A + B is most easily comprehended if you think of it as being purely a theory of accounting rather than economics. For example, this is a statement of economics: Production = Income. This is a statement of accounting: The costs of production charged against sales into final consumption = monetary income of consumers. Ideally, both statements should coincide but they do not necessarily do so in the real world.
It is difficult to determine if the statement, "supply creates it own demand" is correct unless we are informed whether or not we are analyzing a statement from economics or accounting. To prove that the statement is a correct statement of economics, orthodoxy creates quasi-systems of accounting that have no correspondence to the real- world method of double entry, as Friedrich Hayek himself did in *Prices and Production*, that "prove" the statement is correct on its own terms. The first prerequisite to understanding the theorem, in order to counter the orthodox argument, is to have a working knowledge of double entry accounting. It is the social credit contention that "supply creates its own demand" is a statement of accounting, not economics, so the orthodox argument that substitutes an alternative accounting system is irrelevant as to the statement's truth or falsity. Economists are always variously substituting accounting systems that exist only in their minds for the one actually existing in the real world. While double entry in its present state of development is not necessarily the best of all possible accounting systems, it is vastly superior to the one imagined by economists, which could not possibly work in the real world, as is easily demonstrated--though I won't do so now. Rather than re-inventing and imposing a new system of accounting, which might be impossible, social credit proposes adjustment mechanisms at the macro level that compensate for its deficiencies--namely: the consumers' dividend and retail subsidy. A: the rate of flow of purchasing power being paid by firms into account balances held by consumers. B: the rate of flow of purchasing power being paid by firms into account balances held by firms. Accounted for costs of production that are flowing to the point of retail: A + B. In steady state: A + B = A, because net B is zero. This is taken to be the general condition in arguments, such as Hayek's, that "disprove" the theorem. In quasi-steady state: A + B > A because net B is positive, but A + B remains proportional to A through time, which is accommodated adequately through the method of double entry at the level of the individual firm. See the attached diagram also archived at http://www.geocities.com/socredus/compendium/accounting_profit.gif But, and this is a very big but indeed that relates it to actual conditions in the real world, if the *ratio* of B is increasing to A, double entry accounting reports a falling rate of profit regardless of real economic factors as a general matter for the economy as a whole. It is false information being supplied to entrepreneurs, distorting their perception of reality, militating against the utility of the market. When there were only atomized producer/consumers, as was hypothetically the case in the primitive condition of barter, there were effectively only A payments. A = A. But as the division of labor progresses and the structure of production is becoming more complex, the ratio of B payments is necessarily increasing to A payments. --------- Original Message --------- DATE: Wed, 29 Oct 2003 15:29:34 From: Pat Gunning <[EMAIL PROTECTED]> To: [EMAIL PROTECTED] Cc: >Thanks, William, for your patience with someone who knows very little >about this subject. It seems that every answer you give provokes new >questions in my mind. I think now, however, that I understand enough >about "social credit theory" to evaluate it. So in this message I will >do that. > >I hope that other list members will appreciate the fact that I accepted >the invitation several days ago to the list out of curousity. I knew >practically nothing about the subject of social credit before then. I >have learned quite a bit since being on the list and appreciate the >invitation. But I suspect that the learning curve has now reached a peak. > >> In social credit theory, cash incomes are normally >> falling in respect to the accounted for costs of >> production that are charged against sales. So, >> beyond the "first desideratum" of fundamental social >> welfare, the purpose of the dividend is to close the >> "gap" between "prices" and "purchasing power," which >> should benefit the economy as a whole by allowing a >> stable rate of profit. > > >> >> The "gap" is caused by what social crediters broadly >> call "labor displacement," but what "Austrians" would >> call "lengthening" to the "period" or "structure" of >> production that comes naturally through time with >> improvement in process. > > >My understanding of Austrian economics suggests that the lengthening of >the structure of production which occurs under normal conditions (i.e., >in the absence of a money injection) in a growing capitalist economy >causes no gap between prices and purchasing power. But I am uncertain >what you mean by such a gap. > >You seem to be saying that an increase in saving relative to consuming >would cause a deepening of the structure of production. More resources >would be devoted to the production of capital goods and less to the >production of consumer goods. Simultaneously, you seem to say, this >would cause the prices of consumer goods to rise (or fall less) relative >to the change in purchasing power. The term "purchasing power," however, >is confusing here. Surely, you cannot mean an increase in the consumer >goods price index, which is the usual meaning of this term. After all, >there could be no gap between the prices of consumer goods and the index >of consumer goods prices. > >So you must mean that consumers' real incomes rise less than of fall >more than the prices of consumer goods. > >Supposing that this is what you mean, the logic of such an analysis >escapes me. I agree that if people decide to consume less and save more, >producers will respond by producing fewer consumer goods and more >capital goods than otherwise. But I don't see why this would, in turn, >cause a decrease in incomes to be spent on consumer goods. The answer >you seem to have in mind concerns "labor displacement." If this is so, >then the next step, it seems to me, is for you to explain what this >"labor displacement" means. Let me anticipate a bit by saying two >things. First, I can think of no reason why "labor," in the usual >definition, would be demanded less as a result of a shift from consumer >goods production to capital goods production. Second, the class of >consumers includes not only people who supply "labor" but also >recipients of interest income, rents, and profit. > > >> The chief analytical tool is the A + B Theorem. >> > >I have now had time to study the A + B theorem as expressed in Article >by Northridge, which was sent to me by Wallace Klinck. It seems to be >methodologically flawed. It disregards the realistic fact that the money >used to pay wages and salaries is typically paid in advance of the sale >of the final product, sometimes long in advance. Where does the money >come from? The simple answer, assuming that it is not financed by >newly-created money, is past money savings. In a system where production >takes time, that means that the wages and salary incomes of today come >from money that was saved yesterday, not from the sale of today's product. > >This brings me to the issue of the methodological flaws in the theorem. >The proper starting point for considering the effects of a firm's >existence is an imaginary economic equilibrium with no firm. One asks: >How would the economy have to change in order for new production to >occur by means of a new firm? The firm starts when money that would >otherwise have been used somewhere else is used to finance production in >the firm. To trace the effects, we must look not only at what happens as >a consequence of the money being deposited in the firm's investment but >also at what happens as a result of the money being withdrawn from other >parts of the system. > >One of the main flaws of the A + B theorem is that it starts by assuming >that the firm already exists. A second main flaw is that it disregards >the realistic fact that production, consumption and income payment are >not simultaneous. > >I realize that this analysis is short and, probably as a result, not >easy to follow. I will be happy to elaborate, perhaps by referring to >specific pages in the Northridge article. > >-- >Pat Gunning, Feng Chia University, Taiwan; >Web pages on Praxeological Economics, Democracy, Taiwan, Ludwig von Mises, Austrian >Economics, and my University Classes; >http://www.constitution.org/pd/gunning/welcome.htm >and >http://knight.fcu.edu.tw/~gunning/welcome.htm ____________________________________________________________ FREE ADHD DVD or CD-Rom (your choice) - click here! http://ad.doubleclick.net/clk;6413623;3807821;f?http://mocda2.com/1/c/563632/131726/311392/311392 AOL users go here: http://ad.doubleclick.net/clk;6413623;3807821;f?http://mocda2.com/1/c/563632/131726/311392/311392 This offer applies to U.S. Residents Only --^---------------------------------------------------------------- This email was sent to: [EMAIL PROTECTED] EASY UNSUBSCRIBE click here: http://topica.com/u/?a84IaC.bcVIgP.YXJjaGl2 Or send an email to: [EMAIL PROTECTED] TOPICA - Start your own email discussion group. 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