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Yesterday I ran a post that briefly delved into the connection between Keynes and the money cranks of the 1920s and 1930s. There I showed that Keynes’ ideas cannot be said to have been influenced in any substantial way by the money cranks. Rather they were an outgrowth of a modifying of his earlier views, put forward in his Treatise on Money and taken from the Swedish economist Knut Wicksell.
In what follows I will draw upon an article by Robert Dimand entitled Cranks, Heretics and Macroeconomics in the 1930s. Dimand’s narrative is centered on a periodical that was started in the US in 1932 entitled Economic Forum. The goal of Economic Forum was to bring together open-minded economists and people who would otherwise be considered money cranks. Keynes was, of course, a contributor, as were the money cranks C.H. Douglas and Frederick Soddy.
It should be noted that back in England the money cranks were already getting a hearing. R.G. Hawtrey, who was then at the British Treasury, publicly debated Douglas and Lionel Robbins — hardly a progressive economic thinker — saw Douglas’ ideas as having enough validity that he devoted a major portion of his British Association address to analyse them.
Clearly the ideas of the money cranks were in the ether at the time, in both the US and in England. This is not surprising because the unemployment situation had become so bad and economists were having a desperately hard time explaining it. So, those who were attempting to explain it were met with attention by the economists — even if the latter often approached the ideas of the former with the intent of discrediting them.
All of this is important to understand because it allows us to see that Keynes was not the only one engaging with the money cranks in this era. Many economists were — including many economists who would be very unsympathetic to easy money policies and fiscal expansion. During the Depression, the money cranks became regulars on the economic circuit.
Those involved with the Economic Forum also launched clever schemes to bring mainstream economists into the fold and engage with money crank theories directly. William Trufant Foster, for example, offered a $5,000 prize to the economist who could best refute his crank book on money and profits which advocated massive public spending. Fifty professional economists responded with entries and Foster’s ideas would go on to have a major influence on the Roosevelt-appointed Federal Reserve president Marinner Eccles.
Many of the theories of the money cranks were flimsy at best, however, and some had markedly negative tendencies. C.H. Douglas’ theories of social credit were influenced by Medieval Scholastic ideas about a ‘Just Price’ and manifested a tendency to blame most of the world’s economic ills on ‘usury’. In the hands of their most famous proponent — the American fascist poet Ezra Pound — they were easily combined with virulent antisemitism and Nazi idealism.
Those like Pound — who was later diagnosed as having a narcissistic, megalomaniacal personality by psychiatrists after his mental breakdown which was precipitated by his incarceration for treason after the war — who supported the theories did not respond well to rational criticism. F.S. Flint, for example, pointed out that there were many technical flaws in the argument — most notably the theory’s inability to recognise that interest paid is also interest income received — and Pound flew into an irrational rage saying that Flint had no right to comment on matters of algebra which were far above him (i.e. Flint). Flint was, of course, a mathematician employed as a statistician by the Ministry of Labour, while Pound was a mentally unstable poet who lived a life of wandering in search of fascist ideals.
Pound became something of a propagandist for the money cranks in this era. He gave lectures in Italian under invitation by Angelo Sraffa — Pierro Sraffa’s father! Pound’s writings contain bitter vitriol against Keynes; vitriol that comes across as highly personalised and reflective of Pound’s mental instability. But one gets the distinct impression that Pound was threatened by Keynes’ embrace of reasonably similar policies at the time — the narcissism of small differences and all that.
Pound’s presence in the debates shows up two strong traits of money cranks: namely, that when errors in their theories are pointed out they ignore them and get angry with the person making them and also that they have a strong emotional attachment to the theories that borders on zealousness. This is markedly different from the discourse of real economics wherein when people disagree with each other it is generally not over the acceptance or dismissal of logical errors but over the interpretation of various aspects of theory.
For example, New Classical macroeconomists will not argue that fiscal stimulus does not lead to increased GDP by accounting identity but instead will furnish a behavioral theory that negates any impact this might have (i.e. Ricardian equivalence). This gives economic discussion a level of academic rigour that the discussions of the money cranks lack entirely. In the land of the money crank once the theory is accepted as True it cannot be revised in light of evidence, whether logical or empirical, to the contrary.
Other cranks tended to get angry because they saw professional economists as poaching their ideas. Soddy was enraged that Irving Fisher’s proposal for 100% reserve banking was identical in many respects to the one he had put forward ten years earlier. Of course, Fisher never made claims to originality and listed Soddy’s work in the bibliography along with other similar historical work — such as a proposal from 1823! Many of the money crank ideas that were embraced by economists during the Depression had been around since the time when economics as a discipline started.
The Economic Forum also carried a wide range of other authors. Many of these were prominent people working within Treasury departments in major Western powers who had schemes of their own to get the economy moving again. It also carried some work by market socialists who claimed that marginalist equilibrium economics was to be the true functional economics of advanced socialism (an historical point of interest often forgotten in contemporary left-wing critiques of marginalist economics!). By the mid-1930s, however, the periodical had been hijacked by mainstream thinkers from banks who advocated austerity together with newly emerging public relations men like Sigmund Freud’s nephew Edward Bernays.
