Re: [Pen-l] Re: money [was: Skidelsky on Keynes

[Jim Devine <jdevine03@xxxxxxxxx>]

I'm trying to deal with my mailbox being so full. Now I'm using FIFO
rather than my usual LIFO...

me:
>> Since I don't have a unified deductive theory of everything, there's
>> no point in counting "axioms." As I've said before, I think it's silly
>> to rely entirely on deductive/axiomatic reasoning.
>> Inductive/descriptive reasoning is just as important.

several weeks ago, John Vertegaal replied:
> In any natural system, yes (as if we had a choice). But _my_ economic
> system is an entirely _man-made_ set of accounts.

You should have made it clear that you're talking about an accounting
system rather than an actual description of empirical reality.
Different standards apply to these different cases. (BTW, I don't know
what you're talking about when you mention a "natural system." The
economy is human-made, not natural.)

John:
> Its [what does "it" refer to here?] accounted for
> inputs are either going to be resolved by its outputs, fulfilling its
> purpose, or they are not and will be wasted.

The real world has waste, so shouldn't accounting systems do so too?
In business, accountants refer to "wastage" and the like.

> Except for setting its
> axioms, and given that waste as an antinomy is not directly derivable from
> those, the only need for induction would be to to conclude that perhaps some
> waste isn't all bad; thus not ruling inductive reasoning out entirely, but
> relegating it to be of very limited use instead. Is there inductive
> reasoning in accountancy?

Yes, there is inductive reasoning involved in accounting. In the
National Income and Product Accounts (the accounting system I know
best), not only are the concepts of "investment" and "consumption"
based on induction, but empirically it's sometimes hard to decide what
gets put into which category. Does the CEO's company jet count as an
investment, part of the costs of production (an intermediate input),
or consumption. The NIPA people have an answer, but it's arbitrary.

> Economics is macro-accountancy. Tell me what this
> assertion misses, and why that is so vitally important.

First, there's microeconomics, which is more than accounting and helps
us understand a lot of issues in the economy.

Second, accountancy refers to a true-by definition system of
identities (such as that GDP by definition equals C+I+G+NX).
Macroeconomics tries to get beyond accounting to talk about behavioral
equations (as ways of describing actual, empirical, economic behavior,
e.g., C rises with income, all else constant). Even if it is merely
notional, the theoretical and non-accounting idea of equilibrium plays
(and should play) a big role in macroeconomics. (NB: it doesn't have
to be a full-employment equilibrium as in J-B Say's neoclassical
tradition. It also doesn't have to be stable.)

John:
> But no particular empirical description can lead us to the general
> underlying systematic truth. Didn't Marx say something to that effect
> too? Aren't our discussions meant to seek out that truth? ...

I didn't say that "empirical descriptions" can lead us to a "general
underlying systematic truth." Rather, I said that empirical
descriptions and analysis are complementary aspects of trying to
understand the truth (to the extent we can do so).

Marx did, as John mentions, say that abstraction was needed to get to
reality: "The body, as an organic whole, is more easy of study than
are the cells of that body. In the analysis of economic forms,
moreover, neither microscopes nor chemical reagents are of use. The
force of abstraction must replace both. But in bourgeois society, the
commodity-form of the product of labour — or value-form of the
commodity — is the economic cell-form." (1867 Preface to vol. I of
CAPITAL.)

KM's abstraction did involve accounting (that's what a lot of CAPITAL
volume I's value theory consists of) but it also included a
dialectical method of epistemology (asking questions about empirical
reality) and also of presenting his theory. He didn't stay with
accounting. He was also interested in understanding the behavior of
capitalism.

(To get the right reference, I went to "marxists.com" which describes
itself as "your health and medical resource"! strange! of course, I
was looking for marxists.org.)

John had said:
>>> In mine, the identity of money rolls out of a total of _three_ axioms, it  doesn't look like your theory going to beat that. Would you agree that the  theory requiring the least amount of axioms is the most general and therefore is a superior one (all else being equal and no ideologies entering the picture)?<<<

me:
>>This represents an utter commitment to axiomatic/deductive reasoning.<<

John now says:
> Because, if applicable, it's ["axiomatic/deductive reasoning" is] by far the best mind-tool we've got. It allows us to establish the general, and from that determine the truth of the particular. There is no way to get there the other way around, for inductively reasoned particulars may or may not be true. Empirical observation remains an indispensable means to detect contradictions, but a reliance on inductive reasoning is a good way to find yourself in the  middle of nowhere, unable to see the forest through the trees.<

Axiomatic reasoning could easily miss the trees by focusing on the forest.

