Jim Devine wrote:
me:
it's true that saving (and other "leakages," i.e., the government
surplus (when it exists), and the trade deficit = capital inflow) pump
spending power into financial markets. But most of the trades in
financial markets involve selling of old (pre-owned) securities and
equities (or money) to buy new ones. Financial markets mostly involve
buying and selling stock magnitudes, not flow magnitudes.
John Vertegaal says:
The first issue at hand is one of solvency, or possible clearance of the
market in real terms; for the purpose of maintaining (or if adequate natural
resources allow for this, augmenting) our standard of living. Then, the
agreement that a necessary condition for the market to clear, is either a
stop of, or replenishment for, leakages from the process. The underlying
problem of our discussion though, is your unstated assumption (axiom), that
a stock magnitude has a determinate value, and an agglomeration of those
values depicts a solvency situation ex ante.
I don't quite get the drift of what you're saying. I wasn't talking
about solvency but about the need to maintain the distinction between
"real goods & services inflation or deflation" and "asset-price
inflation or deflation." Market clearing does not seem to be a
necessary topic in that discussion.
I understood you to mean by: "keep[ing] real goods & services inflation
or deflation conceptually separate from asset-price inflation or
deflation" that there were no influential connections between the two;
each having their independent building blocks. IOW, at least to a large
extent, independently determined. I tried to explain why you cannot look
at them in isolation. More about solvency later.
If a stock magnitude can be sold, then it has a determinate price on
the market. As far as capitalism is concerned, that's its value.
A determinate price means the system is in equilibrium and ready to move
on. I'm saying, there invariable are systematic consequences to such a
sale that in aggregate could even bring the system down; capitalism's
axioms are powerless to detect that capital values are indeterminate.
However, I'm interested in _your_ point of view regarding determination;
not in capitalism's, which I reject on a level where you still seem to
agree with it.
IOW, I'm trying to get a grip on your defense of economic theory and its
ability to explain the economy's functioning on the one hand; while on
the other, as a Marxian you must be convinced of deep-seated theoretical
shortcomings that are bound to lead to its collapse. Are you playing
devils advocate, or what is your stance here?
Once one agrees however, that a stock without a return is valueless, and I
don't think anyone can disagree with that, you at least don't seem to do so
when you say "that financial assets are, strictly speaking, nothing but
claims on real goods and services (now and in the future)"; there is no
other way to *determine* the value of a stock but through a flow.
right, but the value of the stock is conceptually separate from the flow.
??? If I take "conceptually separate" to mean independently determined,
this does not make sense to me. Additionally, we have a problem between
ex ante and ex post; maybe this will clear itself up later...
So, in
order to be consistent: up until that flow has taken place, all stock
magnitudes are indeterminate.
before the flow has taken place, the value all stock magnitudes are
based on _expected_ flows.
Exactly, agreement already. But now the question becomes whether those
expectations are exogenous impulses and by definition are resulting in
indeterminate values, which is my position; or, whether you believe that
endogenous rationality of its economic agents *determines* equilibrium
magnitudes at all times, thereby ruling out the occurrence of crashes at
any time. Which is it? Or perhaps, do you have some other explanation of
_determining_ the expected flows' magnitudes? If you don't, would it not
be sensible to concede that perhaps economic values _are_ indeterminate
and therefore a potential cause of systematic collapse?
Those expectations may or may not
correspond with actual flows,
No argument here.
but there should be _some_ sort of
connection.
Only if you fall for the conventional idea of the macro being based on
micro principles. As a Marxian, you possibly cannot see anything wrong
with that view? A GT Keynesian would disagree and this controversy in
one form or another has been keeping heterodox thought divided for what
seems forever. Actually, as I will try to show later, there is no causal
connection whatsoever. Given imperfect available information, nothing an
individual does with his "equity" has any determinate effect on the
stability of the system as a whole. It is the resolution of capital
values that provides this systematic stability; not what individuals are
doing with respect to increasing economic "wealth". The admission that
the value of a stock without a return is nil, and only *determinable*
through flows doesn't just move the goalposts on the same playing field;
it turns the playing field upside down, unless and this now becomes
imperative, you can show exactly what determines that connection ex ante.