Funnily enough, the question as to what constituted an economist at this moment in history was slippery at best. Dimand notes that Keynes had a degree in mathematics, Kahn in mathematics and physics and Harrod in the classics. It was not until after WWII, with the emergence of the neoclassical-synthesis, that economics began to become a truly formalised discipline.
But it is also clear that the likes of Keynes and Kahn were seen in the eyes of their peers as actual economists while people like Soddy (a Nobel Prize winner in chemistry) and Douglas (an army engineer) were seen as cranks. Again, I think that this has to do with the manner in which the two groups debated and discussed issues — as well as how they responded to actual logical errors in their doctrines.
I think describing it as virulent is a stretch. It was rather mild.
Those like Pound — who was later diagnosed as having a narcissistic, megalomaniacal personality by psychiatrists after his mental breakdown which was precipitated by his incarceration for treason after the war — who supported the theories did not respond well to rational criticism. F.S. Flint, for example, pointed out that there were many technical flaws in the argument — most notably the theory’s inability to recognise that interest paid is also interest income received — and Pound flew into an irrational rage saying that Flint had no right to comment on matters of algebra which were far above him (i.e. Flint). Flint was, of course, a mathematician employed as a statistician by the Ministry of Labour, while Pound was a mentally unstable poet who lived a life of wandering in search of fascist ideals.
I’ve never heard this anecdote. It’s funny. I think Pound probably couldn’t respond because he wasn’t an economist. One can have very clear ideas about usury and not understand how it fits into economics proper. Especially in the time period. I’m no economist (I have started reading. Steve Keen is getting me into the subject. I might even try to major in it but I’m a working adult with kids so we’ll see) but wasn’t this a time when the discipline was sort of taking off? Now there are easily accessible textbooks and a settled field.
I don’t think the question of interest is that simple. If someone is controlling the money supply and makes a loan (in a two person economy) to me from money he creates, and supplies the loan at interest isn’t it impossible to pay him bakc without borrowing more? At interest? That seems pretty simple. Am I missing something?
Also, the issue is really just justice for those of us concerned with the issue of lending at interest (usury). We just don’t think it is right. It’s a moral issue.
Pound couldn’t respond because he was a crank and a moron.
In your example, the lender gets interest income. He can then spend this to buy services from you and you use it to pay him back ad infinitum.
I think your confusion is caused by starting in medias res, as it were. The economy does not start with a monetary system. The economy starts with a web of power relationships, which give rise to tribute relationships, on which trade and organized manufacture piggybacks.
If you want to understand an economic system, always look for the man with the gun. Once you have identified the man with the gun, figure out how the man with the gun gets other people to give him free stuff. Under feudalism the man with the gun gets free stuff because his serfs have to provide corvee labor. Under classical Imperialism the man with the gun gets free stuff because the colonies have a raw materials quota to fill. Under capitalism the man with the gun gets free stuff because he pays for it with his own IOUs, which he then takes back by virtue of being the man with the gun.
Whether the man with the gun is a banker lending at interest or a state collecting taxes does not really matter to the operation of the monetary system, except insofar as bankers and government bureaucrats have different stakeholders to satisfy.
- Jake
Yes mild. It isn’t worth arguing over though.
Where does the borrower get the interest to give to the lender?
Simple model. But illustrative. You can make it more complex if you like.
And the bigger question for me is if the interest charge is even moral which I also think was the big question for the Scholastics and Pound.
Debt gets repaid in 100 days. Borrowers can borrow again and restart the cycle. The key point is that the system is stable.
We’ll say the borrower was a farmer and had a bad year and needed some whiskey and food to make it until the harvest…
Where does the actual currency to pay the interest come from? It has to be created no? At interest right?
The key point is that the system is stable
Right.
You can’t mix them up – they are as different as miles and miles per hour.
I’ll Get Back To this.
Even Assuming There Is A Distinction Between The Two Things Where Does The Currency Come From To Pay The Interest That Will Materialize Over The Life Of The Loan?
Are We Going To Say That The Farmer Demands The Full Amount Of His Debt Come Harvest Should The Shopkeeper Get Hungry? So The Shopkeeper Gets To Create Money Again And Give It To Himself Interest Free?
Assume a two-person economy: Robinson Crusoe and Friday.
Crusoe has the gun, so he gets to play the lender. Friday has no gun, so he gets to play the borrower.
Friday borrows $ 100 to buy a cave from Crusoe, so he has somewhere to sleep when it rains (Crusoe started by owning the whole island because, again, Crusoe is the man with the gun).
The terms of the loan state that Friday must pay 1 % per day in interest. Crusoe states that he is willing to pay $ 1 for each coconut Friday sells him.
Friday is able to gather 2.1 coconuts per day on average, but he also needs to eat one coconut per day to stay alive, and an average of 0.1 coconut per day spoils due to being stored for too long.
So Friday will be perpetually treading water, just being able to pay interest but never getting out of debt, and Crusoe will get one coconut per day forever, without having to do any work for it.
Now, since there are only two people in this example, Crusoe could just institute a command economy where he demands one coconut per day from Friday (because Crusoe is the man with the gun), and provides Friday with shelter and the privilege of continued breathing.
Or Crusoe could declare Friday his slave, and set Friday to the task of gathering coconuts, which Crusoe would then own in full. But he would still need to provide Friday with food and shelter, because otherwise Friday would not be able to work.
