|
Also thanks for elucidating the social credit program. As I have mentioned, however, I think that at this stage I understand it quite well. This, of course, was not the case when I first commented on this list. Nothing you tell me about the theory or policies in this message is new although it is possible that there are aspects that you have not yet explained. So my focus now is fully on the reasoning used by people like yourself to defend the theory and the policies. Regardless of whether your plan is somehow more Christian or more moral than some other plan, the crucial questions for me are these. 1. WILL THE CONSUMERS NORMALLY BE UNABLE TO PURCHASE THE PRODUCED GOODS? First, are you correct to believe that individuals acting as consumers in a capitalist economy will, under normal circumstances, be unable to purchase the goods that producers have produced. So far, I have only been persuaded that you are on the wrong track by trying to defend this proposition with the accounting logic of the A + B theorem. I am convinced that in order to defend your belief properly, you must begin at a point where the idea to produce by means of a firm is first conceived. Under modern financial conditions, this is the point at which the idea in the mind of financing and producing entrepreneurs becomes actualized through the transfer of funds. These people must combine their knowledge and money in order to get a production process by means of a firm started. When I use the term "financing entrepreneur," I mean a person who saves by trying to earn an income on his savings. These two kinds of entrepreneurs are roles. It is possible that a single individual would finance his own firm. Since you are concerned with financing, however, it is appropriate to separate the roles. To begin with an accounting identity that refers to a process that is already started and ongoing is a major conceptual shortcoming. If you care at all about persuading those who do not accept your views on faith, you should address this issue. It makes no sense to me to claim that slave wages are an inherent characteristic of the current capitalist system without examining the conditions under which those wages are determined. And it makes no sense to me to discuss those conditions without conceiving of the entire production process from start to finish -- i.e., from the point where the idea to produce occurs and financing is provided to the point where the product is sold and the proceeds of the sale distributed. What the A + B theorem does is to carve out a cross section of the market economy at a point in time, stop all the movement, and form theorems as if the said static cross section represents the steadily evolving market economy. This procedure is a faulty way of achieving the goal you want to achieve. 2. WILL THE SALES SUBSIDY ACHIEVE THE GOAL YOU INTEND? Second, will the sales subsidy (or whatever name you wish to give it), financed with new money, achieve the goal you believe it will achieve? Here there are two points. On the one hand, you have not satisfactorily explained how it is possible to increase the quantity of money without causing inflation. I liked the idea of financing it by reducing government spending. But that does not seem to be an integral part of your program. Instead, you want to introduce new money into the system. The main long term effect of this is inflation. However, even the program was financed by existing taxes by means of reducing government spending, I have not been persuaded that the program will work. If the program artificially makes the prices of current consumer goods lower than they would otherwise be, all that would happen is that resources would be shifted from longer-term to shorter-term projects. The prices that exist at any time reflect, in an indirect way, the scarcities perceived by the numerous entrepreneurs involved in current and prospective future production projects. If "social credit" policies were adopted, the scarcities that would otherwise manifest themselves in higher current consumer goods prices would end up manifesting itself in relatively higher consumer goods prices in the future. Just like the government of the U.S. is taking purchasing power away from our sons and daughters in order to pay for our social security, the subsidy plan would take money away from them to pay for our increased indulgence in the near future. In other words, the policies are, in effect though not in intent, spendthrift, devil-may-care policies. 3. WILL THE PLAN ENCOURAGE RENT SEEKING A third question relates to rent seeking, which I think you dismiss all too casually. One of my objections to the practicality of your plan is the projection that there will be what political economists call rent seeking. One example is the effort by small businesses to get a larger share of the subsidy than your scheme would allot to them. In response to this, you speak of civic duty. I am sure that you realize that if the success of your plan depends on people performing their civic duty, it is not very likely to succeed. Realistic policy outcomes can only be predicted on the basis of realistic assumptions about how people will act. These are my main points. Comments on specific issues are interspersed with your remarks. Wallace M. Klinck wrote:
Pat replies: I'm sorry, Wally, but I regard this as incorrect. Money existed long before the banking system. Moreover, until the gold standard was arbitrarily abandoned, gold money existed and was used widely in exchange independently of the banking system. Even in a banking system, if the system is regulated effectively, banks cannot create new money without, at the same time, destroying old money. I pointed this out yesterday in my message to Janos. I have not seen a plausible argument to the contrary. Certainly there is nothing in the A + B theorem to support this claim. If I understand the basis of Bill's message to Ken today, he agrees with me. So here's a subject you can work on privately. I will try to help by explaining the process below. I start with your statement: HE RUNS STRAIGHT TO THE BANK TO PAY OFF HIS PRODUCER LOAN AND THE BANK CANCELS THIS MONEY RIGHT OUT OF EXISTENCE--INTO OBLIVION. THE MONEY SUPPLY IS THEREBY REDUCES. IT DOES NOT CONTINUE TO EXIST AS MONEY OR PURCHASING POWER IN ANYBODY'S HAND AT ALL.I agree that when a business pays off a loan, money is destroyed. In the modern banking system, however, new money is almost immediately created to replace it. This could happen in a number of ways. First it is possible that the bank will have perfectly synchronized its loans with its borrowings from time depositors. If so, it would use the money