It is not such a big deal that all economic
equity signifies an unresolved debt, for that's the meaning of a _claim_;
or, at least there is no reason for it to be disconcerting to those with a
social conscience.
in economics, "equity" refers to net worth, one's capital. It does not
correspond to debt. If I own stock in Microsoft, it's like I'm a
partner in the business. It's not that they owe me money in a
contractual sense, even though I may expect and hope to be paid
dividends and/or capital gains. My stock represents a claim on their
property (software, etc.) but it's different from a debt claim.
I agree, your explanation seems to make perfect sense; but it presumes
as you said _some_ [ex ante] connection between its value as a stock and
a [returning] flow. So, what is a piece of owned Microsoft worth, if MS
owned the entire world? Such a reductio ad absurdum would find MS profit
earning income dependent on the direct spending of its own profit income
earners. What has become the point now, of charging profits over costs
in the first place? May as well determine shareholder share of output ex
ante as a cost. No? So the point is, it's not any physical presence, but
the power of the account setter on the demand side that determines.
Capital, stock, equity, whatever you want to call it, is therefore not
valuable in and of itself, at least not in terms of its unit of account.
Instead, the determinant of "generated" profits on behalf of capital
accounts in a multi-producer environment, is in fact _others_ putting up
advances, i.e. going into debt through providing new income and with it
potential demand, in the realistic _expectation_ that others still, will
reciprocate in kind. And it so happens, that in normal times, indeed
they do; and just about every stock _seems_ to materialize returns, in
the way conventional economic theory teaches it does.
In other words, a time involving obscure circuitous process, without a
"savings" spatial relation, _appears_ as a common linearity, implying
determinate values and the possibility to build up or draw down savings
at will, every step of the way. But normal times don't preclude crashes!
The potential for crashes occurs when the policy of powers that be, has
been able to convince individuals to build up wealth in terms of a unit
of account; oblivious to the fact that the value of the unit of account
itself diminishes in that same process. The above described overall
economic account of debt acquisition and resolution, now becomes saddled
with additional resolution requirements that it cannot handle; since all
generated income in the real-goods economy is already required for the
resolution of its own output. The crash actually occurs when it becomes
obvious that an evolutionary resolution of this debt has indeed become
impossible; and a substantial number of players try to "cash out" in
uninflated terms and leave the system.
The magnitude of your above "net worth" therefore, is abstracting from
the essential time element, during which its accounted for wealth is
resolvable and returns standard of living _in real terms_ to its owner.
Without this intrinsic limitation on the meaning of wealth, economics as
I see it becomes quackery. BTW, the power of satiation is a potent ally
in the equitable distribution of wealth, when returns are limited to be
those in real-terms only; quite possibly much more so than most Marxians
realize. But also note that the above delineation does not really refer
to a Marxian command economy, with its helicopter money; but only to a
balance-sheet regulated, free-market, living standard providing one.
Accounts in the latter are furthermore to be understood as notional
only, since there can never be a universal identity at any point _in_
time; but only an ongoing process, potentially in dynamic equilibrium
_over_ time. That is also why solvency kept reappearing in my argument,
just like time it is a vital entity and cannot be abstracted from.
I'm snipping, at least for now, the rest of the post. Bringing in
Keynesian identities was unhelpful to say the least; as the above goes
too far beyond him to be able to draw easily fitting parallels. Even
though they are there, I concede to making mistakes while trying to use
them before; but if you deem it worthwhile, I'm also willing to retrace.
I hope that herewith I summarized my perspective, for whatever it's
worth, that you had asked for in the snipped part of the post. I much
appreciate the opportunity of being able to bring this alternative and
quite deep going indictment of capitalism's exculpating theories to the
fore, but wouldn't mind at all if someone smarter than me were to refute
its logic, so I could spend the rest of my life doing something else;
rather than being a bothersome gnat, trying to convince patient and open
minded economists like yourself of internal contradictions and/or gaping
holes in their theories, that seem to defy all attempts at closure.
John V
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