Hi Harry,
Our exchanges, I'm sure, will bore some FWers, but I think it's
sufficiently important (because of jobs) to examine them carefully. I've
been simmering your latest posting while taking a brief holiday this
week-end. Now that I'm back at home with my morning pot of tea before me, I
hope I can explain my reservations about your assumptions so far. Also, as
a brief preview of what I'm about to write, I'll mention an important
factor of production which you (and all other economists so far) entirely
exclude from their basic assumptions. But let me introduce this at the
right stage a little later below.
At 18:43 18/10/01 -0700, you wrote:
(HP)
>Just one point with regard to Capital and Wealth. They too are mutually
>exclusive. The product from the time raw materials are hauled out of the
>ground and sent to the factory is Capital. It is still Capital as it
>assumes the shape of a car, is worked on, painted and eventually arrives in
>the holding lot outside the factory.
>
> From there it continues to the local car dealer, who waits hopefully for
>me to arrive.
>
>When I take possession of the new car, once production has finished, the
>car is in the hands of the consumer, it is no longer Capital but Wealth.
>This gives us the basic four mutually exclusive defined concepts that begin
>the Science of Political Economy.
Now I'm bothered about the transformation that you say takes place when
Capital changes to Wealth.
Let me examine the production process alone before any sort of transaction
takes place. It is Land (Resources) + Labour (Skills) = Capital
(Product). (I have written my preferred terms in parentheses.) We're agreed
that these are mutually exclusive.
In shorthand the production process is:
R + S = P (I hope you won't mind if I use my shortened terms)
Now I haven't put your term Wealth in here because it is not involved in
the production process. If a person lives in a habitat which happens to
contain all the resources that are needed for survival and reproduction
then he could survive by the basic production process alone. Thus, in my
view, Wealth cannot be a primary term in economics. It doesn't come into
existence until trade, at least, has taken place.
It is significant, I think, that the important time-dependent consequences
of the production process which you mention (Rent, Wages and Interest) are
also only three in number -- corresponding directly to the 'big three' (and
not the 'big four'). We needn't discuss Wealth just at the moment.
Now there is an important component of Rent which is scarcely ever teased
out (as far as I'm aware) by economists. This is the cost of protecting the
ownership of land. When I rent a piece of land or other resources from
someone, I am paying a rent which means that not only am I using the land
for the time being but also that I am making an acknowledgement that the
owner has a personal right to it. But the owner only has that right because
he is protected from having his land taken away from him by force -- either
by neighbours or by marauding forces from abroad. The ownership right is
protected because he pays taxation to his government. His government spends
this taxation on paying for a system of justice and for the forces
necessary to maintain it from internal and external depradations -- the
police and military.
(In a prehistoric situation -- the hunter-gatherer tribe -- the cost of
protection is still involved in the production process. The government [the
leader and his immediate cohort] protects the tribe from other tribes or
predators and expects, and receives, a 'rent' in the form of grooming and
the supply of the bulk of their [vegetable] food from the womenfolk and
younger members of the tribe.)
I think it's important to consider this protection component of rent right
at the beginning of our definitions. Otherwise, both legitimate and
illegitimate aspects of gvoernment taxation become confused in further
discussion of economics. I appreciate that Political Economy, as you
describe it below ("the Science that deals with the Nature, the Production,
and the Distribution of Wealth") involves trade as well. But before trade
can take place, production has to take place first. Even if trade didn't
occur, production would have to.
The protection component of rent also means that, unlike the basic
definition of land (so far) we can now put a price on land. All three of
the basic factors of production can now be properly valued before any trade
takes place. Without protection, the other components of land (area,
resources, location, solar energy, etc, etc) are all fundamentally free,
given to us by the Good Lord, and no objective cost can be scientifically
attributed to them. Without the cost of protection, the basic formula, R +
S = P simply wouldn't make sense because one of them, Land (Resources),
lacks a unit of measurement. The formula would be unscientific. And we are
both trying to make economics into a scientific subject are we not?