Or Crusoe could charge $ 1 in day rent for the cave instead of selling it on margin.
Or Crusoe could charge 1 coconut in day rent.
In the two-person toy model, these are all equivalent. But once you have more than two people, you start getting more complex institutional structures and power relationships, and then the precise method by which the man with the gun gets his coconut starts to matter. All the above methods have been used at some point or another in history, with societies going back and forth between them as politics, culture, technology and traditions evolved over time.
- Jake
Enabling things that will work to happen is a vital skill that deserves reward because without it nothing happens.
To many of the analogy stories start with the assumption that people cause things to happen automatically as an innate nature (some sort of other belief in the ‘natural order’ as far as I can see). I can assure you that doesn’t happen in the real world. Stuff has to be organised by people with organisational skills.
And just (for some of us)
And chill out brah.
While Douglas’s theories were slightly influenced by ideas about the “Just Price”, Douglas did not blame most of the world’s ills on usury. This is a classic case of a “strawman” argument, which I assume is based upon Gary North’s ridiculous work which used the same type of argument.
Douglas wrote,
“The rapturous iconoclasm of certain groups of monetary reformers’, to whom Usury”, the sparring-partner of the bankers “inflation” is the Scarlet Woman of Babylon, has had the inevitable effect of encouraging the financial authorities to abolish, for practical purposes, the interest paid on undrawn current balances, and deposit accounts. We do not say they would not have done it anyway – the one thoroughly sound feature of the banking system was its dividends to shareholders and its interest payments to depositors which I jointly with the insignificant mint issues, provided almost the only fresh unattached purchasing-power. It is obviously lost time to beg of our amateur currency experts to consider whether they really mean what they ask, which is, the replacement of unattached purchasing-power by loans. But they must not complain if we, and others with us, regard them as propagandists for totalitarianism. ”
The Social Creditor, Oct. 27, 1945.
Douglas’s ideas on “monetary reform” were based upon his A+B theorem which demonstrates that prices increase faster than incomes. The theorem is reproduced below:
“In any manufacturing undertaking the payments made may be divided into two groups:
Group A: Payments made to individuals as wages, salaries, and dividends;
Group B: Payments made to other organizations for raw materials, bank charges and other external costs.
The rate of distribution of purchasing power to individuals is represented by A, but since all payments go into prices, the rate of generation of prices cannot be less than A plus B. Since A will not purchase A plus B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing power which is not comprised in the description grouped under A.” (C.H. Douglas, “The Monopoly of Credit”)
In terms of Douglas’ ideas relating to Medevial Scholars with respect to the “Just Price”, what Douglas demonstrated was that the real cost of production is consumption over an equivalent period of time. Since consumption is always less than potential producton in an industrialized society, prices can be reduced by multiplying the financial price by the ratio of consumption/production. The similarity between this and Thomas Aquinas’s “Just Price” is minimal at best.
Dr. North actually needs to read something written by Douglas before he tries to critique his ideas.
Interest rates are regulatory instruments, far more than they are payment for services rendered. To argue that it is a perversion for the government, which is supposed to be the regulator, to be a net payer of interest to the banks, which are supposed to be the regulated, is some way from arguing that it is perverse for business firms, who are the regulated parties, to be net interest payers to banks, who in that relationship are the regulators.
- Jake
when the government can issue a bond (or sell a bond to raise ‘funds’) why couldn’t it instead just print the currency in the form of its own iou? they are both just promises to pay.
the first douglass quote seemed to specifically be referring to interest paid to interested parties that invested in productive loans or interest paid to people saving for retirement. phil’s quote seems to be about the actual government borrowing funds for doing its business.
i think.
it also highlights, if i’m correct, the psychotic nature of money. we want it to be a store of value and to be worthless enough to use as the “oil” of trade in the economy and it has trouble doing the double duty.
Fortunately, we are in the agreeable situation that a lifetime is a much longer span of time than the typical inventory turnover. This leaves a very large range of rates of inflation and nominal interest which both discourage hoarding of voluntarily idle currency and yet does not materially inconvenience businesses who keep their ready reserves in the coin of the realm.
- Jake
Sure. We can consider it a spectrum if we want but “money” is big and I think demanding that it be both a retirement vehicle and transactional token might be asking a bit too much. At least it seems so to me right now. But that might be the case because we are also demanding that is serve the purpose of a lever and instrument of the wealthy to extract the economic surplus. I dunno. I guess my studies will tell.
You do not, however, want idle money to maintain its value over a human lifetime – about a century.
Right. I wouldn’t want what should be productive capital and should be invested in productive enterprises laying around collecting interest or being amassed into some giant pool and used as a weapon in some sort of derivative gambling.
Fortunately, we are in the agreeable situation that a lifetime is a much longer span of time than the typical inventory turnover. This leaves a very large range of rates of inflation and nominal interest which both discourage hoarding of voluntarily idle currency and yet does not materially inconvenience businesses who keep their ready reserves in the coin of the realm.
And although we are here we still seem to be in the horrible situation where economic parasites seem to come out on top.
