Social credit is a distributive philosophy of political economy developed in the 1920s and 1930s by the British engineer and economist C. H. Douglas. Douglas attributed economic downturns to discrepancies between the cost of goods and the compensation of the workers who made them. To combat what he saw as a chronic deficiency of purchasing power in the economy, Douglas prescribed government intervention in the form of the issuance of debt-free money directly to consumers or producers (if they sold their product below cost to consumers) in order to combat such discrepancy. In defence of his ideas, Douglas wrote that "Systems were made for men, and not men for systems, and the interest of man which is self-development, is above all systems, whether theological, political or economic." Douglas said that Social Crediters want to build a new civilization based upon "absolute economic security" for the individual, where "they shall sit every man under his vine and under his fig tree; and none shall make them afraid." In his words, "what we really demand of existence is not that we shall be put into somebody else's Utopia, but we shall be put in a position to construct a Utopia of our own." The idea of social credit attracted considerable interest in the interwar period, with the Alberta Social Credit Party briefly distributing "prosperity certificates" to the Albertan populace. However, Douglas opposed the distribution of prosperity certificates which were based upon the theories of Silvio Gesell. Douglas' theory of social credit has been disputed and rejected by most economists and bankers. Prominent economist John Maynard Keynes references Douglas's ideas in his book The General Theory of Employment, Interest and Money, but instead poses the principle of effective demand to explain differences in output and consumption.
Economic theory
Factors of production and value Douglas disagreed with classical economists who recognised only three factors of production: land, labour and capital. While Douglas did not deny the role of these factors in production, he considered the "cultural inheritance of society" as the primary factor. He defined cultural inheritance as the knowledge, techniques and processes that have accrued to us incrementally from the origins of civilization (i.e. progress). Consequently, mankind does not have to keep "reinventing the wheel". "We are merely the administrators of that cultural inheritance, and to that extent the cultural inheritance is the property of all of us, without exception." Adam Smith and David Ricardo claimed that labour creates all value, while Karl Marx highlighted labor and nature as the two sources of value. While Douglas did not deny that all costs ultimately relate to labour charges of some sort (past or present), he denied that the present labour of the world creates all wealth. Douglas carefully distinguished between value, costs and prices. He claimed that one of the factors resulting in a misdirection of thought in terms of the nature and function of money was economists' near-obsession about values and their relation to prices and incomes. While Douglas recognized "value in use" as a legitimate theory of values, he also considered values as subjective and not capable of being measured in an objective manner. Thus he rejected the idea of the role of money as a standard, or measure, of value. Douglas believed that money should act as a medium of communication by which consumers direct the distribution of production.
Economic sabotage Closely associated with the concept of cultural inheritance as a factor of production is the social credit theory of economic sabotage. While Douglas believed the cultural heritage factor of production is primary in increasing wealth, he also believed that economic sabotage is the primary factor decreasing it. The word wealth derives from the Old English word wela, or "well-being", and Douglas believed that all production should increase personal well-being. Therefore, production that does not directly increase personal well-being is waste, or economic sabotage.
The economic effect of charging all the waste in industry to the consumer so curtails his purchasing power that an increasing percentage of the product of industry must be exported. The effect of this on the worker is that he has to do many times the amount of work which should be necessary to keep him in the highest standard of living, as a result of an artificial inducement to produce things he does not want, which he cannot buy, and which are of no use to the attainment of his internal standard of well-being.
By modern methods of accounting, the consumer is forced to pay for all the costs of production, including waste. The economic effect of charging the consumer with all waste in industry is that the consumer is forced to do much more work than is necessary. Douglas believed that wasted effort could be directly linked to confusion in regard to the purpose of the economic system, and the belief that the economic system exists to provide employment in order to distribute goods and services.
But it may be advisable to glance at some of the proximate causes operating to reduce the return for effort; and to realise the origin of most of the specific instances, it must be borne in mind that the existing economic system distributes goods and services through the same agency which induces goods and services, i.e., payment for work in progress. In other words, if production stops, distribution stops, and, as a consequence, a clear incentive exists to produce useless or superfluous articles in order that useful commodities already existing may be distributed. This perfectly simple reason is the explanation of the increasing necessity of what has come to be called economic sabotage; the colossal waste of effort which goes on in every walk of life quite unobserved by the majority of people because they are so familiar with it; a waste which yet so over-taxed the ingenuity of society to extend it that the climax of war only occurred in the moment when a culminating exhibition of organised sabotage was necessary to preserve the system from spontaneous combustion.
Purpose of an economy Douglas claimed there were three possible policy alternatives with respect to the economic system:
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