Center for First-Best Policy or Constitutional Capitalism

A Path to Unity, Systemic Fairness,
Economic Efficiency and Social Competitiveness

Dr. Sankarshan Acharya
University of Illinois (U.S.A.)
and Research Center for Finance and Governance (India)
October 31, 2011

Background memo addressed to the U.S. President and Congressional Leaders:

It has been historically impossible to unite people based on similarity in their creeds, religious or scientific beliefs, race, ethnicity, caste or nationality. If it were possible, people of the same group would not be killing each other.

The only foundation for unity among people can be systemic fairness. Such fairness is fortunately guaranteed by the U.S. constitution. The constitution has survived the test of time because it fulfills the common longing of people for systemic fairness. Obfuscation of even the sophisticated systemic unfairness and unconstitutionality, built in to the current system of governance, has been impossible because people have eventually discovered it.

No human-designed systemic unfairness can be depicted as natural or god-ordained by any renowned pundit or preceptor or authority. This is because the innate common intelligence eventually deciphers the truth about the human-designed systemic unfairness.

Impassioned speeches with genuine intentions for unity are definitely soothing at the time of distress. But as someone who presaged the eruption of the simmering distress in research-based memos, circulated among political leaders since 2003, I see that profound speeches are neither necessary nor sufficient to achieve unity, when people can decipher the human-designed systemic unfairness.

Systemic fairness is absolutely necessary and perhaps sufficient for social unity and economic equilibrium to achieve constitutionally mandated social stability. Systemic fairness is the only cement available for unity and togetherness.

One may agree about the necessity of systemic fairness, but what about the following questions:

(i) What is systemic fairness?
(ii) Is systemic fairness necessary to enhance economic efficiency (national competitiveness)?
(iii) Who can guarantee systemic fairness?

I coin a phrase, Constitutional Capitalism, to subsume these three elements. My research offers a foundation for Constitutional Capitalism. It shows that the only form of governance that is stable, universally acceptable to people and economically efficient is Constitutional Capitalism.

Before independence, Americans must have agonized about the systemic unfairness: having to sell their sweat-filled labor and merchandize for fiat money printed overseas. They united to fight for freedom from such systemic unfairness. The basis of their unity must be their common longing for systemic fairness because it is verily depicted in the constitution scripted during their unified struggle and perfected after independence.

The U.S. constitutional provision of "right to wealth" grants complete freedom to an individual if the notion of "wealth" subsumes intangibles like own wisdom and beliefs. As someone who has pursued for fairness since childhood and delved into academic research to further it, I have found that longing for such a constitutional provision has been universal with noteworthy precedents. For example, unfair usurpation of wealth led to the epic war of Mahabharat (Great India). The then wisely Krishna scripted a "constitution" called the Gita to propound systemic fairness and to fight for it. The greatest warrior of the time, Arjuna, was reluctant to fight against systemic unfairness because the usurpers were his relatives. Krishna scripted the Gita in the war field to convince Arjuna of his Dharma (righteousness) to wage war for establishing systemic fairness and to not construe it as a fight against the relatives.

The goal of Mahabharat was the same as that of the recent freedom struggles of the Americans and the Indians: beget systemic fairness for people. This goal has biblical parallels, with Jesus Christ uniting the deprived and downtrodden against the forces that subjugated by depriving people of their possessions. Even Prophet Mohammed had championed the cause of those who were being deprived of their possessions through surreptitious means like usurious lending. In my recent memos, circulated long before the recent financial meltdown, I had shown how the human-designed tools of modern finance and economics have been systemically used to deprive people of their investments made with hard earned savings.

Most democratic nations have adopted constitutions that guarantee the right to wealth earned by an individual. Even China has contemplated its own version of individual right to wealth. This speaks volumes about the sagacity of Americans to script "the right to wealth" as a fundamental constitutional right of every individual.

The "right to wealth" has to be a fundamental universal common longing of humanity because (i) even the ancient constitution, the Gita, has envisaged it, (ii) the modern American constitution makes it fundamental, (ii) most nations have accepted such individual rights, (iii) most struggles (modern, epical and biblical) were based on it, and (iv) the ongoing political rivalries within and across nations are rooted in it.

The universal common longing of humans since time immemorial is to preserve their own wealth. Societies that have guaranteed every individual's earned wealth through constitutional laws have prospered because such guarantees induce people to achieve their best. Perhaps the biological human desire for propagation and protection of progeny prompts humans to persevere for achieving their best when their earned wealth is guaranteed to be passed on to their posterity, instead of being usurped by others including the state. Due to a lack of such guarantees, communist nations had languished in prosperity and competitiveness.

After China correctly recognized this human desire, it offered de facto guarantees to individuals to keep their surplus profits. The unprecedented ensuing Chinese boom shows the immense value of the "right to wealth" of each individual to society. The individual propensity to prosper is making China a juggernaut in enhancement of its competitiveness.

India has lagged behind China perhaps because it remained "socialistic" and even repealed the right to wealth as a fundamental right in 1978, though it is still retained as a constitutional right by which individuals can sue the government for unfair usurpation of individual wealth. Indian lawmakers have not perhaps recognized the necessity of the right to property to enhance global competitiveness.