- Jake
- Jake
I don’t know anybody who has studied the link between privatized pensions and rentier culture formally. It’s just one of those things that seems obvious once you’ve been in a few arguments with (otherwise reasonable and politically agreeable) people who think society owes them 3 % annually compounding risk-free real return on their pension savings, come Hell or high water.
- Jake
I’m probably one of the last guys in my field with a true pension program as well. if it is still around when I retire.
Nowhere, ever, did Douglas advocate interest free loans. Further, nowhere did Douglas say that interest was to blame for most of our economic ills.
Anyone, even remotely familiar with Douglas, knows that most of his recommendations for monetary reform stem from his A+B theorem, which demonstrates that incomes distributed in production are always insufficient to buy back that production. To alleviate this problem, Douglas proposed a national dividend and price rebate mechanism.
The monetary reformer who thought that interest was to blame for most of our economic ills was Frederick Soddy, not C.H. Douglas. Douglas claimed that there was an accounting flaw, which relates to technology displacing labour in production, which creates a situation where prices are always increasing faster than incomes.
Douglas is wrong, though, for the same reason the anti-usury crowd is: He forgets that capitalists gotta eat too.
The problem isn’t profits, or interest, or return on capital investment. One may dislike those as a matter of political inclination, and that’s fine as far as it goes. But they are all perfectly compatible with a functioning mass production economy.
What is fundamentally incompatible with industrial mass production is gross inequality. Because that stops the flow of cash which enables the mobilization of men and machines in the service of the material provisioning of society.
It doesn’t matter whether that inequality comes from manufacturing profits, rent of land, interest payments, sordid embezzlement, or even exorbitant pay scales for particular classes of professionals. What matters is that if you have a class of people who have more money than they can spend productively, the money-hoarding will break the institutions that enable industrial mass production.
(Also, people with more money than they can productively spend tend to busy themselves with buying politicians and similar mischief.)
- Jake
Who said it was? Not I, nor Douglas.
This is false. Every expense is someone else’s income, somewhere down the line. All payments must eventually end up as wages, rents or dividends. What is paid out will be precisely sufficient to purchase what is produced, because the manufacturing firm is neither a cashflow source nor sink – at no point do payments disappear into the darkest night, nor appear ex nihilo. (We ignore for the moment changes in the firm’s net cash position, which does serve as a cash flow source or sink.)
The suppliers of machinery and intermediate goods, the “B” group, must equally split the “B” payment between wages, rents, dividends, etc. and a “C” group of their suppliers. C < B if the supplier is to be financially viable. But supplier C must equally have a "D" for which D < C, etc. ad infinitum. Not unlike Zeno's parable of Achilles and the tortoise.
Cashflow sources and sinks are found in only four places in the economy: At the border, through exports and imports; at the bank, through borrowing and debt service, in the form of changes in the stock of savings by the private non-financial sector, and at the government, through taxation and outlays.
And it is imbalance between cash flow sources and cash flow sinks that causes problems. Which is why fiscal policy is helpful in stabilizing the economy, and interest rate policy can be helpful so long as there remain creditworthy entrepreneurs in the economy.
- Jake
The A+B theorem deals with basic cost accounting as it pertains to income and prices.
“In any manufacturing undertaking the payments made may be divided into two groups:
Group A: Payments made to individuals as wages, salaries, and dividends;
Group B: Payments made to other organizations for raw materials, bank charges and other external costs.
The rate of distribution of purchasing power to individuals is represented by A, but since all payments go into prices, the rate of generation of prices cannot be less than A plus B. Since A will not purchase A plus B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing power which is not comprised in the description grouped under A.” (C.H. Douglas, “The Monopoly of Credit”)
Like you said, the problem isn’t profit, or interest, or returns on capital. The problem is that consumers are given insufficient income to buy back all of production.
This is false. Every expense is someone else’s revenue. Very little revenue actually gets distributed as incomes to individual consumers, but according to accounting standards, all costs are ultimately paid for by the consumer.
Further, you raise an interesting point about “cash flows”. Cash flows and profits are two totally different things.
Yes. But all income comes out of revenue.
No, businesses operate on a revolving line of credit. Workers don’t wait until the product they created sells in order to get paid (that could be months). Businesses borrow the money in advance in order to pay the workers, and most revenue is used to either repay existing loans or replace working capital. Only a small percentage of revenues which is distributed as dividends makes its way to the consumer.
Let us imagine a toy economy with one firm making everything. Production is instantaneous, workers are paid instantly for their work, workers spend their whole wage instantly to buy stuff, and the firm is run as a workers’ cooperative so there are no capitalists or dividends.
In this firm, the whole of the revenue goes to the workers.
Let’s put some numbers on the example:
Firm produces 100 Units of Stuff per day.
Workers get paid € 80 per day.
Firm uses 20 Units of Stuff to repair and replace machines.
Firm sells the remaining 80 Units to workers for € 1/unit.
Total revenue = A, in your terminology.
Now we paint a line on the assembly floor, and say that on the one side of the line we have one firm and on the other side of the line we have another firm.
You still have 80 workers, paid € 1 per day, per worker, and each worker buys one Unit per day. And they do precisely the same things they did yesterday. But now Firm 1 buys 10 Units of Stuff from Firm 2 at € 10 and pays € 40 to its labourers. In turn, it sells 100 Units of half-made Stuff to Firm 2 for € 50.
