RE: [Futurework] http://www.glaesernemanufaktur.de/

Mon, 05 Jan 2004 19:52:20 -0800

Ed,

 

Who decided that perfect markets were worth studying?

 

Who later decided that markets were not perfect?

 

Labor, in Classical thinking, was the name given to human exertion that produced something with exchange value.

 

This covers the so-called “Entrepreneur”.

 

I suppose he is separated from dull plodding labor, who gets a definite wage today, but who may have no job tomorrow. Oops! That sounds risky to me.

 

As you say, all kinds of people take risks. Separating one from the other is not too sensible.

 

But, contrast the simple description of Labor above. That makes possible a good science.

 

In a market society, the price mechanism does not provide a “perfect” price. Instead, it hunts backward and forward always trying to bring the price back to equilibrium. So, at any time in a dynamic market, the price is probably not “right”.

 

If there are abrupt and large changes in supply, or demand, the price mechanism could hunt widely.

 

Doesn’t matter (unless you need a thesis).

 

All the entrepreneur need do to comply with Classical theory is to count the “surplus” (or “loss”) and add it to his salary (or deduct it). Then, distribution to the three Factors would be complete.

 

What he does probably depends more on his tax situation than anything else, but book-keeping does not come within the province of economics (or shouldn’t).

 

Harry

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From: Ed Weick [mailto:[EMAIL PROTECTED]
Sent: Thursday, January 01, 2004 1:12 PM
To: Harry Pollard; 'Ray Evans Harrell'; [EMAIL PROTECTED]; [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED]
Subject: Re: [Futurework] http://www.glaesernemanufaktur.de/

 

Harry, I won't pretend to be an expert on the evolution of economic thought, but I do know that thinking about matters economic did not stop with the Classicists.  Substantial contributions were made by a variety of people, usually dubbed "Neoclassicists" in the 19th Century and much of the 20th.  Much of what the Neoclassicist thought about was whether the Classical model of equality or "equilibrium" between the costs and returns of a firm under conditions of perfect competition was really useful when applied to the real economic world.  You are right that, in a perfectly competitive world, "Rent goes to Land, Wages go to Labor, and Interest goes to Capital."  However, what if, as in day to day reality, the world is not perfectly competitive or perhaps more meaningfully in the present context, perfectly predictable?  This was a question raised by Frank H. Knight in his seminal "Risk, Uncertainty and Profit", published in 1921.  Somewhere at some long-ago book sale when I had pretensions about becoming a real economist, I managed to buy a copy of the book, and a quote from it may be useful to the point I'm trying to make:

As the title of the essay indicates, our task will be envisaged from the immediate standpoint of the problem of profit in distributive theory. The primary attribute of competition, universally recognized and evident at a glance, is the "tendency" to eliminate profit or loss, and bring the value of economic goods to equality with their cost. Or, since costs are in the large identical with the distributive shares other than profit, we may express the same principle by saying that the tendency is toward a remainderless distribution of products among the agencies contributing to their production. But in actual society, cost and value only "tend" to equality; it is only by an occasional accident that they are precisely equal in fact; they are usually separated by a margin of "profit," positive or negative. Hence the problem of profit is one way of looking at the problem of the contrast between perfect competition and actual competition.

And in a footnote to the foregoing, Knight adds:

It will be perceive that the word "profit" is here used in the sense of "pure profit," a distributive share different from the returns to the productive services of land, labor, and capital.

That is about as far as I can take the matter.  From what little I remember of my history of economic thought, not too long after Knight, people like Joan Robinson and Edward Chamberlin recognized that markets were not perfectly competitive and that the study of monopolistic markets was also a legitimate subject of economics.  However, I'd add that what Knight was referring in his study of profits was not monopoly or monopolistic profits, but profits or losses that arise from uncertainty, whether calculable as risks or not.  The idea is essentially that even under highly competitive conditions, the entrepreneur is never quite sure of how things will work out and he should be rewarded or punished for having put himself forward.

Ed

----- Original Message -----

Sent: Thursday, January 01, 2004 2:55 AM

Subject: RE: [Futurework] http://www.glaesernemanufaktur.de/

 

Ed,

The $10K could be called a dividend, a bonus, a commission, a salary, or even perks. However, any return for human mental and physical exertion is called Wages in Classical PE.

The residual could be “contingency or insurance – part of ordinary business expense with a dynamic operation.

However, this is the way we look at Capital – material products of exertion kept in the production process. One of the three tasks of Capital is to maintain itself. If a factory begins the year with $10,000 worth of Capital, but wear and tear reduces it to $9,000, then $1,000 must be set aside  toward replacement. So, at any time the amount of Capital remains the same.

That residual might be replacement for wornout Capital.

A well-used ploy by both business and government is to put off the replacement of Capital, so funds become available for important things like higher salaries. This is why our roads and bridges are a disgrace. It may well be why an apparently solid corporation is found to be buckling at the knees.

Arthur and I – and probably you – agree that the problem is not production, but distribution.

As you know, Classical Political Economy has three avenues of production – Rent goes to Land, Wages go to Labor, and Interest goes to Capital.

After the distribution, there is nothing left.

The accountants bring in residuals, dividends, and profits – but accountancy is not economics. Economists should have stayed with their discipline.

The issue then becomes clear and simple. Why is the distribution to Labor constantly being pressed down?

Why - in the words of Henry George – with our constantly increasing power to produce is it so hard to make a living.

Of course, he said that 130 years ago so it’s out of date. It doesn’t apply now – or does it?

You might think that the Classical stuff isn’t fitted to today’s complicated situation, but it is directly applicable to modern conditions.

On FW it’s hard to get past the basics, yet the Classical view is that an understanding of the Basics is essential if one is to proceed any further.

Yet, most people want to get to the good stuff right away. They don’t want to work up to it.

‘Twas ever thus!

Harry

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From: Ed Weick [mailto:[EMAIL PROTECTED]
Sent: Monday, December 29, 2003 5:31 AM
To: Harry Pollard; 'Ray Evans Harrell'; [EMAIL PROTECTED]; [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED]
Subject: Re: [Futurework] http://www.glaesernemanufaktur.de/

 

Harry, I'm not an accountant, but the $10K we each got would surely be considered a dividend, and if the company kept $8k, that would surely be retained earnings.  Both dividends and retained earnings come out of profits, don't they?

 

Ed

----- Original Message -----

Sent: Monday, December 29, 2003 4:48 AM

Subject: RE: [Futurework] http://www.glaesernemanufaktur.de/

 

Ray,

 

By George, I think we’ve got it!

 

Profit may be a “residual” or a “surplus” or anything else you want to call it. But it is an accounting term and has no economic significance.

 

If you, I, Ed and Arthur ran a business and shared out $40,000 at the end of the financial year, leaving nothing – then the $10,000 we each got would be part of our income, but the company would show no profit.

 

If we each took $8,000 as income (wages) the firm would show a small profit of $8,000.

 

If income taxes were hitting us hard (but profit taxes were low), we might decide to take nothing, leaving it in the firm where it will be a handsome $40,000 profit.

 

To repeat, profit is an accounting term and is not of any importance in economics.

 

In Classical Political Economy, there are only three avenues of distribution, Rent (to land), Wages (to Labor), and Interest (to Capital).

 

There is nothing else to distribute and no-where else to distribute it. If FutureWorkers want to examine Work and Wages and the nub of the subject – why wages constantly trend towards barely enough to earn a living, they could do worse than look at the analyses of the Economic Classicists.

 

Harry

 


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