received from the producer to immediately pay off a debt to a saver-depositor, which would come due at exactly the same time. In the modern system, it is unlikely that a single bank would perfectly synchronize its intermediation function. The reason for this is that this function is performed "by the money market." In order to avoid holding an idle money balance, the bank would immediately (i.e., at the end of the banking day) lend the money out. If he cannot find a better deal, he would lend it in the federal funds market. This means that it would be borrowed by some other bank that is unknown to the first bank and which borrows it in order to either support a new loan it has made during the day or to support a depositor who withdrew his savings earlier in the day. Federal Funds Market: http://www.marketvolume.com/glossary/f0041.asp The process of equating lending with paying off is regulated by the rate of interest in the federal funds market. If for some reason, there is excess money in the system, the rate falls, encouraging businesses to borrow more. If there is a shortage of money, the rate rises. If you expect any economist familiar with money markets to accept your claim, you must show that you know how banking and the money markets work to equilibrate the aggregate demand for loan money with the aggregate supply of it. Of course, the equating process is never perfect. The market never reaches an equilibrium. But the pressures toward equilibrium are continuous. It is the presence of these pressures that make your statement incomplete to the point of being wrong. Pat wrote: Without financing, there would be no business. But, of course, it is rather difficult to imagine a scenario in which consumers would suddenly stop their financing of business, sincek they long to earn returns on their savings. Thus, I don't see that there is a problem that needs solving. Pat replies: My meaning is simple. Businesses are financed by savings. Imagine that there are no firms. There still would be consumers, producers and savers. When the first firm is formed, it is financed with consumer savings. Let us follow this process of production through a cycle. The process begins when savers in the no-firm economy finance the start of the firm. As capitalist entrepreneurs, the savers expect to receive income in the form of profit that will more than compensate them for their saving. In other words, they expect to receive enough income from their saving to buy the products in the future that they believe will be worth more to them at that time than the products that they could buy with their savings now. The producing entrepreneur uses the money to hire resources. Let's keep the production simple by disregarding material capital. Let's suppose that they hire massagers, for example, to supply the massage service for a fee. Although massage service is also offered independently by non-firms, we assume that the technique of supplying it through a firm is more efficient and the same amount of labor can cause more massage service to be produced. So people who otherwise would have bought massage service from a non-firm decide to buy it from the firm. Assuming that the financiers were correct in their prediction, the massage service would be bought because it has a lower price than the alternative. And the financiers would receive the income they expected. The workers would be paid what they expected. There would be no shortage of quantity demanded in the massage industry. It is true that the money paid for massage service would come from other parts of the non-firm economy. That is, it otherwise would have been spent there. But that money is paid to workers and the financiers of the firm. Their demands for goods in the non-firm sector would make up for that deficiency. Now a complete analysis would require me to consider a case in which many products were being produced by firms. But I would proceed in the same way. Each firm gets started when a financier decides to use his saving to finance a firm. There is no reason why there would not be enough money to buy the product that its financiers and producers expect to be produced. If there was, they would not choose to produced it in the first place. Note also that there is no sense in which the massagers are paid "slave wages." They are presumably paid more than they could earn as independent massagers. Otherwise, they would not accept the employment. (Parenthetically, I would note that there are billions of people in the world who aspire to earn the "slave wages" to which you refer. But they are prohibited from competing by immigration laws.) Pat wrote: The financiers perform the function of enabling workers and others with relatively higher preference for goods in the near future relative to goods in the distant future to have old cake now while new cake is being baked. They don't have to wait for their cake to be baked before they can eat it because the consumers before them saved some of their cake. Of course, the financiers earn a return for performing that function.
Pat replies: "WHICH THEY DID NOT PRODUCE?" Marx and the Marxists are the major proponents of the claim that financiers do not contribute to production. Without financing and the entrepreneurial direction that financing commands from the producers it supports, profitable production would not occur. This does not mean that financing is the sole cause of wealth. But it does mean that it contributes. This is one of the major truths of the new economics that emerged toward the end of the 19th century. These developments in the history of economics were a direct reaction to the socialist and Marxist ideas that were becoming increasingly popular at the time. The proposition that the process of production is long and requires the use of a variety of very different factors of production, only one of which is common labor, is, in my view, is required in order to think soundly about production and distribution in the capitalist economy today. My initial feeling that you are basing your beliefs partly on the long-time debunked Marxist ideas is confirmed by your statement here. -- Pat Gunning, Feng Chia University, Taiwan; New book: UNDERSTANDING DEMOCRACY http://www.constitution.org/pd/gunning/votehtm/cove&buy.htm 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 --^^--------------------------------------------------------------- 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. FREE! http://www.topica.com/partner/tag02/create/index2.html --^^--------------------------------------------------------------- |
- RE: [SOCIAL CREDIT] final comment: Wally to Prof. Gunni... Wallace M. Klinck
- Pat Gunning
