Let’s be fair

Both of my courses at UC Berkeley are careening toward their untimely ends. In the History of Economics (ECON 105), my students have just passed through WWI and are on their way to WWII. In the Economic System of Karl Marx (ECON 164), we have skipped to the end of Capital, Volume III, Chapter 48, where Marx unexpectedly tells us that the shortening of the work day (and not death to the running dog capitalist pigs) is the prerequisite to freedom. Damn and double damn.

In ECON 105, Jacob Viner, Professor to Milton Friedman and one of the founders of the Chicago School, asks Who Paid for the War? His answer is unequivocal. When they invested in war bonds to underwrite US military assistance for Great Britain, the wealthiest citizens in the US anticipated and received huge returns on their investment. US bonds helped create full employment and placed US industry at near full capacity. Near full capacity production and full employment in turn placed upward pressures on wages, which kept far enough ahead of inflated war-time prices, to allow average workers to save and consume. And, yet, as Viner puts it:

The pre-war federal tax system, with import duties and excise taxes on tobacco and liquors as its main sources of revenue, was certainly not progressive; it was possibly even regressive in its incidence. With the greater numbers in the lower economic classes than in the higher, and with the greater expenditure on commodities, relatively to total income, of poor than of rich, the bulk of the revenue came from the poorer classes.

The real danger, Viner notes, is that average working families might expect the wealthy, who earned huge returns on their war-time investments, to pay their fair share for the actual costs of the war, not through bonds, which end up in net returns, but in taxes, which they will never see again. “In the modern democracy, the path of least resistance to the collection of increased revenue leads to the greater taxation of the larger incomes. The only feasible way of keeping such taxation within narrow limits by imposing a great share of the burden on the shoulders of the poor is to distribute the repayment of the war debt over a long period.” This is what Viner recommends and this, in fact, is how the war is funded, through long term taxation of working families.

Based on economic growth over the next decade, this appears to have been a good choice.

http://newconsensus.org/wp/wp-content/uploads/2015/11/wpid-PastedGraphic-2015-11-24-15-44.pdf

http://newconsensus.org/wp/wp-content/uploads/2015/11/wpid-PastedGraphic1-2015-11-24-15-44.pdf

Following a slight dip in Gross Domestic Product during the first two years of the war, war-time spending and post-war investing appears to have provided a real boost to the economy. Indeed, following the execution of the Dawes Plan, when JP Morgan loaned Germany funds to pay reparations to France and the United Kingdom, France and the United Kingdom were finally able to repay JP Morgan for the generous loans he advanced to them during the war. As these funds recrossed the Atlantic, they provided quite a boost to US consumption and spending.

But, here’s the rub. Insofar as holders of wealth had made off like bandits during the war, they were sitting on piles of cheap money. Had this wealth been taxed, the results would have been two-fold: first, it would have relieved wage earners the cost of having to settle the US debt, which in turn would have ended up on the consumer goods rather than the financial goods market. Thus, instead of an inflated financial goods market, consumers would have driven the expansion of the consumer goods market. The second result, therefore, would in all likelihood have been a financial goods market more in line with the actual asset base. Had there nevertheless been a recession in 1929, it could not have been nearly so deep nor the consequences so violent as the great depression actually experienced.

It was the depth and violence of this global economic downturn that set the stage for next Fall’s ECON 105 during which we resume our story with the rise of political extremism and — again — world war. Remarkably, JM Keynes had already predicted this Fall’s ECON 105, when, in his 1932 Atlantic Monthly Article, he tellingly wondered why governments appeared unwilling to spend for peace what they will inevitably end up spending on war.

Formerly there was no expenditure out of the proceeds of borrowing that it was thought proper for the State to incur except for war. In the past, therefore, we have not infrequently had to wait for a war to terminate a major depression. I hope that in the future we shall not adhere to this purist financial attitude, and that we shall be ready to spend on the enterprises of peace what the financial maxims of the past would only allow us to spend on the devastations of war.

One way to inflect this cascade of fatalities is through a lens of fairness. It was unfair for Congress to saddle working families with the costs of WWI while rewarding wealth, already enriched by the war, with the liberty to invest their returns on speculative financial markets. But another way to inflect these events is through a lens of care. When we deprive people of the means for thinking clearly and acting responsibly, they will respond as best they can, through the fog of want and ignorance. On the one side a false sense of entitlement and easy money; on the other side genuine ignorance and growing fear. The combination proved toxic, less in the US than in the UK, France, Germany, Spain, Italy and Japan. Yet, even the US, fear and ignorance provoked political extremism, which, but for WWII, would surely have exacted heavy casualties on that generation as well.

Which brings us to ECON 164. Really, Marx, the shortening of the work day? That’s your answer?

The realm of freedom really begins only where labour determined by necessity and external expediency ends; it lies by its very nature beyond the sphere of material production proper. Just as the savage must wrestle with nature to satisfy his needs, to maintain and reproduce his life, so must civilized man, and he must do so in all forms of society and under all possible modes of production. This realm of natural necessity expands with his development, because his needs do too; but the productive forces to satisfy these expand at the same time. Freedom, in this sphere, can consist only in this, that socialized man, the associated producers, govern the human metabolism with nature in a rational way, bringing it under their collective control instead of being dominated by it as a blind power; accomplishing it with the least expenditure of energy and in conditions most worthy and appropriate for their human nature. But this always remains a realm of necessity. The true realm of freedom, the development of human powers as an end in itself, begins beyond it, though it can only flourish with this realm of necessity as its basis. The reduction of the working day is the basic prerequisite.

Not fairness, but dignity. Not fairness, but freedom: the development of human capacities not in order to maximize their utility or expand their margin, but simply because when confronted by truly difficult problems, the reasoning of a Ted Cruz or a Donald Trump, based on or catering to ignorance and fear, falls far short of the ends of which human beings are capable. But, of course, JM Keynes’ earnest questions proved prophetic. No, we were not willing to spend for peace what we would be compelled to spend on war. And anyone who has perused the annual budgets of the last dozen US Presidents must surely have some idea what this ignorance has cost us, not only in dollars, but in lives lost and opportunities squandered.

And so we face about the globe, but specially in those regions reeling from war, poverty, unemployment, hunger and violence, ever new opportunities for investment, not in the instruments of war (whose returns are, it will be admitted, spectacular), but on human beings and their capacities. Such returns are, as Mr Marx points out, impossible to measure precisely because they are themselves the ends to which we have reason to aspire. It seems clear, however, that we will not choose these, but will choose other ends.

Next week we will draw the whole mess to a close, in war, want, and ignorance. And then next semester we will begin again with ECON 161, Transitional Economics, which considers how eastern European, Chinese, and southeast Asian nations have faired in their transition from socialism to capitalism. Can’t wait.