Simkhovitch, V. (1916): “Rome's Fall Reconsidered”. Political Science Quarterly Vol. 31, No. 2. Open Access at JSTOR:
https://www.jstor.org/stable/2141560?seq=1
PLEASE REFER TO THE REVISED VERSION OF THIS POST
When wealth grows faster than it concentrates, wealth spreads. You get
the upswing of an economic cycle. When wealth concentrates faster
than it grows, you get the downswing.
Long-term slowing of economic growth is indistinguishable from the decline of civilization.
I'm going to quote Simkhovitch again. I'll pick up where I left off on the 18th, this time the first seven sentences from the paragraph. And I will interrupt to talk about the ideas. From pages 217-218:
The
entire history of Rome is but a series of illustrations of this story.
Steady is the legislation against interest and drastic are the measures
against the money lenders, but unchecked is the concentration of landed
property even in spite of social resolutions and social wars.
"Steady is the legislation against interest and
drastic are the measures against the money lenders," Simkhovitch says, "but unchecked is the concentration of landed
property..."
I don't see that "the concentration of landed
property" has much to do with the lending of money. The people who owned
the massive properties of ancient Rome probably didn't need to borrow
to buy them. The buyers had the money they needed.
The people
who had to sell their properties to the massive landowner, I figure
those people had been doing some borrowing. But they wouldn't have
needed to borrow more just to sell their few acres of land.
I believe policy
today should be changed to reduce the incentives that encourage the provision
and
use of credit, in order to reduce our use of credit. I believe money (money that requires neither interest
payment nor repayment of principal) should be increased at the same
time, to sustain spending levels.
But I also believe that policy
must be
changed to encourage the
accelerated repayment of debt, to counteract the encouraged borrowing.
(And to fight inflation. But we already have policy to fight inflation.
What we lack is policy that offsets the unnaturally rapid growth of debt
caused by policy.)
Because I know policy can be
highly effective, I figure that these changes will reduce the cost of
using money and therefore boost the nonfinancial economy. I believe
economic policy can be highly effective. But the quote suggests that
Simkhovitch would not agree.
The "steady"
legislation against interest and the "drastic" measures against lenders in ancient Rome must be considered strong
policy. Simkhovitch says it was not effective.
I think the Roman response was incorrectly targeted. It did not stop the concentration of wealth in ancient
Rome because punishing lenders is not the way to limit the concentration of wealth.
To reduce and reverse the concentration of wealth in our time, I believe the business income tax must be
changed.
In our economy, a business spends its capital to
create output, then sells the output to recover its capital plus a
profit. But under our existing tax code, only the profit is subject to income tax. Recovered capital is
not taxed, because property is held to be sacred. (This is not tax
advice. It is a general overview. Do not try to do your taxes based on what I'm saying.) Recovered capital is
not taxed, because property is held to be sacred.
The
failure to tax capital (the failure, that is, to tax gross business income) creates a tax
advantage for business that is not available to consumers. This tax
advantage shifts income and wealth from consumers to businesses. Among
businesses, the greatest tax advantage goes to the business with the
most capital to spend, and the least advantage goes to the business with
the least capital to spend. Property-is-sacred policy, therefore,
if allowed to continue, will lead to ever-more-extreme concentration of
wealth. More extreme, even, than what we have at present.
The
property-is-sacred principle is embedded in our tax
code. Our tax code is creating the extreme concentration of wealth. And
the concentration of wealth is leading us, as it led Rome, to the fall
of civilization.
The property-is-sacred principle is embedded in
our thinking. Therefore it appears in the tax code, in our encouragement
of corporate mergers and acquisitions, and everywhere economic policy
reaches. This, more than anything, is what must change. Our thinking
must change.
It is not property but civilization that is sacred.
Based
on what Simkhovitch says, the property-is-sacred principle was not
addressed in ancient Rome. Nor was it addressed if we judge by the size
of latifundia -- they became "as large as provinces" it says on page 222 in the Rome's Fall Reconsidered essay linked above.
The latifundia are evidence that Rome had a property-is-sacred
policy. The rise of such massive concentrations of "landed property" is evidence of it.
The latifundia are evidence also that Rome created no policy
that effectively undermined the property-is-sacred principle and the
resulting concentration of wealth.
The principle of parallel
evolution supports the view that ancient Rome would have had a
property-is-sacred policy similar to our own. In our case today, we already
have banks that are said to be "too big to fail".
Given the reverence
people have for the property-is-sacred principle, that principle
continues to operate until the government no longer exists, the
government that wrote it into the tax code. When that government falls,
the latifundia become the new centers of government -- subject, of
course, to things being worked out hands-on during the darkest, most militaristic free-for-all phase of the dark age.
Long after the dark age, the ultimate form of property-is-sacred emerges: the divine right of kings.
I want to put a stop to the concentration of wealth by eliminating property-is-sacred from our tax code.
The seven-sentence Simkhovitch quote continues:
... social wars. Because of this peculiar character of credit in certain historical periods ...
Note: "certain historical periods" should be interpreted to mean "in certain stages of the cycle of civilization": Because of this peculiar character of credit in certain stages of the cycle... Again:
Because
of this peculiar character of credit in certain historical periods,
money lending was not a savory occupation. The gentleman, therefore, who
in our industrial and mercantile life is a pillar of society and a
respectable financier, is known by a different name under agricultural
conditions. His name is Usurer.
Simkhovitch's
words here seem quite strongly to refer to stages in the cycle of
civilization. There are stages when money lending is "savory" and stages
when it is not. Specifically, he says money lending is not savory in the
"agricultural" stage, an early part of the cycle. But with the rise of
"mercantile life" and then an industrial age, money-lending and
borrowing at interest are more widely accepted, at least among people
who hope to make money by those activities.
