The Business Cycle: A Kelsonian Analysis

• Author: Michael D. Greaney
• Published date: 01 March 2015
• Date: 01 March 2015
• DOI: http://doi.org/10.1111/ajes.12092

The Business Cycle:

A Kelsonian Analysis

By MICHAEL D. GREANEY*

ABSTRACT. Increasingly dramatic swings in economic activity are

characteristic of the modern business cycle that results from the failure

of Say’s Law of Markets to operate. From the perspective of the banking

principle of the Smithian school of classical economics, the swings of

the modern business cycle are a symptom of a badly structured

economic order based on inadequate or incorrect principles. The

problems associated with the modern business cycle are, however,

entirely solvable with the tools and techniques of binary economics as

applied in a manner consistent with the principles of economic and

social justice as proposed under Capital Homesteading.

Introduction

The business cycle is the key economic issue of today’s advanced

economies. It is often popularly, if misleadingly, categorized solely as

the recurring rounds of “boom and bust” thataccompany severe disrup-

tions of economic activity. The business cycle is better understood,

however, as “the ebb and f‌low of business” (Moulton 1930: 455–505)—

the general trend in the day-to-day aggregate f‌luctuations in production

and consumption. These may be the normal, seasonal changes in sup-

ply and demand, or abnormal swings that seriously disturb economic

life.

The contention in this article is that the governmental practice of

emitting bills of credit—f‌inancing state operations by issuing debt—in

unregulated amounts is one of the three primary factors causing the

f‌inancial panics that precipitate abnormal swings of the business cycle.

The other two major factors are concentrated capital ownership com-

bined with reinvestment of prof‌its instead of spending on consumption,

*Director of Research, Center for Economic and Social Justice, Arlington, VA. Web-

site: http://www.cesj.org/ Email: mgreaney@cesj.org

American Journal of Economics and Sociology, Vol. 74, No. 2 (March, 2015).

DOI: 10.1111/ajes.12092

V

C2015 American Journal of Economics and Sociology, Inc.

and temporary oversupply of marketable goods and services due to

lack of effective demand.

The binary economicsof Louis Orth Kelso (1913–1991) and Mortimer

Jerome Adler (1902–2001), as applied in the Capital Homesteading pro-

posal of Kurland et al. (2004), offers a way to overcome adverse effects

associated with the normal ebb and f‌low of business, and eliminate the

causes of abnormal f‌luctuations in economic activity.

Both forms of the business cycle result from the disruption of Say’s

Law of Markets. Say’s Law can be summarized as “production equals

income, therefore, supply generates its own demand, and demand its

own supply” (Schumpeter 1954: 616–618). Say’s Law assumes as a

given that the quantity and f‌ixed or standardized value of money, the

medium of exchange, is linked directly to the present value of both

existing and future marketable goods and services in the economy

through widespread ownership of the means of production, whether

capital or labor.

When production does not equal income, that is, when people con-

sume more or less than they produce in aggregate, aggregate supply

(production) and aggregate demand (income) are not equal. Given

widespread ownership of the means of production and a direct link

between money and the present, market-determined value of existing

and future marketable goods and services in the economy, economic

activity in a non-monopolistic free market adjusts automatically, with

no more than moderate changes in supply and demand in response to

seasonal changes in the economy.

This is because in a free market characterized by widespread owner-

ship of the means of production, economic activity ebbs when people

save (consume less than they produce), and production is decreased in

response. Similarly, economic activity f‌lows when people dis-save

(consume more than they produce), and production increases in

response (Moulton 1935a: 37–74).

When money and credit are not linked directly to the present value

of existing and future marketable goods and services in the economy

through private property in the means of production, the normal ebb

and f‌low of economic activity becomes exaggerated. The business

cycle is increasingly characterized by greater swings between boom

and bust—the business cycle as popularly understood.

The American Journal of Economics and Sociology380

In the 1950s, Kelso and Adler published two books, The Capitalist

Manifesto (1958) and The New Capitalists (1961) that, in part, examined

the apparent change in the nature of the business cycle since the early

19

th

century. Their work, which eventually took the name “binary eco-

nomics” from the division of the factors of production into human

(labor) and nonhuman (capital, including land and other natural

resources), revealed that two factors work to disconnect supply (pro-

duction) and demand (consumption). This disconnect causes the fail-

ure of Say’s Law to operate, and drives the boom and bust of the

abnormal business cycle.

The f‌irst factor causing the failure of Say’s Law to operate properly is

ever-advancing technology, which displaces many forms of human

labor from the production process. The demand generated by capital

owned by others replaces the demand generated by labor that every

human being owns by nature. In a technologically advanced economy,

many types of labor cannot compete effectively with the productive-

ness of capital. Ownership of human labor no longer guarantees the

opportunity to produce.

Second, when new capital is f‌inanced exclusively out of past savings

(past production withheld from consumption), only those individuals

who already own capital and whose income is suff‌icient to cover both

consumption demands and investment needs have the opportunity and

means to own additional capital. As technology advances and becomes

increasingly expensive, only the very rich can afford to f‌inance new

capital. Absent massive redistribution or exogenous manipulation of

the money supply by the state through the tax system or government-

induced inf‌lation, ownership of new capital becomes increasingly con-

centrated at an accelerating rate (Marx 1867: I.10.1.).

As this article will demonstrate, Say’s Law can only function when

both factors of production are broadly owned. Given that advancing

technology as a mode of production displaces human labor as a mode

of production, Kelso and Adler agreed that restoring Say’s Law requires

widespread ownership of capital to supplement or replace production

by means of human labor. Consequently, since limiting the f‌inancing of

new capital formation to past savings necessarily restricts ownership of

that new capital to a diminishing number of owners, Kelso and Adler

argued that f‌inancing of new capital formation must shift from past

The Business Cycle 381