Firm 1 Revenue = A + B, where A is 40 and B is 10.
Firm 2 buys € 50 worth of HalfStuff from Firm 1 and pays its workers € 40 to turn the Halfstuff into 100 Units of Stuff, of which it spends 10 to maintain its own machinery and sells the other 90 for € 1 apiece.
Firm 2 Revenue = A + B, where A is 40 and B is 50.
The same workers, the same firms, the same wages, the same prices. But now A + B > A, while before A + B = A.
The example scales trivially to include capis, multiple firms, etc.
This is why you need to follow the cash flows up- and downstream to their ultimate sources and sinks, rather than simply add up the revenues.
The cash flow has three sources:
*Spending out of prior or future savings (spending out of future savings is better known as “borrowing to spend”).
*People outside your scope of analysis buying stuff from people inside the scope of analysis.
*The man with the gun spending from seigniorage in order to obtain stuff without working for it.
Conversely, the cash flow has three sinks:
*Saving for future or past expenditures. (The latter being commonly known as debt service.)
*People inside your scope of analysis buying stuff from people outside the scope.
*The man with the gun collecting money.
If the sinks exceed the sources, then there is insufficient cash flow to buy the production of the economy. While if the sources exceed the sinks, there are insufficient goods to cover the demands being placed upon the material provisioning of society by solvent customers wishing to spend money.
- Jake
I’m not “double counting”. I’ll give you a concrete example.
Let’s say I’m constructing a building and the only costs are labour costs (ie. all costs are simply A costs). Let’s assume that the cost to construct the building is $100,000. And let’s also assume that the depreciation of the building is over 20 years, and it’s salvage value after 20 years is $0.
Now, in the construction phase of the building, workers are paid $100,000 in income, but the workers will spend this $100,000 in the current time period, say 1 year, on the day to day needs of living. Once the workers spend this income, it ceases to exist as income to anyone. This activity has the tendency to inflate the price of consumer goods which are currently on the market due to the fact that the suppliers of these goods act based upon the “law” of supply and demand, and they find that the effective demand for their goods is rising.
After period 1, the income no longer exists, but the company that built the building enters it as an asset on their books, and starts to depreciate it in the cost of the consumer goods they produce at a rate of $5,000 per period. Let’s assume the consumer goods they produce cost $100,000 per period in labour costs, and $5,000 in depreciation expense. Now the price of these consumer goods is $105,000/period, but the income distributed per period is $100,000: leaving a discrepancy of $5,000/period.
In a sense, you are correct. I’m not “double counting”, but I’m claiming that capital is paid for twice. It is paid for initially via the inflation of the price of consumer goods as the capital is constructed because during the capital’s construction, income is distributed and used for purchase of consumer goods, yet the capital itself is incapable of producing consumer goods at this point. This inflates the price of consumer goods, and if it was not for the fact that efficiency in production reduces prices at the same time, inflation during this process would be far worse. However, according to the rules of accrual accounting costs are pushed into the future to “match revenues and expenses”. As a consequence, consumers pay for the capital twice: once through the inflation of consumer goods during the capital’s construction, and again as it is expensed in the price of consumer goods through depreciation expenses.
The workers pay this money to some chap. He has profits and costs. The profits are his income, the costs, except for taxes and debt service, are some other chap’s income. And the grocery store owner’s income, less his savings, is some other chap’s income as well.
You need to follow the money all the way home to a cash flow sink – savings, debt service, import or taxes – in order to be able to conclude that it ceases to be income for anyone.
No, the $ 5,000 liquid assets freed up will either be reinvested, thereby being paid out as revenue to some chap as payment for services rendered, released to the shareholders as income, retained as retained earnings (increasing the firm’s stock of savings, which is a cash flow sink), or used to service debt (which is a cash flow sink).
Again, you must follow the cash flow all the way forward to a sink.
That doesn’t follow, unless you assume that all businesses invest at the same time and depreciate at the same time.
One business can build a building in year 1, the second in year 2, the third in year 3, etc. The level of building activity is constant, so there is no sudden spree of activity to generate supernormal inflation, and such that each investment precisely cancels out the savings or debt service caused by the other investments of prior or future years.
Of course, in the real world we do see a business cycle precisely because everybody invests at the same time. But firstly, this is a property of the timing of investment, not of the fact that capital plant must be mobilized prior to the commencement of production. And secondly, the business cycle is fixable with sufficiently heavy-handed fiscal policy interventions.
- Jake
Then they should only get it when there is profit.
It comes from the same place as profit
Profit, increase, etc. come from God (or whatever great spirit you believe in that makes the sun shine and the rain faill) and hard work. Bankers don’t do any of that force times distance shit that I’m pretty good at.
Enabling things that will work to happen is a vital skill that deserves reward because without it nothing happens.
Sure. The question is whether the financial sector does that.
To many of the analogy stories start with the assumption that people cause things to happen automatically as an innate nature (some sort of other belief in the ‘natural order’ as far as I can see). I can assure you that doesn’t happen in the real world. Stuff has to be organised by people with organisational skills.
It doesn’t have to be bankers doing the organizing. Bankers don’t create society. In fact, society has existed without bankers.