Here's an example: in neoclassical economics, which tends to love
axiomatic reasoning, there's a gigantic tendency to treat (say) firms
in a market as totally homogeneous, so that the "representative firm"
is the same as each and every firm in the market. That's the story of
a perfectly competitive market. But it even infests neoclassical
stories of Robinson-Chamberlin monopolistic competition. The point of
this concept is that each of the firms is supposed to be different
from all the others, but I've seen a lot of models where each firm has
the same demand curve and the same cost function as all the others.
Why? because it makes the mathematics easier! The trees are lost in
the forest.

There are other kinds of abstract reasoning besides axiomatic
reasoning. I already mentioned KM's dialectical approach.

me:
>> BTW, what are your axioms? does having fewer axioms make you a better
>> person?

John:
> My axioms are concise assertions of WHAT the economy is, WHY it exists,
> and WHO is supposed to benefit from it. I don't like to pull them out of
> context if I don't have to; http://www.vcn.bc.ca/~vertegaa/outline.pdf
> Since there is no way to prove the truth of an axiom, having fewer of
> them makes it less dependent on potential untruths, as well as easing
> its subject's comprehension, those are its "virtues". Perhaps there are
> others, but I'm not a philosopher.

I really don't need to see John's axioms unless you tell me what new
and different insights he derives from them.

That's because all theories, axiomatic or not, involve untruths.
Theeories are abstractions. The question is whether the the benefits
of the untruths exceed the costs. The answer to that in turn depends
on one's goals and values. The reasonableness of a theory would be
different from the point of view of über-Chicago schooler Gary Becker
than from mine.

The untruth of an axiom cannot be proved within an axiomatic system,
but it can be shown to be unrealistic (anti-empirical).

<ellipsis>

me:
>> In the kind of property-rights
>> system we live under, equity (capital) is not the same as debt.

John:
> Before we get to Max's stock, let's deal with this assertion as it
> stands. Is "equity (capital)" a means or an end?

Does it have to be either? equity in a company represents a _claim_ of
ownership of that company. A stockholder shares in ownership, in
risk-taking, and in decision-making (though most often not very much
of the latter) and sometimes in receipt of dividends  and/or capital
gains. _Owning_ equity is a means to the end of receiving dividends
and/or capital gains. The equity itself is neither a means nor an end.

> If you'd say that for
> capitalists it is an end, I would tentatively agree but also say that
> this has nothing in common with the underlying, and presumably desired,
> stable economy I'm trying to clarify; so a discussion along this line
> would need to be suspended until we get to the point of discovering
> impediments to stability. For now, only capital as a means is fodder for
> pursuance.

To my mind, the capitalists' goal (end) is simply to live the high
life with all sorts of material goodies and servants, get respect,
power, political influence, etc. (along with being able to get dates
on Saturday night). Having capital is a means for attaining those
goals.

(Capitalism itself does not have a goal, though in practice it acts
_as if_ accumulation of capital were the goal.)

John mentions "the underlying, and presumably desired, stable economy
I'm trying to clarify." Well, he and I have different world-views ans
purposes. I don't know of any economy that's "underlying" the
actually-existing one. If it exists, I don't know if it's desirable or
stable. Since I don't have any inkling of an "underlying" stable
economic system, I'm not going to look to find it.

> You see it [capital, equity] as inherently positive, inductively because (from what I gathered so far) it commands a price.<

equity can be negative, as many a homeowner has discovered.

>I'm tracing it from its humble beginnings as a loan, a to be resolved debt, peddled by a bank; wondering under what circumstances this can turn into the positive quantity you now hold it to be.<

To understand equity institutionally, I'd start with partnerships, not
bank lending, because joint-stock companies (for example) are a
developed form of partnerships. They have limited liability only
because of laws.

> Let's assume our enterprise, situated
> somewhere above the retail level, to be successful; having been able to
> sell its output at cost+ prices to other enterprises having made similar
> borrowings, until the output is resolved at the retail level by our
> entrepreneurial employees, bank employees and various profit/rent
> collectors, whose wages and fees had all become embodied in retail output.

"entrepreneurial employees"?? who are they? standard economics of all
stripes treats entrepreneurs and employees as distinct and
non-overlapping sets. I guess one (empirical) person could be both --
like the new entrepreneurs that C. Wright Mills refers to who climb
the ladder between government and business (e.g., Henry Kissinger) --
but the abstract categories are distinct.

> What happens if at some point all the loans are paid off, but the means
> of production is still going strong. Does the above economy yet come to
> a sudden stop because all the money had supposedly disappeared? Has all
> its capital now become the positive entity, enabling renewed borrowings
> to keep it all going; making bank loans indispensable in perpetuity? In
> spite of what conventional economics, not having a coherent theory of
> money, might have you believe, the answer is no to both questions....

"all the money has supposedly disappeared"?? what in heck does that
mean? that we've switched over to barter?