... Usurer.
Not that his profits from money-lending are any larger, but that he is
lending money for purposes of consumption to a man as a rule already
economically doomed, while the "banker" is lending money for productive
purposes and as a rule to the advantage of the borrower. Hence the
different attitude towards the "financier" now and in ages past.
Simkhovitch
focuses on two different categories for the use of borrowed money:
"productive
purposes" and "purposes of consumption". He is hinting at the obvious
here: productive purposes increase output. Purposes of consumption do
not. Productive purposes, by increasing output, increase the producer's
income. This increased income can be used to pay down the debt without
leaving other things unpaid.
Purposes of consumption do not
increase output. They increase spending without increasing the
borrowers' income. Repayment of debt can come only by delaying some
other payment. Simkhovitch says exhaustion of the soil made farming unproductive and income stagnant.
It is interesting to see how Simkhovitch determines the purpose of the debt in ancient Rome. On page 220 he writes:
By improving land we add to our capital, while by robbing land we add
immediately to our income; in doing so, however, we diminish out of all
proportion our capital...
By definition, for
Simkhovitch, growing indebtedness is evidence that the debtor is
borrowing for purposes of consumption. Because if you were borrowing for
productive purposes, with the extra income you'd have paid off that
debt. Simkhovitch (page 217) concludes:
The wholesale indebtedness of the Roman farmer class obviously suggests indebtedness for purposes of consumption.
It
is easier to distinguish the two types of debt in our day: Borrowing by
businesses is for productive purposes. Borrowing by consumers is
not. Easier to distinguish, but I don't know if the logic is any better.
But
the most significant expression of the forces at work comes shortly
after the page 217 quote above: "The increasing weight of accumulated
interest on the
loan and the
decreasing productivity of the land seal the fate of the landowner."
In
other words, the
fall of Rome was caused by exhaustion of the soil, growth of
debt, and the inability or refusal to resolve these problems. Exhaustion
of the soil caused a general decline of income, because most of the
people were farmers. The rising cost of accumulating debt made the
decline of income worse. No happy ending was possible.
In our
time, exhaustion of the soil is not responsible for the decline of
income. Rather, policymakers believe that inflation results primarily
from excessive wage increases. The relative decline of income is largely
a result of anti-inflation policy.
In our time, the relative
decline of income is not responsible for our growing debt. Rather,
policymakers believe that using credit is good for growth. The growth of
debt results primarily from policies that promote the use of credit
and, jointly, from the absence of policies designed to offset our
increased use of credit by accelerating the repayment of debt.
Simkhovitch
makes a convincing argument that in ancient times, exhaustion of the
soil was responsible for the fall of Rome. In our time it should be
obvious that bad economic policy is the source of the problem. First on
the list, chronologically, are policies based on the idea that using
credit is always good for growth.
When we have too little debt,
using more credit helps to improve the economy. When we have too much
debt, using less credit helps to improve the economy. There is a happy
medium. There is an optimum level for debt, a narrow range that best
promotes economic growth and employment and minimizes inflation.
How
much debt is best? I cannot calculate that for you. But my limited
abilities are not the problem. The problem is that few economists are
looking for the optimum level, and none think in terms of an optimum
level. Many of them still think using more credit is always good.
That's just not good enough.
I
have suggested as a way to reduce the growth of debt, that we need
credit to grow more slowly than money. This could be achieved, perhaps,
by means of permanently high interest rates. But permanently high
interest rates are a property of the dark age; this solution seems
inappropriate. High rates, in addition, are not conducive to economic
growth. (Existing policy uses high rates to slow economic growth when
fighting inflation.) And high rates increase financial cost. Permanently high rates are not a good solution.
Consider this
alternative: We should have tax credits that encourage debtors to make
extra payments on their debt; the encouragement being that the tax bill is reduced commensurately.
We
use economic policy to encourage borrowing. Our policy causes
unnaturally rapid growth of debt. This is how we came to have so much debt in our
economy. It is why our debt continues to grow even now.
If we insist on
having policy encourage the use of credit, then we must also have policy
that accelerates repayment of debt. By this method we can reduce the
growth of debt to a more natural level.
Preferably, we can reduce debt to the level that best promotes economic growth.
I
propose using fiscal policy to accelerate the repayment of debt. Fiscal
policy is tax policy. But let me say clearly that I am talking about
new incentives and disincentives that induce us to make extra payments
on our debt, by reducing our taxes when we do. I am not talking about
changing the level of government revenue. I do not take a position on
changing the level of government revenue. I do not take a position on it
because the root of the problem lies elsewhere. It lies in the mix of
cash and credit that we use for money. The more credit there is in the
mix, the more costly it is to use money. The less credit there is in the
mix, the less costly it is to use money.
There was ten times more credit in use (per dollar of money) in 2007 than there was in 1947:
 |
Figure 1: Dollars of Credit-in-use per Dollar of M1 Money
|
The
graph shows almost continuous increase in the cost of using money. If
interest rates never changed, interest cost per dollar in 2007 would
have been 10 times what it was in 1947.
That's great for bankers
and creditors. It is not good for most people today, just as it was not
good for most people in ancient Rome.
The recommended objectives of policy I propose are these:
- The volume of credit-in-use (or "debt") should grow more slowly than the quantity of money.
- Repayment
of debt should be accelerated by policy, to counteract the rapid growth
of debt resulting from policy that encourages the use and provision of
credit.
- To eliminate the factor most responsible for the
concentration of wealth, the business income tax must tax gross income
rather than net income. Tax rates should be adjusted down so that
government revenue is not increased by the change in taxable income.
To preserve civilization, it is not enough just to have Elon Musk buy Twitter.
