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Social credit is an approach to economics that argues that the wealth-building power of society lies in cultural inheritance and the preservation of such. This theory was developed after the First World War by Clifford Hugh Douglas, an engineer who turned to economics after observing economic patterns at a factory he supervised during the war. His theory proved popular in some regions and inspired a number of political parties that worked to advance fiscal policies based on social credit. It also has critics, who argue that his conclusions do not withstand rigorous testing.
In his book on social credit, Douglas argued that in a society where consumers have the purchasing power necessary to dictate production by controlling what they consume and when, there will be more social equality. He felt that existing economic structures created a situation where any attempt to increase wages would cause a corresponding increase in prices. This would lead to decreased purchasing power, an attempt to raise wages again, and a cyclical development of events that would not ultimately benefit society.
This theory also suggests that the inheritance of technology and various approaches to production is the most valuable and important thing. Individual contributions add to the sum of the whole, and over time, the real costs of production should drop. Technology results in more efficiency, for example. Even as production costs drop, the consumption costs tend to rise, and the economy becomes heavily based on lending and credit. Consumers must borrow to cover their needs, for instance, and their borrowing is facilitated by increasing the monetary supply and distributing the excess to financial institutions for them to use in lending.
The limiting factor on production that Douglas observed during the war was the amount of finance available to cover production costs like buying more equipment, adding shifts of workers, and so forth. This differed from more traditional theories about labor and resource limitations on production abilities. Under social credit theory, when the focus of production is on making wealth, rather than creating goods for consumption, it can contribute to the gap between wages and prices. Consumers must cover the waste generated by industry, and this can have cumulative effects over time.
The solution proposed by Douglas and his social credit theory was a form of rebate to bring prices down for consumers and equalize their purchasing power. He suggested that goods should be purchased at full price, with consumers receiving a rebate to adjust the cost they pay. This rebate would come from the funds normally used for lending and credit activities. The rebate would be determined by determining the real cost of production, with the assistance of a ratio comparing production and consumption.