+B theorem (A≠A+B, applies to the discrepancy between the final cost of production and the purchasing power issued from it. It could also apply to the discrepancy between the debt money created and the obligation to refund it plus interest - Dr. Heydorn could elaborate on that.) This faulty system creates a situation where overproduction becomes the means of providing enough purchasing power to satisfy the costumers needs. As the surplus production increases the situation finally becomes unsustainable (we have seen such a result in the auto industry of North America) and production must cease resulting in economic recession. The other result of overproduction is over consumption or consumerism.

Posted: January 08, 2015

By: Ted Reznowski

Thank you for a new analysis of Douglas, based on the ancient wisdom of Aristotle himself. The study of modern economics seems to blind people more than enlighten. You can insist that banks do not loan money from already made deposits, and you are treated like a fool. Even when a Bank of England representative states, that money creation is not like it is commonly taught in economics texts, it seems beyond the understanding of those who made economics their major study in University. Money is created every time the Banks lend, and the creation is not based on the real needs of the community and its ability to produce:

Bank of England Quarterly:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

companion video, 5-6 min from the Bank of England:
https://www.youtube.com/watch?v=CvRAqR2pAgw

Posted: January 23, 2015

By: Richard Cook

I would like to recommend my book "We Hold These Truths: The Hope of Monetary Reform" for an extensive treatment of the value and importance of Social Credit. It is available on Kindle via Amazon or can be ordered from me directly through my website at www.richardccook.com.

Posted: March 21, 2015

By: Brad Bernard

Thank you for this analysis. It's about time we start questioning the economic models put in place during the industrial age. I've created financial and economic models for most of my career and it is getting harder and harder to predict financial outcomes in the social economy. Consumers are no longer acting with "economic rationality." Purchase decisions are becoming brand-driven as opposed to utility-driven, Workers seek jobs for autonomy and personal growth rather than seeing themselves as a "unit of production," People donate their money and free time in increasingly "irrational" ways, and even shareholders pay premiums to invest in green companies. Competition-driven business ideologies are waning in their effectiveness.

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