(You could object at this point and say that, without trade and other
ramifications of a modern economy, such as money, there are no suitable
scientifically measurable units. But there are. It is one of the basic
units of science, energy. Energy is directly involved in all three basic
factors of production. Energy is needed in the creation of resources [but
these are outside the human purview so we can ignore them and treat them as
free], energy is needed in the act of protection, and energy is needed to
build the body and brain of the producer. If these can be measured in
energy units -- and they can, in principle -- then the energy of making a
product can be easily calculated.)
I could now proceed to discuss trade between person A and person B by
showing the following formula:
P(A) = P(B)
where P(A) is a product of A
and P(B) is a product of B
I could now show that P(A) and has less value than P(B) within the economy
of A, and P(A) has more value than P(B) within the economy of B -- that is,
each party to a voluntary transaction gains from it -- and thus derive, and
validate, the notion of profit. However, I won't proceed for the moment.
Are you prepared to criticise where I've got to so far? (As to the rest
of your posting concerning money, I largely agree with it, so let me leave
this on one side for the moment.)
Keith
>
>Political Economy was described as the Science that deals with the Nature,
>the Production, and the Distribution of Wealth. Distribution referred not
>to moving Wealth round, but to how the wealth produced was shared among the
>three Factors of Production - Land, Labor, and Capital.
>
>The part of the produced Wealth that went to Land was called RENT. The part
>that went to Labor was called WAGES. The part that went to Capital was
>called Interest. The most important part of this analysis is that Rent,
>Wages, and Interest, make up the whole product. There is nothing left once
>these are distributed.
>
>As we learned from our first contact with economics, "Money" is two things
>- a "measure of value" and a "medium of exchange". However, these two are
>like chalk and cheese - with completely different characteristics. Trying
>to bring these opposing characteristics together in a single "money" is an
>exercise in frustration.
>
>Properly to be a "measure of value" money needs to be linked in the market
>place to a commodity, perhaps gold, perhaps something else, maybe a basket
>of things, but that I don't favor.
>
>Certainly gold has been the preferred "measure" over thousands of years and
>could be so again. (Greenspan told a Senate Committee that he checked the
>world gold markets in his deliberations.)
>
>If the state issues a standard "measure" it should be in terms of a
>commodity, and should be easily cashed in for the commodity. But the state
>doesn't need to do it. Private banks can easily issue these standard
>"measures of value".
>
>Currently, as you say, the bits of paper that purport to be "measures of
>value" float in limbo with their value determined by almost anything but
>the market.
>
>These bits of paper used as a measure of value are also susceptible to
>inflation, a term that has nothing to do with economics.
>
>Inflation is a physical term meaning an increase in volume. In its use with
>money, it merely indicates that the "measure of value" has increased in
volume.
>
>An effect of this inflation is that prices (the value of things in terms of
>"money") rise.
>
>With quick sleight of hand, the effect has been given the name of the
>cause. "Inflation" has therefore been divorced from the cause. This means
>that the politician can "fight inflation" (rising prices) even as he is
>responsible for it. Do you recall Gerald Ford's WIN (Win Inflation Now).
>It's really enough to make one puke.
>
>Another advantage to the politician is that other causes of rising prices
>can be vectored in so we have "oil inflation" and "energy inflation"
>completely losing in the murk the original "increase in volume" of the bits
>of paper.
>
>However, bits of paper have an important place in transactions as "media of
>exchange". Most business is done with bits of paper and coins. These are
>not standard. In fact, we create them as they are needed, using a check
>book or a credit card. Banks serve as clearing houses for these media of
>exchange and get a commission for doing so. Unlike a "measure of value"
>that should remain pretty constant - the number of bits of paper that act
>as a medium of exchange can vary enormously.
>
>At Christmas, checks and credit card slips may double in number, but no
>inflation can occur because their numbers don't affect the "measure of
value".
>
>So, right away, we are in a morass because two different things have been
>mixed together and called money.