Order typically does happen organically until bankers, administrators and other clipboardy-paper-pusher-types get involved and ruin it.
“This seems to be a suitable occasion on which to emphasise the proposition that a Balanced Budget is quite inconsistent with the use of Social Credit (i.e., Real Credit – the ability to deliver goods and services ‘as, when and where required’) in the modern world, and is simply a statement in accounting figures that the progress of the country is stationary, i.e., that it consumes exactly what it produces, including capital assets. The result of the acceptance of this proposition is that all capital appreciation becomes quite automatically the property of those who create and issue of money [i.e., the banking system] and the necessary unbalancing of the Budget is covered by Debts.”
The profits, less retained earnings are someone’s income, but that could be distributed months after the revenue was received.
“the costs, except for taxes and debt service, are some other chap’s income.”
Sure, and that income was likely distributed months before the good or service was sold, it most likely does not still exist as income.
Your whole analysis does not take into account TIME.
At some point in time all costs distribute as income, but that does not mean that the income is still available as income when the cost finally reaches the consumer (in the case of some capital projects, this may take decades), Further, when someone re-invests their income, they create an additional set of costs without creating the additional income.
“No, the $ 5,000 liquid assets freed up will either be reinvested, thereby being paid out as revenue to some chap as payment for services rendered, ”
If that income is re-invested, then it creates an additional set of costs without creating addtional purchasing power.It will restore equilibrium between costs and income in the current time period, but that re-invested $5000 is expected to be returned (with interest), so it merely pushes the disequilibrium to a future point in time.
“One business can build a building in year 1, the second in year 2, the third in year 3, etc. The level of building activity is constant, so there is no sudden spree of activity to generate supernormal inflation, and such that each investment precisely cancels out the savings or debt service caused by the other investments of prior or future years.”
You’re making alot of assumptions here, but let’s take your example of a car manufacturer who is constructing a building to build cars. Assume only labour costs for simplicity.
In year 1, the car company gives its labourers $100,000 to construct the building, and it enters the building as an asset and depreciates it over 20 years ($5000/year). It also is currently distributing $100,000 to it workers at another manufacturing plant to produce cars totalling 100, and cars are the only thing being produced.
So in year 1 there is 100 cars and $200,000 in income distributed. Operating on the “law” of supply and demand, the company charges ($200,000/100) = $2000/car in year 1, and all 100 cars are distributed to consumers.
In year 2 the second building is constructed and it produces 100 cars and so does the first building. Both distribute $100,000 in income. In year 2 total costs are $100,000 + $100,000 + $5000 (depreciation expense of second building) = $205,000, but only $200,000 was distributed in income. There is now a shortage of income of $5000.
What your example demonstrates is that if the car company wants to have any clear profits, it needs to have more than five thousand in cash profits.
If those five thousand are neither reinvested nor disbursed as dividends, then yes you have a demand deficiency. This is because your cash flow network has more sink than source in that case. In that case the government needs to spend more cash flow into existence, in order to balance cash flow source and cash flow sink.
None of this requires distinguishing between depreciation and other expenses, nor does that distinction help to tell you when the cash flow network is net source or net sink.
It’s a shiny distraction from the real issue, which is that the cash must flow.
- Jake
I’m not conflating the concepts at all.. I’m not the least bit interested in cash accounting, because that is not how most businesses determine their costs which in turn affects their prices. Economists (and I don’t know if you’re a professional economist or not) are the ones who confuse the two because they act as if businesses operate using cash accounting methodology as opposed to accrual accounting.
Most businesses use accrual accounting because if they were to use cash accounting, they’d likely never be able to report a profit, especially if they are to invest in capital assets. Most costs in the economy are determined using accrual accounting methodology.
Douglas’s A+B theorem demonstrates that businesses are always generating costs at a faster rate than they are distributing incomes.
The cause is investment and desired savings (ex ante). The effect is price increases and inadequate income (respectively).
If you re-invest precisely at the rate of depreciation, then Douglas’ paradox goes away. It is only when you are expanding the capital stock of society that you have the imbalance Douglas suggests.
Which of course comes with the corollary that any sustainable increase of the capital stock of society requires sovereign deficit spending, as the sovereign is the only player in the economy which can create free cash.
You can keep nattering on about the microeconomics of the firm as long as you want – I’m a patient guy. But if you want to talk about macroeconomics – such as the flow of available income – then you need to set up the correct boundary conditions and aggregate consistently. Otherwise you’re playing the same game of just-so stories as the neoclassical microfounded general equilibrium models.
- Jake
Bingo! But the capital stock in aggregate is expanding. Capital appreciation > capital depreciation, so the imbalance does exist.
“You can keep nattering on about the microeconomics of the firm as long as you want – I’m a patient guy. But if you want to talk about macroeconomics – such as the flow of available income – then you need to set up the correct boundary conditions and aggregate consistently.”
Douglas’ A+B theorem does what Keynes’ theories do not – they demonstrate a microeconomic foundation for the insufficiency of aggregate demand observed by Keynes and Douglas. I believe your implicit assumption in the above statement about macroeconomis is that incomes=prices.
If all firms are generating costs at a greater rate than they are generating incomes, then the economy as a whole is generating costs at a greater rate than it distributes incomes. In other words, prices > incomes: they do not equate.