As Marx noted, most businesses _start_ with positive capital (M) and
not simply borrowed money. The capitalists put this M into production
because they hope they can turn it into M' > M. It doesn't always do
that, but in most cases it does; at the macroeconomic level it usually
does.

Of course, not all of the M' is reinvested. But much of it is, so that
this M -> M' can become a growing spiral, M -> M' -> M" -> M"" etc.

You seem to be assuming that companies start with zero capital
(equity). If so, they are infinitely leveraged (i.e., the debt/equity
ratio equals infinity). Few if any businesses beyond Ponzi's realm
work that way.

> So where do we stand so far? Because outlays occur before returns come
> in, the economy is always in debt to itself; that is, at least with
> respect to its costs. But what about its mark-ups? Retailers readily
> assume all mark-ups above their own level as a cost, so that their books
> show a to be resolved debt of virtually the entire economy's cost+
> billings; while at the same time the potentiality of its resolution is
> there too, in the form of disbursed personal incomes. The only aspect of
> resolution not yet dealt with are retail mark-ups. These can only be
> resolved by retailers themselves (or again any newly hired retail
> employees) bit by bit in a horizontal fashion, slowly petering out over
> time. In other words, the direct spending of retail level profit, allows
> a whole new set of retailers to realize their profits too, and these
> being spend directly will have the same effect, etc., on an ever
> diminishing scale; while being mixed in with the resolution of
> vertically integrated output, that will be coming down during those
> successive periods.

Marx showed that actual profits (M' minus M) could be realized on a
macroeconomic level. For a non-growing economy (with only simple
reproduction) the profits of the sector producing means of production
(S1) are positive as long as the wages of that sector (V1) are less
than the cost of using up means of production in the consumer goods
sector (C2). The profits can be even larger in an economy undergoing
expanded reproduction. Of course, the underlying process of
exploitation must also be successful.

With M' > M, not only do we see positive equity but the potential for
an upward spiral of accumulation. Of course, it's possible that M = M'
so that surplus-value = 0 and the market-price of corporate stock = 0
(because it reflects the expected value of future earnings), but
that's a capitalist economy in severe crisis, worse than anything
we've seen (except perhaps after 1917 in Russia).

It seems to me that John may have introduced a major inductive
assumption into your deductive system. That is, you seem to be
assuming that the system we live under is what Marx called "simple
commodity production," a system of small businesses in which the total
profit at the macroeconomic level = 0.

>From another of John's missives, I got the impression that he was
following the lead of Sisimondi in his economics. I don't know much
about his thinking, but I understand that Marx criticized and -- more
importantly -- built on his insights. If so, John can learn from Marx.

> However idealized the above depiction may be, it is absolute necessary to  get it clear into one's mind before deviations can be recognized as such; and thus suggesting which ameliorative activities [??] would likely be effective.  One logical deduction would be that a build up of "funds" can only occur at  the cost of having firms perish. [??] Inductive reasoning could momentarily enter the picture here, concluding that some of this could even be healthy, as entrepreneurial deadwood gets pruned and those whose output is most in demand are allowed to expand. With deduction taking over again, by reasoning that without such expansion, unemployment is ensured, and that a malaise will set in regardless of apparent capital value increases by some.<

I don't understand this.

me:
>> Max
>> _owns_ stock in a company. He does not automatically owe any money to
>> anyone as a result (though he could have bought it on margin).

John:
> Linear reasoning will get you nowhere, if your subject is structured in
> a round-about way.

why do you presume that my reasoning is "linear." If anything, the
constant back-and-forth dialectic of inductive and deductive reason is
non-linear, while any effort to derive conclusions simply from axioms
is linear.

> Stocks are bought with personal income.

right.

> Disbursed as
> corporate costs, that are passed down all the way to the retail level,
> these incomes are meant to be exchanged for retail output, resolving all
> those earlier corporate disbursements and turn it into living standard
> enhancement. ...

"meant to be" by whom? Why are stocks purchased only from the payment
of corporate costs? If Max happens to be independently wealthy, he can
buy stock based on the dividends or realized capital gains received
from the stocks he already owns.

> The prime goal of public corporations is to increase shareholder value.

that's the official goal, but it seems that a lot of them feather
their top executives' nests with golden feathers.

> Perhaps this sounds innocent enough, but it runs exactly counter to the
> economy's goal of maximizing exchange value _resolution_....

the economy has a goal? If forced to name such a goal, I would say
that (a) there is no _conscious_ goal but (b) in practice that goal
involves maximum profits and capital accumulation.

what is "value resolution"? do you mean realization?

that's enough. John's message is too long to handle today, if ever.

If forced to summarize, I'd say that John is considering an imaginary
economy with no capitalists, no capital, no accumulation, and no
profits. I think that kind of economy -- a cousin of the neoclassical
perspective -- is irrelevant to the task of understanding the real
world.

-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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