>
>However, we have an advantage. We have two excellent assumptions to
>describe the subjects of our study - the "unlimited desires" and the "least
>exertion" principles. We also have seven defined concepts with which to
>simplify the complexities that are supposed to attach to any study of Man.
>
> From there it's a breeze - or almost!
>
>Harry
>__________________________________________________________________________
>
>Keith wrote:
>
>>Hi Harry,
>>
>>Thank you for your posting (see below). I agree that your definitions of
>>Land, Labour and Capital are mutually exclusive. (Previously I was
>>intrigued to know how you defined Wealth, but I see that you regard this
>>as synonymous with Capital.)
>>
>>I have said previously that I regard economics as a 'literary' science at
>>the present time because human nature has to be taken into account and
>>this, while being scientifically investigated from many angles in different
>>disciplines, is not yet in a condition to be consilient with economics.
>>
>>So, to make economics into a science, some sort of bridge-building seems to
>>be required from both sides of the river. You're building it from your side
>>by defining your basic terms. Science, in the form of subjects such as game
>>theory, evolutionary psychology and so on, is building the bridge from the
>>other side.
>>
>>But there's another 'in-hoise' reason why economics cannot yet be regarded
>>as a science because modern economists have tried to build the bridge (that
>>is, towards the shore of explaining everyday life) by using aggregate
>>numbers involving units of money.
>>
>>This is doomed to failure because money cannot be measured (or equated to
>>Land, Labour, Capital) in any objective way. For the last century or so
>>since money was taken off the gold standard, the nominal value of
>>currencies have been subject to decisions of government (and/or central
>>banks).
>>
>>The nominal value of currencies appears as the current rate of exchange and
>>change from minute to minute on the Exchanges. However, these exchange
>>values are but superficial snapshots of a multitude of different
>>consequences, cross-currents and economic decisions which have been set in
>>motion by previous governmental decisions. And, importantly, these
>>consequences have different time lags.
>>
>>So the data that economists use are always out of date -- and to varying
>>extents because the lengths of all the different time lags can never be
>>known. Although the nominal value of all currencies at any one instant may
>>be known to several decimal points, their real values and their real
>>effects on the underlying economy may be different -- sometimes quite
>>different. At any one time, immense counter-intuitive effects may be
>>occurring which are hardly invisible and don't appear in the statistics for
>>years.
>>
>>In fact, your quote of Humpty-Dumpty is very apt. Economics at present is a
>>Humpty-Dumpty world. It's not so much that economists define the words they
>>use in different ways, but that the data they select are a consequence of
>>both real and non-real factors. The real factors are decided by sellers and
>>buyers, and the non-real factors decided by governments -- these are
>>arbitrary, no matter how rational and persuasive are the reasons given (and
>>usually in terms of the latest fashionable economic theory!).
>>
>>If, however, the value of money could be tied irrevocably to something with
>>real value (gold or platinum, perhaps, or better, a basket of essential
>>goods) and quite outside the monetary decisions of governments, then its
>>value would vary according to the value of the other real factors in the
>>economy. Even though the world-wide economy would still be a complex affair
>>with the different time lags of various processes still going on, it has a
>>chance of being analysed more scientifically because one of its most
>>important factors, government decisions, can be held constant.
>>
>>That's how I see it. But back to you now, Harry. I'd be fascinated to know
>>how much further you build your bridge, now that you've defined Land,
>>Labour and Capital (Wealth).
>>
>>Keith
>
>
>******************************
>Harry Pollard
>Henry George School of LA
>Box 655
>Tujunga CA 91042
>Tel: (818) 352-4141
>Fax: (818) 353-2242
>*******************************
>
>
>
>
>
___________________________________________________________________
Keith Hudson, General Editor, Calus <http://www.calus.org>
6 Upper Camden Place, Bath BA1 5HX, England
Tel: +44 1225 312622; Fax: +44 1225 447727;
mailto:[EMAIL PROTECTED]
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