(X.1) Yt = Ct + It
where Yt is total output/income in period t, Ct is total consumption in period t, and It is total investment in period t.
We are assuming a closed economy with no government spending or taxation to be faithful to the original work.
Income can be either consumed or saved and St = sYt, where s is the marginal propensity to save (which is 1 – the marginal propensity to consume).”
http://bilbo.economicoutlook.net/blog/?p=26724
“The foregoing is sufficient answer to the quotation from Mr. J. M. Keynes, which begins: “Let X be equal to the cost of production of all producers. Then X will also be equal to the incomes of the public.” This is the well-known logical fallacy known as the petitio principii, which consists in assuming the truth of the fact which you have set out to prove and then proving the assumption from the logical conclusion. The cost of production is not equal to the incomes of the public, and therefore the rest of the argument merely indicates what would happen if it were equal.” (C.H. Douglas, “The New and The Old Economics, pge. 16)
http://douglassocialcredit.com/resources/resources/new_and_old_economics_c_h_d.pdf
Keynes’ aggregate income formulas implicitly assume that prices equal incomes. Therefore, any analysis using these formulas will demonstrate what should occur assuming these two things are in equilibrium.
Douglas’ A+B theorem demonstrates that they are not in equilibrium.
Also, prices do not equal income in macroeconomic theory.
Anyway, use your own language if you want. But people will dismiss you as a crank just as they would me if I started hassling chemists after rewriting the table of elements or mathematicians after having rewritten the decimal system. That is the definition of being a crank.
http://en.wikipedia.org/wiki/Crank_%28person%29
If you’re comparing the theories of economics to those of physics or chemistry, you’re living in a dream world. Ph.D’s in the subject are writing books about the fallacies of economic reasoning:
As we say in accounting, accounts are a matter of opinion, cash is a matter of fact.
The economy, and the pressures on the macro-economy, function on cash transactions.
Beyond that it is a matter of opinion which of those cash transactions are called ‘investment’ and which are called ‘consumption’.
But firstly the economic model must function in cash terms – and be stock flow consistent on that basis.
Accrual accounting pushes expenses into the future as certain expenses are capitalized. Consumers are forced to pay for all the costs of production including capitalized expenses. Hence, depreciation expenses are added to the cost of goods sold and form a part of prices.
What I am saying is that you and Douglas deploy classic crank arguments which, as Wiki says, are based on trying to redefine the terms of the field to “prove” your points. You are perfectly entitled to do this if you please but very few people will take you seriously and economists will consider you a crank.
I find the fact that you have now resorted to name calling rather amusing, and I really could care less what you think of me personally, because I don’t know you from Adam.
I’m sorry that you think I’m trying to insult you. I’m really not. What I’m saying is that this is the hallmark of a crank argument. And if you make it people will see you as a crank. If you find this offensive that is your prerogative. But this is a simple fact: argue in this manner and economists will (rightly) think you a crank.
At one time the conception of a geocentric universe was the “norm”. I’d rather be called names and be right, than have the acceptance of my peers and be wrong.
Maybe I’m a moron though and I can’t see the ‘grand truth’ of what you’re saying (I doubt this but I’m willing to entertain it). In that case, if I were you I would go straight to the statistics bureaus and make your case there. The guys that work at these bureaus are very open to changing their accounting rules if they think there is good reason. The folks in the US are by far the most forward-looking (and influential) so maybe you should contact them. (Details here).
Please do open your mind to the possibility that it is you and not the rest of the world that is in error here though. Try not to chalk up the negative responses that you may receive as part of some conspiracy of lies.
As a bit of background, I was educated in orthodox economics at university and fell upon Douglas’ ideas as a bit of an accident. I had heard of Social Credit because I live in Alberta, but had no idea what it was actually about, and actually had many of the negative preconceived notions that you probably have. I chanced upon someone who actually was friends with one of the technical experts (L.D. Byrne) that came to Alberta upon Douglas’ request. It was upon hearing him speak that I realized that these guys aren’t “cranks” but actually quite knowledgeable in the field of economics. They just speak a different language because many of the preconceived notions that I held true can easily be demonstrated to be false (understanding the fallacy of the quantity theory of money was my greatest hurdle to understanding Social Credit).
Douglas testified before many government committees, including the MacMillan Committee to which J.M. Keynes attended and actually questioned Douglas.
http://www.scribd.com/doc/19207513/CH-Douglas-Evidence-MacMillan-Committee-1930-
Based upon policies. Which are chosen – by people. They are choices based upon what you want to see and what you believe is important.
They are not laws of nature.
Yes, Douglas does dispose of the quanity theory of money, but there are many more myths in economic orthodoxy that Douglas dispels as well. Another would be the sanctity of “full employment” as technology and capital replace labour in production. That myth seems to still hold for orthodoxy and the heterodox like MMT.