Competitiveness of a nation can be objectively measured by the value of its currency and by its trade surplus. Making the right to property fundamental can accentuate growth of capital and prosperity of nations. This raises a question about why the United States has been slipping in its competitiveness, despite the constitutionally ordained right to wealth. It is because of surreptitious decimation of the constitutional right to wealth of individuals through legalized financial trading shenanigans, legalized by various laws through specious punditry.

My research has uncovered an economic paradigm to protect and perpetuate the universal common human longing to preserve own earned wealth, as per constitution. Any other economic paradigm that implicitly or explicitly usurps private wealth or redistributes privately earned wealth will destroy the universal common human longing and thus cause erosion of competitiveness, social instability and agitation, consistent with the historical precedents. The prevailing economic paradigm is distortional and unconstitutional.

The crucial issue is not whether the "right to wealth" is constitutional. If such a right were not the universal common human longing, its inclusion in the constitution could not be accepted by people. Any constitution that does not protect and perpetuate the common human longing cannot be sustained. Only if a constitution serves the universal common human longing will it be the lodestar of unity among people. Only then will people persevere to achieve their best, which automatically enhances social competitiveness.

The first-ever written constitution in modern history (of the U.S.) is paramount to humanity. It has reinforced the ancient human wisdom. The American constitutional tenet of right to wealth has been, therefore, accepted by even a communist nation like China. This tenet is the fundamental source of human perseverance and prosperity. It is perhaps the only tenet to protect and perpetuate unity of mankind, not just within a country, but across the world.

With the nonpareil power vested by the people, the government only can protect and perpetuate the privately earned wealth and to guarantee that private wealth is not redistributed, directly or indirectly by any form of sophistry. Any presumption by the designers of systemic sophistry to wangle away of private wealth is uncompetitive, fatuous, unsustainable and unstable. The government of the people cannot afford to support such designs. People running the government should desist from the lure of directly or indirectly sharing the wangled private wealth, because the prosperity of society that props them will evanesce and the edifice of government will eventually collapse.

When I broached the topic of enhancing American competitiveness in my memo of January 2005, I was simply following my paternal advice of fearlessly speaking the truth for common good, without perceiving fully if the constitutional tenet of right to wealth - common human longing - was at stake. Despite warnings from students, friends and even life insurance agents, I kept writing to political leaders who represent society. I now see consciousness evolve at the levels of major governments around the world about the necessity to protect and perpetuate the constitutional tenet designed to fulfill the universal longing for preservation of individual wealth.

The latest speeches given by major leaders in America and elsewhere are very sincere attempts for unity, needed in the aftermath of the violent incidents. But the leaders even within a nation disagree about the policies that will unite people to enhance prosperity and security of the nation. The only robust bases of unity are (a) ensuring the fulfillment of the common human longing for preservation of individual wealth, which induces people to persevere to achieve their best, and (b) a government guarantee (as per constitution) that individual wealth will not be usurped even surreptitiously by human-designed sophistry, howsoever elitist or powerful or educated the men or women who design and perpetuate such sophistry may be. For the sake of unity and competitiveness, the government officials cannot ally for sophisticated and unsophisticated usurpation of private or public wealth.

My paper – developed over twenty-five years – obtains an economically efficient paradigm for constitutional governance. This is not some economic paradigm consistent with some constitution, for example, written by a dictator. My paradigm guarantees protection and perpetuation of the universal common human longing proclaimed in the constitutions in the U.S. and other democracies. It is consistent with the common human wisdom, accumulated since time immemorial. I have shown, for example, that the Federal Reserve Act and such existing central bank acts everywhere are unconstitutional and economically inefficient (socially uncompetitive). I have also derived specific amendments to make a central bank safe (for the economy) and economically efficient.

One equilibrium result of my paper is an economically efficient safe central bank. This is obtained in a more general model of the economy than any in the extant literature, to the best of my knowledge. For example, I obtain a result like the federal deposit insurance is suboptimal, economically inefficient and unconstitutional within equilibrium of my general model. By restricting my model to suppress (a) the constitution and (b) free trading in the market, I obtain the same results as others have obtained in their models. If others' models are restricted forms of my model, then obviously mine is more general. I would be happy to learn about any paper that has a more general model than mine and that obtains different results like safe central banking being economically inefficient and unconstitutional or federal deposit insurance being economically efficient and constitutional.

I also obtain, in equilibrium, total risk-return frontiers for every degree of leverage of a firm that no other paper has derived to the best of my knowledge. The economic efficiency in this research is vis-à-vis these equilibrium total risk-return frontiers, not the extant literature's systematic (partial) risk-return frontiers. As known in finance and economics, the systematic risk is only a part of the total risk, the other part being unique risk. The extant wisdom is based on the systematic risk-return frontier. This wisdom has been resoundingly rejected by eminent empirical studies. This is why mega traders in the real world trade based on the total risk (systematic and unique risk) to counter the common investment strategies of the "wise" investors who follow the published literature. We all know after the 2008 crisis who won and who lost: the common wisdom lost and mega trading won resoundingly. I need not go further to tell why the wise scholars have not widely accepted my paper yet. It is their pyrrhic victory with their wisdom badly exposed and punditry excoriated.