The following is from Keynes’ “The General Theory of Employment, Interest and Income”:
“Thus the problem of providing that new capital-investment shall always outrun capital-disinvestment sufficiently to fill the gap between net income and consumption, presents a problem which is increasingly difficult as capital increases. New capital-investment can only take place in excess of current capital-disinvestment if future expenditure on consumption is expected to increase. Each time we secure to-day’s equilibrium by increased investment we are aggravating the difficulty of securing equilibrium to-morrow. ”
And the following war written by Douglas almost a decade earlier:
“In the first place, these capital goods have to be sold to someone. They form a reservoir of forced exports. They must, as intermediate products, enter somehow into the price of subsequent ultimate products and they produce a position of most unstable equilibrium, since the life of capital goods is in general longer than that of consumable goods, or ultimate products, and yet in order to meet the requirements for money to buy the consumable goods, the rate of production of capital goods must be continuously increased.”
I’ll leave it for others to determine which is more “readable”, but they are saying the exact same thing.
As for Gesell, the following was written by Douglas:
“Now this book of Mr. Maynard Keynes to which I have referred, represents apparently a sudden conversion on the part of the author to the monetary theories of Silvio Gesell, the originator of the idea of “disappearing money,” that is, money that loses its value month by month unless spent (as if money did not disappear fast enough already).
The idea is that if you have got a lOs. note today you have to put a penny stamp on it a fortnight hence to keep it worth lOs., and another penny stamp in a further fortnight’s time so that it shall still remain at the value of lOs. Gesell’s theory was that the trouble with the world was that people saved money so that what you had to do was to make them spend it faster.
Disappearing money is the heaviest form of continuous taxation ever devised.
The theory behind this idea of Gesell’s was that what is required is to stimulate trade – that you have to get people frantically buying goods – a perfectly sound idea so long as the objective of life is merely trading.
When a lOs. note becomes worth only 9s. 11d. tomorrow, a man will go and buy something and so stimulate trade. In fact you have exactly the same state of affairs as existed at the time of the stupendous German inflation of the mark.
When a waiter received payment in millions of marks he hardly waited to throw down his napkin before dashing out to buy something, because the value was disappearing so rapidly that what he bought one minute would require a billion marks ten minutes hence. “
“(Douglas) manifested a tendency to blame most of the world’s economic ills on ‘usury’” (parenthesis added)
This claim is completely false. Douglas did not blame most of the world’s economic ills on usury. Douglas did not see banks charging interest on loans as an issue whatesoever.
(b) Many of Douglas’ followers were anti-usury fascists. Which is not to say that Douglas was one, he probably wasn’t. But the connection is not altogether arbitrary.
(a) And I responded demonstrating that the quote you took was out of context.
(b) There may have been some followers of Douglas who claimed that interest was the cause of all our economic ills and who also may have supported fascism (Ezra Pound comes to mind), but that’s not what your article states. It doesn’t claim that some misled followers of Douglas were led astray this way, it claims that :
““(Douglas) manifested a tendency to blame most of the world’s economic ills on ‘usury’” (parenthesis added)
This statement is completely false, and a blatent misrepresentation of Douglas’ ideas. Douglas’ monetary reform ideas were based upon his A+B theorem, and have nothing to do with “usury being the cause of most of the world’s economic ills.”
This is shoddy research, and the article is a straw man. It’s similar to Dr. Gary North’s work in that respect. If you’re going to write an article criticizing Douglas’ ideas, I would hope that you would do a modicum of research to at least accurately portray those ideas.
It’s a socialist ideal again – like being a ‘global citizen’ and having ‘world government’, and frankly everybody being blue-eyed and blonde. It’s the sort of thing that persists in concepts like the EU, and fixed exchange rates. Make everything centralised and the same and we will be free – as long as the Very Clever People are in charge.
Unfortunately reality is messy because it has these things called human beings in it, and as biological entities they have a tendency not to follow the patterns ascribed to them
Humans live in tribes and need to see quid pro quo if they are to share resources with others. And no amount of declaring that behaviour ‘irrational’ will change the underlying biology. It is how we have evolved and the economic system has to deal with that reality.
We need countries and jobs. Superstates and handouts won’t work and can’t work.
Plus, just handing the surplus over to bankers and economic parasites is far worse than a little bit of welfare.
Although race and nation are real and biologically rooted and a properly ordered economy would take notice.
But make no mistake, there is a plan even in a non command economy. The question is in fact a question about how clever the planners are, who they are, what class they represent, how noble and just they are, etc.
There is a different way, but it is a middle way that respects the reality of the way human beings work. We need something to do with our time that we like doing and others consider useful. The income comes from doing that.
And yes we need to stop the casino games in the banking centres, because they serve no purpose – other than to tie up huge quantities of brain power on pointless activities.
We have to take back our democracies.
I wanted to elaborate on this a little further. In terms of capital production, the consumer goods that the capital creates, and the cost of said capital in those goods, may take decades to fully reach the consumer. People use their income to purchase consumer goods and services at, or near, the time of the construction of capital. They don’t wait decades to spend their money as the cost of said capital finally makes its way to the consumer.
Ultimately, the consumer ends up paying for the capital twice. Once as it inflates the price of consumer goods, at, or near, the time of the capital’s construction, and again as the capital is depreciated over time via depreciation expenses.
This “timing” issue is completely ignored by economists. They simply add up the income distributed in the capital’s construction, and add up the depreciation expense and say they equate, so that income = costs. They forget that it may take decades to depreciate capital, but the people who constructed the capital can’t wait decades to spend their income.