I welcome you to cull a group of top wise scholars in economics and finance, who are willing to disclose their identities publicly to comment on my paper and then respond to my response to their comments. You being the penultimate arbiters of America, being the honorable elected officials, can make the judgment. I am willing to be pilloried and excoriated for any lapse in my integrity. If the wise scholars are true intellectual leaders, they will have no hesitation to disclose their identities to other authors (including me) who are supposed to follow. No one can claim leadership by suppressing his or her self identity to the people by presuming that the latter will follow.

I thought of sharing with you all my research pursuits since 2003 to avert the massive losses of wealth of the vast majority that I saw vividly through my academic research. Academic research has been a mission for me to discover the truth for common good, which I believe should be the motto of the academy as the fountain of truth.

The truth discovered in my research - an economically efficient and constitutional safe central banking without federal deposit insurance - is nothing but the outcome of an economic equilibrium in a general and robust model. It can be disproved as untruth only by obtaining materially different equilibrium outcomes within a more general and more robust model with new parameters of relevance to the economy.

Practically, my model implies that any (direct, indirect or sophisticated) form of economic subsidy is not only economically inefficient and uncompetitive. It also amounts to a redistribution of wealth from those who earn it to those who indolently enjoy the same. For example, Congress appropriates earmarks for projects allocated to contractors making political contributions. The projects may create jobs and public facilities, but the tacit quid-pro-quo makes the system of appropriation economically inefficient. Inefficiency leads to creation of more funds (by borrowing or printing) than would be necessary to execute such projects based on actual taxes agreed to be paid by people. As a result of inefficient creation of funds, prices borne by the people ultimately rise more than feasible with an efficient system. The increased prices borne by people constitute redistribution of wealth to contractors, politicians and marginally unnecessary job holders. Without such earmarks, politicians will agree to have public funding of their election expenses and to eliminate economic inefficiency to enhance competitiveness. In fact, the current system of private funding of elections leads to an erosion of economic efficiency and national competitiveness. Due to erosion of competitiveness, politicians may ultimately lose, on average, and cede power to the vastly enriching designers of the system.

Another example of redistribution of wealth is printing fiat money to boost a depressed or recessed economy. The new money tends to flow through the same system to the people who were responsible for the recession or depression. Little of the new money reaches people who lost their jobs or savings in the recession or depression. The system may still boost employment temporarily through money illusion (bubble), but it will fail to deliver permanent employment growth if the real systemic weaknesses that cause continual recessions and depressions are not corrected.

Subsidies inherent in Social Security, Medicare, Medicaid and other welfare programs are forms of redistribution of wealth. Private individuals and organizations can be and should be compassionate towards the less diligent and deprived. But making the government a charitable entity is economically inefficient and detrimental to national competitiveness. The government should strictly adopt laws that are constitutional and economically efficient, because the survival of society is at stake. Existing subsidy schemes should be redesigned to be actuarially fair to let people receive benefits according to the value of their contributions.

Spectacular redistribution of wealth occurs with legalized sales of assets not belonging to the sellers. Such short-selling can dramatically increase the virtual supply of an asset in the market, without the real availability of the asset for delivery, to dramatically depress the price to create panic among the true owners of the asset to induce the latter to sell their holdings at massive losses to the short-sellers. Short-sellers thus enrich with no effort or risk by depriving the true owners of their assets purchased with their hard earned wealth.

Short-selling is not only unconstitutional. It is also detrimental to national competitiveness. The asset owners lose their hard earned capital. Capital is the value of their labor. When capital is destroyed the longing to persevere to achieve one's best is decimated. This erodes national competitiveness. The manipulators and schemers who accumulate the credits cannot produce, create or serve. The gain to the manipulators (hundreds of billions of dollars in bonus and perquisites) is really miniscule as compared to the gargantuan loss (trillions of dollars) of accumulated capital, as I have illustrated through numerical examples in my earlier memos.

It is flabbergasting how the U.S. – as a champion of capitalism with a constitutional mandate to create and grow capital through free markets – has legalized destruction of capital, i.e., of the accumulated value of labor through short-selling. Those who lose the accumulated value of their labor by trusting their system of governance are the vast majority of households who produce, secure and serve the nation for prosperity and security. If the dignity of their labor, stored as capital, is destroyed through a legalized system, they will agonize. Some of them may lose mental balance to commit heinous acts of violence. Since 2001, I have been begging that the capital destructive system of short-selling be banned to avert another Great Depression that even the short-sellers will not like to have.

As a researcher seeking the truth, I openly welcome more general models than mine showing materially different equilibrium outcomes than mine. The unique robust general equilibrium in my model is an economically efficient paradigm for constitutional governance for social unity and competitiveness.

With profound regards,

Sankarshan Acharya